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VARIFLEX LS VARIABLE ANNUITY
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY:
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 SW HARRISON STREET
TOPEKA, KANSAS 66636-0001
1-800-888-2461
MAILING ADDRESS:
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 SW HARRISON STREET
TOPEKA, KANSAS 66636-0001
This Prospectus describes the Variflex LS Variable Annuity -- an individual
flexible purchase payment deferred variable annuity contract (the "Contract")
offered by Security Benefit Life Insurance Company ("Security Benefit"). The
Contract is available for individuals as a non-tax qualified retirement plan
("Non-Qualified Plan") or in connection with a retirement plan qualified under
Section 401, 403(b), 408, or 457 of the Internal Revenue Code ("Qualified
Plan"). The Contract is designed to give Contractowners flexibility in planning
for retirement and other financial goals.
During the Accumulation Period, the Contract provides for the accumulation
of a Contractowner's value on either a variable basis, a fixed basis, or both.
The Contract also provides several options for annuity payments on either a
variable basis, a fixed basis, or both to begin on the Annuity Start Date. The
minimum initial purchase payment is $25,000. Subsequent purchase payments are
flexible, though they must be for at least $1,000. Purchase payments may be
allocated at the Contractowner's discretion to one or more of the Subaccounts
that comprise a separate account of Security Benefit called the Variable Annuity
Account VIII (the "Separate Account"), or to the Fixed Account of Security
Benefit. Each Subaccount of the Separate Account invests in a corresponding
portfolio ("Series") of the SBL Fund (the "Mutual Fund"), which currently
consists of eleven Series: (1) Growth Series, (2) Growth-Income Series, (3)
Money Market Series, (4) Worldwide Equity Series, (5) High Grade Income Series,
(6) Social Awareness Series, (7) Emerging Growth Series, (8) Global Aggressive
Bond Series, (9) Specialized Asset Allocation Series, (10) Managed Asset
Allocation Series, and (11) Equity Income Series. The Contract Value in the
Fixed Account will accrue interest at rates that are paid by Security Benefit as
described in "The Fixed Account" on page 18. Contract Value in the Fixed Account
is guaranteed by Security Benefit.
The Contract Value in the Subaccounts under a Contract will vary based on
investment performance of the Subaccounts to which the Contract Value is
allocated. No minimum amount of Contract Value is guaranteed.
A Contract may be returned according to the terms of its Free-Look Right.
(See "Free-Look Right," page 15.)
This Prospectus concisely sets forth information about the Contract and the
Separate Account that a prospective investor should know before purchasing the
Contract. Certain additional information is contained in a "Statement of
Additional Information," dated June 1, 1995, as supplemented March 11, 1996,
which has been filed with the Securities and Exchange Commission (the "SEC").
The Statement of Additional Information, as it may be supplemented from time to
time, is incorporated by reference into this Prospectus and is available at no
charge, by writing Security Benefit at 700 Harrison Street, Topeka, Kansas 66636
or by calling 1-800-888-2461. The table of contents of the Statement of
Additional Information is set forth on page 31 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE SBL FUND. BOTH
PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
THE CONTRACT INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, AND IS NOT A
DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE CONTRACT
IS NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
DATE: JUNE 1, 1995, AS SUPPLEMENTED MARCH 11, 1996
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TABLE OF CONTENTS
Page
DEFINITIONS .............................................................. 5
SUMMARY .............................................................. 5
Purpose of the Contract................................................. 5
The Separate Account and the Mutual Fund................................ 6
Fixed Account........................................................... 6
Purchase Payments....................................................... 6
Contract Benefits....................................................... 6
Free-Look Right......................................................... 6
Charges and Deductions.................................................. 6
Mortality and Expense Risk Charge..................................... 6
Administrative Charge................................................. 7
Premium Tax Charge.................................................... 7
Other Expenses........................................................ 7
Contacting Security Benefit............................................. 7
EXPENSE TABLE .............................................................. 7
Contractual Expenses.................................................... 7
Annual Separate Account Expenses........................................ 7
Annual Mutual Fund Expenses............................................. 7
Examples ............................................................... 7
INFORMATION ABOUT SECURITY BENEFIT, THE SEPARATE ACCOUNT, AND THE MUTUAL FUND 8
Security Benefit Life Insurance Company................................. 8
Published Ratings....................................................... 8
Separate Account........................................................ 8
SBL Fund ............................................................... 9
Series A (Growth Series).............................................. 9
Series B (Growth-Income Series)....................................... 9
Series C (Money Market Series)........................................ 9
Series D (Worldwide Equity Series).................................... 9
Series E (High Grade Income Series)................................... 9
Series S (Social Awareness Series).................................... 10
Series J (Emerging Growth Series)..................................... 10
Series K (Global Aggressive Bond Series).............................. 10
Series M (Specialized Asset Allocation Series)........................ 10
Series N (Managed Asset Allocation Series)............................ 10
Series O (Equity Income Series)....................................... 10
The Investment Adviser................................................ 10
THE CONTRACT .............................................................. 10
General ............................................................... 10
Application for a Contract.............................................. 11
Purchase Payments....................................................... 11
Allocation of Purchase Payments......................................... 11
Dollar Cost Averaging Option............................................ 11
Asset Reallocation Option............................................... 12
Transfers of Contract Value............................................. 13
Contract Value.......................................................... 13
Determination of Contract Value......................................... 13
Full and Partial Withdrawals............................................ 13
Systematic Withdrawals.................................................. 14
Free-Look Right......................................................... 15
Death Benefit........................................................... 15
Distribution Requirements............................................... 15
Death of the Annuitant.................................................. 16
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TABLE OF CONTENTS (CONTINUED)
CHARGES AND DEDUCTIONS...................................................... 16
Mortality and Expense Risk Charge....................................... 16
Administrative Charge................................................... 16
Premium Tax Charge...................................................... 16
Other Charges........................................................... 16
Variations in Charges................................................... 16
Guarantee of Certain Charges............................................ 16
Mutual Fund Expenses.................................................... 16
ANNUITY PERIOD.............................................................. 17
General ............................................................... 17
Annuity Options......................................................... 17
Option 1--Life Income................................................. 17
Option 2--Life Income with Guaranteed Payment of 5, 10, 15 or 20 Years 17
Option 3--Life with Installment Refund Option......................... 17
Option 4--Joint and Last Survivor..................................... 18
Option 5--Payments for a Specified Period............................. 18
Option 6--Payments of a Specified Amount.............................. 18
Selection of an Option.................................................. 18
THE FIXED ACCOUNT........................................................... 18
Interest ............................................................... 18
Death Benefit........................................................... 19
Contract Charges........................................................ 19
Transfers and Withdrawals from the Fixed Account........................ 19
Payments from the Fixed Account......................................... 20
MORE ABOUT THE CONTRACT..................................................... 20
Ownership............................................................... 20
Joint Owners.......................................................... 20
Designation and Change of Beneficiary................................... 20
Participating........................................................... 20
Payments from the Separate Account...................................... 20
Proof of Age and Survival............................................... 21
Misstatements........................................................... 21
Loans ............................................................... 21
Restrictions on Withdrawals from Qualified Plans........................ 22
FEDERAL TAX MATTERS......................................................... 22
Introduction............................................................ 22
Tax Status of Security Benefit and the Separate Account................. 22
General............................................................... 22
Charge for Security Benefit Taxes..................................... 22
Diversification Standards............................................. 22
Income Taxation of Annuities in General--Non-Qualified Plans............ 23
Surrenders or Withdrawals Prior to the Annuity Start Date............. 23
Surrenders or Withdrawals on or after Annuity Start Date.............. 23
Penalty Tax on Certain Surrenders and Withdrawals..................... 24
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TABLE OF CONTENTS (CONTINUED)
Additional Considerations............................................... 24
Distribution-at-Death Rules........................................... 24
Gift of Annuity Contracts............................................. 24
Contracts Owned by Non-Natural Persons................................ 24
Multiple Contract Rule................................................ 24
Possible Tax Changes.................................................. 25
Transfers, Assignments or Exchanges of a Contract..................... 25
Qualified Plans......................................................... 25
Section 401........................................................... 25
Section 403(b)........................................................ 26
Section 408........................................................... 26
Section 457........................................................... 27
Rollovers............................................................. 27
Tax Penalties......................................................... 27
Withholding........................................................... 28
OTHER INFORMATION........................................................... 28
Voting of Mutual Fund Shares............................................ 28
Substitution of Investments............................................. 29
Changes to Comply with Law and Amendments............................... 29
Reports to Owners....................................................... 29
Telephone Transfer Privileges........................................... 29
Legal Proceedings....................................................... 30
Legal Matters........................................................... 30
PERFORMANCE INFORMATION..................................................... 30
ADDITIONAL INFORMATION...................................................... 31
Registration Statement.................................................. 31
Financial Statements.................................................... 31
STATEMENT OF ADDITIONAL INFORMATION......................................... 31
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THE CONTRACT IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN AS CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF
ADDITIONAL INFORMATION, THE MUTUAL FUND'S PROSPECTUS OR THE STATEMENT OF
ADDITIONAL INFORMATION OF THE FUND, OR ANY SUPPLEMENT THERETO.
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DEFINITIONS
Various terms commonly used in this Prospectus are defined as follows:
Accumulation Period -- The period commencing on the Contract Date and
ending on the Annuity Start Date or, if earlier, when the Contract is
terminated, either through a full withdrawal, payment of charges, or payment of
the death benefit proceeds.
Accumulation Unit -- A unit of measure used to calculate the value of a
Contractowner's interest in a Subaccount during the Accumulation Period and
variable annuity payments under Annuity Options 5 and 6.
Annuitant -- The person on whose life annuity payments depend.
Annuity -- A series of periodic income payments made by Security Benefit to
an Annuitant, Joint Annuitant, or Beneficiary during the period specified in the
Annuity Option.
Annuity Options -- Options under the Contract that prescribe the provisions
under which a series of annuity payments are made.
Annuity Period -- The period during which annuity payments are made.
Annuity Start Date -- The date when annuity payments are to begin.
Automatic Investment Program -- A program pursuant to which purchase
payments are automatically paid from the owner's checking account on a specified
day of each month.
Contract Date -- The date shown as the Contract Date in a Contract. Annual
Contract anniversaries are measured from the Contract Date. It is usually the
date that the initial purchase payment is credited to the Contract.
Contract Debt -- The unpaid loan balance including accrued loan interest.
Contractowner or Owner -- The person entitled to the ownership rights under the
Contract and in whose name the Contract is issued.
Contract Value -- The total value of the amounts in a Contract allocated to
the Subaccounts of the Separate Account and the Fixed Account as well as any
amount set aside in the loan account to secure loans as of any Valuation Date.
Contract Year -- Each twelve-month period measured from the Contract Date.
Designated Beneficiary -- The person having the right to the death benefit,
if any, payable upon the death of the Owner or the Joint Owner during the
Accumulation Period. The Designated Beneficiary is the first person on the
following list who is alive on the date of death of the Owner or the Joint
Owner: the Owner, the Joint Owner; the Primary Beneficiary; the Secondary
Beneficiary; the Annuitant; or if none of the above are alive, the Owner's
Estate.
Fixed Account -- An account that is part of Security Benefit's General
Account in which all or a portion of the Contract Value may be held for
accumulation at fixed rates of interest (which may not be less than 3.0 percent)
declared by Security Benefit periodically at its discretion.
General Account -- All assets of Security Benefit other than those
allocated to the Separate Account or to any other separate account of Security
Benefit. Home Office -- The Annuity Administration Department of Security
Benefit, P.O. Box 750497, Topeka, Kansas 66675-0497.
Mutual Fund -- SBL Fund. The Mutual Fund is a diversified, open-end
management investment company commonly referred to as a mutual fund.
Purchase Payment -- The amounts paid to Security Benefit as consideration
for the Contract.
Separate Account -- The Variable Annuity Account VIII. A separate account
of Security Benefit that consists of accounts, referred to as Subaccounts, each
of which invests in a corresponding Series of the SBL Fund.
Subaccount -- A division of the Separate Account of Security Benefit which
invests in a corresponding series of the Mutual Fund. Currently, eleven
Subaccounts are available under the Contract.
Valuation Date -- Each date on which the Separate Account is valued, which
currently includes each day that the New York Stock Exchange is open for
trading. The New York Stock Exchange is closed on weekends and on the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, July
Fourth, Labor Day, Thanksgiving Day, and Christmas Day.
Valuation Period -- A period used in measuring the investment experience of
each Subaccount of the Separate Account. 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 may receive upon full
withdrawal of the Contract, which is equal to Contract Value less any Contract
Debt, and any uncollected premium taxes.
SUMMARY
This summary is intended to provide a brief overview of the more
significant aspects of the Contract. Further detail is provided in this
Prospectus, the Statement of Additional Information, and the Contract. Unless
the context indicates otherwise, the discussion in this summary and the
remainder of the Prospectus relates to the portion of the Contract involving the
Separate Account. The Fixed Account is briefly described under "The Fixed
Account" on page 18 and in the Contract.
PURPOSE OF THE CONTRACT
The individual flexible purchase payment deferred variable annuity contract
("Contract") described in this Prospectus is designed to give Contractowners
flexibility in planning for retirement and other financial goals. The Contract
provides for the accumulation of values on a
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variable basis, a fixed basis, or both, during the Accumulation Period and
provides several options for annuity payments on a variable basis, a fixed
basis, or both. During the Accumulation Period, an Owner can pursue various
allocation options by allocating purchase payments to the Subaccounts of the
Separate Account or to the Fixed Account. See "The Contract," page 10.
The Contract is eligible for purchase as a non-tax qualified retirement
plan for an individual ("Non-Qualified Plan"). The Contract is also eligible for
an individual in connection with a retirement plan qualified under Section 401,
403(b), 408, or 457 of the Internal Revenue Code of 1986, as amended. These
plans are sometimes referred to in this Prospectus as "Qualified Plans."
THE SEPARATE ACCOUNT AND THE MUTUAL FUND
Purchase payments designated to accumulate on a variable basis are
allocated to the Separate Account. See "Separate Account," page 8. The Separate
Account is currently divided into eleven accounts referred to as Subaccounts.
Each Subaccount invests exclusively in shares of a corresponding Series of the
Mutual Fund. The Series of the Mutual Fund, each of which has a different
investment objective or objectives, are as follows: Growth Series, Growth-Income
Series, Money Market Series, Worldwide Equity Series, High Grade Income Series,
Social Awareness Series, Emerging Growth Series, Global Aggressive Bond Series,
Specialized Asset Allocation Series, Managed Asset Allocation Series, and Equity
Income Series. See "SBL Fund," page 9. Amounts held in a Subaccount will
increase or decrease in dollar value depending on the investment performance of
the Series of the Mutual Fund in which such Subaccount invests. The
Contractowner bears the investment risk for amounts allocated to a Subaccount of
the Separate Account.
FIXED ACCOUNT
Purchase payments designated to accumulate on a fixed basis may be
allocated to the Fixed Account, which is part of Security Benefit's General
Account. Amounts allocated to the Fixed Account earn interest at rates
determined at the discretion of Security Benefit and are guaranteed to be at
least an effective annual rate of 3.0 percent. See "The Fixed Account," on page
18.
PURCHASE PAYMENTS
The minimum initial purchase payment is $25,000. Thereafter, the
Contractowner may choose the amount and frequency of purchase payments, except
that the minimum subsequent purchase payment is $1,000. See "Purchase Payments"
on page 11.
CONTRACT BENEFITS
During the Accumulation Period, Contract Value may be transferred by the
Contractowner among the Subaccounts of the Separate Account and to and from the
Fixed Account, subject to certain restrictions as described in "The Contract" on
page 10 and "The Fixed Account" on page 18.
At any time before the Annuity Start Date, a Contract may be surrendered
for its Withdrawal Value, and partial withdrawals, including systematic
withdrawals, may be taken from the Contract Value, subject to certain
restrictions described in "The Fixed Account" on page 18. See "Full and Partial
Withdrawals," page 13 and "Federal Tax Matters," page 22 for more information
about withdrawals, including the 10 percent penalty tax that may be imposed upon
full and partial withdrawals (including systematic withdrawals) made prior to
the Owner attaining age 59 1/2.
The Contract provides for a death benefit upon the death of the Owner
during the Accumulation Period. See "Death Benefit," on page 15 for more
information. The Contract provides for several Annuity Options on either a
variable basis, a fixed basis, or both. Payments under the fixed Annuity Options
will be guaranteed by Security Benefit. See "Annuity Period," on page 17.
FREE-LOOK RIGHT
An Owner may return a Contract within the Free-Look Period, which is
generally a ten-day period beginning when the Owner receives the Contract. In
this event, Security Benefit will refund to the Owner purchase payments
allocated to the Fixed Account plus the Contract Value in the Subaccounts plus
any charges deducted from Contract Value in the Subaccounts. Security Benefit
will refund purchase payments allocated to the Subaccounts rather than the
Contract Value in those states where it is required to do so.
CHARGES AND DEDUCTIONS
Security Benefit does not make any deductions for sales load from purchase
payments before allocating them to the Contract Value and no surrender charge is
assessed upon withdrawal or surrender of a Contract. Certain charges will be
deducted in connection with the Contract as described below.
Mortality and Expense Risk Charge
Security Benefit deducts a daily charge from the assets of each Subaccount
for mortality and expense risks equal to an annual rate of 1.25 percent of each
Subaccount's average daily net assets. See "Mortality and Expense Risk Charge"
on page 16.
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Administrative Charge
Security Benefit deducts a daily administrative charge equal to an annual
rate of 0.15 percent of each Subaccount's average daily net assets. The
Administrative Charge is not assessed against Contract Value which is applied
under Annuity Options 1-4. See "Administrative Charge" on page 16.
Premium Tax Charge
Security Benefit assesses a premium tax charge to reimburse itself for any
premium taxes that it incurs with respect to this Contract. This charge will
usually be deducted on annuitization or upon full withdrawal if a premium tax
was incurred by Security Benefit and is not refundable. Partial withdrawals,
including systematic withdrawals, may be subject to a premium tax charge if a
premium tax is incurred on the withdrawal by Security Benefit and is not
refundable. Security Benefit reserves the right to deduct such taxes when due or
anytime thereafter. Premium tax rates currently range from 0 percent to 3.5
percent. See "Premium Tax Charge" on page 16.
Other Expenses
The operating expenses of the Separate Account are paid by Security
Benefit. Investment advisory fees and operating expenses of the Mutual Fund are
paid by the Mutual Fund and are reflected in the net asset value of the Mutual
Fund shares. For a description of these charges and expenses, see the Prospectus
for the Mutual Fund.
CONTACTING SECURITY BENEFIT
All written requests, notices, and forms required by the Contract, and any
questions or inquiries should be directed to Security Benefit Life Insurance
Company, P.O. Box 750497, Topeka, Kansas 66675-0497 or by phone by calling (913)
295-3112 or 1-800-888-2461, extension 3112.
EXPENSE TABLE
The purpose of this table is to assist investors in understanding the
various costs and expenses borne directly and indirectly by Owners of the
Contracts with Contract Value allocated to the Subaccounts. The table reflects
any contractual charges, expenses of the Separate Account, and charges and
expenses of the Mutual Fund. The table does not reflect premium taxes that may
be imposed by various jurisdictions. See "Premium Tax Charge," on page 16. The
information contained in the table is not generally applicable to amounts
allocated to the Fixed Account.
For a complete description of a Contract's costs and expenses, see "Charges
and Deductions," on page 16. For a more complete description of the Mutual
Fund's costs and expenses, see the SBL Fund Prospectus, which accompanies this
Prospectus.
CONTRACTUAL EXPENSES
Sales load on purchase payments.................... None
Contingent deferred sales charge................... None
Transfer Fee (per transfer)........................ None
ANNUAL SEPARATE ACCOUNT EXPENSES (AS A PERCENTAGE OF
EACH SUBACCOUNT'S AVERAGE DAILY NET ASSETS)
Annual Mortality and Expense Risk Charge........... 1.25%
Annual Administrative Charge....................... 0.15%
Total Separate Account Annual Expenses............. 1.40%
ANNUAL MUTUAL FUND EXPENSES
(AS A PERCENTAGE OF EACH SERIES' AVERAGE DAILY NET ASSETS)
Total
Mutual
Advisory Other Fund
Fee Expenses(1) Expenses
--- ----------- --------
Growth (Series A)................... 0.75% 0.09% 0.84%
Growth-Income (Series B)............ 0.75% 0.09% 0.84%
Money Market (Series C)............. 0.50% 0.11% 0.61%
Worldwide Equity
(Series D)...................... 1.00% 0.34% 1.34%
High Grade Income
(Series E)..................... 0.75% 0.10% 0.85%
Social Awareness
(Series S)..................... 0.75% 0.15% 0.90%
Emerging Growth (Series J).......... 0.75% 0.13% 0.88%
Global Aggressive Bond
(Series K)..................... 0.75% 0.65% 1.40%
Specialized Asset Allocation
(Series M)..................... 1.00% 0.65% 1.65%
Managed Asset Allocation
(Series N)..................... 1.00% 0.65% 1.65%
Equity Income (Series O)............ 1.00% 0.35% 1.35%
1. The "other expenses" of Series K, M, N, and O are based on projected
net assets and estimated expenses for the current fiscal year.
EXAMPLES
The example presented below shows expenses that a Contractowner would pay
at the end of one or three years. The information presented applies if, at the
end of those time periods, the Contract is (1) surrendered, (2) annuitized, or
(3) not surrendered or annuitized. The example shows expenses based upon an
allocation of $1,000 to each of the Subaccounts.
The example below should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown. The
5 percent
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return assumed in the examples is hypothetical and should not be considered a
representation of past or future actual returns, which may be greater or lesser
than the assumed amount.
Example -- The Owner would pay the expenses shown below on a $1,000
investment, assuming 5 percent annual return on assets:
1 Year 3 Years
------ -------
Growth Subaccount.............................. $23 $70
Growth-Income Subaccount....................... 23 70
Money Market Subaccount........................ 20 63
Worldwide Equity Subaccount.................... 28 85
High Grade Income Subaccount................... 23 70
Social Awareness Subaccount.................... 23 72
Emerging Growth Subaccount..................... 23 71
Global Aggressive Bond Subaccount.............. 28 87
Specialized Asset Allocation Subaccount........ 31 94
Managed Asset Allocation Subaccount............ 31 94
Equity Income Subaccount....................... 28 85
INFORMATION ABOUT SECURITY BENEFIT,
THE SEPARATE ACCOUNT, AND THE
MUTUAL FUND
SECURITY BENEFIT LIFE INSURANCE COMPANY
Security Benefit is a mutual life insurance company organized under the
laws of the State of Kansas. It was organized originally as a fraternal benefit
society and commenced business February 22, 1892. It became a mutual life
insurance company under its present name on January 2, 1950.
