<PAGE> 1
As filed with the Securities and Exchange Commission on April 28, 1997
Registration Nos. 33-89028
811-8964
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
----
Post-Effective Amendment No. 4 [x]
----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 5 [x]
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IL ANNUITY AND INSURANCE CO.
----------------------------
SEPARATE ACCOUNT 1
------------------
(Exact Name of Registrant)
IL ANNUITY AND INSURANCE COMPANY
--------------------------------
(Name of Depositor)
2960 North Meridian Street, Indianapolis, Indiana 46208
-------------------------------------------------------
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code:
(317) 927-6500
<TABLE>
<S> <C>
Name and Address of Agent for Service: Copy to:
Margaret M. McKinney, Esq. Stephen E. Roth, Esquire
Vice President, General Counsel and Secretary Sutherland, Asbill & Brennan, L.L.P.
Indianapolis Life Insurance Company 1275 Pennsylvania Avenue, N.W.
2960 North Meridian Street Washington, D.C. 20004-2404
Indianapolis, Indiana 46208
</TABLE>
Approximate date of proposed public offering:
As soon as practicable after effectiveness of the Registration Statement.
DECLARATION PURSUANT TO RULE 24f-2
An indefinite amount of securities has been registered under the Securities Act
of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940 in
connection with the separate account. The Rule 24f-2 Notice for the fiscal
year ending December 31, 1996 was filed with the Commission on February 23,
1997.
-------------------
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b) of Rule
485
[x] on May 1, 1997 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] on _____________ pursuant to paragraph (a) of the Rule 485
<PAGE> 2
CROSS REFERENCE SHEET
Pursuant to Rule 495
Showing location in Part A (Prospectus) and Part B (Statement of
Additional Information) of Registration Statement of information required by
Form N-4.
PART A
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PROSPECTUS CAPTION
<S> <C> <C>
1. Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . Definitions
3. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . Fee Table; Summary
4. Condensed Financial
Information . . . . . . . . . . . . . . . . . . . . . . . . . Appendix I: Condensed Financial Information;
How to Review Investment Performance of the Variable
Accounts
5. General Description of Registrant,
Depositor and Portfolio Companies
(a) Depositor. . . . . . . . . . . . . . . . . . . . . . . About IL Annuity and Insurance Company
(b) Registrant . . . . . . . . . . . . . . . . . . . . . . IL Annuity and Insurance Co. Separate Account 1
(c) Portfolio Company . . . . . . . . . . . . . . . . . . The Portfolios
(d) Fund Prospectus . . . . . . . . . . . . . . . . . . . The Portfolios
(e) Voting Rights . . . . . . . . . . . . . . . . . . . . Voting Rights
(f) Administrators . . . . . . . . . . . . . . . . . . . . N/A
6. Deductions and Expenses
(a) General. . . . . . . . . . . . . . . . . . . . . . . . Fees and Charges; Summary
(b) Sales Load . . . . . . . . . . . . . . . . . . . . . . Fees and Charges; Summary
(c) Special Purchase Plan . . . . . . . . . . . . . . . . Fees and Charges
(d) Commissions . . . . . . . . . . . . . . . . . . . . . Other Information
(e) Expenses - Registrant . . . . . . . . . . . . . . . . Fees and Charges; Summary
(f) Fund Expenses . . . . . . . . . . . . . . . . . . . . Fees and Charges
(g) Organizational Expenses . . . . . . . . . . . . . . . N/A
7. Contracts
(a) Persons with Rights . . . . . . . . . . . . . . . . . Summary; The Portfolios; The Pay-In Period, Payout
Period; Voting Rights; Death Benefit
(b) (i) Allocation of
Premium Payments . . . . . . . . . . . . . . . Summary; Pay-In Period; Other Information
(ii) Transfers . . . . . . . . . . . . . . . . . . . Summary; Transfers
(iii) Exchanges . . . . . . . . . . . . . . . . . . . Transfers
(c) Changes. . . . . . . . . . . . . . . . . . . . . . . . The Portfolios; Other Information
(d) Inquiries. . . . . . . . . . . . . . . . . . . . . . . Cover page; Other Information
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PROSPECTUS CAPTION
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<S> <C> <C>
8. Annuity Period . . . . . . . . . . . . . . . . . . . . . . . . Summary; Payout Period
9. Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . Death Benefits
10. Purchases and Contract Value
(a) Purchases. . . . . . . . . . . . . . . . . . . . . . . Summary; Transfers; Pay-In Period
(b) Valuation. . . . . . . . . . . . . . . . . . . . . . . Definitions; Pay-In Period
(c) Daily Calculation . . . . . . . . . . . . . . . . . . Definitions; Pay-In Period
(d) Underwriter. . . . . . . . . . . . . . . . . . . . . . Other Information
11. Redemptions
(a) - By Owners. . . . . . . . . . . . . . . . . . . . . . Summary; Transfers; Withdrawals; Payout Period; Federal
Tax Matters
- By Annuitant . . . . . . . . . . . . . . . . . . . . Summary; Transfers; Withdrawals; Payout Period; Federal
Tax Matters
(b) Texas ORP. . . . . . . . . . . . . . . . . . . . . . . N/A
(c) Check Delay. . . . . . . . . . . . . . . . . . . . . . Other Information
(d) Lapse . . . . . . . . . . . . . . . . . . . . . . . . Contract Loans
(e) Free Look . . . . . . . . . . . . . . . . . . . . . . Summary; Pay-In Period
12. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary; Federal Tax Matters
13. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings
14. Table of Contents for the
Statement of Additional Information . . . . . . . . . . . . . Statement of Additional Information Table of Contents
</TABLE>
<PAGE> 4
PART B
<TABLE>
<CAPTION>
ITEM OF FORM N-4 STATEMENT OF ADDITIONAL INFORMATION CAPTION
<S> <C> <C>
15. Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
16. Table of Contents. . . . . . . . . . . . . . . . . . . . . . . Table of Contents
17. General Information and
History. . . . . . . . . . . . . . . . . . . . . . . . . . . . About IL Annuity and Insurance Company; IL Annuity and
Insurance Co. Separate Account 1; the Portfolios
(Prospectus)
18. Services
(a) Fees and Expenses of
Registrant . . . . . . . . . . . . . . . . . . . . . . Fees and Charges (Prospectus)
(b) Management Contracts . . . . . . . . . . . . . . . . . Termination of Participation Agreements
(c) Custodian. . . . . . . . . . . . . . . . . . . . . . . Safekeeping of Account Assets
Independent
Auditors . . . . . . . . . . . . . . . . . . . . . . . Experts
(d) Assets of Registrant . . . . . . . . . . . . . . . . . About IL Annuity and Insurance Co. Separate Account 1
(Prospectus)
(e) Affiliated Persons . . . . . . . . . . . . . . . . . . About IL Annuity and Insurance Company (Prospectus)
(f) Principal Underwriter . . . . . . . . . . . . . . . . Distribution of the Contracts
19. Purchase of Securities
Being Offered . . . . . . . . . . . . . . . . . . . . Distribution of the Contracts
Offering Sales Load . . . . . . . . . . . . . . . . . N/A
20. Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . Distribution of the Contracts
21. Calculation of Performance
Data . . . . . . . . . . . . . . . . . . . . . . . . . Calculation of Historical Performance Data; How to Review
Investment Performance of the Variable Accounts
(Prospectus)
22. Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . Variable Annuity Payments; Payout Period (Prospectus)
23. Financial Statements . . . . . . . . . . . . . . . . . . . . . Financial Statements
</TABLE>
<PAGE> 5
PART C -- OTHER INFORMATION
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PART C CAPTION
<S> <C> <C>
24. Financial Statements
and Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Exhibits
(a) Financial Statements . . . . . . . . . . . . . . . . . (a) Financial Statements
(b) Exhibits . . . . . . . . . . . . . . . . . . . . . . . (b) Exhibits
25. Directors and Officers
of the Depositor . . . . . . . . . . . . . . . . . . . . . . . Directors and Officers of IL Annuity and Insurance
Company
26. Persons Controlled By or
Under Common Control with
the Depositor or Registrant . . . . . . . . . . . . . . . . . Persons Controlled By or Under Common Control with the
Depositor or Registrant
27. Number of Contractowners . . . . . . . . . . . . . . . . . . . Number of owners
28. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . Indemnification
29. Principal Underwriters . . . . . . . . . . . . . . . . . . . . Principal Underwriter
30. Location of Accounts
and Records. . . . . . . . . . . . . . . . . . . . . . . . . . Location of Books and Records
31. Management Services . . . . . . . . . . . . . . . . . . . . . Management Services
32. Undertakings . . . . . . . . . . . . . . . . . . . . . . . . . Undertakings and Representations
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . Signatures
</TABLE>
<PAGE> 6
SUPPLEMENT DATED MAY 1, 1997 TO
PROSPECTUS DATED MAY 1, 1997
IL ANNUITY AND INSURANCE CO. SEPARATE ACCOUNT I
VISIONARY VARIABLE ANNUITY
For Residents of the State of Texas
This supplement is intended to be used with the prospectus dated May
1, 1997. This supplement, together with the prospectus and any supplements
previously furnished to you, constitute a current prospectus for the Visionary
Variable Annuity.
The following information supplements footnote 1 of the Expense Table
on page 8 of the Prospectus, as well as the second paragraph of the section on
page 13 of the Prospectus entitled "Withdrawal Charge (Contingent Deferred
Sales Charge)":
For Texas Owners 58 years of age and older on the date the Contract is
issued, the maximum withdrawal charge is 7% of the amount withdrawn
during the first two Contract Years, declining to 6.5% for withdrawals
made during the third Contract Year, and 6% during the fourth Contract
Year. Thereafter, the Withdrawal Charges decreases by 1% for each
subsequent Contract Year until it is zero in year ten.
---------------------------
The following chart replaces the chart on page 34 of the Prospectus in
the section entitled "Charge for Partial or Full Withdrawal":
<TABLE>
<CAPTION>
===============================================================================================================
Age 57 or under Age 58 or older
--------------- ---------------
- ---------------------------------------------------------------------------------------------------------------
Conract Charge as % of Contract Charge as % Contract Charge as %
Year Withdrawal Year of Withdrawal Year of Withdrawal
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1-6 7% 1-2 7% 7 3%
7 6% 3 6.5% 8 2%
8 4% 4 6% 9 1%
9 2% 5 5% 10 0%
10 0% 6 4%
=================================================================================================================
</TABLE>
<PAGE> 7
SUPPLEMENT DATED MAY 1, 1997 TO
PROSPECTUS DATED MAY 1, 1997
IL ANNUITY AND INSURANCE CO. SEPARATE ACCOUNT I
VISIONARY VARIABLE ANNUITY
For Residents of the State of Maryland
This supplement is intended to be used with the prospectus dated May
1, 1997. This supplement, together with the prospectus and any supplements
previously furnished to you, constitute a current prospectus for the Visionary
Variable Annuity.
The following information supplements footnote 1 of the Expense Table
on page 8 of the Prospectus, as well as the second paragraph of the section on
page 13 of the Prospectus entitled "Withdrawal Charge (Contingent Deferred
Sales Charge)":
For Maryland Owners 58 years of age and older on the date the Contract
is issued, the maximum withdrawal charge is 7% of the amount withdrawn
during the first two Contract Years, declining to 6.5% for withdrawals
made during the third Contract Year, and 6% during the fourth Contract
Year. Thereafter, the Withdrawal Charges decreases by 1% for each
subsequent Contract Year until it is zero in year ten.
--------------------------
The following chart replaces the chart on page 34 of the Prospectus in
the section entitled "Charge for Partial or Full Withdrawal":
<TABLE>
<CAPTION>
==================================================================================================================
Age 57 or under Age 58 or older
--------------- ---------------
- ------------------------------------------------------------------------------------------------------------------
Contract Charge as % of Contract Charge as % Contract Charge as %
Year Withdrawal Year of Withdrawal Year of Withdrawal
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1-6 7% 1-2 7% 7 3%
7 6% 3 6.5% 8 2%
8 4% 4 6% 9 1%
9 2% 5 5% 10 0%
10 0% 6 4%
==================================================================================================================
</TABLE>
<PAGE> 8
PROSPECTUS FOR THE VISIONARY
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
Offered by
IL ANNUITY AND INSURANCE COMPANY
2960 North Meridian Street
Indianapolis, Indiana 46208
Telephone: (317) 927-6500
(800)
388-1331
This Prospectus describes the Visionary, a flexible premium deferred
variable annuity contract (the "Contract") being offered by IL Annuity and
Insurance Company (the "Company" or "Il Annuity"). The Contract is designed to
aid individuals in long-term financial planning and provides for the
accumulation of capital on a tax-deferred basis for retirement and other
long-term purposes. The Contract may be sold to or used in connection with
retirement plans, including those that qualify for favorable federal tax
treatment under the Internal Revenue Code.
Net Premium Payments and Contract Values will be allocated, as designated
by the Owner, to one or more of the Variable Accounts of the IL Annuity and
Insurance Co. Separate Account 1 (the "Separate Account") or to the Fixed
Account (which is part of the Company's General Account and pays interest at
declared rates guaranteed to equal or exceed 3%) or to both. The assets of each
Variable Account will be invested solely in an investment portfolio
("Portfolio") of a designated mutual fund ("Fund"). Currently, there are seven
such Funds with 15 Portfolios available under this Contract:
The Alger American Fund:
MidCap Growth Portfolio and Small Capitalization Portfolio
Fidelity Variable Insurance Products ("VIP") Fund:
Equity-Income Portfolio, Growth Portfolio and Money Market Portfolio
Fidelity Variable Insurance Products ("VIP") Fund II:
Asset Manager Portfolio, Contrafund Portfolio, Index 500 Portfolio
and Investment Grade Bond Portfolio
OCC Accumulation Trust:
Managed Portfolio and Small Cap Portfolio
T. Rowe Price Fixed Income Series, Inc.:
Limited-Term Bond Portfolio
T. Rowe Price International Series, Inc.:
International Stock Portfolio
Van Eck Worldwide Insurance Trust:
Worldwide Hard Assets Portfolio (formerly Gold and Natural Resources
Portfolio) and Worldwide Balanced Portfolio
The Contract Value of the Contracts prior to the Annuity Commencement Date,
except for amounts in the Fixed Account, will vary according to the investment
performance of the Portfolios in which the selected Variable Accounts are
invested. The Owner bears the entire investment risk on amounts allocated to the
Variable Accounts.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE FUNDS.
