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
fourteen 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,
(11) Equity Income Series, (12) High Yield Series, (13) Value Series, and (14)
Small Cap 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 20. 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 16.)
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 October 15, 1997, as supplemented January 15,
1998, which has been filed with the Securities and Exchange Commission (the
"SEC"). The Statement of Additional Information, as it may be supplemented from
time to time, is incorporated by reference into this Prospectus and is available
at no charge, by writing 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 33 of this Prospectus.
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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: OCTOBER 15, 1997, AS SUPPLEMENTED JANUARY 15, 1998
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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
CONDENSED FINANCIAL INFORMATION....................................................... 8
INFORMATION ABOUT SECURITY BENEFIT, THE SEPARATE ACCOUNT, AND THE MUTUAL FUND......... 9
Security Benefit Life Insurance Company............................................ 9
Published Ratings.................................................................. 9
Separate Account................................................................... 9
SBL Fund........................................................................... 10
Series A (Growth Series)........................................................ 10
Series B (Growth-Income Series)................................................. 10
Series C (Money Market Series).................................................. 10
Series D (Worldwide Equity Series).............................................. 10
Series E (High Grade Income Series)............................................. 11
Series J (Emerging Growth Series)............................................... 11
Series K (Global Aggressive Bond Series)........................................ 11
Series M (Specialized Asset Allocation Series).................................. 11
Series N (Managed Asset Allocation Series)...................................... 11
Series O (Equity Income Series)................................................. 11
Series P (High Yield Series).................................................... 11
Series S (Social Awareness Series).............................................. 11
Series V (Value Series)......................................................... 11
Series X (Small Cap Series)..................................................... 11
The Investment Adviser.......................................................... 11
THE CONTRACT.......................................................................... 12
General............................................................................ 12
Application for a Contract......................................................... 12
Purchase Payments.................................................................. 12
Allocation of Purchase Payments.................................................... 13
Dollar Cost Averaging Option....................................................... 13
Asset Reallocation Option.......................................................... 13
Transfers of Contract Value........................................................ 14
Contract Value..................................................................... 14
Determination of Contract Value.................................................... 14
Full and Partial Withdrawals....................................................... 15
Systematic Withdrawals............................................................. 15
Free-Look Right.................................................................... 16
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Death Benefit...................................................................... 16
Distribution Requirements.......................................................... 17
Death of the Annuitant............................................................. 17
CHARGES AND DEDUCTIONS................................................................ 17
Mortality and Expense Risk Charge.................................................. 17
Administrative Charge.............................................................. 17
Premium Tax Charge................................................................. 18
Other Charges...................................................................... 18
Variations in Charges.............................................................. 18
Guarantee of Certain Charges....................................................... 18
Mutual Fund Expenses............................................................... 18
ANNUITY PERIOD........................................................................ 18
General............................................................................ 18
Annuity Options.................................................................... 19
Option 1--Life Income........................................................... 19
Option 2--Life Income with Guaranteed Payment of 5, 10, 15 or 20 Years.......... 19
Option 3--Life with Installment Refund Option................................... 19
Option 4--Joint and Last Survivor............................................... 19
Option 5--Payments for a Specified Period....................................... 19
Option 6--Payments of a Specified Amount........................................ 19
Value of Variable Annuity Payments: Assumed Interest Rate...................... 19
Selection of an Option............................................................. 19
THE FIXED ACCOUNT..................................................................... 20
Interest........................................................................... 20
Death Benefit...................................................................... 21
Contract Charges................................................................... 21
Transfers and Withdrawals from the Fixed Account................................... 21
Payments from the Fixed Account.................................................... 21
MORE ABOUT THE CONTRACT............................................................... 22
Ownership.......................................................................... 22
Joint Owners.................................................................... 22
Designation and Change of Beneficiary.............................................. 22
Participating...................................................................... 22
Payments from the Separate Account................................................. 22
Proof of Age and Survival.......................................................... 22
Misstatements...................................................................... 22
Loans ............................................................................. 22
Restrictions on Withdrawals from Qualified Plans................................... 23
FEDERAL TAX MATTERS................................................................... 24
Introduction....................................................................... 24
Tax Status of Security Benefit and the Separate Account............................ 24
General......................................................................... 24
Charge for Security Benefit Taxes............................................... 24
Diversification Standards....................................................... 24
Income Taxation of Annuities in General--Non-Qualified Plans....................... 25
Surrenders or Withdrawals Prior to the Annuity Start Date....................... 25
Surrenders or Withdrawals on or after Annuity Start Date........................ 25
Penalty Tax on Certain Surrenders and Withdrawals............................... 25
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TABLE OF CONTENTS (CONTINUED)
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Additional Considerations.......................................................... 26
Distribution-at-Death Rules..................................................... 26
Gift of Annuity Contracts....................................................... 26
Contracts Owned by Non-Natural Persons.......................................... 26
Multiple Contract Rule.......................................................... 26
Possible Tax Changes............................................................ 26
Transfers, Assignments or Exchanges of a Contract............................... 27
Qualified Plans.................................................................... 27
Section 401..................................................................... 27
Section 403(b).................................................................. 28
Section 408..................................................................... 28
Section 457..................................................................... 29
Rollovers....................................................................... 29
Tax Penalties................................................................... 30
Withholding..................................................................... 30
OTHER INFORMATION..................................................................... 30
Voting of Mutual Fund Shares....................................................... 30
Substitution of Investments........................................................ 31
Changes to Comply with Law and Amendments.......................................... 31
Reports to Owners.................................................................. 31
Telephone Transfer Privileges...................................................... 32
Legal Proceedings.................................................................. 32
Legal Matters...................................................................... 32
PERFORMANCE INFORMATION............................................................... 32
ADDITIONAL INFORMATION................................................................ 33
Registration Statement............................................................. 33
Financial Statements............................................................... 33
STATEMENT OF ADDITIONAL INFORMATION................................................... 33
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IRA DISCLOSURE STATEMENT
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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 bank 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, fourteen
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, Martin Luther King, Jr. 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 20 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 12.
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 9. The Separate Account is
currently divided into fourteen 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, Equity
Income Series, High Yield Series, Value Series, and Small Cap Series. See "SBL
Fund," page 10. 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 20.
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 12.
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 12 and "The Fixed Account" on page 20.
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 20. See "Full and Partial Withdrawals," page 15
and "Federal Tax Matters," page 24 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 16 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 18.
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 17.
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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 17.
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 18.
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 (785)
431-3112 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 18. 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 17. 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.......... 0.16%
Total Separate Account Annual Expenses 1.40%
ANNUAL MUTUAL FUND EXPENSES
(AS A PERCENTAGE OF EACH SERIES' AVERAGE DAILY NET ASSETS)
MANAGEMENT
FEE TOTAL
(AFTER MUTUAL
FEE OTHER FUND
WAIVER(1) EXPENSES(2) EXPENSES
Growth (Series A).... 0.75% 0.08% 0.83%
Growth-Income
(Series B)......... 0.75% 0.09% 0.84%
Money Market (Series 0.58%
C)................. 0.50% 0.08%
Worldwide Equity 1.30%
(Series D)......... 1.00% 0.30%
High Grade Income
(Series E)......... 0.75% 0.08% 0.83%
Emerging Growth
(Series J)......... 0.75% 0.09% 0.84%
Global Aggressive
Bond (Series K).... 0.00% 0.84% 0.84%
Specialized Asset
Allocation
(Series M)......... 1.00% 0.34% 1.34%
Managed Asset
Allocation
(Series N)......... 1.00% 0.45% 1.45%
Equity Income
(Series O)......... 1.00% 0.15% 1.15%
High Yield (Series P) 0.00% 0.28% 0.28%
Social Awareness
(Series S)......... 0.75% 0.09% 0.84%
Value (Series V)..... 0.00% 0.51% 0.51%
Small Cap (Series X). 0.00% 0.48% 0.48%
1. During the fiscal year ended December 31, 1996, the Investment Adviser waived
the management fees of Series K and Series P, and during the fiscal year
ending December 31, 1997, the Investment Adviser will waive the management
fees of Series K, Series P, Series V, and Series X; absent such waiver, the
management fees of Series K, Series P and Series V would have been .75% and
that of Series X would have been 1.00%. There can be no assurance that the
Investment Manager will continue to waive the Series' management fees after
December 31, 1997.
2. Other Expenses for Series V and Series X are based on estimated amounts for
the current fiscal year.
EXAMPLES
The example presented below shows expenses that a Contractowner would pay at
the end of one, three, five and ten years. The information presented applies if,
at the end of
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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 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 3 5 10
YEAR YEARS YEARS YEARS
Growth Subaccount..........$23 $70 $119 $256
Growth-Income Subaccount... 23 70 120 257
Money Market Subaccount.... 20 62 107 231
Worldwide Equity Subaccount 27 84 143 303
High Grade Income
Subaccount............... 23 70 119 256
Emerging Growth Subaccount. 23 70 120 257
Global Aggressive Bond
Subaccount............... 23 70 120 257
Specialized Asset
Allocation Subaccount.... 28 85 145 307
Managed Asset Allocation
Subaccount............... 29 88 150 318
Equity Income Subaccount... 26 79 136 289
High Yield Subaccount...... 17 53 91 199
Social Awareness Subaccount 23 70 120 257
Value Subaccount........... 19 60 103 223
Small Cap Subaccount....... 19 59 102 220
CONDENSED FINANCIAL INFORMATION
The following condensed financial information presents accumulation unit
values for the year ended December 31, 1996, and the period April 1, 1995 (date
of inception) through December 31, 1995, as well as ending accumulation units
outstanding under each Subaccount, except the High Yield, Value and Small Cap
Subaccounts.
GROWTH SUBACCOUNT 1995(1) 1996
Accumulation unit value:
Beginning of period....... $10.00 $13.20
End of period............. 13.20 15.96
Accumulation units
outstanding at the end of
period..................289,693 1,987,463
GROWTH-INCOME SUBACCOUNT 1995(1) 1996
Accumulation unit value:
Beginning of period....... $10.00 $12.70
End of period............. 12.70 14.80
Accumulation units
outstanding at the end of
period..................248,974 1,388,519
MONEY MARKET SUBACCOUNT
Accumulation unit value:
Beginning of period....... $10.00 $10.35
End of period............. 10.35 10.72
Accumulation units
outstanding at the end of
period..................288,907 1,520,180
WORLDWIDE EQUITY SUBACCOUNT
Accumulation unit value:
Beginning of period....... $10.00 $11.42
End of period............. 11.42 13.21
Accumulation units
outstanding at the end of
period..................126,206 1,183,160
HIGH GRADE INCOME SUBACCOUNT
Accumulation unit value:
Beginning of period....... $10.00 $11.56
End of period............. 11.56 11.31
Accumulation units
outstanding at the end of
period..................240,306 1,631,708
EMERGING GROWTH SUBACCOUNT
Accumulation unit value:
Beginning of period....... $10.00 $11.89
End of period............. 11.89 13.84
Accumulation units
outstanding at the end of
period..................133,581 772,390
GLOBAL AGGRESSIVE BOND SUBACCOUNT
Accumulation unit value:
Beginning of period....... $10.00 $10.67
End of period............. 10.67 11.96
Accumulation units
outstanding at the end of
period.................. 86,477 328,077
SPECIALIZED ASSET ALLOCATION SUBACCOUNT
Accumulation unit value:
Beginning of period....... $10.00 $10.62
End of period............. 10.62 11.96
Accumulation units
outstanding at the end of
period..................471,091 1,361,078
MANAGED ASSET ALLOCATION SUBACCOUNT
Accumulation unit value:
Beginning of period....... $10.00 $10.64
End of period............. 10.64 11.84
Accumulation units
outstanding at the end of
period.................231,852 715,033
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EQUITY INCOME SUBACCOUNT 1995(1) 1996
Accumulation unit value:
Beginning of period....... $10.00 $11.61
End of period............. 11.61 13.73
Accumulation units
outstanding at the end of
period.................267,317 1,764,015
SOCIAL AWARENESS SUBACCOUNT
Accumulation unit value:
Beginning of period....... $10.00 $12.56
End of period............. 12.56 14.69
Accumulation units
outstanding at the end of
period.................. 37,149 220,549
1. Global Aggressive Bond Subaccount, Specialized Asset Allocation Subaccount,
Managed Asset Allocation Subaccount and Equity Income Subaccount for the
period June 1, 1995 (inception) through December 31, 1995.
