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File No. 33-83238
File No. 811-8724
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. [_]
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Post-Effective Amendment No. 9 [X]
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 10 [X]
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(Check appropriate box or boxes)
T. ROWE PRICE VARIABLE ANNUITY ACCOUNT
(Exact Name of Registrant)
Security Benefit Life Insurance Company
(Name of Depositor)
700 Harrison Street, Topeka, Kansas 66636-0001
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, Including Area Code:
(785) 431-3000
Copies to:
Amy J. Lee Jeffrey S. Puretz, Esq.
Associate General Counsel and Vice President Dechert Price & Rhoads
Security Benefit Group, Inc. 1500 K Street, N.W.
700 Harrison Street, Topeka, KS 66636-0001 Washington, DC 20005
(Name and address of Agent for Service)
It is proposed that this filing will become effective:
[_] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on April 23, 1999, pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[_] on May 1, 1999, pursuant to paragraph (a)(1) of Rule 485
[_] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[_] on May 1, 1999, pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of securities being registered: Interests in a separate account under
individual flexible premium deferred variable annuity contracts and individual
single premium immediate variable annuity contracts.
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VARIABLE ANNUITY PROSPECTUS
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T. ROWE PRICE NO-LOAD VARIABLE ANNUITY
An Individual Flexible Premium
Deferred Variable Annuity Contract
May 1, 1999
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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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INTRODUCTION
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* THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THE PROSPECTUS IS TRUTHFUL OR COMPLETE.
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. YOU SHOULD READ THE
PROSPECTUSES CAREFULLY AND RETAIN THEM FOR FUTURE REFERENCE.
This Prospectus describes the T. Rowe Price No-Load Variable Annuity--a
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. The
Contract is also available as an individual retirement annuity ("IRA")
qualified under Section 408, or a Roth IRA qualified under Section 408A, of
the Internal Revenue Code. The Contract is designed to give you flexibility
in planning for retirement and other financial goals.
You may allocate your purchase payments to one or more of the Subaccounts
that comprise a separate account of the Company called the T. Rowe Price
Variable Annuity Account, or to the Fixed Interest Account of the Company.
Each Subaccount invests in a corresponding 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
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 sponsored by T. Rowe
Price Associates, Inc., including other mutual funds with investment
objectives and policies similar to those of the Portfolios. Different
performance will result due to differences in cash flows into and out of the
Portfolios, different fees and expenses and differences in portfolio size and
position.
Amounts that you allocate to the Subaccounts will vary based on investment
performance of the Subaccounts to which the Account Value is allocated. The
Company does not guarantee any minimum amount of Account Value in the
Subaccounts.
Amounts that you allocate to the Fixed Interest Account will accrue interest
at rates that are paid by the Company as described in "The Fixed Interest
Account," page 28. The Company guarantees Account Value in the Fixed Interest
Account.
When you are ready to begin receiving annuity payments, the Contract provides
several options for annuity payments (see "Annuity Options," page 26.)
You may return a Contract 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 T. Rowe Price Variable Annuity Account that you
should know before purchasing the Contract. The "Statement of Additional
Information," dated May 1, 1999, which has been filed with the Securities and
Exchange Commission (the "SEC") contains certain additional information. 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 42 of this Prospectus.
Date: May 1, 1999
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CONTENTS
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* YOU MAY NOT BE ABLE TO PURCHASE THE CONTRACT IN YOUR STATE. YOU SHOULD NOT
CONSIDER THIS PROSPECTUS TO BE AN OFFERING IF THE CONTRACT MAY NOT BE
LAWFULLY OFFERED IN YOUR STATE. YOU SHOULD ONLY RELY UPON INFORMATION
CONTAINED IN THIS PROSPECTUS OR THAT WE HAVE REFERRED YOU TO. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
Definitions 5
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Summary 7
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Expense Table 9
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Condensed Financial Information 11
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Information About the Company, the Separate Account, and the Funds 12
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The Contract 15
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Charges and Deductions 23
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Annuity Payments 24
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The Fixed Interest Account 28
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More About the Contract 31
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Federal Tax Matters 32
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Other Information 39
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Performance Information 41
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Additional Information 42
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DEFINITIONS
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* VARIOUS TERMS COMMONLY USED IN THIS PROSPECTUS ARE DEFINED AS FOLLOWS:
ACCOUNT VALUE The total value of a Contract, which includes amounts allocated
to the Subaccounts and the Fixed Interest Account. The Company determines
Account Value as of each Valuation Date prior to the Annuity Payout Date and
on and after the Annuity Payout Date under Annuity Options 5 through 7.
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 Account Value.
ANNUITANT The person or persons on whose life annuity payments depend under
Annuity Options 1 through 4. If Joint Annuitants are named in the Contract,
"Annuitant" means both Annuitants unless otherwise stated. The Annuitant
receives Annuity Payments during the Annuity Period.
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 or OPTIONS Options under the Contract that prescribe the
provisions under which a series of Annuity Payments are made.
ANNUITY PAYMENTS Payments made beginning on the Annuity Payout Date according
to the provisions of the Annuity Option selected. Annuity Payments are made
on the same day of each month, on a monthly, quarterly, semiannual or annual
basis depending upon the Annuity Option selected.
ANNUITY PERIOD The period beginning on the Annuity Payout Date 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 your 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 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 or the death of the Annuitant during the Annuity 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 Account 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.
GENERAL ACCOUNT All assets of the Company other than those allocated to the
Separate Account or to any other separate account of the Company.
PAYMENT UNIT A unit of measure used to calculate Annuity Payments under
Options 1 through 4 and 8.
PURCHASE PAYMENT The amounts paid to the Company as consideration for the
Contract.
SEPARATE ACCOUNT The T. Rowe Price Variable Annuity Account, a separate
account of the Company. Account Value 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. 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 Account Value less any premium taxes due and
paid by the Company. The Withdrawal Value during the Annuity Period under
Option 8 is the present value of future annuity payments commuted at the
assumed interest rate less any premium taxes due and paid by the Company.
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SUMMARY
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This summary provides 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," page 28 and in the Contract.
PURPOSE OF THE CONTRACT
The flexible premium deferred variable annuity contract ("Contract")
described in this Prospectus is designed to give you flexibility in planning
for retirement and other financial goals.
You may purchase the Contract as a non-tax qualified retirement plan for an
individual ("Non-Qualified Plan"). If you are eligible, you may also purchase
the Contract as an individual retirement annuity ("IRA") qualified under
Section 408, or a Roth IRA qualified under Section 408A, of the Internal
Revenue Code of 1986, as amended ("Qualified Plan"). See the discussion of
IRAs and Roth IRAs under "Section 408 and Section 408A," page 36.
THE SEPARATE ACCOUNT AND THE FUNDS
You may allocate your purchase payments to the T. Rowe Price Variable Annuity
Account (the "Separate Account"). See "Separate Account," page 13. The
Separate Account is currently divided into seven divisions 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 that you allocate to the Subaccounts 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.
FIXED INTEREST ACCOUNT
You may allocate all or part of your purchase payments to the Fixed Interest
Account, which is part of the Company's General Account. Amounts that you
allocate 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," page 28.
PURCHASE PAYMENTS
If you are purchasing a Contract as a Non-Qualified Plan, the minimum initial
purchase payment is $10,000 ($5,000 if made pursuant to an Automatic
Investment Program). If you are purchasing a Contract as a Qualified Plan,
the minimum initial purchase payment is $2,000 ($25 if made pursuant to an
Automatic Investment Program). Thereafter, you 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 Non-Qualified Plan or $500 ($25 if made pursuant to an Automatic
Investment Program) for a Qualified Plan. See "Purchase Payments," page 16.
CONTRACT BENEFITS
You may exchange Account Value among the Subaccounts and to and from the
Fixed Interest Account, subject to certain restrictions as described in "The
Contract," page 15, "Annuity Payments," page 24 and "The Fixed Interest
Account," page 28.
At any time before the Annuity Payout Date, you may surrender your Contract
for its Withdrawal Value and may make partial withdrawals, including
systematic withdrawals, from Account Value. On or after the Annuity Payout
Date, you may withdraw your Account Value under Annuity Options 5 through 8.
Withdrawals of Account Value allocated to the Fixed Interest Account are
subject to certain restrictions described in "The Fixed Interest Account,"
page 28. See "Full and Partial Withdrawals," page 20, "Annuity Payments,"
page 24 and "Federal Tax Matters," page 32 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 prior
to the Annuity Start Date. See "Death Benefit," page 22 for more information.
The Contract provides for several Annuity Options on either a variable basis,
a fixed basis, or both. The Company guarantees Annuity Payments under the
fixed Annuity Options. See "Annuity Payments," page 24.
FREE-LOOK RIGHT
You may return the Contract within the Free-Look Period, which is generally a
10-day period beginning when you receive the Contract. In this event, the
Company will refund to you the amount of purchase payments allocated to the
Fixed Interest Account plus the Account Value in the Subaccounts. The Company
will refund purchase payments allocated to the Subaccounts rather than the
Account Value in those states and circumstances in which it is required to do
so. See "Free-Look Right," page 22.
CHARGES AND DEDUCTIONS
The Company does not deduct a sales load from purchase payments. The Company
will deduct certain charges 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," 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 when Annuity Payments begin or upon
full withdrawal if the Company incurs a premium tax. 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," page 24.
* OTHER EXPENSES The Company pays the operating expenses of the Separate
Account. 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
You should direct all written requests, notices, and forms required by the
Contract, and any questions or inquiries to the T. Rowe Price Variable
Annuity Service Center, P.O. Box 750440, Topeka, Kansas 66675-0440,
1-800-469-6587.
EXPENSE TABLE
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The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly and indirectly if you allocate
Account Value to the Subaccounts. The table reflects any contractual charges,
expenses of the Separate Account, and charges and expenses of the Portfolios.
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 Portfolio's
costs and expenses, see the Funds' prospectus, which accompanies this
Prospectus.
TABLE 1
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CONTRACTOWNER TRANSACTION 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%
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Total Annual Separate Account Expenses .55%
ANNUAL PORTFOLIO EXPENSES (AS A PERCENTAGE OF EACH PORTFOLIO'S AVERAGE DAILY
NET ASSETS)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER PORTFOLIO
FEE(1) EXPENSES EXPENSES
<S> <C> <C> <C>
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%
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</TABLE>
1 The management fee includes the ordinary expenses of operating the Funds.
EXAMPLES
The examples presented below show expenses that you would pay at the end of
one, three, five, or ten years. The examples show expenses based upon an
allocation of $1,000 to each of the Subaccounts and a hypothetical annual
return of 5%.
You should not consider the examples below 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 - You would pay the expenses shown below during the Accumulation
Period and during the Annuity Period:
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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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CONDENSED FINANCIAL INFORMATION
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The following condensed financial information presents accumulation unit
values for the years ended December 31, 1998, 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.
<TABLE>
<CAPTION>
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1995 1996 1997 1998
<S> <C> <C> <C> <C>
NEW AMERICA GROWTH SUBACCOUNT
Accumulation unit value:
Beginning of period ............... $10.00 $13.40 $16.00 $19.28
End of period ..................... $13.40 $16.00 $19.28 $22.72
Accumulation units:
Outstanding at the end of period .. 333,934 1,596,903 2,030,514 2,269,650
INTERNATIONAL STOCK SUBACCOUNT
Accumulation unit value:
Beginning of period ............... $10.00 $11.19 $12.77 $13.09
End of period ..................... $11.19 $12.77 $13.09 $15.08
Accumulation units:
Outstanding at the end of period .. 218,427 1,124,821 1,562,428 1,554,164
EQUITY INCOME SUBACCOUNT
Accumulation unit value:
Beginning of period ............... $10.00 $12.37 $14.70 $18.84
End of period ..................... $12.37 $14.70 $18.84 $20.42
Accumulation units:
Outstanding at the end of period .. 365,712 1,902,935 3,450,047 3,428,903
PERSONAL STRATEGY BALANCED SUBACCOUNT
Accumulation unit value:
Beginning of period ............... $10.00 $11.90 $13.51 $15.86
End of period ..................... $11.90 $13.51 $15.86 $18.04
Accumulation units:
Outstanding at the end of period .. 148,349 599,843 983,602 1,257,891
LIMITED TERM-BOND SUBACCOUNT
Accumulation unit value:
Beginning of period ............... $10.00 $10.64 $10.93 $11.60
End of period ..................... $10.64 $10.93 $11.60 $12.38
Accumulation units:
Outstanding at the end of period .. 86,891 445,079 626,694 926,046
MID-CAP GROWTH SUBACCOUNT*
Accumulation unit value:
Beginning of period ............... $10.00 $11.82
End of period ..................... $11.82 $14.34
Accumulation units:
Outstanding at the end of period .. 1,100,979 1,508,570
PRIME RESERVE SUBACCOUNT*
Accumulation unit value:
Beginning of period ............... $10.00 $10.48
End of period ..................... $10.48 $10.97
Accumulation units:
Outstanding at the end of period .. 769,829 1,367,278
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*The Mid-Cap Growth and Prime Reserve Subaccounts commenced operations on
January 2, 1997.
</TABLE>
<PAGE>
INFORMATION ABOUT THE COMPANY, THE SEPARATE ACCOUNT, AND THE FUNDS
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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. On July 31, 1998, the
Company converted from a mutual life insurance company to a stock life
insurance company ultimately controlled by Security Benefit Mutual Holding
Company, a Kansas mutual holding company. Membership interests of persons who
were Contractowners as of July 31, 1998 became membership interests in
Security Benefit Mutual Holding Company as of that date, and persons who
acquire policies from the Company after that date automatically become
members in the mutual holding company.
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 1998, the Company had total assets of approximately $7.9
billion. Together with its subsidiaries, the Company has total funds under
management of approximately $8.8 billion.
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. We consider a system Year 2000 Compliant when it is able to
correctly process, provide, and/or receive data before, during and after the
Year 2000. 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 progress towards completing the modification/replacement
of its internal systems as well as obtaining Year 2000 Compliant
certifications from its external vendors. Overall systems testing commenced
in early 1998 and will extend into the first eight months of 1999.
Although the Company has taken steps to ensure that its systems will function
properly before, during, and after the Year 2000, external vendors provide
its key operating systems and information sources, 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 associated with an investment in the Separate Account.
SEPARATE ACCOUNT
T. ROWE PRICE VARIABLE ANNUITY ACCOUNT
The Company established the T. Rowe Price Variable Annuity Account as a
separate account under Kansas law on March 28, 1994. The Contract provides
that the income, gains, or losses of the Separate Account, whether or not
realized, are credited to or charged against the assets of the Separate
Account without regard to other income, gains, or losses of the Company. 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 Contract. Such Separate Account assets are not subject
to claims of the Company's creditors. 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.
The Separate Account is currently divided into seven Subaccounts. The
Contract provides that income, gains and losses, whether or not realized, are
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 its contract
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 (1)
such change is necessary to comply with applicable laws, (2) shares of any or
all of the Portfolios should no longer be available for investment, or (3)
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 41.
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. 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, 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. 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 set
forth 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 that operate in service industries.
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 common stocks of
medium-sized growth companies.
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 Associates, Inc. ("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 the Portfolios, T. Rowe
Price and Price-Fleming are responsible for selection and management of
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
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GENERAL
The Company issues the Contract offered by this Prospectus. It is a flexible
premium deferred variable annuity. To the extent that you allocate all or a
portion of your purchase payments to the Subaccounts, the Contract is
significantly different from a fixed annuity contract in that you assume the
risk of investment gain or loss rather than the Company. When you are ready
to begin receiving annuity payments, the Contract 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 you have allocated Account
Value and the amount of interest credited on Account Value that you have
allocated to the Fixed Interest Account.
The Contract is available for purchase by an individual as a non-tax
qualified retirement plan ("Non-Qualified Plan"). The Contract is also
eligible for purchase as an individual retirement annuity ("IRA") qualified
under Section 408, or a Roth IRA under Section 408A, of the Internal Revenue
Code ("Qualified Plan"). You may name Joint Owners only on a Contract issued
pursuant to a Non-Qualified Plan.
APPLICATION FOR A CONTRACT
If you wish to purchase a Contract, you 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 you own shares of one or more mutual funds distributed
by Investment Services ("T. Rowe Price Funds"), you may elect 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. If you
redeem fund shares, it is a sale of shares for tax purposes, which may result
in a taxable gain or loss. You may obtain an application 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
If you are purchasing a Contract as a Non-Qualified Plan, the minimum initial
purchase payment is $10,000 ($5,000 if made pursuant to an Automatic
Investment Program). If you are purchasing a Contract as a Qualified Plan,
the minimum initial purchase payment is $2,000 ($25 if made pursuant to an
Automatic Investment Program). Thereafter, you 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.
The Company will apply the initial purchase payment not later than the end of
the second Valuation Date after the Valuation Date it is received at the T.
Rowe Price Variable Annuity Service Center; provided that the purchase
payment is preceded or accompanied by an application that contains sufficient
information to establish an account and properly credit such purchase
payment. If the Company does not receive a complete application, the Company
will notify you that it does not have the necessary information to issue a
Contract. If you do not provide the necessary information 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
you unless you consent to the Company retaining the purchase payment until
the application is made complete.
The Company will credit subsequent purchase payments as of the end of the
Valuation Period in which they are received at the T. Rowe Price Variable
Annuity Service Center. You may make purchase payments after the initial
purchase payment 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 you own shares of one or more T. Rowe Price Funds, you may
direct Investment Services to redeem shares of that fund(s) and forward the
redemption proceeds to the Company as a subsequent purchase payment. The
minimum initial purchase payment must be paid before the Company will accept
an Automatic Investment Program. If you redeem fund shares, it 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, you select the Subaccounts or the Fixed
Interest Account to which purchase payments will be allocated. The allocation
must be a whole percentage. Purchase payments will be allocated according to
your 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 5% of any payment being allocated to any one
Subaccount or the Fixed Interest Account. Available allocation alternatives
generally include the seven Subaccounts and the Fixed Interest Account.
You may change your 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 at
the T. Rowe Price Variable Annuity Service Center and will continue in effect
until subsequently changed. You may also change your purchase payment
allocation instructions by telephone. Changes in the allocation of future
purchase payments have no effect on existing Account Value. You may, however,
exchange Account Value among the Subaccounts and the Fixed Interest Account
as described in "Exchanges of Account Value," page 19.
DOLLAR COST AVERAGING OPTION
Prior to the Annuity Payout Date, you may dollar cost average your Account
Value by authorizing the Company to make periodic exchanges of Account 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 exchange of Account Value from one
Subaccount to one or more of the other Subaccounts. Amounts exchanged under
this option will be credited at the Subaccount's price as of the end of the
Valuation Dates on which the exchanges are effected. Since the price of a
Subaccount's Accumulation Units will vary, the amounts allocated to a
Subaccount will result in the crediting of a greater number of units when the
price is low and a lesser number of units when the price is high. Similarly,
the amounts exchanged from a Subaccount will result in a debiting of a
greater number of units when the Subaccount's price is low and a lesser
number of units when the price is high. Dollar cost averaging does not
guarantee profits, nor does it assure that you will not have losses.
You may request a Dollar Cost Averaging Request form from the T. Rowe Price
Variable Annuity Service Center. On the form, you must designate whether
Account 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.
To elect the Dollar Cost Averaging Option, your Account 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 at the T. Rowe Price
Variable Annuity Service Center. The Company will not consider the Dollar
Cost Averaging Request form to be complete until your Account Value is at
least the required amount. You 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 Account Value in the amounts you designate from the Subaccount from
which exchanges are to be made to the Subaccount or Subaccounts you have
chosen. The minimum amount that may be exchanged is $200 and the minimum
amount that may be allocated to any one Subaccount is $25. The Company will
effect each exchange on the date you specify or if no date is specified, on
the monthly, quarterly, semiannual, or annual anniversary, whichever
corresponds to the period selected, 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 Account 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 Account Value," page 19.
You 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 Account Value in the Subaccount from which exchanges were being made that
has not been exchanged will remain in that Subaccount unless you instruct us
otherwise. If you wish 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, you must complete a new Dollar Cost
Averaging Request and send it to the T. Rowe Price Variable Annuity Service
Center. The Contract must meet the $5,000 ($2,000 for a Contract funding a
Qualified Plan) minimum required amount of Account 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 contract with Investment
Services, the Company first obtains the consent of Investment Services.
Account Value also may be dollar cost averaged to or from the Fixed Interest
Account, subject to certain restrictions described under "The Fixed Interest
Account," page 28.
ASSET REBALANCING OPTION
Prior to the Annuity Payout Date, you may authorize the Company to
automatically exchange Account Value each quarter to maintain a particular
percentage allocation among the Subaccounts. The Account Value allocated to
each Subaccount will grow or decline in value at different rates during the
quarter, and Asset Rebalancing automatically reallocates the Account Value in
the Subaccounts each quarter to the allocation you select. Asset Rebalancing
is intended to exchange Account 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 you to 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 you will not have losses.
To elect the Asset Rebalancing Option, the Account Value 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 at the T. Rowe Price
Variable Annuity Service Center. You may 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, you must indicate the
applicable Subaccounts and the percentage of Account 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 Account
Value allocated to the Subaccounts must be included in the Asset Rebalancing
Option.
This option will result in the exchange of Account Value to one or more of
the Subaccounts on the date you specify 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 price of the Subaccount 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.
You may instruct the Company at any time to terminate this option by written
request to the T. Rowe Price Variable Annuity Service Center. This option
will terminate automatically in the event that you exchange Account Value
(outside the Asset Rebalancing Option) by written request or telephone
instructions. In either event, the Account Value in the Subaccounts that has
not been exchanged will remain in those Subaccounts regardless of the
percentage allocation unless you instruct us otherwise. If you wish to resume
Asset Rebalancing after it has been canceled, you must complete a new Asset
Rebalancing Request form and send it to the T. Rowe Price Variable Annuity
Service Center. The Account 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 contract with Investment Services, the
Company first obtains the consent of Investment Services.
Account Value allocated to the Fixed Interest Account may be included in
Asset Rebalancing, subject to certain restrictions described under "The Fixed
Interest Account," page 28.
EXCHANGES OF ACCOUNT VALUE
Prior to the Annuity Payout Date, you may exchange Account Value among the
Subaccounts upon proper written request to the T. Rowe Price Variable Annuity
Service Center. You may exchange Account Value (other than exchanges in
connection with the Dollar Cost Averaging or Asset Rebalancing Options) 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.
You may also exchange Account Value between the Subaccounts and the Fixed
Interest Account; however, exchanges from the Fixed Interest Account to the
Subaccounts are restricted as described under "The Fixed Interest Account,"
page 28. For a discussion of exchanges after the Annuity Payout Date, see
"Annuity Payments," page 24.
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 of Account Value 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 contract with Investment Services, the Company first obtains the
consent of Investment Services.
ACCOUNT VALUE
The Account Value is the sum of the amounts under the Contract held in each
Subaccount and the Fixed Interest Account. Account Value is determined as of
any Valuation Date during the Accumulation Period and during the Annuity
Period under Annuity Options 5 through 7.
On each Valuation Date, the portion of the Account Value allocated to any
particular Subaccount will be adjusted to reflect the investment experience
of that Subaccount for that date. See "Determination of Account Value,"
below. No minimum amount of Account Value is guaranteed. You bear the entire
investment risk relating to the investment performance of Account Value
allocated to the Subaccounts.
DETERMINATION OF ACCOUNT VALUE
Account Value will vary to a degree that depends upon several factors,
including investment performance of the Subaccounts to which you have
allocated Account Value, payment of subsequent purchase payments, partial
withdrawals, annuity payments under Options 5 through 7 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 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 you allocate purchase payments to a
Subaccount, your 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 price for the particular
Subaccount as of the end of the Valuation Period in which the purchase
payment is credited. In addition, other transactions including full or
partial withdrawals, exchanges, annuity payments under Options 5 through 7
and assessment of premium taxes against the Contract, all 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 price of the affected Subaccount.
The price of each Subaccount is determined as of 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 price 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 price of each Subaccount's units initially was $10. Determination of the
price 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
Prior to the Annuity Payout Date, you may surrender the Contract for its
Withdrawal Value or make a partial withdrawal of Account Value. A full or
partial withdrawal, including a systematic withdrawal, may be taken from the
Account Value at any time while the Owner is living, subject to restrictions
on partial withdrawals of Account Value from the Fixed Interest Account and
limitations under applicable law. Withdrawals after the Annuity Payout Date
are permitted only under Annuity Options 5 through 8. See "Annuity Payments,"
page 24. A full or partial withdrawal request will be effective as of the end
of the Valuation Period that a proper written request is received 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. You 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 your written withdrawal
request.
The proceeds received upon a full withdrawal will be the Contract's
Withdrawal Value. The Withdrawal Value generally is equal to the Account
Value as of the end of the Valuation Period during which a proper withdrawal
request is received at the T. Rowe Price Variable Annuity Service Center,
less any premium taxes due and paid by the Company. The Withdrawal Value
during the Annuity Period under Option 8 is the present value of future
annuity payments calculated using the assumed interest rate, less any premium
taxes due and paid by the Company. (See "Annuity Payments," page 24.)