This Prospectus sets forth basic information about the Contract and the
Separate Account that a prospective investor should know before investing.
Additional information about the Contract and the Separate Account is contained
in the Statement of Additional Information, which has been filed with the
Securities and Exchange Commission. The Statement of Additional Information has
the same date as this
<PAGE> 9
Prospectus and is incorporated herein by reference. The table of contents for
the Statement of Additional information is on page of this prospectus. You may
obtain a copy of the Statement of Additional Information free of charge by
writing to or calling the Company at the address or phone number shown above.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Unlike bank and credit union accounts, Contract Value invested in the
Separate Account is not insured. Investment of Contract Value in the Separate
Account involves certain risks including loss of Premium Payments (principal).
Separate Account Value is not deposited in or guaranteed by any bank or credit
union and is not guaranteed by any government agency.
The Date of This Prospectus is May 1, 1997
ii
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS.......................................................................... 3
EXPENSE TABLES....................................................................... 6
SUMMARY.............................................................................. 11
The Contract.................................................................... 11
Charges and Deductions.......................................................... 13
Annuity Provisions.............................................................. 14
Federal Tax Status.............................................................. 14
CONDENSED FINANCIAL INFORMATION...................................................... 14
THE COMPANY AND THE SEPARATE ACCOUNT................................................. 16
IL Annuity and Insurance Company................................................ 16
IL Annuity and Insurance Co. Separate Account 1................................. 17
THE FUNDS............................................................................ 17
The Alger American Fund......................................................... 18
Fidelity Variable Insurance Products Fund and Fidelity Variable
Insurance Products Fund II.................................................... 18
OCC Accumulation Trust.......................................................... 19
T. Rowe Price Fixed Income Series, Inc.......................................... 19
T. Rowe Price International Series, Inc......................................... 19
Van Eck Worldwide Insurance Trust............................................... 20
Availability of the Funds....................................................... 20
Addition, Deletion or Substitution of Investments............................... 21
Resolving Material Conflicts.................................................... 21
DESCRIPTION OF THE CONTRACT.......................................................... 22
Issuance of a Contract.......................................................... 22
Premium Payments................................................................ 22
Free-Look Period................................................................ 22
Allocation of Net Premium Payments.............................................. 23
Separate Account Value.......................................................... 23
Transfer Privileges............................................................. 25
Full and Partial Withdrawals.................................................... 26
Contract Loans.................................................................. 27
Death Benefit Before the Annuity Commencement Date.............................. 28
Death of Payee After the Annuity Commencement Date.............................. 29
The Maturity Benefit............................................................ 29
Annuity Payments on the Annuity Commencement Date............................... 32
Payments........................................................................ 33
Modification.................................................................... 33
Reports to Owners............................................................... 33
Inquiries....................................................................... 33
THE FIXED ACCOUNT.................................................................... 33
Fixed Account Value............................................................. 34
Transfer Privileges............................................................. 34
Payment Deferral................................................................ 35
CHARGES AND DEDUCTIONS............................................................... 35
Withdrawal Charge (Contingent Deferred Sales Charge)............................ 35
Contract Fee.................................................................... 36
Asset-Based Administration Charge............................................... 37
Transfer Fee.................................................................... 37
Mortality and Expense Risk Charge............................................... 37
</TABLE>
1
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses................................................................... 37
Premium Taxes................................................................... 37
Other Taxes..................................................................... 38
PAYOUT PLAN OPTIONS.................................................................. 38
Election of Payout Plan Options................................................. 38
Fixed Annuity Payments.......................................................... 38
Variable Annuity Payments....................................................... 38
Description of Payout Plan Options.............................................. 39
HISTORICAL PERFORMANCE DATA.......................................................... 40
FEDERAL TAX MATTERS.................................................................. 42
Introduction.................................................................... 42
Tax Status of the Contract...................................................... 42
Taxation of Annuities........................................................... 43
Transfers, Assignments or Exchanges of a Contract............................... 45
Withholding..................................................................... 45
Multiple Contracts.............................................................. 45
Taxation of Qualified Plans..................................................... 45
Possible Charge for the Company's Taxes......................................... 46
Other Tax Consequences.......................................................... 46
DISTRIBUTION OF THE CONTRACTS........................................................ 47
LEGAL PROCEEDINGS.................................................................... 47
VOTING RIGHTS........................................................................ 47
COMPANY HOLIDAYS..................................................................... 48
FINANCIAL STATEMENTS................................................................. 48
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS................................ 49
</TABLE>
2
<PAGE> 12
DEFINITIONS
ACCUMULATION UNIT -- A unit of measure used to calculate the value of a Variable
Account prior to the Annuity Commencement Date.
ANNUITANT -- The person or persons whose life (or lives) determine the annuity
payment benefits payable under the Contract and whose death determines the Death
Benefit. The maximum number of joint annuitants is two and provisions referring
to the death of an annuitant mean the death of the last surviving annuitant. The
Annuitant may not be changed.
ANNUITY COMMENCEMENT DATE -- The date when the adjusted Contract Value will be
applied under an annuity payment option, if the Annuitant is still living. The
Owner of a Non-Qualified Contract may specify an Annuity Commencement Date; if
the Owner does not specify, the Annuity Commencement Date is the later of the
Annuitant's age 70 or 10 years after the Date of Issue. For Qualified Contracts,
the Annuity Commencement Date is fixed at age 70 1/2.
ANNUITY SERVICE OFFICE -- The office of Financial Administrative Services, Inc.
which provides service for the Contract. The mailing address for the Annuity
Service Office is P.O. Box 290764, Wethersfield, CT 06129.
ANNUITY UNIT -- An accounting unit of measure used to calculate the amount of
annuity payments under a variable annuity option.
BENEFICIARY -- The person named by the Owner to receive the Death Benefit if the
Annuitant dies before the Annuity Commencement Date.
THE CODE -- The Internal Revenue Code of 1986, as amended.
CONTINGENT OWNER -- The person or persons who will own the Contract following
the Owner's death (or the death of the last surviving Joint Owner).
CONTRACT FEE -- A charge deducted from Contract Value at the end of each
contract quarter or on the date of full withdrawal, if earlier, to cover the
Company's cost of providing certain administrative services related to the
Contracts and the Separate Account. The charge is $7.50 per contract quarter.
Deduction of the Contract Fee is currently waived for all Qualified Contracts.
The Company also currently waives quarterly deduction of the Contract Fee for
Non-Qualified Contracts whose cumulative Premium Payments on the date the
Contract Fee is assessed are equal to or greater than $100,000. The Company
reserves the right to modify this waiver upon 30 days written notice to Contract
Owners.
CONTRACT VALUE -- The total amount invested under the Contract. It is the sum of
the Separate Account Value and the Fixed Account Value.
CONTRACT YEAR -- A twelve-month period beginning on the Date of Issue or on a
contract anniversary.
DATE OF ISSUE -- The date shown on the specifications page of the Contract on
which the first Contract Year begins.
DUE PROOF OF DEATH -- Proof of death that is satisfactory to the Company. Such
proof may consist of the following if acceptable to the Company: (a) a certified
copy of the death record; (b) a certified copy of a court decree reciting a
finding of death; (c) any other proof satisfactory to the Company.
ELIGIBLE PREMIUM PAYMENT -- That part of a Premium Payment that the Owner
initially allocated to a particular Eligible Variable Account at the time of
payment, provided payment was made at least ten (10) years prior to the Maturity
Benefit Date. (See "Maturity Benefit.")
ELIGIBLE VARIABLE ACCOUNT -- Currently all Variable Accounts except the Van Eck
Worldwide Hard Assets Variable Account. (See "Maturity Benefit.")
FIXED ACCOUNT -- Part of the Company's General Account to which Net Premium
Payments and transferred amounts may be allocated. The Fixed Account provides
guarantees of principal and interest. Special limits apply to transfers of
Contract Value to and from the Fixed Account. See page .
3
<PAGE> 13
FIXED ACCOUNT CURRENT RATE -- The applicable interest rate contained in a
schedule of rates established by the Company from time to time. The rate of
interest applicable to the initial Premium Payment is shown on the
specifications page of the Contract.
FIXED ACCOUNT VALUE -- The value of the Contract in the Fixed Account prior to
the Annuity Commencement Date.
FUND -- A designated open-end management investment company (or investment
portfolio thereof) or unit investment trust in which a Variable Account invests.
GENERAL ACCOUNT -- The assets of the Company other than those allocated to the
Separate Account or any other separate account of the Company.
MATURITY BENEFIT -- If the Contract is in the accumulation phase on the Maturity
Benefit Date, the Maturity Benefit for a particular Eligible Variable Account is
equal to: (a) the sum of the Eligible Premium Payments for that particular
Eligible Variable Account; MINUS (b) a percentage of any transfer or withdrawal
from that Eligible Variable Account; and MINUS (c) the value of that Eligible
Variable Account on the Maturity Benefit Date. (See "Maturity Benefit.")
MATURITY BENEFIT DATE -- The later of the Annuitant's age 70 or 10 years after
the Date of Issue. If the Contract is owned by Joint Owners who are spouses at
the time one Joint Owner dies, the Maturity Benefit Date will become the date
the surviving spouse attains age 70. If the Contract is owned by Joint Owners
who are not spouses and one of the Joint Owners dies before the Maturity Benefit
Date, the Maturity Benefit is not available to the sole surviving Owner.
NET PREMIUM PAYMENT -- A Premium Payment minus any applicable premium tax
deducted from Premium Payments.
NON-QUALIFIED CONTRACT -- A Contract that is not a "Qualified Contract."
OWNER -- The person(s) who owns the Contract and who is entitled to exercise all
rights and privileges provided in the Contract. The maximum number of Joint
Owners is two. Joint Owners are not permitted under Qualified Contracts.
PAYEE -- The person or persons entitled to receive annuity payments. The
"Successor Payee" named by the Owner is the person who will receive any
guaranteed annuity payments after the death of the sole surviving Payee.
PAYOUT PLAN -- An arrangement under which annuity payments are made under the
Contract.
QUALIFIED CONTRACT -- A Contract that is issued in connection with retirement
plans that qualify for special federal income tax treatment under Sections
401(a), 403(b), or 408 of the Code.
SEC -- U.S. Securities and Exchange Commission.
SEPARATE ACCOUNT -- IL Annuity and Insurance Co. Separate Account 1 which is not
part of the Company's General Account. The Separate Account is divided into
Variable Accounts, each of which invests in shares of a corresponding Portfolio
of a designated Fund.
SEPARATE ACCOUNT VALUE -- The value of the Contract in the Separate Account
prior to the Annuity Commencement Date.
SURRENDER VALUE -- The Contract Value MINUS (1) any applicable Withdrawal
Charges; MINUS (2) any premium taxes not previously deducted; and MINUS (3) the
Contract Fee. For a 403(b) Qualified Plan, the outstanding loan amount, if any,
is also deducted from Contract Value.
VALUATION DAY -- For each Variable Account, each day on which the New York Stock
Exchange is open for business except for the holidays listed in the prospectus
under "Holidays" and any day that a Variable Account's corresponding fund does
not value its shares.
4
<PAGE> 14
VALUATION PERIOD -- The period commencing at the close of the New York Stock
Exchange ("NYSE") on each Valuation Day and ending at the close of the NYSE for
the next succeeding Valuation Day.
VARIABLE ACCOUNT -- A subdivision of the Separate Account; the assets of each
Variable Account are invested in a corresponding Portfolio of a designated Fund.
WRITTEN REQUEST -- A written notice or request in a form satisfactory to the
Company which is signed by the Owner and received at the Annuity Service Office.
5
<PAGE> 15
EXPENSE TABLES
The following expense information assumes that the entire Contract Value is
in the Separate Account.
OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Charge Imposed on Premium Payments............................................ None
Maximum Withdrawal Charge (contingent
deferred sales charge) as a percentage of
Premium Payments(1)............................................................... 7.0%
Transfer Fee.......................... No fee for first twelve transfers in a Contract Year
The Company reserves the right to charge a $25 fee for each transfer thereafter during a
Contract Year
ANNUALIZED CONTRACT FEE(2).......................................................... $30
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of net assets)
<TABLE>
<S> <C>
Mortality and Expense Risk Charge.................................................. 1.25%
Other Separate Account Expenses(3)................................................. 0.15
----
Total Separate Account Annual Expenses........................................ 1.40%
====
</TABLE>
ANNUAL FUND EXPENSES
(as a percentage of average net assets after expense cap or expense deferral)
ALGER AMERICAN FUND ANNUAL EXPENSES
<TABLE>
<CAPTION>
SMALL
MIDCAP GROWTH CAPITALIZATION
PORTFOLIO PORTFOLIO
------------- --------------
<S> <C> <C>
Management Fees (investment advisory fees)........................ 0.80% 0.85%
Other Expenses After Reimbursement................................ 0.04 0.03
---- ----
Total Annual Portfolio Expenses
(after reimbursements)..................................... 0.84% 0.88%
==== ====
</TABLE>
FIDELITY VIP FUND ANNUAL EXPENSES
<TABLE>
<CAPTION>
EQUITY INCOME GROWTH MONEY MARKET
PORTFOLIO(4) PORTFOLIO(4) PORTFOLIO
------------- ---------- ------------
<S> <C> <C> <C>
Management Fees (investment advisory fees)............... 0.51% 0.61% 0.21%
Other Expenses After Reimbursement....................... 0.07 0.08 0.09
---- ----- ----
Total Annual Portfolio Expenses
(after reimbursements)............................ 0.58% 0.69% 0.30%
==== ==== ====
</TABLE>
6
<PAGE> 16
FIDELITY VIP FUND II ANNUAL EXPENSES
<TABLE>
<CAPTION>
ASSET INVESTMENT
MANAGER CONTRAFUND INDEX 500 GRADE BOND
PORTFOLIO(4) PORTFOLIO(4) PORTFOLIO(5) PORTFOLIO
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Management Fees (investment advisory fees)......... 0.64% 0.61% 0.13% 0.45%
Other Expenses After Reimbursement................. 0.10 0.13 0.15 0.13
---- ---- ---- ----
Total Annual Portfolio Expenses
(after reimbursements)...................... 0.74% 0.74% 0.28% 0.58%
==== ==== ==== ====
</TABLE>
OCC ACCUMULATION TRUST ANNUAL EXPENSES
<TABLE>
<CAPTION>
MANAGED SMALL CAP
PORTFOLIO(6) PORTFOLIO(6)
---------- ---------
<S> <C> <C>
Management Fees (investment advisory fees)............................... 0.80% 0.80%
Other Expenses After Reimbursement....................................... 0.10 0.22
---- ----
Total Annual Portfolio Expenses
(after reimbursements)............................................ 0.90% 1.02%
==== ====
</TABLE>
T. ROWE PRICE FIXED INCOME SERIES, INC. ANNUAL EXPENSES
<TABLE>
<CAPTION>
LIMITED-TERM
BOND
PORTFOLIO(7)
-------------
<S> <C>
Management Fees (investment advisory fees)................................... 0.70%
Other Expenses............................................................... 0.00
----
Total Annual Portfolio Expenses......................................... 0.70%
====
</TABLE>
T. ROWE PRICE INTERNATIONAL SERIES, INC. ANNUAL EXPENSES
<TABLE>
<CAPTION>
INTERNATIONAL
STOCK
PORTFOLIO(7)
--------------
<S> <C>
Management Fees (investment advisory fees).................................. 1.05%
Other Expenses.............................................................. 0.00
----
Total Annual Portfolio Expenses........................................ 1.05%
====
</TABLE>
VAN ECK WORLDWIDE INSURANCE TRUST ANNUAL EXPENSES
<TABLE>
<CAPTION>
WORLDWIDE
HARD WORLDWIDE
ASSETS BALANCED
PORTFOLIO PORTFOLIO(8)
------------- ---------------
<S> <C> <C>
Management Fees (investment advisory fees).................. 1.00% 00.0%
Other Expenses After Reimbursement.......................... 0.08 00.0
---- ----
Total Annual Portfolio Expenses
(after reimbursements)............................... 1.08% 00.0%
==== ====
</TABLE>
Premium taxes may be applicable, depending on the laws of various
jurisdictions.
The purpose of these tables is to assist the Contract Owner in
understanding the costs and expenses that he or she will bear directly or
indirectly. The table reflects the actual charges and expenses for the Separate
7
<PAGE> 17
Account and for each Portfolio for the fiscal year ended December 31, 1995. For
a more complete description of the various charges and expenses described in
these tables, see "Charges and Deductions" and the prospectus for each Portfolio
which accompanies this prospectus.
(1) A Withdrawal Charge is deducted only if a full or partial withdrawal occurs
during the first nine Contract Years; no Withdrawal Charge is deducted from
a full or partial surrender in Contract Years ten and later. Amounts subject
to the Withdrawal Charge will be deemed to be first from Premium Payments,
then from earnings. No Withdrawal Charge applies to Contract Value in excess
of aggregate Premium Payments. For the first six Contract Years, the maximum
charge is 7% of the amount withdrawn. For amounts withdrawn within the
seventh year from the Date of Issue, the charge is 6% of the amount
withdrawn. Thereafter, the Withdrawal Charge decreases by 2% for each
subsequent Contract Year until it is zero in year ten. (See "Charges for
Partial or Full Withdrawals.")
(2) Deduction of the Contract Fee is currently waived for all Qualified
Contracts. The Company also currently waives deduction of the Contract Fee
for Non-Qualified Contracts whose cumulative Premium Payments on the date
the Contract Fee is assessed are equal to or greater than $100,000.
(3) Asset-based administrative charge.
(4) A portion of the brokerage commissions paid by certain Portfolios was used
to reduce Portfolio expenses. In addition, certain Portfolios have entered
into arrangements with their custodian and transfer agent whereby interest
earned on uninvested cash balances was used to reduce custodian and transfer
agent expenses. Including these reductions, the total operating expenses
presented in the table above would have been 0.56% for Equity Income
Portfolio, 0.67% for Growth Portfolio, 0.73% for Asset Manager Portfolio,
and 0.71% for Contrafund Portfolio.
(5) The investment adviser to the Fidelity Index 500 Portfolio agreed to
reimburse a portion of that Portfolio's expenses during 1996. Without this
reimbursement, the Portfolio's Management Fee, Other Expenses and Total
Annual Portfolio Expenses would have been 0.28%, 0.15%, and 0.43%,
respectively.
(6) The Total Annual Portfolio Expenses of the OCC Accumulation Trust Portfolios
as of December 31, 1996 have been restated to reflect new Management Fee and
expense limitation arrangements in effect as of May 1, 1996. Additionally,
Other Expenses are shown gross of certain expense offsets afforded the
Portfolios which effectively lowered overall custody expenses. Effective May
1, 1996, the Total Annual Portfolio Expenses of the Managed and Small Cap
Portfolios are contractually limited by OpCap Advisors so that their
respective annualized operating expenses (net of any expense offsets) do not
exceed 1.25% of their respective average daily net assets. Furthermore,
through December 31, 1997, the annualized operating expenses of the Managed
and Small Cap Portfolios will be voluntarily limited by OpCap Advisors so
that annualized operating expenses (net of any expense offsets) of these
Portfolios do not exceed 1.00% of their respective average daily net assets.
Without such contractual and voluntary expense limitations, and without
giving effect to any expense offsets, the Management Fees, Other Expenses
and Total Annual Portfolio Expenses incurred for the fiscal year ended
December 31, 1996 would have been: 0.80%, 0.10% and 0.90%, respectively, for
the Managed Portfolio; and 0.80%, 0.26% and 1.06%, respectively, for the
Small Cap Portfolio.
(7) The Limited-Term Bond Portfolio pays T. Rowe Price an annual all-inclusive
fee of 0.70% based on its average daily net assets. The International Stock
Portfolio pays Rowe Price-Fleming International, Inc. ("Price-Fleming") an
annual all-inclusive fee of 1.05% based on its average daily net assets.
These fees pay for investment management services and other operating costs
of the Portfolios.
(8) The Worldwide Balanced Portfolio's expenses were voluntarily reduced by the
Portfolio's investment adviser. Absent such reimbursement, Management Fees,
Other Expenses, and Total Annual Portfolio Expenses would have been 1.00%,
1.49%, and 2.49%, respectively.
8
<PAGE> 18
EXAMPLES
(NOTE: The examples shown below are entirely hypothetical. They are not
representations of past or future performance or expenses. Actual performance
and/or expenses may be more or less than shown.)
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets and charges and expenses reflected in the Fee Table
above:
1. If You surrender your Contract (or if you elect to annuitize under
a period certain option for a specified period of less than 10 years) at
the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Alger American Fund
MidCap Growth Portfolio.................. $94.50 $143.44 $198.64 $273.95
Small Capitalization Portfolio........... $94.92 $144.61 $200.74 $278.14
Fidelity VIP Fund
Equity-Income Portfolio.................. $91.77 $135.79 $184.89 $246.26
Growth Portfolio......................... $92.92 $139.03 $190.73 $258.07
Money Market Portfolio................... $88.83 $127.50 $169.91 $215.62
Fidelity VIP Fund II
Asset Manager Portfolio.................. $93.45 $140.50 $193.37 $263.39
Contrafund Portfolio..................... $93.45 $140.50 $193.37 $263.39
Index 500 Portfolio...................... $88.62 $126.90 $168.83 $213.40
Investment Grade Bond Portfolio.......... $91.77 $135.79 $184.89 $246.26
OCC Accumulation Trust
Managed Portfolio........................ $95.13 $145.20 $201.79 $280.23
Small Cap Portfolio...................... $96.39 $148.72 $208.07 $292.69
T. Rowe Price Fixed Income Series, Inc.
Limited-Term Bond Portfolio.............. $93.03 $139.32 $191.26 $259.13
T. Rowe Price International Series, Inc.
International Stock Portfolio............ $96.70 $149.59 $209.64 $295.78
Van Eck Worldwide Insurance Trust
Worldwide Hard Assets Portfolio.......... $97.01 $150.47 $211.20 $298.86
Worldwide Balanced Portfolio............. $85.69 $118.56 $153.65 $181.82
</TABLE>
9
<PAGE> 19
2. If You do not surrender your Contract (or if you elect to annuitize
under a life contingency option or under a period certain option for a
minimum specified period of 10 years) at the end of the applicable time
period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Alger American Fund
MidCap Growth Portfolio................... $24.50 $75.31 $128.64 $273.95
Small Capitalization Portfolio............ $24.92 $76.57 $130.74 $278.14
Fidelity VIP Fund
Equity-Income Portfolio................... $21.77 $67.09 $114.89 $246.26
Growth Portfolio.......................... $22.92 $70.57 $120.73 $258.07
Money Market Portfolio.................... $18.83 $58.18 $ 99.91 $215.62
Fidelity VIP Fund II
Asset Manager Portfolio................... $23.45 $72.15 $123.37 $263.39
Contrafund Portfolio...................... $23.45 $72.15 $123.37 $263.39
Index 500 Portfolio....................... $18.62 $57.55 $ 98.83 $213.40
Investment Grade Bond Portfolio........... $21.77 $67.09 $114.89 $246.26
OCC Accumulation Trust
Managed Portfolio......................... $25.13 $77.20 $131.79 $280.23
Small Cap Portfolio....................... $26.39 $80.97 $138.07 $292.69
T. Rowe Price Fixed Income Series, Inc.
Limited-Term Bond Portfolio............... $23.03 $70.89 $121.26 $259.13
T. Rowe Price International Series, Inc.
International Stock Portfolio............. $26.70 $81.91 $139.64 $295.78
Van Eck Worldwide Insurance Trust
Worldwide Hard Assets Portfolio........... $27.01 $82.85 $141.20 $298.86
Worldwide Balanced Portfolio.............. $15.69 $48.59 $ 83.65 $181.82
</TABLE>
The examples provided above assume that no transfer charges or premium
taxes have been assessed. The examples also reflect that the annualized Contract
Fee of $30 is assessed on an average Contract Value of $30,000, which translates
the Contract Fee into a 0.10% charge for the purposes of the examples based on a
$1,000 investment.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE ASSUMED
5% ANNUAL RATE OF RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THIS ASSUMED RATE.
10
<PAGE> 20
SUMMARY
THE CONTRACT
Issuance of a Contract. The Contract is a flexible premium deferred
variable annuity issued by IL Annuity and Insurance Company. Contracts may be
sold in connection with retirement plans that may or may not qualify for special
federal tax treatment under the Code. The maximum age for Owners on the Date of
Issue is 85. Annuity payments are deferred until the Annuity Commencement Date.
(See "Issuance of a Contract.")
Free-Look Period. The Owner has the right to return the Contract for any
reason within 10 days after he or she receives it (or within 20 days of receipt
if the Contract is replacing another annuity contract or insurance policy). The
contract must be returned to the Annuity Service Office. The Owner's Written
Request for cancellation must accompany the Contract. The returned contract will
be treated as if it were never issued. In certain states the Owner may have more
than 10 days to return the Contract for a refund. The amount that the Company
refunds will vary according to state requirements. Most states allow the Company
to refund an amount equal to the sum of: (i) the difference between the Premium
Payments made and the amounts allocated to the Fixed Account and the Separate
Account; and (ii) the Contract Value as of the date the contract and request for
cancellation is received at the Annuity Service Office. The Contract Owner bears
the investment risk for Premium Payments allocated to the Variable Accounts
during the period prior to the Company's receipt of the Contract and Written
Request for cancellation.
A few states require a return of Premium Payments. In these states, the
refund amount will be the greater of: (i) the amount of Premium Payments made
under the Contract; and (ii) the Contract Value on the date the Contract is
received at the Annuity Service Office, plus any amounts which may have been
deducted for premium taxes. In these states, the Company will allocate Premium
Payments to the Money Market Variable Account for 15 calendar days from the date
the initial Premium Payment is credited to the Contract. (See "Free-Look
Period.")
Premium Payments. The minimum amount which the Company will accept as an
initial Premium Payment is $1,000; the maximum amount of the initial premium is
$250,000. Subsequent Premium Payments of not less than $1,000 may be paid under
the Contract at any time until the earliest of: (a) the Annuity Commencement
Date; (b) full withdrawal of Contract Value; or (c) the date the Owner attains
age 85 (age 70 1/2 if this is a Qualified Contract). Additional premiums in
amounts up to two times the initial premium may be paid annually. The Company
will not accept total premiums in excess of $250,000. The Company reserves the
right to waive these premium limitations. (See "Premium Payments.")
Allocation of Net Premium Payments. Net Premium Payments under a Contract
will be allocated, as designated by the Owner, to any available Variable Account
of the Separate Account and to the Fixed Account or to both, subject to any
minimum allocation amounts established by the Company. In states where the
Company must refund Premium Payments in the event the Owner exercises the
free-look right, any portion of the initial Net Premium Payments to be allocated
to a Variable Account will be allocated to the Money Market Variable Account for
a 15-day period following the date the initial Premium Payment is credited to
the Contract. At the end of that period, the amount in the Money Market Variable
Account will be allocated to the Variable Accounts selected by the Owner. The
assets of each Variable Account will be invested solely in a corresponding
Portfolio of a Fund. The Contract Value, except for amounts in the Fixed
Account, will vary according to the investment performance of the Portfolio(s)
in which the selected Variable Account(s) is invested. Interest will be credited
to amounts in the Fixed Account at a guaranteed minimum rate of 3% per year, or
a higher current interest rate declared by the Company. (See "Allocation of Net
Premium Payments.")