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 variable life insurance policies, fixed and variable
annuity contracts, as well as financial and retirement services. It is admitted
to do business in the District of Columbia, and in all states except New York.
As of December 31, 1996, Security Benefit had total assets of approximately $5.5
billion. Together with its subsidiaries, Security Benefit has total funds under
management of over $6.6 billion.
In December of 1997, the Board of Directors of Security Benefit approved a
Plan of Conversion ("Plan") under which Security Benefit would convert from a
mutual life insurance company to a stock life insurance company ultimately
controlled by a newly-formed mutual holding company to be named Security Benefit
Mutual Holding Company. Under the Plan, membership interests of current Security
Benefit policyholders would become membership interests in Security Benefit
Mutual Holding Company upon conversion. After the conversion, persons who
acquire policies from Security Benefit would automatically be members in the
mutual holding company. The conversion will not increase premiums or reduce
policy benefits, values, guarantees or other policy obligations to
policyholders. The Plan is subject to approval by the Insurance Commissioner of
the State of Kansas and Security Benefit policyholders, among other approvals
and conditions. If the necessary approvals are obtained and conditions met, the
conversion could occur in the second quarter of 1998.
The Principal Underwriter for the Contracts is Security Distributors, Inc.
("SDI"), 700 SW Harrison Street, Topeka, Kansas 66636-0001. SDI is registered as
a broker/dealer with the SEC and is a wholly-owned subsidiary of Security
Benefit Group, Inc., a financial services holding company wholly owned by
Security Benefit.
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 Security Benefit 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
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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 fourteen 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 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 fourteen 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.
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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.
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.
SERIES P (HIGH YIELD SERIES)
Amounts allocated to the High Yield Subaccount are invested in Series P. The
investment objective of Series P is to seek high current income and as a
secondary objective, capital appreciation by investing in a combination of
domestic and foreign high-yield, lower rated debt securities (commonly known as
"junk bonds").
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 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 V (VALUE SERIES)
Amounts allocated to the Value Subaccount are invested in Series V. The
investment objective of Series V is to seek long-term growth of capital by
investing primarily in a diversified portfolio of common stocks, securities
convertible into common stocks, preferred stocks, and warrants which the
Investment Manager believes are undervalued.
SERIES X (SMALL CAP SERIES)
Amounts allocated to the Small Cap Subaccount are invested in Series X. The
investment objective of Series X is to seek long-term growth of capital by
investing primarily in domestic and foreign equity securities of small
capitalization companies (defined as companies with a market capitalization of
less than $1 billion at the time of purchase).
THE INVESTMENT ADVISER
Security Management Company, LLC (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, O and X. With respect to Series M, the foregoing
responsibilities are divided between the Investment Adviser and a Sub-Adviser.
See the accompanying SBL Fund prospectus for details. The Investment Adviser has
engaged Lexington Management Corporation, Park 80 West, Plaza Two, Saddle Brook,
New Jersey 07663, to provide investment advisory services to Series D and K, and
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Lexington has entered into an agreement with MFR Advisors, Inc., One Liberty
Plaza, 46th Floor, New York, New York 10006, to provide certain investment
advisory services to Series K. The Investment Adviser has engaged T. Rowe Price
Associates, Inc., 100 E. Pratt St., Baltimore, Maryland 21202 to provide
investment advisory services to Series N and O, and has engaged Meridian
Investment Management Corporation, 12835 East Arapahoe Road, Tower II, 7th
Floor, Engelwood, Colorado 80112, to provide investment advisory and analytic
research services to Series M. The Investment Adviser has engaged Strong Capital
Management Corporation, 900 Heritage Reserve, Menomonee, Wisconsin 53051 to
provide investment advisory services to Series X.
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 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 90. 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
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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 fourteen 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 14.
DOLLAR COST AVERAGING OPTION
Security Benefit currently offers an option under which Contractowners may
dollar cost average their allocations in the Subaccounts under the Contract by
authorizing Security Benefit to make periodic allocations of Contract Value from
any one Subaccount to one or more of the other Subaccounts. Dollar cost
averaging is a systematic method of investing in which securities are purchased
at regular intervals in fixed dollar amounts so that the cost of the securities
gets averaged over time and possibly over various market cycles. The option will
result in the allocation of Contract Value to one or more Subaccounts, and these
amounts will be credited at the Accumulation Unit value as of the end of the
Valuation Dates on which the transfers are effected. Since the value of
Accumulation Units will vary, the amounts allocated to a Subaccount will result
in the crediting of a greater number of units when the Accumulation Unit value
is low and a lesser number of units when the Accumulation Unit value is high.
Similarly, the amounts transferred from a Subaccount will result in a debiting
of a greater number of units when the Accumulation Unit value is low and a
lesser number of units when the Accumulation Unit value is high. Dollar cost
averaging does not guarantee profits, nor does it assure that a Contractowner
will not have losses.
A Dollar Cost Averaging Request form is available upon request. On the form,
the Contractowner must designate whether a specific dollar amount, 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 20.
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
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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 certain restrictions described in "Transfers
and Withdrawals from the Fixed Account," page 21.
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 20.
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
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Unit value for the 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 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 20. 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, High
Yield Subaccount, Global Aggressive Bond Subaccount, Growth-Income Subaccount,
Equity Income Subaccount, Managed Asset Allocation Subaccount, Specialized Asset
Allocation Subaccount, Growth Subaccount, Value Subaccount, Worldwide Equity
Subaccount, Social Awareness Subaccount, Emerging Growth Subaccount, and Small
Cap 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 18.
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 24. The tax consequences of a
withdrawal under the Contract should be carefully considered. See "Federal Tax
Matters" on page 24.
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
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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, High
Yield Subaccount, Global Aggressive Bond Subaccount, Growth-Income Subaccount,
Equity Income Subaccount, Managed Asset Allocation Subaccount, Specialized Asset
Allocation Subaccount, Growth Subaccount, Value Subaccount, Worldwide Equity
Subaccount, Social Awareness Subaccount, Emerging Growth Subaccount, and Small
Cap 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 20. The tax
consequences of a systematic withdrawal, including the 10 percent penalty tax
which may be imposed on withdrawals made prior to the Owner attaining age 59
1/2, should be carefully considered. See "Federal Tax Matters" on page 24.
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," page 17. 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
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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 24
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 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.
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PREMIUM TAX CHARGE
Various states and municipalities impose a tax on premiums on annuity
contracts received by insurance companies. Whether or not a premium tax is
imposed will depend upon, among other things, the Owner's state of residence,
the Annuitant's state of residence, and the insurance tax laws and Security
Benefit's status in a particular state. Security Benefit assesses a premium tax
charge to reimburse itself for premium taxes that it incurs in connection with a
Contract. This charge 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 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 95th 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 19. 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 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.
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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 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.
VALUE OF VARIABLE ANNUITY PAYMENTS:
ASSUMED INTEREST RATE
The annuity tables in the Contract which are used to calculate variable annuity
payments for Annuity Options 1 through 4, 7 and 8 are based on an "assumed
interest rate" of 3 1/2 percent. If the actual investment performance of the
Subaccount selected is such that the net investment return is 3 1/2 percent per
annum, payments under one of those options will remain constant. If the net
investment return exceeds 3 1/2 percent, the payments will increase and if the
return is less than 3 1/2 percent, the payments will decline. Use of a higher
assumed interest rate would mean a higher initial payment but a more slowly
rising series of subsequent payments in a rising market (or a more rapidly
falling series of subsequent payments in a declining market). A lower assumption
would have the opposite effect.
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,
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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 95th 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 12.
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 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.
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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 16.
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 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 15 and "Systematic Withdrawals," page 15. 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 22.
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
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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 to
herein as "Non-Natural Persons." See "Federal Tax Matters," page 24.
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 Benefit can postpone the calculation or payment of
such a payment or transfer of amounts from the Subaccounts to the extent
permitted under applicable law, which is currently permissible only for any
period: (a) during which the New York Stock Exchange is closed other than
customary weekend and holiday closings, (b) during which trading on the New York
Stock Exchange is restricted as determined by the SEC, (c) during which an
emergency, as determined by the SEC, exists as a result of which (i) disposal of
securities held by the Separate Account is not reasonably practicable, or (ii)
it is not reasonably practicable to determine the value of the assets of the
Separate Account, or (d) for such other periods as the SEC may by order permit
for the protection of investors.
PROOF OF AGE AND SURVIVAL
Security Benefit may require proof of age or survival of any person on whose
life annuity payments depend.
MISSTATEMENTS
If the age or sex of an Annuitant or age of an Owner has been misstated, the
correct amount paid or payable by Security Benefit under the Contract shall be
such as the Contract Value would have provided for the correct age or sex
(unless unisex rates apply).
LOANS
An Owner of a Contract issued in connection with a retirement plan that is
qualified under Section 403(b) of the Internal Revenue Code may borrow money
from Security Benefit using his or her Contract Value as the only security for
the loan by submitting a proper written request to Security Benefit. A loan may
be taken while the Owner is living and prior to the Annuity Start Date. The
minimum loan that may be taken is $1,000. The maximum loan that can be taken is
generally equal to the lesser of: (1) $50,000 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
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outstanding loan balance on the date the loan is made; or (2) 50 percent of the
Contract Value or $10,000, whichever is greater. The Internal Revenue Code
requires aggregation of all loans made to an individual employee under a single
employer plan. However, since Security Benefit has no information concerning
outstanding loans with other providers, we will only use information available
under annuity contracts issued by us. In addition, reference should be made to
the terms of the particular Qualified Plan for any additional loan
restrictions.
When an eligible Contractowner takes a loan, Contract Value in an amount
equal to the loan amount is transferred from the Subaccounts and/or the Fixed
Account into an account called the "Loan Account." 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, unless Security Benefit determines
that the loan is to be used to acquire a principal residence of the Owner, in
which case the loan must be repaid within 30 years. Loan payments must be made
at least quarterly and may be prepaid at any time. Upon receipt of a loan
payment, Security Benefit will transfer Contract Value from the Loan Account to
the Fixed Account and/or the Subaccounts according to the 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.
If any required loan payment is not made, within 30 days of the due date for
loans with a monthly repayment schedule or within 90 days of the due date for
loans with a quarterly repayment schedule, the TOTAL OUTSTANDING LOAN BALANCE
will be deemed to be in default, and the entire loan balance, with any accrued
interest, will be reported as income to the Internal Revenue Service ("IRS").
Once a loan has gone into default, regularly scheduled payments will not be
accepted, and no new loans will be allowed while a loan is in default. Interest
will continue to accrue on a loan in default and if such interest is not paid by
December 31st of each year, it will be added to the outstanding balance of the
loan and will be reported to the IRS. Contract Value equal to the amount of the
accrued interest will be transferred to the Loan Account. If a loan continues to
be in default, the total outstanding balance will be deducted from Contract
Value upon the Contractowner's attaining age 59 1/2. The Contract will be
automatically terminated if the outstanding loan balance on a loan in default
equals or exceeds the Withdrawal Value. The proceeds from the Contract will be
used to repay the debt. Because of the adverse tax consequences associated with
defaulting on a loan, a Contractowner should carefully consider his or her
ability to repay the loan and should consult with a tax advisor 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.
RESTRICTIONS ON WITHDRAWALS FROM QUALIFIED PLANS
Generally, a Qualified Plan may not provide for the distribution or
withdrawal of amounts accumulated under such Qualified Plan until after a fixed
number of years, the attainment of a stated age or upon the occurrence of a
specific event such as hardship, disability, retirement, death or termination of
employment. Therefore, the Owner of a Contract purchased in connection with a
Qualified Plan may not be entitled to make a full or partial withdrawal, as
described in this Prospectus, unless one of the above-described conditions has
been satisfied. For this reason reference should be made to the terms of the
particular Qualified Plan, the Internal Revenue Code and other applicable law
for any limitation or restriction on distributions and withdrawals, including
the 10 percent penalty tax that may be imposed in the event of a distribution
from a Qualified Plan before the participant reaches age 59 1/2. See the
discussion under "Tax Penalties" on page 30.