Security Benefit offers a complete line of life insurance policies and
annuity contracts, as well as financial and retirement services. It is admitted
to do business in the District of Columbia, and in all states except New York.
As of December 31, 1994, Security Benefit had over $13.9 billion of life
insurance in force and total assets of approximately $4.1 billion. Together with
its subsidiaries, Security Benefit has total funds under management of over $4.8
billion.
The Principal Underwriter for the Contracts is Security Distributors, Inc.
("SDI"), 700 SW Harrison Street, Topeka, Kansas 66636-0001. SDI is registered as
a broker/dealer with the SEC and is a wholly-owned subsidiary of Security
Management Company, which is wholly-owned by Security Benefit Group, Inc., a
financial services holding company wholly-owned by Security Benefit.
PUBLISHED RATINGS
Security Benefit 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 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
The Separate Account was established by Security Benefit on September 12,
1994, under procedures established under Kansas law. The income, gains, or
losses of the Separate Account, whether or not realized, are, in accordance with
the Contracts, credited to or charged against the assets of the Separate Account
without regard to other income, gains, or losses of Security Benefit. K.S.A.
40-436 provides that assets in a separate account attributable to the reserves
and other liabilities under the contracts are not chargeable with liabilities
arising from any other business that the insurance company conducts if, and to
the extent the contracts so provide, the Contract contains such a provision.
Security Benefit owns the assets in the Separate Account and is required to
maintain sufficient assets in the Separate Account to meet all Separate Account
obligations under the Contracts. Security Benefit may transfer to its General
Account assets that exceed anticipated obligations of the Separate Account. All
obligations arising under the Contracts are general corporate obligations of
Security Benefit. Security Benefit may invest its own assets in the Separate
Account for other purposes, but not to support contracts other than variable
annuity contracts, and may accumulate in the Separate Account proceeds from
Contract charges and investment results applicable to those assets.
The Separate Account is currently divided into eleven Subaccounts. Income,
gains and losses, whether or not realized, are, in accordance with the
Contracts, credited to, or charged against, the assets of each Subaccount
without regard to the income, gains or losses in the other Subaccounts. Each
Subaccount invests exclusively in shares of a specific Series of the Mutual
Fund. Security Benefit may in the future establish additional Subaccounts of the
Separate Account, which may invest in other Series of the
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Mutual Fund or in other securities, mutual funds, or investment vehicles.
The Separate Account is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"). Registration with the
SEC does not involve supervision by the SEC of the administration or investment
practices of the Separate Account or of Security Benefit.
SBL FUND
SBL Fund (the "Mutual Fund") is a diversified, open-end management
investment company of the series type. The Mutual Fund is registered with the
SEC under the 1940 Act. Such registration does not involve supervision by the
SEC of the investments or investment policy of the Mutual Fund. The Mutual Fund
currently has eleven separate portfolios ("Series"), each of which pursues
different investment objectives and policies.
Shares of the Mutual Fund currently are offered only for purchase by
separate accounts of Security Benefit to serve as an investment medium for
variable life insurance policies and for variable annuity contracts issued by
Security Benefit. Thus, the Mutual Fund serves as an investment medium for both
variable life insurance policies and variable annuity contracts. This is called
"mixed funding." Shares of the Mutual Fund may also be sold in the future to
separate accounts of other insurance companies, both affiliated and not
affiliated with Security Benefit. This is called "shared funding." Security
Benefit currently does not foresee any disadvantages to Contractowners arising
from either mixed or shared funding; however, due to differences in tax
treatment or other considerations, it is theoretically possible that the
interests of owners of various contracts for which the Mutual Fund serves as an
investment medium might at some time be in conflict. However, Security Benefit,
the Mutual Fund's Board of Directors, and any other insurance companies that
participate in the Mutual Fund in the future are required to monitor events in
order to identify any material conflicts that arise from the use of the Mutual
Fund for mixed and/or shared funding. The Mutual Fund's Board of Directors are
required to determine what action, if any, should be taken in the event of such
a conflict. If such a conflict were to occur, Security Benefit might be required
to withdraw the investment of one or more of its separate accounts from the
Mutual Fund. This might force the Mutual Fund to sell securities at
disadvantageous prices.
A summary of the investment objective of each Series of the Mutual Fund is
described below. There can be no assurance that any Series will achieve its
objective. More detailed information is contained in the accompanying prospectus
of the Mutual Fund, including information on the risks associated with the
investments and investment techniques of each Series.
THE MUTUAL FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
SERIES A (GROWTH SERIES)
Amounts allocated to the Growth Subaccount are invested in Series A. The
investment objective of Series A is to seek long-term capital growth by
investing in a broadly diversified portfolio of common stocks, securities
convertible into common stocks, preferred stocks, bonds and other debt
securities.
SERIES B (GROWTH-INCOME SERIES)
Amounts allocated to the Growth-Income Subaccount are invested in Series B.
Series B seeks long-term growth of capital with secondary emphasis on income by
investing in various types of securities, including common stocks, convertible
securities, preferred stocks and debt securities. Series B's investments in debt
securities may include securities rated below investment grade. Series B may
also temporarily invest in government bonds or commercial paper.
SERIES C (MONEY MARKET SERIES)
Amounts allocated to the Money Market Subaccount are invested in Series C.
The investment objective of Series C is to provide as high a level of current
income as is consistent with preserving capital. It invests in high quality
money market instruments with maturities of not longer than thirteen months.
SERIES D (WORLDWIDE EQUITY SERIES)
Amounts allocated to the Worldwide Equity Subaccount are invested in Series
D. The investment objective of Series D is to seek long-term growth of capital
primarily through investment in common stocks and equivalents of companies
domiciled in foreign countries and the United States.
SERIES E (HIGH GRADE INCOME SERIES)
Amounts allocated to the High Grade Income Subaccount are invested in
Series E. The investment objective of Series E is to provide current income with
security of principal. Series E seeks to achieve this investment objective by
investing in a broad range of debt securities, including U.S. and foreign
corporate debt securities and securities issued by the U.S. and foreign
governments.
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SERIES S (SOCIAL AWARENESS SERIES)
Amounts allocated to the Social Awareness Subaccount are invested in Series
S. The investment objective of Series S is to seek high total return through a
combination of income and capital appreciation by investing in various types of
securities which meet certain social criteria established for the Series. Series
S will invest in a diversified portfolio of common stocks, convertible
securities, preferred stocks and debt securities. Series S may temporarily
invest in government bonds or commercial paper.
SERIES J (EMERGING GROWTH SERIES)
Amounts allocated to the Emerging Growth Subaccount are invested in Series
J. The investment objective of Series J is to seek capital appreciation through
investment in a broadly diversified portfolio of securities which may include
common stocks, preferred stocks, debt securities and securities convertible into
common stocks.
SERIES K (GLOBAL AGGRESSIVE BOND SERIES)
Amounts allocated to the Global Aggressive Bond Subaccount are invested in
Series K. The investment objective of Series K is to seek high current income
and, as a secondary objective, capital appreciation by investing in a
combination of foreign and domestic high-yield, lower rated debt securities
(commonly known as "junk bonds").
SERIES M ( SPECIALIZED ASSET ALLOCATION SERIES)
Amounts allocated to the Specialized Asset Allocation Subaccount are
invested in Series M. The investment objective of Series M is to seek high total
return consisting of capital appreciation and current income. Series M seeks
this objective by following an asset allocation strategy that contemplates
shifts among a wide range of investment categories and market sectors, including
equity and debt securities of domestic and foreign issues.
SERIES N (MANAGED ASSET ALLOCATION SERIES)
Amounts allocated to the Managed Asset Allocation Subaccount are invested
in Series N. The investment objective of Series N is to seek a high level of
total return by investing primarily in a diversified portfolio of debt and
equity securities.
SERIES O (EQUITY INCOME SERIES)
Amounts allocated to the Equity Income Subaccount are invested in Series O.
The investment objective of Series O is to seek to provide substantial dividend
income and also capital appreciation by investing primarily in dividend-paying
common stocks of established companies.
THE INVESTMENT ADVISER
Security Management Company (the "Investment Adviser") located at 700 SW
Harrison Street, Topeka, Kansas 66636 serves as investment adviser to each
Series of the Mutual Fund. The Investment Adviser is registered with the SEC as
an investment adviser. The Investment Adviser formulates and implements
continuing programs for the purchase and sale of securities in compliance with
the investment objectives, policies, and restrictions of each Series, and is
responsible for the day to day decisions to buy and sell securities for the
Series except Series D, K, N and O. The Investment Adviser has engaged Lexington
Management Corporation, Park 80 West, Plaza Two, Saddle Brook, New Jersey 07662
to provide certain investment advisory services to Series D and K of the Fund.
The Investment Adviser has engaged T. Rowe Price Associates, Inc., 100 E. Pratt
St., Baltimore, Maryland 21202 to provide certain investment advisory services
to Series N and O. The Investment Adviser has engaged Meridian Investment
Management Corporation, 12835 East Arapahoe Road, Tower II, 7th Floor,
Engelwood, Colorado 80112 and Templeton/Franklin Investment Services, Inc., 777
Mariners Island Boulevard, San Mateo, California 94404, to provide certain
analytic research services for Series M.
THE CONTRACT
GENERAL
The Contract offered by this Prospectus is an individual flexible purchase
payment deferred variable annuity that is issued by Security Benefit. To the
extent that all or a portion of purchase payments are allocated to the
Subaccounts, the Contract is significantly different from a fixed annuity
contract in that it is the Owner under a Contract who assumes the risk of
investment gain or loss rather than Security Benefit. Upon the maturity of a
Contract, the Contract provides several Annuity Options on a variable basis, a
fixed basis or both, under which Security Benefit will pay periodic annuity
payments beginning on the Annuity Start Date. The amount that will be available
for annuity payments will depend on the investment performance of the
Subaccounts to which purchase payments have been allocated and the amount of
interest credited on Contract Value that has been allocated to the Fixed
Account.
The Contract is available for purchase as a non-tax qualified retirement
plan ("Non-Qualified Plan") by an individual. The Contract is also eligible for
use in connection with certain tax qualified retirement plans that meet the
requirements of Section 401, 403(b), 408, or 457 of the Internal Revenue Code
("Qualified Plan"). Certain federal tax advantages are currently available to
retirement plans that qualify as (1) self-employed individuals' retirement plans
under Section 401, such as HR-10 and Keogh plans, (2) pension or profit-sharing
plans established by an
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employer for the benefit of its employees under Section 401, (3) individual
retirement accounts or annuities, including those established by an employer as
a simplified employee pension plan, under Section 408, (4) annuity purchase
plans of public school systems and certain tax-exempt organizations under
Section 403(b) or (5) deferred compensation plans for employees established by a
unit of a state or local government or by a tax-exempt organization under
Section 457. Joint Owners are permitted only on a Contract issued pursuant to a
Non-Qualified Plan.
APPLICATION FOR A CONTRACT
Any person wishing to purchase a Contract may submit an application and an
initial purchase payment to Security Benefit, as well as any other form or
information that Security Benefit may require. Security Benefit reserves the
right to reject an application or purchase payment for any reason, subject to
Security Benefit's underwriting standards and guidelines and any applicable
state or federal law relating to nondiscrimination.
The maximum age of an Owner or Annuitant for which a Contract will be
issued is 85. If there are Joint Owners or Annuitants, the maximum issue age
will be determined by reference to the older Owner or Annuitant.
PURCHASE PAYMENTS
The minimum initial purchase payment for the purchase of a Contract is
$25,000 for both Non-Qualified and Qualified Plans. Thereafter, the
Contractowner may choose the amount and frequency of purchase payments, except
that the minimum subsequent purchase payment is $1,000 for both Non-Qualified
and Qualified Plans. The minimum subsequent purchase payment pursuant to an
Automatic Investment Program is also $1,000. Security Benefit may reduce the
minimum purchase payment requirement under certain circumstances. Any purchase
payment exceeding $1 million will not be accepted without prior approval of
Security Benefit.
An initial purchase payment will be applied not later than the end of the
second Valuation Date after the Valuation Date it is received by Security
Benefit at its Home Office if the purchase payment is preceded or accompanied by
an application that contains sufficient information necessary to establish an
account and properly credit such purchase payment. The application form will be
provided by Security Benefit. If Security Benefit does not receive a complete
application, the applicant will be notified by Security Benefit that it does not
have the necessary information to issue a Contract. If the necessary information
is not provided to Security Benefit within five Valuation Dates after the
Valuation Date on which Security Benefit first receives the initial purchase
payment or if Security Benefit determines it cannot otherwise issue the
Contract, Security Benefit will return the initial purchase payment to the
applicant unless the applicant consents to Security Benefit retaining the
purchase payment until the application is made complete.
Subsequent purchase payments will be credited as of the end of the
Valuation Period in which they are received by Security Benefit at its Home
Office. Purchase payments after the initial purchase payment may be made at any
time prior to the Annuity Start Date, so long as the Owner is living. Subsequent
purchase payments under a Qualified Plan may be limited by the terms of the plan
and provisions of the Internal Revenue Code. Subsequent purchase payments may be
paid under an Automatic Investment Program. The initial purchase payment
required must be paid before the Automatic Investment Program will be accepted
by Security Benefit.
ALLOCATION OF PURCHASE PAYMENTS
In an application for a Contract, the Contractowner selects the Subaccounts
or the Fixed Account to which purchase payments will be allocated. Purchase
payments will be allocated according to the Contractowner's instructions
contained in the application or more recent instructions received, if any,
except that no purchase payment allocation is permitted that would result in
less than 1 percent of each payment being allocated to any one Subaccount or the
Fixed Account. The allocations must be whole percentages and must total 100
percent. Available allocation alternatives include the eleven Subaccounts and
the Fixed Account.
A Contractowner may change the purchase payment allocation instructions by
submitting a proper written request to Security Benefit's Home Office. A proper
change in allocation instructions will be effective upon receipt by Security
Benefit at its Home Office and will continue in effect until subsequently
changed. Changes in purchase payment allocation and changes to an existing
Dollar Cost Averaging or Asset Reallocation Option may be made by telephone
provided the Telephone Transfer Section of the application or an Authorization
for Telephone Requests form is properly completed, signed, and filed at Security
Benefit's Home Office. Changes in the allocation of future purchase payments
have no effect on existing Contract Value. Such Contract Value, however, may be
transferred among the Subaccounts of the Separate Account or the Fixed Account
in the manner described in "Transfers of Contract Value" on page 13.
DOLLAR COST AVERAGING OPTION
Security Benefit currently offers an option under which Contractowners may
dollar cost average their allocations in the Subaccounts under the Contract by
authorizing Security Benefit to make periodic allocations of Contract Value from
any one Subaccount to one or more of the other Subaccounts. Dollar cost
averaging is a systematic method of investing in which securities are purchased
at regular intervals in fixed dollar amounts so that the cost of the
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securities gets averaged over time and possibly over various market cycles. The
option will result in the allocation of Contract Value to one or more
Subaccounts, and these amounts will be credited at the Accumulation Unit value
as of the end of the Valuation Dates on which the transfers are effected. Since
the value of Accumulation Units will vary, the amounts allocated to a Subaccount
will result in the crediting of a greater number of units when the Accumulation
Unit value is low and a lesser number of units when the Accumulation Unit value
is high. Similarly, the amounts transferred from a Subaccount will result in a
debiting of a greater number of units when the Accumulation Unit value is low
and a lesser number of units when the Accumulation Unit value is high. Dollar
cost averaging does not guarantee profits, nor does it assure that a
Contractowner will not have losses.
A Dollar Cost Averaging Request form is available upon request. On the
form, the Contractowner must designate whether a specific dollar amount, fixed
period or earnings only are to be transferred, the Subaccount or Subaccounts
from and to which the transfers will be made, the desired frequency of the
transfers, which may be on a monthly or quarterly basis, and the length of time
during which the transfers shall continue or the total amount to be transferred
over time.
After Security Benefit has received a Dollar Cost Averaging Request in
proper form at its Home Office, Security Benefit will transfer Contract Value in
amounts designated by the Contractowner from the Subaccount from which transfers
are to be made to the Subaccount or Subaccounts chosen by the Contractowner.
Each transfer will be effected on the monthly or quarterly anniversary,
whichever corresponds to the period selected by the Contractowner, of the date
of receipt at Security Benefit's Home Office of a Dollar Cost Averaging Request
in proper form. Transfers will be made until the total amount elected has been
transferred, or until Contract Value in the Subaccount from which transfers are
made has been depleted. No transfers will be made pursuant to the Dollar Cost
Averaging Option on the last business day of any month, but instead will be made
as of the next following Valuation Date.
A Contractowner may instruct Security Benefit at any time to terminate the
option by written request to Security Benefit's Home Office. In that event, the
Contract Value in the Subaccount from which transfers were being made that has
not been transferred will remain in that Subaccount unless the Contractowner
instructs otherwise. If a Contractowner wishes to continue transferring on a
dollar cost averaging basis after the expiration of the applicable period, the
total amount elected has been transferred, or the Subaccount has been depleted,
or after the Dollar Cost Averaging Option has been canceled, a new Dollar Cost
Averaging Request must be completed and sent to Security Benefit's Home Office.
Security Benefit may discontinue, modify, or suspend the Dollar Cost Averaging
Option at any time.
Contract Value may also be dollar cost averaged to or from the Fixed
Account, subject to certain restrictions described under "The Fixed Account,"
page 18.
ASSET REALLOCATION OPTION
Security Benefit currently offers an option under which Contractowners
authorize Security Benefit to automatically transfer their Contract Value each
quarter to maintain a particular percentage allocation among the Subaccounts as
selected by the Contractowner. The Contract Value allocated to each Subaccount
will grow or decline in value at different rates during the quarter, and Asset
Reallocation automatically reallocates the Contract Value in the Subaccounts
each quarter to the allocation selected by the Contractowner. Asset Reallocation
is intended to transfer Contract Value from those Subaccounts that have
increased in value to those Subaccounts that have declined in value. Over time,
this method of investing may help a Contractowner buy low and sell high. This
investment method does not guarantee profits, nor does it assure that a
Contractowner will not have losses.
To elect this option an Asset Reallocation Request in proper form must be
received by Security Benefit at its Home Office. An Asset Reallocation Request
form is available upon request. On the form, the Contractowner must indicate the
applicable Subaccounts and the percentage of Contract Value to be allocated on a
quarterly basis to each Subaccount ("Asset Reallocation Program").
Upon receipt of the Asset Reallocation Request, Security Benefit will
effect a transfer or, in the case of a new Contract, an initial allocation of
Contract Value to the allocation among the Subaccounts selected by the
Contractowner. Thereafter, transfers to maintain that allocation will occur on
each quarterly anniversary of the date of Security Benefit's receipt of the
Asset Reallocation Request in proper form. The amounts transferred will be
credited at the Accumulation Unit value as of the end of the Valuation Dates on
which the transfers are effected.
A Contractowner may instruct Security Benefit at any time to terminate this
option by written request to Security Benefit's Home Office. The Asset
Reallocation Option will terminate automatically if a transfer is made to, or
from, any Subaccount included in the allocation selected by the Contractowner.
In that event, the Contract Value in the Subaccounts that has not been
transferred will remain in those Subaccounts regardless of the percentage
allocation unless the Contractowner instructs otherwise. If a Contractowner
wishes to continue Asset Reallocation after it has been canceled, a new Asset
Reallocation Request form must be completed and sent to Security Benefit's Home
Office. Security Benefit may discontinue, modify, or suspend, and reserves the
right to charge a fee for the Asset Reallocation Option at any time.
Contract Value allocated to the Fixed Account may be included in the Asset
Reallocation Program, subject to
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certain restrictions described in "Transfers and Withdrawals from the Fixed
Account," page 19.
TRANSFERS OF CONTRACT VALUE
During the Accumulation Period, Contract Value may be transferred among the
Subaccounts by the Contractowner upon proper written request to Security
Benefit's Home Office. Transfers (other than transfers pursuant to the Dollar
Cost Averaging and Asset Reallocation Options) may be made by telephone if the
Telephone Transfer section of the application or an Authorization for Telephone
Requests form has been properly completed, signed and filed at Security
Benefit's Home Office. The minimum transfer amount is $1,000, or the amount
remaining in a given Subaccount. The minimum transfer amount does not apply to
transfers under the Dollar Cost Averaging or Asset Reallocation Options.
Contract Value may also be transferred from the Subaccounts to the Fixed
Account; however, transfers from the Fixed Account to the Subaccounts are
restricted as described in "The Fixed Account" on page 18.
The frequency of transfers generally is not limited, although Security
Benefit reserves the right at a future date to limit the number of transfers to
14 in a Contract Year. Security Benefit also reserves the right to limit the
size and frequency of such transfers, and to discontinue telephone transfers.
CONTRACT VALUE
The Contract Value is the sum of the amounts under the Contract held in
each Subaccount of the Separate Account and Fixed Account as well as any amount
set aside in the loan account to secure loans as of any Valuation Date.
On each Valuation Date, the portion of the Contract Value allocated to any
particular Subaccount will be adjusted to reflect the investment experience of
that Subaccount. See "Determination of Contract Value," below. No minimum amount
of Contract Value is guaranteed. A Contractowner bears the entire investment
risk relating to the investment performance of Contract Value allocated to the
Subaccounts.
DETERMINATION OF CONTRACT VALUE
The Contract Value will vary to a degree that depends upon several factors,
including investment performance of the Subaccounts to which Contract Value has
been allocated, payment of purchase payments, the amount of any outstanding
Contract Debt, partial withdrawals, and the charges assessed in connection with
the Contract. The amounts allocated to the Subaccounts will be invested in
shares of the corresponding Series of the Mutual Fund. The investment
performance of the Subaccounts will reflect increases or decreases in the net
asset value per share of the corresponding Series and any dividends or
distributions declared by a Series. Any dividends or distributions from any
Series of the Mutual Fund will be automatically reinvested in shares of the same
Series, unless Security Benefit, on behalf of the Separate Account, elects
otherwise.
Assets in the Subaccounts are divided into Accumulation Units, which are
accounting units of measure used to calculate the value of a Contractowner's
interest in a Subaccount. When a Contractowner allocates purchase payments to a
Subaccount, the Contract is credited with Accumulation Units. The number of
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to the particular Subaccount by the Accumulation Unit value for the
particular Subaccount at the end of the Valuation Period in which the purchase
payment is credited. In addition, other transactions including loans, full or
partial withdrawals, transfers, and assessment of certain charges against the
Contract affect the number of Accumulation Units credited to a Contract. The
number of units credited or debited in connection with any such transaction is
determined by dividing the dollar amount of such transaction by the unit value
of the affected Subaccount. The Accumulation Unit value of each Subaccount is
determined on each Valuation Date. The number of Accumulation Units credited to
a Contract shall not be changed by any subsequent change in the value of an
Accumulation Unit, but the dollar value of an Accumulation Unit may vary from
Valuation Date to Valuation Date depending upon the investment experience of the
Subaccount and charges against the Subaccount.