You may request a partial withdrawal as a specified percentage or dollar
amount of Account Value. Each partial withdrawal must be for at least $500
except systematic withdrawals discussed below. A request for a partial
withdrawal will result in a payment by the Company in accordance with the
amount specified in the partial withdrawal request. Upon payment, the Account
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, 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 Account Value in
the Subaccounts and the Fixed Interest Account, according to your
instructions to the Company, subject to the restrictions on partial
withdrawals from the Fixed Interest Account. See "The Fixed Interest
Account," page 28. If you do not specify the allocation, the Company will
contact you 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," 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. You should
carefully consider the tax consequences of a withdrawal under the Contract.
See "Federal Tax Matters," page 32.
SYSTEMATIC WITHDRAWALS
The Company currently offers a feature under which you may elect to receive
systematic withdrawals of Account Value by sending a properly completed
Systematic Withdrawal Request form to the T. Rowe Price Variable Annuity
Service Center. Systematic withdrawals are available only prior to the
Annuity Payout Date. You 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. You may designate the systematic
withdrawal amount as a percentage of Account 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. You may stop or modify systematic withdrawals upon proper written
request to 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, your Account
Value will be reduced by an amount equal to the payment proceeds plus any
applicable premium 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.
The Company will effect each systematic withdrawal 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 your Account Value
in the Subaccounts and the Fixed Interest Account based on your instructions.
The Company may, at any time, discontinue, modify, or suspend systematic
withdrawals provided that, as required by its contract with Investment
Services, the Company first obtains the consent of Investment Services.
Systematic withdrawals from Account 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," page 28. You should consider
carefully 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. See "Federal Tax Matters," page 32.
FREE-LOOK RIGHT
You may return a Contract within the Free-Look Period, which is generally a
10-day period beginning when you receive 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 Account 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 Account 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," page 23. 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, any death benefit will be
determined according to the terms of the Annuity Option. See "Annuity
Options," page 26.
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
Account 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, (2) the total 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 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
Account 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.
The death benefit for Contracts issued in Florida is different than the death
benefit described above. For Contracts issued in Florida, the death benefit,
regardless of age at issue, is the greater of (1) the Account 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 total purchase payments received less any reductions
caused by previous withdrawals.
The Company will pay the death benefit proceeds 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," page 32 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 death benefit is determined under the terms of
the Annuity Option. See "Annuity Options," page 26.
CHARGES AND DEDUCTIONS
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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 generally is equal to an annual rate of .55% 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 assumes a mortality risk in connection with the death
benefit under the Contract.
The Company may ultimately realize a profit from the mortality and expense
risk 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
Investment Services, Inc. or an affiliate thereof. The Company pays
Investment Services 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 the Annuity Payout Date,
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 32.
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 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, you indirectly bear 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.
ANNUITY PAYMENTS
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GENERAL
You may select the Annuity Payout Date at the time of application. You may
not defer the Annuity Payout Date beyond the Annuitant's 90th birthday,
although the terms of a Qualified Plan and the laws of certain states may
require you to begin receiving annuity payments at an earlier age. If you do
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," 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 Account Value as of that date, less any
premium taxes, will be applied to provide an annuity under one of the Options
described on page 26. Each Option is available either 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
under Options 5 through 7. Your payment choices for each Annuity Option are
set forth in the table below.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
VARIABLE FIXED COMBINATION VARIABLE
ANNUITY OPTION ANNUITY ANNUITY AND FIXED ANNUITY
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Option 1 - Life Income X X
--------------------------------------------------------------------------------------------------
Option 2 - Life Income with Period Certain X X
--------------------------------------------------------------------------------------------------
Option 3 - Life Income with Installment Refund X X
--------------------------------------------------------------------------------------------------
Option 4 - Joint and Last Survivor X X
--------------------------------------------------------------------------------------------------
Option 5 - Payments for a Specified Period X X X
--------------------------------------------------------------------------------------------------
Option 6 - Payments of a Specified Amount X X X
--------------------------------------------------------------------------------------------------
Option 7 - Age Recalculation X X X
--------------------------------------------------------------------------------------------------
Option 8 - Period Certain X X
--------------------------------------------------------------------------------------------------
</TABLE>
Variable Annuity Payments will fluctuate with the investment performance of
the applicable Subaccounts while fixed Annuity Payments will not. Unless you
direct otherwise, Account Value allocated to the Subaccounts will be applied
to purchase a variable annuity and Account Value allocated to the Fixed
Interest Account will be applied to purchase a fixed annuity.
The Company will make Annuity Payments on a monthly, quarterly, semiannual,
or annual basis. No Annuity Payments will be made for less than $100. You 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.
You may designate or change an Annuity Payout Date, Annuity Option and
Annuitant, provided proper written notice is received at the T. Rowe Price
Variable Annuity Service Center at least 30 days prior to the Annuity Payout
Date. 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.
EXCHANGES AND WITHDRAWALS
During the Annuity Period, you may exchange Account Value or Payment Units
among the Subaccounts upon proper written request to the T. Rowe Price
Variable Annuity Service Center. Up to six exchanges are allowed in any
Contract Year. Exchanges of Account Value or Payment Units during the Annuity
Period will result in future annuity payments based upon the performance of
the Subaccounts to which the exchange is made.
The Owner may exchange Payment Units under Options 1 through 4 and 8 and may
exchange Account Value among the Subaccounts and the Fixed Interest Account
under Options 5 through 7, subject to the restrictions on exchanges from the
Fixed Interest Account described under the "Fixed Interest Account," page 28.
The minimum amount of Account Value that may be exchanged is $500 or, if
less, the amount remaining in the Fixed Interest Account or Subaccount.
Once Annuity Payments have commenced, an Annuitant or Owner cannot change the
Annuity Option and generally cannot surrender his or her annuity for the
Withdrawal Value. Full and partial withdrawals of Account Value are
available, however, during the Annuity Period under Options 5 through 7,
subject to the restrictions on withdrawals from the Fixed Interest Account.
An Owner may elect to withdraw the present value of annuity payments,
commuted at the assumed interest rate, if a variable annuity under Option 8
is selected. Partial withdrawals during the Annuity Period will reduce the
amount of future Annuity Payments.
ANNUITY OPTIONS
The Contract provides for eight Annuity Options. Other Annuity Options may be
available upon request at the discretion of the Company. 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 10 years. The Annuity
Options are set forth below.
OPTION 1 - LIFE INCOME Periodic Annuity Payments will be made during the
lifetime of the Annuitant. It is possible under this Option for an 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 due date of the third Annuity Payment, 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 PERIOD CERTAIN 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. UPON THE ANNUITANT'S DEATH AFTER THE PERIOD CERTAIN,
NO FURTHER ANNUITY PAYMENTS WILL BE MADE.
OPTION 3 - LIFE INCOME 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
Annuity Ppayments has been made.
OPTION 4 - JOINT AND LAST SURVIVOR Periodic Annuity Payments will be made
during the lifetime of the Annuitants. Annuity Payments will be made as long
as either Annuitant is living. Upon the death of one Annuitant, Annuity
Payments continue to the surviving annuitant at the same or a reduced level
of 75%, 66 2/3% or 50% of Annuity Payments as elected by the Owner at the
time the Annuity Option is selected. With respect to fixed Annuity Payments,
the amount of the Annuity Payment and, with respect to variable annuity
payments, the number of Payment Units used to determine the Annuity Payment
is reduced as of the first Annuity Payment following the Annuitant's death.
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 by the
Owner. The amount of each Annuity Payment is determined by dividing Account
Value by the number of Annuity Payments remaining in the period. If, at the
death of the Annuitant, 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 Annuity Payments of the
amount elected by the Owner will be made until Account Value is exhausted,
with the guarantee that, if, at the death of the Annuitant, all guaranteed
payments have not yet been made, the remaining unpaid payments will be paid
to the Designated Beneficiary. This Option is available only for Contracts
issued in connection with Non-Qualified Plans.
OPTION 7 - AGE RECALCULATION Periodic Annuity Payments will be made based
upon the Annuitant's life expectancy, or the joint life expectancy 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 government actuarial tables and are
made until Account Value is exhausted. Upon the Annuitant's death, any
Account Value will be paid to the Designated Beneficiary.
OPTION 8 - PERIOD CERTAIN Periodic Annuity Payments will be made for a fixed
period which may be 5, 10, 15 or 20 years. This option differs from Option 5
in that Annuity Payments are calculated on the basis of Payment Units. If the
Annuitant dies prior to the end of the period certain, the remaining
guaranteed Annuity Payments will be made to the Designated Beneficiary.
SELECTION OF AN OPTION
You should carefully review the Annuity Options with your financial or tax
adviser. 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.
ANNUITY PAYMENTS
Annuity Payments under Options 1 through 4 and 8 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 upon the age and sex of the Annuitant,
except that unisex rates are used where required by law. The annuity rates
reflect your life expectancy based upon your age and gender as of the Annuity
Payout Date unless unisex rates apply. The annuity rates are based upon the
1983(a) Mortality Table and are adjusted to reflect an assumed interest rate
of 3.5%, compounded annually, as selected by the Owner. See the table below
for the basis of annuity rates. In the case of Options 5, 6 and 7, Annuity
Payments are based upon Account Value without regard to annuity rates.
BASIS OF ANNUITY RATES
-----------------------------------------------------------
OPTIONS 1-4 OPTION 8
Assumed Interest Rate Assumed Interest Rate
Mortality Table 1983(a)
-----------------------------------------------------------
The Company calculates variable Annuity Payments under Options 1 through 4
and 8 using Payment Units. The value of a Payment Unit for each Subaccount is
determined as of each Valuation Date and was initially $1.00. The Payment
Unit value of a Subaccount as of any subsequent Valuation Date is determined
by adjusting the Payment Unit value on the previous Valuation Date for (1)
the interim performance of the corresponding Portfolio of the Funds; (2) any
dividends or distributions paid by the corresponding Portfolio; (3) the
mortality and expense risk charge; (4) the charges, if any, that may be
assessed by the Company for taxes attributable to the operation of the
Subaccount; and (5) the assumed interest rate.
The Company determines the number of Payment Units used to calculate each
variable Annuity Payment as of the Annuity Payout Date. As discussed above,
the Contract specifies annuity rates for Options 1 through 4 and 8 which are
the guaranteed minimum dollar amount of monthly annuity payment for each
$1,000 of Account Value, less any applicable premium taxes, applied to an
Annuity Option. The Account Value as of the Annuity Payout Date, less any
applicable premium taxes, is divided by $1,000 and the result is multiplied
by the rate per $1,000 specified in the annuity tables to determine the
initial Annuity Payment for a variable annuity and the guaranteed monthly
Annuity Payment for a fixed annuity.
On the Annuity Payout Date, the Company divides the initial variable Annuity
Payment by the value as of that date of the Payment Unit for the applicable
Subaccount to determine the number of Payment Units to be used in calculating
subsequent Annuity Payments. If variable Annuity Payments are allocated to
more than one Subaccount, the number of Payment Units will be determined by
dividing the portion of the initial variable Annuity Payment allocated to a
Subaccount by the value of that Subaccount's Payment Unit as of the Annuity
Payout Date. The initial variable Annuity Payment is allocated to the
Subaccounts in the same proportion as the Account Value is allocated as of
the Annuity Payout Date. The number of Payment Units will remain constant for
subsequent Annuity Payments, unless the Owner exchanges Payment Units among
Subaccounts or makes a withdrawal under Option 8.
Subsequent variable Annuity Payments are calculated by multiplying the number
of Payment Units allocated to a Subaccount by the value of the Payment Unit
as of the date of the Annuity Payment. If the Annuity Payment is allocated to
more than one Subaccount, the Annuity Payment is equal to the sum of the
payment amount determined for each Subaccount.
ASSUMED INTEREST RATE
As discussed above, the annuity rates for Options 1 through 4 and 8 are based
upon an assumed interest rate of 3.5%, compounded annually, as you elect at
the time the Annuity Option is selected. Variable Annuity Payments generally
increase or decrease from one Annuity Payment date to the next based upon the
performance of the applicable Subaccounts during the interim period adjusted
for the assumed interest rate. If the performance of the Subaccounts is equal
to the assumed interest rate, Annuity Payments will remain constant. If the
performance of the Subaccounts is greater than the assumed interest rate, the
amount of the Annuity Payments will increase and if it is less than the
assumed interest rate, the amount of the Annuity Payments will decline. A
higher assumed interest rate, for example 5%, would mean a higher initial
variable Annuity Payment, but the amount of the Annuity Payments would
increase more slowly in a rising market (or the amount of the Annuity
Payments would decline more rapidly in a falling market). Conversely, a lower
assumed interest rate, for example 3.5%, would mean a lower initial variable
Annuity Payment and more rapidly rising Annuity Payment amounts in a rising
market and more slowly declining Annuity Payment amounts in a falling market.
THE FIXED INTEREST ACCOUNT
- --------------------------------------------------------------------------------
You may allocate all or a portion of your purchase payments, and exchange
Account 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 advised 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," 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
Account Value allocated to the Fixed Interest Account earns interest at a
fixed rate or rates that are paid by the Company. The Account 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.
Account 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
Account Value is allocated or exchanged to the Fixed Interest Account. The
Current Rate paid on any such portion of Account Value allocated or 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
Account Value, which will earn interest at the Current Rate, if any, declared
by the Company on the first day of the new Guarantee Period.
Account 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, Account 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 your Account 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 Account 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 Account
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 Account
Value allocated to the Fixed Interest Account for which the Guarantee Period
expires during the calendar month in which the withdrawal or exchange is
effected, then in the order beginning with that portion of such Account 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 Account Value in the Fixed Interest Account as for a
Contract that has Account 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 Account 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 Account 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 Account 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 than one year, and (3) pursuant to the Asset
Rebalancing Option, provided that upon receipt of the Asset Rebalancing
Request, Account 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 Account 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 Account 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 Account 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 Account 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 Account Value to the Subaccounts. A
Contractowner may make a partial withdrawal from the Fixed Interest Account
only (1) from Account 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% of Account Value allocated to the Fixed Interest
Account at the time of the partial withdrawal. Systematic withdrawals from
Account 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 any full
and partial withdrawals and exchanges from the Fixed Interest Account for up
to six months after a written request in proper form is received at the T.
Rowe Price Variable Annuity Service Center. 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 you if there will be a delay.
MORE ABOUT THE CONTRACT
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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 and exercise all rights that the
Contract grants or the Company 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," page 36.
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. Joint Owners are permitted only on a Contract issued pursuant
to a Non-Qualified Plan.
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 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.
DIVIDENDS
The Contract is eligible to 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 Account 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 Account Value would have provided for the correct age or sex
(unless unisex rates apply).
FEDERAL TAX MATTERS
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INTRODUCTION
The Contract described in this Prospectus is designed for use by individuals
in retirement plans which may or may not be Qualified Plans under the
provisions of the Internal Revenue Code ("Code").
The ultimate effect of federal income taxes on the amounts held under a
Contract, on annuity payments, and on the economic benefits to the Owner, the
Annuitant, and the Beneficiary or other payee will depend upon the type of
retirement plan 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 issued 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 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 announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As of
the date of this Prospectus, no such guidance has been issued.
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 in the present case, the Contractowner has additional flexibility in
allocating purchase payments and Contract Values than in the cases described
in the rulings. 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 promulgated, 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," page 35 and
"Diversification Standards," page 33. 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.
* 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
distribution 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.
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 annuity contracts
issued by the same insurer to the same Contractowner during any calendar
year are to be aggregated and treated as one contract. Thus, any amount
received under any such contract prior to the contract's Annuity 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.
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, 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 AND SECTION 408A
INDIVIDUAL RETIREMENT ANNUITIES. 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. Roth IRAs are described below.
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 year of 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 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 to all IRAs bear to the expected return under the IRAs.
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.
ROTH IRAS. Section 408A of the Code permits eligible individuals to
establish a Roth IRA, a new type of IRA which became available in 1998.
The Contract may be purchased as a Roth IRA. Contributions to a Roth IRA
are not deductible, but withdrawals that meet certain requirements are not
subject to federal income tax. Sale of the contract for use with Roth IRAs
may be subject to special requirements imposed by the Internal Revenue
Service. Purchasers of the Contract for such purposes will be provided
with such supplementary information as may be required by the Internal
Revenue Service or other appropriate agency, and will have the right to
revoke the Contract under certain requirements. Unlike a traditional IRA,
Roth IRAs are not subject to minimum required distribution rules during
the Contractowner's life time. Generally, however, upon the death of the
Contractowner, the amount in a remaining Roth IRA must be distributed in
the same manner as a traditional IRA as described above.
The Internal Revenue Service has not reviewed the Contract for
qualification as a Roth 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 Roth 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 all your IRAs 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 from
all your IRAs.
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% 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 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
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VOTING OF FUND SHARES
You indirectly (through the Separate Account) purchase shares of the
Portfolios when you allocate purchase payments to the Subaccounts. The
Company owns shares of the Portfolios in the Separate Account for your
benefit. Under current law, the Company will vote shares of the Portfolios
held in the Subaccounts in accordance with voting instructions received from
Owners having the right to give such instructions. You will have the right to
give voting instructions to the extent that you have Account Value allocated
to the particular Subaccount. The Company will vote all shares it owns
through the Subaccount in the same proportion as the shares for which it
receives voting instructions from Owners. The Company votes shares in
accordance with its current understanding of the federal securities laws. If
the Company later determines that it may vote shares of the Funds in its own
right, it may elect to do so.
Unless otherwise required by applicable law, the number of shares of a
particular Portfolio as to which you may give voting instructions to the
Company is determined by dividing your Account 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
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.
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.
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 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 indicating the
Account Value as of the end of each year. In addition, the statement will
indicate the allocation of Account 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, 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
You may request an exchange of Account 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 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 fees) 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. 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
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Performance information for the Subaccounts, 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.
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 Account 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
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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 Security Benefit Life Insurance
Company and subsidiaries at December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, and the financial
statements of the Separate Account as of December 31, 1998, and for the years
ended December 31, 1998 and 1997, 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
below.
TABLE OF CONTENTS
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General Information and History 3
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Distribution of the Contract 3
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Limits on Premiums Paid Under Tax-Qualified Retirement Plans 3
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Experts 4
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Performance Information 4
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Financial Statements 6
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<PAGE>
IRA DISCLOSURE STATEMENT
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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.
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 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").
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 withdraw 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:
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 Section 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 contract 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>
ROTH INDIVIDUAL RETIREMENT ANNUITY DISCLOSURE STATEMENT
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This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of Roth IRAs. Internal Revenue Service
regulations require that this be given to each person desiring to establish a
Roth IRA. Further information can be obtained from any district office of the
Internal Revenue Service.
YOUR RIGHT TO REVOKE
You may revoke your Roth IRA within seven days of the date your first
purchase payment is received by Security Benefit Life Insurance Company. To
revoke your Roth IRA 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 REQUIREMENTS?
A Roth IRA contract must meet the following requirements:
1. The amount in your Roth IRA 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. If you die before your entire interest in the contract has been
distributed, your beneficiary may need to receive distributions within a
specified time frame (see "Required Minimum Distributions" below).
5. The contract must provide that you cannot contribute more than $2,000
forany year. This requirement does not apply to qualified rollover
contributions. (See "Rollovers and Direct Transfers" below).
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 Roth IRA 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. You may make a qualified rollover contribution to this contract from
another Roth IRA or from a traditional IRA, and such a contribution will
not count toward the annual limit on contributions to the contract. You
may make a qualified rollover contribution from a traditional IRA only if
your modified adjusted gross income for the year in which the rollover
will occur is $100,000 or less, = and if you are married, you and your
spouse have joint income of $100,000 or less and you file a joint income
tax return for the year in which the rollover occurs. You and your spouse
will not be subject to the requirements for married individuals if you
have lived apart for the entire year of contribution.
2. The amount distributed from your traditional IRA and rolled over will be
subject to federal income taxes, except to the extent such amounts relate
to nondeductible contributions. However, if the distribution occurs before
1999, the amount to be included in your taxable income will be evenly
divided over a four-year period. If you die before the four-year period
ends, the amount that was not included at the time of your death in your
income because you elected to divide your income over a four-year period
must be included in your final return, unless your spouse is the sole
beneficiary of all your Roth IRAs. If your spouse is the sole beneficiary
of all your Roth IRAs, he or she will continue to include the amounts
converted from your traditional IRA over the four-year period. If you
become divorced during the four-year period, or you are married and file a
separate income tax return during the four-year period, you must continue
to recognize income over the four-year period.
3. You must complete a qualified rollover contribution by the 60th day after
the date you receive the distribution from your IRA.
4. A direct transfer of funds in a Roth IRA or a traditional IRA from one
trustee or insurance company to this Roth IRA does not constitute a
rollover.
5. You may make a direct transfer of funds in a traditional IRA to this Roth
IRA.
6. You may not make a rollover contribution from a qualified pension or
profit-sharing plan or tax-sheltered annuity to this Roth IRA. A
distribution from this Roth IRA may be used as a rollover contribution to
another Roth IRA. You may not transfer a Roth IRA to a traditional IRA.
7. You may not rollover minimum required distributions from your traditional
IRA into this Roth IRA.
8. A rollover contribution from one IRA to another IRA, other than a
qualified rollover contribution from a traditional IRA to a Roth IRA, may
be made only once a year. The one-year period begins on the date you
receive the distribution from the first IRA, not on the date you roll it
over (reinvest it) into another IRA. A conversion from a traditional IRA
to a Roth IRA is not treated as a rollover for purposes of the one-year
rule.
AMOUNT OF ANNUAL CONTRIBUTION
1. In general, the amount you can contribute each year to the contract is the
lesser of $2,000 or your taxable compensation for the year. If you have
more than one IRA (either a Roth IRA or a traditional 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. No amount you contribute to the contract will be deductible for federal
income tax purposes.
3. Contributions to your Roth 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.
4. If both you and your spouse have compensation you can each set up your own
Roth 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
Roth IRA or contract.
5. If you and your spouse file a joint federal income tax return, each of you
may contribute up to $2,000 to your own Roth IRA annually if your joint
income is $4,000 or more. The maximum amount the higher compensated spouse
may contribute for the year is the lesser of $2,000 or 100% of that
spouse's compensation. The maximum the lower compensated spouse may
contribute is the lesser of (i) $2,000 or (ii) 100% of that spouse's
compensation plus the amount by which the higher compensated spouse's
compensation exceeds the amount the higher compensated spouse contributes
to his or her Roth IRA.
6. Your maximum annual contribution amount shall be phased-out if you are
single and have an adjusted gross income between $95,000 and $110,000, or
if you are married and you and your spouse have a combined adjusted gross
income between $150,000 and $160,000 in accordance with Section
ss.408A(c)(3) of the Internal Revenue Code (the "Code").
TAX STATUS OF DISTRIBUTIONS
1. Since your contributions to the contract will be made with after-tax
dollars, when your contributions are distributed to you they will not be
subject to federal income tax. Distributions from the contract will be
considered as coming first from your contributions and then from the
earnings on your contributions. You will owe no federal income tax when
earnings on your contributions are distributed to you, provided they are
distributed in a "qualified distribution."
2. "Qualified distributions" from the contract will not be subject to federal
income tax or the additional 10% early withdrawal tax. To be qualified, a
distribution must:
(a) occur after the five-year period beginning on the first day of the
year you made your initial contribution to the contract, and
(b) must be:
(1) made on or after the date on which you attain age 59 1/2;
(2) made to a beneficiary (or your estate) on or after your death;
(3) attributable to your being disabled; or
(4) a distribution to pay for "qualified first-time homebuyer
expenses" under Code ss.72(t)(8) up to $10,000.
3. You will owe federal income tax, and perhaps an additional 10% early
withdrawal tax, as a result of obtaining a "nonqualified distribution." A
nonqualified distribution is subject to federal income tax and the early
withdrawal tax to the extent that the sum of the distribution PLUS all
other distributions from the Roth IRA (whether qualified or nonqualified)
MINUS the amount of your previous distributions that were taxable EXCEEDS
your contribution to all of your Roth IRAs.
4. Your surviving spouse will be treated as the owner of your Roth IRA for
purposes of determining whether a distribution is a "nonqualified
distribution." This means that a distribution to your surviving spouse
from your Roth IRA will be satisfied only if the above requirements are
satisfied with respect to your surviving spouse. However, the period
during which you held the Roth IRA prior to your death will be taken into
account for purposes of determining whether your spouse has satisfied the
five-year requirement in 2(a) above.
5. Amounts held in Roth IRAs are generally subject to the imposition of
federal estate taxes. 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.
6. Taxable distributions from a Roth IRA are not eligible for special
five-year or ten-year averaging that may apply to lump sum distributions
from qualified employer retirement plans.
7. Distributions that are rolled over as a qualified rollover contribution to
another Roth IRA will be treated as a "qualified distribution."