Transfers. Prior to the Annuity Commencement Date, the Owner may transfer
Contract Value from one or more of the Variable Accounts or the Fixed Account to
another one or more of the Variable Accounts, subject to certain restrictions.
If the Owner transfers Contract Value from an Eligible Variable Account, the
transfer will reduce the amount of the Eligible Premium Payments on which the
Maturity Benefit is based. (See "Maturity Benefit.")
11
<PAGE> 21
Transfers to the Fixed Account must be at least $1,000. Prior to the
Annuity Commencement Date, the Owner may transfer up to 20% of the Fixed Account
Value (as determined at the beginning of the Contract Year) from the Fixed
Account to one or more of the Variable Accounts in any Contract Year. No fee is
charged for transfers from the Fixed Account to one or more Variable Accounts
and such transfers are not considered a transfer for purposes of assessing a
transfer charge. (See "Transfer Privileges.")
The Company reserves the right to impose a transfer charge of $25 for the
thirteenth and each subsequent request made by the Owner to transfer Contract
Value from one or more Variable Accounts to another one or more of the Variable
Accounts or the Fixed Account during a single Contract Year prior to the Annuity
Commencement Date. (See "Charges and Deductions.")
Partial Withdrawal. Prior to the Annuity Commencement Date, the Owner may
submit a Written Request to withdraw part of the Contract Value in amounts not
less than $250. If the remaining Contract Value is reduced to less than $1,000
by the partial withdrawal, the Company reserves the right to pay the Surrender
Value to the Owner in a lump sum. The Federal tax laws impose penalties upon,
and in some cases prohibit, certain premature distributions from the Contract
before or after the date on which the annuity payments are to begin. (See
"Federal Tax Matters.") Amounts withdrawn may be subject to a Withdrawal Charge
(Contingent Deferred Sales Charge), depending on the number of years between the
request for withdrawal and the Contract's Date of Issue. In any Contract Year
after the first Contract Year, an amount equal to 10% of the Contract Value at
the beginning of the Contract Year may be withdrawn without Withdrawal Charges.
(See "Withdrawal Charge -- Full and Partial Withdrawals.")
Full Withdrawal. Upon Written Request before the Annuity Commencement
Date, the Owner may cancel the Contract and receive its Surrender Value. (See
"Full and Partial Withdrawals.") As with partial withdrawals, Federal tax laws
impose penalties upon, and in some cases prohibit, certain premature
distributions from the Contract before or after the date on which the annuity
payments are to begin. (See "Federal Tax Matters.")
Death Benefit. If the Annuitant dies before the Annuity Commencement
Date, the Beneficiary will receive a Death Benefit. The Death Benefit will be
equal to the greater of:
(1) Premium Payments made under the Contract, less partial withdrawals
as of the date the Company receives due proof of the deceased's
death and payment instructions; or
(2) Contract Value as of the date the Company receives due proof of the
deceased's death and payment instructions;
LESS any applicable premium taxes not previously deducted. If the Owner dies
before the Annuity Commencement Date, the Contract Value (or if the Owner is
also the Annuitant, the Death Benefit) must generally be distributed to the
Beneficiary within five years after the date of the Owner's death. (See "Death
Benefit Before the Annuity Commencement Date.")
Maturity Benefit. If the Contract is in the accumulation phase on the
Maturity Benefit Date, IL Annuity will calculate the Maturity Benefit for each
Eligible Variable Account in which the Owner has value as of that date. The
Maturity Benefit will be credited to the Contract Value of an Eligible Variable
Account only if the value of the Eligible Variable Account on the Maturity
Benefit Date is less than: (a) the sum of the Eligible Premium Payments for such
Eligible Variable Account, MINUS (b) a percentage of all prior withdrawals and
transfers from such Eligible Variable Account.
Eligible Premium Payments are those Premium Payments that initially were
allocated to a particular Eligible Variable Account at the time of payment,
provided the payment was made at least ten (10) years prior to the Maturity
Benefit Date.
On the Maturity Benefit Date, the Maturity Benefit to be credited to each
Eligible Variable Account is equal to: (a) the sum of the Eligible Premium
Payments for that particular Eligible Variable Account; MINUS (b) a percentage
of all prior withdrawals and transfers from that Eligible Variable Account;
MINUS (c) the value of that Eligible Variable Account as of the Maturity Benefit
Date.
12
<PAGE> 22
The Maturity Benefit Date is the later of the Annuitant's age 70 and 10
years after the Date of Issue. If the Contract is owned by Joint Owners who are
spouses at the time one Joint Owner dies, the Maturity Benefit Date will become
the date the surviving spouse attains age 70. If the Contract is owned by Joint
Owners who are not spouses and one of them dies before the Maturity Benefit
Date, the Maturity Benefit is not available to the sole surviving Owner. The
Eligible Variable Accounts currently include all Variable Accounts except the
Van Eck Worldwide Hard Assets Variable Account.
The Maturity Benefit will not be credited to Contract Value if the Owner
chooses an Annuity Commencement Date that is earlier than the Maturity Benefit
Date.
Transfers and withdrawals from an Eligible Variable Account will reduce the
amount of the Eligible Premium Payments on which the Maturity Benefit is based.
(See "Maturity Benefit.")
CHARGES AND DEDUCTIONS
The following charges and deductions are assessed under the Contract:
Withdrawal Charge (Contingent Deferred Sales Charge). No charge for sales
expenses is deducted from Premium Payments at the time Premium Payments are
paid. However, a Withdrawal Charge is deducted upon full or partial withdrawal
of Contract Value during the first nine Contract Years. No Withdrawal Charge
will be assessed on distributions made in the event the contract terminates due
to the death of the Annuitant or Owner or if Contract Values are applied to a
life contingency option or an annuity plan with a period certain of at least 10
years.
For amounts withdrawn within the first six years from the Date of Issue,
the charge is 7.0% of the amount withdrawn. For amounts withdrawn during the
seventh year from the Date of Issue, the charge is 6.0% of the amount withdrawn.
For each Contract Year thereafter, the Withdrawal Charge decreases by 2.0% for
each subsequent Contract Year until it is zero in year ten. Amounts subject to
the Withdrawal Charge will be deemed to be first from Premium Payments, then
from earnings. No Withdrawal Charge is assessed upon the withdrawal of Contract
Value in excess of aggregate Premium Payments or on withdrawals made in Contract
Years ten or later. (See "Withdrawal Charge -- Charges for Full or Partial
Withdrawals.")
In any Contract Year after the first Contract Year, an amount equal to 10%
of the Contract Value at the beginning of the Contract Year may be withdrawn
without Withdrawal Charges. (See "Withdrawal Charge.") The Withdrawal Charge
also may be waived in cases of extended hospitalization, long-term care,
terminal illness, or to pay for post secondary education, as provided in the
Contract. (See "Withdrawal Charge -- Waiver of Withdrawal Charge.")
Contract Fee. At the end of each Contract quarter (or on the date of full
surrender of the Contract) prior to the Annuity Commencement Date, the Company
deducts a quarterly Contract Fee of $7.50 from the Contract Value. Deduction of
the Contract Fee is currently waived for all Qualified Contracts. The Company
also currently waives quarterly deduction of the Contract Fee for Non-Qualified
Contracts whose cumulative Premium Payments on the date the Contract Fee is
assessed are equal to or greater than $100,000. The Company reserves the right
to modify this waiver upon 30 days written notice to Contract Owners. This
charge does not apply after an annuity payout plan has begun. (See "Contract
Fee.")
Transfer Fee. The Company reserves the right to impose a transfer charge
of $25 for the thirteenth and each subsequent request made by the Owner to
transfer Contract Value from one or more Variable Accounts to another one or
more of the Variable Accounts or the Fixed Account during a single Contract Year
prior to the Annuity Commencement Date. (See "Transfer Fee.")
Mortality and Expense Risk Charge. The Company deducts a daily mortality
and expense risk charge to compensate it for assuming certain mortality and
expense risks. The charge is deducted from the assets of the Separate Account at
a rate of 0.003404% per day which is an annual rate of 1.25% (approximately
0.90% for mortality risk and 0.35% for expense risks). This charge will continue
to be assessed if annuity payments are made on a variable basis after the
Annuity Commencement Date. (See "Mortality and Expense Risk Charge.")
13
<PAGE> 23
Asset-Based Administration Charge. The Company deducts a daily
administration charge to compensate it for certain expenses it incurs in
administration of the Contract. The charge is deducted from the assets of the
Separate Account at an annual rate of 0.15%. This charge will continue to be
assessed after annuitization if annuity payments are made on a variable basis.
(See "Asset-Based Administration Charge.")
Premium Taxes. Various states and other governmental entities levy a
premium tax, currently ranging up to 3.5%, on annuity contracts issued by
insurance companies. Premium tax rates are subject to change from time to time
by legislative and other governmental action. In addition, other governmental
units within a state may levy such taxes. If state or other premium taxes are
applicable to a Contract, they will be deducted either: (a) from Premium
Payments as they are received, (b) from Contract Value upon partial or full
withdrawal, (c) upon application of adjusted Contract Value to a payout plan
option, or (d) upon payment of a Death Benefit. (See "Premium Taxes.")
Investment Advisory Fees and Other Expenses of the Funds. Because each
Variable Account purchases shares of the Funds, the net assets of each Variable
Account will reflect the investment advisory fee incurred by the corresponding
Portfolio of the Funds. For each Portfolio, an investment advisor is paid a
daily fee by the Funds for its investment advisory services. The advisory fees
are based on the average daily net assets of the Portfolio, and, as a result,
the amount of the advisory fee will depend upon the Portfolio and the assets of
such Portfolio. Each Portfolio of the Fund in which the Variable Accounts invest
is also responsible for its own expenses. Presently, certain fees and expenses
of the Funds are waived and reimbursed. (See the accompanying Prospectuses of
the Funds for further details.)
ANNUITY PROVISIONS
Payout Plan Options. On the Annuity Commencement Date, the Contract Value
(adjusted as described below) will be applied to a payout plan option, unless
the Owner chooses to receive the Surrender Value in a lump sum. Adjusted
Contract Value is Contract Value, LESS applicable premium tax not yet deducted,
LESS the quarterly Contract Fee, and, for an installment income annuity payout
plan with a payout period of less than 10 years, LESS any applicable Withdrawal
Charge. (See "Payout Plan Options.")
FEDERAL TAX STATUS
Generally, a distribution (including a full or partial withdrawal or Death
Benefit payment) may result in taxable income. In certain circumstances, a 10%
penalty tax may apply. For a further discussion of the federal tax status of
variable annuity contracts, see "Federal Tax Status."
CONDENSED FINANCIAL INFORMATION
The following condensed financial information is derived from the financial
statements of the Separate Account. The data should be read in conjunction with
the financial statements, related notes and other financial information included
in the Statement of Additional Information. See "Financial Statements"
concerning the financial statements contained in the Statement of Additional
Information.
14
<PAGE> 24
The Variable Accumulation Unit values and the number of Variable
Accumulation Units outstanding for each Variable Account for the periods shown
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------------------------------------
ALGER ALGER FIDELITY FIDELITY FIDELITY
MIDCAP GROWTH SMALL CAPITALIZATION EQUITY-INCOME GROWTH MONEY MARKET
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT
---------------- -------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value at
Beginning of Period......... $10.000 $10.000 $10.000 $10.000 $10.000
Accumulation Unit Value at End
of Period................... $ 9.786 $ 9.675 $10.616 $ 9.604 0
Number of Accumulation Units
Outstanding at End of
Period...................... 2,764 1,709 3,789 2,199 0
</TABLE>
<TABLE>
<CAPTION>
FIDELITY FIDELITY FIDELITY FIDELITY OCC ACCUMULATION*
ASSET MANAGER CONTRAFUND INDEX 500 INVESTMENT GRADE BOND MANAGED
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT
---------------- ---------------- ---------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value at
Beginning of Period...... $10.000 $10.000 $10.000 $10.000 $10.000
Accumulation Unit Value at
End of Period............ $ 8.224 $10.091 $10.514 $10.247 $10.380
Number of Accumulation
Units Outstanding at End
of Period ............... 255 5,731 3,538 1,668 161
</TABLE>
<TABLE>
<CAPTION>
OCC ACCUMULATION* T.ROWE PRICE T.ROWE PRICE VAN ECK VAN ECK
SMALL CAP LIMITED-TERM BOND INTERNATIONAL STOCK WORLDWIDE HARD ASSETS WORLDWIDE BALANCED
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT** VARIABLE ACCOUNT
----------------- ----------------- ------------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit
Value at Beginning
of Period.......... $10.000 $10.000 $10.000 $10.000 $10.000
Accumulation Unit
Value at End of
Period............. $10.388 $10.042 $10.487 $10.621 $10.010
Number of
Accumulation Units
Outstanding at End
of Period.......... 1,182 1,485 2,530 58 1,201
</TABLE>
- ---------------
* Prior to May 1, 1996, OCC Accumulation Trust was called Quest for Value
Accumulation Trust.
** Prior to May 1, 1997, Van Eck Worldwide Hard Assets Variable Account was
called Van Eck Gold and Natural Resources.