Section 403(b) imposes restrictions on certain distributions from
tax-sheltered annuity contracts meeting the requirements of Section 403(b) that
apply to tax years beginning on or after January 1, 1989. Section 403(b)
requires that distributions from Section 403(b) tax-sheltered annuities that are
attributable to employee contributions made after December 31, 1988 under a
salary reduction agreement begin only after the employee reaches age 59 1/2,
separates from service, dies, becomes disabled, or incurs a hardship.
Furthermore, distributions of gains attributable to such contributions accrued
after December 31, 1988 may not be made on account of hardship. Hardship, for
this purpose, is generally defined as an immediate and heavy financial need,
such as paying for medical expenses, the purchase of a residence, or paying
certain tuition expenses, that may ONLY be met by the distribution.
An Owner of a Contract purchased as a tax-sheltered Section 403(b) annuity
contract will not, therefore, be entitled to make a full or partial withdrawal,
as described in this Prospectus, in order to receive proceeds from the Contract
attributable to contributions under a salary reduction agreement or any gains
credited to such Contract after December 31, 1988 unless one of the
above-described
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conditions has been satisfied. In the case of transfers of amounts accumulated
in a different Section 403(b) contract to this Contract under a Section 403(b)
program, the withdrawal constraints described above would not apply to the
amount transferred to the Contract attributable to the Owner's December 31,
1988 account balance under the old contract, provided the amounts transferred
between contracts qualified as a tax-free exchange under the Internal Revenue
Code. An Owner of a Contract may be able to transfer the Contract's Full
Withdrawal Value to certain other investment alternatives meeting the
requirements of Section 403(b) that are available under an employer's Section
403(b) arrangement. 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 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
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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 27 and "Diversification
Standards" above. 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.
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,
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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 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,
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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 Security Benefit's 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 later of the calendar year in which
the employee reaches age 70 1/2 or retires ("required beginning date"). Periodic
distributions must not extend beyond the life of the employee or the lives of
the employee and a designated beneficiary (or over a period extending beyond the
life expectancy of the employee or the joint life expectancy of the employee and
a designated beneficiary).
If an employee dies before reaching his or her required beginning date, the
employee's entire interest in the plan must generally be distributed within five
years of the
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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 (1) the number of anticipated payments
determined under a table set forth in Section 72 of the Code or (2) in the case
of a contract calling for installment payments, the number of monthly annuity
payments under such contract. The portion of each payment in excess of the
exclusion amount is taxable as ordinary income. Once the employee's investment
has been recovered, the full annuity payment will be taxable. If the employee
should die prior to recovering his or her entire investment, the unrecovered
investment will be allowed as a deduction on the employee's final return. If the
employee made no contributions that were taxable when made, the full amount of
each annuity payment is taxable 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 five-year averaging has been repealed for
distributions after 1999.) 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
29.
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 27.
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 29.
3. Section 408
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to establish individual retirement programs through the purchase of
Individual Retirement Annuities ("traditional IRAs"). The Contract may be
purchased as an IRA. The IRAs described in this paragraph are called
"traditional IRAs" to distinguish them from the new "Roth IRA" which became
available in 1998.
IRAs are subject to limitations on the amount that may be contributed, the
persons who may be eligible and on the time when distributions must commence.
Depending upon the circumstances of the individual, contributions to a
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traditional 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. See the IRA Disclosure
Statement that accompanies this Prospectus.
In general, traditional IRAs are subject to minimum distribution requirements
similar to those applicable to retirement plans qualified under Section 401 of
the Code; however, the required beginning date for traditional IRAs is generally
the date that the Contractowner reaches age 70 1/2--the Contractowner's
retirement date, if any, will not affect his or her required beginning date. See
"Section 401" on page 27.
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 a traditional IRA may
be eligible for a tax-free rollover to another traditional IRA. In certain
cases, a distribution from a traditional 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," page 29.
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 if those employees are
participants in an eligible deferred compensation plan. A Section 457 plan may
permit the purchase of Contracts to provide benefits thereunder.
Although a participant under a Section 457 plan may be permitted to direct or
choose methods of investment in the case of a tax-exempt employer sponsor, all
amounts deferred under the plan, and any income thereon, remain solely the
property of the employer and subject to the claims of its general creditors,
until paid to the participant. The assets of a Section 457 plan maintained by a
state or local government employer must be held in trust (or custodial account
or an annuity contract) for the exclusive benefit of plan participants, who will
be responsible for taxes upon distribution. 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 28. Since under a Section 457 plan,
contributions are generally excludable from the taxable income of the employee,
the full amount received will usually be taxable as ordinary income when annuity
payments commence or other 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 or her 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
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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 after the death of the
employee; (ii) attributable to the employee's disability; (iii) which are part
of a series of substantially equal periodic payments made (at least annually)
for the life (or life expectancy) of the employee or the joint lives (or joint
life expectancies) of the employee and a designated beneficiary and which begin
after the employee terminates employment; (iv) made to an employee after
termination of employment after reaching age 55; (v) made to pay for certain
medical expenses; (vi) that are exempt withdrawals of an excess contribution;
(vii) that are rolled over or transferred in accordance with Code requirements;
or (viii) that are transferred pursuant to a decree of divorce or separate
maintenance or written instrument incident to such a decree.
The exception to the 10 percent penalty tax described in item (iv) above is
not applicable to IRAs. However, distributions from an IRA to unemployed
individuals can be made without application of the 10 percent penalty tax to pay
health insurance premiums in certain cases. In addition, the 10 percent penalty
tax is generally not applicable to distributions from a Section 457 plan.
Starting January 1, 1998, there are two additional exceptions to the 10% penalty
tax on withdrawals from IRA's before age 59 1/2: withdrawals made to pay
"qualified" higher education expenses and withdrawals made to pay certain
"eligible first-time home buyer expenses."
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. The penalty tax of 15 percent which was
imposed (in addition to any ordinary income tax) on large plan distributions and
the "excess retirement accumulations" of an individual has been repealed,
effective January 1, 1997.
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 and
Section 457 plans) are generally subject to mandatory 20 percent income tax
withholding. However, no withholding is imposed if the distribution is
transferred directly to another eligible Qualified Plan. Nonperiodic
distributions from an IRA are subject to income tax withholding at a flat 10
percent rate. The recipient of such a distribution may elect not to have
withholding apply.
The above description of the federal income tax consequences of the different
types of Qualified Plans which may be funded by the Contract offered by this
Prospectus is only a brief summary and is not intended as tax advice. The rules
governing the provisions of Qualified Plans are extremely complex and often
difficult to comprehend. Anything less than full compliance with the applicable
rules, all of which are subject to change, may have adverse tax consequences. A
prospective Contractowner considering adoption of a Qualified Plan and purchase
of a Contract in connection therewith should first consult a qualified and
competent tax adviser, with regard to the suitability of the Contract as an
investment vehicle for the Qualified Plan.
OTHER INFORMATION
VOTING OF MUTUAL FUND SHARES
Security Benefit is the legal owner of the shares of the Mutual Fund held by
the Subaccounts of the Separate Account. 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
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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.
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.
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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 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., Associate General Counsel
Security Benefit.
PERFORMANCE INFORMATION
Performance information for the Subaccounts of the Separate Account,
including the yield and effective yield of the Subaccount investing in the 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
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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
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 Life Insurance Company at December
31, 1996 and 1995 and for each of the three years in the period ended December
31, 1996, and the financial statements of the Separate Account for the year
ended December 31, 1996, and the period from April 1, 1995 to December 31, 1995,
are contained in the Statement of Additional Information.
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information
and financial statements relating to Security Benefit. The Table of Contents of
the Statement of Additional Information is set forth below:
TABLE OF CONTENTS
Page
GENERAL INFORMATION AND HISTORY........ 1
DISTRIBUTION OF THE CONTRACT........... 1
LIMITS ON PURCHASE PAYMENTS PAID UNDER
TAX-QUALIFIED RETIREMENT PLANS..... 1
EXPERTS................................ 3
PERFORMANCE INFORMATION................ 3
FINANCIAL STATEMENTS................... 5
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VARIFLEX LS VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
DATE: OCTOBER 15, 1997
AS SUPPLEMENTED JANUARY 15, 1998
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 October 15, 1997, as it may be supplemented from time to time. 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.
<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
EXPERTS................................................................... 3
PERFORMANCE INFORMATION................................................... 3
FINANCIAL STATEMENTS...................................................... 5
i
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GENERAL INFORMATION AND HISTORY
For a description of the Individual Flexible Purchase Payment Deferred
Variable Annuity Contract (the "Contract"), Security Benefit Life Insurance
Company ("Security Benefit"), and the 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
the 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 3% 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 will
depend upon whether the annuities are purchased with employer or employee
contributions. Rollover contributions are not subject to these annual limits.
1
<PAGE>
Section 402(g) generally limits an employee's salary reduction
contributions to a 403(b) annuity to $10,000 a year. The $10,000 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 $10,000 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 or her 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. Spousal IRAs allow an Owner and his or her spouse to contribute up
to $2,000 to their respective IRAs so long as a joint tax return is filed and
joint income is $4,000 or more. The maximum amount the higher compensated spouse
may contribute for the year is the lesser of $2,000 or 100% of that spouse's
compensation. The maximum the lower compensated spouse may contribute is the
lesser of (i) $2,000 or (ii) 100% of that spouse's compensation plus the amount
by which the higher compensated spouse's compensation exceeds the amount the
higher compensated spouse contributes to his or her IRA. The extent to which an
Owner may deduct contributions to an IRA depends on the gross income of the
Owner and his or her spouse for the year and whether either 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) $8,000 or (ii) 33 1/3% of the employee's includable
compensation. The current $8,000 limit will be indexed for inflation (in $500
increments) for tax years beginning after December 31, 1996. If the employee
participates in more than one Section 457 plan, the $8,000 limit applies to
contributions to all such programs. The $8,000 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>
EXPERTS
The consolidated financial statements for Security Benefit Life Insurance
Company at December 31, 1996, and 1995 and for each of the three years in the
period ended December 31, 1996, and for the Separate Account for the year ended
December 31, 1996, and the period from April 1, 1995 to December 31, 1995,
appearing in this Statement of Additional Information have been audited by Ernst
& Young LLP, independent auditors, as set forth in their reports thereon
appearing on page 6 herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
PERFORMANCE INFORMATION
Performance information for the Subaccounts of the Separate Account,
including the yield and total return of all Subaccounts, may appear in
advertisements, reports, and promotional literature provided to current or
prospective Owners.
Quotations of yield for the Money Market Subaccount will be based on the
change in the value, exclusive of capital changes, of a hypothetical investment
in a Contract over a particular seven day period, less a hypothetical charge
reflecting deductions from the Contract during the period (the "base period")
and stated as a percentage of the investment at the start of the base period
(the "base period return"). The base period return is then annualized by
multiplying the 365/7, with the resulting yield figure carried to at least the
nearest one hundredth of one percent. Any quotations of effective yield for the
Money Market Subaccount assume that all dividends received during an annual
period have been reinvested. Calculation of "effective yield" begins with the
same "base period return" used in the yield calculation, which is then
annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1
For the seven-day period ended December 31, 1996, the yield for the Money
Market Subaccount was 5.90% and the effective yield was 6.08%.
Quotations of yield for the Subaccounts, other than the Money Market
Subaccount, will be based on all investment income per Accumulation Unit earned
during a particular 30-day period, less expenses accrued during the period ("net
investment income"), and will be computed by dividing net investment income by
the value of the Accumulation Unit on the last day of the period, according to
the following formula:
YIELD = 2[(A-B + 1)6 - 1]
---
cd
where a = net investment income earned during the period by the 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.
3
<PAGE>
Where the Series in which a Subaccount invests was established prior to
inception of the Subaccount, quotations of average annual and total return will
include quotations for periods beginning prior to the Subaccount's date of
inception. Such quotations will be based upon the performance of the
Subaccount's corresponding Series adjusted to reflect deduction of the mortality
and expense risk charge and the administrative charge.