The Accumulation Unit value of each Subaccount's unit initially was $10.
The unit value of a Subaccount on any Valuation Date is calculated by dividing
the value of each Subaccount's net assets by the number of Accumulation Units
credited to the Subaccount on that date. Determination of the value of the net
assets of a Subaccount takes into account the following: (1) the investment
performance of the Subaccount, which is based upon the investment performance of
the corresponding Series of the Mutual Fund, (2) any dividends or distributions
paid by the corresponding Series, (3) the charges, if any, that may be assessed
by Security Benefit for taxes attributable to the operation of the Subaccount,
(4) the mortality and expense risk charge under the Contract, and (5) the
administrative charge under the Contract.
FULL AND PARTIAL WITHDRAWALS
A Contractowner may obtain proceeds from a Contract by surrendering the
Contract for its Withdrawal Value or by making a partial withdrawal. A full or
partial withdrawal, including a systematic withdrawal, may be taken from the
Contract Value at any time while the Owner is living and before the Annuity
Start Date, subject to restrictions on partial withdrawals of Contract Value
from the Fixed Account and limitations under the applicable plan for Qualified
Plans and applicable law. A full or partial withdrawal request will be effective
as of the end of the
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Valuation Period that a proper written request is received by Security Benefit
at its Home Office. A proper written request must include the written consent of
any effective assignee or irrevocable Beneficiary, if applicable.
The proceeds received upon a full withdrawal will be the Contract's
Withdrawal Value. The Withdrawal Value is equal to the Contract Value as of the
end of the Valuation Period during which a proper withdrawal request is received
by Security Benefit at its Home Office, minus any outstanding Contract Debt, and
any uncollected premium taxes. A partial withdrawal may be requested for a
specified percentage or dollar amount of Contract Value. Each partial withdrawal
must be for at least $1,000 except systematic withdrawals discussed below. A
request for a partial withdrawal will result in a payment by Security Benefit in
accordance with the amount specified in the partial withdrawal request. Upon
payment, the Contract Value will be reduced by an amount equal to the payment
and any applicable premium tax. If a partial withdrawal is requested that would
leave the Withdrawal Value in the Contract less than $5,000, then Security
Benefit reserves the right to treat the partial withdrawal as a request for a
full withdrawal.
The amount of a partial withdrawal will be allocated from the Contract
Value in the Subaccounts and the Fixed Account, according to the Contractowner's
instructions to Security Benefit, subject to the restrictions on partial
withdrawals from the Fixed Account. See "The Fixed Account" on page 18. If a
Contractowner does not specify the allocation, the withdrawal will be allocated
from the Contract Value in the Subaccounts and the Fixed Account in the
following order: Money Market Subaccount, High Grade Income Subaccount, Global
Aggressive Bond Subaccount, Growth-Income Subaccount, Equity Income Subaccount,
Managed Asset Allocation Subaccount, Specialized Asset Allocation Subaccount,
Growth Subaccount, Worldwide Equity Subaccount, Social Awareness Subaccount, and
Emerging Growth Subaccount and then from the Fixed Account. The value of each
account will be depleted before the next account is charged.
A full or partial withdrawal, including a systematic withdrawal, may be
subject to a premium tax charge to reimburse Security Benefit for any tax on
premiums on a Contract that may be imposed by various states and municipalities.
See "Premium Tax Charge," on page 16.
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
attaining age 59 1/2, may be subject to a 10 percent penalty tax. In the case of
Contracts issued in connection with retirement plans that meet the requirements
of Section 401(a), 403(b), 408 or 457 of the Internal Revenue Code, reference
should be made to the terms of the particular Qualified Plan for any limitations
or restrictions on withdrawals. For more information, see "Restrictions on
Withdrawals from Qualified Plans" on page 22. The tax consequences of a
withdrawal under the Contract should be carefully considered. See "Federal Tax
Matters" on page 22.
SYSTEMATIC WITHDRAWALS
Security Benefit currently offers a feature under which systematic
withdrawals may be elected. Under this feature, a Contractowner may elect to
receive systematic withdrawals before the Annuity Start Date by sending a
properly completed Systematic Withdrawal Request form to Security Benefit at its
Home Office. This option may be elected at any time. A Contractowner may
designate the systematic withdrawal amount as a percentage of Contract Value
allocated to the Subaccounts and/or Fixed Account, as a fixed period, 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. A Contractowner may
also designate the desired frequency of the systematic withdrawals, which may be
monthly, quarterly, semiannually or annually. Systematic withdrawals may be
stopped or modified upon proper written request by the Contractowner received by
Security Benefit at its Home Office at least 30 days in advance of the requested
date of termination or modification. A proper request must include the written
consent of any effective assignee or irrevocable Beneficiary, if applicable.
Each systematic withdrawal must be at least $100. Upon payment, the
Contractowner's Contract Value will be reduced by an amount equal to the payment
proceeds plus any applicable premium tax. Any systematic withdrawal that equals
or exceeds the Withdrawal Value will be treated as a full withdrawal. In no
event will payment of a systematic withdrawal exceed the Withdrawal Value. The
Contract will automatically terminate if a systematic withdrawal causes the
Contract's Withdrawal Value to equal zero.
Each systematic withdrawal will be effected as of the end of the Valuation
Period during which the withdrawal is scheduled. The deduction caused by the
systematic withdrawal will be allocated from the Contractowner's Contract Value
in the Subaccounts and the Fixed Account, as directed by the Contractowner. If a
Contractowner does not specify the allocation, the systematic withdrawal will be
allocated from the Contract Value in the Subaccounts and the Fixed Account in
the following order: Money Market Subaccount, High Grade Income Subaccount,
Global Aggressive Bond Subaccount, Growth-Income Subaccount, Equity Income
Subaccount, Managed Asset Allocation Subaccount, Specialized Asset Allocation
Subaccount, Growth Subaccount, Worldwide Equity Subaccount, Social Awareness
Subaccount, and Emerging Growth Subaccount and then from the Fixed Account. The
value of each account will be depleted before the next account is charged.
Security Benefit may, at any time, discontinue, modify, suspend or charge a
fee for systematic withdrawals. Systematic withdrawals from Contract Value
allocated to the Fixed Account must provide for payments over a period of not
less than 36 months as described under "The Fixed Account" on page 18. The tax
consequences of a systematic withdrawal, including the 10 percent penalty tax
which may be imposed on withdrawals made prior to the Owner
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attaining age 59 1/2, should be carefully considered. See "Federal Tax Matters"
on page 22.
FREE-LOOK RIGHT
An Owner may return a Contract within the Free-Look Period, which is
generally a ten-day period beginning when the Owner receives the Contract. The
returned Contract will then be deemed void and Security Benefit will refund any
purchase payments allocated to the Fixed Account plus the Contract Value in the
Subaccounts as of the end of the Valuation Period during which the returned
Contract is received by Security Benefit. Security Benefit will refund purchase
payments allocated to the Subaccounts rather than Contract Value in those states
that require it to do so.
DEATH BENEFIT
If the Owner dies during the Accumulation Period, Security Benefit will pay
the death benefit proceeds to the Designated Beneficiary upon receipt of due
proof of the Owner's 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" below. 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.
Additionally, if the Owner is not a natural person, the amount of the death
benefit will be based on the age of the oldest annuitant on the date the
Contract was issued. If the death of the Owner occurs on or after the Annuity
Start Date, no death benefit proceeds will be payable under the Contract, except
that any guaranteed payments remaining unpaid will continue to be paid to the
Annuitant pursuant to the Annuity Option in force at the date of death.
The death benefit proceeds will be the death benefit reduced by any
outstanding Contract Debt and any uncollected premium taxes. 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 sum of all Purchase Payments, less any reductions caused by
previous withdrawals, (2) the Contract Value on the date due proof of death is
received by Security Benefit, or (3) the stepped-up death benefit. The
stepped-up death benefit is: (a) the largest death benefit on any Contract
anniversary that is both an exact multiple of five and occurs prior to the
oldest Owner attaining 76, plus (b) any Purchase Payments made since the
applicable fifth year anniversary, less (c) any reductions caused by previous
withdrawals since the applicable fifth year anniversary.
If an Owner dies during the Accumulation Period and the age of any Owner
was 76 or greater on the date the Contract was issued, or if due proof of death
(regardless of the age of any Owner on the date the Contract was issued) and
instructions regarding payment are not received by Security Benefit at its Home
Office within six months of the date of the Owner's death, the death benefit
will be the Contract Value on the date due proof of death is received by
Security Benefit at its Home Office.
Notwithstanding the foregoing, the death benefit for Contracts issued in
Florida, regardless of the age at issue, is the greater of (1) the Contract
Value as of the end of the Valuation Period in which due proof of death and
instructions regarding payment are received by Security Benefit at its Home
Office, or (2) the aggregate purchase payments received less any reductions
caused by previous withdrawals. However, if due proof of death and instructions
regarding payment are not received by Security Benefit at its Home Office within
six months of the date of the Owner's death, the death benefit will be the
Contract Value on the date due proof of death and instructions regarding payment
are received by Security Benefit at its Home Office.
The death benefit proceeds will be paid to the Designated Beneficiary in a
single sum or under one of the Annuity Options, as directed by the Owner or as
elected by the Designated Beneficiary. If the Designated Beneficiary is to
receive annuity payments under an Annuity Option, there may be limits under
applicable law on the amount and duration of payments that the Beneficiary may
receive, and requirements respecting timing of payments. A tax adviser should be
consulted in considering Annuity Options. See "Federal Tax Matters" on page 22
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 this Contract in force until the earliest of the
spouse's death or the Annuity Start Date or 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 such 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 the
particular Qualified Plan and the Internal Revenue Code should be reviewed with
respect to
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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 Start Date, and the Owner is a
natural person and is not the Annuitant, no death benefit proceeds will be
payable under the Contract. The Owner may name a new Annuitant within 30 days of
the Annuitant's death. If a new Annuitant is not named, Security Benefit will
designate the Owner as Annuitant. On the death of the Annuitant after the
Annuity Start Date, any guaranteed payments remaining unpaid will continue to be
paid to the Designated Beneficiary pursuant to the Annuity Option in force at
the date of death.
CHARGES AND DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE
Security Benefit deducts a daily charge from the assets of each Subaccount
for mortality and expense risks assumed by Security Benefit under the Contracts.
The charge is equal to an annual rate of 1.25 percent of each Subaccount's
average daily net assets. This amount is intended to compensate Security Benefit
for certain mortality and expense risks Security Benefit assumes in offering and
administering the Contracts and in operating the Subaccounts.
The expense risk is the risk that Security Benefit's actual expenses in
issuing and administering the Contracts and operating the Subaccounts will be
more than the charges assessed for such expenses. The mortality risk borne by
Security Benefit is the risk that Annuitants, as a group, will live longer than
Security Benefit's actuarial tables predict. In this event, Security Benefit
guarantees that annuity payments will not be affected by a change in mortality
experience that results in the payment of greater annuity income than assumed
under the Annuity Options in the Contract. Security Benefit also assumes a
mortality risk in connection with the death benefit under the Contract.
Security Benefit may ultimately realize a profit from this charge to the
extent it is not needed to cover mortality and administrative expenses, but
Security Benefit may realize a loss to the extent the charge is not sufficient.
Security Benefit may use any profit derived from this charge for any lawful
purpose, including distribution expenses.
ADMINISTRATIVE CHARGE
Security Benefit deducts a daily administrative charge equal to an annual
rate of .15 percent of each Subaccount's average daily net assets. The purpose
of this charge is to reimburse Security Benefit for the expenses associated with
administration of the Contracts and operation of the Subaccounts. Security
Benefit does not expect to profit from this charge.
PREMIUM TAX CHARGE
Various states and municipalities impose a tax on premiums on annuity
contracts received by insurance companies. Whether or not a premium tax is
imposed will depend upon, among other things, the Owner's state of residence,
the Annuitant's state of residence, and the insurance tax laws and Security
Benefit's status in a particular state. Security Benefit assesses a premium tax
charge to reimburse itself for premium taxes that it incurs in connection with a
Contract. This charge is currently deducted upon annuitization or upon full or
partial withdrawal if a premium tax was incurred and is not refundable. Security
Benefit reserves the right to deduct premium taxes when due or any time
thereafter. Premium tax rates currently range from 0 percent to 3.5 percent, but
are subject to change by a governmental entity.
OTHER CHARGES
Security Benefit may charge the Separate Account or the Subaccounts for the
federal, state, or local taxes incurred by Security Benefit that are
attributable to the Separate Account or the Subaccounts, or to the operations of
Security Benefit with respect to the Contracts, or that are attributable to
payment of premiums or acquisition costs under the Contracts. No such charge is
currently assessed. See "Tax Status of Security Benefit and the Separate
Account" and "Charge for Security Benefit Taxes."
VARIATIONS IN CHARGES
Security Benefit may reduce or waive the amount of the administrative
charge for a Contract where the expenses associated with the sale of the
Contract or the administrative and maintenance costs associated with the
Contract are reduced for reasons such as the amount of the initial purchase
payment or the amounts of projected purchase payments.
GUARANTEE OF CERTAIN CHARGES
Security Benefit guarantees that the charge for mortality and expense risks
will not exceed an annual rate of 1.25 percent of each Subaccount's average
daily net assets and the administrative charge shall not exceed an annual rate
of .15 percent of each Subaccount's average daily net assets.
MUTUAL FUND EXPENSES
Each Subaccount of the Separate Account purchases shares at the net asset
value of the corresponding Series of the Mutual Fund. Each Series' net asset
value reflects the investment advisory fee and other expenses that are
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deducted from the assets of the Series. These fees and expenses are not deducted
from the Subaccounts, but are paid from the assets of the corresponding Series.
As a result, the Owner indirectly bears a pro rata portion of such fees and
expenses. The advisory fees and other expenses, if any, which are more fully
described in the Mutual Fund's prospectus, are not specified or fixed under the
terms of the Contract.
ANNUITY PERIOD
GENERAL
The Contractowner selects the Annuity Start Date at the time of
application. The Annuity Start Date may not be prior to the first annual
Contract anniversary and may not be deferred beyond the Annuitant's 90th
birthday, although the terms of a Qualified Plan and the laws of certain states
may require annuitization at an earlier age. If the Contractowner does not
select an Annuity Start Date, the Annuity Start Date will be the later of the
Annuitant's 70th birthday or the tenth annual Contract Anniversary. See
"Selection of an Option," on page 18. If there are Joint Annuitants, the
birthdate of the older Annuitant will be used to determine the latest Annuity
Start Date.
On the Annuity Start Date, the proceeds under the Contract will be applied
to provide an annuity under one of the options described below. Each option is
available in two forms -- either as a variable annuity for use with the
Subaccounts or as a fixed annuity for use with the Fixed Account. A combination
variable and fixed annuity is also available. Variable annuity payments will
fluctuate with the investment performance of the applicable Subaccounts while
fixed annuity payments will not. Unless the Owner directs otherwise, proceeds
derived from Contract Value allocated to the Subaccounts will be applied to
purchase a variable annuity and proceeds derived from Contract Value allocated
to the Fixed Account will be applied to purchase a fixed annuity. The proceeds
under the Contract will be equal to the Contractowner's Contract Value in the
Subaccounts and the Fixed Account as of the Annuity Start Date, reduced by any
applicable premium taxes, and any outstanding Contract Debt.
The Contracts provide for six Annuity Options. Other Annuity Options may be
available upon request at the discretion of Security Benefit. Annuity payments
under Annuity Options 1 through 4 are based upon annuity rates that vary with
the Annuity Option selected. In the case of Options 1 through 4, the annuity
rates will vary based on the age and sex of the Annuitant, except that unisex
rates are available where required by law. The annuity rates are based upon an
assumed interest rate of 3.5 percent, compounded annually. In the case of
Options 5 and 6 as described below, annuity rates based on age and sex are not
used to calculate annuity payments. If no Annuity Option has been selected,
annuity payments will be made to the Annuitant under an automatic option which
shall be an annuity payable during the lifetime of the Annuitant with payments
guaranteed to be made for 120 months under Option 2.
Annuity payments can be made on a monthly, quarterly, semiannual, or annual
basis, although no payments will be made for less than $100. If the frequency of
payments selected would result in payments of less than $100, Security Benefit
reserves the right to change the frequency.
An Owner may designate or change an Annuity Start Date, Annuity Option, and
Annuitant, provided proper written notice is received by Security Benefit at its
Home Office at least 30 days prior to the Annuity Start Date set forth in the
Contract. The date selected as the new Annuity Start Date must be at least 30
days after the date written notice requesting a change of Annuity Start Date is
received at Security Benefit's Home Office.
Once annuity payments have commenced, an Annuitant or Owner cannot change
the Annuity Option and cannot surrender his or her annuity and receive a
lump-sum settlement in lieu thereof. The Contract specifies annuity tables for
Annuity Options 1 through 4 described below which contain the guaranteed minimum
dollar amount of periodic annuity payments for each $1,000 applied to an Annuity
Option for a fixed annuity.
ANNUITY OPTIONS
Option 1 -- Life Income
Periodic annuity payments will be made during the lifetime of the
Annuitant. It is possible under this Option for any Annuitant to receive only
one annuity payment if the Annuitant's death occurred prior to the due date of
the second annuity payment, two if death occurred prior to the third annuity
payment due date, etc. THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED UNDER
THIS OPTION. PAYMENTS CEASE UPON THE DEATH OF THE ANNUITANT, REGARDLESS OF THE
NUMBER OF PAYMENTS RECEIVED.
Option 2 -- Life Income with Guaranteed Payments of 5, 10, 15 or 20 Years
Periodic annuity payments will be made during the lifetime of the Annuitant
with the promise that if, at the death of the Annuitant, payments have been made
for less than a stated period, which may be five, ten, fifteen or twenty years,
as elected, annuity payments will be continued during the remainder of such
period to the Designated Beneficiary.
Option 3 -- Life with Installment Refund Option
Periodic annuity payments will be made during the lifetime of the Annuitant
with the promise that, if at the death of the Annuitant, the number of payments
that has been made is less than the number determined by dividing
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the amount applied under this Option by the amount of the first payment, annuity
payments will be continued to the Designated Beneficiary until that number of
payments has been made.
Option 4 -- Joint and Last Survivor
Periodic annuity payments will be made during the lifetime of either
Annuitant. It is possible under this Option for only one annuity payment to be
made if both Annuitants died prior to the second annuity payment due date, two
if both died prior to the third annuity payment due date, etc. AS IN THE CASE OF
OPTION 1, THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED UNDER THIS OPTION.
PAYMENTS CEASE UPON THE DEATH OF THE LAST SURVIVING ANNUITANT, REGARDLESS OF THE
NUMBER OF PAYMENTS RECEIVED.
Option 5 -- Payments for Specified Period
Periodic annuity payments will be made for a fixed period, which may be
from five to twenty years, as elected, with the guarantee that, if, at the death
of all Annuitants, payments have been made for less than the selected fixed
period, the remaining unpaid payments will be paid to the Designated
Beneficiary.
Option 6 -- Payments of a Specified Amount
Periodic payments of the amount elected will be made until the amount
applied and interest thereon are exhausted, with the guarantee that, if, at the
death of all Annuitants, all guaranteed payments have not yet been made, the
remaining unpaid payments will be paid to the Designated Beneficiary.
SELECTION OF AN OPTION
Contractowners should carefully review the Annuity Options with their
financial or tax advisers, and, for Contracts used in connection with a
Qualified Plan, reference should be made to the terms of the particular plan and
the requirements of the Internal Revenue Code for pertinent limitations
respecting annuity payments and other matters. For instance, Qualified Plans
generally require that annuity payments begin no later than April 1 of the
calendar year following the year in which the Annuitant reaches age 70 1/2. In
addition, under Qualified Plans, the period elected for receipt of annuity
payments under Annuity Options generally may be no longer than the joint life
expectancy of the Annuitant and Beneficiary in the year that the Annuitant
reaches age 70 1/2, and must be shorter than such joint life expectancy if the
Beneficiary is not the Annuitant's spouse and is more than ten years younger
than the Annuitant. For Non-Qualified Plans, SBL does not allow annuity payments
to be deferred beyond the Annuitant's 90th birthday.
THE FIXED ACCOUNT
Contractowners may allocate all or a portion of their purchase payments and
transfer Contract Value to the Fixed Account. Amounts allocated to the Fixed
Account become part of Security Benefit's General Account, which supports
Security Benefit's insurance and annuity obligations. The General Account is
subject to regulation and supervision by the Kansas Department of Insurance as
well as the insurance laws and regulations of other jurisdictions in which the
Contract is distributed. In reliance on certain exemptive and exclusionary
provisions, interests in the Fixed Account have not been registered as
securities under the Securities Act of 1933 (the "1933 Act") and the Fixed
Account has not been registered as an investment company under the Investment
Company Act of 1940 (the "1940 Act"). Accordingly, neither the Fixed Account nor
any interests therein are generally subject to the provisions of the 1933 Act or
the 1940 Act. Security Benefit has been advised that the staff of the SEC has
not reviewed the disclosure in this Prospectus relating to the Fixed Account.
This disclosure, however, may be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in the Prospectus. This Prospectus is generally
intended to serve as a disclosure document only for aspects of a Contract
involving the Separate Account and contains only selected information regarding
the Fixed Account. For more information regarding the Fixed Account, see "The
Contract" on page 10.
Amounts allocated to the Fixed Account become part of the General Account
of Security Benefit, which consists of all assets owned by Security Benefit
other than those in the Separate Account and other separate accounts of Security
Benefit. Subject to applicable law, Security Benefit has sole discretion over
the investment of the assets of its General Account.
INTEREST
Amounts allocated to the Fixed Account earn interest at a fixed rate or
rates that are paid by Security Benefit. The Contract Value in the Fixed Account
earns interest at an interest rate that is guaranteed to be at least an annual
effective rate of 3.0 percent which will accrue daily ("Guaranteed Rate"). Such
interest will be paid regardless of the actual investment experience of the
Fixed Account. In addition, Security Benefit may in its discretion pay interest
at a rate ("Current Rate") that exceeds the Guaranteed Rate. Security Benefit
will determine the Current Rate, if any, from time to time.
Contract Value allocated or transferred to the Fixed Account will earn
interest at the Current Rate, if any, in effect on the date such portion of
Contract Value is allocated or transferred to the Fixed Account. The Current
Rate paid on any such portion of Contract Value allocated or transferred to the
Fixed Account will be guaranteed for rolling periods of one or more years (each
a "Guarantee
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Period"). Security Benefit currently offers only Guarantee Periods of one year.