8. Substantially equal periodic payments from a Roth IRA that was formerly a
traditional IRA from which you were receiving substantially equal periodic
payments will be treated as nonqualified distributions. However, such
distributions will not be subject to the 10% penalty on premature
distributions (see below).
REQUIRED MINIMUM DISTRIBUTIONS
1. You are not required to receive required minimum distributions from your
Roth IRA during your lifetime.
2. If you die before the entire balance in your Roth IRA has been
distributed, the general rule is that the entire balance must be
distributed within five (5) years of your death. However, if the balance
in your Roth IRA account is payable to your designated beneficiary, you
may elect or 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 the
sole designated beneficiary of your Roth IRA on your date of death, these
rules do not apply and the Roth IRA will be treated as your spouse's IRA,
and no distributions from the Roth IRA to your spouse will be required
during your spouse's lifetime.
3. 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, write the IRS Forms
Distribution Center for your area as shown in your income tax return
instructions.
4. If the actual distribution from your Roth IRA is less than the minimum
amount that should be distributed in accordance with the rules set forth
above, the difference is subject to a 50% excise tax.
WHAT HAPPENS IF EXCESS CONTRIBUTIONS ARE MADE TO MY ROTH IRA?
1. You must pay a 6% excise tax if you make excess contributions to your Roth
IRA. Generally, an excess contribution is the amount contributed to your
Roth IRA that is above the maximum amount you can contribute for the year.
2. You will not have to pay the 6% excise tax if you withdraw the excess
amount, plus the net income on those excess contributions, by the date
your tax return is due, including extensions, for the year of the
contribution. The net earnings on these excess contributions will be
included in your income for the year in which the contributions were made.
3. If your excess contributions, plus the net income on those contributions,
are distributed AFTER the due date of your tax return for the year of
contribution, the earnings on those contributions may be subject to
federal income tax and the 10% tax on premature distributions. However, if
you choose to leave the excess contributions in your Roth IRA after the
due date of your income tax return for the year of contribution, the
excess contributions will be treated as deemed Roth IRA contributions for
subsequent years, to the extent you contribute less than $2,000 for those
subsequent years.
ARE THERE ANY PENALTIES FOR PREMATURE DISTRIBUTIONS?
There is an additional tax on premature distributions which are part of a
nonqualified distribution equal to 10% of the amount of the premature
distribution that you must include in your gross income. (See the discussion
above on the "Tax Status of Distributions.") Premature distributions are
generally amounts you withdraw from your Roth IRA before you are age 59 1/2.
Distributions to your surviving spouse will be treated as premature
distributions if your surviving spouse withdraws amounts from your Roth IRA
before he or she is 59 1/2. However, the tax on premature distributions does
not apply:
1. To distributions that constitute qualified rollover contributions to
another Roth IRA.
2. To a series of substantially equal periodic payments made over your life
or life expectancy, or the joint life expectancy of you and your
beneficiary.
3. To amounts distributed to a beneficiary, or your estate, on or after your
death.
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 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 Section 72(t)(8), up to $10,000.
8. To a distribution for post-secondary education costs for you, your spouse
or any child or grandchild of you or your spouse.
IRA EXCISE TAX REPORTING
Use Form 5329, Return for Individual Retirement Arrangement Taxes, to report
the excise taxes on excess contributions and premature distributions. If you
do not owe any excise taxes, you do not need Form 5329. Further information
can be obtained from any district office of the Internal Revenue Service.
TRANSACTIONS WITH YOUR ROTH IRA
If you engage in a so-called prohibited transaction with respect to your Roth
IRA, the IRA will lose its exemption from tax. In this event, you will be
taxed on the fair market value of the contract even if you do not actually
receive a distribution. In addition, if you are less than 59 1/2, your taxes
may be further increased by a penalty tax in an amount equal to 10% of the
fair market value of the contract. These prohibited transactions include
borrowing money from your Roth IRA, using your Roth IRA account as security
for a loan or a number of other financial transactions with your Roth IRA. If
you pledge your Roth IRA as security for a loan, then the amount or portion
pledged is considered to be distributed to you and also must be included in
your gross income. (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 Roth IRA 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 Roth IRA 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.
IMPORTANT: The discussion of the tax rules for Roth IRAs in this Disclosure
Statement is based upon the best available information. However, the rules
that apply to Roth IRAs, including those applicable to the conversion and
reconversion of IRAs, are complex and may have consequences that are specific
to your personal tax or financial situation. Therefore, you should consult
your tax advisor for the latest developments and for advice about how
maintaining a Roth IRA will affect your personal tax or financial situation.
<PAGE>
VARIABLE ANNUITY PROSPECTUS
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T. ROWE PRICE NO-LOAD IMMEDIATE VARIABLE ANNUITY
An Individual Single Premium
Immediate Variable Annuity Contract
May 1, 1999
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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
<PAGE>
INTRODUCTION
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* THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THE PROSPECTUS IS TRUTHFUL OR COMPLETE.
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. YOU SHOULD READ THE
PROSPECTUSES CAREFULLY AND RETAIN THEM FOR FUTURE REFERENCE.
This Prospectus describes the T. Rowe Price No-Load Immediate Variable
Annuity--a single premium immediate 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. The Contract is also available as an individual retirement
annuity ("IRA") qualified under Section 408, or a Roth IRA qualified under
Section 408A, of the Internal Revenue Code. The Contract is designed to give
you flexibility in receiving retirement income.
The Contract provides several options for annuity payments beginning on the
Annuity Payout Date. The Annuity Payout Date, which must be within 30 days of
the Contract Date, and Annuity Option are selected at the time of purchase.
The minimum initial Purchase Payment is $25,000. The Company does not accept
additional Purchase Payments. You may allocate the Purchase Payment to one or
more of the Subaccounts that comprise a separate account of the Company
called the T. Rowe Price Variable Annuity Account, or to the Fixed Interest
Account of the Company. Each Subaccount invests in a corresponding 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
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 sponsored by T. Rowe
Price Associates, Inc., including other mutual funds with investment
objectives and policies similar to those of the Portfolios. Different
performance will result due to differences in cash flows into and out of the
Portfolios, different fees and expenses and differences in portfolio size and
position.
Your Annuity Payments, if supported by the Subaccounts, will vary based on
the investment performance of the Subaccounts to which you allocate the
Purchase Payment. No minimum amount of variable annuity payments is
guaranteed, except that Annuity Payments under Option 9 are guaranteed never
to fall below the Floor Payment. The Company guarantees the amount of fixed
Annuity Payments.
You may return a Contract according to the terms of its Free-Look Right (see
"Free-Look Right," page 18). This Prospectus concisely sets forth information
about the Contract and the T. Rowe Price Variable Annuity Account that you
should know before purchasing the Contract. The "Statement of Additional
Information," dated May 1, 1999, which has been filed with the Securities and
Exchange Commission (the "SEC"), contains certain additional information. 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 42 of this Prospectus.
Date: May 1, 1999
<PAGE>
CONTENTS
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* YOU MAY NOT BE ABLE TO PURCHASE THE CONTRACT IN YOUR STATE. YOU SHOULD
NOT CONSIDER THIS PROSPECTUS TO BE AN OFFERING IF THE CONTRACT MAY NOT BE
LAWFULLY OFFERED IN YOUR STATE. YOU SHOULD ONLY RELY UPON INFORMATION
CONTAINED IN THIS PROSPECTUS OR THAT WE HAVE REFERRED YOU TO. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
Definitions 5
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Summary 7
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Expense Table 9
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Condensed Financial Information 12
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Information About the Company, the Separate Account, and the Funds 13
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The Contract 16
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Charges and Deductions 19
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Annuity Payments 21
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The Fixed Interest Account 28
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More About the Contract 30
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Federal Tax Matters 31
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Other Information 38
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Performance Information 41
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Additional Information 41
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<PAGE>
DEFINITIONS
- --------------------------------------------------------------------------------
* VARIOUS TERMS COMMONLY USED IN THIS PROSPECTUS ARE DEFINED AS FOLLOWS:
ACCOUNT VALUE The total value of a Contract, which includes amounts allocated
to the Subaccounts and the Fixed Interest Account. The Company determines
Account Value as of each Valuation Date prior to the Annuity Payout Date and
on and after the Annuity Payout Date under Annuity Options 5 through 7.
Account Value is also determined under Option 9 during the Liquidity Period.
ACCUMULATION UNIT A unit of measure used to calculate Account Value.
ANNUITANT The Annuitant receives Annuity Payments during the Annuity Period
and is the person or persons on whose life Annuity Payments depend under
Annuity Options 1 through 4 and 9. If the Owner names Joint Annuitants 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 or OPTIONS Options under the Contract that prescribe the
provisions under which a series of Annuity Payments or a death benefit, if
applicable, is paid.
ANNUITY PAYMENTS Payments made beginning on the Annuity Payout Date according
to the provisions of the Annuity Option selected. Annuity Payments are made
on the same day of each month, on a monthly, quarterly, semiannual or annual
basis, depending on the Annuity Option selected.
ANNUITY PERIOD The period beginning on the Annuity Payout Date during which
Annuity Payments are made.
ANNUITY PAYOUT DATE The date within 30 days of the Contract Date upon which
Annuity Payments are scheduled to begin.
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. Any Owner must also be an
Annuitant.
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 Annuitant during the Annuity Period. The
Designated Beneficiary is the first person on the following list who is alive
on the date of death of the Annuitant: the Primary Beneficiary; the Secondary
Beneficiary; 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 to which the Purchase Payment may be allocated to purchase a fixed
annuity. Account Value allocated to the Fixed Interest Account under Options
5 through 7 will earn fixed rates of interest (which may not be less than 3%)
declared by the Company periodically at its discretion.
FLOOR PAYMENT Annuity Payments under Option 9 are guaranteed never to be less
than the Floor Payment, which is equal to 80% of the amount of the initial
Annuity Payment, adjusted for withdrawals.
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.
GENERAL ACCOUNT All assets of the Company other than those allocated to the
Separate Account or to any other separate account of the Company.
LIQUIDITY PERIOD Under Annuity Option 9, the Liquidity Period is the period
of time during which the Owner may withdraw Account Value. The Liquidity
Period is a period beginning on the Contract Date and ending on a date five
years from the Annuity Payout Date.
PAYMENT UNIT A unit of measure used to calculate Annuity Payments under
Options 1 through 4, 8 and 9.
PURCHASE PAYMENT The amount paid to the Company as consideration for the
Contract.
SEPARATE ACCOUNT The T. Rowe Price Variable Annuity Account, a separate
account of the Company. The Purchase Payment may be allocated to Subaccounts
of the Separate Account to support an Annuity Payment.
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 depending upon the Annuity Option selected.
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. 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 Account Value less any premium taxes due and
paid by the Company and for withdrawals under Option 9, any withdrawal
charge. The Withdrawal Value under Option 8 is the present value of future
Annuity Payments calculated using the assumed interest rate less any premium
taxes due and paid by the Company.
<PAGE>
SUMMARY
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This summary provides a brief overview of the more significant aspects of the
Contract. Further detail is provided in this Prospectus, the Statement of
Additional Information, and the Contract. Unless the context indicates
otherwise, the discussion in this summary and the remainder of the Prospectus
relates to the portion of the Contract involving the Separate Account. The
Fixed Interest Account is briefly described under "The Fixed Interest
Account," page 28 and in the Contract.
PURPOSE OF THE CONTRACT
The single premium immediate variable annuity contract (the "Contract")
described in this Prospectus provides several Options for Annuity Payments on
a variable basis, a fixed basis, or both. You may select an Annuity Option
that provides income for your lifetime or a specified period.
You may purchase the Contract as a non-tax qualified retirement plan for an
individual ("Non-Qualified Plan"). If you are eligible, you may also purchase
the Contract as an individual retirement annuity ("IRA") qualified under
Section 408, or a Roth IRA qualified under Section 408A, of the Internal
Revenue Code of 1986, as amended ("Qualified Plan"). An IRA may be purchased
with contributions rolled over from tax-qualified plans such as 403(b) plans,
401(k) plans, or individual retirement accounts. See the discussion of IRAs
and Roth IRAs under "Section 408 and Section 408A," page 36.
THE SEPARATE ACCOUNT AND THE FUNDS
You may allocate your Purchase Payment to the T. Rowe Price Variable Annuity
Account (the "Separate Account") to provide a variable annuity. See "Separate
Account," page 14. The Separate Account is currently divided into seven
divisions 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
Your Annuity Payments, if supported by a Subaccount, will increase or
decrease in dollar value depending on the investment performance of the
corresponding Portfolio in which such Subaccount invests. You bear the
investment risk for amounts allocated to a Subaccount. Not all of the
Subaccounts are available under each Annuity Option.
FIXED INTEREST ACCOUNT
You may allocate your Purchase Payment to the Fixed Interest Account to
provide a fixed annuity. The Fixed Interest Account 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," page 28.
PURCHASE PAYMENT
The minimum Purchase Payment is $25,000. The Company does not accept
additional Purchase Payments under the Contract. A Purchase Payment exceeding
$1,000,000 will not be accepted under a Contract without prior approval of
the Company. See "Purchase Payments," page 17.
CONTRACT BENEFITS
The Contract provides for several Annuity Options on either a variable basis,
a fixed basis, or both. The Company guarantees payments under the fixed
Annuity Options. See "Annuity Payments," page 21. The Contract provides for a
death benefit upon the death of the Annuitant under certain of the Annuity
Options. See "Annuity Options," page 24 for more information.
You may exchange your interest in the Contract among the Subaccounts, subject
to certain restrictions as described in "The Contract," page 16, "Exchanges,"
page 22 and "The Fixed Interest Account," page 28. You may make up to six
exchanges in any Contract Year.
You may withdraw your Account Value under Annuity Options 5 through 8 and
during the Liquidity Period under Option 9. Withdrawals under Option 9 are
subject to a withdrawal charge as discussed below. Withdrawals of Account
Value allocated to the Fixed Interest Account are subject to certain
restrictions described in "The Fixed Interest Account," page 28. See "Full
and Partial Withdrawals," page 22, and "Federal Tax Matters," page 31 for
more information about withdrawals, including the 10% penalty tax that may be
imposed upon full and partial withdrawals made prior to the Owner attaining
age 59 1/2.
FREE-LOOK RIGHT
You may return the Contract within the Free-Look Period, which is generally a
10-day period beginning when you receive the Contract. In this event, the
Company will refund to you the amount of the Purchase Payment allocated to
the Fixed Interest Account plus the Account Value in the Subaccounts. The
Company will refund the amount of the Purchase Payment allocated to the
Subaccounts rather than the Account Value in those states and circumstances
in which it is required to do so. See "Free-Look Right," page 18.
CHARGES AND DEDUCTIONS
The Company does not deduct a sales load from the Purchase Payment. The
Company will deduct certain charges 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 0.55% (1.40% under Annuity Option 9) of each Subaccount's
average daily net assets. See "Mortality and Expense Risk Charge," page
19.
* 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 be deducted from your Purchase Payment if the
Company incurs a premium tax. 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," page 20.
* WITHDRAWAL CHARGE If you withdraw Account Value during the Liquidity
Period under Option 9, the withdrawal is subject to a withdrawal charge.
The charge is based upon the year in which the withdrawal is made as
measured from the Annuity Payout Date. The withdrawal charge, which
ranges from 5% in the first year to 1% in the fifth year, is applied to
the amount of the withdrawal. Withdrawals after the fifth year from the
Annuity Payout Date are not permitted under Option 9. See "Contract
Withdrawal Charge," page 20.
* OTHER EXPENSES The Company pays the operating expenses of the Separate
Account. 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
You should direct all written requests, notices, and forms required by the
Contract, and any questions or inquiries to the T. Rowe Price Variable
Annuity Service Center, P.O. Box 750440, Topeka, Kansas 66675-0440,
1-800-469-6587.
EXPENSE TABLE
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The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly and indirectly if you allocate your
Purchase Payment to the Subaccounts. The table reflects any contractual
charges, expenses of the Separate Account, and charges and expenses of the
Portfolios. The table does not reflect premium taxes that may be imposed by
various jurisdictions. See "Premium Tax Charge," page 20. 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 19. For a more complete description of each Portfolio's
costs and expenses, see the Funds' prospectus, which accompanies this
Prospectus.
TABLE 1
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All Other
Annuity
Option 9 Options
CONTRACTOWNER TRANSACTION EXPENSES
Withdrawal Charge Under Option 9
(as a percentage of amount surrendered) .......... 5%(1) None
CONTRACTUAL EXPENSES
Sales Load on Purchase Payments .................... None None
Annual Maintenance Fee ............................. None None
ANNUAL SEPARATE ACCOUNT EXPENSES
Annual Mortality and Expense Risk Charge
(as a percentage of each Subaccount's
average daily net assets) ........................ 1.40% .55%
Total Annual Separate Account Expenses ............. 1.40% .55%
ANNUAL PORTFOLIO EXPENSES (AS A PERCENTAGE OF EACH PORTFOLIO'S AVERAGE DAILY
NET ASSETS
TOTAL
MANAGEMENT OTHER PORTFOLIO
FEE(2) 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%
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1 The withdrawal charge, which ranges from 5% in the first year to 1% in the
fifth year, is imposed only upon withdrawals under Option 9 which are
permitted only during the Liquidity Period. The withdrawal charge is based
upon the year in which the withdrawal is made as measured from the Annuity
Payout Date.
2 The management fee includes the ordinary expenses of operating the Funds.
EXAMPLES
The examples presented below show expenses that you would pay at the end of
one, three, five, or ten years. The examples show expenses based upon an
allocation of $1,000 to each of the Subaccounts and a hypothetical annual
return of 5%.
You should not consider the examples below 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 - You would pay the expenses shown below (unless Option 9 were
selected):
-----------------------------------------------------------------------------
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
-----------------------------------------------------------------------------
EXAMPLE - You would pay the expenses shown below assuming (1) selection of
Option 9, and (2) no withdrawals:
-----------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
New America Growth Subaccount ....... $23 $70 $120 $258
International Stock Subaccount ...... $25 $76 $131 $279
Mid-Cap Growth Subaccount ........... $23 $70 $120 $258
Equity Income Subaccount ............ $23 $70 $120 $258
Personal Strategy Balanced Subaccount $23 $72 $123 $264
Limited-Term Bond Subaccount ........ $21 $66 $113 $243
Prime Reserve Subaccount* ........... $20 $61 $105 $227
-----------------------------------------------------------------------------
EXAMPLE - You would pay the expenses shown below assuming (1) selection of
Option 9, and (2) a full withdrawal at the end of each time period:
-----------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
New America Growth Subaccount ....... $74 $103 $132 $258
International Stock Subaccount ...... $76 $108 $142 $279
Mid-Cap Growth Subaccount ........... $74 $103 $132 $258
Equity Income Subaccount ............ $74 $103 $132 $258
Personal Strategy Balanced Subaccount $75 $104 $134 $264
Limited-Term Bond Subaccount ........ $73 $98 $124 $243
Prime Reserve Subaccount* ........... $71 $94 $117 $227
-----------------------------------------------------------------------------
*Not available for Option 9.
<PAGE>
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The following condensed financial information presents accumulation unit
values for the years ended December 31, 1998, 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.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1995 1996 1997 1998
<S> <C> <C> <C> <C>
NEW AMERICA GROWTH SUBACCOUNT
Accumulation unit value:
Beginning of period ............... $10.00 $13.40 $16.00 $19.28
End of period ..................... $13.40 $16.00 $19.28 $22.72
Accumulation units:
Outstanding at the end of period .. 333,934 1,596,903 2,030,514 2,269,650
INTERNATIONAL STOCK SUBACCOUNT
Accumulation unit value:
Beginning of period ............... $10.00 $11.19 $12.77 $13.09
End of period ..................... $11.19 $12.77 $13.09 $15.08
Accumulation units:
Outstanding at the end of period .. 218,427 1,124,821 1,562,428 1,554,164
EQUITY INCOME SUBACCOUNT
Accumulation unit value:
Beginning of period ............... $10.00 $12.37 $14.70 $18.84
End of period ..................... $12.37 $14.70 $18.84 $20.42
Accumulation units:
Outstanding at the end of period .. 365,712 1,902,935 3,450,047 3,428,903
PERSONAL STRATEGY BALANCED SUBACCOUNT
Accumulation unit value:
Beginning of period ............... $10.00 $11.90 $13.51 $15.86
End of period ..................... $11.90 $13.51 $15.86 $18.04
Accumulation units:
Outstanding at the end of period .. 148,349 599,843 983,602 1,257,891
LIMITED TERM-BOND SUBACCOUNT
Accumulation unit value:
Beginning of period ............... $10.00 $10.64 $10.93 $11.60
End of period ..................... $10.64 $10.93 $11.60 $12.38
Accumulation units:
Outstanding at the end of period .. 86,891 445,079 626,694 926,046
MID-CAP GROWTH SUBACCOUNT*
Accumulation unit value:
Beginning of period ............... $10.00 $11.82
End of period ..................... $11.82 $14.34
Accumulation units:
Outstanding at the end of period .. 1,100,979 1,508,570
PRIME RESERVE SUBACCOUNT*
Accumulation unit value:
Beginning of period ............... $10.00 $10.48
End of period ..................... $10.48 $10.97
Accumulation units:
Outstanding at the end of period .. 769,829 1,367,278
-----------------------------------------------------------------------------------
*The Mid-Cap Growth and Prime Reserve Subaccounts commenced operations on
January 2, 1997.
</TABLE>
<PAGE>
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. On July 31, 1998, the
Company converted from a mutual life insurance company to a stock life
insurance company ultimately controlled by Security Benefit Mutual Holding
Company, a Kansas mutual holding company. Membership interests of persons who
were Contractowners as of July 31, 1998 became membership interests in
Security Benefit Mutual Holding Company as of that date, and persons who
acquire policies from the Company after that date automatically become
members in the mutual holding company.
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 1998, the Company had total assets of approximately $7.9
billion. Together with its subsidiaries, the Company has total funds under
management of approximately $8.8 billion.
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. We consider a system Year 2000 Compliant when it is able to
correctly process, provide, and/or receive data before, during and after the
Year 2000. 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 progress towards completing the modification/replacement
of its internal systems as well as obtaining Year 2000 Compliant
certifications from its external vendors. Overall systems testing commenced
in early 1998 and will extend into the first eight months of 1999.
Although the Company has taken steps to ensure that its systems will function
properly before, during, and after the Year 2000, external vendors provide
its key operating systems and information sources, 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 associated with an investment in the Separate Account.
SEPARATE ACCOUNT
T. ROWE PRICE VARIABLE ANNUITY ACCOUNT
The Company established the T. Rowe Price Variable Annuity Account as a
separate account under Kansas law on March 28, 1994. The Contract provides
that income, gains, or losses of the Separate Account, whether or not
realized, are credited to or charged against the assets of the Separate
Account without regard to other income, gains, or losses of the Company. 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 Contract. Such Separate Account assets are not subject
to claims of the Company's creditors. 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.
The Separate Account is currently divided into seven Subaccounts. The
Contract provides that income, gains and losses, whether or not realized, are
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 its contract
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 (1)
such change is necessary to comply with applicable laws, (2) shares of any or
all of the Portfolios should no longer be available for investment, or (3)
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 40.
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. 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, 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. 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 set
forth 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 that operate in service industries.
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 common stocks of
medium-sized growth companies.
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 (NOT AVAILABLE UNDER OPTION 9)
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 Associates, Inc. ("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 the Portfolios, T. Rowe
Price and Price-Fleming are responsible for selection and management of
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 Company issues the Contract offered by this Prospectus. It is a single
premium immediate variable annuity. To the extent that all or a portion of
the Purchase Payment is allocated to the Subaccounts, the Contract is
significantly different from a fixed annuity contract in that it is the
Contractowner who assumes the risk of investment gain or loss rather than the
Company. The Contract 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 of variable
Annuity Payments will depend on the investment performance of the Subaccounts
to which the Purchase Payment has been allocated. The Company guarantees the
amount of fixed Annuity Payments.
The Contract is available for purchase by an individual as a non-tax
qualified retirement plan ("Non-Qualified Plan"). The Contract is also
eligible for purchase as an individual retirement annuity ("IRA") qualified
under Section 408, or a Roth IRA qualified under Section 408A, of the
Internal Revenue Code ("Qualified Plan"). An IRA may be purchased with
contributions from tax-qualified plans such as 403(b) plans, 401(k) plans, or
individual retirement accounts. See the discussion of IRAs and Roth IRAs
under "Section 408 and Section 408A," page 36. Joint Owners are permitted
only on a Contract issued pursuant to a Non-Qualified Plan.
APPLICATION FOR A CONTRACT
If you wish to purchase a Contract, you may submit an application and the
Purchase Payment to the Company, as well as any other form or information
that the Company may require. The Purchase Payment may be made by check or,
if you own shares of one or more mutual funds distributed by Investment
Services ("T. Rowe Price Funds"), you may elect 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. If you redeem fund
shares, it is a sale of shares for tax purposes, which may result in a
taxable gain or loss. You may obtain an application 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.