15
<PAGE> 25
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------------------------
ALGER ALGER FIDELITY FIDELITY FIDELITY
MIDCAP GROWTH SMALL CAPITALIZATION EQUITY-INCOME GROWTH MONEY MARKET
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT
---------------- -------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value at
Beginning of Period......... $ 9.786 $9.675 $ 10.616 $ 9.604 $ 10.000
Accumulation Unit Value at End
of Period................... $ 10.812 $9.955 $ 11.958 $ 10.868 $ 10.456
Number of Accumulation Units
Outstanding at End of
Period...................... 109,955 181,361 195,400 164,945 179,504
</TABLE>
<TABLE>
<CAPTION>
FIDELITY FIDELITY FIDELITY FIDELITY OCC ACCUMULATION*
ASSET MANAGER CONTRAFUND INDEX 500 INVESTMENT GRADE BOND MANAGED VARIABLE
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT ACCOUNT
---------------- ---------------- ---------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value at
Beginning of Period...... $ 8.224 $ 10.091 $ 10.514 $10.247 $10.380
Accumulation Unit Value at
End of Period............ $ 11.817 $ 12.105 $ 12.734 $10.422 $12.567
Number of Accumulation
Units Outstanding at End
of Period................ 61,512 203,860 193,803 57,476 133,102
</TABLE>
<TABLE>
<CAPTION>
OCC ACCUMULATION* T.ROWE PRICE T.ROWE PRICE VAN ECK VAN ECK
SMALL CAP LIMITED-TERM BOND INTERNATIONAL STOCK WORLDWIDE HARD ASSETS** WORLDWIDE BALANCED
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT
----------------- ----------------- ------------------- ----------------------- ------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit
Value at Beginning
of Period......... $10.388 $10.042 $10.487 $10.621 $ 10.010
Accumulation Unit
Value at End of
Period............ $12.148 $ 9.946 $11.780 $12.356 $ 11.019
Number of
Accumulation Units
Outstanding at End
of Period......... 40,024 27,325 122,831 29,990 26,719
</TABLE>
- ---------------
* Prior to May 1, 1996, OCC Accumulation Trust was called Quest for Value
Accumulation Trust.
** Prior to May 1, 1997, Van Eck Worldwide Hard Assets Variable Account was
called Van Eck Gold and Natural Resources.
THE COMPANY AND THE SEPARATE ACCOUNT
IL ANNUITY AND INSURANCE COMPANY
IL Annuity and Insurance Company, formerly known as Sentry Investors Life
Insurance Company, is a stock life insurance company organized under the laws of
the Commonwealth of Massachusetts on December 21, 1965 and incorporated on March
9, 1966. The Company changed its named to "IL Annuity and Insurance Company" on
January 17, 1995.
Effective October 31, 1994, the Company entered into an assumption
reinsurance agreement with Sentry Life Insurance Company ("Sentry") whereby
Sentry assumed all of the existing insurance in-force and related assets and
liabilities from the Company.
On November 1, 1994, the Company became a wholly-owned subsidiary of the
Indianapolis Life Group of Companies, Inc., which is a wholly-owned subsidiary
of Indianapolis Life Insurance Company. Indianapolis Life Insurance Company is a
mutual life insurance company chartered under Indiana law in 1905 with assets as
of December 31, 1996 which exceeded $1.596 billion.
The Company is subject to regulation by the Insurance Department of the
State of Massachusetts as well as by the insurance departments of all other
states and jurisdictions in which it does business. The Company
16
<PAGE> 26
submits annual statements on its operations and finances to insurance officials
in such states and jurisdictions. The forms for the Contract described in this
Prospectus are filed with and (where required) approved by insurance officials
in each state and jurisdiction in which Contracts are sold.
IL ANNUITY AND INSURANCE CO. SEPARATE ACCOUNT 1
The IL Annuity and Insurance Co. Separate Account I (the "Separate
Account") was established by the Company as a separate account under
Massachusetts insurance law on November 1, 1994. The Separate Account will
receive and invest Net Premium Payments made under the Contracts. In addition,
the Separate Account may receive and invest Premium Payments for any other
variable annuity contracts issued in the future by the Company.
Although the assets in the Separate Account are the property of the
Company, the portion of the assets in the Separate Account equal to the reserves
and other contract liabilities of the Separate Account are not chargeable with
the liabilities arising out of any other business which the Company may conduct
and which has no specific relation to or dependence upon the Separate Account.
The assets of the Separate Account are available to cover the general
liabilities of the Company only to the extent that the Separate Account's assets
exceed its liabilities arising under the Contracts and any other contracts
supported by the Separate Account. The Company has the right to transfer to the
general account any assets of the Separate Account which are in excess of
reserves and other contract liabilities. All obligations arising under the
Contracts are general corporate obligations of the Company. Income, gains and
losses, whether or not realized, from assets allocated to the Separate Account
are credited to or charged against the Separate Account without regard to other
income, gains or losses of any other separate account or of the Company.
The Separate Account currently is divided into fifteen Variable Accounts
but may, in the future, include additional Variable Accounts. Each Variable
Account invests exclusively in shares of a single corresponding fund. The
income, gains and losses, whether or not realized, from the assets allocated to
each Variable Account are credited to or charged against that Variable Account
without regard to income, gains or losses from any other Variable Account.
The Separate Account has been registered with the SEC as a unit investment
trust under the Investment Company Act of 1940 (the "1940 Act") and meets the
definition of a separate account under the federal securities laws. Registration
with the SEC does not involve supervision of the management or investment
practices or policies of the Separate Account or the Company by the SEC. The
Separate Account is also subject to the laws of the State of Massachusetts which
regulate the operations of insurance companies domiciled in Massachusetts.
THE FUNDS
Each Variable Account of the Separate Account invests in shares of the
Portfolios of seven series-type mutual funds (the "Funds"). Each Fund currently
available under the Contract is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act") as an open-end, management investment
company. Such registration does not involve supervision of the management or
investment practices or policies of the companies or their funds by the SEC.
Each Variable Account invests exclusively in a designated investment
Portfolio of one of the Funds. The assets of each Portfolio of each series Fund
are separate from the assets of that Fund's other Portfolios, and each Portfolio
has separate investment objectives and policies. As a result, each Portfolio
operates as a separate investment Portfolio and the income or losses of one
Portfolio has no effect on the investment performance of any other Portfolio.
Some of the Funds may, in the future, create additional portfolios.
The investment objectives and policies of each Portfolio are summarized
below. THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED
OBJECTIVES. More detailed information, including a description of risks and
expenses, may be found in the prospectuses for the Portfolios which must
accompany or precede this prospectus and which should be read carefully and
retained for future reference.
17
<PAGE> 27
Each of the Funds is managed by an investment adviser registered with the
SEC under the Investment Advisers Act of 1940, as amended. Each investment
manager is responsible for the selection of Portfolio investments consistent
with the investment objectives and policies of the Portfolio, and conducts
securities trading for the Portfolio.
Certain Variable Accounts invest in Portfolios that have similar investment
objectives and/or policies; therefore, before choosing Variable Accounts,
carefully read the individual prospectuses for the Funds along with this
prospectus.
THE ALGER AMERICAN FUND
The MidCap Growth Variable Account and the Small Capitalization Variable
Account will invest exclusively in shares of the MidCap Growth Portfolio and the
Small Capitalization Portfolio of The Alger American Fund.
The investment objectives of these Portfolios are:
MIDCAP GROWTH PORTFOLIO -- seeks to obtain long-term capital
appreciation. Except during temporary defensive periods, the Portfolio
invests at least 65% of its total assets in equity securities of companies
that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the S&P MidCap 400
Index, updated quarterly. The S&P MidCap Index is designed to track the
performance of medium capitalization companies. As of March 31, 1997, the
range of market capitalization of these companies was $120 million to $7.19
billion.
SMALL CAPITALIZATION PORTFOLIO -- seeks to obtain long-term capital
appreciation. Except during temporary defensive periods, the Portfolio
invests at least 65% of its total assets in equity securities of companies
that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the Russell 2000
Growth Index ("Russell Index") or the S&P SmallCap 600 Index, updated
quarterly. Both indexes are broad indices of small capitalization stocks.
As of March 31, 1997, the range of market capitalization of the companies
in the Russell Index was $10 million to $1.94 billion; the range of
capitalization of the companies in the S&P SmallCap 600 Index at that date
was $32 million to $2.579 billion.
Fred Alger Management, Inc. ("Alger Management") serves as investment
adviser for the MidCap Growth and Small Capitalization Portfolios of The Alger
American Fund. Fred Alger & Company, Incorporated, an affiliate of Alger
Management, will serve as the Portfolios' broker in effecting substantially all
of the portfolio transactions on security exchanges.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND FIDELITY VARIABLE INSURANCE
PRODUCTS FUND II
The Equity-Income Variable Account, the Growth Variable Account and the
Money Market Variable Account will invest exclusively in shares of the
corresponding Portfolio of Fidelity's Variable Insurance Products Fund ("VIP
Fund"); the Asset Manager Variable Account, the Contrafund Variable Account, the
Index 500 Variable Account and the Investment Grade Bond Variable Account will
invest exclusively in shares of the corresponding Portfolio of the Variable
Insurance Products Fund II ("VIP Fund II").
The investment objectives of these Portfolios are:
EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities.
GROWTH PORTFOLIO -- seeks to achieve capital appreciation by investing
in common stocks and securities convertible into common stock of companies
that the adviser believes have above-average growth potential. The
Portfolio, however, is not restricted to any one type of security and may
pursue capital appreciation through the purchase of bonds and preferred
stocks.
MONEY MARKET PORTFOLIO -- seeks to earn a high level of current income
while maintaining a stable $1.00 share price by investing in high-quality,
short-term money market securities of different types.
18
<PAGE> 28
ASSET MANAGER PORTFOLIO -- seeks to obtain high total return with
reduced risk over the long-term by allocating its assets among stocks,
bonds, short-term and other instruments of U.S. and foreign issuers.
CONTRAFUND PORTFOLIO -- seeks capital appreciation by investing in
companies that the adviser believes to be undervalued due to an overly
pessimistic appraisal by the public.
INDEX 500 PORTFOLIO -- seeks to match the total return of the S&P 500
while keeping expenses low. The adviser normally invests at least 80% (65%
if Portfolio assets are below $20 million) of the Portfolio's assets in
equity securities of companies that compose the S&P 500.
INVESTMENT GRADE BOND PORTFOLIO -- seeks high current income by
investing in fixed-income obligations of all types.
The Portfolios of the VIP Fund and the VIP Fund II are managed by Fidelity
Management & Research Company ("FMR"). On behalf of the Money Market Portfolio,
FMR has entered in a subadvisory agreement with FMR Texas, Inc., pursuant to
which FMR Texas, Inc. has primary responsibility for providing investment
management services to the Portfolio. On behalf of the Asset Manager Portfolio
and the Contrafund Portfolio, FMR has entered into subadvisory agreements with
Fidelity Investment Management and Research (U.K.) Inc. ("FMR (U.K.)") and
Fidelity Management and Research (Far East) Inc. ("FMR Far East"), pursuant to
which those entities provide research and investment recommendations with
respect to companies based outside the United States. FMR (U.K.) focuses
primarily on companies based in Europe, while FMR Far East focuses primarily on
companies based in Asia and the Pacific Basin.
OCC ACCUMULATION TRUST
The Managed Variable Account and the Small Cap Variable Account will invest
only in shares of their corresponding portfolios of the OCC Accumulation Trust
("OCC Trust") (formerly known as the Quest for Value Accumulation Trust). The
investment objectives of these Portfolios are:
MANAGED PORTFOLIO -- seeks growth of capital over time through
investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based on management's
assessments of relative investment values.
SMALL CAP PORTFOLIO -- seeks capital appreciation through investment
in a diversified portfolio of equity securities of companies with market
capitalizations of under $1 billion.
The OCC Trust receives investment advice with respect to each of its
Portfolios from OpCap Advisors, a subsidiary of Oppenheimer Capital which is a
subsidiary of Oppenheimer Financial Corp.
T. ROWE PRICE FIXED INCOME SERIES, INC.
The Limited-Term Bond Variable Account will invest exclusively in shares of
the Limited-Term Bond Portfolio of the T. Rowe Price Fixed Income Series, Inc.
The investment objective of this Portfolio is:
LIMITED-TERM BOND PORTFOLIO -- seeks a high level of income consistent
with modest price fluctuations by investing primarily in short- and
intermediate-term investment-grade debt securities.
T. Rowe Price Associates, Inc. is responsible for the selection and
management of the portfolio investments of T. Rowe Price Limited-Term Bond
Portfolio and receives a single, all-inclusive fee based on the Portfolio's
average daily net assets to cover investment management and operating expenses.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
The International Stock Variable Account will invest exclusively in shares
of the International Stock Portfolio of the T. Rowe Price International Series,
Inc. The investment objective of this Portfolio is:
INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established non-U.S.
companies.
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<PAGE> 29
Rowe Price-Fleming International, Inc. ("Price-Fleming") is responsible for
the selection and management of the Portfolio's investments. Incorporated in
1979 as a joint venture between T. Rowe Price Associates, Inc. ("T. Rowe Price")
and Robert Fleming Holdings Limited ("Fleming"), Price-Fleming receives a
single, all-inclusive fee based on the Portfolio's average daily net assets to
cover investment management and operating expenses.
VAN ECK WORLDWIDE INSURANCE TRUST
The Worldwide Balanced Variable Account and the Worldwide Hard Assets
(formerly Gold and Natural Resources) Variable Account will invest exclusively
in shares of the Worldwide Balanced Portfolio and the Worldwide Hard Assets
Portfolio of the Van Eck Worldwide Insurance Trust (the "Van Eck Trust").
The investment objectives of these Portfolios are:
WORLDWIDE HARD ASSETS PORTFOLIO -- seeks long-term capital
appreciation by investing globally, primarily in "Hard Asset Securities" of
companies that are directly or indirectly engaged to a significant extent
in the exploration, development, production or distribution of one or more
of the following: (i) precious metals, (ii) ferrous and non-ferrous metals,
(iii) energy, (iv) forest products, (v) real estate, and (vi) other basic
non-agricultural commodities.
WORLDWIDE BALANCED PORTFOLIO -- seeks long-term capital appreciation
together with current income by investing in equity securities, fixed
income securities and short-term instruments.
Van Eck Associates Corporation serves as investment adviser and manager to
the Van Eck Worldwide Hard Assets Portfolio pursuant to an Advisory Agreement
with the Van Eck Trust. Fiduciary International, Inc. is expected to serve as
sub-investment adviser to the Van Eck Worldwide Balanced Portfolio pursuant to a
Sub-Investment Advisory Agreement with the Van Eck Trust when the Portfolio's
assets reach a level at which it is appropriate to utilize the sub-investment
advisor's services.
THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED OBJECTIVE.
MORE DETAILED INFORMATION, INCLUDING A DESCRIPTION OF EACH PORTFOLIO'S
INVESTMENT OBJECTIVE AND POLICIES AND A DESCRIPTION OF RISKS INVOLVED IN
INVESTING IN EACH OF THE PORTFOLIOS AND OF EACH PORTFOLIO'S FEES AND EXPENSES,
IS CONTAINED IN THE PROSPECTUSES FOR THE FUNDS, CURRENT COPIES OF WHICH
ACCOMPANY THIS PROSPECTUS. INFORMATION CONTAINED IN THE FUNDS' PROSPECTUSES
SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE CONCERNING THE ALLOCATION
OF PREMIUM PAYMENTS TO OR TRANSFERS AMONG THE VARIABLE ACCOUNTS.
An investment in a Variable Account, or in any Portfolio, including the
Money Market Portfolio, is not insured or guaranteed by the U.S. Government and
there can be no assurance that the Money Market Portfolio will be able to
maintain a stable net asset value per share.
The Company cannot guarantee that each Fund will always be available for
its variable annuity contracts, but in the unlikely event that a fund is not
available, the Company will do everything reasonably practicable to secure the
availability of a comparable fund. Shares of each Portfolio are purchased and
redeemed at net asset value, without a sales charge.
IL Annuity has entered into agreements with the investment adviser of
several of the Funds pursuant to which each such investment adviser will pay IL
Annuity a servicing fee based upon an annual percentage of the average aggregate
net assets invested by IL Annuity on behalf of the Separate Account. These
agreements reflect administrative services provided to the Funds by IL Annuity.
Payments of such amounts by the Funds will not increase the fees paid by the
Funds or their shareholders.
AVAILABILITY OF THE FUNDS
The Separate Account purchases shares of each of the Funds in accordance
with a participation agreement between the Company and the Fund. The termination
provisions of these agreements vary. A summary of the termination provisions of
these agreements may be found in the Statement of Additional Information. Should
a participation agreement between the Company and a Fund terminate, the Separate
Account may not be able to purchase additional shares of that Fund. Likewise, in
certain circumstances, it is
20
<PAGE> 30
possible that shares of a Fund may not be available to the Separate Account even
if the participation agreement relating to that Fund has not been terminated. In
either event, Owners will no longer be able to allocate Premium Payments or
transfer Contract Value to the Variable Account investing in that Fund.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make
additions to, deletions from, or substitutions for the shares of a fund that are
held in the Separate Account or that the Separate Account may purchase. If the
shares of a fund are no longer available for investment or if, in the Company's
judgment, further investment in any fund should become inappropriate, the
Company may redeem the shares, if any, of that fund and substitute shares of
another fund. The Company will not substitute any shares attributable to a
Contract's interest in a Variable Account without notice and prior approval of
the SEC and state insurance authorities, to the extent required by the 1940 Act
or other applicable law.
The Company also reserves the right to establish additional Variable
Accounts of the Separate Account, each of which would invest in shares of a new
corresponding fund having a specified investment objective. The Company may, in
its sole discretion, establish new Variable Accounts or eliminate or combine one
or more Variable Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new Variable Accounts may be made available to existing
Contract Owners on a basis to be determined by the Company. Subject to obtaining
any approvals or consents required by applicable law, the assets of one or more
Variable Accounts may be transferred to any other Variable Account if, in the
sole discretion of the Company, marketing, tax, or investment conditions
warrant.
In the event of any such substitution or change, the Company may (by
appropriate endorsement, if necessary) change the Contract to reflect the
substitution or change. If the Company considers it to be in the best interest
of Owners and Annuitants, and subject to any approvals that may be required
under applicable law, the Separate Account may be operated as a management
investment company under the 1940 Act, it may be deregistered under that Act if
registration is no longer required, it may be combined with other Company
separate accounts, or its assets may be transferred to another separate account
of the Company. In addition, the Company may, when permitted by law, restrict or
eliminate any voting rights of Owners or other persons who have such rights
under the Contracts.
The Company will continue to pay a Maturity Benefit on Premium Payments
allocated to an Eligible Variable Account if: (a) the Portfolio underlying an
Eligible Variable Account changes its investment objective; (b) the Company
determines that an investment in the Portfolio underlying an Eligible Variable
Account is no longer appropriate in light of the purposes of the Separate
Account; or (c) shares of a Portfolio underlying an Eligible Variable Account
are no longer available for investment by the Separate Account and IL Annuity is
forced to redeem all shares of the Portfolio held by the Eligible Variable
Account. (See "Maturity Benefit.")
RESOLVING MATERIAL CONFLICTS
The Funds currently sell shares to registered separate accounts of
insurance companies other than the Company to support other variable annuity
contracts and variable life insurance contracts. In addition, some of the Funds
may in the future be sold to other separate accounts of the Company and may in
the future be sold to separate accounts of other affiliated life insurance
companies to support other variable annuity or variable life insurance
contracts. Moreover, shares of some of the Funds may in the future be sold to
qualified retirement plans. As a result, there is a possibility that an
irreconcilable material conflict may arise between the interests of Contract
Owners owning Contracts whose Contract Values are allocated to the Separate
Account and of Contract Owners owning Contracts whose Contract Values are
allocated to one or more other separate accounts investing in any one of the
Funds. There is also the possibility that a material conflict may arise between
the interests of Contract Owners generally, or certain classes of Contract
Owners, and participating qualified retirement plans or participants in such
retirement plans.
The Company currently does not foresee any disadvantages to Owners arising
from the sale of such shares to support variable life insurance contracts or
variable annuity contracts of other companies or to qualified
21
<PAGE> 31
retirement plans. However, the management of the Funds will each monitor events
related to their Fund in order to identify any material irreconcilable conflicts
that might possibly arise as a result of such Fund's offering its shares to (1)
support both variable life insurance contracts and variable annuity contracts,
or (2) support the variable life insurance contracts and/or variable annuity
contracts issued by various unaffiliated insurance companies. In addition, the
management of the Funds will monitor the Funds in order to identify any material
irreconcilable conflicts that might possibly arise as a result of the sale of
its shares to qualified retirement plans, if applicable. In the event of such a
conflict, the management of the appropriate Fund would determine what action, if
any, should be taken in response to the conflict. In addition, if the Company
believes that the response of the Funds to any such conflict insufficiently
protects Owners, it will take appropriate action on its own, including
withdrawing the Separate Account's investment in such Funds, as appropriate.
(See the Fund's prospectuses for greater detail.)
DESCRIPTION OF THE CONTRACT
ISSUANCE OF A CONTRACT
In order to purchase a Contract, application must be made to the Company
through a licensed representative of the Company, who is also a registered
representative of IL Securities, Inc. or a broker-dealer having a selling
agreement with IL Securities, Inc. or a broker-dealer having a selling agreement
with such broker-dealer. Contracts may be sold to or in connection with
retirement plans that do not qualify for special tax treatment as well as
retirement plans that qualify for special tax treatment under the Code. The
maximum age for Owners on the Date of Issue is 85.
PREMIUM PAYMENTS
The minimum amount which the Company will accept as an initial Premium
Payment is $1,000; the maximum amount of the initial premium is $250,000.
Subsequent Premium Payments may be paid under the Contract at any time until the
earliest of: (a) the Annuity Commencement Date; (b) full withdrawal of Contract
Value; or (c) the date the Owner attains age 85 (age 70 1/2 for Qualified
Plans), and must be for at least $1,000. The Company will not accept total
premiums under the Contract in excess of $250,000. The Company reserves the
right to waive these limitations.
Under the Company's Automatic Premium Payment Plan, the Owner can select an
annual, semi-annual, or monthly payment schedule pursuant to which Premium
Payments will be automatically deducted from a bank or credit union account or
other source. The minimum size of such payment is $1,000.
FREE-LOOK PERIOD
The Contract provides for an initial "Free-Look" Period. The Owner has the
right to return the Contract within 10 days of receiving it (or within 20 days
of receipt if the Contract is replacing another annuity contract or insurance
policy). In some jurisdictions, this period may be longer than 10 days. When the
Company receives a Written Request for cancellation and the returned Contract at
the Annuity Service Office before the end of this period, the Company will
cancel the Contract.
The amount that the Company will refund will vary according to state
requirements. In most states, the Company will refund to the Owner an amount
equal to the sum of: (i) the difference between the Premium Payments paid and
the amounts allocated to the Variable Accounts and the Fixed Account under the
Contract; and (ii) the Contract Value as of the date the Contract and the
Written Request for cancellation are received at the Annuity Service Office. The
Contract Owner bears the investment risk only for premiums allocated to the
Variable Accounts during the period prior to the Company's receipt of the
Contract and Written Request for cancellation.
A few states require the return of Premium Payments. If state law requires
that Premium Payments be returned, the amount of the refund will be the greater
of: (i) the Premium Payments made under the Contract; and (ii) the Contract
Value (without reduction of any withdrawal charge) on the date the Contract
22
<PAGE> 32
is received at the Annuity Service Office, plus any amount that may have been
deducted for premium taxes. In those states where Premium Payments must be
returned, the Company will allocate Premium Payments to the Money Market
Variable Account for 15 calendar days from the date the initial Premium Payment
is credited to the Contract.
ALLOCATION OF NET PREMIUM PAYMENTS
At the time of application, the Owner selects how the initial Net Premium
Payment is to be allocated among the Variable Accounts and the Fixed Account.
Any allocation must be for at least 1% of a Premium Payment and be in whole
percentages.
If the application for a Contract is properly completed and is accompanied
by all the information necessary to process it, including payment of the initial
Premium Payment, the initial Net Premium Payment will be allocated, as
designated by the Owner, to one or more of the Variable Accounts or to the Fixed
Account within two valuation days of receipt of such Premium Payment by the
Company at its Annuity Service Office. If the application is not properly
completed, the Company reserves the right to retain the Premium Payment for up
to five valuation days while it attempts to complete the application. If the
application is not complete at the end of the 5-day period, the Company will
inform the applicant of the reason for the delay and the initial Premium Payment
will be returned immediately, unless the applicant specifically consents to the
Company retaining the Premium Payment until the application is complete. Once
the application is complete, the initial Net Premium Payment will be allocated
as designated by the Owner within two valuation days.
Notwithstanding the foregoing, in jurisdictions where the Company must
refund aggregate Premium Payments in the event the Owner exercises the free-look
right, the Company will place any portion of the initial Net Premium Payments
allocated to a Variable Account into the Money Market Variable Account for a
15-day period following the date on which the initial Premium Payment is
credited to the Contract. At the end of that period, the amount in the Money
Market Variable Account will be allocated to the Variable Accounts as designated
by the Owner based on the proportion that the allocation percentage for each
such Variable Account bears to the sum of the allocation percentages.
Any subsequent Net Premium Payments will be allocated as of the end of the
valuation period in which the subsequent Net Premium Payment is received by the
Company and will be allocated in accordance with the allocation schedule in
effect at the time the Premium Payment is received. However, Owners may direct
individual payments to a specific Variable Account or to the Fixed Account (or
any combination thereof) without changing the existing allocation schedule. The
allocation schedule may be changed by the Owner at any time by Written Request.
Changing the Premium Payment allocation schedule will not change the allocation
of existing Contract Value among the Variable Accounts or the Fixed Account.
THE CONTRACT VALUES ALLOCATED TO A VARIABLE ACCOUNT WILL VARY WITH THAT VARIABLE
ACCOUNT'S INVESTMENT EXPERIENCE. THE OWNER BEARS THE ENTIRE INVESTMENT RISK FOR
AMOUNTS ALLOCATED TO THE VARIABLE ACCOUNTS. OWNERS SHOULD PERIODICALLY REVIEW
THEIR PREMIUM PAYMENT ALLOCATION SCHEDULE IN LIGHT OF MARKET CONDITIONS AND
THEIR OVERALL FINANCIAL OBJECTIVES.
SEPARATE ACCOUNT VALUE
The Separate Account Value will reflect the investment experience of the
selected Variable Accounts, any Net Premium Payments paid, any surrenders or
partial withdrawals, any transfers, and any charges assessed in connection with
the Contract. There is no guaranteed minimum Separate Account Value, and,
because a Contract's Separate Account Value on any future date depends upon a
number of variables, it cannot be predetermined.
Calculation of Separate Account Value. The Separate Account Value is
determined at the end of each valuation period. The value will be the aggregate
of the values attributable to the Contract in each of the Variable Accounts,
determined for each Variable Account by multiplying that Variable Account's unit
value
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for the relevant valuation period by the number of accumulation units of that
Variable Account allocated to the Contract.
Determination of Number of Accumulation Units. Any amounts allocated or
transferred to the Variable Accounts will be converted into Variable Account
accumulation units. The number of accumulation units to be credited to a
Contract is determined by dividing the dollar amount being allocated or
transferred to a Variable Account by the accumulation unit value for that
Variable Account at the end of the valuation period during which the amount was
allocated or transferred. The number of accumulation units in any Variable
Account will be increased at the end of the valuation period by any Net Premium
Payments allocated to the Variable Account during the current valuation period
and by any amounts transferred to the Variable Account from another Variable
Account or from the Fixed Account during the current valuation period.
Any amounts transferred, surrendered or deducted from a Variable Account
will be processed by cancelling or liquidating accumulation units. The number of
accumulation units to be cancelled is determined by dividing the dollar amount
being removed from a Variable Account by the accumulation unit value for that
Variable Account at the end of the valuation period during which the amount was
removed. The number of accumulation units in any Variable Account will be
decreased at the end of the valuation period by: (a) any amounts transferred
(including any applicable transfer fee) from that Variable Account to another
Variable Account or to the Fixed Account, (b) any amounts withdrawn or
surrendered during that valuation period, (c) any Withdrawal Charge or premium
tax assessed upon a partial withdrawal or surrender, and (d) the quarterly
contract fee, if assessed during that valuation period.