Upon expiration of any Guarantee Period, a new Guarantee Period of the same
duration begins with respect to that portion of Contract Value which will earn
interest at the Current Rate, if any, in effect on the day of the new Guarantee
Period.
Contract Value allocated or transferred to the Fixed Account at one point
in time may be credited with a different Current Rate than amounts allocated or
transferred to the Fixed Account at another point in time. For example, amounts
allocated to the Fixed Account in June may be credited with a different current
rate than amounts allocated to the Fixed Account in July. In addition, if
Guarantee Periods of different durations are offered, Contract Value allocated
or transferred to the Fixed Account for a Guarantee Period of one duration may
be credited with a different Current Rate than amounts allocated or transferred
to the Fixed Account for a Guarantee Period of a different duration. Therefore,
at any time, various portions of a Contractowner's Contract Value in the Fixed
Account may be earning interest at different Current Rates depending upon the
point in time such portions were allocated or transferred to the Fixed Account
and the duration of the Guarantee Period. Security Benefit bears the investment
risk for the Contract Value allocated to the Fixed Account and for paying
interest at the Guaranteed Rate on amounts allocated to the Fixed Account.
For purposes of determining the interest rates to be credited on Contract
Value in the Fixed Account, withdrawals, loans, or transfers from the Fixed
Account will be deemed to be taken first from any portion of Contract Value
allocated to the Fixed Account for which the Guarantee Period expires during the
calendar month in which the withdrawal, loan, or transfer is effected, then in
the order beginning with that portion of such Contract Value which has the
longest amount of time remaining before the end of its Guarantee Period and
ending with that portion which has the least amount of time remaining before the
end of its Guarantee Period. For more information about transfers and
withdrawals from the Fixed Account, see "Transfers and Withdrawals From the
Fixed Account" below.
DEATH BENEFIT
The death benefit under the Contract will be determined in the same fashion
for a Contract that has Contract Value in the Fixed Account as for a Contract
that has Contract Value allocated to the Subaccounts. See "Death Benefit," on
page 15.
CONTRACT CHARGES
Premium taxes will be the same for Contractowners who allocate purchase
payments or transfer Contract Value to the Fixed Account as for those who
allocate purchase payments to the Subaccounts. The charges for mortality and
expense risks and the administrative charge will not be assessed against the
Fixed Account, and any amounts that Security Benefit pays for income taxes
allocable to the Subaccounts will not be charged against the Fixed Account. In
addition, the investment advisory fees and operating expenses paid by the Mutual
Fund will not be paid directly or indirectly by Contractowners to the extent the
Contract Value is allocated to the Fixed Account; however, such Contractowners
will not participate in the investment experience of the Subaccounts.
TRANSFERS AND WITHDRAWALS FROM THE FIXED ACCOUNT
Amounts may be transferred from the Subaccounts to the Fixed Account and
from the Fixed Account to the Subaccounts, subject to the following limitations.
Transfers from the Fixed Account are allowed only (1) from Contract Value, the
Guarantee Period of which expires during the calendar month in which the
transfer is effected, (2) pursuant to the Dollar Cost Averaging Option, provided
that such transfers are scheduled to be made over a period of not less than one
year, and (3) pursuant to the Asset Reallocation Option, provided that, upon
receipt of the Asset Reallocation Request, Contract Value is allocated among the
Fixed Account and the Subaccounts in the percentages selected by the
Contractowner without violating the restrictions on transfers from the Fixed
Account set forth in (1) above. Accordingly, a Contractowner who desires to
implement the Asset Reallocation Option should do so at a time when Contract
Value may be transferred from the Fixed Account to the Subaccounts in the
percentages selected by the Contractowner without violating the restrictions on
transfers from the Fixed Account. Once an Asset Reallocation Option is
implemented, the restrictions on transfers will not apply to transfers made
pursuant to the Option.
The minimum amount that may be transferred from the Fixed Account to the
Subaccounts is the lesser of (i) $1,000 or (ii) the amount of Contract Value for
which the Guarantee Period expires in the calendar month that the transfer is
effected. Transfers of Contract Value pursuant to the Dollar Cost Averaging and
Asset Reallocation Options are not currently subject to any minimums. The
Company reserves the right to waive or limit the number of transfers permitted
each Contract Year to 14 transfers, to suspend transfers, to limit the amount
that may be subject to transfers and the amount remaining in an account after a
transfer.
If purchase payments are allocated (except purchase payments made pursuant
to an Automatic Investment Program), or Contract Value is transferred, to the
Fixed Account, any transfers from the Fixed Account in connection with the
Dollar Cost Averaging or Asset Reallocation Options and any systematic
withdrawals from the Fixed Account will automatically terminate as of the date
of such purchase payment or transfer. A Contractowner may reestablish Dollar
Cost Averaging, Asset Reallocation or systematic withdrawals from the Fixed
Account by submitting a written request to Security Benefit. However, if
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for any reason a Dollar Cost Averaging or systematic withdrawal option is
cancelled, a Contractowner may only reestablish the option after the expiration
of the next monthly or quarterly anniversary (or semiannual or annual
anniversary in the case of systematic withdrawals) that corresponds to the
period selected by the Owner in establishing the option.
The Contractowner may also make full withdrawals to the same extent as a
Contractowner who has allocated Contract Value to the Subaccounts. A
Contractowner may make a partial withdrawal from the Fixed Account only (1) from
Contract Value, the Guarantee Period of which expires during the calendar month
in which the partial withdrawal is effected, (2) pursuant to systematic
withdrawals and (3) once per Contract Year in an amount equal to the greater of
$5,000 or 10 percent of the Contract Value in the Fixed Account at the time of
the partial withdrawal. However, no partial withdrawal request will be processed
which would result in the withdrawal of Contract Value from the Loan Account.
Systematic withdrawals from Contract Value allocated to the Fixed Account must
provide for payments over a period of not less than 36 months. Any change in the
type, frequency or amount of Systematic Withdrawals from the Fixed Account
requires that a new 36 month period be started. See "Full and Partial
Withdrawals," page 13 and "Systematic Withdrawals," page 14. In addition, to the
same extent as Contractowners with Contract Value in the Subaccounts, the Owner
of a Contract used in connection with a Qualified Plan may obtain a loan if so
permitted under the terms of the Qualified Plan. See "Loans," page 21.
PAYMENTS FROM THE FIXED ACCOUNT
Full and partial withdrawals, loans, and transfers from the Fixed Account
may be delayed for up to six months after a written request in proper form is
received by Security Benefit at its Home Office. During the period of deferral,
interest at the applicable interest rate or rates will continue to be credited
to the amounts allocated to the Fixed Account. However, payment of any amounts
will not be deferred if they are to be used to pay premiums on any policies or
contracts issued by Security Benefit.
MORE ABOUT THE CONTRACT
OWNERSHIP
The Contractowner is the person named as such in the application or in any
later change shown in Security Benefit's records. While living, the
Contractowner alone has the right to receive all benefits and exercise all
rights that the Contract grants or Security Benefit allows. The Owner may be an
entity that is not a living person such as a trust or corporation referred
herein as "Non-natural Persons." See "Federal Tax Matters," page 22.
Joint Owners. The Joint Owners will be joint tenants with rights of
survivorship and upon the death of an Owner, the surviving Owner shall be the
sole Owner. Any Contract transaction requires the signature of all persons named
jointly.
DESIGNATION AND CHANGE OF BENEFICIARY
The Designated Beneficiary is the person having the right to the death
benefit, if any, payable upon the death of the Owner or Joint Owner during the
Accumulation Period. The Designated Beneficiary is the first person on the
following list who is alive on the date of death of the Owner or the Joint
Owner: the Owner; the Joint Owner; the Primary Beneficiary; the Secondary
Beneficiary; the Annuitant; or if none of the above are alive, the Owner's
estate. The Primary Beneficiary is the individual named as such in the
application or any later change shown in Security Benefit's records. The Primary
Beneficiary will receive the death benefit of the Contract only if he or she is
alive on the date of death of both the Owner and any Joint Owner during the
Accumulation Period. Because the death benefit of the Contract goes to the first
person on the above list who is alive on the date of death of any Owner, careful
consideration should be given to the manner in which the Contract is registered,
as well as the designation of the Primary Beneficiary. The Contractowner may
change the Primary Beneficiary at any time while the Contract is in force by
written request on forms provided by Security Benefit and received by Security
Benefit at its Home Office. The change will not be binding on Security Benefit
until it is received and recorded at its Home Office. The change will be
effective as of the date this form is signed subject to any payments made or
other actions taken by Security Benefit before the change is received and
recorded. A Secondary Beneficiary may be designated. The Owner may designate a
permanent Beneficiary whose rights under the Contract cannot be changed without
his or her consent.
Reference should be made to the terms of a particular Qualified Plan and
any applicable law for any restrictions or limitations on the designation of a
Beneficiary.
PARTICIPATING
The Contract is participating and will share in the surplus earnings of
Security Benefit. However, the current dividend scale is zero and Security
Benefit does not anticipate that dividends will be paid.
PAYMENTS FROM THE SEPARATE ACCOUNT
Security Benefit will pay any full or partial withdrawal benefit or death
benefit proceeds from Contract Value allocated to the Subaccounts, and will
effect a transfer between Subaccounts or from a Subaccount to the Fixed Account
on the Valuation Date a proper request is received at Security Benefit's Home
Office. However, Security
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Benefit can postpone the calculation or payment of such a payment or transfer of
amounts from the Subaccounts to the extent permitted under applicable law, which
is currently permissible only for any period: (a) during which the New York
Stock Exchange is closed other than customary weekend and holiday closings, (b)
during which trading on the New York Stock Exchange is restricted as determined
by the SEC, (c) during which an emergency, as determined by the SEC, exists as a
result of which (i) disposal of securities held by the Separate Account is not
reasonably practicable, or (ii) it is not reasonably practicable to determine
the value of the assets of the Separate Account, or (d) for such other periods
as the SEC may by order permit for the protection of investors.
PROOF OF AGE AND SURVIVAL
Security Benefit may require proof of age or survival of any person on
whose life annuity payments depend.
MISSTATEMENTS
If the age or sex of an Annuitant or age of an Owner has been misstated,
the correct amount paid or payable by Security Benefit under the Contract shall
be such as the Contract Value would have provided for the correct age or sex
(unless unisex rates apply).
LOANS
An Owner of a Contract issued in connection with a retirement plan that is
qualified under Section 403(b) of the Internal Revenue Code may borrow money
from Security Benefit using his or her Contract Value as the only security for
the loan by submitting a proper written request to Security Benefit. A loan may
be taken while the Owner is living and prior to the Annuity Start Date. The
minimum loan that may be taken is $1,000. For Contracts with Contract Value of
$20,000 or less, the maximum loan that can be taken is the amount that produces
a loan balance immediately after the loan that is the lesser of $10,000 or 75
percent of the Contract Value. For Contracts with Contract Value over $20,000,
the maximum loan that can be taken is the amount that produces a loan balance
immediately after the loan that is the lesser of (1) $50,000 reduced by the
excess of (a) the highest outstanding loan balance within the preceding 12 month
period ending on the day before the date the loan is made over (b) the
outstanding loan balance on the date the loan is made or (2) 50 percent of the
Contract Value. Reference should be made to the terms of the particular
Qualified Plan for any additional loan restrictions.
When an eligible Contractowner takes a loan, Contract Value in an amount
equal to the loan amount is transferred from the Subaccounts and/or the Fixed
Account into an account called the "Loan Account" as security for the loan.
Amounts allocated to the Loan Account earn 3 percent, the minimum rate of
interest guaranteed under the Fixed Account.
Interest will be charged for the loan and will accrue on the loan balance
from the effective date of any loan. The loan interest rate will be 5.5 percent.
Because the Contract Value maintained in the Loan Account will always be equal
in amount to the outstanding loan balance, the net cost of a loan is 2.5
percent.
Loans must be repaid within five years and before the Annuity Start Date,
unless Security Benefit determines that the loan is to be used to acquire a
principal residence of the Owner, in which case the loan must be repaid within
30 years and before the Annuity Start Date. Loan repayments must be made at
least quarterly. Loans that are not repaid within the required time periods will
be subject to taxation as distributions from the Contract. Loans may be prepaid
at any time. Upon receipt of a loan payment, Security Benefit will transfer
Contract Value from the Loan Account to the Fixed Account and/or the Subaccounts
according to the Owner's current instructions with respect to purchase payments
in an amount equal to the amount by which the payment reduces the amount of the
loan outstanding, plus the amount of accrued interest credited on the Loan
Account as of the date of the payment. If a loan payment is not received when
due, a partial withdrawal equal to the repayment amount due, including any
accrued loan interest, will be made from Contract Value and paid to Security
Benefit. The partial withdrawal may be subject to taxation as a distribution.
Any such partial withdrawal will be allocated to the Owner's Contract Value in
the Subaccounts and the Fixed Account in the following order: Money Market
Subaccount, High Grade Income Subaccount, Global Aggressive Bond Subaccount,
Growth-Income Subaccount, Equity Income Subaccount, Managed Asset Allocation
Subaccount, Specialized Asset Allocation Subaccount, Growth Subaccount,
Worldwide Equity Subaccount, Social Awareness Subaccount and Emerging Growth
Subaccount and then from the Fixed Account. The value of each account will be
depleted before the next account is charged. If any such partial withdrawal
equals or exceeds the Withdrawal Value, it will be treated as a full withdrawal.
Contractowners should consult with their tax advisers before requesting a loan.
While the amount to secure the loan is held in the Loan Account, the Owner
forgoes the investment experience of the Subaccounts and the Current Rate of
interest on the Fixed Account. Outstanding Contract Debt will reduce the amount
of proceeds paid upon full withdrawal, upon payment of the death benefit, and
upon annuitization. In addition, no partial withdrawal will be processed which
would result in the withdrawal of Contract Value from the Loan Account.
A Contractowner should consult with his or her tax adviser on the effect of
a loan.
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RESTRICTIONS ON WITHDRAWALS FROM QUALIFIED PLANS
Generally, a Qualified Plan may not provide for the distribution or
withdrawal of amounts accumulated under such Qualified Plan until after a fixed
number of years, the attainment of a stated age or upon the occurrence of a
specific event such as hardship, disability, retirement, death or termination of
employment. Therefore, the Owner of a Contract purchased in connection with a
Qualified Plan may not be entitled to make a full or partial withdrawal, as
described in this Prospectus, unless one of the above-described conditions has
been satisfied. For this reason reference should be made to the terms of the
particular Qualified Plan, the Internal Revenue Code and other applicable law
for any limitation or restriction on distributions and withdrawals, including
the 10 percent penalty tax that may be imposed in the event of a distribution
from a Qualified Plan before the participant reaches age 59 1/2. See the
discussion under "Tax Penalties" on page 27.
The distribution or withdrawal of amounts under a Contract purchased in
connection with a Qualified Plan may result in the receipt of taxable income to
the Owner or Annuitant and in some instances may also result in a penalty tax.
Therefore, the tax consequences of a distribution or withdrawal under a Contract
should be carefully considered and a competent tax adviser should be consulted.
See "Federal Tax Matters" below.
FEDERAL TAX MATTERS
INTRODUCTION
The Contract described in this Prospectus is designed for use by
individuals in retirement plans which may or may not be Qualified Plans under
the provisions of the Internal Revenue Code ("Code"). The ultimate effect of
federal income taxes on the amounts held under a Contract, on annuity payments,
and on the economic benefits to the Owner, the Annuitant, and the Beneficiary or
other payee will depend upon the type of retirement plan, if any, for which the
Contract is purchased, the tax and employment status of the individuals involved
and a number of other factors. The discussion contained herein and in the
Statement of Additional Information is general in nature and is not intended to
be an exhaustive discussion of all questions that might arise in connection with
a Contract. It is based upon Security Benefit's understanding of the present
federal income tax laws as currently interpreted by the Internal Revenue Service
("IRS"), and is not intended as tax advice. No representation is made regarding
the likelihood of continuation of the present federal income tax laws or of the
current interpretations by the IRS or the courts. Future legislation may affect
annuity contracts adversely. Moreover, no attempt has been made to consider any
applicable state or other laws. Because of the inherent complexity of 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 with 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.
SECURITY BENEFIT DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF, OR TAX
CONSEQUENCES ARISING FROM, ANY CONTRACT OR ANY TRANSACTION INVOLVING THE
CONTRACTS.
TAX STATUS OF SECURITY BENEFIT AND THE SEPARATE ACCOUNT
General
Security Benefit 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 Security Benefit, Security Benefit 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 Security Benefit Taxes
A charge may be made for any federal taxes incurred by Security Benefit
that are attributable to the Separate Account, the Subaccounts or to the
operations of Security Benefit with respect to the Contracts or attributable to
payments, premiums, or acquisition costs under the Contracts. Security Benefit
will review the question of a charge to the Separate Account, the Subaccounts or
the Contracts for Security Benefit's federal taxes periodically. Charges may
become necessary if, among other reasons, the tax treatment of Security Benefit
or of income and expenses under the Contracts is ultimately determined to be
other than what Security Benefit currently believes it to be, if there are
changes made in the federal income tax treatment of variable annuities at the
insurance company level, or if there is a change in Security Benefit's tax
status.
Under current laws, Security Benefit may incur state and local taxes (in
addition to premium taxes) in several states. At present, these taxes are not
significant. If there is a material change in applicable state or local tax
laws, Security Benefit reserves the right to charge the Separate Account or the
Subaccounts for such taxes, if any, attributable to the Separate Account or
Subaccounts.
Diversification Standards
Each Series of the Mutual Fund will be required to adhere to regulations
adopted by the Treasury Department pursuant to Section 817(h) of the Code
prescribing asset diversification requirements for investment companies whose
shares are sold to insurance company separate accounts funding variable
contracts. Pursuant to these regulations, on the last day of each calendar
quarter (or on any day within 30 days thereafter), no more than 55 percent
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of the total assets of a Series may be represented by any one investment, no
more than 70 percent may be represented by any two investments, no more than 80
percent may be represented by any three investments, and no more than 90 percent
may be represented by any four investments. For purposes of Section 817(h),
securities of a single issuer generally are treated as one investment but
obligations of the U.S. Treasury and each U.S. Governmental agency or
instrumentality generally are treated as securities of separate issuers. The
Separate Account, through the Series, 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 includable 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, the Contractowner has additional flexibility in allocating purchase
payments and Contract Values. These differences could result in a Contractowner
being treated as the owner of a pro rata portion of the assets of the Separate
Account. In addition, Security Benefit does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury Department has
stated it expects to issue. Security Benefit therefore reserves the right to
modify the Contract, as it deems appropriate, to attempt to prevent a
Contractowner from being considered the owner of a pro rata share of the assets
of the Separate Account. Moreover, in the event that regulations or rulings are
adopted, there can be no assurance that the Series will be able to operate as
currently described in the Prospectus, or that the Mutual Fund will not have to
change any Series' investment objective or investment policies.
INCOME TAXATION OF ANNUITIES IN GENERAL --
NON-QUALIFIED PLANS
Section 72 of the Code governs the taxation of annuities. In general, a
Contractowner is not taxed on increases in value under an annuity contract until
some form of distribution is made under the contract. However, the increase in
value may be subject to tax currently under certain circumstances. See
"Contracts Owned by Non-Natural Persons" on page 24 and "Diversification
Standards" on page 22. Withholding of federal income taxes on all distributions
may be required unless a recipient who is eligible elects not to have any
amounts withheld and properly notifies Security Benefit of that election.
1. Surrenders or Withdrawals Prior to the Annuity Start Date
Code Section 72 provides that amounts received upon a total or partial
withdrawal (including systematic withdrawals) from a Contract prior to the
Annuity Start Date generally will be treated as gross income to the extent that
the cash value of the Contract immediately before the withdrawal (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.
2. Surrenders or Withdrawals on or after the Annuity Start 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.
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3. Penalty Tax on Certain Surrenders and Withdrawals
With respect to amounts withdrawn or distributed before the taxpayer
reaches age 59 1/2, a penalty tax is imposed equal to 10 percent of the portion
of such amount which is includable in gross income. However, the penalty tax is
not applicable to withdrawals: (i) made on or after the death of the owner (or
where the owner is not an individual, the death of the "primary annuitant," who
is defined as the individual the events in whose life are of primary importance
in affecting the timing and amount of the payout under the Contract); (ii)
attributable to the taxpayer's becoming totally disabled within the meaning of
Code Section 72(m)(7); (iii) which are part of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the taxpayer, or the joint lives (or joint life expectancies) of
the taxpayer and his or her beneficiary; (iv) from certain qualified plans; (v)
under a so-called qualified funding asset (as defined in Code Section 130(d));
(vi) under an immediate annuity contract; or (vii) which are purchased by an
employer on termination of certain types of qualified plans and which are held
by the employer until the employee separates from service.
If the penalty tax does not apply to a surrender or withdrawal as a result
of the application of item (iii) above, and the series of payments are
subsequently modified (other than by reason of death or disability), the tax for
the first year in which the modification occurs will be increased by an amount
(determined by the regulations) equal to the tax that would have been imposed
but for item (iii) above, plus interest for the deferral period, if the
modification takes place (a) before the close of the period which is five years
from the date of the first payment and after the taxpayer attains age 59 1/2, or
(b) before the taxpayer reaches age 59 1/2.
ADDITIONAL CONSIDERATIONS
1. Distribution-at-Death Rules
In order to be treated as an annuity contract, a contract must provide the
following two distribution rules: (a) if any owner dies on or after the Annuity
Start Date, and before the entire interest in the Contract has been distributed,
the remainder of the owner's interest will be distributed at least as quickly as
the method in effect on the owner's death; and (b) if any owner dies before the
Annuity Start Date, the entire interest in the Contract must generally be
distributed within five years after the date of death, or, if payable to a
designated beneficiary, must be annuitized over the life of that designated
beneficiary or over a period not extending beyond the life expectancy of that
beneficiary, commencing within one year after the date of death of the owner. If
the 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.
2. Gift of Annuity Contracts
Generally, gifts of non-tax qualified Contracts prior to the Annuity Start
Date will trigger tax on the gain on the Contract, with the donee getting a
stepped-up basis for the amount included in the donor's income. The 10 percent
penalty tax and gift tax also may be applicable. This provision does not apply
to transfers between spouses or incident to a divorce.
3. Contracts Owned by Non-Natural Persons
If the Contract is held by a non-natural person (for example, a
corporation) the income on that Contract (generally the increase in net
surrender value less the purchase payments) is includable in taxable income each
year. The rule does not apply where the Contract is acquired by the estate of a
decedent, where the Contract is held by certain types of retirement plans, where
the Contract is a qualified funding asset for structured settlements, where the
Contract is purchased on behalf of an employee upon termination of a qualified
plan, and in the case of an immediate annuity. An annuity contract held by a
trust or other entity as agent for a natural person is considered held by a
natural person.