Any Owner must also be an Annuitant. 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 Purchase Payment for the purchase of a Contract is $25,000. The
Company will not accept additional Purchase Payments under the Contract. A
Purchase Payment exceeding $1 million will not be accepted without prior
approval of the Company.
The Company will apply the initial Purchase Payment not later than the end of
the second Valuation Date after the Valuation Date it is received at the T.
Rowe Price Variable Annuity Service Center; provided that the Purchase
Payment is preceded or accompanied by an application that contains sufficient
information to establish an account and properly credit such Purchase
Payment. If the Company does not receive a complete application, the Company
will notify you that it does not have the necessary information to issue a
Contract. If you do not provide the necessary information 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 you unless you consent to the Company retaining the
Purchase Payment until the application is made complete.
An application will be considered properly completed if it (1) includes all
information requested on the application, including election of an Annuity
Option, and (2) is accompanied by proof of the date of birth of the Annuitant
and any Joint Annuitant and the entire amount of the Purchase Payment.
ALLOCATION OF THE PURCHASE PAYMENT
In an application for a Contract, you select the Subaccounts or the Fixed
Interest Account to which the Purchase Payment will be allocated. The
allocation must be a whole percentage. The Purchase Payment will be allocated
according to your instructions contained in the application, except that no
Purchase Payment allocation is permitted that would result in less than 5% of
any payment being allocated to any one Subaccount or the Fixed Interest
Account. Available allocation alternatives generally include the seven
Subaccounts and the Fixed Interest Account. The Prime Reserve Subaccount and
the Fixed Interest Account are not available under Option 9.
ACCOUNT VALUE
The Account Value is the sum of the amounts under the Contract held in each
Subaccount and in the Fixed Interest Account. Account Value is determined as
of any Valuation Date prior to the Annuity Payout Date and on and after the
Annuity Payout Date under Annuity Options 5 through 7 and during the
Liquidity Period under Option 9. There is no Account Value under Options 1
through 4 and 8, or after the Liquidity Period, under Option 9.
On each Valuation Date, the portion of the Account Value allocated to any
particular Subaccount will be adjusted to reflect the investment experience
of that Subaccount for that date. See "Determination of Account Value,"
below. No minimum amount of Account Value is guaranteed. You bear the entire
investment risk relating to the investment performance of Account Value
allocated to the Subaccounts.
DETERMINATION OF ACCOUNT VALUE
The Account Value will vary to a degree that depends upon several factors,
including investment performance of the Subaccounts to which Account Value
has been allocated, partial withdrawals, the charges assessed in connection
with the Contract and Annuity Payments under Options 5 through 7 and during
the Liquidity Period, under Option 9. 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 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 all or part of the
Purchase Payment 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 as of the end of the
Valuation Period in which the Purchase Payment is credited. In addition,
other transactions including full or partial withdrawals and any withdrawal
charge, exchanges, Annuity Payments under Options 5 through 7 and during the
Liquidity Period under Option 9, and assessment of premium taxes against the
Contract, all 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 Accumulation Unit value of the affected Subaccount. The Accumulation
Unit value of each Subaccount is determined as of 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.
Determination of the unit value 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 of the applicable Annuity Option under the Contract.
FREE-LOOK RIGHT
You may return a Contract within the Free-Look Period, which is generally a
10-day period beginning when you receive the Contract. The returned Contract
will then be deemed void and the Company will refund to you any part of the
Purchase Payment allocated to the Fixed Interest Account plus the Account
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 refund the
amount of the Purchase Payment allocated to the Subaccounts rather than
Account Value in those states and circumstances in which it is required to do
so.
DEATH BENEFIT
If the Owner dies prior to the Annuity Payout Date, the Company will pay the
death benefit proceeds upon receipt of due proof of death and instructions
regarding payment. If the Owner dies and there is no Joint Annuitant, the
death benefit proceeds will be payable to the Designated Beneficiary in an
amount equal to the Account Value as of the date due proof of death and
instructions regarding payment are received by the Company, less any premium
taxes due or paid by the Company, any partial withdrawals and any Annuity
Payments. If the Owner dies and there is a Joint Annuitant, the surviving
Joint Annuitant may elect to receive the death benefit proceeds described
above or elect a new Annuity Option. 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 prior to the Annuity Payout Date and instructions regarding
payment. If the death of an Owner occurs on or after the Annuity Payout Date,
any death benefit will be determined according to the terms of the Annuity
Option selected by the Owner. See "Annuity Options," page 24. See "Federal
Tax Matters," 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 any Owner
dies prior to the Annuity Payout Date, the entire death benefit must be paid
within five years after the death of such Owner. If any Owner dies on or
after the Annuity Payout Date, Annuity Payments shall continue to be paid at
least as rapidly as under the method of payment being used as of the date of
the Owner's death. 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.
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 generally is equal to an annual rate of 0.55% 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. If Option 9 is
selected, the mortality and expense risk charge is equal to an annual rate of
1.40% of each Subaccount's average daily net assets.
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. With respect to Option 9, the Company also assumes the risks
associated with providing the Floor Payment. See "Option 9 - Life Income with
Liquidity," page 25.
The Company may ultimately realize a profit from the mortality and expense
risk 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
Investment Services, Inc. or an affiliate thereof, at the annual rate of
0.10% 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 from the Purchase Payment if
premium tax is incurred. 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.
CONTRACT WITHDRAWAL CHARGE
The Company deducts a withdrawal charge from full or partial withdrawals made
during the Liquidity Period under Option 9. The charge is deducted from the
Subaccounts in the same proportion as the withdrawal is allocated. The
withdrawal charge is based upon the year in which the withdrawal is made as
measured from the Annuity Payout Date. Withdrawals after the fifth year from
the Annuity Payout Date are not permitted. The withdrawal charge, which is
set forth below, is applied to the amount of the withdrawal.
--------------------------------------------------------
YEAR FROM ANNUITY PAYOUT DATE WITHDRAWAL CHARGE
First 5%
Second 4%
Third 3%
Fourth 2%
Fifth 1%
--------------------------------------------------------
The withdrawal charge compensates the Company for the costs associated with
providing the Floor Payment under Option 9, including the costs of
reinsurance purchased by the Company to hedge against the Company's potential
losses from providing the Floor Payment.
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 32.
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 (1.40% of each Subaccount's average daily net assets under Option 9).
FUND EXPENSES
Each Subaccount 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, you indirectly bear 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.
ANNUITY PAYMENTS
- --------------------------------------------------------------------------------
GENERAL
You must select an Annuity Payout Date, which must be within 30 days of the
Contract Date, at the time of purchase. If you do not select an Annuity
Payout Date, the Annuity Payout Date will be a date one month from the
Contract Date. For example, if the Contract Date is February 28 and no
Annuity Payout Date is selected, the Annuity Payout Date will be March 28.
On the Annuity Payout Date, the Purchase Payment, less any applicable premium
taxes, will be applied to provide an annuity under one of the Options
described on page 24. The Purchase Payment is further reduced by an amount
equal to 1.8% of the Purchase Payment if you elect a fixed annuity under one
of Options 1 through 4 or 8. Each Option, except Option 9 which is available
only as a variable annuity, is available either 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
under Options 5 through 7. Your payment choices for each Annuity Option are
set forth in the table below.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
VARIABLE FIXED COMBINATION VARIABLE
ANNUITY OPTION ANNUITY ANNUITY AND FIXED ANNUITY
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Option 1 - Life Income X X
---------------------------------------------------------------------------------------------
Option 2 - Life Income with Period Certain X X
---------------------------------------------------------------------------------------------
Option 3 - Life Income with Installment Refund X X
---------------------------------------------------------------------------------------------
Option 4 - Joint and Last Survivor X X
---------------------------------------------------------------------------------------------
Option 5 - Payments for a Specified Period X X X
---------------------------------------------------------------------------------------------
Option 6 - Payments of a Specified Amount X X X
---------------------------------------------------------------------------------------------
Option 7 - Age Recalculation X X X
---------------------------------------------------------------------------------------------
Option 8 - Period Certain X X
---------------------------------------------------------------------------------------------
Option 9 - Life Income with Liquidity X
---------------------------------------------------------------------------------------------
</TABLE>
Variable Annuity Payments will fluctuate with the investment performance of
the applicable Subaccounts while fixed Annuity Payments will not. Any portion
of the net Purchase Payment under the Contract allocated to the Subaccounts
will be applied to purchase a variable annuity and any portion under the
Contract allocated to the Fixed Interest Account will be applied to purchase
a fixed annuity. The net Purchase Payment will be equal to the Purchase
Payment, reduced by any applicable premium taxes, and 1.8% of the Purchase
Payment if a fixed annuity under one of Options 1 through 4 or 8 is selected.
The Company will make Annuity Payments on a monthly, quarterly, semiannual,
or annual basis, except that under Option 9, Annuity Payments can be made
only on a monthly basis. No Annuity Payments will be made for less than $100
except that there is no minimum payment amount with respect to Annuity
Payments under Option 9. You 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.
You may not change the Annuity Payout Date, Annuity Option or Annuitant at
any time after the Contract has been issued.
EXCHANGES
You may exchange Account Value or Payment Units (depending upon the Annuity
Option selected) among the Subaccounts upon proper written request to the T.
Rowe Price Variable Annuity Service Center. Exchanges may be made by
telephone if telephone exchanges were elected in the application, or 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 amount of Account
Value that may be exchanged is $500 or, if less, the amount remaining in the
Fixed Interest Account or Subaccount. Exchanges of Account Value or Payment
Units will immediately affect the amount of future Annuity Payments, which
will be based upon the performance of the Subaccounts to which the exchange
is made. Because Option 9 provides for level monthly payments that reset only
annually, an exchange under Option 9 will not affect the amount of the
Annuity Payment until the next annual reset date.
The Owner may exchange Payment Units among Subaccounts under Options 1
through 4 and 8 and may exchange Account Value among the Subaccounts and the
Fixed Interest Account under Options 5 through 7, subject to the restrictions
on exchanges from the Fixed Interest Account described under the "Fixed
Interest Account," page 28. Under Option 9, the Owner may exchange only among
the Subaccounts (excluding the Prime Reserve Subaccount). Under Option 9,
Account Value may be exchanged during the Liquidity Period and Payment Units
may be exchanged after the Liquidity Period. An exchange of Account Value
during the Liquidity Period under Option 9 will automatically effect a
corresponding exchange of Payment Units.
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 of Account Value 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 contract with Investment Services, the Company first obtains the
consent of Investment Services.
FULL AND PARTIAL WITHDRAWALS
Once the Contract has been issued, an Annuitant or Owner cannot change the
Annuity Option and generally cannot surrender his or her annuity and receive
a lump-sum settlement in return. Full and partial withdrawals of Account
Value are available, however, under Options 5 through 7, subject to the
restrictions on withdrawals from the Fixed Interest Account, and under Option
9 during the Liquidity Period. Withdrawals during the Liquidity Period under
Option 9 are subject to a withdrawal charge as discussed under "Contract
Withdrawal Charge," page 20. An Owner may elect to withdraw the present value
of Annuity Payments, commuted at the assumed interest rate, if a variable
annuity under Option 8 is selected. Partial withdrawals will reduce the
amount of future Annuity Payments. Under Option 9, upon a partial withdrawal
of Account Value, the amount of the Annuity Payment, Floor Payment and number
of Payment Units used to calculate the Annuity Payment will be reduced. The
amount of the Annuity Payment and the number of Payment Units for each
Subaccount is reduced in the same proportion as the withdrawal reduces
Account Value allocated to that Subaccount as of the date of the withdrawal.
The Floor Payment is reduced in the same proportion as the withdrawal reduces
overall Account Value as of the date of the withdrawal. An example of a
partial withdrawal under Option 9 is set forth below.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
SUBACCOUNTS FROM WHICH ACCOUNT VALUE ON WITHDRAWAL AMOUNT PERCENTAGE
ANNUITY PAYMENT IS MADE DATE OF WITHDRAWAL (INCLUDING WITHDRAWAL CHARGES) REDUCTION
<S> <C> <C> <C>
Equity Income $95,000 $0 0%
International Stock $25,000 $15,000 60%
Total $120,000 $15,000 12.5%
----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
PRIOR TO PARTIAL WITHDRAWAL AFTER PARTIAL WITHDRAWAL
------------------------------- ---------------------------------
AMOUNT OF AMOUNT OF
SUBACCOUNTS FROM WHICH ANNUITY PAYMENT FLOOR ANNUITY PAYMENT FLOOR
ANNUITY PAYMENT IS MADE PAYMENT UNITS PAYMENT PAYMENT UNITS PAYMENT(1)
<S> <C> <C> <C> <C> <C> <C>
Equity Income(2) $300 29.7914 N/A $300 29.7914 N/A
International Stock(3) $100 9.7847 N/A $40 3.9139 N/A
Total $400 $304 $340 $266
-------------------------------------------------------------------------------------------------
1 The Floor Payment is reduced 12.5%, the percentage by which the partial
Withdrawal reduced Account Value.
2 The Annuity Payment and Payment Units allocated to this Subaccount are not
reduced in this example, because no amount is withdrawn from Account Value
allocated to the Equity Income Subaccount.
3 The Annuity Payment and Payment Units allocated to this Subaccount are
reduced by 60%, the percentage by which the partial Withdrawal reduced
Account Value allocated to the International Stock Subaccount.
</TABLE>
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 generally is equal to the Account
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 and, under
Option 9, any withdrawal charge. The Withdrawal Value under Option 8 is the
present value of future Annuity Payments calculated using the assumed
interest rate, less any premium taxes due and paid by the Company.
A partial withdrawal may be requested for a specified percentage or dollar
amount of Account Value. Each partial withdrawal must be for at least $500. 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 Account Value will be reduced by an amount equal to the
withdrawal, any applicable premium tax and any applicable withdrawal charge.
If a partial withdrawal is requested that would leave the Withdrawal Value in
the Contract less than $10,000, or with respect to Option 8, Annuity Payments
after the withdrawal would be less than $100, 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 Account 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," page 28. 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 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," page 31.
ANNUITY OPTIONS
The Contract provides for nine Annuity Options. Other Annuity Options may be
available upon request at the discretion of the Company. The Annuity Options
are set forth below.
OPTION 1 - LIFE INCOME Periodic Annuity Payments will be made during the
lifetime of the Annuitant. It is possible under this Option for an 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 due date of the third Annuity Payment, 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 PERIOD CERTAIN 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. UPON THE ANNUITANT'S DEATH AFTER THE PERIOD CERTAIN,
NO FURTHER ANNUITY PAYMENTS WILL BE MADE.
OPTION 3 - LIFE INCOME 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 Annuity Payment, Annuity
Payments will be continued to the Designated Beneficiary until that number of
Annuity Payments has been made.
OPTION 4 - JOINT AND LAST SURVIVOR Periodic Annuity Payments will be made
during the lifetime of the Annuitants. Annuity Payments will be made as long
as either Annuitant is living. Upon the death of one Annuitant, Annuity
Payments continue to the surviving Annuitant at the same or a reduced level
of 75%, 66 2/3% or 50% of Annuity Payments as elected by the Owner at the
time the Annuity Option is selected. With respect to fixed Annuity Payments,
the amount of the Annuity Payment and, with respect to variable Annuity
Payments, the number of Payment Units used to determine the Annuity Payment
is reduced as of the first Annuity Payment following the Annuitant's death.
In the event of the death of one Annuitant, the surviving Joint Annuitant has
the right to exercise all rights under the Contract, including the right to
make exchanges. 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 by the
Owner. The amount of each Annuity Payment is determined by dividing Account
Value by the number of Annuity Payments remaining in the period. If, at the
death of the Annuitant, 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 Annuity Payments of the
amount elected by the Owner will be made until Account Value is exhausted,
with the guarantee that, if, at the death of the Annuitant, all guaranteed
payments have not yet been made, the remaining unpaid payments will be paid
to the Designated Beneficiary. This Option is available only for Contracts
issued in connection with Non-Qualified Plans.
OPTION 7 - AGE RECALCULATION Periodic Annuity Payments will be made based
upon the Annuitant's life expectancy, or the joint life expectancy 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 government actuarial tables, and are
made until Account Value is exhausted. Upon the Annuitant's death, any
Account Value will be paid to the Designated Beneficiary.
OPTION 8 - PERIOD CERTAIN Periodic Annuity Payments will be made for a fixed
period which may be 5, 10, 15 or 20 years. This option differs from Option 5
in that Annuity Payments are calculated on the basis of Payment Units. If the
Annuitant dies prior to the end of the period certain, the remaining
guaranteed Annuity Payments will be made to the Designated Beneficiary.
OPTION 9 - LIFE INCOME WITH LIQUIDITY Monthly Annuity Payments will be made
for the life of the Annuitant, or the Owner may elect Annuity Payments for
the life of the Annuitant and a Joint Annuitant, and in both cases with a
period certain of 15 years. The period certain may be for a period of less
than 15 years in the case of a Contract issued in connection with a Qualified
Plan, as the period certain in that case may not exceed the life expectancy
of the Annuitant or joint life expectancy of the Joint Annuitants. Annuity
Payments under this option are guaranteed never to be less than the Floor
Payment which is equal to 80% of the initial Annuity Payment; provided that
the Floor Payment is adjusted in the event of a withdrawal as discussed under
"Full and Partial Withdrawals," page 22. The amount of the Annuity Payment
will remain level for 12 month intervals and will reset on each anniversary
of the Annuity Payout Date. Annuity Payments during the Liquidity Period are
paid from Account Value and reduce the amount of Account Value available for
withdrawal. If Account Value allocated to a Subaccount is depleted during the
Liquidity Period, any shortfall will be deducted proportionately from those
Subaccounts that have Account Value, and future annuity payments will be
based upon the performance of those Subaccounts.
If there are Joint Annuitants, Annuity Payments will be made as long as
either Annuitant is living. Upon the death of one Annuitant, Annuity Payments
continue to the surviving Annuitant at the same or a reduced level of 75%, 66
2/3% or 50% of Annuity Payments as elected by the Owner at the time the
Annuity Option is selected. The number of Payment Units used to calculate
Annuity Payments is reduced (1) as of the Annuity Payment due at the close of
the period certain, or (2) if later, as of the first Annuity Payment
following the death of the Annuitant.
A death benefit is payable to the Designated Beneficiary upon the death of
the Annuitant or, if there are Joint Annuitants, upon the death of the last
Annuitant prior to the close of the period certain. The death benefit during
the Liquidity Period is the Account Value as of the end of the Valuation
Period during which due proof of death and instructions regarding payment are
received at the T. Rowe Price Variable Annuity Service Center. The Designated
Beneficiary may elect the death benefit in the event of death during the
remainder of the period certain, as follows: (1) a lump sum equal to the
present value, calculated using the assumed interest rate, of the remaining
guaranteed Annuity Payments as of the end of the Valuation Period during
which due proof of death and instructions regarding payment are received at
the T. Rowe Price Variable Annuity Service Center; or (2) the remaining
guaranteed Annuity Payments paid to the Designated Beneficiary on a monthly
basis.
If there are Joint Annuitants, upon the death of one Annuitant during the
Liquidity Period, the amount of Annuity Payments to the surviving Annuitant
may be increased as of the close of the Liquidity Period. Whether the amount
of the Annuity Payment will be increased is determined by applying an amount
equal to the present value of the future Annuity Payments based upon the
joint lives of the Annuitants, calculated using the assumed interest rate, to
a life income option with a period certain of ten years (or the amount of
time remaining in the period certain as of the close of the Liquidity Period)
to determine an Annuity Payment. If this Annuity Payment is greater than the
current Annuity Payment, the current payment would be increased to that
amount as of the close of the Liquidity Period. The Payment Units and Floor
Payment would be increased proportionately as of that date.
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.
ANNUITY PAYMENTS
Annuity Payments under Options 1 through 4, 8 and 9 are based upon annuity
rates that vary with the Annuity Option selected. In the case of Options 1
through 4 and 9 the annuity rates will vary based upon your age and sex,
except that unisex rates are used where required by law. The annuity rates
reflect your life expectancy as of the Annuity Payout Date and gender, unless
unisex rates apply. The annuity rates are based upon the 1983(a) mortality
table and are adjusted to reflect an assumed interest rate of 3.5% or 5%,
compounded annually, as selected by you. See the discussion under "Assumed
Interest Rate," below. See the table below for the basis of annuity rates. In
the case of Options 5, 6 and 7, Annuity Payments are based upon Account Value
without regard to annuity rates.
BASIS OF ANNUITY RATES
-----------------------------------------------------
OPTIONS 1-4 AND 9 OPTION 8
Assumed Interest Rate Assumed Interest Rate
Mortality Table 1983(a)
-----------------------------------------------------
The Company calculates Variable Annuity Payments under Options 1 through 4, 8
and 9 using Payment Units. The value of a Payment Unit for each Subaccount is
determined as of each Valuation Date and initially was $1.00. The Payment
Unit value of a Subaccount as of any subsequent Valuation Date is determined
by adjusting the Payment Unit value on the previous Valuation Date for (1)
the interim performance of the corresponding Portfolio of the Funds; (2) any
dividends or distributions paid by the corresponding Portfolio; (3) the
mortality and expense risk charge; (4) the charges, if any, that may be
assessed by the Company for taxes attributable to the operation of the
Subaccount; and (5) the assumed interest rate.
The Company determines the number of Payment Units used to calculate each
variable Annuity Payment as of the Annuity Payout Date. As discussed above,
the Contract specifies annuity rates for Options 1 through 4, 8 and 9, which
are the guaranteed minimum dollar amount of monthly Annuity Payment for each
$1,000 of Purchase Payment, less any applicable premium taxes, and less a
charge equal to 1.8% of the Purchase Payment for a fixed annuity, applied to
an Annuity Option. The net Purchase Payment is divided by $1,000 and the
result is multiplied by the rate per $1,000 specified in the annuity tables
to determine the initial Annuity Payment for a variable annuity and the
guaranteed monthly Annuity Payment for a fixed annuity.
On the Annuity Payout Date, the Company divides the initial variable Annuity
Payment by the value of the Payment Unit as of that date for the applicable
Subaccount to determine the number of Payment Units to be used in calculating
subsequent Annuity Payments. If variable Annuity Payments are allocated to
more than one Subaccount, the number of Payment Units will be determined by
dividing the portion of the initial variable Annuity Payment allocated to a
Subaccount by the value of that Subaccount's Payment Unit as of the Annuity
Payout Date. The initial variable Annuity Payment is allocated to the
Subaccounts in the same proportion as the Purchase Payment is allocated. The
number of Payment Units will remain constant for subsequent Annuity Payments,
unless you exchange Payment Units among Subaccounts or make a withdrawal
under Option 8 or during the Liquidity Period under Option 9.
Subsequent variable Annuity Payments are calculated by multiplying the number
of Payment Units allocated to a Subaccount by the value of the Payment Unit
as of the date of the Annuity Payment. If the Annuity Payment is allocated to
more than one Subaccount, the Annuity Payment is equal to the sum of the
payment amount determined for each Subaccount. Annuity Payments under Option
9 are reset only once each year on the 12-month anniversary of the Annuity
Payout Date to reflect the investment performance of the Subaccount(s). An
example is set forth below of an Annuity Payment calculation under Option 9
assuming purchase of a Contract by a 60-year old male with a Purchase Payment
of $100,000 and no premium tax.
-----------------------------------------------------------------------------
Initial Purchase Payment $100,000 $100,000
Premium Tax - 0 -------- = 100
-------- $1,000
Net Purchase Payment $100,000
Amount determined by reference to annuity table for a male,
age 60 under Option 9............................................... $4.78
First Variable Annuity Payment (100 x $4.78)........................ $478
<TABLE>
<CAPTION>
ALLOCATION OF FIRST VARIABLE PAYMENT UNIT NUMBER OF PAYMENT
NET PURCHASE ANNUITY PAYMENT VALUE ON ANNUITY UNITS USED TO DETERMINE
SUBACCOUNT PAYMENT ALLOCATION PAYOUT DATE SUBSEQUENT PAYMENTS
<S> <C> <C> <C> <C>
Equity Income 50% $239.00 / $1.51 = 158.2781
International Stock 50% 239.00 / 1.02 = 234.3137
------
$478.00
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF PAYMENT PAYMENT UNIT AMOUNT OF
SUBACCOUNT UNITS USED TO DETERMINE VALUE ON ANNUAL SUBSEQUENT
SUBSEQUENT PAYMENTS RESET DATE ANNUITY PAYMENT
<S> <C> <C> <C>
Equity Income 158.2781 x $1.60 = $253.24
International Stock 234.3137 x 1.10 = 257.74
------
Subsequent Variable Annuity Payment......................................... $510.98
</TABLE>
DATE OF AMOUNT OF
ANNUITY PAYMENT ANNUITY PAYMENT
Annuity Payout Date February 15 $478.00
March 15 478.00
April 15 478.00
May 15 478.00
June 15 478.00
July 15 478.00
August 15 478.00
September 15 478.00
October 15 478.00
November 15 478.00
December 15 478.00
January 15 478.00
Annual Reset Date February 15 510.98
-----------------------------------------------------------------------------
ASSUMED INTEREST RATE
As discussed above, the annuity rates for Options 1 through 4, 8 and 9 are
based upon an assumed interest rate of 3.5% or 5%, compounded annually, as
you elect at the time the Annuity Option is selected. Variable Annuity
Payments generally increase or decrease from one Annuity Payment date to the
next based upon the performance of the applicable Subaccounts during the
interim period adjusted for the assumed interest rate. If the performance of
the Subaccounts is equal to the assumed interest rate, Annuity Payments will
remain constant. If the performance of the Subaccounts is greater than the
assumed interest rate, the amount of the Annuity Payments will increase and
if it is less than the assumed interest rate, the amount of the Annuity
Payments will decline. A higher assumed interest rate, for example 5%, would
mean a higher initial Variable Annuity Payment, but the amount of the Annuity
Payments would increase more slowly in a rising market (or the amount of the
Annuity Payments would decline more rapidly in a falling market). Conversely,
a lower assumed interest rate, for example 3.5%, would mean a lower initial
variable Annuity Payment and more rapidly rising Annuity Payment amounts in a
rising market and more slowly declining Annuity Payment amounts in a falling
market.