Determination of Accumulation Unit Value. The accumulation unit value for
each Variable Account's first valuation period was set at $10. The accumulation
unit value for a Variable Account is calculated for each subsequent Valuation
Period by multiplying the Accumulation Unit Value at the end of the immediately
preceding Valuation Period by the Net Investment Factor for the Valuation Period
for which the value is being determined.
Net Investment Factor. The Net Investment Factor is an index that measures
the investment performance of a Variable Account from one Valuation Period to
the next. Each Variable Account has its own Net Investment Factor, which may be
greater or less than one. The Net Investment Factor for each Variable Account
for a Valuation Period equals 1 plus the fraction obtained by dividing (a) by
(b) where:
(a) is the net result of:
1. the investment income, dividends, and capital gains, realized or
unrealized, credited during the current Valuation Period; PLUS
2. the amount credited or released from reserves for taxes attributed
to the operation of the Variable Account; MINUS
3. the capital losses, realized or unrealized, charged during the
current Valuation Period; MINUS
4. any amount charged for taxes or any amount set aside during the
Valuation Period as a reserve for taxes attributable to the
operation or maintenance of the Variable Account; MINUS
5. the amount charged for mortality and expense risk for that
Valuation Period; MINUS
6. the amount charged for administration for that Valuation Period;
and
(b) is the value of the assets in the Variable Account at the end of the
preceding Valuation Period, adjusted for allocations and transfers
to and withdrawals and transfers from the Variable Account occurring
during that preceding Valuation Period.
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TRANSFER PRIVILEGES
General. Before the Annuity Commencement Date and subject to the
restrictions described below, the Owner may transfer all or part of the amount
in a Variable Account or the Fixed Account to another Variable Account or the
Fixed Account.
If the Owner transfers Contract Value from an Eligible Variable Account,
the transfer will reduce the amount of the Eligible Premium Payments on which
the Maturity Benefit is based. (See "Maturity Benefit.")
Transfers to the Fixed Account must be at least $1,000. Prior to the
Annuity Commencement Date, the Owner may transfer up to 20% of the Fixed Account
Value (as determined at the beginning of the Contract Year) from the Fixed
Account to one or more of the Variable Accounts in any Contract Year. No fee is
charged for transfers from the Fixed Account to one or more Variable Accounts
and such a transfer is not considered a transfer for purposes of assessing a
transfer charge.
Transfers will be made as of the valuation day on which Written Request
requesting such transfer is received by the Company if received before 4:00 p.m.
Eastern Time. Transfers will be made as of the valuation day next following the
day on which Written Request requesting such transfer is received if received
after 4:00 p.m. Eastern Time. Subject to the foregoing restrictions, there
currently is no limit on the number of transfers that can be made prior to the
Annuity Commencement Date among or between Variable Accounts or to the Fixed
Account.
Telephone Transfers. Transfers will be made based upon instructions given
by telephone, provided the Company has a currently valid telephone transfer
authorization form on file signed by the Owner(s). A telephone transfer
authorization form received by the Company at the Annuity Service Office is
valid until it is rescinded or revoked in writing by the Owner(s) or until a
subsequently dated form signed by the Owner(s) is received at the Annuity
Service Office.
The Company will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and if it follows such procedures it will
not be liable for any losses due to unauthorized or fraudulent instructions. The
Company, however, may be liable for such losses if it does not follow those
reasonable procedures. The procedures the Company may follow for telephone
transfers include providing a written confirmation of all transfers made
pursuant to telephone instructions, requiring a form of personal identification
prior to acting on instructions received by telephone, and tape recording
instructions received by telephone.
The Company reserves the right to modify, restrict, suspend or eliminate
the transfer privileges (including the telephone transfer facility) at any time,
for any class of Contracts, for any reason. In particular, the Company reserves
the right to not honor transfers requested by a third party holding a power of
attorney from an Owner where that third party requests simultaneous transfers on
behalf of the Owners of two or more Contracts.
Transfer Fee. The Company reserves the right to impose a transfer charge
of $25 for the thirteenth and each subsequent request made by the Owner to
transfer Contract Value from one or more Variable Accounts to another one or
more of the Variable Accounts or the Fixed Account during a single Contract Year
prior to the Annuity Commencement Date. (See "Charges and Deductions.")
Dollar-Cost Averaging. If elected at the time of the application or at any
time thereafter before the Annuity Commencement Date by Written Request, an
Owner may systematically or automatically transfer (on a monthly or quarterly
basis) specified dollar amounts from one or more Variable Accounts or the Fixed
Account to one or more other Variable Accounts. This is known as the dollar-cost
averaging method of investment. The fixed dollar amount will purchase more
accumulation units of a Variable Account when their value is lower and fewer
units when their value is higher. Over time, the cost per unit averages out to
be less than if all purchases of units had been made at the highest value and
greater than if all purchases had been made at the lowest value. The dollar-cost
averaging method of investment reduces the risk of making purchases only when
the price of accumulation units is high. It does not assure a profit or protect
against a loss in declining markets.
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The minimum transfer amount for dollar-cost averaging is $100 to each
Variable Account. Once elected, dollar-cost averaging remains in effect for the
life of the Contract until Separate Account Value in the Variable Account from
which transfers are being made is depleted (and the value of the Fixed Account
is expended if transfers are being made from the Fixed Account) or until the
Owner cancels the election (by Written Request or by telephone if the Company
has the Owner's telephone authorization form on file). There is no additional
charge for dollar-cost averaging and a transfer under this program is not
considered a transfer for purposes of assessing a transfer change. The Company
reserves the right to discontinue offering the dollar-cost averaging facility at
any time and for any reason. Dollar-Cost Averaging from an Eligible Variable
Account will reduce the amount of the Eligible Premium Payments on which the
Maturity Benefit is based. (See "Maturity Benefit.")
Interest Sweep. Prior to the Annuity Commencement Date, the Owner may
elect to have any interest credited to the Fixed Account automatically
transferred on a quarterly basis to one or more Variable Accounts. There is no
charge for interest sweep transfers and an interest sweep transfer is not
considered a transfer for purposes of assessing a transfer charge. Amounts
transferred out of the Fixed Account due to an interest sweep transfer are
counted toward the 20% of Fixed Account Value that may be transferred out of the
Fixed Account during any Contract Year.
Automatic Account Balancing Service. If elected at the time of the
application or requested at any time thereafter before the Annuity Commencement
Date by Written Request, an Owner may instruct the Company to automatically
balance (on a monthly or quarterly basis) Contract Value in order to match the
Owner's currently effective Premium Payment allocation schedule. Such percentage
allocations must be in whole percentages and be at least 1% per allocation.
Owners may start and stop Automatic Account Balancing at any time. There is no
additional charge for using Automatic Account Balancing and an account balancing
transfer is not considered a transfer for purposes of assessing a transfer
charge. The Company reserves the right to discontinue offering the automatic
account balancing service at any time and for any reason. Automatic Account
Balancing from an Eligible Variable Account will reduce the amount of the
Eligible Premium Payments on which the Maturity Benefit is based. (See "Maturity
Benefit.")
FULL AND PARTIAL WITHDRAWALS
Full Withdrawals. At any time before the Annuity Commencement Date, the
Owner may surrender the contract for its Surrender Value. The Surrender Value is
equal to the Contract Value MINUS (1) any applicable Withdrawal Charges; MINUS
(2) any premium taxes not previously deducted; MINUS (3) the contract fee. For
Qualified Plans, any outstanding loan balance is also deducted. The Surrender
Value will be determined as of the valuation day on the date that the Written
Request requesting surrender and the Contract are received at the Company's
Annuity Service Office. The Surrender Value will be paid in a lump sum unless
the Owner requests payment under a payout plan option. A full withdrawal may
have adverse federal income tax consequences, including a penalty tax. (See
"Taxation of Annuities.")
Partial Withdrawals. At any time before the Annuity Commencement Date, an
Owner may submit a Written Request to withdraw part of the Contract Value in
amounts not less than $250. The maximum amount is that which would leave the
remaining Surrender Value equal to $1,000. If the remaining Contract Value is
reduced to less than $1,000 by the partial withdrawal, the Company reserves the
right to pay the Surrender Value to the Owner in a lump sum. The Company will
withdraw the amount requested from the Contract Value as of the Valuation Day
that the Written Request requesting the partial withdrawal is received. Any
applicable Withdrawal Charge also will be deducted from the remaining Contract
Value. (See "Withdrawal Charge.")
The Owner may specify the amount of the partial withdrawal to be made from
the Variable Accounts or the Fixed Account. If the Owner does not so specify, or
if the amount in the designated Variable Accounts or Fixed Account is inadequate
to comply with the request, the partial withdrawal will be made on a pro rata
basis from the Fixed Account and Variable Accounts in which Contract Value is
invested based on the proportion that the Variable Account Values and the Fixed
Account Value bear to the Contract Value prior to the partial withdrawal.
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If the Owner withdraws Contract Value from an Eligible Variable Account,
the withdrawal will reduce the amount of the Eligible Premium Payments on which
the Maturity Benefit is based. (See "Maturity Benefit.")
For purposes of calculating the Maturity Benefit, withdrawals from the
Variable Accounts and the Fixed Account will be accounted for on a last-in,
first-out ("LIFO") basis. (See "Maturity Benefit.") For purposes of calculating
the Withdrawal Charge, all withdrawals will be deemed to be first from Premium
Payments, then from earnings. (See "Withdrawal Charge.")
A partial withdrawal may have adverse federal income tax consequences,
including a penalty tax. (See "Taxation of Annuities.")
Systematic Withdrawal Program. The Systematic Withdrawal Program provides
an automatic monthly or quarterly payment to the Owner from amounts accumulated
in the Variable Accounts and/or the Fixed Account. The minimum amount that may
be withdrawn is $100. To use the program, the Owner must maintain a $1,000
balance in the Contract. An Owner may elect to participate in the Systematic
Withdrawal Program at any time before the Annuity Commencement Date by sending a
Written Request to the Annuity Service Office. Once elected, the program remains
in effect unless the balance in the Contract drops below $1,000. The program may
be canceled at any time by sending a Written Request, or by calling IL Annuity
provided a telephone authorization form for the Owner is on file.
A Withdrawal Charge will be assessed on each systematic withdrawal made
during the first nine Contract Years, unless the amount withdrawn qualifies as a
Free Withdrawal Amount. (See "Withdrawal Charge -- Free Withdrawal Amount.")
Withdrawals under the Systematic Withdrawal Program are permitted an Annual Free
Withdrawal Amount during the first Contract Year. No other charges are deducted
for this program.
All Systematic Withdrawals will be paid to the Owner on the same day each
month, provided that day is a Valuation Day. If it is not, then payment will be
made on the next Valuation Day. Systematic withdrawals may be taxable, subject
to withholding, and subject to a 10% penalty tax. (See "Federal Tax Matters.")
IL Annuity reserves the right to discontinue offering the Systematic Withdrawal
Program at any time and for any reason.
Full and Partial Withdrawal Restrictions. The Owner's right to make full
and partial withdrawals is subject to any restrictions imposed by applicable law
or employee benefit plan.
Restrictions on Distributions from Certain Types of Contracts. There are
certain restrictions on surrenders of and partial withdrawals from Contracts
used as funding vehicles for Code Section 403(b) retirement programs. Section
403(b)(11) of the Code restricts the distribution under Section 403(b) annuity
contracts of: (i) elective contributions made in years beginning after December
31, 1988; (ii) earnings on those contributions; and (iii) earnings in such years
on amounts held as of the last year beginning before January 1, 1989.
Distributions of those amounts may only occur upon the death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. In addition, income attributable to elective contributions may not be
distributed in the case of hardship.
CONTRACT LOANS
Owners of Contracts issued in connection with retirement programs meeting
the requirements of Section 403(b) of the Code (other than those programs
subject to Title 1 of the Employee Retirement Income Security Act of 1984) may
borrow from the Company using their Contracts as collateral. Loans such as these
are subject to the provisions of any applicable retirement program and to the
Code. Owners should, therefore, consult their tax and retirement plan advisers
prior to taking a contract loan.
At any time prior to the year the Owner reaches age 70 1/2, Owners may
borrow the lesser of (1) the maximum loan amount permitted under the Code, and
(2) 90% of the Surrender Value of their Contract less any existing loan amount,
determined as of the date of the loan. Loans in excess of the maximum amount
permitted under the Code will be treated as a taxable distribution rather than a
loan. The minimum loan
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amount is $1,000. The Company will only make contract loans after approving a
written application by the Owner. The written consent of all assignees and
irrevocable beneficiaries must be obtained before a loan will be given.
When a loan is made, the Company transfers an amount equal to the amount
borrowed from Separate Account Value or Fixed Account Value to the loan account.
The loan account is part of the Company's general account and Contract Value in
the loan account does not participate in the investment experience of any
Variable Account or Fixed Account. The Owner must indicate in the loan
application from which Variable Accounts or Fixed Account, and in what amounts,
Contract Value is to be transferred to the loan account. In the absence of any
such instructions from the Owner, the transfer(s) are made pro-rata on a last-
in, first out ("LIFO") basis from all Variable Accounts having Separate Account
Value and from the Fixed Account. Loans may be repaid by the Owner at any time
before the Annuity Commencement Date. Upon the repayment of any portion of a
loan, an amount equal to the repayment will be transferred from the loan account
to the Variable Account(s) or Fixed Account designated by the Owner or according
to the Owner's current Premium Payment allocation instructions.
The Company charges interest on contract loans at an effective annual rate
of 6.0%. The Company pays interest on the Contract Value in the loan account at
rates it determines from time to time but never less than an effective annual
rate of 3.0%. Consequently, the net cost of a loan is the difference between
6.0% and the rate being paid from time to time on the Contract Value in the loan
account. The Company may declare from time to time higher current interest
rates. Different current interest rates may be applied to the loan account than
the rest of the Fixed Account. If not repaid, loans will automatically reduce
the amount of any Death Benefit, the amount payable upon a partial or full
withdrawal of Contract Value and the amount applied on the Annuity Commencement
Date to provide annuity payments.