4. Multiple Contract Rule
For purposes of determining the amount of any distribution under Code
Section 72(e) (amounts not received as annuities) that is includable in gross
income, all 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 Start Date, such as a partial surrender, dividend, or loan,
will be taxable (and possibly subject to the 10 percent penalty tax) to the
extent of the combined income in all such contracts.
In addition, the Treasury Department has broad regulatory authority in
applying this provision to prevent avoidance of the purposes of this rule. It is
possible that, under this authority, the Treasury Department may apply this rule
to amounts that are paid as annuities (on and after the Annuity Start Date)
under annuity contracts issued by the same company to the same owner during any
calendar year. In this case, annuity payments could be fully taxable (and
possibly subject to the 10 percent penalty tax) to the extent of the combined
income in all such contracts and regardless
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of whether any amount would otherwise have been excluded from income because of
the "exclusion ratio" under the contract.
5. Possible Tax Changes
In recent years, legislation has been proposed that would have adversely
modified the federal taxation of certain annuities. Although as of the date of
this prospectus, it does not appear that Congress is considering any legislation
regarding the taxation of 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).
6. 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 Start 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 competent
tax adviser with respect to the potential effects of such a transaction.
QUALIFIED PLANS
The Contract may be used with Qualified Plans that meet the requirements of
Section 401, 403(b), 408 or 457 of the Code. The tax rules applicable to
participants in such Qualified Plans vary according to the type of plan and the
terms and conditions of the plan itself. No attempt is made herein to provide
more than general information about the use of the Contract with the various
types of Qualified Plans. These Qualified Plans may permit the purchase of the
Contracts to accumulate retirement savings under the plans. Adverse tax or other
legal consequences to the plan, to the participant or to both may result if this
Contract is assigned or transferred to any individual as a means to provide
benefit payments, unless the plan complies with all legal requirements
applicable to such benefits prior to transfer of the Contract. Contractowners,
Annuitants, and Beneficiaries, are cautioned that the rights of any person to
any benefits under such Qualified Plans may be subject to the terms and
conditions of the plans themselves or limited by applicable law, regardless of
the terms and conditions of the Contract issued in connection therewith. For
example, Security Benefit may accept beneficiary designations and payment
instructions under the terms of the Contract without regard to any spousal
consents that may be required under the Employee Retirement Income Security Act
of 1974 (ERISA). Consequently, a Contractowner's Beneficiary designation or
elected payment option may not be enforceable.
The amounts that may be contributed to Qualified Plans are subject to
limitations that vary depending on the type of Plan. In addition, early
distributions from most Qualified Plans may be subject to penalty taxes, or in
the case of distributions of amounts contributed under salary reduction
agreements, could cause the Plan to be disqualified. Furthermore, distributions
from most Qualified Plans are subject to certain minimum distribution rules.
Failure to comply with these rules could result in disqualification of the Plan
or subject the Owner or Annuitant to penalty taxes. As a result, the minimum
distribution rules may limit the availability of certain Annuity Options to
certain Annuitants and their beneficiaries. These requirements may not be
incorporated into our Contract administration procedures. Owners, participants
and beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law.
The following are brief descriptions of the various types of Qualified
Plans and the use of the Contract therewith:
1. Section 401
Code Section 401 permits employers to establish various types of retirement
plans (e.g., pension, profit sharing and 401(k) plans) for their employees. For
this purpose, self-employed individuals (proprietors or partners operating a
trade or business) are treated as employees and therefore eligible to
participate in such plans. Retirement plans established in accordance with
Section 401 may permit the purchase of Contracts to provide benefits thereunder.
In order for a retirement plan to be "qualified" under Code Section 401, it
must: (i) meet certain minimum standards with respect to participation, coverage
and vesting; (ii) not discriminate in favor of "highly compensated" employees;
(iii) provide contributions or benefits that do not exceed certain limitations;
(iv) prohibit the use of plan assets for purposes other than the exclusive
benefit of the employees and their beneficiaries covered by the plan; (v)
provide for distributions that comply with certain minimum distribution
requirements; (vi) provide for certain spousal survivor benefits; and (vii)
comply with numerous other qualification requirements.
A retirement plan qualified under Code Section 401 may be funded by
employer contributions, employee contributions or a combination of both. Plan
participants are not subject to tax on employer contributions until such amounts
are actually distributed from the plan. Depending upon the terms of the
particular plan, employee contributions may be made on a pre-tax or after-tax
basis. In addition, plan participants are not taxed on plan earnings derived
from either employer or employee contributions until such earnings are
distributed.
Each employee's interest in a retirement plan qualified under Code Section
401 must generally be distributed or begin to be distributed not later than
April 1 of the calendar year following the calendar year in which the employee
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reaches age 70 1/2 ("required beginning date"). Periodic distributions must not
extend beyond the life of the employee or the lives of the employee and a
designated beneficiary (or over a period extending beyond the life expectancy of
the employee or the joint life expectancy of the employee and a designated
beneficiary).
If an employee dies before reaching his or her required beginning date, the
employee's entire interest in the plan must generally be distributed within five
years of the employee's death. However, the five-year rule will be deemed
satisfied, if distributions begin before the close of the calendar year
following the year of the employee's death to a designated beneficiary and are
made over the life of the beneficiary (or over a period not extending beyond the
life expectancy of the beneficiary). If the designated beneficiary is the
employee's surviving spouse, distributions may be delayed until the employee
would have reached age 70 1/2.
If an employee dies after reaching his or her required beginning date, the
employee's interest in the plan must generally be distributed at least as
rapidly as under the method of distribution in effect at the time of the
employee's death.
Annuity payments distributed from a retirement plan qualified under Code
Section 401 are taxable under Section 72 of the Code. Section 72 provides that
the portion of each payment attributable to contributions that were taxable to
the employee in the year made, if any, is excluded from gross income as a return
of the employee's investment. The portion so excluded is determined by dividing
the employee's investment in the plan by the expected return under the plan. The
portion of each payment in excess of the exclusion amount is taxable as ordinary
income. Once the employee's investment has been recovered, the full annuity
payment will be taxable. If the employee should die prior to recovering his
entire investment, the unrecovered investment will be allowed as a deduction on
his final return. If the employee made no contributions that were taxable when
made, the full amount of each annuity payment is taxable to him as ordinary
income.
A "lump-sum" distribution from a retirement plan qualified under Code
Section 401 is eligible for favorable tax treatment. A "lump-sum" distribution
means the distribution within one taxable year of the balance to the credit of
the employee which becomes payable: (i) on account of the employee's death, (ii)
after the employee attains age 59 1/2, (iii) on account of the employee's
termination of employment (in the case of a common law employee only) or (iv)
after the employee has become disabled (in the case of a self-employed person
only).
As a general rule, a lump-sum distribution is fully taxable as ordinary
income except for an amount equal to the employee's investment, if any, which is
recovered tax-free. However, special five-year averaging may be available,
provided the employee has reached age 59 1/2 and has not previously elected to
use income averaging. Special ten-year averaging and capital-gains treatment may
be available to an employee who reached age 50 before 1986.
Distributions from a retirement plan qualified under Code Section 401 may
be eligible for a tax-free rollover to either another qualified retirement plan
or to an individual retirement account or annuity (IRA). See "Rollovers" on page
27.
2. Section 403(b)
Code Section 403(b) permits public school employees and employees of
certain types of charitable, educational and scientific organizations specified
in Section 501(c)(3) of the Code to purchase annuity contracts, and, subject to
certain limitations, to exclude the amount of purchase payments from gross
income for tax purposes. The Contract may be purchased in connection with a
Section 403(b) annuity program.
Section 403(b) annuities must generally be provided under a plan which
meets certain minimum participation, coverage, and nondiscrimination
requirements. Section 403(b) annuities are generally subject to minimum
distribution requirements similar to those applicable to retirement plans
qualified under Section 401 of the Code. See "Section 401" on page 25.
A Section 403(b) annuity contract may be purchased with employer
contributions, employee contributions or a combination of both. An employee's
rights under a Section 403(b) contract must be nonforfeitable. Numerous
limitations apply to the amount of contributions that may be made to a Section
403(b) annuity contract. The applicable limit will depend upon, among other
things, whether the annuity contract is purchased with employer or employee
contributions.
Amounts used to purchase Section 403(b) annuities generally are excludable
from the taxable income of the employee. As a result, all distributions from
such annuities are normally taxable in full as ordinary income to the employee.
A Section 403(b) annuity contract must prohibit the distribution of
employee contributions (including earnings thereon) until the employee: (i)
attains age 59 1/2, (ii) terminates employment; (iii) dies; (iv) becomes
disabled; or (v) incurs a financial hardship (earnings may not be distributed in
the event of hardship).
Distributions from a Section 403(b) annuity contract may be eligible for a
tax-free rollover to either another Section 403(b) annuity contract or to an
individual retirement account or annuity (IRA). See "Rollovers" on page 27.
3. Section 408
Section 408 of the Code permits eligible individuals to establish
individual retirement programs through the purchase of Individual Retirement
Annuities ("IRAs"). The Contract may be purchased as an IRA.
IRAs are subject to limitations on the amount that may be contributed, the
persons who may be eligible and on the
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time when distributions must commence. Depending upon the circumstances of the
individual, contributions to an IRA may be made on a deductible or
non-deductible basis. IRAs may not be transferred, sold, assigned, discounted or
pledged as collateral for a loan or other obligation. The annual premium for an
IRA may not be fixed and may not exceed $2,000 (except in the case of a rollover
contribution). Any refund of premium must be applied to the payment of future
premiums or the purchase of additional benefits.
Sale of the Contract for use with 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.
IRAs are subject to minimum distribution requirements similar to those
applicable to retirement plans qualified under Section 401 of the Code. See
"Section 401" on page 25. Distributions from IRAs are generally taxed under Code
Section 72. Under these rules, a portion of each distribution may be excludable
from income. The amount excludable from the individual's income is the amount of
the distribution which bears the same ratio as the individual's nondeductible
contributions bears to the expected return under the IRA.
Distributions from an IRA may be eligible for a tax-free rollover to
another IRA. In certain cases, a distribution from an IRA may be eligible to be
rolled over to a retirement plan qualified under Code Section 401(a) or a
Section 403(b) annuity contract. See "Rollovers" below.
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.
4. Section 457
Section 457 of the Code permits employees of state and local governments
and units and agencies of state and local governments as well as tax-exempt
organizations described in Section 501(c)(3) of the Code to defer a portion of
their compensation without paying current taxes. The employees must be
participants in an eligible deferred compensation plan. A Section 457 plan may
permit the purchase of Contracts to provide benefits thereunder.
Although a participant under a Section 457 plan may be permitted to direct
or choose methods of investment, all amounts deferred under the plan, and any
income thereon, remain solely the property of the employer and subject to the
claims of its general creditors, until paid to the participant. A Section 457
plan must not permit the distribution of a participant's benefits until the
participant attains age 70 1/2, terminates employment or incurs an
"unforeseeable emergency."
Section 457 plans are generally subject to minimum distribution
requirements similar to those applicable to retirement plans qualified under
Section 401 of the Code. See "Section 401" on page 25. Since under a Section 457
plan, contributions are generally excludable from the taxable income of the
employee, the full amount received will usually be taxable as ordinary income
when annuity payments commence or other distributions are made. Distributions
from a Section 457 plan are not eligible for tax-free rollovers.
5. Rollovers
A "rollover" is the tax-free transfer of a distribution from one Qualified
Plan to another. Distributions which are rolled over are not included in the
employee's gross income until some future time.
If any portion of the balance to the credit of an employee in a Section 401
plan or Section 403(b) plan is paid to the employee in an "eligible rollover
distribution" and the employee transfers any portion of the amount received to
an "eligible retirement plan," then the amount so transferred is not includable
in income. An "eligible rollover distribution" generally means any distribution
that is not one of a series of periodic payments made for the life of the
distributee or for a specified period of at least ten years. In addition, a
required minimum distribution will not qualify as an eligible rollover
distribution. A rollover must be completed within 60 days after receipt of the
distribution.
In the case of a Section 401 plan, an "eligible retirement plan" will be
another retirement plan qualified under Code Section 401 or an individual
retirement account or annuity under Code Section 408. With respect to a Section
403(b) plan, an "eligible retirement plan" will be another Section 403(b) plan
or an individual retirement account or annuity described in Code Section 408.
A Section 401 plan and a Section 403(b) plan must generally provide a
participant receiving an eligible rollover distribution, the option to have the
distribution transferred directly to another eligible retirement plan.
The owner of an IRA may make a tax-free rollover of any portion of the IRA.
The rollover must be completed within 60 days of the distribution and generally
may only be made to another IRA. However, an individual may receive a
distribution from his IRA and within 60 days roll it over into a retirement plan
qualified under Code Section 401(a) if all of the funds in the IRA are
attributable to a rollover from a Section 401(a) plan. Similarly, a distribution
from an IRA may be rolled over to a Section 403(b) plan only if all of the funds
in the IRA are attributable to a rollover from a Section 403(b) annuity.
6. Tax Penalties
Premature Distribution Tax. Distributions from a Qualified Plan before the
participant reaches age 59 1/2 are generally subject to an additional tax equal
to 10 percent of the taxable portion of the distribution. The 10 percent penalty
tax does not apply to distributions: (i) made on or
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after the death of the employee; (ii) attributable to the employee's disability;
(iii) which are part of a series of substantially equal periodic payments made
(at least annually) for the life (or life expectancy) of the employee or the
joint lives (or joint life expectancies) of the employee and a designated
beneficiary and which begin after the employee terminates employment; (iv) made
to an employee after termination of employment after reaching age 55; or (v)
made to pay for certain medical expenses.
The exceptions to the 10 percent penalty tax described in items (iv) and
(v) above are not applicable to IRAs. In addition, the 10 percent penalty tax is
generally not applicable to distributions from a Section 457 plan.
Minimum Distribution Tax. If the amount distributed from a Qualified Plan
is less than the minimum required distribution for the year, the participant is
subject to a 50 percent tax on the amount that was not properly distributed.
Excess Distribution Accumulation Tax. If the aggregate distributions from
all Qualified Plans (other than Section 457 plans) with respect to an individual
in a calendar year exceed the greater of (i) $150,000, or (ii) $112,500, as
indexed for inflation ($148,500 for 1994), a penalty tax of 15 percent is
generally imposed (in addition to any ordinary income tax) on the excess portion
of the distribution. In addition, a 15 percent tax is imposed on the "excess
retirement accumulations" of an individual whose aggregate retirement benefits
exceed the value of a hypothetical life annuity determined as of the date of his
or her death.
7. Withholding
Periodic distributions (e.g., annuities and installment payments) from a
Qualified Plan that will last for a period of ten or more years are generally
subject to voluntary income tax withholding. The amount withheld on such
periodic distributions is determined at the rate applicable to wages. The
recipient of a periodic distribution may generally elect not to have withholding
apply.
Nonperiodic distributions (e.g., lump sums and annuities or installment
payments of less than ten years) from a Qualified Plan (other than IRAs) are
generally subject to mandatory 20 percent income tax withholding. However, no
withholding is imposed if the distribution is transferred directly to another
eligible Qualified Plan. Nonperiodic distributions from an IRA are subject to
income tax withholding at a flat 10 percent rate. The recipient of such a
distribution may elect not to have withholding apply.
The above description of the federal income tax consequences of the
different types of Qualified Plans which may be funded by the Contract offered
by this Prospectus is only a brief summary and is not intended as tax advice.
The rules governing the provisions of Qualified Plans are extremely complex and
often difficult to comprehend. Anything less than full compliance with the
applicable rules, all of which are subject to change, may have adverse tax
consequences. A prospective Contractowner considering adoption of a Qualified
Plan and purchase of a Contract in connection therewith should first consult a
qualified and competent tax adviser, with regard to the suitability of the
Contract as an investment vehicle for the Qualified Plan.
OTHER INFORMATION
VOTING OF MUTUAL FUND SHARES
Security Benefit is the legal owner of the shares of the Mutual Fund held
by the Subaccounts of the Separate Account. Security Benefit will exercise
voting rights attributable to the shares of each Series of the Mutual Fund held
in the Subaccounts at any regular and special meetings of the shareholders of
the Mutual Fund on matters requiring shareholder voting under the 1940 Act. In
accordance with its view of presently applicable law, Security Benefit will
exercise these voting rights based on instructions received from persons having
the voting interest in corresponding Subaccounts of the Separate Account.
However, if the 1940 Act or any regulations thereunder should be amended, or if
the present interpretation thereof should change, and as a result Security
Benefit determines that it is permitted to vote the shares of the Mutual Fund in
its own right, it may elect to do so.
The person having the voting interest under a Contract is the Owner. Unless
otherwise required by applicable law, the number of shares of a particular
Series as to which voting instructions may be given to Security Benefit is
determined by dividing a Contractowner's Contract Value in a Subaccount on a
particular date by the net asset value per share of that Series as of the same
date. Fractional votes will be counted. The number of votes as to which voting
instructions may be given will be determined as of the date coincident with the
date established by the Mutual Fund for determining shareholders eligible to
vote at the meeting of the Mutual Fund. If required by the SEC, Security Benefit
reserves the right to determine in a different fashion the voting rights
attributable to the shares of the Mutual Fund. Voting instructions may be cast
in person or by proxy.
Voting rights attributable to the Contractowner's Contract Value in a
Subaccount for which no timely voting instructions are received will be voted by
Security Benefit in the same proportion as the voting instructions that are
received in a timely manner for all Contracts participating in that Subaccount.
Security Benefit will also exercise the voting rights from assets in each
Subaccount that are not otherwise attributable to Contractowners, if any, in the
same proportion as the voting instructions that are received in a timely manner
for all Contracts participating in that Subaccount and generally will exercise
voting rights attributable to shares of the Series of the Mutual Fund held in
its General Account, if any, in the same proportion as votes cast with respect
to shares of the Series of the Mutual Fund held by the Separate Account and
other separate accounts of Security Benefit, in the aggregate.
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28
<PAGE>
SUBSTITUTION OF INVESTMENTS
Security Benefit reserves the right, subject to compliance with the law as
then in effect, to make additions to, deletions from, substitutions for, or
combinations of the securities that are held by the Separate Account or any
Subaccount or that the Separate Account or any Subaccount may purchase. If
shares of any or all of the Series of the Mutual Fund should no longer be
available for investment, or if, in the judgment of Security Benefit management,
further investment in shares of any or all of the Series of the Mutual Fund
should become inappropriate in view of the purposes of the Contract, Security
Benefit may substitute shares of another Series of the Mutual Fund or of a
different fund for shares already purchased, or to be purchased in the future
under the Contract. Security Benefit may also purchase, through the Subaccount,
other securities for other classes or contracts, or permit a conversion between
classes of contracts on the basis of requests made by Owners.
In connection with a substitution of any shares attributable to an Owner's
interest in a Subaccount or the Separate Account, Security Benefit will, to the
extent required under applicable law, provide notice, seek Owner approval, seek
prior approval of the SEC, and comply with the filing or other procedures
established by applicable state insurance regulators.
Security Benefit also reserves the right to establish additional
Subaccounts of the Separate Account that would invest in a new Series of the
Mutual Fund or in shares of another investment company, a series thereof, or
other suitable investment vehicle. New Subaccounts may be established in the
sole discretion of Security Benefit, and any new Subaccount will be made
available to existing Owners on a basis to be determined by Security Benefit.
Security Benefit may also eliminate or combine one or more Subaccounts if, in
its sole discretion, marketing, tax, or investment conditions so warrant.
Subject to compliance with applicable law, Security Benefit may transfer
assets to the General Account. Security Benefit also reserves the right, subject
to any required regulatory approvals, to transfer assets of any Subaccount of
the Separate Account to another separate account or Subaccount.
In the event of any such substitution or change, Security Benefit may, by
appropriate endorsement, make such changes in these and other contracts as may
be necessary or appropriate to reflect such substitution or change. If deemed by
Security Benefit to be in the best interests of persons having voting rights
under the Contracts, the Separate Account may be operated as a management
investment company under the 1940 Act or any other form permitted by law; it may
be deregistered under that Act in the event such registration is no longer
required; or it may be combined with other separate accounts of Security Benefit
or an affiliate thereof. Subject to compliance with applicable law, Security
Benefit also may combine one or more Subaccounts and may establish a committee,
board, or other group to manage one or more aspects of the operation of the
Separate Account.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
Security Benefit reserves the right, without the consent of Owners, to
suspend sales of the Contract as presently offered and to make any change to the
provisions of the Contracts to comply with, or give Owners the benefit of, any
federal or state statute, rule, or regulation, including but not limited to
requirements for annuity contracts and retirement plans under the Internal
Revenue Code and regulations thereunder or any state statute or regulation.
Security Benefit also reserves the right to limit the amount and frequency of
subsequent purchase payments.
REPORTS TO OWNERS
A statement will be sent annually to each Contractowner setting forth a
summary of the transactions that occurred during the year, and indicating the
Contract Value as of the end of each year. In addition, the statement will
indicate the allocation of Contract Value among the Fixed Account and the
Subaccounts and any other information required by law. Confirmations will also
be sent out upon purchase payments, transfers, loans, loan repayments, and full
and partial withdrawals. Certain transactions may be confirmed on a quarterly
basis. These transactions include purchases under an Automatic Investment
Program, transfers under the Dollar Cost Averaging and Asset Reallocation
Options, systematic withdrawals and annuity payments.
Each Contractowner will also receive an annual and semiannual report
containing financial statements for the Mutual Fund, which will include a list
of the portfolio securities of the Mutual Fund, as required by the 1940 Act,
and/or such other reports as may be required by federal securities laws.
TELEPHONE TRANSFER PRIVILEGES
A Contractowner may request a transfer of Contract Value and may make
changes to an existing Dollar Cost Averaging or Asset Reallocation option by
telephone if the Telephone Transfer section of the application or an
Authorization for Telephone Requests form ("Telephone Authorization") has been
completed, signed, and filed at Security Benefit's Home Office. Security Benefit
has established procedures to confirm that instructions communicated by
telephone are genuine and will not be liable for any losses due to fraudulent or
unauthorized instructions provided it complies with its procedures. Security
Benefit's procedures require that any person requesting a transfer by telephone
provide the account number and the Owner's tax identification number and such
instructions must be received on a recorded line. Security Benefit reserves the
right to deny any telephone transfer
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29
<PAGE>
request. If all telephone lines are busy (which might occur, for example, during
periods of substantial market fluctuations), Contractowners might not be able to
request transfers by telephone and would have to submit written requests.