THE FIXED INTEREST ACCOUNT
- --------------------------------------------------------------------------------
You may allocate your net Purchase Payment to the Fixed Interest Account to
purchase a fixed annuity under Annuity Options 1 through 4 and 8. Under
Annuity Options 5 through 7, all or a portion of the Purchase Payment may be
allocated to the Fixed Interest Account and Account Value allocated to the
Subaccounts under those Options may be exchanged to the Fixed Interest
Account. A fixed annuity is not available under Option 9. 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 advised 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," page 16.
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
Account Value allocated to the Fixed Interest Account earns interest at a
fixed rate or rates that are paid by the Company. The Account 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.
Account 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
Account Value is allocated or exchanged to the Fixed Interest Account. The
Current Rate paid on any such portion of Account Value allocated or 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
Account Value, which will earn interest at the Current Rate, if any, declared
by the Company on the first day of the new Guarantee Period.
Account 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, Account 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 Account 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 Account 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 Account
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 Account
Value allocated to the Fixed Interest Account for which the Guarantee Period
expires during the calendar month in which the withdrawal or exchange is
effected, then in the order beginning with that portion of such Account 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 is supported by the Fixed Interest Account as for a
Contract that is supported by the Subaccounts. See "Annuity Options," page
24.
CONTRACT CHARGES
Premium taxes will be the same for Contractowners who allocate the Purchase
Payment to the Fixed Interest Account as for those who allocate the Purchase
Payment 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 is
supported by the Fixed Interest Account; however, such Contractowners will
not participate in the investment experience of the Subaccounts.
EXCHANGES AND WITHDRAWALS
Under Annuity Options 5 through 7 only, Account Value may be exchanged from
the Subaccounts to the Fixed Interest Account and from the Fixed Interest
Account to the Subaccounts, subject to the following limitation. Exchanges
from the Fixed Interest Account are allowed only from the portion of Account
Value, for which the Guarantee Period expires during the calendar month in
which the exchange is effected. Up to six exchanges are allowed in any
Contract Year and the minimum exchange amount is $500 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.
The Contractowner may make a full or partial withdrawal of Account Value
allocated to the Fixed Interest Account only under Annuity Options 5 through
7. A Contractowner may make a partial withdrawal from the Fixed Interest
Account only (1) from the portion of Account Value, for which the Guarantee
Period expires during the calendar month in which the partial withdrawal is
effected, and (2) once per Contract Year in an amount up to the greater of
$5,000 or 10% of Account Value allocated to the Fixed Interest Account at the
time of the partial withdrawal. See "Full and Partial Withdrawals," page 22.
PAYMENTS FROM THE FIXED INTEREST ACCOUNT
As required by most states, the Company reserves the right to delay any full
and partial withdrawals and exchanges from the Fixed Interest Account for up
to six months after a written request in proper form is received at the T.
Rowe Price Variable Annuity Service Center. 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 you if there will be a delay.
MORE ABOUT THE CONTRACT
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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 and exercise all rights that the
Contract grants or the Company 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," page 31.
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. Joint Owners are permitted only if the Contract is issued
pursuant to a Non-Qualified Plan and the Joint Owner is an Annuitant.
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 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 the Change of Beneficiary
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.
DIVIDENDS
The Contract is eligible to 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 Account 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 has been misstated, the correct amount paid
or payable by the Company under the Contract shall be such as the Purchase
Payment under the Contract would have provided for the correct age or sex
(unless unisex rates apply).
FEDERAL TAX MATTERS
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INTRODUCTION
The Contract described in this Prospectus is designed for use by individuals
in retirement plans which may or may not be Qualified Plans under the
provisions of the Internal Revenue Code ("Code").
The ultimate effect of federal income taxes on the amounts held under a
Contract, on Annuity Payments, and on the economic benefits to the Owner, the
Annuitant, and the Beneficiary or other payee will depend upon the type of
retirement plan 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 issued 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 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 announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As of
the date of this Prospectus, no such guidance has been issued.
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 in the present case, the Contractowner has additional flexibility in
allocating the Purchase Payment and Account Values than in the cases
described in the rulings. 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 promulgated, 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," page 35 and
"Diversification Standards," page 32. 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 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.
* 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
distribution 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.
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 annuity contracts
issued by the same insurer to the same Contractowner during any calendar
year are to be aggregated and treated as one contract. Thus, any amount
received under any such contract prior to the contract's Annuity 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.
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, 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 AND SECTION 408A
INDIVIDUAL RETIREMENT ANNUITIES. 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. Roth IRAs are described below.
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 year of 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 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 to all IRAs bear to the expected return under the IRAs.
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.
ROTH IRAS. Section 408A of the Code permits eligible individuals to
establish a Roth IRA, a new type of IRA which became available in 1998.
The Contract may be purchased as a Roth IRA. Contributions to a Roth IRA
are not deductible, but withdrawals that meet certain requirements are not
subject to federal income tax. Sale of the contract for use with Roth IRAs
may be subject to special requirements imposed by the Internal Revenue
Service. Purchasers of the Contract for such purposes will be provided
with such supplementary information as may be required by the Internal
Revenue Service or other appropriate agency, and will have the right to
revoke the Contract under certain circumstances. Unlike a traditional IRA,
Roth IRAs are not subject to minimum required distribution rules during
the Contractowner's lifetime. Generally, however, upon the death of the
Contractowner, the amount in a remaining Roth IRA must be distributed in
the same manner as a traditional IRA as described above.
The Internal Revenue Service has not reviewed the Contract for
qualification as a Roth 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 Roth 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 all of your IRAs
is less than the minimum required distribution for the year, you are
subject to a 50% tax on the amount that was not properly distributed from
the IRAs.
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% 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 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
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VOTING OF FUND SHARES
You indirectly (through the Separate Account) purchase shares of the
Portfolios when you allocate purchase payments to the Subaccounts. The
Company owns shares of the Portfolios in the Separate Account for your
benefit. Under current law, the Company will vote shares of the Portfolios
held in the Subaccounts in accordance with voting instructions received from
Owners having the right to give such instructions. You will have the right to
give voting instructions to the extent that you have Account Value allocated
to the particular Subaccount. The Company will vote all shares it owns
through the Subaccount in the same proportion as the shares for which it
receives voting instructions from Owners. The Company votes shares in
accordance with its current understanding of the federal securities laws. If
the Company later determines that it may vote shares of the Funds in its own
right, it may elect to do so.
Unless otherwise required by applicable law, the number of shares of a
particular Portfolio as to which you may give voting instructions to the
Company is determined by dividing your Account 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
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.
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.
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.
REPORTS TO OWNERS
A statement will be sent annually to you setting forth a summary of the
transactions that occurred during the year, and indicating any Account Value
as of the end of each year. In addition, the statement will indicate the
allocation of Account Value among the Fixed Interest Account and the
Subaccounts and any other information required by law. Confirmations will
also be sent out upon the initial Purchase Payment, exchanges and full and
partial withdrawals. Annuity Payments will be confirmed quarterly.
You 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
You may request an exchange of Account Value or Payment Units by telephone if
you elected telephone exchanges in the application, or 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 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 fees) 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
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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.
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 Account 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
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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 Security Benefit Life Insurance
Company and subsidiaries at December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, and the financial
statements of the Separate Account as of December 31, 1998, and for each of
the two years in the period ended December 31, 1998, 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
below.
TABLE OF CONTENTS
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General Information and History 3
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Distribution of the Contract 3
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Limits on Premiums Paid Under Tax-Qualified Retirement Plans 3
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Experts 4
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Performance Information 4
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Financial Statements 6
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<PAGE>
IRA DISCLOSURE STATEMENT
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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.
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 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").
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 withdraw 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:
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 contract 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>
ROTH INDIVIDUAL RETIREMENT ANNUITY DISCLOSURE STATEMENT
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This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of Roth IRAs. Internal Revenue Service
regulations require that this be given to each person desiring to establish a
Roth IRA. Further information can be obtained from any district office of the
Internal Revenue Service.
YOUR RIGHT TO REVOKE
You may revoke your Roth IRA within seven days of the date your first
purchase payment is received by Security Benefit Life Insurance Company. To
revoke your Roth IRA 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 REQUIREMENTS?
A Roth IRA contract must meet the following requirements:
1. The amount in your Roth IRA 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. If you die before your entire interest in the contract has been
distributed, your beneficiary may need to receive distributions within a
specified time frame (see "Required Minimum Distributions" below).
5. The contract must provide that you cannot contribute more than $2,000 for
any year. This requirement does not apply to qualified rollover
contributions. (See "Rollovers and Direct Transfers" below).
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 Roth IRA 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. You may make a qualified rollover contribution to this contract from
another Roth IRA or from a traditional IRA, and such a contribution will
not count toward the annual limit on contributions to the contract. You
may make a qualified rollover contribution from a traditional IRA only if
your modified adjusted gross income for the year in which the rollover
will occur is $100,000 or less, = and if you are married, you and your
spouse have joint income of $100,000 or less and you file a joint income
tax return for the year in which the rollover occurs. You and your spouse
will not be subject to the requirements for married individuals if you
have lived apart for the entire year of contribution.
2. The amount distributed from your traditional IRA and rolled over will be
subject to federal income taxes, except to the extent such amounts relate
to nondeductible contributions. However, if the distribution occurs before
1999, the amount to be included in your taxable income will be evenly
divided over a four-year period. If you die before the four-year period
ends, the amount that was not included at the time of your death in your
income because you elected to divide your income over a four-year period
must be included in your final return, unless your spouse is the sole
beneficiary of all your Roth IRAs. If your spouse is the sole beneficiary
of all your Roth IRAs, he or she will continue to include the amounts
converted from your traditional IRA over the four-year period. If you
become divorced during the four-year period, or you are married and file a
separate income tax return during the four-year period, you must continue
to recognize income over the four-year period.
3. You must complete a qualified rollover contribution by the 60th day after
the date you receive the distribution from your IRA.
4. A direct transfer of funds in a Roth IRA or a traditional IRA from one
trustee or insurance company to this Roth IRA does not constitute a
rollover.
5. You may make a direct transfer of funds in a traditional IRA to this Roth
IRA.
6. You may not make a rollover contribution from a qualified pension or
profit-sharing plan or tax-sheltered annuity to this Roth IRA. A
distribution from this Roth IRA may be used as a rollover contribution to
another Roth IRA. You may not transfer a Roth IRA to a traditional IRA.
7. You may not rollover minimum required distributions from your traditional
IRA into this Roth IRA.
8. A rollover contribution from one IRA to another IRA, other than a
qualified rollover contribution from a traditional IRA to a Roth IRA, may
be made only once a year. The one-year period begins on the date you
receive the distribution from the first IRA, not on the date you roll it
over (reinvest it) into another IRA. A conversion from a traditional IRA
to a Roth IRA is not treated as a rollover for purposes of the one-year
rule.
AMOUNT OF ANNUAL CONTRIBUTION
1. In general, the amount you can contribute each year to the contract is the
lesser of $2,000 or your taxable compensation for the year. If you have
more than one IRA (either a Roth IRA or a traditional 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. No amount you contribute to the contract will be deductible for federal
income tax purposes.
3. Contributions to your Roth 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.
4. If both you and your spouse have compensation you can each set up your own
Roth 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
Roth IRA or contract.
5. If you and your spouse file a joint federal income tax return, each of you
may contribute up to $2,000 to your own Roth IRA annually if your joint
income is $4,000 or more. The maximum amount the higher compensated spouse
may contribute for the year is the lesser of $2,000 or 100% of that
spouse's compensation. The maximum the lower compensated spouse may
contribute is the lesser of (i) $2,000 or (ii) 100% of that spouse's
compensation plus the amount by which the higher compensated spouse's
compensation exceeds the amount the higher compensated spouse contributes
to his or her Roth IRA.
6. Your maximum annual contribution amount shall be phased-out if you are
single and have an adjusted gross income between $95,000 and $110,000, or
if you are married and you and your spouse have a combined adjusted gross
income between $150,000 and $160,000 in accordance with Section
ss.408A(c)(3) of the Internal Revenue Code (the "Code").
TAX STATUS OF DISTRIBUTIONS
1. Since your contributions to the contract will be made with after-tax
dollars, when your contributions are distributed to you they will not be
subject to federal income tax. Distributions from the contract will be
considered as coming first from your contributions and then from the
earnings on your contributions. You will owe no federal income tax when
earnings on your contributions are distributed to you, provided they are
distributed in a "qualified distribution."
2. "Qualified distributions" from the contract will not be subject to federal
income tax or the additional 10% early withdrawal tax. To be qualified, a
distribution must:
(a) occur after the five-year period beginning on the first day of the
year you made your initial contribution to the contract, and
(b) must be:
(1) made on or after the date on which you attain age 59 1/2;
(2) made to a beneficiary (or your estate) on or after your death;
(3) attributable to your being disabled; or
(4) a distribution to pay for "qualified first-time homebuyer
expenses" under Code ss.72(t)(8) up to $10,000.
3. You will owe federal income tax, and perhaps an additional 10% early
withdrawal tax, as a result of obtaining a "nonqualified distribution." A
nonqualified distribution is subject to federal income tax and the early
withdrawal tax to the extent that the sum of the distribution PLUS all
other distributions from the Roth IRA (whether qualified or nonqualified)
MINUS the amount of your previous distributions that were taxable EXCEEDS
your contribution to all of your Roth IRAs.
4. Your surviving spouse will be treated as the owner of your Roth IRA for
purposes of determining whether a distribution is a "nonqualified
distribution." This means that a distribution to your surviving spouse
from your Roth IRA will be satisfied only if the above requirements are
satisfied with respect to your surviving spouse. However, the period
during which you held the Roth IRA prior to your death will be taken into
account for purposes of determining whether your spouse has satisfied the
five-year requirement in 2(a) above.
5. Amounts held in Roth IRAs are generally subject to the imposition of
federal estate taxes. 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.
6. Taxable distributions from a Roth IRA are not eligible for special
five-year or ten-year averaging that may apply to lump sum distributions
from qualified employer retirement plans.
7. Distributions that are rolled over as a qualified rollover contribution to
another Roth IRA will be treated as a "qualified distribution."
8. Substantially equal periodic payments from a Roth IRA that was formerly a
traditional IRA from which you were receiving substantially equal periodic
payments will be treated as nonqualified distributions. However, such
distributions will not be subject to the 10% penalty on premature
distributions (see below).
REQUIRED MINIMUM DISTRIBUTIONS
1. You are not required to receive required minimum distributions from your
Roth IRA during your lifetime.
2. If you die before the entire balance in your Roth IRA has been
distributed, the general rule is that the entire balance must be
distributed within five (5) years of your death. However, if the balance
in your Roth IRA account is payable to your designated beneficiary, you
may elect or 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 the
sole designated beneficiary of your Roth IRA on your date of death, these
rules do not apply and the Roth IRA will be treated as your spouse's IRA,
and no distributions from the Roth IRA to your spouse will be required
during your spouse's lifetime.
3. 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, write the IRS Forms
Distribution Center for your area as shown in your income tax return
instructions.
4. If the actual distribution from your Roth IRA is less than the minimum
amount that should be distributed in accordance with the rules set forth
above, the difference is subject to a 50% excise tax.
WHAT HAPPENS IF EXCESS CONTRIBUTIONS ARE MADE TO MY ROTH IRA?
1. You must pay a 6% excise tax if you make excess contributions to your Roth
IRA. Generally, an excess contribution is the amount contributed to your
Roth IRA that is above the maximum amount you can contribute for the year.
2. You will not have to pay the 6% excise tax if you withdraw the excess
amount, plus the net income on those excess contributions, by the date
your tax return is due, including extensions, for the year of the
contribution. The net earnings on these excess contributions will be
included in your income for the year in which the contributions were made.
3. If your excess contributions, plus the net income on those contributions,
are distributed AFTER the due date of your tax return for the year of
contribution, the earnings on those contributions may be subject to
federal income tax and the 10% tax on premature distributions. However, if
you choose to leave the excess contributions in your Roth IRA after the
due date of your income tax return for the year of contribution, the
excess contributions will be treated as deemed Roth IRA contributions for
subsequent years, to the extent you contribute less than $2,000 for those
subsequent years.
ARE THERE ANY PENALTIES FOR PREMATURE DISTRIBUTIONS?
There is an additional tax on premature distributions which are part of a
nonqualified distribution equal to 10% of the amount of the premature
distribution that you must include in your gross income. (See the
discussion above on the "Tax Status of Distributions.") Premature
distributions are generally amounts you withdraw from your Roth IRA before
you are age 59 1/2. Distributions to your surviving spouse will be treated
as premature distributions if your surviving spouse withdraws amounts from
your Roth IRA before he or she is 59 1/2. However, the tax on premature
distributions does not apply:
1. To distributions that constitute qualified rollover contributions to
another Roth IRA.
2. To a series of substantially equal periodic payments made over your life
or life expectancy, or the joint life expectancy of you and your
beneficiary.
3. To amounts distributed to a beneficiary, or your estate, on or after your
death.
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 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 ss.72(t)(8), up to $10,000.
8. To a distribution for post-secondary education costs for you, your spouse
or any child or grandchild of you or your spouse.
IRA EXCISE TAX REPORTING
Use Form 5329, Return for Individual Retirement Arrangement Taxes, to
report the excise taxes on excess contributions and premature
distributions. If you do not owe any excise taxes, you do not need Form
5329. Further information can be obtained from any district office of the
Internal Revenue Service.
TRANSACTIONS WITH YOUR ROTH IRA
If you engage in a so-called prohibited transaction with respect to your
Roth IRA, the IRA will lose its exemption from tax. In this event, you
will be taxed on the fair market value of the contract even if you do not
actually receive a distribution. In addition, if you are less than 59 1/2,
your taxes may be further increased by a penalty tax in an amount equal to
10% of the fair market value of the contract. These prohibited
transactions include borrowing money from your Roth IRA, using your Roth
IRA account as security for a loan or a number of other financial
transactions with your Roth IRA. If you pledge your Roth IRA as security
for a loan, then the amount or portion pledged is considered to be
distributed to you and also must be included in your gross income. (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 Roth IRA 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 Roth IRA 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.
IMPORTANT: The discussion of the tax rules for Roth IRAs in this
Disclosure Statement is based upon the best available information.
However, the rules that apply to Roth IRAs, including those applicable to
the conversion and reconversion of IRAs, are complex and may have
consequences that are specific to your personal tax or financial
situation. Therefore, you should consult your tax advisor for the latest
developments and for advice about how maintaining a Roth IRA will affect
your personal tax or financial situation.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
T. ROWE PRICE NO-LOAD VARIABLE ANNUITY
T. ROWE PRICE NO-LOAD IMMEDIATE VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
DATE: MAY 1, 1999
-----------------------------------------------------------------------------
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
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the current Prospectus for the T. Rowe Price No-Load
Variable Annuity or the T. Rowe Price No-Load Immediate Variable Annuity
dated May 1, 1999. 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.
<PAGE>
CONTENTS
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General Information and History 3
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Distribution of the Contract 3
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Limits on Premiums Paid Under Tax-Qualified Retirement Plans 3
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Experts 4
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Performance Information 4
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Financial Statements 6
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<PAGE>
GENERAL INFORMATION AND HISTORY
- --------------------------------------------------------------------------------
For a description of the Individual Flexible Premium Deferred Variable
Annuity Contract or the Single Premium Immediate Variable Annuity (each
referred to herein as the "Contract"), Security Benefit Life Insurance
Company (the "Company"), and the T. Rowe Price Variable Annuity Account (the
"Separate Account"), see the appropriate Prospectus. This Statement of
Additional Information contains information that supplements the information
in the respective Prospectuses. 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 Contract 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, or an
affiliate thereof, 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 IRAs 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 earned income. An additional $2,000 may be contributed if the
Owner has a spouse with little or no earned income 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 type of
IRA (Traditional or Roth) and 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 Security Benefit Life Insurance Company and subsidiaries and the Separate
Account. The financial statements for the Company at December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
are contained in this Statement of Additional Information. Financial
statements of the Separate Account as of December 31, 1998, and for the years
ended December 31, 1998 and 1997, are also included in this Statement of
Additional Information. These 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, 1998, the yield of the Prime
Reserve Subaccount was 4.35% and the effective yield of the Subaccount was
4.44%.
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:
YIELD = 2[(a - b + 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, 1998, the yield of the Limited-Term
Bond Subaccount was 5.47%.
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 1, 5, or 10 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 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.
-----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1998
------------------------------------
FROM DATE OF INCEPTION
SUBACCOUNT ONE-YEAR (APRIL 3, 1995)
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International ...................... 15.20% 11.59%
New America Growth ................. 17.84 24.50
Mid-Cap Growth ..................... 21.42 19.75*
Equity Income ...................... 8.39 21.00
Personal Strategy Balanced.......... 13.75 17.06
Limited-Term Bond .................. 6.47 5.80
-----------------------------------------------------------------------------
*Average annual total return from Mid-Cap Growth Subaccount date of inception
December 31, 1996.
-----------------------------------------------------------------------------
Performance information for a Subaccount may be compared, in reports and
promotional literature, to (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, the Lehman Brothers Government Corporate Index, the
Morgan Stanley Capital International's EAFE Index, or other indices that
measure performance of a pertinent group of securities so that investors may
compare a Subaccount's results with those of a group of securities widely
regarded by investors as representative of the securities markets in general
or representative of a particular type of security; (ii) other variable
annuity separate accounts, mutual funds, or other investment products tracked
by Lipper Analytical Services, a widely used independent research firm that
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 that 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 that 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 Account 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 or
general hypothetical illustrations of accumulation and payout period Account
Values and annuity payments.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The consolidated financial statements of Security Benefit Life Insurance
Company and subsidiaries at December 31, 1998 and 1997, and for each of the
three years in the period ended December 31,1998, and the financial
statements of the Separate Account as of December 31, 1998, and for the years
ended December 31, 1998 and 1997, are set forth herein, starting on page 7.
The financial statements of Security Benefit Life Insurance Company and
subsidiaries, which are included in this Statement of Additional Information,
should be considered only as bearing on the ability of Security Benefit Life
Insurance Company and subsidiaries 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 7
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Audited Financial Statements
Balance Sheet 8
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Statements of Operations and Changes in Net Assets 9
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Notes to Financial Statements 11
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Contract Owners of T. Rowe Price Variable Annuity Account and the Board
of Directors of Security Benefit Life Insurance Company
We have audited the accompanying balance sheet of T. Rowe Price Variable
Annuity Account (the Account) (comprised of the individual series as
indicated therein) as of December 31, 1998 and the related statements of
operations and changes in net assets for each of the two years in the period
then ended. These financial statements are the responsibility of the
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of December 31,
1998 by correspondence with the transfer agent. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the individual series of the
T. Rowe Price Variable Annuity Account at December 31, 1998 and the results
of their operations and changes in their net assets for each of the two years
in the period then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Kansas City, Missouri
February 5, 1999
<PAGE>
T. ROWE PRICE VARIABLE ANNUITY ACCOUNT
BALANCE SHEET
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS -
EXCEPT PER SHARE AND UNIT VALUES)
ASSETS
Investments:
T. Rowe Price Portfolios:
New America Growth Portfolio - 2,085,300 shares at net
asset value of $24.74 per share (cost, $42,194)................ $ 51,590
International Stock Portfolio - 1,616,711 shares at net
asset value of $14.52 per share (cost, $21,488)................ 23,475
Equity Income Portfolio - 3,650,555 shares at net asset
value of $19.24 per share (cost, $65,245) ..................... 70,237
Personal Strategy Balanced Portfolio - 1,405,575 shares
at net asset value of $16.16 per share (cost, $21,192)......... 22,714
Limited-Term Bond Portfolio - 2,287,803 shares at net
asset value of $5.02 per share (cost, $11,442)................. 11,485
Mid-Cap Growth Portfolio - 1,516,695 shares at net
asset value of $14.27 per share (cost, $19,091) ............... 21,643
Prime Reserve Portfolio - 15,023,712 shares at net
asset value of $1.00 per share (cost, $15,024) ................ 15,024
========
Total assets......................................................... $216,168
========
LIABILITIES AND NET ASSETS
Mortality guarantee payable.......... $ 3
NUMBER UNIT
NET ASSETS OF UNITS VALUE AMOUNT
-----------------------------
Net assets are represented by
(NOTE 3):
New America Growth Subaccount:
Accumulation units.............. 2,269,650 $22.72 $51,559
Annuity reserves................ 1,371 22.72 31 51,590
-------
International Stock Subaccount:
Accumulation units.............. 1,554,164 15.08 23,438
Annuity reserves................ 2,466 15.08 37 23,475
-------
Equity Income Subaccount:
Accumulation units.............. 3,428,903 20.42 70,021
Annuity reserves................ 10,454 20.42 213 70,234
-------
Personal Strategy
Balanced Subaccount:
Accumulation units.............. 1,257,891 18.04 22,686
Annuity reserves................ 1,544 18.04 28 22,714
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Limited-Term Bond Subaccount:
Accumulation units.............. 926,046 12.38 11,464
Annuity reserves................ 1,661 12.38 21 11,485
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Mid-Cap Growth Subaccount:
Accumulation units.............. 1,508,570 14.34 21,640
Annuity reserves................ 238 14.34 3 21,643
-------
Prime Reserve Subaccount:
Accumulation units.............. 1,367,278 10.97 14,997
Annuity reserves................ 2,421 10.97 27 15,024
-------------------
Total net assets..................... 216,165
--------
Total liabilities and net assets..... $216,168
========
See accompanying notes.