For the 1-, 5- and 10-year periods ended December 31, 1996, respectively,
the average annual total return was 20.91%, 14.22% and 13.37% for the Growth
Subaccount; 16.54%, 10.12% and 12.18% for the Growth-Income Subaccount; 15.85%,
9.85% and 1.57% for the Worldwide Equity Subaccount; and -2.16%, 4.33% and 5.84%
for the High Grade Income Subaccount. For the 1- and 5-year periods ended
December 31, 1996, and the period between May 1, 1991 (Series date of inception)
and December 31, 1996, respectively, the average annual total return was 17.12%,
12.13% and 11.49% for the Social Awareness Subaccount. For the 1-year period
ended December 31, 1996, and the period between October 1, 1992 (Series date of
inception), and December 31, 1996, respectively, the average annual total return
was 16.40% and 14.65% for the Emerging Growth Subaccount. For the 1-year period
ended December 31, 1996, and the period between June 1, 1995 (Series date of
inception), and December 31, 1996, respectively, the average annual total return
was 12.09% and 11.91% for the Global Aggressive Bond Subaccount; 12.62% and
11.91% for the Specialized Asset Allocation Subaccount; 11.28% and 11.21% for
the Managed Asset Allocation Subaccount and 18.35% and 22.12% for the Equity
Income Subaccount. For the period between August 5, 1996 (Series date of
inception) and December 31, 1996, the average annual total return on an
annualized basis is 15.68% for the High Yield Subaccount. Performance
information is not yet available for the Value and Small Cap Subaccounts as they
did not begin operations until May 1997 and October 1997, respectively. The
performance of the Global Aggressive Bond Subaccount and the High Yield
Subaccount reflects the reimbursement of certain expenses by the Investment
Adviser. In the absence of such reimbursement, the performance figures would be
reduced.
Quotations of total return for any Subaccount of the Separate Account will
be based on a hypothetical investment in an Account over a certain period and
will be computed by subtracting the initial value of the investment from the
ending value and dividing the remainder by the initial value of the investment.
Such quotations of total return will reflect the deduction of all applicable
charges to the contract and the separate account (on an annual basis).
For the fiscal years ended 1996 through 1986, the total return for each
Subaccount was the following:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
----- ----- ----- ----- ----- ----- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Subaccount ......... 20.91% 34.91% (3.02%) 12.12% 9.61% 34.18% (11.80%) 33.05% 8.58% 4.80% 4.85%
Growth-Income Subaccount .. 16.54% 28.26% (4.33%) 8.08% 4.78% 35.89% (5.79%) 26.61% 17.66% 2.21% 17.23%
Money Market Subaccount ... 3.59% 3.90% 2.28% 1.15% 1.80% 4.18% 6.35% 7.53% 5.68% 4.98% 4.89%
Worldwide Equity Subaccount 15.85% 9.34% 1.31% 29.80% (3.98%) 2.96%(1) -- -- -- -- --
High Grade Income Subaccount (2.16%) 16.92% (8.23%) 11.06% 5.95% 15.34% 5.19% 10.32% 5.70% 1.00% 8.15%
Emerging Growth Subaccount 16.40% 17.82% (6.42%) 12.07% 24.34%(2) -- -- -- -- -- --
Global Aggressive
Bond Subaccount ........... 12.09% 6.74%(3) -- -- -- -- -- -- -- -- --
Specialized Asset
Allocation Subaccount ..... 12.62% 6.23%(3) -- -- -- -- -- -- -- -- --
Managed Asset
Allocation Subaccount ..... 11.28% 6.43%(3) -- -- -- -- -- -- -- -- --
Equity Income Subaccount .. 18.35% 16.05%(3) -- -- -- -- -- -- -- -- --
High Yield Subaccount ..... 6.00%(4) -- -- -- -- -- -- -- -- -- --
Social Awareness Subaccount 17.12% 26.02% (5.15%) 10.33% 14.76% 4.56%(5) -- -- -- -- --
</TABLE>
1. On May 1, 1991 the Worldwide Equity Subaccount changed its investment
objective from high current income to long-term capital growth through
investment in common stocks and equivalents of companies domiciled in
foreign countries and the United States. The performance information set
forth above reflects performance after the change in investment objective.
2. From October 1, 1992 to December 31, 1992.
3. From June 1, 1995 to December 31, 1995.
4. From August 5, 1996 to December 31, 1996.
5. From May 1, 1991 to December 31, 1991.
- -------------------------------------------------------------------------------
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
4
<PAGE>
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. 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
Security Benefit Life Insurance Company's consolidated balance sheets as
of December 31, 1996 and 1995 and the related consolidated statements of income,
changes in equity, and cash flows for each of the three years in the period
ended December 31, 1996, and the financial statements of the Separate Account
for the year ended December 31, 1996, and the period April 1, 1995 to December
31, 1995, are set forth herein, starting on page 6.
The consolidated financial statements of Security Benefit Life Insurance
Company, which are included in this Statement of Additional Information, should
be considered only as bearing on the ability of the Company to meet its
obligations under the Contracts. They should not be considered as bearing on the
investment performance of the assets held in the Separate Account.
The following disclosure should be read in conjunction with the financial
statements of Security Benefit Life Insurance Company. On September 4, 1997,
Security Benefit Life Insurance Company entered into a 100% coinsurance
agreement with a third party relating to all of Security Benefit Life Insurance
Company's traditional and interest sensitive life insurance business. This life
insurance business comprised approximately 5% of total assets and total
liabilities of Security Benefit Life Insurance Company as of December 31, 1996.
5
<PAGE>
VARIABLE ANNUITY ACCOUNT VIII
Financial Statements
Year ended December 31, 1996 and
the period from April 1, 1995
(inception) to December 31, 1995
CONTENTS
Report of Independent Auditors......................................... 7
Audited Financial Statements
Balance Sheet..................................................... 8
Statements of Operations and Changes in Net Assets................ 10
Notes to Financial Statements..................................... 12
6
<PAGE>
Report of Independent Auditors
The Contract Owners of Variable Annuity Account VIII and
The Board of Directors of Security Benefit Life Insurance Company
We have audited the accompanying balance sheet of Variable Annuity Account VIII
(the Company) as of December 31, 1996, and the related statements of operations
and changes in net assets for the year ended December 31, 1996 and for the
period from April 1, 1995 (inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments owned as of December 31, 1996, by correspondence
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Variable Annuity Account VIII
at December 31, 1996, and the results of its operations and changes in its net
assets for the year ended December 31, 1996 and for the period from April 1,
1995 (inception) to December 31, 1995, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Kansas City, Missouri
February 7, 1997
7
<PAGE>
VARIABLE ANNUITY ACCOUNT VIII
Balance Sheet
December 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
SBL Fund:
Series A (Growth Series) - 1,304,751 shares at net asset value
of $24.31 per share (cost, $30,692)............................ $ 31,719
Series B (Growth-Income Series) - 580,561 shares at net asset
value of $35.40 per share (cost, $20,771)...................... 20,552
Series C (Money Market Series) - 1,297,710 shares at net asset
value of $12.56 per share (cost, $16,204)...................... 16,299
Series D (Worldwide Equity Series) - 2,545,572 shares at net
asset value of $6.14 per share (cost, $15,488)................. 15,630
Series E (High Grade Income Series) - 1,538,241 shares at net
asset value of $12.00 per share (cost, $18,684)................ 18,459
Series J (Emerging Growth Series) - 585,572 shares at net
asset value of $18.25 per share (cost, $10,498)................ 10,687
Series K (Global Aggressive Bond Series) - 366,144 shares at
net asset value of $10.72 per share (cost, $4,032)............. 3,925
Series M (Specialized Asset Allocation Series) - 1,351,411
shares at net asset value of $12.05 per share (cost, $15,180).. 16,285
Series N (Managed Asset Allocation Series) - 704,076 shares at
net asset value of $12.02 per share (cost, $7,861)............. 8,463
Series O (Equity Income Series) - 1,728,336 shares at net
asset value of $14.01 per share (cost, $21,854)................ 24,214
Series S (Social Awareness Series) - 169,763 shares at net
asset value of $19.08 per share (cost, $3,169)................. 3,239
--------
Total assets......................................................... $169,472
=========
8
<PAGE>
NET ASSETS
Net assets are represented by (NOTE 3):
NUMBER UNIT
OF UNITS VALUE AMOUNT
-------------------------------
Growth Series:
Accumulation units...................... 1,987,463 $15.96 $31,719
Growth-Income Series:
Accumulation units...................... 1,388,519 14.80 20,552
Money Market Series:
Accumulation units...................... 1,520,180 10.72 16,299
Worldwide Equity Series:
Accumulation units...................... 1,183,160 13.21 15,630
High Grade Income Series:
Accumulation units...................... 1,631,708 11.31 18,459
Emerging Growth Series:
Accumulation units...................... 772,390 13.84 10,687
Global Aggressive Bond Series:
Accumulation units...................... 328,077 11.96 3,925
Specialized Asset Allocation Series:
Accumulation units...................... 1,361,078 11.96 16,285
Managed Asset Allocation Series:
Accumulation units...................... 715,033 11.84 8,463
Equity Income Series:
Accumulation units...................... 1,764,015 13.73 24,214
Social Awareness Series:
Accumulation units...................... 220,549 14.69 3,239
----------
Total net assets............................. $169,472
==========
SEE ACCOMPANYING NOTES.