By authorizing telephone transfers, a Contractowner authorizes Security
Benefit to accept and act upon telephonic instructions for transfers involving
the Contractowner's Contract, and agrees that neither Security Benefit, nor any
of its affiliates, nor the Mutual Fund, will be liable for any loss, damages,
cost, or expense (including attorneys' fees) arising out of any requests
effected in accordance with the Telephone Authorization and believed by Security
Benefit to be genuine, provided that Security Benefit has complied with its
procedures. As a result of this policy on telephone requests, the Contractowner
may bear the risk of loss arising from the telephone transfer privileges.
Security Benefit may discontinue, modify, or suspend the telephone transfer
privilege at any time.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Contracts
described in this Prospectus, Security Benefit's authority to issue the
Contracts under Kansas law, and the validity of the forms of the Contracts under
Kansas law have been passed upon by Amy J. Lee, Esq., Assistant Counsel,
Security Benefit.
PERFORMANCE INFORMATION
Performance information for the Subaccounts of the Separate Account,
including the yield and effective yield of the Subaccount investing in the Money
Market Series ("Money Market Subaccount"), the yield of the remaining
Subaccounts, and the total return of all Subaccounts may appear in
advertisements, reports, and promotional literature to current or prospective
Owners.
Current yield for the Money Market Subaccount will be based on income
received by a hypothetical investment over a given 7-day period (less expenses
accrued during the period), and then "annualized" (i.e., assuming that the 7-day
yield would be received for 52 weeks, stated in terms of an annual percentage
return on the investment). "Effective yield" for the Money Market Subaccount is
calculated in a manner similar to that used to calculate yield, but reflects the
compounding effect of earnings.
For the remaining Subaccounts, quotations of yield will be based on all
investment income per Accumulation Unit earned during a given 30-day period,
less expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the value of an Accumulation Unit
on the last day of the period. Quotations of average annual total return for any
Subaccount will be expressed in terms of the average annual compounded rate of
return on a hypothetical investment in a Contract over a period of one, five,
and ten years (or, if less, up to the life of the Subaccount), and will reflect
the deduction of the administrative charge and the mortality and expense risk
charge and may simultaneously be shown for other periods.
Although the Contracts were not available for purchase until April 4, 1995,
the underlying investment vehicle of the Separate Account, the SBL Fund, has
been in existence since May 26, 1977. Performance information for the
Subaccounts may also include quotations of total return for periods beginning
prior to the availability of the Contracts that incorporate the performance of
the SBL Fund.
Performance information for a Subaccount may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donaghue Money Market
Institutional Averages, the Lehman Brothers Government Corporate Index, the
Morgan Stanley Capital International's EAFE Index or other indices measuring
performance of a pertinent group of securities so that investors may compare a
Subaccount's results with those of a group of securities widely regarded by
investors as representative of the securities markets in general or
representative of a particular type of security: (ii) other variable annuity
separate accounts or other investment products tracked by Lipper Analytical
Services, a widely used independent research firm which ranks mutual funds and
other investment companies by overall performance, investment objectives, and
assets, or tracked by other ratings services, companies, publications, or
persons who rank separate accounts or other investment products on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the Contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
Performance information for any Subaccount reflects only the performance of
a hypothetical Contract under which Contract Value is allocated to a Subaccount
during a particular time period on which the calculations are based. Performance
information should be considered in light of the investment objectives and
policies, characteristics, and quality of the Series in which the Subaccount
invests, and the market conditions during the given time period, and should not
be considered as a representation of what may be achieved in the future. For a
description of the methods used to determine yield and total return for the
Subaccounts, see the Statement of Additional Information.
Reports and promotional literature may also contain other information
including (i) the ranking of any Subaccount derived from rankings of variable
annuity separate accounts or other investment products tracked by
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30
<PAGE>
Lipper Analytical Services or by other rating services, companies, publications,
or other persons who rank separate accounts or other investment products on
overall performance or other criteria, (ii) the effect of tax-deferred
compounding on a Subaccount's investment returns, or returns in general, which
may be illustrated by graphs, charts, or otherwise, and which may include a
comparison, at various points in time, of the return from an investment in a
Contract (or returns in general) on a tax-deferred basis (assuming one or more
tax rates) with the return on a taxable basis, and (iii) Security Benefit's
rating or a rating of Security Benefit's claim-paying ability as determined by
firms that analyze and rate insurance companies and by nationally recognized
statistical rating organizations.
ADDITIONAL INFORMATION
REGISTRATION STATEMENT
A Registration Statement under the 1933 Act has been filed with the SEC
relating to the offering described in this Prospectus. This Prospectus does not
include all the information included in the Registration Statement, certain
portions of which, including the Statement of Additional Information, have been
omitted pursuant to the rules and regulations of the SEC. The omitted
information may be obtained at the SEC's principal office in Washington, DC,
upon payment of the SEC's prescribed fees.
FINANCIAL STATEMENTS
Financial statements of Security Benefit at December 31, 1994 and 1993 and
for each of the three years in the period ended December 31, 1994, are contained
in the Statement of Additional Information. Financial statements of the Separate
Account are not yet available.
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information
and financial statements relating to Security Benefit. The Table of Contents of
the Statement of Additional Information is set forth below:
TABLE OF CONTENTS
Page
GENERAL INFORMATION AND HISTORY........................... 1
DISTRIBUTION OF THE CONTRACT.............................. 1
LIMITS ON PURCHASE PAYMENTS PAID UNDER
TAX-QUALIFIED RETIREMENT PLANS........................ 1
INDEPENDENT AUDITORS...................................... 3
PERFORMANCE INFORMATION................................... 3
FINANCIAL STATEMENTS...................................... 4
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31
<PAGE>
VARIFLEX LS VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
DATE: JUNE 1, 1995
AS SUPPLEMENTED MARCH 11, 1996
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT DEFERRED VARIABLE
ANNUITY CONTRACT
ISSUED BY
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 SW HARRISON STREET
TOPEKA, KANSAS 66636-0001
1-800-888-2461
MAILING ADDRESS:
SECURITY BENEFIT LIFE INSURANCE COMPANY
P.O. BOX 750497
TOPEKA, KANSAS 66675-0497
1-800-888-2461
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the current Prospectus for the Variflex LS Variable
Annuity dated June 1, 1995, as supplemented March 11, 1996. A copy of the
Prospectus may be obtained from Security Benefit by calling 1-800-888-2461 or by
writing P.O. Box 750497, Topeka, Kansas 66675-0497.
6911A (R02-96) 32-69113-01
<PAGE>
TABLE OF CONTENTS
Page
GENERAL INFORMATION AND HISTORY...............................................1
DISTRIBUTION OF THE CONTRACT..................................................1
LIMITS ON PURCHASE PAYMENTS PAID UNDER TAX-QUALIFIED RETIREMENT PLANS.........1
INDEPENDENT AUDITORS..........................................................3
PERFORMANCE INFORMATION.......................................................3
FINANCIAL STATEMENTS..........................................................4
i
<PAGE>
GENERAL INFORMATION AND HISTORY
For a description of the Individual Flexible Purchase Payment Deferred
Variable Annuity Contract (the "Contract"), Security Benefit Life Insurance
Company ("Security Benefit"), and the Variable Annuity Account VIII (the
"Separate Account"), see the Prospectus. This Statement of Additional
Information contains information that supplements the information in the
Prospectus. Defined terms used in this Statement of Additional Information have
the same meaning as terms defined in the section entitled "Definitions" in the
Prospectus.
SAFEKEEPING OF ASSETS
Security Benefit is responsible for the safekeeping of the assets of the
Subaccounts. These assets, which consist of shares of the Series of the Mutual
Fund in non-certificated form, are held separate and apart from the assets of
Security Benefit's General Account and its other separate accounts.
DISTRIBUTION OF THE CONTRACT
Security Distributors, Inc. ("SDI") is Principal Underwriter of the
Contract. SDI is registered as a broker/dealer with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc. ("NASD"). The offering of
the Contracts is continuous.
Subject to arrangements with Security Benefit, the Contract is sold by
independent broker/dealers who are members of the NASD and who become licensed
to sell variable annuities for SBL, and by certain financial institutions. SDI
acts as principal underwriter on behalf of Security Benefit for the distribution
of the Contract. SDI is not compensated under its Distribution Agreement with
Security Benefit.
The compensation payable by SDI under these arrangements may vary, but is
not expected to exceed in the aggregate 1% of purchase payments and 1% of
contract value on an annualized basis.
LIMITS ON PURCHASE PAYMENTS PAID UNDER TAX-QUALIFIED
RETIREMENT PLANS
SECTION 401
The applicable annual limits on purchase payments for a Contract used in
connection with a retirement plan that is qualified under Section 401 of the
Internal Revenue Code depend upon the type of plan. Total purchase payments on
behalf of a participant to all defined contribution plans maintained by an
employer are limited under Section 415(c) of the Internal Revenue Code to the
lesser of (a) $30,000, or (b) 25% of the participant's annual compensation.
Salary reduction contributions to a cash-or-deferred arrangement under a profit
sharing plan are subject to additional annual limits. Contributions to a defined
benefit pension plan are actuarially determined based upon the amount of
benefits the participants will receive under the plan formula. The maximum
annual benefit any individual may receive under an employer's defined benefit
plan is limited under Section 415(b) of the Internal Revenue Code. The limits
determined under Section 415(b) and (c) of the Internal Revenue Code are further
reduced for an individual who participates in a defined contribution plan and a
defined benefit plan maintained by the same employer. Rollover contributions are
not subject to the annual limitations described above.
SECTION 403(B)
Contributions to 403(b) annuities are excludable from an employee's gross
income if they do not exceed the smallest of the limits calculated under
Sections 402(g), 403(b)(2), and 415 of the Code. The applicable limit
1
<PAGE>
will depend upon whether the annuities are purchased with employer or employee
contributions. Rollover contributions are not subject to these annual limits.
Section 402(g) generally limits an employee's salary reduction
contributions to a 403(b) annuity to $9,500 a year. The $9,500 limit will be
reduced by salary reduction contributions to other types of retirement plans. An
employee with at least 15 years of service for a "qualified employer" (i.e., an
educational organization, hospital, home health service agency, health and
welfare service agency, church or convention or association of churches)
generally may exceed the $9,500 limit by $3,000 per year, subject to an
aggregate limit of $15,000 for all years.
Section 403(b)(2) provides an overall limit on employer and employee salary
reduction contributions that may be made to a 403(b) annuity. Section 403(b)(2)
generally provides that the maximum amount of contributions an employee may
exclude from his or her gross income in any taxable year is equal to the excess,
if any, of:
(i) the amount determined by multiplying 20% of the employee's includable
compensation by the number of his or her years of service with the
employer, over
(ii) the total amount contributed to retirement plans sponsored by the
employer, that were excludable from his gross income in prior years.
Section 415(c) also provides an overall limit on the amount of employer and
employee salary reduction contributions to a Section 403(b) annuity that will be
excludable from an employee's gross income in a given year. The Section 415(c)
limit is the lesser of (i) $30,000, or (ii) 25% of the employee's annual
compensation.
SECTION 408
Premiums (other than rollover contributions) paid under a Contract used in
connection with an individual retirement annuity (IRA) that is described in
Section 408 of the Internal Revenue Code are subject to the limits on
contributions to IRA's under Section 219(b) of the Internal Revenue Code. Under
Section 219(b) of the Code, contributions (other than rollover contributions) to
an IRA are limited to the lesser of $2,000 per year or the Owner's annual
compensation. An additional $250 may be contributed if the Owner has a spouse
with little or no compensation for the year, provided distinct accounts are
maintained for the Owner and his or her spouse, and no more than $2,000 is
contributed to either account in any one year. The extent to which an Owner may
deduct contributions to an IRA depends on the gross income of the Owner and his
or her spouse for the year and whether either participate in an
employer-sponsored retirement plan.
Premiums under a Contract used in connection with a simplified employee
pension plan described in Section 408 of the Internal Revenue Code are subject
to limits under Section 402(h) of the Internal Revenue Code. Section 402(h)
currently limits employer contributions and salary reduction contributions (if
permitted) under a simplified employee pension plan to the lesser of (a) 15% of
the compensation of the participant in the Plan, or (b) $30,000. Salary
reduction contributions, if any, are subject to additional annual limits.
SECTION 457
Contributions on behalf of an employee to a Section 457 plan generally are
limited to the lesser of (i) $7,500 or (ii) 33 1/3% of the employee's includable
compensation. If the employee participates in more than one Section 457 plan,
the $7,500 limit applies to contributions to all such programs. The $7,500 limit
is reduced by the amount of any salary reduction contribution the employee makes
to a 403(b) annuity, an IRA or a retirement plan qualified under Section 401.
The Section 457 limit may be increased during the last three years ending before
the employee reaches his or her normal retirement age. In each of these last
three years, the plan may permit a "catch-up" amount in addition to the regular
amount to be deferred. The maximum combined amount which may be deferred in each
of these three years is $15,000 reduced by any amount excluded from the
employee's income for the taxable year as a contribution to another plan.
2
<PAGE>
INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, perform certain accounting and
auditing services for Security Benefit and will perform services for the
Separate Account. The financial statements for Security Benefit at December 31,
1994 and 1993, and for each of the three years in the period ended December 31,
1994, included in this Statement of Additional Information have been audited by
Ernst & Young LLP, as set forth in their report thereon appearing on page 5
herein.
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 Subaccounts will be based on all investment
income per Accumulation Unit earned during a particular 30-day period, less
expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the value of the Accumulation Unit
on the last day of the period, according to the following formula:
YIELD = 2[(a-b + 1)6 - 1]
---
cd
where a = net investment income earned during the period by the Series
attributable to shares owned by the Subaccount,
b = expenses accrued for the period (net of 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.
Quotations of average annual total return for any Subaccount will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, five and ten years
(or, if less, up to the life of the Subaccount), calculated pursuant to the
following formula: P(1 + T)n = ERV (where P = a hypothetical initial payment of
$1,000, T = the average annual total return, n = the number of years, and ERV =
the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All total return figures reflect the deduction of the
mortality and expense risk charge and the administrative charge. Quotations of
total return may simultaneously be shown for other periods.
Performance information for a Subaccount may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), 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, insurance products funds, or other investment products
tracked by Lipper Analytical Services, a widely used independent research firm
which ranks mutual funds and other investment companies by overall performance,
investment objectives, and assets, or tracked by The Variable Annuity Research
and Data Service ("VARDS"), an independent service which monitors and ranks the
performance of variable annuity issues by investment objectives on an
industry-wide basis or tracked by 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.
3
<PAGE>
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
Performance information for any Subaccount reflects only the performance of
a hypothetical Contract under which an Owner's Contract Value is allocated to a
Subaccount during a particular time period on which the calculations are based.
Performance information should be considered in light of the investment
objectives and policies, characteristics and quality of the Series of the Mutual
Fund in which the Subaccount invests, and the market conditions during the given
time period, and should not be considered as a representation of what may be
achieved in the future.
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 or by other rating services,
companies, publications, or other persons who rank separate accounts or other
investment products on overall performance or other criteria, and (ii) the
effect of a tax-deferred compounding on a Subaccount's investment returns, or
returns in general, which may be illustrated by graphs, charts, or otherwise,
and which may include a comparison, at various points in time, of the return
from an investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a taxable basis.
FINANCIAL STATEMENTS
The financial statements of Security Benefit at December 31, 1994 and 1993,
and for each of the three years in the period ended December 31, 1994, are set
forth herein, starting on page 5.
The financial statements of Security Benefit, which are included in this
Statement of Additional Information, should be considered only as bearing on the
ability of the Company to meet its obligations under the Contracts. They should
not be considered as bearing on the investment performance of the assets held in
the Separate Account.
4
<PAGE>
ERNST & YOUNG LLP One Kansas City Place Phone: 816 474-5200
1200 Main Street
Kansas City
Missouri 64105-2143
Report of Independent Auditors
The Board of Directors
Security Benefit Life Insurance Company
We have audited the accompanying balance sheets of Security Benefit Life
Insurance Company (the Company) as of December 31, 1994 and 1993, and the
related statements of operations, surplus and cash flows for each of the three
years in the period ended December 31, 1994. 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 financial position of Security Benefit Life Insurance
Company at December 31, 1994 and 1993, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles and with reporting
practices prescribed or permitted by the Kansas Insurance Department.
ERNST & YOUNG LLP
February 3, 1995
<PAGE>
Security Benefit Life Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Investments (Note 2):
Fixed maturities, at amortized cost (fair value:
1994 - $1,987,040; 1993 - $2,072,553) $2,160,550 $2,026,884
Equity securities:
Preferred stock, at cost (fair value: 1994 - $6,423;
1993 - $5,786) 5,979 4,950
Common stock, at fair value (cost: 1994 - $2,509;
1993 - $2,802) 3,071 4,279
----------------------------------
9,050 9,229
Affiliated entities (Note 5) 21,028 21,013
Mortgage loans 90,509 80,104
Real estate, less accumulated depreciation
(1994 - $10,821; 1993 - $10,197):
Home office properties 9,953 10,151
Investment properties 14,576 16,116
----------------------------------
24,529 26,267
Policy loans 92,130 86,551
Short-term investments 50,406 29,602
Other invested assets 27,402 12,917
----------------------------------
Total investments 2,475,604 2,292,567
Cash and certificates of deposit 10,820 4,486
Premiums deferred and uncollected 9,101 9,700
Investment income due and accrued 25,857 25,280
Other assets 14,088 11,394
Separate account assets (Note 3) 1,517,627 1,395,518
----------------------------------
$4,053,097 $3,738,945
==================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------------------
(In Thousands)
<S> <C> <C>
LIABILITIES AND SURPLUS
Policy reserves:
Life $ 355,338 $ 343,723
Annuity 1,927,591 1,773,040
Accident and health 1,204 1,360
Policy proceeds left at interest 19,600 21,910
----------------------------------
2,303,733 2,140,033
Policy and contract claims 8,058 11,894
Other policyholders' funds:
Dividend accumulations 19,697 20,075
Dividends payable in subsequent year 2,787 2,832
Premium deposit funds and other 2,446 2,262
----------------------------------
24,930 25,169
Other liabilities, including income taxes of
$3,111 in 1994 and $1,210 in 1993 13,203 7,012
Investment reserve 27,834 24,876
Interest maintenance reserve 6,986 5,658
Separate account liabilities (Note 3) 1,517,627 1,395,518
----------------------------------
Total liabilities 3,902,371 3,610,160
Commitments and contingencies (Notes 6 and 11)
Surplus:
Contingency surplus 35,771 33,219
Unassigned surplus 114,955 95,566
----------------------------------
Total surplus 150,726 128,785
----------------------------------
$4,053,097 $3,738,945
==================================
</TABLE>
See accompanying notes.
<PAGE>
Security Benefit Life Insurance Company
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Revenues:
Individual life premiums $ 49,837 $ 59,373 $ 64,512
Annuity considerations and deposits 530,530 467,396 413,054
Group life and health premiums 18,435 15,632 13,878
Reinsurance premiums 944 988 452
Amortization of interest maintenance reserve 1,077 804 914
Net investment income (Note 2) 173,391 172,879 174,557
Other income 27,972 26,431 27,570
----------------------------------------------------
Total revenues 802,186 743,503 694,937
Benefits and expenses:
Death benefits 29,368 34,990 27,960
Annuity benefits 17,765 26,661 22,765
Accident and health and disability benefits 2,177 2,912 1,650
Surrender benefits 294,105 244,636 192,107
Increase in reserves and funds for all policies 333,749 319,457 339,387
Other benefits 12,126 13,407 12,132
Commissions 39,059 41,116 39,915
Other insurance operating expenses 31,994 29,226 30,007
----------------------------------------------------
Total benefits and expenses 760,343 712,405 665,923
----------------------------------------------------
Gain from operations before dividends to
policyholders, federal income taxes and
realized capital losses 41,843 31,098 29,014
Dividends to policyholders 2,689 2,725 2,834
----------------------------------------------------
Gain from operations before federal income
taxes and realized capital losses 39,154 28,373 26,180
Federal income taxes (Note 8) 10,678 4,569 4,316
----------------------------------------------------
Gain from operations before realized
capital losses 28,476 23,804 21,864
Realized capital losses, net (Note 2) (1,122) (3,280) (2,836)
----------------------------------------------------
Net income $ 27,354 $ 20,524 $ 19,028
====================================================
</TABLE>
See accompanying notes.
<PAGE>
Security Benefit Life Insurance Company
Statements of Surplus
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $128,785 $106,000 $ 83,290
Add (deduct):
Net income 27,354 20,524 19,028
Decrease (increase) in investment reserves (2,958) (4,854) 1,092
Unrealized gain on investments 546 6,027 2,068
Other (3,001) 1,088 522
----------------------------------------------------
21,941 22,785 22,710
----------------------------------------------------
Balance at end of year $150,726 $128,785 $106,000
====================================================
</TABLE>
See accompanying notes.
<PAGE>
Security Benefit Life Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 27,354 $ 20,524 $ 19,028
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in investment income due and
accrued (577) (4,147) (1,169)
Increase in policy reserves 163,700 138,931 201,150
Accretion of discount on investments (3,580) (5,135) (21,280)
Amortization of premium on investments 15,623 16,440 19,855
Other 1,529 (16,820) 5,794
----------------------------------------------------
Net cash provided by operating activities 204,049 149,793 223,378
INVESTING ACTIVITIES
Investments sold or matured:
Fixed maturities 460,070 1,251,398 1,762,236
Equity securities 3,830 2,103 2,737
Mortgage loans 20,432 16,969 17,562
Real estate 2,782 1,293 2,300
Short-term investments 834,082 2,416,685 1,829,730
Other invested assets 3,602 2,458 1,329
----------------------------------------------------
1,324,798 3,690,906 3,615,894
Acquisition of investments:
Fixed maturities 606,368 1,403,541 2,024,000
Equity securities 4,627 741 3,631
Mortgage loans 33,516 12,021 7,043
Real estate 554 448 2,318
Short-term investments 854,833 2,426,336 1,789,021
Other invested assets 17,036 875 1,583
----------------------------------------------------
1,516,934 3,843,962 3,827,596
Net increase in policy loans (5,579) (2,212) (4,565)
----------------------------------------------------
Net cash used in investing activities (197,715) (155,268) (216,267)
----------------------------------------------------
Increase (decrease) in cash and certificates
of deposit 6,334 (5,475) 7,111
Cash and certificates of deposit at beginning
of year 4,486 9,961 2,850
----------------------------------------------------
Cash and certificates of deposit at end of
year $ 10,820 $ 4,486 $ 9,961
====================================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for federal income taxes $ 8,851 $ 6,284 $ 6,335
====================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Conversion of mortgage loans to real
estate owned $ 2,350 $ 673 $ 1,269
====================================================
</TABLE>
See accompanying notes.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements
December 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements have been prepared on the basis of accounting practices
prescribed or permitted by the Kansas Insurance Department, which practices
presently are regarded as generally accepted accounting principles for mutual
life insurance companies.