<PAGE>
T. ROWE PRICE VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<CAPTION>
NEW PERSONAL
AMERICA INTERNATIONAL EQUITY STRATEGY LIMITED- MID-CAP PRIME
GROWTH STOCK INCOME BALANCED TERM BOND GROWTH RESERVE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend distributions............... $ --- $ 271 $ 1,403 $ 603 $ 500 $ --- $ 651
Expenses (NOTE 2):
MORTALITY AND EXPENSE RISK FEE..... (251) (123) (378) (106) (49) (93) (70)
--------------------------------------------------------------------------------------------
Net investment income (loss)......... (251) 148 1,025 497 451 (93) 581
Capital gain distributions........... 1,019 94 2,162 810 22 311 ---
Realized gain on investments......... 3,409 798 6,302 920 92 1,748 ---
Unrealized appreciation
(depreciation) on investments...... 2,861 1,970 (4,068) 206 (3) 1,129 ---
--------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments................ 7,289 2,862 4,396 1,936 111 3,188 ---
--------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations.......... 7,038 3,010 5,421 2,433 562 3,095 581
Net assets at beginning of year...... 39,153 20,472 65,084 15,625 7,287 13,009 8,068
Variable annuity deposits
(NOTES 2 AND 3).................... 17,228 5,717 22,321 8,764 8,087 13,294 26,964
Terminations and withdrawals
(NOTES 2 AND 3).................... (11,826) (5,720) (22,547) (4,105) (4,449) (7,755) (20,586)
Annuity payments (NOTES 2 AND 3)..... (2) (4) (42) (3) (2) --- (3)
Net mortality guarantee transfer..... (1) --- (3) --- --- --- ---
--------------------------------------------------------------------------------------------
Net assets at end of year............ $ 51,590 $23,475 $ 70,234 $22,714 $11,485 $21,643 $ 15,024
============================================================================================
</TABLE>
See accompanying notes.
<PAGE>
T. ROWE PRICE VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<CAPTION>
NEW PERSONAL
AMERICA INTERNATIONAL EQUITY STRATEGY LIMITED- MID-CAP PRIME
GROWTH STOCK INCOME BALANCED TERM BOND GROWTH RESERVE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend distributions............... $ --- $ 188 $ 1,156 $ 396 $ 311 $ --- $ 283
Expenses (NOTE 2):
Mortality and expense risk fee..... (174) (108) (258) (65) (29) (43) (30)
--------------------------------------------------------------------------------------------
Net investment income (loss)......... (174) 80 898 331 282 (43) 253
Capital gain distributions........... 91 267 1,942 235 --- --- ---
Realized gain on investments......... 1,427 727 1,816 382 20 175 ---
Unrealized appreciation
(depreciation) on investments...... 4,680 (791) 6,797 916 21 1,423 ---
--------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments................ 6,198 203 10,555 1,533 41 1,598 ---
--------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations.......... 6,024 283 11,453 1,864 323 1,555 253
Net assets at beginning of year...... 25,570 14,362 27,983 8,121 4,865 --- ---
Variable annuity deposits
(NOTES 2 AND 3).................... 15,321 11,401 32,625 8,325 5,200 14,695 19,412
Terminations and withdrawals
(NOTES 2 AND 3).................... (7,753) (5,574) (6,977) (2,684) (3,101) (3,241) (11,597)
Annuity payments (NOTES 2 AND (3).... (9) --- --- (1) --- --- ---
--------------------------------------------------------------------------------------------
Net assets at end of year............ $39,153 $20,472 $65,084 $15,625 $ 7,287 $13,009 $ 8,068
============================================================================================
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
T. Rowe Price Variable Annuity Account (the Account) is a separate account
of Security Benefit Life Insurance Company (SBL). The Account is registered
as a unit investment trust under the Investment Company Act of 1940 as
amended. The Account currently is divided into seven subaccounts. Each
subaccount invests exclusively in shares of a single corresponding mutual
fund or series thereof. Purchase payments received by the Account are
invested in one of the Portfolios of either T. Rowe Price Equity Series,
Inc., T. Rowe Price Fixed Income Series, Inc. or T. Rowe Price International
Series, Inc. mutual funds not otherwise available to the public. As directed
by the owners, purchase payments are invested in shares of New America
Growth Portfolio - emphasis on long-term capital growth through investments
in common stocks of domestic companies, International Stock Portfolio -
emphasis on long-term capital growth through investments in common stocks of
established foreign companies, Equity Income Portfolio - emphasis on
substantial dividend income and capital appreciation by investing primarily
in dividend-paying common stocks, Personal Strategy Balanced Portfolio -
emphasis on both capital appreciation and income, Limited-Term Bond
Portfolio - emphasis on income with moderate price fluctuation by investing
in short- and intermediate-term investment-grade debt securities, Mid-Cap
Growth Portfolio - emphasis on long-term capital appreciation through
investments in common stocks of medium-sized growth companies and Prime
Reserve Portfolio - emphasis on preservation of capital and liquidity while
generating current income by investing primarily in high-quality money
market securities.
T. Rowe Price Associates, Inc. (T. Rowe Price) serves as the investment
advisor to each Portfolio except the International Stock Portfolio which is
managed by Rowe Price-Fleming International, Inc., an affiliate of T. Rowe
Price. The investment advisors are responsible for managing the Portfolio's
assets in accordance with the terms of the investment advisory contracts.
INVESTMENT VALUATION
Investments in mutual fund shares are carried in the balance sheet at market
value (net asset value of the underlying mutual fund). The first-in,
first-out cost method is used to determine gains and losses. Security
transactions are accounted for on the trade date.
The cost of investments purchased and proceeds from investments sold for the
year ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------
COST OF PROCEEDS COST OF PROCEEDS
PURCHASES FROM SALES PURCHASES FROM SALES
-----------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
New America Growth Portfolio........ $18,940 $12,773 $15,921 $ 8,445
International Stock Portfolio....... 6,348 6,113 12,122 5,948
Equity Income Portfolio............. 26,941 24,022 36,441 7,953
Personal Strategy Balanced Portfolio 10,669 4,706 9,170 2,964
Limited-Term Bond Portfolio......... 8,752 4,643 5,875 3,494
Mid-Cap Growth Portfolio............ 14,083 8,326 14,965 3,554
Prime Reserve Portfolio............. 28,398 21,442 21,041 12,973
</TABLE>
ANNUITY RESERVES
Annuity reserves relate to contracts which have matured and are in the
payout stage. Such reserves are computed on the basis of published mortality
tables using assumed interest rates that will provide reserves as prescribed
by law. In cases where the payout option selected is life contingent, SBL
periodically recalculates the required annuity reserves, and any resulting
adjustment is either charged or credited to SBL and not to the Account.
REINVESTMENT OF DIVIDENDS
Dividend and capital gains distributions paid by the mutual fund to the
Account are reinvested in additional shares of each respective portfolio.
Dividend income and capital gains distributions are recorded as income on
the ex-dividend date.
FEDERAL INCOME TAXES
The operations of the Account are a part of the operations of SBL. Under
current law, no federal income taxes are allocated by SBL to the operations
of the Account.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. VARIABLE ANNUITY CONTRACT CHARGES
Mortality and expense risks assumed by SBL are compensated for by a fee
equivalent to an annual rate of 0.55% of the average daily net assets of
each account.
When applicable, an amount for state premium taxes is deducted as provided
by pertinent state law either from the purchase payments or from the amount
applied to effect an annuity at the time annuity payments commence.
3. SUMMARY OF UNIT TRANSACTIONS
UNITS
----------------------
YEAR ENDED DECEMBER 31
1998 1997
----------------------
(IN THOUSANDS)
New America Growth Subaccount:
Variable annuity deposits........................ 827 897
Terminations, withdrawals and annuity payments... 587 464
International Stock Subaccount:
Variable annuity deposits........................ 397 862
Terminations, withdrawals and annuity payments... 404 423
Equity Income Subaccount:
Variable annuity deposits........................ 1,132 1,970
Terminations, withdrawals and annuity payments... 1,148 419
Personal Strategy Balanced Subaccount:
Variable annuity deposits........................ 520 568
Terminations, withdrawals and annuity payments... 245 184
Limited-Term Bond Subaccount:
Variable annuity deposits........................ 667 462
Terminations, withdrawals and annuity payments... 367 279
Mid-Cap Growth Subaccount:
Variable annuity deposits........................ 1,029 1,406
Terminations, withdrawals and annuity payments... 621 305
Prime Reserve Subaccount:
Variable annuity deposits........................ 2,510 1,929
Terminations, withdrawals and annuity payments... 1,910 1,159
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
CONTENTS
- --------------------------------------------------------------------------------
Report of Independent Auditors 15
----------------------------------------------------------------------------
Audited Consolidated Financial Statements
Consolidated Balance Sheets 16
----------------------------------------------------------------------------
Consolidated Statements of Income 17
----------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholder's Equity 18
----------------------------------------------------------------------------
Consolidated Statements of Cash Flows 19
----------------------------------------------------------------------------
Notes to Consolidated Financial Statements 21
----------------------------------------------------------------------------
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors
Security Benefit Life Insurance Company
We have audited the accompanying consolidated balance sheets of Security
Benefit Life Insurance Company and Subsidiaries (the Company) as of December
31, 1998 and 1997, and the related consolidated statements of income, changes
in stockholder's equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Security
Benefit Life Insurance Company and Subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
February 5, 1999
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1998 1997
-------------------------
ASSETS (IN THOUSANDS)
Investments:
Securities available-for-sale:
Fixed maturities............................... $2,120,369 $1,650,324
Equity securities.............................. 158,291 120,508
Fixed maturities held-to-maturity................ 264,283 452,411
Mortgage loans................................... 57,400 64,251
Real estate...................................... 2,875 3,056
Policy loans..................................... 88,385 85,758
Cash............................................. 28,419 30,896
Other invested assets............................ 49,308 42,395
-------------------------
Total investments................................... 2,769,330 2,449,599
Accrued investment income........................... 31,740 30,034
Accounts receivable................................. 20,373 22,227
Reinsurance recoverable............................. 407,891 397,519
Property and equipment, net......................... 20,869 19,669
Deferred policy acquisition costs................... 168,483 159,441
Other assets........................................ 17,381 15,537
Separate account assets............................. 4,416,194 3,716,639
-------------------------
$7,852,261 $6,810,665
=========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy reserves and annuity account values....... $2,699,894 $2,439,713
Policy and contract claims....................... 9,768 10,955
Other policyholder funds......................... 20,496 21,582
Accounts payable and accrued expenses............ 47,168 35,343
Income taxes payable............................. 24,622 10,960
Deferred income tax liability.................... 60,724 58,261
Long-term debt and other borrowings.............. 60,000 65,000
Other liabilities................................ 14,276 17,331
Separate account liabilities..................... 4,416,194 3,716,639
-------------------------
Total liabilities................................... 7,353,142 6,375,784
Stockholder's equity:
Common stock, $10 par value; 1,000,000 shares
authorized; 700,010 issued and outstanding..... 7,000 ---
Retained earnings................................ 462,019 409,432
Accumulated other comprehensive income, net...... 30,100 25,449
-------------------------
Total stockholder's equity.......................... 499,119 434,881
-------------------------
$7,852,261 $6,810,665
=========================
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Insurance premiums and other considerations............ $ 24,187 $ 24,640 $ 28,848
Net investment income.................................. 174,048 184,975 194,783
Asset based fees....................................... 88,721 72,025 55,977
Other product charges.................................. 7,749 9,163 10,470
Realized gains (losses) on investments................. 4,261 4,929 (244)
Other revenues......................................... 17,307 21,389 24,391
-----------------------------------
Total revenues........................................... 316,273 317,121 314,225
Benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances................ 94,552 102,640 108,705
Benefit claims in excess of account balances......... 4,662 4,985 7,541
Traditional life insurance benefits.................... 12,617 17,472 18,222
Supplementary contract payments........................ 9,694 9,660 11,121
Increase in traditional life reserves.................. 1,699 7,050 8,580
Other benefits......................................... 13,227 7,801 11,416
-----------------------------------
Total benefits........................................... 136,451 149,608 165,585
Commissions and other operating expenses................. 63,998 59,576 52,044
Amortization of deferred policy acquisition costs........ 25,447 26,179 25,930
Interest expense......................................... 5,075 5,305 4,285
Other expenses........................................... 3,354 3,381 1,667
-----------------------------------
Total benefits and expenses.............................. 234,325 244,049 249,511
-----------------------------------
Income before income taxes............................... 81,948 73,072 64,714
Income taxes............................................. 22,361 21,567 20,871
-----------------------------------
Net income............................................... $ 59,587 $ 51,505 $ 43,843
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK EARNINGS INCOME TOTAL
----------------------------------------------
Balance at December 31, 1995... $ --- $314,084 $ 11,607 $325,691
Comprehensive income:
Net income................. --- 43,843 --- 43,843
Unrealized losses, net..... --- --- (12,086) (12,086)
---------
Comprehensive income......... 31,757
----------------------------------------------
Balance at December 31, 1996... --- 357,927 (479) 357,448
Comprehensive income:
Net income................. --- 51,505 --- 51,505
Unrealized gains, net...... --- --- 25,928 25,928
---------
Comprehensive income......... 77,433
----------------------------------------------
Balance at December 31, 1997.. --- 409,432 25,449 434,881
Common stock issued......... 7,000 (7,000) --- ---
Comprehensive income:
Net income................ --- 59,587 --- 59,587
Unrealized gains, net..... --- --- 4,651 4,651
---------
Comprehensive income........ 64,238
----------------------------------------------
Balance at December 31, 1998... $7,000 $462,019 $ 30,100 $499,119
==============================================
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $ 59,587 $ 51,505 $ 43,843
Adjustments to reconcile net income to
net cash provided by operating activities:
Annuity and interest sensitive life products:
Interest credited to account balances......................... 94,552 102,640 108,705
Charges for mortality and administration...................... (297) (10,582) (13,115)
Increase (decrease) in traditional life policy reserves......... 1,699 (3,101) 10,697
Increase (decrease) in accrued investment income................ (1,706) 2,127 (1,538)
Policy acquisition costs deferred............................... (34,068) (37,999) (36,865)
Policy acquisition costs amortized.............................. 25,447 26,179 25,930
Accrual of discounts on investments............................. (2,708) (2,818) (3,905)
Amortization of premiums on investments......................... 8,452 9,138 11,284
Depreciation and amortization................................... 4,441 3,959 3,748
Other........................................................... 10,144 (8,444) (3,379)
--------------------------------------
Net cash provided by operating activities.......................... 165,543 132,604 145,405
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities available-for-sale............................. 436,773 368,901 870,240
Fixed maturities held-to-maturity............................... 157,729 124,013 58,874
Equity securities available-for-sale............................ 13,293 48,495 3,643
Mortgage loans.................................................. 8,924 3,739 12,545
Real estate..................................................... --- 946 2,935
Separate account assets......................................... --- 9,180 5,214
Other invested assets........................................... 2,929 7,865 26,293
--------------------------------------
619,648 563,139 979,744
Acquisition of investments:
Fixed maturities available-for-sale............................. (878,753) (219,736) (936,376)
Fixed maturities held-to-maturity............................... (1,287) (1,188) (52,422)
Equity securities available-for-sale............................ (42,641) (67,004) (68,222)
Mortgage loans.................................................. (2,054) (1,447) (4,538)
Real estate..................................................... (756) (712) (2,637)
Other invested assets........................................... (7,441) (7,518) (22,782)
--------------------------------------
(932,932) (297,605) (1,086,977)
Purchase of property and equipment................................. (4,617) (4,144) (1,879)
Net increase in policy loans....................................... (2,627) (8,654) (6,370)
Net cash transferred per coinsurance agreement..................... --- (218,043) ---
--------------------------------------
Net cash provided by (used in) investing activities................ (320,528) 34,693 (115,482)
</TABLE>
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Issuance of long-term debt......................................... $ --- $ --- $ 65,000
Repayment of long-term debt........................................ (5,000) --- ---
Annuity and interest sensitive life products:
Deposits credited to account balances........................... 475,522 167,517 202,129
Withdrawals from account balances............................... (318,014) (312,228) (305,530)
--------------------------------------
Net cash provided by (used in) financing activities................ 152,508 (144,711) (38,401)
--------------------------------------
Increase (decrease) in cash........................................ (2,477) 22,586 (8,478)
Cash at beginning of year.......................................... 30,896 8,310 16,788
--------------------------------------
Cash at end of year................................................ $ 28,419 $ 30,896 $ 8,310
======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................................................ $ 5,443 $ 5,307 $ 2,966
======================================
Income taxes.................................................... $ 8,269 $ 27,920 $ 16,213
======================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND ORGANIZATION
The operations of Security Benefit Life Insurance Company (SBL or the
Company) consist primarily of marketing and distributing annuities, mutual
funds, life insurance and related products throughout the United States.
The Company and/or its subsidiaries offer a diversified portfolio of
investment products comprised primarily of individual and group annuities
and mutual fund products through multiple distribution channels. In recent
years, the Company's new business activities increasingly have been
concentrated in the individual flexible premium variable annuity markets.
On July 31, 1998, the Company converted from a mutual life insurance
company to a stock life insurance company under a mutual holding company
structure pursuant to a Plan of Conversion (the Conversion). In connection
with the Conversion, Security Benefit Corp. (SBC), a Kansas domiciled
intermediate stock holding company, and Security Benefit Mutual Holding
Company (SBMHC), a Kansas domiciled mutual holding company, were formed. On
the same date, all of the initial shares of common stock of SBL, except for
shares issued to SBL Directors in accordance with Kansas law, were issued
to SBC. In addition, all of the initially issued shares of common stock of
SBC, consisting of 1,000 shares of Class B common stock, were issued to
SBMHC. As a result of the Conversion, SBMHC indirectly owned, through its
ownership of SBC, all of the issued and outstanding common stock of SBL
(except shares required by law to be held by SBL Directors). In accordance
with Kansas law, SBMHC must at all times hold at least 51% of the voting
stock of SBC.
BASIS OF PRESENTATION
The consolidated financial statements include the operations and accounts
of the Company and its subsidiaries including Security Management Company,
LLC and Security Benefit Group, Inc. (which includes First Security Benefit
Life Insurance and Annuity Company of New York; Security Distributors,
Inc.; Security Benefit Academy, Inc.; and Creative Impressions, Inc.).
Significant intercompany transactions have been eliminated in
consolidation.
ACCOUNTING CHANGE
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) Statement No. 130, "Reporting Comprehensive Income." Statement No.
130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net income or stockholder's equity. Statement No.
130 requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in equity, to
be included in other comprehensive income.
USE OF ESTIMATES
The preparation of consolidated financial statements requires management to
make estimates and assumptions that affect amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
INVESTMENTS
Fixed maturities are classified as either held-to-maturity or
available-for-sale. Fixed maturities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities
to maturity. Held-to-maturity securities are stated at amortized cost,
adjusted for amortization of premiums and accrual of discounts. Fixed
maturities not classified as held-to-maturity and equity securities are
classified as available-for-sale. Equity securities are comprised of common
stock, preferred stock and mutual funds.
Securities available-for-sale are reported in the accompanying consolidated
financial statements at fair value. Any valuation changes resulting from
changes in the fair value of these securities are reflected as a component
of accumulated other comprehensive income. These unrealized gains or losses
in accumulated other comprehensive income are reported, net of taxes and
adjustments to deferred policy acquisition costs.
The amortized cost of fixed maturities is adjusted for amortization of
premiums and accrual of discounts. Premiums and discounts are recognized
over the estimated lives of the assets adjusted for prepayment activity.
Distributions from mutual funds are included in investment income. Realized
gains and losses on sales of investments are recognized in revenues on the
specific-identification method.
Mortgage loans are reported at amortized cost. Real estate investments are
carried at the lower of depreciated cost or estimated realizable value.
Policy loans are reported at unpaid principal. Investments accounted for by
the equity method include investments in, and advances to, various joint
ventures and partnerships.
The operations of the Company are subject to risk resulting from interest
rate fluctuations to the extent that there is a difference between the
amount of the Company's interest-earning assets and the amount of
interest-bearing liabilities that are prepaid/withdrawn, mature or reprice
in specified periods. The principal objective of the Company's
asset/liability management activities is to provide maximum levels of net
investment income while maintaining acceptable levels of interest rate and
liquidity risk and while facilitating the funding needs of the Company. The
Company periodically may use derivative financial instruments to modify its
interest rate sensitivity to levels deemed to be appropriate based on the
Company's current economic outlook.
Such derivative financial instruments are for purposes other than trading
and are classified as available-for-sale in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, these instruments are stated at fair value with the change in
fair value reported as a component of accumulated other comprehensive
income.
DEFERRED POLICY ACQUISITION COSTS
To the extent recoverable from future policy revenues and gross profits,
commissions and other policy-issue, underwriting and marketing costs that
are primarily related to the acquisition or renewal of life insurance and
deferred annuity business have been deferred.
Traditional life insurance deferred policy acquisition costs are being
amortized in proportion to premium revenues over the premium-paying period
of the related policies using assumptions consistent with those used in
computing policy benefit reserves.
For interest sensitive life and deferred annuity business, deferred policy
acquisition costs are amortized in proportion to the present value
(discounted at the crediting rate) of expected gross profits from
investment, mortality and expense margins. That amortization is adjusted
retrospectively when estimates of current or future gross profits to be
realized from a group of products are revised. Deferred policy acquisition
costs are adjusted for the impact on estimated gross profits of net
unrealized gains and losses on securities.
PROPERTY AND EQUIPMENT
Property and equipment, including home-office real estate, furniture and
fixtures, and data-processing hardware and related systems, are recorded at
cost, less accumulated depreciation. The provision for depreciation of
property and equipment is computed using the straight-line method over the
estimated lives of the related assets.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying
balance sheets represent funds that are separately administered for the
benefit of contractholders who bear the investment risk. The separate
account assets and liabilities are carried at fair value. Revenues and
expenses related to separate account assets and liabilities, to the extent
of benefits paid or provided to the separate account contractholders, are
excluded from the amounts reported in the consolidated statements of
income. Investment income and gains or losses arising from separate
accounts accrue directly to the contractholders and, therefore, are not
included in investment earnings in the accompanying statements of income.
Revenues to the Company from the separate accounts consist principally of
contract maintenance charges, administrative fees, and mortality and
expense risk charges.
POLICY RESERVES AND ANNUITY ACCOUNT VALUES
Liabilities for future policy benefits for traditional life products are
computed using a net level-premium method, including assumptions as to
investment yields, mortality and withdrawals, and other assumptions that
approximate expected experience.
Liabilities for future policy benefits for interest sensitive life and
deferred annuity products represent accumulated contract values without
reduction for potential surrender charges and deferred front-end contract
charges that are amortized over the life of the policy. Interest on
accumulated contract values is credited to contracts as earned. Crediting
rates ranged from 3.4% to 8% during 1998, from 3.8% to 7.25% during 1997
and from 3.5% to 7.25% during 1996.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and income tax bases of assets and
liabilities and are measured using the enacted tax rates and laws. Deferred
income tax expenses or credits reflected in the Company's statements of
income are based on the changes in deferred tax assets or liabilities from
period to period (excluding unrealized gains and losses on securities
available-for-sale).