9
<PAGE>
VARIABLE ANNUITY ACCOUNT VIII
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
GROWTH- MONEY WORLDWIDE GRADE EMERGING
GROWTH INCOME MARKET EQUITY INCOME GROWTH
SERIES SERIES SERIES SERIES SERIES SERIES
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend distributions.......................... $167 $299 $619 $328 $651 $13
Expenses (Note 2):
Mortality and expense risk fee............... (202) (144) (198) (100) (110) (76)
Administrative fee........................... (24) (17) (23) (12) (13) (9)
----------------------------------------------------------------
Net investment income (loss).................... (59) 138 398 216 528 (72)
Capital gains distributions..................... 1,038 1,447 - 309 - 297
Realized gain (loss) on investments............. 861 338 62 270 (215) 138
Unrealized appreciation (depreciation) on
investments.................................. 899 (325) 117 105 (298) 182
----------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments.................................. 2,798 1,460 179 684 (513) 617
----------------------------------------------------------------
Net increase in net assets resulting from
operations................................... 2,739 1,598 577 900 15 545
Net assets at beginning of year................. 3,825 3,162 2,991 1,441 2,777 1,589
Variable annuity deposits (Notes 2 and 3)....... 36,931 19,038 52,927 16,001 20,763 13,962
Terminations and withdrawals (Notes 2 and 3).... (11,776) (3,246) (40,196) (2,712) (5,096) (5,409)
----------------------------------------------------------------
Net assets at end of year....................... $31,719 $20,552 $16,299 $15,630 $18,459 $10,687
================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<TABLE>
<CAPTION>
SPECIALIZED MANAGED
GLOBAL ASSET ASSET EQUITY SOCIAL
AGGRESSIVE ALLOCATION ALLOCATION INCOME AWARENESS
OND SERIES SERIES SERIES SERIES SERIES
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dividend distributions.......................... $260 $144 $39 $42 $8
Expenses (Note 2):
Mortality and expense risk fee............... (30) (145) (72) (189) (20)
Administrative fee........................... (4) (18) (8) (22) (3)
----------------------------------------------------------
Net investment income (loss).................... 226 (19) (41) (169) (15)
Capital gains distributions..................... 44 67 8 3 41
Realized gain (loss) on investments............. 156 285 155 622 78
Unrealized appreciation (depreciation) on
investments.................................. (114) 998 536 2,141 53
----------------------------------------------------------
Net realized and unrealized gain (loss) on
investments.................................. 86 1,350 699 2,766 172
----------------------------------------------------------
Net increase in net assets resulting from
operations................................... 312 1,331 658 2,597 157
Net assets at beginning of year................. 923 5,004 2,468 3,102 467
Variable annuity deposits (Notes 2 and 3)....... 4,266 12,169 6,890 21,963 3,033
Terminations and withdrawals (Notes 2 and 3).... (1,576) (2,219) (1,553) (3,448) (418)
----------------------------------------------------------
Net assets at end of year....................... $3,925 $16,285 $8,463 $24,214 $3,239
==========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
10
<PAGE>
VARIABLE ANNUITY ACCOUNT VIII
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
PERIOD FROM APRIL 1, 1995 (INCEPTION) TO DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
GROWTH- MONEY WORLDWIDE GRADE EMERGING
GROWTH INCOME MARKET EQUITY INCOME GROWTH
SERIES SERIES SERIES SERIES SERIES SERIES
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend distributions.......................... $8 $18 $55 - $35 $-
Expenses (Note 2):
Mortality and expense risk fee............... (10) (10) (10) (4) (7) (5)
Administrative fee........................... (1) (1) (1) (1) (1) (1)
-----------------------------------------------------------------
Net investment income (loss).................... (3) 7 44 (5) 27 (6)
Capital gains distributions..................... 34 - - 6 - -
Realized gain (loss) on investments............. 49 55 (33) 15 (4) 35
Unrealized appreciation (depreciation) on
investments.................................. 128 106 (22) 37 73 7
-----------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments.................................. 211 161 (55) 58 69 42
-----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations.............................. 208 168 (11) 53 96 36
Net assets at beginning of period............... - - - - - -
Variable annuity deposits (Notes 2 and 3)....... 3,949 3,079 5,045 1,419 2,894 1,769
Terminations and withdrawals (Notes 2 and 3).... (332) (85) (2,043) (31) (213) (216)
-----------------------------------------------------------------
Net assets at end of period..................... $3,825 $3,162 $2,991 $1,441 $2,777 $1,589
=================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<TABLE>
<CAPTION>
SPECIALIZED MANAGED
GLOBAL ASSET ASSET EQUITY SOCIAL
AGGRESSIVE ALLOCATION ALLOCATION INCOME AWARENESS
OND SERIES SERIES SERIES SERIES SERIES
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dividend distributions.......................... $42 $- $- $- $1
Expenses (Note 2):
Mortality and expense risk fee............... (4) (20) (7) (11) (2)
Administrative fee........................... (1) (2) (1) (1) -
---------------------------------------------------------
Net investment income (loss).................... 37 (22) (8) (12) (1)
Capital gains distributions..................... 4 - - - -
Realized gain (loss) on investments............. 1 92 14 48 16
Unrealized appreciation (depreciation) on
investments.................................. 7 107 66 219 17
---------------------------------------------------------
Net realized and unrealized gain (loss) on
investments.................................. 12 199 80 267 33
---------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations.............................. 49 177 72 255 32
Net assets at beginning of period............... - - - - -
Variable annuity deposits (Notes 2 and 3)....... 887 5,116 2,556 2,966 436
Terminations and withdrawals (Notes 2 and 3).... (13) (289) (160) (119) (1)
---------------------------------------------------------
Net assets at end of period..................... $923 $5,004 $2,468 $3,102 $467
=========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
11
<PAGE>
VARIABLE ANNUITY ACCOUNT VIII
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Variable Annuity Account VIII (the Account) is a separate account of Security
Benefit Life Insurance Company (SBL). The Account is registered as a unit
investment trust under the Investment Company Act of 1940, as amended. Deposits
received by the Account are invested in the SBL Fund, a mutual fund not
otherwise available to the public. As directed by the owners, amounts deposited
may be invested in shares of Series A (Growth Series - emphasis on capital
appreciation), Series B (Growth-Income Series emphasis on capital appreciation
with secondary emphasis on income), Series C (Money Market Series - emphasis on
capital preservation while generating interest income), Series D (Worldwide
Equity Series - emphasis on long-term capital growth through investment in
foreign and domestic common stocks and equivalents), Series E (High Grade Income
Series - emphasis on current income with security of principal), Series J
(Emerging Growth Series - emphasis on capital appreciation), Series K (Global
Aggressive Bond Series - emphasis on high current income with secondary emphasis
on capital appreciation), Series M (Specialized Asset Allocation Series -
emphasis on high total return consisting of capital appreciation and current
income), Series N (Managed Asset Allocation Series - emphasis on high level of
total return), Series O (Equity Income Series - emphasis on substantial dividend
income and capital appreciation) and Series S (Social Awareness Series -
emphasis on high total return).
Under the terms of the investment advisory contracts, portfolio investments of
the underlying mutual fund are made by Security Management Company, LLC (SMC),
which is owned 50% by SBL and 50% by Security Benefit Group, Inc. (SBG), a
wholly-owned subsidiary of SBL. SMC has engaged Lexington Management Corporation
to provide sub-advisory services for the Worldwide Equity Series and Global
Aggressive Bond Series and has engaged T. Rowe Price Associates, Inc. to provide
sub-advisory services for the Managed Asset Allocation Series and the Equity
Income Series. SMC has also entered into agreements with Templeton Quantitative
Advisors, Inc. and Meridian Investment Management Corporation to provide certain
quantitative research services with respect to the Specialized Asset Allocation
Series.
INVESTMENT VALUATION
Investments in mutual fund shares are carried in the balance sheet at market
value (net asset value of the underlying mutual fund). The first-in, first-out
cost method is used to determine gains and losses. Security transactions are
accounted for on the trade date.
12
<PAGE>
VARIABLE ANNUITY ACCOUNT VIII
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost of investments purchased and proceeds from investments sold were as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1995
YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------------------------------------------
COST OF PROCEEDS COST OF PROCEEDS
PURCHASES FROM SALES PURCHASES FROM SALES
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Growth Series.................................. $40,767 $14,633 $4,914 $1,266
Growth-Income Series........................... 22,294 4,917 3,964 963
Money Market Series............................ 57,357 44,228 5,704 2,658
Worldwide Equity Series........................ 17,845 4,031 1,854 465
High Grade Income Series....................... 23,119 6,924 3,733 1,025
Emerging Growth Series......................... 15,884 7,106 2,237 690
Global Aggressive Bond Series.................. 5,138 2,178 936 21
Specialized Asset Allocation Series............ 13,727 3,729 8,733 3,928
Managed Asset Allocation Series................ 7,768 2,464 2,963 575
Equity Income Series........................... 23,567 5,218 3,264 429
Social Awareness Series........................ 3,333 692 549 115
</TABLE>
SBG's investment in the subaccounts represented the following number of units
and contract value of Variable Annuity Account VIII contracts owned at December
31, 1996 (DOLLARS IN THOUSANDS):
NUMBER CONTRACT
OF UNITS VALUE
----------------------------
Global Aggressive Bond Series................ 50,000 $598
Managed Asset Allocation Series.............. 40,000 474
ANNUITY RESERVES
As of December 31, 1996, annuity reserves have not been established because
there are no contracts that have matured and are in the payout stage. Such
reserves would be computed on the basis of published mortality tables using
assumed interest rates that will provide reserves as prescribed by law. In cases
where the payout option selected is life contingent, SBL periodically
recalculates the required annuity reserves, and any resulting adjustment is
either charged or credited to SBL and not to the Account.
13
<PAGE>
VARIABLE ANNUITY ACCOUNT VIII
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REINVESTMENT OF DIVIDENDS
Dividend and capital gains distributions paid by the mutual fund to the Account
are reinvested in additional shares of each respective Series. Dividend income
and capital gains distributions are recorded as income on the ex-dividend date.
FEDERAL INCOME TAXES
Under current law, no federal income taxes are payable with respect to the
Account.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. VARIABLE ANNUITY CONTRACT CHARGES
SBL deducts an administrative fee equivalent to an annual rate of 0.15% of the
average daily net asset value of each account. Mortality and expense risks
assumed by SBL are compensated for by a fee equivalent to an annual rate of
1.25% of the asset value of each contract, of which 0.7% is for assuming
mortality risks and the remainder is for assuming expense risks.
When applicable, an amount for state premium taxes is deducted as provided by
pertinent state law, either from the purchase payments or from the amount
applied to effect an annuity at the time annuity payments commence.
14
<PAGE>
VARIABLE ANNUITY ACCOUNT VIII
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1995
3. SUMMARY OF UNIT TRANSACTIONS
UNITS
------------------------------------
PERIOD FROM
APRIL 1, 1995
YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------
(IN THOUSANDS)
Growth Series:
Variable annuity deposits.................. 2,499 316
Terminations and withdrawals............... 802 26
Growth-Income Series:
Variable annuity deposits.................. 1,372 256
Terminations and withdrawals............... 232 7
Money Market Series:
Variable annuity deposits.................. 5,023 491
Terminations and withdrawals............... 3,792 202
Worldwide Equity Series:
Variable annuity deposits.................. 1,273 129
Terminations and withdrawals............... 216 3
High Grade Income Series:
Variable annuity deposits.................. 1,846 259
Terminations and withdrawals............... 454 19
Emerging Growth Series:
Variable annuity deposits.................. 1,048 151
Terminations and withdrawals............... 410 18
Global Aggressive Bond Series:
Variable annuity deposits.................. 380 88
Terminations and withdrawals............... 138 1
Specialized Asset Allocation Series:
Variable annuity deposits.................. 1,089 782
Terminations and withdrawals............... 199 310
Managed Asset Allocation Series:
Variable annuity deposits.................. 625 247
Terminations and withdrawals............... 142 16
Equity Income Series:
Variable annuity deposits.................. 1,772 278
Terminations and withdrawals............... 275 11
Social Awareness Series:
Variable annuity deposits.................. 215 37
Terminations and withdrawals............... 32 -
15
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
CONTENTS
Report of Independent Auditors........................................... 17
Audited Consolidated Financial Statements
Consolidated Balance Sheets......................................... 18
Consolidated Statements of Income................................... 20
Consolidated Statements of Changes in Equity........................ 21
Consolidated Statements of Cash Flows............................... 22
Notes to Consolidated Financial Statements.......................... 24
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Security Benefit Life Insurance Company
We have audited the accompanying consolidated balance sheets of Security Benefit
Life Insurance Company and Subsidiaries (the Company) as of December 31, 1996
and 1995, and the related consolidated statements of income, changes in equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Security Benefit
Life Insurance Company and Subsidiaries at December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in NOTE 1 to the consolidated financial statements, in 1996, the
Company adopted certain accounting changes to conform with generally accepted
accounting principles for mutual life insurance enterprises and retroactively
restated the 1994 and 1995 financial statements for the change. Also, as
discussed in NOTE 1 to the consolidated financial statements, the Company
changed its method of accounting for debt securities as of January 1, 1994.