In April 1993, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises." Under this
Interpretation, financial statements of mutual life insurance companies prepared
on the basis of statutory accounting principles no longer will be considered to
be prepared in conformity with generally accepted accounting principles. In
January 1995, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by
Insurance Enterprises for Certain Long-Duration Participating Contracts," and
the American Institute of Certified Public Accountants issued its Statement of
Position No. 95-1, "Accounting for Certain Insurance Activities of Mutual Life
Insurance Enterprises," which define generally accepted accounting principles
for mutual life insurance enterprises. Interpretation No. 40, SFAS No. 120 and
Statement of Position No. 95-1 are concurrently effective for fiscal years
beginning after December 15, 1995.
Security Benefit Life Insurance Company (the Company) has not yet determined
whether it will continue to file statutory financial statements with the
Securities and Exchange Commission as currently permitted by Regulation S-X,
Rule 7-02(b) or file financial statements prepared in accordance with all
applicable authoritative accounting pronouncements that define generally
accepted accounting principles for all enterprises. Because the Company has not
yet determined which action it will take to comply with FASB Interpretation No.
40, SFAS No. 120 and Statement of Position No. 95-1, it is unable at this time
to assess the impact of such compliance on its financial statements.
INVESTMENTS
Investments are valued as prescribed by the National Association of Insurance
Commissioners (NAIC).
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fixed maturities are reported at cost, adjusted for amortization of discount or
premium using the effective interest method. For mortgage-backed fixed
maturities, anticipated prepayments are considered when determining the
amortization of discount or premium. Preferred stocks in good standing are
carried at cost. Bonds and preferred stocks not in good standing are carried at
market value. Common stocks are valued at market except investments in stocks of
unconsolidated subsidiaries, which are carried at cost adjusted to reflect
subsequent operating results. Home Office property (including the portion
reported as investment real estate) is reported at 1989 appraised value less
accumulated depreciation as permitted by the Kansas Insurance Department. As of
December 31, 1994, this permitted practice increased statutory surplus by $4.2
million. Investment real estate or property acquired in satisfaction of debt is
reported at the lower of depreciated cost, less encumbrances, or estimated
market value. Other investments are reported on the equity basis. Policy loans
are stated at the aggregate unpaid balance. Mortgage loans on real estate are
carried at the aggregate unpaid balance adjusted for any unamortized discount or
premium.
Investment reserve represents the Asset Valuation Reserve (AVR). The AVR is
computed in accordance with the formula prescribed by the NAIC and represents a
provision for possible fluctuations in the value of bonds, equity securities,
mortgage loans, and other invested assets. Changes to the AVR are charged or
credited directly to unassigned surplus.
Realized gains and losses are determined on a specific identification basis and
are reported in income net of related federal income tax. Beginning in 1992,
under a formula prescribed by the NAIC, the Company reported an Interest
Maintenance Reserve (IMR) that represents the net accumulated unamortized
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates. Such gains or losses are amortized into income on a
straight-line basis over the remaining period to maturity based on groupings of
individual securities sold in five-year bands.
The investment in Security Benefit Group, Inc. (SBG), a wholly-owned subsidiary,
is reported on an equity basis, as permitted by the Kansas Insurance Department.
Changes in SBG's equity are reflected as unrealized gains (losses) on
investments and are accounted for through surplus and investment reserves as
described above. Dividends received from SBG are recorded as investment income
when received.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESERVES FOR LIFE AND ANNUITY POLICIES
The reserves for life and annuity policies are developed by actuarial methods,
and the life reserves are established and maintained on the basis of published
mortality tables. Life and annuity reserves are computed using assumed interest
rates and valuation methods that will provide, in the aggregate, reserves that
are greater than the minimum valuation required by law and greater than the
guaranteed policy cash values.
For life policies, the 1941, 1958 and 1980 CSO mortality tables have been used
principally, and interest assumptions range from 2% to 5 1/2%. For annuity
contracts, the PAT, 1971 IAM and 1983a mortality tables have been used
principally, and interest assumptions range from 2 1/2% to 11 1/2%.
RECOGNITION OF PREMIUM REVENUES AND ACQUISITION COSTS
For life and annuity contracts, premiums are recognized as revenues over the
premium-paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
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 and certificates of deposits, short-term investments: The carrying
amounts reported in the balance sheet for these instruments approximate
their fair values.
Investment securities: The fair values for fixed maturity securities are
based on quoted market prices, where available. For fixed maturity
securities 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.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans and policy loans: The fair values for mortgage loans and
policy loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for similar loans to borrowers
with similar credit ratings. Loans with similar characteristics are
aggregated for purposes of the calculations.
Investment 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.
RECLASSIFICATIONS
Certain balances in the accompanying financial statements have been reclassified
to conform with the 1994 presentation.
2. INVESTMENTS
Information as to the amortized cost, gross unrealized gains and losses and
estimated fair values of the Company's portfolio of fixed maturities at December
31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 10,490 $ 55 $ 622 $ 9,923
Obligations of states and political subdivisions 21,147 - 2,615 18,532
Corporate securities 773,714 1,809 64,494 711,029
Mortgage-backed securities 1,355,199 200 107,843 1,247,556
---------------------------------------------------------------
Totals $2,160,550 $2,064 $175,574 $1,987,040
===============================================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 12,491 $ 221 $ 94 $ 12,618
Obligations of states and political subdivisions 21,453 41 366 21,128
Corporate securities 622,763 21,182 4,001 639,944
Mortgage-backed securities 1,370,177 34,043 5,357 1,398,863
---------------------------------------------------------------
Totals $2,026,884 $55,487 $9,818 $2,072,553
===============================================================
</TABLE>
The amortized cost and estimated fair value of debt securities at December 31,
1994, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
AMORTIZED FAIR
COST VALUE
----------------------------------
(In Thousands)
Due in one year or less $ 37 $ 37
Due after one year through five years 172,701 167,396
Due after five years through 10 years 188,972 174,987
Due after 10 years 443,641 397,064
----------------------------------
805,351 739,484
Mortgage-backed securities 1,355,199 1,247,556
----------------------------------
$2,160,550 $1,987,040
==================================
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
The cost and the estimated fair values of the Company's equity securities at
December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------------------------------
GROSS GROSS
COST UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
-------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Preferred stock $5,979 $ 568 $ 124 $ 6,423
Common stock 2,509 599 37 3,071
-------------------------------------------------------------------------------
$8,488 $1,167 $ 161 $ 9,494
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------------------------------------------------------------
GROSS GROSS
COST UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
-------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Preferred stock $4,950 $ 836 $ - $ 5,786
Common stock 2,802 2,484 1,007 4,279
-------------------------------------------------------------------------------
$7,752 $3,320 $1,007 $10,065
===============================================================================
</TABLE>
The carrying amounts and the estimated fair values of the Company's investment
in mortgage loans and policy loans at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------- ---------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage loans $90,509 $88,894 $80,104 $82,370
Policy loans 92,130 91,492 86,551 85,325
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
Proceeds from sales of fixed maturities and related realized gains and losses,
including valuation adjustments, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Proceeds from sales $119,773 $891,044 $677,781
Gross realized gains 4,966 35,955 21,974
Gross realized losses 4,813 21,375 26,631
</TABLE>
The composition of the Company's portfolio of fixed maturity securities by
quality rating at December 31, 1994 is as follows:
<TABLE>
<CAPTION>
QUALITY RATING AMOUNT %
---------------------------- ---------------------------------
(In Thousands)
<S> <C> <C>
AAA $1,327,192 61%
AA 78,462 4
A 329,517 15
BBB 287,502 13
Noninvestment grade 137,877 7
---------------------------------
$2,160,550 100%
=================================
</TABLE>
The Company has a diversified portfolio of commercial and residential mortgage
loans outstanding in 26 states. The loans are somewhat geographically
concentrated in the midwestern and southwestern United States with the largest
outstanding balances at December 31, 1994 being in the states of Kansas (31%)
and Texas (16%).
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
Major categories of net investment income are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Interest on fixed maturities $ 151,688 $ 150,930 $ 154,105
Interest on mortgage loans 7,552 7,835 8,708
Real estate income 3,563 3,451 3,441
Interest on policy loans 5,446 5,174 5,030
Dividends on equity securities 708 566 1,135
Dividends from subsidiary (Note 5) 5,200 8,300 4,800
Other 5,149 2,139 2,913
----------------------------------------------------
Total investment income 179,306 178,395 180,132
Investment expenses 5,915 5,516 5,575
----------------------------------------------------
Net investment income $ 173,391 $ 172,879 $ 174,557
====================================================
</TABLE>
The Company did not hold any investments that individually exceeded 10% of
surplus at December 31, 1994 except for securities guaranteed by the U.S.
government or an agency of the U.S. government.
Realized gains (losses) consist of the following:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities $ 153 $14,580 $(4,657)
Equity Securities (62) (5,179) 247
Other (2,401) (1,934) (606)
----------------------------------------------------
Total realized gains (losses) (2,310) 7,467 (5,016)
Income tax expense (benefit) (3,593) 1,937 (747)
----------------------------------------------------
1,283 5,530 (4,269)
Transferred to interest maintenance
reserve, net of tax (2,405) (8,810) 1,433
----------------------------------------------------
$(1,122) $(3,280) $(2,836)
====================================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
The Company's principal objective in holding derivatives for purposes other than
trading is asset-liability management. The operations of the Company are subject
to risk of interest rate fluctuations to the extent that there is a difference
between the amount of the Company's interest earning assets and interest bearing
liabilities that mature in specified periods. The principal objective of the
Company's asset-liability management activities is to provide maximum levels of
net interest income while maintaining acceptable levels of interest rate and
liquidity risk and facilitating the funding needs of the Company. To achieve
that objective, the Company uses financial futures instruments. Interest rate
futures contracts are commitments to either purchase or sell a financial
instrument at a specific future date for a specified price and may be settled in
cash or through delivery of the financial instrument.
If a financial futures contract that is used to manage interest rate risk is
terminated early or results in a single payment based on the change in value of
an underlying asset, any resulting gain or loss is deferred and amortized as an
adjustment to yield of the designated asset over its remaining life. Deferred
gains totaling $1.8 million at December 31, 1994, resulting from terminated and
expired futures contracts are included in fixed maturities and will be amortized
as an adjustment to interest income.
3. SEPARATE ACCOUNT TRANSACTIONS
The separate accounts are established in conformity with Kansas Insurance Laws
and are not chargeable with liabilities that arise from any other business of
the Company. Premiums designated for investment in the separate accounts are
included in income with corresponding liability increases included in benefits.
Separate account reserves are treated as miscellaneous reserves with the
corresponding change reflected in operations as permitted by the Kansas
Insurance Department. This permitted practice does not have any effect on the
surplus of the Company. Assets and liabilities of the separate accounts,
representing net deposits and accumulated net investment earnings held primarily
for the benefit of contract holders, are shown as separate captions in the
balance sheet. Assets held in the separate accounts are carried at quoted market
values, or where quoted market values are not available, at fair market value as
determined by Security Management Company, a wholly-owned subsidiary of SBG, and
the investment manager for the separate account assets. The Company receives
administrative and risk fees relating to amounts invested in the separate
accounts.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
3. SEPARATE ACCOUNT TRANSACTIONS (CONTINUED)
The statement of operations includes the following separate account
transactions, which have no effect on net income:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Annuity considerations and deposits $256,061 $235,624 $191,450
====================================================
Benefits:
Benefits and other charges $ 83,933 $ 52,283 $ 33,947
Net transfers to separate accounts 172,128 183,341 157,503
----------------------------------------------------
$256,061 $235,624 $191,450
====================================================
</TABLE>
4. 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 average
compensation during the last five years of service. The Company's policy has
been to contribute funds to the plan in amounts required to maintain sufficient
plan assets to provide for accrued benefits. In applying this general policy,
the Company considers, among other factors, the recommendations of its
independent consulting actuaries, the requirements of federal pension law and
the limitations on deductibility imposed by federal income tax law.
The Company records pension cost in accordance with the provisions of SFAS No.
87, "Employers' Accounting for Pensions." Pension cost for the year is allocated
to each sponsoring company based on the ratio of salary costs for each company
to total salary cost. Pension cost allocated to the Company for 1994, 1993 and
1992 was $218,000, $139,000 and $78,000, respectively.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
Separate information disaggregated by sponsoring employer company is not
available on the components of the net pension cost or on the funded status of
the plan. Pension cost for the total plan for 1994, 1993 and 1992 is summarized
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost $ 679 $ 571 $ 480
Interest cost 535 483 453
Actual return on plan assets 310 (966) (567)
Net amortization and deferral (949) 277 (172)
---------------------------------------------------------
Net pension cost $ 575 $ 365 $ 194
=========================================================
</TABLE>
The funded status of the total plan as of December 31, 1994 and 1993 was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
------------------------------------
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(4,589) $(3,838)
Non-vested benefit obligation (157) (292)
------------------------------------
Accumulated benefit obligation (4,746) (4,130)
Excess of projected benefit obligation over
accumulated benefit obligation (2,405) (3,108)
------------------------------------
Projected benefit obligation (7,151) (7,238)
Plan assets at fair market value 6,514 6,775
------------------------------------
Plan assets less than projected benefit obligation (637) (463)
Unrecognized net loss 1,971 2,228
Unrecognized prior service cost 815 640
Unrecognized net asset established at the date
of initial application (2,209) (2,394)
------------------------------------
Net prepaid (accrued) pension expense $ (60) $ 11
====================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumptions were as follows:
1994 1993 1992
-------------------------------
Weighted average discount rate 8.5% 7.5% 8.5%
Weighted average compensation rate for
participants age 45 and older 4.5 4.5 6.0
Weighted average expected long-term return
on plan assets 9.0 9.0 9.5
Salary increase rates that vary by age for participants under age 45 were used
in determining the actuarial present value of the projected benefit obligation
in 1994. Plan assets are invested in a diversified portfolio of affiliated
mutual funds that invest in equity and debt securities.
In addition to the Company's defined benefit pension plan, the Company and
certain of its affiliates provide 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 and its affiliates' portion of the costs is frozen after 1996 with
all future cost increases passed on to the retirees. Retirees in the plan prior
to July 1, 1993 are covered 100% by the Company.
In 1993, the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," electing the cumulative method.
The effect of adopting the new rules was a one-time charge of $1,735,000, net of
a $1,103,000 tax benefit. The net periodic cost is allocated among the Company
and its affiliates based on the number of eligible employees. The net periodic
cost allocated to the Company was $171,000 and $166,000 for 1994 and 1993,
respectively. Postretirement benefit costs of $89,000 for 1992 were recorded on
a cash basis and have not been restated.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
Separate information disaggregated by sponsoring employer company is not
available on the components of the net retiree medical care and life insurance
costs or on the funded status of the plan. Retiree medical care and life
insurance costs for the total plan for 1994 and 1993 are summarized as follows:
1994 1993
------------------------------------
(In Thousands)
Service cost $116 $118
Interest cost 275 233
------------------------------------
$391 $351
====================================
The funded status of the total plan as of December 31, 1994 and 1993 was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------------------------------
(In Thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(2,418) $(2,144)
Active participants:
Retirement eligible (620) (384)
Others (706) (737)
----------------------------------------------
(3,744) (3,265)
Unrecognized net (gain) loss (30) 253
----------------------------------------------
Accrued postretirement benefit cost $(3,774) $(3,012)
==============================================
</TABLE>
The annual assumed rate of increase in the per capita cost of covered benefits
is 12% for 1994 and is assumed to decrease gradually to 5% for 2001 and remain
at that level thereafter. The health 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, 1994 by $209,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1994 by $58,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 8.5% and 7.5% at December 31, 1994 and 1993, respectively.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has a profit-sharing and savings plan for which substantially all
employees are eligible after one year of employment with the Company.
Contributions for profit sharing are based on a formula established by the Board
of Directors with pro rata allocation among employees based on salaries. The
savings plan is a tax-deferred 401(k) retirement plan. Employees may contribute
up to 10% of their eligible compensation. The Company matches 50% of the first
6% of the employee contributions. Employee contributions are fully vested and
Company contributions are vested over a five-year period. Company contributions
to the profit-sharing and savings plan charged to operations were $371,000,
$463,000 and $426,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
5. RELATED PARTIES
SBG provides certain management and administrative services to the Company.
During 1994, 1993 and 1992, the Company incurred $16,852,000, $14,729,000 and
$12,795,000, respectively, for such services. The Company leases certain office
space to SBG for which rent income of $1,133,000, $1,133,000 and $1,062,000 was
recorded in 1994, 1993 and 1992. Additionally, in 1994, 1993 and 1992, the
Company paid commissions of $2,700,000, $2,985,000 and $2,476,000, respectively,
to Security Distributors, Inc., a wholly-owned subsidiary of SBG.
At December 31, 1994 and 1993, the Company's investment in SBG was $21,028,000
and $21,013,000, respectively. The Company recorded cash dividends of
$5,200,000, $8,300,000 and $4,800,000 from SBG during 1994, 1993 and 1992.
Condensed financial information related to SBG is as follows:
<TABLE>
<CAPTION>
1994 1993
----------------------------------------------
(In Thousands)
<S> <C> <C>
Cash and investments $19,456 $24,753
Property and equipment 8,736 7,888
Other assets 7,991 4,867
----------------------------------------------
$36,183 $37,508
==============================================
Accounts payable and other liabilities $15,155 $16,495
Stockholder's equity 21,028 21,013
----------------------------------------------
$36,183 $37,508
==============================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
5. RELATED PARTIES (CONTINUED)
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Revenues:
Management fees $16,852 $14,729 $12,795
Mutual fund fees 22,608 21,352 20,296
Other (including in 1993 a gain
from sale of management rights) 2,373 7,287 1,720
----------------------------------------------------
41,833 43,368 34,811
General, administrative and other expenses 32,940 30,080 27,080
Income taxes 3,430 5,233 3,111
Cumulative effect of SFAS No. 106 - 1,735 -
----------------------------------------------------
Net income $ 5,463 $ 6,320 $ 4,620
====================================================
</TABLE>
6. REINSURANCE
The Company is involved in both the cession and assumption of reinsurance with
other companies. The Company's maximum retention on any one life is $500,000.
Risks are reinsured with other companies to permit recovery of a portion of
direct losses.
Principal reinsurance transactions are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Reinsurance assumed:
Premiums received $ 1,276 $ 1,359 $ 579
====================================================
Commissions paid $ 239 $ 96 $ 205
====================================================
Claims paid $ 1,469 $ 7,290 $ 1,621
====================================================
Reinsurance ceded:
Premiums paid $ 12,018 $ 4,194 $ 3,739
====================================================
Commissions received $ 1,443 $ 148 $ 165
====================================================
Claim recoveries $ 2,485 $ 2,231 $ 3,205
====================================================
Reinsurance in force (at December 31):
Assumed policies $ 30,814 $ 39,730 $ 18,515
====================================================
Ceded policies $1,150,828 $1,081,591 $999,558
====================================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
6. REINSURANCE (CONTINUED)
The liabilities for policy reserves and policy and contract claims include the
following amounts for reinsurance assumed: $120,000 and $3,187,000 at December
31, 1994 and $132,000 and $6,145,000 at December 31, 1993.
The ceding of insurance through reinsurance agreements does not discharge the
primary liability of the original underwriters to the insured. However,
statutory accounting practices treat risks that have been reinsured, to the
extent of reinsurance, as though they were not risks for which the original
insurer is liable. Therefore, in financial statement presentations, policy
reserves and policy and contract claim liabilities are presented net of that
portion of risk reinsured. Accordingly, policy reserves and policy and contract
claim liabilities have been shown net of reinsurance credits of $11,048,000 and
$459,000 at December 31, 1994 and $4,157,000 and $474,000 at December 31, 1993.
Effective December 31, 1994, the Company transferred through a 100% coinsurance
agreement, a block of limited payment whole life insurance business that had
aggregate claim and policy reserves of $7.5 million. The Company recorded a gain
of $1.3 million which represented the initial ceding commission.
In prior years, the Company was involved in litigation arising out of its
participation from 1986 to 1990 in a reinsurance pool. The litigation related to
the pool manager and a reinsurance intermediary placing major medical business
in the pool without authorization. During 1993, the Company settled the major
medical portion of the pool's activity with no significant adverse effect on the
Company. The nonmajor medical business placed in the pool has experienced
significant losses. At December 31, 1994, the Company believes adequate
provision has been made for such losses.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
7. INVESTMENT-TYPE INSURANCE CONTRACTS
The carrying amounts and the fair values of the Company's liabilities for
investment-type insurance contracts (included with policy reserves in the
balance sheet) at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------- ---------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Supplementary contracts
without life contingencies $ 41,239 $ 39,771 $ 38,322 $ 37,780
Individual and group annuities 1,828,753 1,690,693 1,711,440 1,586,182
--------------------------------- ---------------------------------
$1,869,992 $1,730,464 $1,749,762 $1,623,962
</TABLE>
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the liabilities under all
insurance contracts are taken into consideration in the Company's overall
management of interest rate risk, which minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due under
insurance contracts.
8. INCOME TAXES
The Company files a life/nonlife consolidated federal income tax return with
SBG. Income taxes are allocated to the Company on the basis of its filing a
separate tax return. The Company is taxed at usual corporate rates as defined by
the applicable income tax laws for mutual life insurance companies. These laws
provide for differences in the recognition of certain income and expenses, and
provide for deductions that may result in a provision for income taxes that does
not have the customary relationship of taxes to income. The capitalization of
acquisition expenses required by the Revenue Reconciliation Act of 1990
increased the Company's effective tax rate for the year ended December 31, 1992,
but this was offset by the dividends received deduction and policy and contract
reserve changes. The principal item reducing the Company's effective rate in
subsequent years is the dividends received deduction.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
During the year ended December 31, 1993, the Company began establishing deferred
income taxes on its tax-basis deferred policy acquisition costs. Prior to this
time, no deferred income taxes had been established on any difference between
the financial statement and income tax bases of assets and liabilities and, at
December 31, 1994, this remains the only item to which deferred income tax
accounting has been applied. The Company's policy is to nonadmit any resulting
deferred tax asset; accordingly, this practice has no impact on capital and
surplus. The cumulative effect of adopting this change as of January 1, 1993
amounted to $3,464,000 and was reflected as a nonadmitted asset at that time.
Prior year financial statements have not been restated to reflect the new
accounting method. The effect of the new method was to decrease income tax
expense by $927,000 and $1,444,000 for the years ended December 31, 1994 and
1993.