RECOGNITION OF REVENUES
Traditional life insurance products include whole life insurance, term life
insurance and certain annuities. Premiums for these traditional products
are recognized as revenues when due. Revenues from interest sensitive life
insurance products and deferred annuities consist of policy charges for the
cost of insurance, policy administration charges and surrender charges
assessed against contractholder account balances during the period.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash: The carrying amounts reported in the balance sheet for these
instruments approximate their fair values.
Investment securities: Fair values for fixed maturities are based on quoted
market prices if available. For fixed maturities not actively traded, fair
values are estimated using values obtained from independent pricing
services or estimated by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality and maturity of
the investments. The fair values for equity securities are based on quoted
market prices.
Mortgage loans and policy loans: Fair values for mortgage loans and policy
loans are estimated using discounted cash flow analyses based on market
interest rates for similar loans to borrowers with similar credit ratings.
Loans with similar characteristics are aggregated for purposes of the
calculations. The carrying amounts reported in the consolidated balance
sheets approximate their fair values.
Investment-type contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using the assumption
reinsurance method, whereby the amount of statutory profit the assuming
company would realize from the business is calculated. Those amounts are
then discounted at a rate of return commensurate with the rate presently
offered by the Company on similar contracts.
Long-term debt: Fair values for long-term debt are estimated using
discounted cash flow analyses based on current borrowing rates for similar
types of borrowing arrangements.
2. INVESTMENTS
Information as to the amortized cost, gross unrealized gains and losses,
and fair values of the Company's portfolio of fixed maturities and equity
securities at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............. $ 204,414 $ 5,254 $ 8 $ 209,660
Obligations of states and political
subdivisions.......................... 27,583 2,310 --- 29,893
Corporate securities.................... 1,053,782 33,400 10,716 1,076,466
Mortgage-backed securities.............. 628,020 12,530 2,550 638,000
Asset-backed securities................. 166,144 2,113 1,907 166,350
-------------------------------------------------
Totals.................................. $2,079,943 $55,607 $15,181 $2,120,369
=================================================
Equity securities....................... $ 140,999 $18,271 $ 979 $ 158,291
=================================================
HELD-TO-MATURITY
Obligations of states and political
subdivisions.......................... $ 61,473 $ 3,196 $ --- $ 64,669
Corporate securities.................... 93,413 7,718 360 100,771
Mortgage-backed securities.............. 96,987 1,640 --- 98,627
Asset-backed securities................. 12,410 289 --- 12,699
-------------------------------------------------
Totals.................................. $ 264,283 $12,843 $ 360 $ 276,766
=================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 214,088 $ 3,313 $ --- $ 217,401
Obligations of states and political
subdivisions......................... 24,008 1,365 8 25,365
Corporate securities.................... 742,123 27,986 1,674 768,435
Mortgage-backed securities.............. 510,991 11,429 2,137 520,283
Asset-backed securities................. 117,907 1,030 97 118,840
----------------------------------------------------
Totals.................................. $1,609,117 $45,123 $3,916 $1,650,324
====================================================
Equity securities....................... $ 109,763 $11,220 $ 475 $ 120,508
====================================================
HELD-TO-MATURITY
Obligations of states and political
subdivisions......................... $ 74,802 $ 2,094 $ 30 $ 76,866
Corporate securities.................... 108,609 5,295 201 113,703
Mortgage-backed securities.............. 227,131 2,725 364 229,492
Asset-backed securities................. 41,869 297 1 42,165
----------------------------------------------------
Totals.................................. $ 452,411 $10,411 $ 596 $ 462,226
====================================================
</TABLE>
The prior-year financial statements have been reclassified to conform to
the requirements of FASB Statement No. 130. After making these balance
sheet reclassifications, the following amounts were included in accumulated
other comprehensive income for the years ended December 31, 1998, 1997 and
1996:
1998 1997 1996
-------------------------------
Unrealized holding gains (losses)
arising during the year................ $10,523 $ 60,638 $(37,942)
Less: Realized gains (losses) included
in net income.......................... 4,757 4,929 (244)
-------------------------------
Other comprehensive income (loss),
before deferred taxes and the unlocking
of deferred policy acquisition costs... 5,766 55,709 (37,698)
Deferred income taxes.................... (2,033) (13,913) 6,203
Unlocking of deferred policy acquisition
costs.................................. 918 (15,868) 19,409
-------------------------------
Other comprehensive income (loss), net... $ 4,651 $ 25,928 $(12,086)
===============================
The amortized cost and fair value of fixed maturities at December 31, 1998,
by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less................. $ 48,041 $ 48,326 $ 1,508 $ 1,528
Due after one year through five years... 176,414 180,716 8,485 8,977
Due after five years through 10 years... 567,478 579,461 36,368 38,562
Due after 10 years...................... 493,846 507,516 108,525 116,373
Mortgage-backed securities.............. 628,020 638,000 96,987 98,627
Asset-backed securities................. 166,144 166,350 12,410 12,699
------------------------------------------------
$2,079,943 $2,120,369 $264,283 $276,766
================================================
</TABLE>
The composition of the Company's portfolio of fixed maturities by quality
rating at December 31, 1998 is as follows:
CARRYING
QUALITY RATING AMOUNT %
-------------------------------------------------------------------
(IN THOUSANDS)
AAA.................................... $1,055,819 44.3%
AA..................................... 215,520 9.0
A...................................... 469,855 19.7
BBB.................................... 422,600 17.7
Noninvestment grade.................... 220,858 9.3
=======================
$2,384,652 100.0%
=======================
Major categories of net investment income for the years ended December 31,
1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
-------------------------------
(IN THOUSANDS)
Interest on fixed maturities............ $154,529 $167,646 $174,592
Dividends and distributions on
equity securities .................... 10,945 7,358 5,817
Interest on mortgage loans ............. 5,388 6,017 6,680
Interest on policy loans................ 5,381 6,282 6,372
Interest on short-term investments...... 2,377 2,221 1,487
Other................................... 865 (166) 4,199
-------------------------------
Total investment income................. 179,485 189,358 199,147
Less investment expenses................ 5,437 4,383 4,364
-------------------------------
Net investment income................... $174,048 $184,975 $194,783
===============================
Proceeds from sales of fixed maturities and equity securities and related
realized gains and losses, including valuation adjustments, for the years
ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
----------------------------------
(IN THOUSANDS)
Proceeds from sales................... $196,849 $333,498 $393,189
Gross realized gains.................. 9,801 11,889 9,407
Gross realized losses................. 4,939 6,640 9,723
Net realized gains (losses), net of associated amortization of deferred
policy acquisition costs, for the years ended December 31, 1998, 1997 and
1996 consist of the following:
1998 1997 1996
--------------------------------
(IN THOUSANDS)
Fixed maturities........................ $2,976 $ 861 $(1,329)
Equity securities....................... 1,886 4,388 1,013
Other................................... (105) (320) 72
--------------------------------
4,757 4,929 (244)
Amortization of deferred policy
acquisition costs..................... (496) --- ---
--------------------------------
Net realized gains (losses)............. $4,261 $4,929 $ (244)
================================
There were no deferred losses at December 31, 1998 or 1997 resulting from
terminated and expired futures contracts. There were no outstanding
agreements to sell securities at December 31, 1998, 1997 or 1996. The
notional amount of interest rate exchange agreements outstanding at
December 31, 1998 was $88,450,000. These agreements have maturities ranging
from September 2002 to December 2005. Under these agreements, the Company
receives variable interest rates based on the three-month LIBOR rate and
pays fixed interest rates ranging from 5.54% to 7.5%.
The Company has a diversified portfolio of commercial and residential
mortgage loans outstanding in 14 states. The loans are somewhat
geographically concentrated in the midwestern and southwestern United
States with the largest outstanding balances at December 31, 1998 being in
the states of Kansas (31%), Iowa (16%) and Texas (14%).
3. EMPLOYEE BENEFIT PLANS
Substantially all Company employees are covered by a qualified,
noncontributory defined benefit pension plan sponsored by the Company and
certain of its affiliates. Benefits are based on years of service and an
employee's highest average compensation over a period of five consecutive
years during the last 10 years of service. The Company's policy has been to
contribute funds to the plan in amounts required to maintain sufficient
plan assets to provide for accrued benefits. In applying this general
policy, the Company considers, among other factors, the recommendations of
its independent consulting actuaries, the requirements of federal pension
law and the limitations on deductibility imposed by federal income tax law.
Plan assets are invested in public mutual funds with varying investment
objectives which are managed by an affiliated entity. Unrealized gains on
plan assets were $669,000 and $628,000 at December 31, 1998 and 1997,
respectively.
In addition to the Company's defined benefit pension plan, the Company
provides certain medical and life insurance benefits to full-time employees
who have retired after the age of 55 with five years of service. The plan
is contributory, with retiree contributions adjusted annually, and contains
other cost-sharing features such as deductibles and coinsurance.
Contributions vary based on the employee's years of service earned after
age 40. The Company's portion of the costs is frozen after 2002 with all
future cost increases passed on to the retirees. Retirees in the plan prior
to July 1, 1993 are covered 100% by the Company.
The following table sets forth the plans' funded status and amounts
recognized in the financial statements at December 31 and for the years
then ended:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------------------------------
1998 1997 1998 1997
-------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation at year end.......... $(13,306) $(12,487) $(4,962) $(4,361)
Fair value of plan assets at year end... 11,363 11,279 --- ---
-------------------------------------------
Funded status of the plan............... $ (1,943) $ (1,208) $(4,962) $(4,361)
===========================================
Accrued benefit cost recognized in the
consolidated balance sheets........... $ (253) $ (404) $(5,323) $(5,053)
Net periodic benefit cost............... 719 1,999 474 786
Benefits paid........................... 2,475 1,563 197 170
Contributions........................... 870 865 --- ---
</TABLE>
PENSION BENEFITS OTHER BENEFITS
------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS 1998 1997 1998 1997
------------------------------------
Discount rate....................... 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets...... 9.00% 9.00% --- ---
Rate of compensation increase....... 4.50% 4.50% --- ---
The annual assumed rate of increase in the per capita cost of covered
benefits is 8% for 1998 and 9% for 1997, and is assumed to decrease
gradually to 5% for 2001 and remain at that level thereafter.
The health care cost trend rate has a significant effect on the amount
reported. For example, increasing the assumed health care cost trend rates
by one percentage point each year would increase the accumulated
postretirement benefit obligation as of December 31, 1998 by $228,000 and
the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1998 by $68,000.
The Company has a profit-sharing and savings plan for which substantially
all employees are eligible after one year of employment with the Company.
Company contributions to the profit-sharing and savings plan charged to
operations were $2,176,000, $2,065,000 and $1,783,000 for 1998, 1997 and
1996, respectively.
4. REINSURANCE
The Company assumes and cedes reinsurance with other companies to provide
for greater diversification of business, to allow management to control
exposure to potential losses arising from large risks, and to provide
additional capacity for growth. Life insurance in force ceded at December
31, 1998 and 1997 was $7.0 billion and $7.4 billion, respectively.
Principal reinsurance transactions for the years ended December 31, 1998,
1997 and 1996 are summarized as follows:
1998 1997 1996
-------------------------------
(IN THOUSANDS)
Reinsurance ceded:
Premiums paid.......................... $46,391 $33,872 $25,442
===============================
Commissions received................... $ 5,647 $ 5,173 $ 4,669
-------------------------------
Claim recoveries....................... $20,166 $12,136 $ 5,235
===============================
In the accompanying financial statements, premiums, benefits, settlement
expenses and deferred policy acquisition costs are reported net of
reinsurance ceded; policy liabilities and accruals are reported gross of
reinsurance ceded. The Company remains liable to policyholders if the
reinsurers are unable to meet their contractual obligations under the
applicable reinsurance agreements. To minimize its exposure to significant
losses from reinsurance insolvencies, the Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities or economic
characteristics of reinsurers. At December 31, 1998 and 1997, the Company
had established receivables totaling $407,891,000 and $397,519,000,
respectively, for reserve credits, reinsurance claims and other receivables
from its reinsurers. Substantially all of these receivables are
collateralized by assets of the reinsurers held in trust. The amount of
reinsurance assumed is not significant.
In 1997, the Company transferred, through a 100% coinsurance agreement,
$318 million in policy reserves and claim liabilities reduced by a ceding
commission of $63 million and other related items. The agreement related to
a block of universal life and traditional life insurance business. The
Company recorded a pretax gain of $14.625 million which is deferred in
other liabilities and amortized to income over the estimated life of the
business transferred, estimated to be 15 years. Amortization of this
deferred gain during 1998 amounted to $1,358,000.
5. INCOME TAXES
The Company files a life/nonlife consolidated federal income tax return
with SBMHC. The provision for income taxes includes current federal income
tax expense or benefit and deferred income tax expense or benefit due to
temporary differences between the financial reporting and income tax bases
of assets and liabilities. Such differences relate principally to
liabilities for future policy benefits and accumulated contract values,
deferred compensation, deferred policy acquisition costs, postretirement
benefits, deferred selling commissions, depreciation expense and unrealized
gains (losses) on securities available-for-sale.
Income tax expense (benefit) consists of the following for the years ended
December 31, 1998, 1997 and 1996:
1998 1997 1996
--------------------------------
(IN THOUSANDS)
Current................................. $21,931 $32,194 $12,528
Deferred................................ 430 (10,627) 8,343
--------------------------------
$22,361 $21,567 $20,871
================================
The provision for income taxes differs from the amount computed at the
statutory federal income tax rate due primarily to dividends-received
deductions and tax credits.
Net deferred tax assets or liabilities consist of the following:
DECEMBER 31
1998 1997
-------------------
(IN THOUSANDS)
Deferred tax assets:
Future policy benefits............................ $ 5,432 $ 9,869
Employee benefits................................. 8,110 6,487
Deferred gain on coinsurance agreement............ 4,475 4,970
Other............................................. 11,147 8,747
-------------------
Total deferred tax assets............................ 29,164 30,073
Deferred tax liabilities:
Deferred policy acquisition costs................. $55,540 $53,173
Net unrealized appreciation on securities
available-for-sale.............................. 20,034 18,115
Deferred gain on investments...................... 7,772 8,378
Depreciation...................................... 1,499 1,935
Other............................................. 5,043 6,733
-------------------
Total deferred tax liabilities....................... 89,888 88,334
-------------------
Net deferred tax liabilities......................... $60,724 $58,261
===================
6. CONDENSED FAIR VALUE INFORMATION
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosures of fair value information about financial instruments,
whether recognized or not recognized in a company's balance sheet, for
which it is practicable to estimate that value. The methods and assumptions
used by the Company to estimate the following fair value disclosures for
financial instruments are set forth in NOTE 1.
SFAS No. 107 excludes certain insurance liabilities and other nonfinancial
instruments from its disclosure requirements. However, the liabilities
under all insurance contracts are taken into consideration in the Company's
overall management of interest rate risk that minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts. The fair value amounts presented
herein do not include an amount for the value associated with customer or
agent relationships, the expected interest margin (interest earnings in
excess of interest credited) to be earned in the future on investment-type
products or other intangible items. Accordingly, the aggregate fair value
amounts presented herein do not necessarily represent the underlying value
of the Company; likewise, care should be exercised in deriving conclusions
about the Company's business or financial condition based on the fair value
information presented herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Supplementary contracts
without life contingencies............ $ 27,105 $ 27,353 $ 29,890 $ 30,189
Individual and group annuities.......... 2,147,665 2,005,939 1,894,605 1,713,509
Long-term debt.......................... 60,000 69,909 65,000 71,793
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company leases various equipment under several operating lease
agreements. Total expense for all operating leases amounted to $1,155,000,
$1,018,000 and $1,108,000 during 1998, 1997 and 1996, respectively. The
Company has aggregate future lease commitments at December 31, 1998 of
$4,406,000 for noncancelable operating leases consisting of $1,272,000 in
1999, $1,231,000 in 2000, $1,082,000 in 2001 and $821,000 in 2002. There
are no noncancelable lease commitments beyond 2002.
In addition, in 2001, under the terms of one of the operating leases, the
Company has the option to renew the lease for another five years, purchase
the asset for approximately $4.7 million, or return the asset to the lessor
and pay a termination charge of approximately $3.7 million.
In connection with its investments in low-income housing partnerships, the
Company is committed to invest additional capital of $9,190,000 in 1999.
Guaranty fund assessments are levied on the Company by life and health
guaranty associations in most states in which it is licensed to cover
losses of policyholders of insolvent or rehabilitated insurers. In some
states, these assessments can be partially recovered through a reduction in
future premium taxes. The Company cannot predict whether and to what extent
legislative initiatives may affect the right to offset. Based on
information from the National Organization of Life and Health Guaranty
Association and information from the various state guaranty associations,
the Company believes that it is probable that these insolvencies will
result in future assessments. The Company regularly evaluates its reserve
for these insolvencies and updates its reserve based on the Company's
interpretation of information recently received. The associated costs for a
particular insurance company can vary significantly based on its premium
volume by line of business in a particular state and its potential for
premium tax offset. The Company accrued no additional reserves for these
insolvencies in 1998. At December 31, 1998, the Company has reserved
$2,142,000 to cover current and estimated future assessments, net of
related premium tax credits.
8. LONG-TERM DEBT AND OTHER BORROWINGS
The Company has a $61.5 million line-of-credit facility from the Federal
Home Loan Bank of Topeka. Any borrowings in connection with this facility
bear interest at 0.1% over the Federal Funds rate. No amounts were
outstanding at December 31, 1998 and 1997.
The Company has two separate $5 million advances from the Federal Home Loan
Bank of Topeka. The advances are due February 26, 1999 and February 28,
2001 and carry interest rates of 5.76% and 6.04%, respectively.
In May 1996, the Company issued $50 million of 8.75% surplus notes maturing
on May 15, 2016. The surplus notes were issued pursuant to Rule 144A under
the Securities Act of 1933. The surplus notes have repayment conditions and
restrictions whereby each payment of interest on or principal of the
surplus notes may be made only with the prior approval of the Kansas
Insurance Commissioner and only out of surplus funds that the Kansas
Insurance Commissioner determines to be available for such payment under
the Kansas Insurance Code.
9. RELATED-PARTY TRANSACTIONS
The Company owns shares of mutual funds managed by Security Management
Company, LLC with net asset values totaling $108,285,000 and $85,950,000 at
December 31, 1998 and 1997, respectively. These amounts are included in
equity securities on the consolidated balance sheets.
10. STATUTORY INFORMATION
The Company and its insurance subsidiary prepare statutory-basis financial
statements in accordance with accounting practices prescribed or permitted
by the Kansas and New York Insurance regulatory authorities, respectively.
Accounting practices used to prepare statutory-basis financial statements
for regulatory filings of life insurance companies differ in certain
instances from generally accepted accounting principles (GAAP). Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state
laws, regulations and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed;
such practices may differ from state to state, may differ from company to
company within a state and may change in the future. In addition, in March
1998, the NAIC adopted the codification of Statutory Accounting Principles
(the Codification). Once implemented, the definitions of what comprises
prescribed versus permitted statutory accounting practices may result in
changes to accounting policies that insurance enterprises use to prepare
their statutory financial statements. The implementation date is ultimately
dependent on an insurer's state of domicile. The Company does not expect a
material impact on its statutory financial statements resulting from the
implementation of codification. Statutory capital and surplus of the
insurance operations are $427,350,000 and $382,005,000 at December 31, 1998
and 1997, respectively. Statutory net income of the insurance operations
are $50,371,000, $42,950,000 and $37,946,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
11. IMPACT OF YEAR 2000 (UNAUDITED)
Over the past few years, the Company has been assessing the potential
impact of the year 2000 on its systems, procedures, customers and business
processes. The year 2000 assessment provided information used to determine
what system components needed to be changed or replaced to minimize the
impact of the calendar change from 1999 to 2000.
The Company will continue to use internal and external resources to modify,
replace and test the year 2000 changes. All identified modifications to
critical operating systems have been completed as of December 31, 1998, and
the Company continues to validate completed systems to ensure ongoing
compliance. Management estimates 100% of the identified modifications to
other less-important operating systems will be completed by June 30, 1999.
In any event, all identified modifications are expected to be completed
prior to any anticipated impact on Company operations. Total costs of the
modifications have been immaterial to the Company's operations and have
been expensed as incurred.
The Company does face the risk that one or more of its critical suppliers
or customers (external relationships) will not be able to interact with the
Company due to the third party's inability to resolve its own year 2000
issues. The Company completed an inventory of external relationships, is
engaged in discussions with such third parties and is requesting
information as to those parties' year 2000 plans and states of readiness.
The Company, however, is unable to predict with certainty to what extent
its external relationships will be year 2000 ready. However, third-party
vendors of the Company's primary administrative systems have represented to
the Company that the systems are or will be year 2000 ready.
While the Company believes that it has addressed its year 2000 concerns,
the Company has begun to strengthen its contingency/recovery plans aimed at
ensuring the continuity of critical business functions before, on and after
December 31, 1999. The Company expects contingency/recovery planning to be
substantially complete by July 1, 1999. The year 2000 contingency plans
will be reviewed periodically throughout 1999 and revised as needed. The
Company believes its year 2000 contingency plans, coupled with existing
disaster recovery and business resumption plans, minimize the impact year
2000 issues may have on its business and customers.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
All required financial statements are included in Part B of this
Registration Statement.
(b) Exhibits
(1) Certified Resolution of the Board of Directors of Security
Benefit Life Insurance Company ("SBL") authorizing
establishment of the Separate Account(a)
(2) Not Applicable
(3) Amended and Restated Distribution Agreement(a)
(4) (a) Individual DVA Contract (Form V6021 R8-98)(a)
(b) Individual IVA Contract (Form V6027 8-98)(a)
(c) TSA Loan Endorsement (Form V6846 R1-97)(b)
(d) SIMPLE IRA Endorsement (Form 4453C-5S 2-97)(b)
(e) IRA Endorsement (Form V6842A 1-97)(b)
(f) TSA Endorsement (Form V6832A R9-96)(b)
(g) Roth IRA Endorsement (Form V6851 10-97)(c)
(h) 457 Endorsement (Form V6054 1-98)(d)
(i) Options 8&9 Endorsement (Form V6056 8-98)(a)
(j) 403(a) Endorsement (Form V6057 10-98)
(5) (a) DVA Application (Form V6844 R1-98)(a)
(b) IVA Application (Form V7588 8-98)(a)
(6) (a) Composite of Articles of Incorporation of SBL(e)
(b) Bylaws of SBL(e)
(7) Not Applicable
(8) (a) Amended and Restated Participation Agreement(a)
(b) Amended and Restated Master Agreement(a)
(9) Opinion of Counsel
(10) Consent of Independent Auditors
(11) Not Applicable
(12) Not Applicable
(13) Schedule of Computation of Performance
(14) Powers of Attorney of Thomas R. Clevenger, Sister Loretto
Marie Colwell, John C. Dicus, Steven J. Douglass, Howard R.
Fricke, William W. Hanna, John E. Hayes, Jr., Laird G.
Noller, Frank C. Sabatini, and Robert C. Wheeler(a)
(a) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 8 under the Securities Act of
1933 and Amendment No. 9 under the Investment Company Act of 1940 to
Registration Statement No. 33-83238 (February 18, 1999).
(b) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 6 under the Securities Act of
1933 and Amendment No. 7 under the Investment Company Act of 1940 to
Registration Statement No. 33-83238 (April 30, 1997).
(c) Incorporated herein by reference to the Exhibits filed with the Variflex
Separate Account Post-Effective Amendment No. 19 under the Securities Act
of 1933 and Amendment No. 18 under the Investment Company Act of 1940 to
Registration Statement No. 2-89328 (April 30, 1998).
(d) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 7 under the Securities Act of
1933 and Amendment No. 8 under the Investment Company Act of 1940 to
Registration Statement No. 33-83238 (April 30, 1998).
(e) Incorporated herein by reference to the Exhibits filed with the Variflex
Separate Account Post-Effective Amendment No. 20 under the Securities Act
of 1933 and Amendment No. 19 under the Investment Company Act of 1940 to
Registration Statement No. 2-89328 (August 17, 1998).