Ernst & Young LLP
Kansas City, Missouri
February 7, 1997
17
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1996 1995*
----------------------------
(IN THOUSANDS)
ASSETS
Investments:
Securities available-for-sale, at
fair value (NOTES 2 AND 9):
Fixed maturities.............................. $1,805,066 $1,778,370
Equity securities ............................ 89,188 21,880
Fixed maturities held-to-maturity, at
amortized cost (NOTE 2)......................... 528,045 536,137
Mortgage loans.................................. 66,611 74,342
Real estate..................................... 4,000 5,864
Policy loans.................................... 106,822 100,452
Short-term investments.......................... - 992
Cash and cash equivalents....................... 8,310 16,788
Other invested assets........................... 40,531 37,769
---------------------------
Total investments.................................. 2,648,573 2,572,594
Premiums deferred and uncollected.................. 149 574
Accrued investment income.......................... 32,161 30,623
Accounts receivable................................ 4,256 3,064
Reinsurance recoverable (NOTE 4)................... 92,197 78,877
Notes receivable................................... 110 147
Property and equipment, net........................ 18,592 18,884
Deferred policy acquisition costs (NOTE 1)......... 216,918 186,940
Other assets....................................... 24,680 36,221
Separate account assets (NOTE 10).................. 2,802,927 2,065,306
---------------------------
$5,840,563 $4,993,230
===========================
18
<PAGE>
DECEMBER 31
1996 1995*
-------------------------
(IN THOUSANDS)
LIABILITIES AND EQUITY
Liabilities:
Policy reserves and annuity account values........ $2,497,998 $2,495,113
Policy and contract claims........................ 10,607 10,571
Other policyholder funds.......................... 24,073 21,305
Accounts payable and accrued expenses............. 18,003 13,609
Income taxes payable (NOTE 5):
Current......................................... 6,686 10,371
Deferred........................................ 54,847 53,659
Long-term debt (NOTE 8)........................... 65,000 -
Other liabilities................................. 11,990 11,619
Separate account liabilities...................... 2,793,911 2,051,292
-------------------------
Total liabilities.................................... 5,483,115 4,667,539
Equity:
Retained earnings................................. 357,927 314,084
Unrealized appreciation (depreciation)
of securities available-for-sale, net........... (479) 11,607
---------------------------
Total equity......................................... 357,448 325,691
---------------------------
$5,840,563 $4,993,230
===========================
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Insurance premiums and other considerations........... $28,848 $49,608 $55,148
Net investment income................................. 192,636 179,940 166,857
Asset based fees...................................... 55,977 40,652 33,809
Other product charges................................. 10,470 10,412 7,335
Realized gains (losses) on investments................ (244) 3,876 134
Other revenues........................................ 20,033 22,164 27,241
------------------------------------------------------
Total revenues........................................... 307,720 306,652 290,524
Benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances............... 108,705 113,700 103,087
Benefit claims in excess of account balances........ 7,541 6,808 7,145
Traditional life insurance benefits................... 6,474 7,460 6,203
Supplementary contract payments....................... 11,121 11,508 11,286
Increase in traditional life reserves................. 8,580 13,212 12,977
Dividends to policyholders............................ 2,374 2,499 2,669
Other benefits........................................ 20,790 22,379 29,924
------------------------------------------------------
Total benefits........................................... 165,585 177,566 173,291
Commissions and other operating expenses................. 45,539 46,233 39,998
Amortization of deferred policy acquisition costs........ 25,930 26,628 24,674
Other expenses........................................... 1,667 1,099 785
Interest expense......................................... 4,285 7 630
------------------------------------------------------
Total benefits and expenses.............................. 243,006 251,533 239,378
------------------------------------------------------
Income before income taxes............................... 64,714 55,119 51,146
Income taxes (NOTE 5).................................... 20,871 17,927 17,129
------------------------------------------------------
Net income............................................... $43,843 $37,192 $34,017
======================================================
</TABLE>
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Retained earnings:
Beginning of year, as previously reported............. $207,669 $150,726 $128,785
Cumulative effect of change in accounting principle... 106,415 126,166 114,090
------------------------------------------------------
Beginning of year, as restated........................ 314,084 276,892 242,875
Net income............................................ 43,843 37,192 34,017
------------------------------------------------------
End of year........................................... 357,927 314,084 276,892
Unrealized appreciation (depreciation)
of securities available-for-sale, net:
Beginning of year................................... 11,607 (48,466) (10,034)
Cumulative effect of change in accounting principle
(NOTE 1).......................................... - - 10,733
Change in unrealized appreciation (depreciation) of
securities available-for-sale, net................ (12,086) 60,073 (49,165)
------------------------------------------------------
End of year......................................... (479) 11,607 (48,466)
------------------------------------------------------
Total equity............................................. $357,448 $325,691 $228,426
======================================================
</TABLE>
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $43,843 $37,192 $34,017
Adjustments to reconcile net income to net cash provided
by operating activities:
Annuity and interest sensitive life products:
Interest credited to account balances............. 108,705 113,700 103,087
Charges for mortality and administration.......... (13,115) (16,585) (17,000)
Decrease (increase) in traditional life policy
reserves.......................................... 10,697 2,142 (5,950)
Increase in accrued investment income............... (1,538) (4,573) (567)
Policy acquisition costs deferred................... (36,865) (33,021) (38,737)
Policy acquisition costs amortized.................. 25,930 26,628 24,674
Accrual of discounts on investments................. (3,905) (3,421) (3,588)
Amortization of premiums on investments............. 11,284 9,782 15,726
Provision for depreciation and amortization......... 3,748 3,750 3,201
Other............................................... (3,379) (4,225) 2,511
------------------------------------------------------
Net cash provided by operating activities................ 145,405 131,369 117,374
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities available-for-sale................... 870,240 517,480 318,252
Fixed maturities held-to-maturity..................... 58,874 59,873 147,043
Equity securities available-for-sale.................. 8,857 10,242 3,830
Mortgage loans........................................ 12,545 23,248 21,096
Real estate........................................... 2,935 3,173 2,782
Short-term investments................................ 20,069 229,871 834,082
Other invested assets................................. 6,224 22,839 6,748
------------------------------------------------------
979,744 866,726 1,333,833
Acquisition of investments:
Fixed maturities available-for-sale................... (936,376) (591,121) (552,433)
Fixed maturities held-to-maturity..................... (52,422) (125,276) (56,398)
Equity securities available-for-sale.................. (68,222) (19,500) (4,627)
Mortgage loans........................................ (4,538) (4,179) (34,260)
Real estate........................................... (2,637) (1,511) (554)
Short-term investments................................ (19,070) (180,259) (854,833)
Other invested assets................................. (3,712) (31,861) (18,581)
------------------------------------------------------
(1,086,977) (953,707) (1,521,686)
</TABLE>
22
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Other investing activities:
Purchase of property and equipment.................... $(1,879) $(2,036) $(2,932)
Net increase in policy loans.......................... (6,370) (8,058) (5,569)
Net cash transferred per coinsurance agreement........ - (16,295) -
------------------------------------------------------
Net cash used in investing activities.................... (115,482) (113,370) (196,354)
FINANCING ACTIVITIES
Issuance of long-term debt............................... 65,000 - -
Annuity and interest sensitive life products:
Deposits credited to account balances................. 705,118 509,183 553,542
Withdrawals from account balances..................... (808,519) (526,509) (466,760)
------------------------------------------------------
Net cash provided by (used in) financing activities...... (38,401) (17,326) 86,782
------------------------------------------------------
Increase (decrease) in cash and cash equivalents......... (8,478) 673 7,802
Cash and cash equivalents at beginning of year........... 16,788 16,115 8,313
------------------------------------------------------
Cash and cash equivalents at end of year................. $8,310 $16,788 $16,115
======================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.............................................. $2,966 $120 $157
======================================================
Income taxes.......................................... $16,213 $11,551 $14,634
======================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Conversion of mortgage loans to real estate owned........ $844 $- $2,350
======================================================
</TABLE>
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Security Benefit Life Insurance Company (SBL or the Company) is a
Kansas-domiciled mutual life insurance company whose insurance operations are
licensed to sell insurance products in 50 states. The Company offers a
diversified portfolio of individual and group annuities, ordinary life and
mutual fund products through multiple distribution channels. In recent years,
the Company's new business activities have increasingly been concentrated in the
individual flexible premium variable annuity markets.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on the
basis of generally accepted accounting principles (GAAP). Prior to 1996, the
Company prepared its financial statements in conformity with accounting
practices prescribed or permitted by the Kansas Insurance Department, which
practices were considered GAAP for mutual life insurance companies and their
stock life insurance subsidiaries. Financial Accounting Standards Board (FASB)
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises," as amended, which is
effective for 1996 annual financial statements and thereafter, no longer permits
statutory-basis financial statements to be described as being prepared in
conformity with GAAP. Accordingly, the Company has adopted GAAP, including
Statement of Financial Accounting Standards (SFAS) No. 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," and Statement of Position 95-1,
"Accounting for Certain Insurance Activities of Mutual Life Insurance
Enterprises," which address the accounting for long-duration and short-duration
insurance and reinsurance contracts, including all participating business.
Pursuant to the requirements of FASB Interpretation No. 40 and SFAS No. 120, the
effect of the changes in accounting have been applied retroactively, and the
previously issued 1995 and 1994 financial statements have been restated for the
change. The effect of the changes applicable to years prior to January 1, 1994
has been presented as a restatement of retained earnings as of that date. The
adoption had the effect of increasing net income for 1996, 1995 and 1994 by
approximately $5,897,000, $8,436,000 and $6,663,000, respectively.
The consolidated financial statements include the operations and accounts of
Security Benefit Life Insurance Company and the following wholly-owned
subsidiaries: Security Benefit Group, Inc., First Security Benefit Life
Insurance and Annuity Company of New York, Security Management
24
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company, LLC, Security Distributors, Inc., Security Benefit Academy, Inc., First
Advantage Insurance Agency, Inc. and Creative Impressions, Inc. Significant
intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ACCOUNTING CHANGE
Prior to January 1, 1994, fixed maturities were reported at cost, adjusted for
amortization of premiums and accrual of discounts. Effective January 1, 1994,
the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." SFAS No. 115 requires that fixed maturities are to be
classified as either held-to-maturity, trading or available-for-sale. Equity
securities are to be classified as either available-for-sale or trading. The
adoption had no effect on net income and resulted in an increase in equity at
January 1, 1994 of $10,733,000, net of the related effect of deferred policy
acquisition costs and deferred income taxes.
INVESTMENTS
Fixed maturities have been classified as either held-to-maturity or
available-for-sale. Fixed maturities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accrual of discounts. Such amortization and accrual
on these securities are included in investment income. Fixed maturities not
classified as held-to-maturity are classified as available-for-sale.
Available-for-sale fixed maturities are stated at fair value with the unrealized
appreciation or depreciation, net of adjustment of deferred policy acquisition
costs and deferred income taxes, reported in a separate component of equity and,
accordingly, have no effect on net income. The DPAC offsets to the unrealized
appreciation or depreciation represent valuation adjustments or restatements of
DPAC that would have been required as a charge or credit to operations had such
unrealized amounts been realized. The amortized cost of fixed maturities
classified as available-for-sale is adjusted for amortization of premiums and
accrual of discounts. Premiums and discounts are recognized over the estimated
lives of the assets adjusted for prepayment activity.
Equity securities consisting of common stocks, mutual funds and nonredeemable
preferred stock are carried at fair value and are reported in accordance with
SFAS No. 115. Mortgage loans and short-term investments are reported at cost,
adjusted for amortization of premiums and accrual of
25
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
discounts. Real estate investments are carried at the lower of depreciated cost
or estimated realizable value. Policy loans are reported at unpaid principal.
Investments accounted for by the equity method include investments in, and
advances to, various joint ventures and partnerships. Realized gains and losses
on sales of investments are recognized in revenues on the specific
identification method.
The carrying amounts of all the Company's investments are reviewed on an ongoing
basis. If this review indicates a decline in value that is other than temporary
for any investment, the amortized cost of the investment is reduced to its fair
value. Such reductions in carrying amount are recognized as realized losses in
the determination of net income.
The Company's principal objective in holding derivatives for purposes other than
trading is asset-liability management. The operations of the Company are subject
to risk of interest rate fluctuations to the extent that there is a difference
between the amount of the Company's interest-earning assets and interest-bearing
liabilities that reprice or mature in specified periods. The principal objective
of the Company's asset-liability management activities is to provide maximum
levels of net interest income while maintaining acceptable levels of interest
rate and liquidity risk and facilitating the funding needs of the Company. To
achieve that objective, the Company uses financial futures instruments and
interest rate exchange agreements. Financial futures contracts are commitments
to either purchase or sell a financial instrument at a specific future date for
a specified price and may be settled in cash or through delivery of the
financial instrument. Interest rate exchange agreements generally involve the
exchange of fixed and floating rate interest payments without an exchange of the
underlying principal.
Interest rate exchange agreements are used to convert the interest rate
characteristics (fixed or variable) of certain investments to match those of the
related insurance liabilities that the investments are supporting. The net
interest effect of such swap transactions is reported as an adjustment of
interest income as incurred.
Gains and losses on those instruments are included in the carrying amount of the
underlying hedged investments, or anticipated investment transactions, and are
amortized over the remaining lives of the hedged investments as adjustments to
investment income. Any unamortized gains or losses are recognized when the
underlying investments are sold.
DEFERRED POLICY ACQUISITION COSTS
To the extent recoverable from future policy revenues and gross profits,
commissions and other policy-issue, underwriting and marketing costs incurred to
acquire or renew traditional life insurance, interest sensitive life and
deferred annuity business that vary with and are primarily related to the
production of new and renewal business have been deferred.
26
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Traditional life insurance deferred policy acquisition costs are being amortized
in proportion to premium revenues over the premium-paying period of the related
policies using assumptions consistent with those used in computing policy
benefit reserves.