9. CONDENSED FAIR VALUE INFORMATION
SFAS No. 107, "Disclosures about Fair Values 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. 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 over 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.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
9. CONDENSED FAIR VALUE INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------- ---------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities (Note 2) $2,160,550 $1,987,040 $2,026,884 $2,072,553
Equity securities (Note 2) 9,050 9,494 9,229 10,065
Mortgage loans 90,509 88,894 80,104 82,370
Policy loans 92,130 91,492 86,651 85,325
Short-term investments 50,406 50,406 29,602 29,602
Cash and certificates of deposit 10,820 10,820 4,486 4,486
Investment income due and accrued 25,857 25,857 25,280 25,280
Futures contracts - 240 - -
Investment type:
Insurance contracts (Note 7) 1,869,992 1,730,464 1,749,762 1,623,962
</TABLE>
10. BUSINESS DISPOSITION
Security Management Company (SMC), a wholly-owned subsidiary of SBG, a
wholly-owned subsidiary of the Company, entered into an agreement with Fidelity
Management & Research Company (FMR) in connection with the acquisition of
Security Action Fund by a fund managed by FMR. Pursuant to its agreement with
FMR, SMC agreed to provide various consulting and other services to FMR in
connection with and following the acquisition and to forgo competition in this
market for one year.
On March 26, 1993, the transaction closed and FMR paid SMC $5.1 million in cash
at the time of closing with the remaining $1.3 million of proceeds paid in March
1994. SMC realized a pretax gain of $5.8 million in 1993 after deducting certain
costs associated with the transaction.
11. COMMITMENTS AND CONTINGENCIES
The Company has a $10 million line of credit facility from a bank. Any
borrowings in connection with this facility bear interest at 1/4% over the prime
rate. At December 31, 1994, there were no borrowings outstanding under this
facility.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Open investment funding commitments at December 31, 1994 and 1993 equal $1.2
million and $16.4 million, respectively.
The economy and other factors have caused an increase in the number of insurance
companies that have required regulatory supervision. This circumstance is
expected to result in an increase in assessments by state guaranty funds, or
voluntary payments by solvent insurance companies, to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments can
be partially recovered through a reduction in future premium taxes in some
states. The Company records these assessments on a cash basis and has paid
$2,270,000, $2,077,000 and $1,259,000 for the years ended December 31, 1994,
1993 and 1992, respectively. The ultimate amounts or the ultimate effect of any
such increased assessments or voluntary payments on the Company's financial
position and results of operations are not currently determinable. The
accompanying financial statements do not include any provision for any such
potential assessments.
12. SUBSEQUENT EVENTS
Effective January 2, 1995, the Company acquired from Pioneer National Life
Insurance Company (Pioneer), a wholly-owned subsidiary of Pioneer National
Corporation (PNC), a wholly-owned subsidiary of SBG, substantially all of
Pioneer's life insurance business by assuming liability for the business through
an assumption reinsurance agreement. Concurrent with the assumption reinsurance
agreement, the Company entered into a 100% coinsurance agreement with Pioneer
reinsuring the remaining business. The Company did not recognize any gain or
loss on the above transactions. The Company received $2.7 million of assets as
consideration for the liabilities assumed by the Company in the assumption
reinsurance and coinsurance agreement.
Pursuant to an Agreement and Plan of Merger, Pioneer merged with the First
Security Benefit Life Insurance and Annuity Company of New York (FSBL), a
wholly-owned subsidiary of Security Benefit Group, Inc. FSBL (the surviving
corporation) will be in the business of transacting life insurance in the state
of New York.
On February 8, 1995, the Company purchased 200,000 shares of common stock of
FSBL, at a par value of $10 per share ($2,000,000). Concurrent with this
transaction, the Company (the sole shareholder) contributed $4,000,000 to FSBL
to meet the minimum capital requirements of New York. The Company will
contribute the common stock of FSBL to its downstream holding company, Security
Benefit Group, Inc.
<PAGE>
APPENDIX
DEATH BENEFIT PERCENTAGES
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
0-40 250% 50 185% 60 130% 70 115%
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94 101
<PAGE>
ILLUSTRATIONS
The following tables illustrate how the Death Benefits and Net Cash
Surrender Values of a hypothetical policy may vary over an extended period of
time assuming hypothetical rates of return equivalent to constant gross annual
rates of 0%, 6% and 12%.
The policies illustrated include the following:
1. Male, age 40, Preferred Rating Class (based on tobacco use), Option A,
$10,000 annual premium, Current Cost of Insurance Rates and Current
Mortality and Expense Risk and Administrative Charges.
2. Male, age 40, Preferred Rating Class (based on tobacco use), Option A,
$10,000 annual premium, Guaranteed Cost of Insurance Rates and Guaranteed
Mortality and Expense Risk and Administrative Charges.
3. Male, age 40, Preferred Rating Class (based on tobacco use), Option B,
$25,000 annual premium, Current Cost of Insurance Rates and Current
Mortality and Expense Risk and Administrative Charges.
4. Male, age 40, Preferred Rating Class (based on tobacco use), Option B,
$25,000 annual premium, Guaranteed Cost of Insurance Rates and Guaranteed
Mortality and Expense Risk and Administrative Charges.
The values would be different from those shown if the gross annual
investment rates of return averaged 0%, 6% or 12% over a period of years, but
also fluctuated above or below those averages for individual policy years.
The fourth column of each table, labeled "Total Premiums Paid Plus Interest
at 5%," shows the amount that would accumulate if an amount equal to the annual
premium (after taxes) were invested to earn interest at 5% compounded annually.
These illustrations assume that no policy loans have been made.
The amounts shown for the Death Benefits and Net Cash Surrender Values
reflect the fact that the net investment return on the Variable Accounts is
lower than the gross investment return on the assets as a result of the
mortality and expense risk and administrative charges levied against the
Accounts. These values also take into account a premium load of 2.5%, although
the premium load may be more or less than this amount depending on the state in
which the policy is issued. The amounts shown would differ if unisex rates were
used or if the insured were female and female rates were used. The amounts would
also differ if the insured were a tobacco user and standard rates were used.
The expenses of the Fund are assumed to be equal to an annual rate of 0.90%
of the aggregate average daily net assets of the Fund. The assumed total Fund
expense of .90% is a dollar weighted average of each Series' expenses. For the
year ended December 31, 1994, the total expenses of each Series of the Fund were
the following percentages of the average daily net assets of the Series: 0.84%
for Series A, 0.84% for Series B; 0.61% for Series C; 1.34% for Series D; 0.85%
for Series E; 0.90% for Series S and 0.88% for Series J; 1.40% for Series K;
1.65% for Series M; 1.65% for Series N; and 1.35% for Series O. Series K, M, N
and O were not publicly offered until June 1, 1995. The expenses of these Series
as a percentage of average daily net assets, based on estimated expenses for
fiscal year 1995, are as follows: 1.40% for Series K; 1.65% for Series M; 1.65%
for Series N; and 1.35% for Series O. The assumed total Fund expense of .90% was
determined based on the average daily net assets of each Series during 1994 and,
with respect to Series K, M, N and O, assuming average daily net assets of
$10,000,000. Accordingly, existing Series, which have lower expenses, were given
more weight in determining the amount of the Fund's assumed expenses than were
the new Series which have higher expenses. The assumed Fund expense of .90% may
be more or less than the Fund expenses incurred depending on the actual expenses
of the Series underlying the Variable Account to which Accumulated Value is
allocated.
After deductions of the charges and Fund expenses described above, the
illustrated gross annual investment rates of return of 0%, 6%, and 12%
correspond to approximate net annual rates of -2.14%, 3.73%, and 9.60% in the
tables based on guaranteed charges. In the tables based on current charges, the
illustrated gross annual investment rates of return of 0%, 6% and 12% correspond
to approximate net annual rates of -2.14%, 3.73%, and 9.60% in the first ten
Policy Years and -1.84%, 4.05% and 9.94% thereafter. The hypothetical values
shown in the tables do not reflect any charges against the Variable Accounts for
income taxes that may be attributable to the Variable Accounts in the future,
since Security Benefit is not currently making these charges. In the event that
these charges are to be made, the gross annual investment rate would have to
exceed 0%, 6% or 12% by an amount sufficient to cover the tax charges in order
to produce the death benefits and Net Cash Surrender Values illustrated.
We will furnish upon request a comparable illustration reflecting the
proposed Insured's Age, gender (unless unisex rates apply), Underwriting Class,
Rating Class, Specified Amount, Death Benefit Option and premium amounts
requested. In addition, upon request, illustrations will be furnished reflecting
allocation of premiums to specified Variable Accounts. Such illustrations will
reflect the expenses of the Series of the Fund in which the Variable Account
invests. Illustrations that use a hypothetical gross rate of return in excess of
12% are available to certain large institutional investors upon request.
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 HARRISON, TOPEKA, KS 66636
SECURITY ELITE BENEFIT
A Flexible Premium Variable Life Insurance Policy
Illustration for: Male, Age 40, Preferred
Initial Specified Amount: $750,000, Option A
Initial Annual Premium: $10,000
BASED ON CURRENT COST OF INSURANCE RATES AND CURRENT MORTALITY
AND EXPENSE RISK AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12% HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
------------------------ ------------------------ ------------------------
TOTAL
PREMIUMS
END OF PAID PLUS NET CASH NET CASH NET CASH
POLICY ANNUAL INTEREST SURRENDER DEATH SURRENDER DEATH SURRENDER DEATH
YEAR AGE PREMIUMS AT 5% VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
---- --- -------- ----- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $10,000 $10,500 $9,016 $750,000 $9,572 $750,000 $10,128 $750,000
2 42 $10,000 $21,525 $16,720 $750,000 $18,349 $750,000 $20,043 $750,000
3 43 $10,000 $33,101 $24,277 $750,000 $27,473 $750,000 $30,936 $750,000
4 44 $10,000 $45,256 $31,689 $750,000 $36,961 $750,000 $42,901 $750,000
5 45 $10,000 $58,019 $38,959 $750,000 $46,824 $750,000 $56,046 $750,000
6 46 $10,000 $71,420 $46,089 $750,000 $57,080 $750,000 $70,487 $750,000
7 47 $10,000 $85,491 $53,084 $750,000 $67,742 $750,000 $86,350 $750,000
8 48 $10,000 $100,266 $59,944 $750,000 $78,828 $750,000 $103,777 $750,000
9 49 $10,000 $115,779 $66,672 $750,000 $90,353 $750,000 $122,921 $750,000
10 50 $10,000 $132,068 $73,272 $750,000 $102,337 $750,000 $143,951 $750,000
11 51 $10,000 $149,171 $79,746 $750,000 $114,796 $750,000 $167,054 $750,000
12 52 $10,000 $167,130 $86,095 $750,000 $127,749 $750,000 $192,434 $750,000
13 53 $10,000 $185,986 $92,323 $750,000 $141,217 $750,000 $220,315 $750,000
14 54 $10,000 $205,786 $98,431 $750,000 $155,219 $750,000 $250,944 $750,000
15 55 $10,000 $226,575 $104,423 $750,000 $169,777 $750,000 $284,591 $750,000
16 56 $10,000 $248,404 $110,300 $750,000 $184,914 $750,000 $321,554 $750,000
17 57 $10,000 $271,324 $116,064 $750,000 $200,651 $750,000 $362,159 $750,000
18 58 $10,000 $295,390 $121,718 $750,000 $217,012 $750,000 $406,766 $750,000
19 59 $10,000 $320,660 $127,263 $750,000 $234,023 $750,000 $455,769 $750,000
20 60 $10,000 $347,193 $132,703 $750,000 $251,710 $750,000 $509,601 $750,000
20 60 $10,000 $347,193 $132,703 $750,000 $251,710 $750,000 $509,601 $750,000
25 65 $10,000 $501,135 $157,470 $750,000 $350,557 $750,000 $867,830 $1,058,753
30 70 $10,000 $697,609 $175,797 $750,000 $468,070 $750,000 $1,432,262 $1,661,424
</TABLE>
All Premiums illustrated are assumed to be paid at the beginning of the policy
year.
This illustration assumes that no policy loans or withdrawals have been made.
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT
ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE EXPERIENCE OF THE
ACCOUNTS. NO REPRESENTATION CAN BE MADE BY SECURITY BENEFIT LIFE, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 HARRISON, TOPEKA, KS 66636
SECURITY ELITE BENEFIT
A Flexible Premium Variable Life Insurance Policy
Illustration for: Male, Age 40, Preferred
Initial Specified Amount: $750,000, Option A
Initial Annual Premium: $10,000
BASED ON GUARANTEED COST OF INSURANCE RATES AND GUARANTEED MORTALITY
AND EXPENSE RISK AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12% HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
------------------------ ------------------------ ------------------------
TOTAL
PREMIUMS
END OF PAID PLUS NET CASH NET CASH NET CASH
POLICY ANNUAL INTEREST SURRENDER DEATH SURRENDER DEATH SURRENDER DEATH
YEAR AGE PREMIUMS AT 5% VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
---- --- -------- ----- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $10,000 $10,500 $7,804 $750,000 $8,321 $750,000 $8,840 $750,000
2 42 $10,000 $21,525 $15,329 $750,000 $16,840 $750,000 $18,413 $750,000
3 43 $10,000 $33,101 $22,576 $750,000 $25,558 $750,000 $28,789 $750,000
4 44 $10,000 $45,256 $29,538 $750,000 $34,474 $750,000 $40,036 $750,000
5 45 $10,000 $58,019 $36,210 $750,000 $43,586 $750,000 $52,232 $750,000
6 46 $10,000 $71,420 $42,580 $750,000 $52,883 $750,000 $65,454 $750,000
7 47 $10,000 $85,491 $48,641 $750,000 $62,365 $750,000 $79,799 $750,000
8 48 $10,000 $100,266 $54,390 $750,000 $72,030 $750,000 $95,373 $750,000
9 49 $10,000 $115,779 $59,815 $750,000 $81,872 $750,000 $112,290 $750,000
10 50 $10,000 $132,068 $64,905 $750,000 $91,885 $750,000 $130,676 $750,000
11 51 $10,000 $149,171 $69,634 $750,000 $102,050 $750,000 $150,664 $750,000
12 52 $10,000 $167,130 $73,974 $750,000 $112,342 $750,000 $172,395 $750,000
13 53 $10,000 $185,986 $77,888 $750,000 $122,734 $750,000 $196,029 $750,000
14 54 $10,000 $205,786 $81,336 $750,000 $133,190 $750,000 $221,744 $750,000
15 55 $10,000 $226,575 $84,281 $750,000 $143,684 $750,000 $249,750 $750,000
16 56 $10,000 $248,404 $86,683 $750,000 $154,183 $750,000 $280,286 $750,000
17 57 $10,000 $271,324 $88,507 $750,000 $164,661 $750,000 $313,634 $750,000
18 58 $10,000 $295,390 $89,731 $750,000 $175,107 $750,000 $350,130 $750,000
19 59 $10,000 $320,660 $90,300 $750,000 $185,481 $750,000 $390,140 $750,000
20 60 $10,000 $347,193 $90,144 $750,000 $195,732 $750,000 $434,086 $750,000
20 60 $10,000 $347,193 $90,144 $75,000 $195,732 $750,000 $434,086 $750,000
25 65 $10,000 $501,135 $75,073 $75,000 $242,750 $750,000 $730,712 $891,469
30 70 $10,000 $697,609 $23,051 $75,000 $274,104 $750,000 $1,191,698 $1,382,370
</TABLE>
All Premiums illustrated are assumed to be paid at the beginning of the policy
year.
This illustration assumes that no policy loans or withdrawals have been made.
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT
ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE EXPERIENCE OF THE
ACCOUNTS. NO REPRESENTATION CAN BE MADE BY SECURITY BENEFIT LIFE, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 HARRISON, TOPEKA, KS 66636
SECURITY ELITE BENEFIT
A Flexible Premium Variable Life Insurance Policy
Illustration for: Male, Age 40, Preferred
Initial Specified Amount: $750,000, Option B
Initial Annual Premium: $25,000
BASED ON CURRENT COST OF INSURANCE RATES AND CURRENT MORTALITY
AND EXPENSE RISK AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12% HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
------------------------ ------------------------ ------------------------
TOTAL
PREMIUMS
END OF PAID PLUS NET CASH NET CASH NET CASH
POLICY ANNUAL INTEREST SURRENDER DEATH SURRENDER DEATH SURRENDER DEATH
YEAR AGE PREMIUMS AT 5% VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
---- --- -------- ----- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $25,000 $26,250 $23,322 $773,322 $24,736 $774,736 $26,150 $776,150
2 42 $25,000 $53,813 $44,992 $794,992 $49,206 $799,206 $53,587 $803,587
3 43 $25,000 $82,753 $66,200 $816,200 $74,589 $824,589 $83,658 $833,658
4 44 $25,000 $113,141 $86,954 $836,954 $100,921 $850,921 $116,619 $866,619
5 45 $25,000 $145,048 $107,264 $857,264 $128,235 $878,235 $152,745 $902,745
6 46 $25,000 $178,550 $127,140 $877,140 $156,570 $906,570 $192,341 $942,341
7 47 $25,000 $213,728 $146,591 $896,591 $185,962 $935,962 $235,741 $985,741
8 48 $25,000 $250,664 $165,626 $915,626 $216,451 $966,451 $283,309 $1,033,309
9 49 $25,000 $289,447 $184,254 $934,254 $248,079 $998,079 $335,446 $1,085,446
10 50 $25,000 $330,170 $202,484 $952,484 $280,888 $1,030,888 $392,591 $1,142,591
11 51 $25,000 $372,928 $220,324 $970,324 $314,922 $1,064,922 $455,226 $1,205,226
12 52 $25,000 $417,825 $237,782 $987,782 $350,227 $1,100,227 $523,877 $1,273,877
13 53 $25,000 $464,966 $254,868 $1,004,868 $386,849 $1,136,850 $599,122 $1,349,122
14 54 $25,000 $514,464 $271,588 $1,021,588 $424,840 $1,174,840 $681,594 $1,431,594
15 55 $25,000 $566,437 $287,951 $1,037,951 $464,248 $1,214,248 $771,989 $1,521,989
16 56 $25,000 $621,009 $303,963 $1,053,963 $505,128 $1,255,128 $871,066 $1,621,066
17 57 $25,000 $678,310 $319,634 $1,069,634 $547,535 $1,297,535 $979,660 $1,729,660
18 58 $25,000 $738,475 $334,969 $1,084,969 $591,524 $1,341,524 $1,098,685 $1,848,685
19 59 $25,000 $801,649 $349,977 $1,099,977 $637,157 $1,387,157 $1,229,143 $1,979,143
20 60 $25,000 $867,981 $364,663 $1,114,663 $684,492 $1,434,492 $1,372,131 $2,122,131
20 60 $25,000 $867,981 $364,663 $1,114,663 $684,492 $1,434,492 $1,372,131 $2,122,131
25 65 $25,000 $1,257,836 $432,377 $1,182,377 $947,813 $1,697,813 $2,320,146 $3,070,146
30 70 $25,000 $1,750,401 $487,741 $1,237,741 $1,257,935 $2,007,935 $3,812,768 $4,562,768
</TABLE>
All Premiums illustrated are assumed to be paid at the beginning of the policy
year.
This illustration assumes that no policy loans or withdrawals have been made.
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT
ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE EXPERIENCE OF THE
ACCOUNTS. NO REPRESENTATION CAN BE MADE BY SECURITY BENEFIT LIFE, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 HARRISON, TOPEKA, KS 66636
SECURITY ELITE BENEFIT
A Flexible Premium Variable Life Insurance Policy
Illustration for: Male, Age 40, Preferred
Initial Specified Amount: $750,000, Option B
Initial Annual Premium: $25,000
BASED ON GUARANTEED COST OF INSURANCE RATES AND GUARANTEED MORTALITY
AND EXPENSE RISK AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12% HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
------------------------ ------------------------ ------------------------
TOTAL
PREMIUMS
END OF PAID PLUS NET CASH NET CASH NET CASH
POLICY ANNUAL INTEREST SURRENDER DEATH SURRENDER DEATH SURRENDER DEATH
YEAR AGE PREMIUMS AT 5% VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
---- --- -------- ----- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $25,000 $26,250 $22,096 $772,096 $23,470 $773,470 $24,846 $774,846
2 42 $25,000 $53,813 $43,586 $793,586 $47,680 $797,680 $51,938 $801,938
3 43 $25,000 $82,753 $64,476 $814,476 $72,648 $822,648 $81,481 $831,481
4 44 $25,000 $113,141 $84,764 $834,764 $98,388 $848,388 $113,698 $863,698
5 45 $25,000 $145,048 $104,449 $854,449 $124,915 $874,915 $148,829 $898,829
6 46 $25,000 $178,550 $123,521 $873,521 $152,234 $902,234 $187,130 $937,130
7 47 $25,000 $213,728 $141,979 $891,979 $180,359 $930,359 $228,891 $978,891
8 48 $25,000 $250,664 $159,821 $909,821 $209,307 $959,307 $274,428 $1,024,428
9 49 $25,000 $289,447 $177,038 $927,038 $239,084 $989,084 $324,081 $1,074,081
10 50 $25,000 $330,170 $193,621 $943,621 $269,699 $1,019,699 $378,220 $1,128,220
11 51 $25,000 $372,928 $209,547 $959,547 $301,144 $1,051,145 $437,238 $1,187,238
12 52 $25,000 $417,825 $224,785 $974,785 $333,406 $1,083,406 $501,557 $1,251,557
13 53 $25,000 $464,966 $239,299 $989,299 $366,462 $1,116,462 $571,632 $1,321,632
14 54 $25,000 $514,464 $253,046 $1,003,046 $400,281 $1,150,281 $647,953 $1,397,953
15 55 $25,000 $566,437 $265,990 $1,015,990 $434,837 $1,184,837 $731,065 $1,481,065
16 56 $25,000 $621,009 $278,089 $1,028,089 $470,098 $1,220,099 $821,559 $1,571,559
17 57 $25,000 $678,310 $289,309 $1,039,309 $506,038 $1,256,038 $920,090 $1,670,090
18 58 $25,000 $738,475 $299,633 $1,049,633 $542,642 $1,292,642 $1,027,391 $1,777,391
19 59 $25,000 $801,649 $309,006 $1,059,006 $579,861 $1,329,861 $1,144,227 $1,894,227
20 60 $25,000 $867,981 $317,360 $1,067,360 $617,627 $1,367,627 $1,271,421 $2,021,421
20 60 $25,000 $867,981 $317,360 $1,067,360 $617,627 $1,367,627 $1,271,421 $2,021,421
25 65 $25,000 $1,257,836 $340,656 $1,090,656 $811,126 $1,561,127 $2,096,555 $2,846,555
30 70 $25,000 $1,750,401 $322,829 $1,072,829 $999,216 $1,749,216 $3,351,554 $4,101,554
</TABLE>
All Premiums illustrated are assumed to be paid at the beginning of the policy
year.
This illustration assumes that no policy loans or withdrawals have been made.
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT
ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE EXPERIENCE OF THE
ACCOUNTS. NO REPRESENTATION CAN BE MADE BY SECURITY BENEFIT LIFE, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