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
NAME AND PRINCIPAL
BUSINESS ADDRESS POSITIONS AND OFFICES WITH DEPOSITOR
Howard R. Fricke* Chairman of the Board, Chief
Executive Officer and Director
Thomas R. Clevenger Director
P.O. Box 8514
Wichita, Kansas 67208
Sister Loretto Marie Colwell Director
1700 SW 7th Street
Topeka, Kansas 66044
John C. Dicus Director
700 Kansas Avenue
Topeka, Kansas 66603
Steven J. Douglass Director
3231 E. 6th Street
Topeka, Kansas 66607
William W. Hanna Director
P.O. Box 2256
Wichita, KS 67201
John E. Hayes, Jr. Director
200 Gulf Blvd.
Bellair Shore, FL 33786
Laird G. Noller Director
2245 Topeka Avenue
Topeka, Kansas 66611
Frank C. Sabatini Director
120 SW 6th Street
Topeka, Kansas 66603
Robert C. Wheeler Director
P.O. Box 148
Topeka, Kansas 66601
Donald J. Schepker* Senior Vice President, Chief
Financial Officer and Treasurer
Kris A. Robbins* President and Chief Operating
Officer
Roger K. Viola* Senior Vice President, General
Counsel and Secretary
Malcolm E. Robinson* Senior Vice President and Assistant
to the Chairman and CEO
Richard K Ryan* Senior Vice President
John D. Cleland* Senior Vice President
Terry A. Milberger* Senior Vice President
Venette K. Davis* Senior Vice President
J. Craig Anderson* Senior Vice Presiden
Gregory Garvin* Senior Vice President
Amy J. Lee* Associate General Counsel and Vice
President
James R. Schmank* Senior Vice President
Tom Swank* Vice President and Chief Investment
Officer
*Located at 700 Harrison Street, Topeka, Kansas 66636.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR
OR REGISTRANT
The Depositor, Security Benefit Life Insurance Company ("SBL"), is
controlled by Security Benefit Corp. through the ownership of 700,000
of SBL's 700,010 issued and outstanding shares of common stock. One
share each of SBL's issued and outstanding common stock is owned by
each director of SBL, in accordance with the requirements of Kansas
law. Security Benefit Corp. is wholly-owned by Security Benefit
Mutual Holding Company ("SBMHC"), which in turn is controlled by SBL
policyholders. No one person holds more than approximately 0.0004% of
the voting power of SBMHC. The Registrant is a segregated asset
account of SBL.
The following chart indicates the persons controlled by or under
common control with T. Rowe Price Variable Annuity Account or SBL:
PERCENT OF
VOTING SECURITIES
OWNED BY SBMHC
JURISDICTION OF (directly or
NAME INCORPORATION indirectly)
Security Benefit Corp.
(Holding Company) Kansas 100%
Security Benefit Life
Insurance Company
(Stock Life Insurance Company) Kansas 100%
Security Benefit Group, Inc.
(Holding Company) Kansas 100%
Security Management Company, LLC
(Investment Adviser) Kansas 100%
Security Distributors, Inc.
(Broker/Dealer, Principal
Underwriter of Mutual Funds) Kansas 100%
Security Benefit Academy, Inc.
(Daycare Company) Kansas 100%
Creative Impressions, Inc.
(Advertising Agency) Kansas 100%
First Advantage Insurance
Agency, Inc. Kansas 100%
First Security Benefit
Life Insurance and Annuity
Company of New York New York 100%
SBL is also the depositor of the following separate accounts: SBL
Variable Annuity Accounts I, III, IV, VIII and X, Variflex Separate
Account, SBL Variable Life Insurance Account Varilife, Security
Varilife Separate Account and Parkstone Variable Annuity Separate
Account.
Through the above-referenced separate accounts, SBL might be deemed
to control the open-end management investment companies listed below.
The approximate percentage of ownership by the separate accounts for
each company is as follows:
Security Ultra Fund 32.0% SBL Fund 100%
Security Growth and Income Fund 39.4%
ITEM 27. NUMBER OF CONTRACT OWNERS
As of January 31, 1999, there were 4,287 owners of T. Rowe Price
Variable Annuity Contracts.
ITEM 28. INDEMNIFICATION
The bylaws of Security Benefit Life Insurance Company provide that
the Company shall, to the extent authorized by the laws of the State
of Kansas, indemnify officers and directors for certain liabilities
threatened or incurred in connection with such person's capacity as
director or officer.
The Articles of Incorporation include the following provision:
A Director shall not be personally liable to the Corporation or to
its policyholders for monetary damages for breach of fiduciary duty
as a director, provided that this sentence shall not eliminate nor
limit the liability of a director
A. for any breach of his or her duty of loyalty to the Corporation
or its policyholders;
B. for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
C. under the provisions of K.S.A. 17-6424 and amendments thereto; or
D. for any transaction from which the director derived an improper
personal benefit.
This Article Eighth shall not eliminate or limit the liability of
a director for any act or omission occurring prior to the date
this Article Eighth becomes effective.
Insofar as indemnification for a liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Depositor has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment of
expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Depositor will, unless in the opinion of its counsel
the matter has been settled by a controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) 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., serves as the
distributor of the T. Rowe Price Variable Annuity Account
contracts. Investment Services receives no compensation for
distributing the Contracts. Investment Services also serves as
principal underwriter for the following investment companies:
T. Rowe Price Growth Stock Fund, Inc.; T. Rowe Price New Horizons
Fund, Inc.; T. Rowe Price New Era Fund, Inc.; T. Rowe Price New
Income Fund, Inc.; T. Rowe Price Growth & Income Fund, Inc.; T.
Rowe Price Prime Reserve Fund, Inc. (which includes T. Rowe Price
Prime Reserve Fund - PLUS class); T. Rowe Price Tax-Free Income
Fund, Inc.; T. Rowe Price Tax-Exempt Money Fund, Inc. (which
includes T. Rowe Price Tax-Exempt Money Fund PLUS class); T. Rowe
Price Short-Term Bond Fund, Inc.; T. Rowe Price Tax-Free
Intermediate Bond Fund, Inc.; T. Rowe Price Tax-Free
Short-Intermediate Fund, Inc.; T. Rowe Price High Yield Fund,
Inc.; T. Rowe Price Tax-Free High Yield Fund, Inc.; T. Rowe Price
GNMA Fund; T. Rowe Price Equity Income Fund; T. Rowe Price New
America Growth Fund; T. Rowe Price Capital Appreciation Fund; T.
Rowe Price Capital Opportunity Fund, Inc.; T. Rowe Price Science
& Technology Fund, Inc.; T. Rowe Price Health Science Fund, Inc.;
T. Rowe Price Small-Cap Value Fund, Inc.; T. Rowe Price U.S.
Treasury Funds, Inc. (which includes U.S. Treasury Money Fund,
U.S. Treasury Intermediate Fund and U.S. Treasury Long-Term
Fund); T. Rowe Price State Tax-Free Income Trust (which includes
Maryland Tax-Free Bond Fund, New York Tax-Free Bond Fund, New
York Tax-Free Money Fund, Virginia Short-Term Tax-Free Bond Fund,
Virginia Tax-Free Bond Fund, New Jersey Tax-Free Bond Fund,
Georgia Tax-Free Bond Fund, Florida Intermediate Tax-Free Fund,
and Maryland Short-Term Tax-Free Bond Fund); T. Rowe Price
California Tax-Free Income Trust (which includes California
Tax-Free Bond Fund and California Tax-Free Money Fund); T. Rowe
Price Index Trust, Inc. (which includes the T. Rowe Price Equity
Index 500 Fund, T. Rowe Price Extended Equity Market Index Fund
and T. Rowe Price Total Equity Market Index Fund); T. Rowe Price
Spectrum Fund, Inc. (which includes the Spectrum Growth Fund,
Spectrum International Fund and Spectrum Income Fund); T. Rowe
Price Short-Term U.S. Government Fund, Inc.; T. Rowe Price Value
Fund, Inc.; T. Rowe Price Balanced Fund, Inc.; T. Rowe Price
Mid-Cap Growth Fund, Inc.; T. Rowe Price Small Cap Stock Fund,
Inc. (formerly known as T. Rowe Price OTC Fund); T. Rowe Price
Blue Chip Growth Fund, Inc.; T. Rowe Price Dividend Growth Fund,
Inc.; T. Rowe Price Summit Funds, Inc. (which includes T. Rowe
Price Summit Cash Reserves Fund, T. Rowe Price Summit
Limited-Term Bond Fund and T. Rowe Price Summit GNMA Fund); T.
Rowe Price Summit Municipal Funds, Inc. (which includes T. Rowe
Price Summit Municipal Money Market Fund, T. Rowe Price Summit
Municipal Intermediate Fund, T. Rowe Price Summit Municipal
Income Fund); T. Rowe Price Corporate Income Fund, Inc.; T. Rowe
Price Equity Series, Inc., (which includes T. Rowe Price Equity
Income Portfolio, T. Rowe Price New America Growth Portfolio, T.
Rowe Price Mid-Cap Growth Portfolio and T. Rowe Price Personal
Strategy Balanced Portfolio); T. Rowe Price Fixed Income Series,
Inc. (which includes T. Rowe Price Limited-Term Bond Portfolio
and T. Rowe Price Prime Reserve Portfolio); T. Rowe Price
International Series, Inc. (which includes T. Rowe Price
International Stock Portfolio); T. Rowe Price Personal Strategy
Funds, Inc. (which includes T. Rowe Price Personal Strategy
Income Fund, T. Rowe Price Personal Strategy Balanced Fund and T.
Rowe Price Personal Strategy Growth Fund); T. Rowe Price
International Funds, Inc. (which includes the T. Rowe Price
International Stock Fund, T. Rowe Price International Bond Fund,
T. Rowe Price International Discovery Fund, T. Rowe Price
European Stock Fund, T. Rowe Price New Asia Fund, T. Rowe Price
Global Bond Fund, T. Rowe Price Japan Fund, T. Rowe Price Latin
America Fund, T. Rowe Price Emerging Markets Stock Fund, T. Rowe
Price Global Stock Fund, and T. Rowe Price Emerging Markets Bond
Fund); Frank Russell Investment Securities Fund; the RPF
International Bond Fund; the Institutional International Funds,
Inc. (which includes the Foreign Equity Fund); T. Rowe Price
Diversified Small-Cap Growth Fund, Inc; T. Rowe Price Financial
Services Fund, Inc.; T. Rowe Price Media & Telecommunications
Fund, Inc.; T. Rowe Price Mid-Cap Value Fund, Inc.; T. Rowe Price
Real Estate Fund, Inc.; T. Rowe Price Tax-Efficient Balanced
Fund, Inc.; Reserved Investment Funds, Inc. (which includes
Reserve Investment Fund and Government Reserve Investment Fund);
Institutional Equity Funds, Inc. (which includes Mid-Cap Equity
Growth Fund).
(b) NAME AND PRINCIPAL POSITION AND OFFICES
BUSINESS ADDRESS* WITH UNDERWRITER
------------------ ------------------
James S. Riepe Chairman of the Board of Directors
Patricia M. Archer Vice President
Edward C. Bernard President and Director
Joseph C. Bonasorte Vice President
Darrell N. Braman Vice President
Ronae M. Brock Vice President
Meredith C. Callanan Vice President
Ann R. Campbell Vice President
Christine M. Carolan Vice President
Joseph A. Carrier Vice President
Laura H. Chasney Vice President
Renee M. Christoff Vice President
Christopher W. Dyer Vice President
Christine Fahlund Vice President
Forrest R. Foss Vice President
Thomas A. Gannon Vice President
Andrea G. Griffin Vice President
Douglas E. Harrison Vice President
David J. Healy Vice President
Joseph P. Healy Vice President
Walter J. Helmlinger Vice President
Henry H. Hopkins Vice President and Director
Eric G. Knauss Vice President
Valerie King-Calloway Vice President
Sharon R. Krieger Vice President
Jeanette M. LeBlanc Vice President
Keith Wayne Lewis Vice President
Kim Lewis-Collins Vice President
Sarah McCafferty Vice President
Maurice Albert Minerbi Vice President
Mark Mitchell Vice President
Nancy M. Morris Vice President
George A. Murnaghan Vice President
Steven E. Norwitz Vice President
Kathleen M. O'Brien Vice President
Barbara O'Connor Vice President and Controller
David Oestreicher Vice President
Robert Petrow Vice President
Pamela D. Preston Vice President
George D. Riedel Vice President
Lucy Beth Robins Vice President
John Richard Rockwell Vice President
Kenneth J. Rutherford Vice President
Kristin E. Seeberger Vice President
Donna B. Singer Vice President
Charles E. Vieth Vice President and Director
William F. Wendler, II Vice President
Jane F. White Vice President
Thomas R. Woolley Vice President
Alvin M. Younger, Jr. Treasurer and Secretary
*Unless otherwise indicated, the business address of each of
Investment Services' officers and directors is 100 East Pratt
Street, Baltimore, Maryland 21202.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts and records required to be maintained by Section 31(a)
of the 1940 Act and the rules under it are maintained by SBL at its
administrative offices--700 Harrison Street, Topeka, Kansas
66636-0001.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes that it will file a post-effective
amendment to this Registration Statement as frequently as
necessary to ensure that the audited financial statements in the
Registration Statement are never more than sixteen (16) months
old for so long as payments under the Variable Annuity contracts
may be accepted.
(b) Registrant undertakes that it will provide, as a part of the
Application Kit, a box for the applicant to check if he or she
wishes to receive a copy of the Statement of Additional
Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made
available under this Form promptly upon written or oral request
to SBL at the address or phone number listed in the prospectus.
(d) Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the Registrant hereby undertakes
to file with the Securities and Exchange Commission such
supplementary and periodic information, documents, and reports as
may be prescribed by any rule or regulation of the Commission
heretofore or hereafter duly adopted pursuant to authority
conferred in that Section.
(e) Depositor represents that the fees and charges deducted under the
contract, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the
risks assumed by the Depositor.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf, in the City of Topeka, and
State of Kansas on this 16th day of April, 1999.
SIGNATURES AND TITLES
- ---------------------
Howard R. Fricke SECURITY BENEFIT LIFE INSURANCE COMPANY
Director, Chairman of the Board (THE DEPOSITOR)
and Chief Executive Officer
By: ROGER K. VIOLA
Thomas R. Clevenger -----------------------------------------
Director Roger K. Viola, Senior Vice President,
General Counsel and Secretary as
Sister Loretto Marie Colwell Attorney-In-Fact for the Officers and
Director Directors Whose Names Appear Opposite
John C. Dicus
Director T. ROWE PRICE VARIABLE ANNUITY ACCOUNT
(THE REGISTRANT)
Steven J. Douglass
Director By: SECURITY BENEFIT LIFE INSURANCE COMPANY
(THE DEPOSITOR)
William W. Hanna
Director By: HOWARD R. FRICKE
-----------------------------------------
John E. Hayes, Jr. Howard R. Fricke, Chairman of the Board,
Director Chief Executive Officer and Director
Laird G. Noller
Director
By: DONALD J. SCHEPKER
Frank C. Sabatini -----------------------------------------
Director Donald J. Schepker, Senior Vice President
Chief Financial Officer and Treasurer
Robert C. Wheeler
Director
(ATTEST): ROGER K. VIOLA
------------------------------------
Roger K. Viola, Senior Vice
President, General Counsel and
Secretary
Date: April 16, 1999
<PAGE>
EXHIBIT INDEX
(1) None
(2) None
(3) None
(4) (j) 403(a) Endorsement (Form V6057 10-98)
(5) None
(6) (a) None
(b) None
(7) None
(8) None
(9) Opinion of Counsel
(10) Consent of Independent Auditors
(11) None
(12) None
(13) Schedule of Computation of Performance
(14) None
<PAGE>
- --------------------------------------------------------------------------------
ENDORSEMENT
FOR SECTION 403(A) PLANS
- --------------------------------------------------------------------------------
The Contract to which this endorsement is attached is hereby modified as
specified below so that it may be utilized under the Plan. This endorsement is
attached to and made part of the Contract as of the Contract Date or, if later,
the date shown below. Notwithstanding any other provisions of the Contract to
the contrary, the following provisions shall apply:
DEFINITIONS
For purposes of this endorsement, the following definitions shall apply:
1. ANNUITANT - means the person entitled to payments under the terms of the
Plan and the Contract based on his or her employment with the Employer.
2. BENEFICIARY - means an individual designated by the Annuitant to receive
payments under the Plan after the Annuitant's death.
3. CODE - means the Internal Revenue Code of 1986, as amended.
4. COMPANY - means Security Benefit Life Insurance Company.
5. EMPLOYER - means the employer which maintains the Plan.
6. PLAN - means a deferred compensation plan which meets the requirements of
Code Section 403(a) and pursuant to which the Contract has been purchased.
7. REQUIRED BEGINNING DATE - means the date when benefit payments to an
Annuitant are required to commence under the Plan. This date will either be
(i) the April 1 following the calendar year in which the Annuitant attains
age 70 1/2 or (ii) the April 1 following the later of the calendar year in
which the Annuitant attains age 70 1/2 or the calendar year in which the
Annuitant separates from service with the Employer.
SECTION 403(A) PLAN PROVISIONS
1. Distributions from this Contract must comply with the minimum distribution
rules of Code Section 401(a)(9) and the regulations thereunder, all of which
are herein incorporated by reference. Accordingly, the entire interest under
the Contract must be distributed:
(a) not later than the Required Beginning Date, or
(b) commencing not later than the Required Beginning Date over the life of
the Annuitant or over the lives of the Annuitant and his or her
Beneficiary (or over a period not extending beyond the life expectancy
of the Annuitant or the life expectancy of the Annuitant and his or her
Beneficiary).
In addition, if the Annuitant dies before distribution of his or her
interest in the Contract has begun in accordance with paragraph (b) above,
the Annuitant's entire interest must be distributed by December 31 of the
year containing the fifth anniversary of the Annuitant's death, unless (i)
such interest is distributed to a Beneficiary over his or her life (or over
a period not extending beyond such Beneficiary's life expectancy) and (ii)
such distribution begins not later than December 31 of the year following
the year of the Annuitant's death. If the Beneficiary is the Annuitant's
surviving spouse, the date on which the distributions are required to begin
shall be the December 31 of the later of: (1) the calendar year immediately
following the calendar year in which the Annuitant died; or (2) the calendar
year in which the Annuitant would have attained age 70 1/2.
If the Annuitant dies after distribution of his or her interest in the
Contract has begun in accordance with paragraph (b) above but before his or
her entire interest has been distributed, the remaining interest will be
distributed at least as rapidly as under the method of distribution being
used prior to the Annuitant's death.
2. No benefits under this Contract may be transferred, sold, alienated,
assigned, subject to garnishment or execution, or pledged as collateral for
a loan, or as security for the performance of an obligation or for any other
purpose, to any person other than the Company, except as may be provided by
a "qualified domestic relations order" within the meaning of Section 414(p)
of the Code.
3. Any refund of premiums will be applied before the close of the calendar year
following the year of the refund toward the payment of retirement annuities.
4. Distributions under the Contract may be further limited in accordance with
the terms of the Plan.
AMENDMENTS
1. The Company reserves the right to amend this endorsement to comply with
future changes in the Code and any regulations or rulings issued thereunder.
The Company shall provide the Owner with a copy of any such amendment.
SECURITY BENEFIT LIFE INSURANCE COMPANY
ROGER K. VIOLA
Secretary
- ------------------------------
Endorsement Effective Date
(If Other Than Contract Date)
V6057 (10-98)
<PAGE>
[SBG LOGO]
- --------------------------------------------------------------------------------
Security Benefit Life Insurance Company 700 SW Harrison St.
Security Benefit Group, Inc. Topeka, Kansas 66636-0001
Security Distributors, Inc. (785) 431-3000
Security Management Company, LLC
April 23, 1999
Security Benefit Life Insurance Company
700 SW Harrison Street
Topeka, KS 66636-0001
Dear Sir/Madam:
This letter is with reference to the Registration Statement of T. Rowe Price
Variable Annuity Account of which Security Benefit Life Insurance Company
(hereinafter "SBL") is the Depositor. Said Registration Statement is being filed
with the Securities and Exchange Commission for the purpose of registering the
variable annuity contracts issued by SBL and the interests of T. Rowe Price
Variable Annuity Account under such variable annuity contracts which will be
sold pursuant to an indefinite registration.
I have examined the Articles of Incorporation and Bylaws of SBL, minutes of the
meetings of its Board of Directors and other records, and pertinent provisions
of the Kansas insurance laws, together with applicable certificates of public
officials and other documents which I have deemed relevant. Based on the
foregoing, it is my opinion that:
1. SBL is duly organized and validly existing as a stock life insurance company
under the laws of Kansas.
2. T. Rowe Price Variable Annuity Account has been validly created as a
Separate Account in accordance with the pertinent provisions of the
insurance laws of Kansas.
3. SBL has the power, and has validly and legally exercised it, to create and
issue the variable annuity contracts which are administered within and by
means of T. Rowe Price Variable Annuity Account.
4. The amount of variable annuity contracts to be sold pursuant to the
indefinite registration, when issued, will represent binding obligations of
SBL in accordance with their terms providing said contracts were issued for
the considerations set forth therein and evidenced by appropriate policies
and certificates.
I hereby consent to the inclusion in the Registration Statement of my foregoing
opinion.
Respectfully submitted,
AMY J. LEE
Amy J. Lee, Esq.
Associate General Counsel and Vice President
Security Benefit Life Insurance Company
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 5, 1999, with respect to the condolidated
financial statements of Security Benefit Life Insurance Company and Subsidiaries
and the financial statements of T. Rowe Price Variable Annuity Account, included
in Post-Effective Amendment No. 9 to the Registration Statement under the
Securities Act of 1933 (Registration No. 33-83238) and Post-Effective Amendment
No. 10 to the Registration Statement under the Investment Company Act of 1940
(Registration No. 811-8724) on Form N-4 and the related Statement of Additional
Information accompanying the Prospectuses of T. Rowe Price No-Load Variable
Annuity and T. Rowe Price No-Load Immediate Variable Annuity.
Ernst & Young LLP
Kansas City, Missouri
April 23, 1999
<PAGE>
EQUITY INCOME
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998
1 Year
1000 (1+T)^1 = 1,083.86
((1+T)^1)^1 = (1.08386)^1
1+T = 1.08386
T = .0839
3.75 Years (From Date of Inception 4/3/95)
1000 (1+T)^3.75 = 2,043.87
((1+T)^3.75)^3.75 = (2.04387)^3.75
1+T = 1.21001
T = .2100
INTERNATIONAL STOCK
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998
1 Year
1000 (1+T)^1 = 1,152.02
((1+T)^1)^1 = (1.15202)^1
1+T = 1.15202
T = .1520
3.75 Years (From Date of Inception 4/3/95)
1000 (1+T)^3.75 = 1,508.79
((1+T)^3.75)^3.75 = (1.50879)^3.75
1+T = 1.11592
T = .1159
LIMITED-TERM BOND
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998
1 Year
1000 (1+T)^1 = 1,064.66
((1+T)^1)^1 = (1.06466)^1
1+T = 1.06466
T = .0647
3.75 Years (From Date of Inception 4/3/95)
1000 (1+T)^3.75 = 1,235.33
((1+T)^3.75)^3.75 = (1.23533)^3.75
1+T = 1.05798
T = .0580
NEW AMERICA GROWTH
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998
1 Year
1000 (1+T)^1 = 1,178.42
((1+T)^1)^1 = (1.17842)^1
1+T = 1.17842
T = .1784
3.75 Years (From Date of Inception 4/3/95)
1000 (1+T)^3.75 = 2,274.39
((1+T)^3.75)^3.75 = (2.27439)^3.75
1+T = 1.24498
T = .2450
PERSONAL STRATEGY BALANCED
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998
1 Year
1000 (1+T)^1 = 1,137.45
((1+T)^1)^1 = (1.13745)^1
1+T = 1.13745
T = .1375
3.75 Years (From Date of Inception 4/3/95)
1000 (1+T)^3.75 = 1,805.36
((1+T)^3.75)^3.75 = (1.80536)^3.75
1+T = 1.17062
T = .1706
MID-CAP GROWTH
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998
1 Year
1000 (1+T)^1 = 1,214.23
((1+T)^1)1 = (1.21423)^1
1+T = 1.21423
T = .2142
2 Years (From Date of Inception 12/31/96)
1000 (1+T)^2 = 1,434.00
((1+T)^2)^2 = (1.43400)^2
1+T = 1.19750
T = .1975
PRIME RESERVE
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998
1 Year
1000 (1+T)^1 = 1,046.76
((1+T)^1)^1 = (1.04676)^1
1+T = 1.04676
T = .04676
2 Years (From Date of Inception 12/31/96)
1000 (1+T)^2 = 1,097.00
((1+T)^2)^2 = (1.09700)^2
1+T = 1.04738
T = .0474
<PAGE>
PRIME RESERVE
Money Market Yield as of December 31, 1998
CALCULATION OF CHANGE IN UNIT VALUE:
(Unrounded Unrounded)
( Price Price )
(12-31-98 - 12-24-98 ) = 10.968553225532 - 10.959418422030 = .000833512
----------------------- ---------------------------------
( Unrounded Price ) 10.959418422030
( 12-24-98 )
ANNUALIZED YIELD:
365/7 (.000833512) = 4.35%
EFFECTIVE YIELD:
(1 + .000833512)^365/7 - 1 = 4.44%
<PAGE>
LIMITED - TERM BOND
YIELD CALCULATION AS OF DECEMBER 31, 1998
[ [ (51,401.97) ]6 ]
2 [ [ ----------------------- + 1 ]- 1
[ [ (923,457.0264 x 12.35) ] ]
[ ( (51,401.97) )6 ]
2 [ ( ----------------------- + 1 ) ]- 1
[ ( (11,404,694.28) ) ]
2 [((.00450709 + 1)^6 ) - 1]
2 [((1.00450709)^6) - 1]
2 [(1.02735) - 1]
2 (.02735)
= .0547 or 5.47% December 31, 1998