For interest sensitive life and deferred annuity business, deferred policy
acquisition costs are amortized in proportion to the present value (discounted
at the crediting rate) of expected gross profits from investment, mortality and
expense margins. That amortization is adjusted retrospectively when estimates of
current or future gross profits to be realized from a group of products are
revised.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers certificates
of deposits with original maturities of 90 days or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment, including real estate, furniture and fixtures, and data
processing hardware and related systems, are recorded at cost, less accumulated
depreciation. The provision for depreciation of property and equipment is
computed using the straight-line method over the estimated lives of the related
assets.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for the benefit of
contractholders who bear the investment risk. The separate account assets and
liabilities are carried at fair value. Revenues and expenses related to separate
account assets and liabilities, to the extent of benefits paid or provided to
the separate account contractholders, are excluded from the amounts reported in
the consolidated statements of income. Investment income and gains or losses
arising from separate accounts accrue directly to the contractholders and are,
therefore, not included in investment earnings in the accompanying statements of
income. Revenues to the Company from separate accounts consist principally of
contract maintenance charges, administrative fees, and mortality and expense
risk charges.
POLICY RESERVES AND ANNUITY ACCOUNT VALUES
The liabilities for future policy benefits for traditional life and reinsurance
products are computed using a net level premium method, including assumptions as
to investment yields, mortality, withdrawals, and other assumptions that
approximate expected experience.
27
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Liabilities for future policy benefits for interest sensitive life and deferred
annuity products represent accumulated contract values without reduction for
potential surrender charges and deferred front-end contract charges that are
amortized over the life of the policy. Interest on accumulated contract values
is credited to contracts as earned. Crediting rates ranged from 3.5% to 7.25%
during 1996, 4.0% to 7.75% during 1995, and 4.5% to 7.75% during 1994.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under that method, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and income tax bases of assets and liabilities and are measured using
the enacted tax rates and laws. Deferred income tax expenses or credits
reflected in the Company's statements of income are based on the changes in
deferred tax assets or liabilities from period to period (excluding the SFAS No.
115 adjustment, which is charged or credited directly to equity).
RECOGNITION OF REVENUES
Traditional life insurance products include whole life insurance, term life
insurance and certain annuities. Premiums for these traditional products are
recognized as revenues when due. Revenues from interest sensitive life insurance
products and deferred annuities consist of policy charges for the cost of
insurance, policy administration charges and surrender charges assessed against
contractholder account balances during the period.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash, certificates of deposits and short-term investments: The carrying
amounts reported in the balance sheet for these instruments approximate
their fair values.
Investment securities: Fair values for fixed maturities are based on quoted
market prices, where available. For fixed maturities not actively traded,
fair values are estimated using values obtained from independent pricing
services or estimated by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality and maturity of
the investments. The fair values for equity securities are based on quoted
market prices.
Mortgage loans and policy loans: Fair values for mortgage loans and policy
loans are estimated using discounted cash flow analyses based on interest
rates currently being offered
28
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for similar loans to borrowers with similar credit ratings. Loans with
similar characteristics are aggregated for purposes of the calculations.
Investment-type contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using the assumption
reinsurance method, whereby the amount of statutory profit the assuming
company would realize from the business is calculated. Those amounts are
then discounted at a rate of return commensurate with the rate presently
offered by the Company on similar contracts.
Long-term debt: Fair values for long-term debt are estimated using
discounted cash flow analyses based on current borrowing rates available
for similar types of borrowing arrangements.
2. INVESTMENTS
Information as to the amortized cost, gross unrealized gains and losses, and
fair values of the Company's portfolio of fixed maturities and equity securities
at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.......... $173,884 $414 $1,431 $172,867
Obligations of states and political subdivisions. 23,244 361 705 22,900
Special revenue and assessment................... 330 - - 330
Corporate securities............................. 863,124 13,758 18,651 858,231
Mortgage-backed securities....................... 627,875 9,091 9,308 627,658
Asset-backed securities.......................... 122,523 832 275 123,080
-----------------------------------------------------------------
Total fixed maturities........................... $1,810,980 $24,456 $30,370 $1,805,066
=================================================================
Equity securities................................ $86,991 $2,422 $225 $89,188
=================================================================
</TABLE>
29
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
Obligations of states and political subdivisions. $81,791 $463 $1,036 $81,218
Special revenue and assessment................... 420 - - 420
Corporate securities............................. 128,487 2,003 1,830 128,660
Mortgage-backed securities....................... 264,155 2,121 1,347 264,929
Asset-backed securities.......................... 53,192 382 97 53,477
-----------------------------------------------------------------
Total fixed maturities........................... $528,045 $4,969 $4,310 $528,704
=================================================================
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.......... $5,746 $522 $- $6,268
Obligations of states and political subdivisions. 23,304 510 139 23,675
Special revenue and assessment................... 330 2 - 332
Corporate securities............................. 857,926 29,671 13,146 874,451
Mortgage-backed securities....................... 857,685 17,838 1,879 873,644
-----------------------------------------------------------------
Total fixed securities........................... $1,744,991 $48,543 $15,164 $1,778,370
=================================================================
Equity securities................................ $21,278 $687 $85 $21,880
=================================================================
HELD-TO-MATURITY
Obligations of states and political subdivisions. $67,160 $1,221 $- $68,381
Special revenue and assessment................... 870 - - 870
Corporate securities............................. 163,032 6,426 43 169,415
Mortgage-backed securities....................... 305,075 5,539 4 310,610
-----------------------------------------------------------------
Totals........................................... $536,137 $13,186 $47 $549,276
=================================================================
</TABLE>
The change in the Company's unrealized appreciation (depreciation) on fixed
maturities was $(51,773,000), $220,048,000 and $(219,496,000) during 1996, 1995
and 1994, respectively; the corresponding amounts for equity securities were
$1,595,000, $1,034,000 and $(1,702,000) during 1996, 1995 and 1994,
respectively.
30
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
-------------------------------------------------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
-------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less........................ $17,711 $17,764 $320 $320
Due after one year through five years.......... 197,414 197,267 12,184 12,240
Due after five years through 10 years.......... 469,394 471,099 47,804 48,193
Due after 10 years............................. 376,063 368,198 150,390 149,545
Mortgage-backed securities..................... 627,875 627,658 264,155 264,929
Asset-backed securities........................ 122,523 123,080 53,192 53,477
-------------------------------------------------------------------
$1,810,980 $1,805,066 $528,045 $528,704
===================================================================
</TABLE>
Late in 1995, the FASB issued a special report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." This report provided companies with an opportunity for a one-time
reassessment and reclassification of securities as of a single measurement date
without tainting the held-to-maturity debt securities classification. On
December 8, 1995, the Company reclassified securities with an amortized cost of
$202,417,000 from held-to-maturity to available-for-sale. The transfer resulted
in an increase to unrealized gains on securities of approximately $2,162,000 net
of related adjustments for deferred policy acquisition costs and deferred income
taxes.
The Company did not hold any investments that individually exceeded 10% of
equity at December 31, 1996 except for securities guaranteed by the U.S.
government or an agency of the U.S. government.
31
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
Major categories of net investment income are summarized as follows:
1996 1995 1994
--------------------------------
(IN THOUSANDS)
Interest on fixed maturities............. $174,592 $165,684 $154,739
Dividends on equity securities........... 5,817 1,309 712
Interest on mortgage loans............... 6,680 7,876 7,746
Real estate income....................... 781 1,287 1,326
Interest on policy loans................. 6,372 5,927 5,462
Interest on short-term investments....... 1,487 2,625 2,272
Other.................................... 3,418 1,453 525
--------------------------------
Total investment income.................. 199,147 186,161 172,782
Investment expenses...................... 6,511 6,221 5,925
--------------------------------
Net investment income.................... $192,636 $179,940 $166,857
================================
Proceeds from sales of fixed maturities and equity securities and related
realized gains and losses, including valuation adjustments, are as follows:
1996 1995 1994
-------------------------------------------
(IN THOUSANDS)
Proceeds from sales............... $393,189 $310,590 $128,533
Gross realized gains.............. 9,407 5,901 5,814
Gross realized losses............. 9,723 3,361 4,889
The composition of the Company's portfolio of fixed maturities by quality rating
at December 31, 1996 is as follows:
QUALITY RATING CARRYING AMOUNT %
- ------------------------- ------------------------- --------------------
(IN THOUSANDS)
AAA...................... $1,199,762 51.4%
AA....................... 158,785 6.8
A........................ 361,008 15.5
BBB...................... 416,589 17.9
Noninvestment grade...... 196,967 8.4
---------- ------
$2,333,111 100.0%
========== ======
The Company has a diversified portfolio of commercial and residential mortgage
loans outstanding in 14 states. The loans are somewhat geographically
concentrated in the midwestern
32
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
and southwestern United States with the largest outstanding balances at December
31, 1996 being in the states of Kansas (34%), Iowa (15%) and Texas (14%).
Net realized gains (losses) consist of the following:
1996 1995 1994
--------------------------------------
(IN THOUSANDS)
Fixed maturities...................... $(1,329) $1,805 $397
Equity securities..................... 1,013 735 528
Other................................. 72 1,336 (791)
--------------------------------------
Total realized gains (losses)......... $(244) $3,876 $134
======================================
Deferred losses totaling $2.2 million and $3.9 million at December 31, 1996 and
1995, respectively, resulting from terminated and expired futures contracts are
included in fixed maturities and will be amortized as an adjustment to net
investment income. The notional amount of outstanding agreements to sell
securities was $79 million at December 31, 1995. There were no outstanding
agreements at December 31, 1996.
For interest rate exchange agreements, one agreement was terminated during 1996
resulting in a deferred gain of $1.1 million. The notional amount of the
remaining outstanding agreements was $30 million at December 31, 1996. Also, as
of December 31, 1996, these agreements have maturities ranging from March 1997
to May 2005. Under these agreements, the Company receives variable rates based
on the one- and three-month LIBOR and pays fixed rates ranging from 6.875% to
7.215%.
3. EMPLOYEE BENEFIT PLANS
Substantially all Company employees are covered by a qualified, noncontributory
defined benefit pension plan sponsored by the Company and certain of its
affiliates. Benefits are based on years of service and an employee's highest
average compensation over a period of five consecutive years during the last 10
years of service. The Company's policy has been to contribute funds to the plan
in amounts required to maintain sufficient plan assets to provide for accrued
benefits. In applying this general policy, the Company considers, among other
factors, the recommendations of its independent consulting actuaries, the
requirements of federal pension law and the limitations on deductibility imposed
by federal income tax law. The Company records pension cost in accordance with
the provisions of SFAS No. 87, "Employers' Accounting for Pensions."
33
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
Pension cost for the plan for 1996, 1995 and 1994 is summarized as follows:
1996 1995 1994
----------------------------------
(IN THOUSANDS)
Service cost................................ $670 $528 $679
Interest cost............................... 587 508 535
Actual return on plan assets................ (1,064) (1,568) 310
Net amortization and deferral............... 284 900 (949)
----------------------------------
Net pension cost............................ $477 $368 $575
==================================
The funded status of the plan as of December 31, 1996 and 1995 was as follows:
DECEMBER 31
1996 1995
-------------------------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation......................... $(6,059) $(5,243)
Non-vested benefit obligation..................... (202) (165)
-------------------------
Accumulated benefit obligation.................... (6,261) (5,408)
Excess of projected benefit obligation over
accumulated benefit obligation.................. (2,961) (2,865)
-------------------------
Projected benefit obligation...................... (9,222) (8,273)
Plan assets, at fair market value.................... 10,085 8,342
-------------------------
Plan assets greater than projected
benefit obligation................................ 863 69
Unrecognized net loss................................ 1,007 1,560
Unrecognized prior service cost...................... 700 758
Unrecognized net asset established
at the date of initial application................. (1,841) (2,025)
-------------------------
Net prepaid pension cost............................. $729 $362
=========================
Assumptions were as follows:
1996 1995 1994
-------------------------
Weighted average discount rate................... 7.75% 7.5% 8.5%
Weighted average rate of increase in compensation
for participants age 45 and older.............. 4.5 4.5 4.5
Weighted average expected long-term
return on plan assets.......................... 9.0 9.0 9.0
34
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
Compensation rates that vary by age for participants under age 45 were used in
determining the actuarial present value of the projected benefit obligation in
1996. Plan assets are invested in a diversified portfolio of affiliated mutual
funds that invest in equity and debt securities.
In addition to the Company's defined benefit pension plan, the Company provides
certain medical and life insurance benefits to full-time employees who have
retired after the age of 55 with five years of service. The plan is
contributory, with retiree contributions adjusted annually and contains other
cost-sharing features such as deductibles and coinsurance. Contributions vary
based on the employee's years of service earned after age 40. The Company's
portion of the costs is frozen after 1996 with all future cost increases passed
on to the retirees. Retirees in the plan prior to July 1, 1993 are covered 100%
by the Company.
Retiree medical care and life insurance cost for the total plan for 1996, 1995
and 1994 is summarized as follows:
1996 1995 1994
--------------------------------
(IN THOUSANDS)
Service cost........................ $157 $151 $116
Interest cost....................... 280 305 275
--------------------------------
$437 $456 $391
================================
The funded status of the plan as of December 31, 1996 and 1995 was as follows:
DECEMBER 31
1996 1995
----------------------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees.......................................... $(2,498) $(2,514)
Active participants:
Retirement eligible............................... (568) (632)
Others............................................ (1,023) (1,035)
----------------------
(4,089) (4,181)
Unrecognized net (gain) loss......................... (348) 67
----------------------
Accrued postretirement benefit cost.................. $(4,437) $(4,114)
======================
The annual assumed rate of increase in the per capita cost of covered benefits
is 10% for 1996 and is assumed to decrease gradually to 5% for 2001 and remain
at that level thereafter. The health care cost trend rate has a significant
effect on the amount reported. For example, increasing the assumed health care
cost trend rates by one percentage point each year would increase the
accumulated postretirement benefit obligation as of December 31, 1996 by
$191,000
35
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1996 by $54,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.75%, 7.5% and 8.5% at December 31, 1996, 1995 and 1994,
respectively.
The Company has a profit-sharing and savings plan for which substantially all
employees are eligible after one year of employment with the Company.
Contributions for profit sharing are based on a formula established by the Board
of Directors with pro rata allocation among employees based on salaries. The
savings plan is a tax-deferred, 401(k) retirement plan. Employees may contribute
up to 10% of their eligible compensation. The Company matches 50% of the first
6% of the employee contributions. Employee contributions are fully vested, and
Company contributions are vested over a five-year period. Company contributions
to the profit-sharing and savings plan charged to operations were $1,783,000,
$1,567,000 and $1,075,000 for 1996, 1995 and 1994, respectively.
4. REINSURANCE
The Company assumes and cedes reinsurance with other companies to provide for
greater diversification of business, allow management to control exposure to
potential losses arising from large risks, and provide additional capacity for
growth. The Company's maximum retention on any one life is $500,000. The Company
does not use financial or surplus relief reinsurance. Life insurance in force
ceded at December 31, 1996 and 1995 was $4.0 and $3.9 billion, respectively.
Principal reinsurance transactions are summarized as follows:
1996 1995 1994
-----------------------------------
(IN THOUSANDS)
Reinsurance ceded:
Premiums paid...................... $25,442 $5,305 $3,980
===================================
Commissions received............... $4,669 $230 $1,443
===================================
Claim recoveries................... $5,235 $3,089 $2,485
===================================
In the accompanying financial statements, premiums, benefits, settlement
expenses and deferred policy acquisition costs are reported net of reinsurance
ceded; policy liabilities and accruals are reported gross of reinsurance ceded.
The Company remains liable to policyholders if the reinsurers are unable to meet
their contractual obligations under the applicable reinsurance agreements. To
minimize its exposure to significant losses from reinsurance insolvencies, the
36
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REINSURANCE (CONTINUED)
Company evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic regions,
activities or economic characteristics of reinsurers. At December 31, 1996 and
1995, the Company had established a receivable totaling $92,197,000 and
$78,877,000 for reserve credits, reinsurance claims and other receivables from
its reinsurers. The amount of reinsurance assumed is not significant.
In 1995, the Company transferred, through a 100% coinsurance agreement, $66.9
million in policy reserves and claim liabilities. The agreement related to a
block of whole life and decreasing term life insurance business.
In prior years, the Company was involved in litigation arising out of its
participation from 1986 to 1990 in a reinsurance pool. The litigation related to
the pool manager and a reinsurance intermediary placing major medical business
in the pool without authorization. During 1993, the Company settled the major
medical portion of the pool's activity with no significantly adverse effect on
the Company. The nonmajor medical business placed in the pool has experienced
significant losses. At December 31, 1996, the Company believes adequate
provision has been made for such losses.
5. INCOME TAXES
The Company files a life/nonlife consolidated federal income tax return. The
provision for income taxes includes current federal income tax expense or
benefit and deferred income tax expense or benefit due to temporary differences
between the financial reporting and income tax bases of assets and liabilities.
Such differences relate principally to liabilities for future policy benefits
and accumulated contract values, deferred compensation, deferred policy
acquisition costs, postretirement benefits, deferred selling commissions,
depreciation expense and unrealized appreciation (depreciation) on securities
available-for-sale.
Income tax expense consists of the following for 1996, 1995 and 1994:
1996 1995 1994
----------------------------------------------
(IN THOUSANDS)
Current......................... $12,528 $15,200 $11,361
Deferred........................ 8,343 2,727 5,768
----------------------------------------------
$20,871 $17,927 $17,129
==============================================
The provision for income taxes differs from the amount computed at the statutory
federal income tax rate due primarily to dividends received deductions and tax
credits.
37
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Income taxes paid by the Company were $16,213,000, $11,551,000, and $14,634,000
during 1996, 1995, and 1994, respectively.
Net deferred tax assets or liabilities consist of the following:
1996 1995
-------------------------
(IN THOUSANDS)
Deferred tax assets:
Future policy benefits.......................... $20,487 $17,780
Net unrealized depreciation on
securities available-for-sale................. 1,409 -
Guaranty fund assessments....................... 1,400 1,260
Employee benefits............................... 4,852 3,836
Other........................................... 4,620 3,662
-------------------------
Total deferred tax assets.......................... 32,768 26,538
Deferred tax liabilities:
Deferred policy acquisition costs............... 69,647 50,580
Net unrealized appreciation on
securities available-for-sale................. - 12,539
Deferred gain on investments.................... 10,446 8,681
Depreciation.................................... 2,061 988
Other........................................... 5,461 7,409
-------------------------
Tax deferred tax liabilities....................... 87,615 80,197
-------------------------
Net deferred tax liabilities....................... $54,847 $53,659
=========================
6. CONDENSED FAIR VALUE INFORMATION
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosures of fair value information about financial instruments, whether
recognized or not recognized in a company's balance sheet, for which it is
practicable to estimate that value. The methods and assumptions used by the
Company to estimate the following fair value disclosures for financial
instruments are set forth in NOTE 1.
SFAS No. 107 excludes certain insurance liabilities and other nonfinancial
instruments from its disclosure requirements. However, the liabilities under all
insurance contracts are taken into consideration in the Company's overall
management of interest rate risk that minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due under
insurance contracts. The fair value amounts presented herein do not include an
amount for the value associated with customer or agent relationships, the
expected interest margin (interest earnings in excess of interest credited) to
be earned in the future on investment-type products or other intangible items.
Accordingly, the aggregate fair value amounts presented herein do not
necessarily represent the underlying value of the Company; likewise, care should
be exercised in
38
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONDENSED FAIR VALUE INFORMATION (CONTINUED)
deriving conclusions about the Company's business or financial condition based
on the fair value information presented herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- ---------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------------------------- -------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investments:
Fixed maturities (NOTE 2)................. $2,333,111 $2,333,770 $2,314,507 $2,327,646
Equity securities (NOTE 2)................ 89,188 89,188 21,880 21,880
Mortgage loans............................ 66,611 69,004 74,342 80,175
Policy loans.............................. 106,822 108,685 100,452 104,077
Short-term investments.................... - - 992 992
Cash and cash equivalents................. 8,310 8,310 16,788 16,788
Accrued investment income................. 32,161 32,161 30,623 30,623
Futures contracts......................... - - - (737)
Interest rate exchange agreements ........ - (282) - (2,291)
Liabilities:
Supplementary contracts without life
contingencies........................... 33,225 33,803 34,363 35,387
Individual and group annuities............ 1,942,697 1,767,692 1,922,901 1,774,642
Long-term debt............................ 65,000 67,683 - -
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company leases various equipment under several operating lease agreements.
Total expense for all operating leases amounted to $1,904,000, $1,302,000 and
$1,450,000 for 1996, 1995 and 1994, respectively. The Company has aggregate
future lease commitments at December 31, 1996 of $4,337,000 for noncancelable
operating leases consisting of $992,000 in 1997, $941,000 in 1998, $829,000 in
1999, $818,000 in 2000 and $757,000 in 2001 and thereafter.
In addition, in 2001, under the terms of an operating lease for an airplane, the
Company has the option to renew the lease for another five years, purchase the
airplane for approximately $4.7 million, or return the airplane to the lessor
and pay a termination charge of approximately $3.7 million. If the option to
renew the lease for five years is selected, at the end of the five-year period
(2006), the Company has the option to purchase the airplane for approximately
$3.4 million or return the airplane to the lessor and pay a termination charge
of approximately $2.7 million.
39
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The economy and other factors have caused an increase in the number of insurance
companies that have required regulatory supervision. Guaranty fund assessments
are levied on the Company by life and health guaranty associations in most
states in which it is licensed to cover losses of policyholders of insolvent or
rehabilitated insurers. In some states, these assessments can be partially
recovered through a reduction in future premium taxes. The Company cannot
predict whether and to what extent legislative initiatives may affect the right
to offset. Based on information from the National Organization of Life and
Health Guaranty Association and information from the various state guaranty
associations, the Company believes that it is probable that these insolvencies
will result in future assessments. The Company regularly evaluates its reserve
for these insolvencies and updates its reserve based on the Company's
interpretation of information recently received. The associated costs for a
particular insurance company can vary significantly based on its premium volume
by line of business in a particular state and its potential for premium tax
offset. The Company accrued and charged to expense $1,574,000, $2,302,000 and
$237,000 for 1996, 1995 and 1994, respectively. At December 31, 1996, the
Company has reserved $4,000,000 to cover current and estimated future
assessments net of related premium tax credits.
8. LONG-TERM DEBT
The Company has a $75.5 million line of credit facility from the Federal Home
Loan Bank of Topeka. Any borrowings in connection with this facility bear
interest at .1% over the Federal Funds rate. No amounts were outstanding at
December 31, 1996.
In February 1996, the Company negotiated three separate $5,000,000 advances with
the Federal Home Loan Bank of Topeka. The advances are due February 27, 1998,
February 26, 1999 and February 28, 2001 and carry interest rates of 5.59%, 5.76%
and 6.04%, respectively.
In May 1996, the Company issued $50 million of 8.75% surplus notes maturing on
May 15, 2016. The surplus notes were issued pursuant to Rule 144A under the
Securities Act of 1933. The surplus notes have repayment conditions and
restrictions whereby each payment of interest on or principal of the surplus
notes may be made only with the prior approval of the Kansas Insurance
Commissioner and only out of surplus funds that the Kansas Insurance
Commissioner determines to be available for such payment under the Kansas
Insurance Code.
9. RELATED-PARTY TRANSACTIONS
The Company owns shares of mutual funds managed by Security Management Company,
LLC with a net asset value totaling $60,559,000 and $5,364,000 at December 31,
1996 and 1995, respectively.
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SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ASSETS HELD IN SEPARATE ACCOUNTS
Separate account assets were as follows:
1996 1995
--------------------------
(IN THOUSANDS)
Premium and annuity considerations for the
variable annuity products and variable
universal life product for which the
contractholder, rather than the Company,
bears the investment risk...................... $2,793,911 $2,051,292
Assets of the separate accounts owned by
the Company, at fair value..................... 9,016 14,014
--------------------------
$2,802,927 $2,065,306
==========================
11. STATUTORY INFORMATION
The Company and its insurance subsidiary prepare statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the Kansas and New York Insurance regulatory authorities, respectively.
Accounting practices used to prepare\statutory-basis financial statements for
regulatory filings of life insurance companies differ in certain instances from
GAAP. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed; such practices may differ from state to state, may differ from
company to company within a state and may change in the future. Statutory
capital and surplus of the insurance operations are $286,689,000 and
$207,669,000 at December 31, 1996 and 1995, respectively.
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