If at any time, the loan amount of a Contract exceeds the Surrender Value,
the Contract will be in default. In this event, the Company will send a Written
Request of default to the Owner stating the amount of loan repayment needed to
reinstate the Contract and the Owner will have 60 days, from the day the notice
is mailed, to pay the stated amount. If the Company does not receive the
required loan repayment within 60 days, it will terminate the Contract without
value. In addition, in order to comply with the requirements of the Code, loans
must be repaid in substantially equal installments, at least quarterly, over a
period of no longer than five years (which can be longer for certain home
loans). If these requirements are not satisfied, or if the Contract terminates
while a loan is outstanding, the loan balance will be treated as a taxable
distribution and may be subject to penalty tax, and the treatment of the
Contract under section 403(b) may be adversely affected.
Any loan amount outstanding upon the death of the Owner or Annuitant is
deducted from any Death Benefit paid. In addition, a contract loan, whether or
not repaid, will have a permanent effect on the Contract Value because the
investment experience of the Separate Account and the interest rates applicable
to the Fixed Account do not apply to the portion of Contract Value transferred
to the loan account. The longer the loan remains outstanding, the greater this
effect is likely to be.
DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE
Death of an Owner. If the Contract is owned by Joint Owners and one Owner
dies prior to the Annuity Commencement Date, the surviving Owner becomes the
sole Owner. If the Contract is owned by one person and a Contingent Owner is
named, the Contingent Owner will become the Owner if the sole Owner dies. If
there is no surviving Owner, the estate of the Owner will become the Owner. If
the Owner or Joint Owner who is the Annuitant dies before the Annuity
Commencement Date, then the provisions relating to the death of an Annuitant
(described below) will govern.
The following options are available to sole surviving Owners or new Owners
of Non-Qualified Contracts who are not the Annuitant:
(1) If the Owner is the spouse of the deceased Owner, he or she may
continue the Contract as the new Owner.
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(2) If the Owner is not the spouse of the deceased Owner:
(a) he or she may elect to receive the Contract Value, LESS any
premium taxes not yet deducted, in a single sum within 5 years of
the deceased Owner's death; or
(b) he or she may elect to receive the Contract Value paid out under
one of the approved payout plan options, provided that
distributions begin within one year of the deceased Owner's death
and the distribution period under the payout plan is for the life
of, or for a period not exceeding the life expectancy of, the
sole surviving or new Owner.
If he or she does not elect one of the above options, the Company
will pay the Contract Value five years from the date of the deceased
Owner's death.
Under any of these options, sole surviving Owners or new Owners may exercise all
Ownership rights and privileges from the date of the deceased Owner's death
until the date that the Contract Value is paid. Similar rules apply to Qualified
Contracts.
Death of the Annuitant. If the Annuitant dies before the Annuity
Commencement Date, the Company will pay the Death Benefit described below to the
Beneficiaries named by the Owner in a lump sum. (Owners also may name contingent
beneficiaries.) If the Owner has named two or more primary beneficiaries, they
will share equally in the Death Benefit unless the Owner has specified
otherwise. If there are no living primary beneficiaries at the time of the
Annuitant's death, payments will be made to those contingent beneficiaries who
are living when payment of the Death Benefit is due. If all the beneficiaries
have predeceased the Annuitant, the Company will pay the Death Benefit to the
Owner, if living, or the Annuitant's estate. In lieu of a lump sum payment, the
beneficiary may elect, within 60 days of the date the Company receives due proof
of the Annuitant's death, to apply the Death Benefit to a payout plan option.
If the Annuitant who is also an Owner dies, the provisions described
immediately above apply except that the beneficiary may only apply the Death
Benefit payment to a payout plan option if:
(1) payments under the option begin within one (1) year of the
Annuitant's death; and
(2) payments under the option are payable over the beneficiary's life or
over a period not greater than the beneficiary's life expectancy.
Death Benefit. If the Annuitant dies before the Annuity Commencement Date,
the Death Benefit is an amount equal to the greater of:
(1) aggregate Premium Payments made under the Contract, LESS partial
withdrawals as of the date the Company receives due proof of the
deceased's death and payment instructions; or
(2) Contract Value as of the date the Company receives due proof of the
deceased's death and payment instructions;
LESS any applicable premium taxes not previously deducted. If the Contract is a
Qualified Contract, any outstanding loan amount on the date the Death Benefit is
paid will also be deducted.
DEATH OF PAYEE AFTER THE ANNUITY COMMENCEMENT DATE
If the Payee dies after the Annuity Commencement Date, any Joint Payee
becomes the sole Payee. If there is no Joint Payee, the Successor Payee becomes
the sole Payee. If there is no Successor Payee, the remaining benefits are paid
to the estate of the last surviving Payee. The death of the Payee after the
Annuity Commencement Date will have the effect stated in the payout plan option
pursuant to which annuity payments are being made. If the Owner dies on or after
the Annuity Commencement Date, any payments that remain must be made at least as
rapidly as under the payout plan in effect on the date of the Owner's death.
THE MATURITY BENEFIT
If the Contract is in the accumulation phase on the Maturity Benefit Date,
IL Annuity will calculate the Maturity Benefit for each Eligible Variable
Account in which the Owner has value. The Maturity Benefit will
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be credited to the Contract Value of an Eligible Variable Account only if the
value of the Eligible Variable Account on the Maturity Benefit Date is less
than: (a) the sum of the Eligible Premium Payments for such Eligible Variable
Account, MINUS (b) a percentage of all prior withdrawals and transfers from the
Eligible Variable Account.
Eligible Premium Payments are those Premium Payments that initially were
allocated to a particular Eligible Variable Account at the time of payment,
provided the payment was made at least ten (10) years prior to the Maturity
Benefit Date.
The Maturity Benefit to be credited to each Eligible Variable Account on
the Maturity Benefit Date is equal to: (a) the sum of the Eligible Premium
Payments for that particular Eligible Variable Account; MINUS (b) a percentage
of all prior withdrawals and transfers from that Eligible Variable Account;
MINUS (c) the value of that Eligible Variable Account on the Maturity Benefit
Date.
The Maturity Benefit Date is the later of the Annuitant's age 70 and 10
years after the Date of Issue. If the Contract is owned by Joint Owners who are
spouses at the time one Joint Owner dies, the Maturity Benefit Date will become
the date the surviving spouse attains age 70. If the Contract is owned by Joint
Owners who are not spouses and one of the Joint Owners dies before the Maturity
Benefit Date, the Maturity Benefit is not available to the sole surviving Owner.
Eligible Variable Accounts are those Variable Accounts shown on the
specifications page of the Contract which invest in Funds which, in turn, invest
primarily in stocks, equity securities, bonds or money market instruments.
Currently, all Variable Accounts, except the Van Eck Worldwide Hard Assets
Variable Account, are Eligible Variable Accounts.
The Maturity Benefit will not be credited to Contract Value if the Owner
chooses an Annuity Commencement Date that is earlier than the Maturity Benefit
Date.
A TRANSFER OR A PARTIAL WITHDRAWAL OF PREMIUM PAYMENTS OUT OF AN ELIGIBLE
VARIABLE ACCOUNT WILL REDUCE THE AMOUNT OF ELIGIBLE PREMIUM PAYMENTS HELD IN THE
ELIGIBLE VARIABLE ACCOUNT IN THE SAME PROPORTION AS THE TRANSFER OR WITHDRAWAL
REDUCED THE VALUE OF THE ELIGIBLE VARIABLE ACCOUNT. EXAMPLES #3, 4 AND 6 BELOW
ILLUSTRATE HOW THIS FEATURE OF THE MATURITY BENEFIT WORKS.
For purposes of calculating the value of an Eligible Variable Account, the
Company deems all transfers and withdrawals to be first a withdrawal of Premium
Payments, then of earnings. Transfers out of an Eligible Variable Account
include transfers resulting from Dollar Cost Averaging or Automatic Account
Balancing; withdrawals out of an Eligible Variable Account include withdrawals
resulting from the Systematic Withdrawal Payments.
The following examples illustrate how the Maturity Benefit works:
Example #1:
Suppose an Owner buys a Contract with a single Premium Payment of
$50,000 at age 55 and immediately allocates the $50,000 to an Eligible
Variable Account. The Owner does not withdraw or transfer any amounts from
the Eligible Variable Account. As of the Maturity Benefit Date (which is
fifteen years later when the Owner is age 70), the $50,000 qualifies as an
Eligible Premium Payment because it was made fifteen years prior to the
Maturity Benefit Date and so it meets the requirement that payment be made
ten years prior to the Maturity Benefit Date.
On the Maturity Benefit Date (Owner's age 70), IL Annuity will
calculate the Maturity Benefit for the Eligible Variable Account. IL
Annuity will total the value of all Eligible Premium Payments in the
Eligible Variable Account -- in this case $50,000. If the value of the
Eligible Variable Account on the Maturity Benefit Date is less than
$50,000, IL Annuity will automatically credit the difference to Contract
Value.
Example #2:
Assume the same facts as in Example #1, except that the Owner
specifies an Annuity Commencement Date of age 65 and begins to receive
payments under one of the payout options available under the
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Contract. At age 70 (the Maturity Benefit Date), IL Annuity does not
calculate the Maturity Benefit and does not credit a Maturity Benefit to
Contract Value. By selecting an Annuity Commencement Date (age 65) that is
earlier than the Maturity Benefit Date (age 70), the Owner forfeited all
eligibility for the Maturity Benefit.
Example #3:
Assume the same facts as in Example #1, except that the Owner
transfers $40,000 from the Eligible Variable Account at age 69. At that
time, the total value of the Eligible Variable Account is $100,000. The
transfer of $40,000 reduced the value of the Eligible Variable Account by
40% ($40,000/$100,000 = .40). No additional transfers or withdrawals are
made prior to the Maturity Benefit Date. On the Maturity Benefit Date, the
sum of the Eligible Premium Payments is $50,000 and is reduced by 40% to
take into account the transfer at age 69 ($50,000 X .40 = $20,000), leaving
$30,000 ($50,000 - $20,000 = $30,000). If on the Maturity Benefit Date the
value of the Eligible Variable Account is less than $30,000, IL Annuity
will automatically credit the difference to Contract Value.
Example #4:
Assume the same facts as in Example #1, except that at age 65 the
Owner deposits (or transfers) an additional $50,000 Premium Payment into
the Eligible Variable Account. At age 69, when the value of the Eligible
Variable Account is $150,000, the Owner withdraws $40,000. The withdrawal
reduced the value of the Eligible Variable Account by 26.667%
($40,000/$150,000 = .26667). No additional transfers or withdrawals are
made before the Maturity Benefit Date. On the Maturity Benefit Date, the
sum of Eligible Premium Payments is $50,000. (The second Premium Payment of
$50,000 does not qualify as an Eligible Premium Payment because it was made
only five years prior to the Maturity Benefit Date and does not meet the
requirement that payment be made ten years prior to the Maturity Benefit
Date.) This sum is then reduced by 26.667% to take into account the
transfer at age 69 ($50,000 X .26667 = $13,333.33), leaving $36,666.67
($50,000 - $13,333.33 = $36,666.67). If on the Maturity Benefit Date the
value of the Eligible Variable Account is less than $36,666.67, IL Annuity
will automatically credit the difference to Contract Value.
Example #5:
Assume the Owner deposits Premium Payments of $5,000 per year into the
same Eligible Variable Account beginning at age 55 until the Maturity
Benefit Date. By age 70, the Owner had paid $75,000 in Premium Payments and
had taken no withdrawals or transfers. The sum of the Eligible Premium
Payments on the Maturity Benefit Date (age 70) is $25,000 because only the
five Premium Payments made prior to age 60 ($5,000 X 5 = $25,000) meet the
requirement that payment be made ten years prior to the Maturity Benefit
Date. If on the Maturity Benefit Date the value of the Eligible Variable
Account is less than $25,000, IL Annuity will automatically credit the
difference to Contract Value.
Example #6:
Assume the same facts as in Example #5, except that the Owner
transfers $10,000 out of the Eligible Variable Account at age 68 when the
value of the Eligible Variable Account is $100,000. The transfer reduced
the value of the Eligible Variable Account by 10% ($10,000/$100,000 = .10).
The next year, the Owner withdraws $9,000 when the value of the Eligible
Variable Account is $90,000. The withdrawal reduced the value of the
Eligible Variable Account by 10% ($9,000/$90,000 = .10). No additional
transfers or withdrawals are made prior to the Maturity Benefit Date. On
the Maturity Benefit Date the sum of the Eligible Premium Payments
($25,000) is reduced by 20% to take into account both the 10% transfer at
age 68 and the 10% withdrawal at age 69 ($25,000 X .20 = $5,000), leaving
$20,000 ($25,000 - $5,000 = $20,000). If on the Maturity Benefit Date the
value of the Eligible Variable Account is less than $20,000, IL Annuity
will automatically credit the difference to Contract Value.
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<PAGE> 41
Example #7:
Spousal Joint Owners: If the Contract is owned by Joint Owners who are
spouses at the time one of the Joint Owners dies, the surviving spouse may
continue the Contract. The Maturity Benefit Date will become the date the
surviving spouse attains age 70. On that date, IL Annuity will calculate
the Maturity Benefit for each Eligible Variable Account with value.
Example #8:
If the Contract is owned by Joint Owners who are not spouses and one
of the Joint Owners dies, the Maturity Benefit is not available to the sole
surviving Owner.
The Company will continue to pay a Maturity Benefit on Premium Payments
allocated to an Eligible Variable Account if: (a) the Portfolio underlying an
Eligible Variable Account changes its investment objective; (b) the Company
determines that an investment in the Portfolio underlying an Eligible Variable
Account is no longer appropriate in light of the purposes of the Separate
Account; or (c) shares of a Portfolio underlying an Eligible Variable Account
are no longer available for investment by the Separate Account and IL Annuity is
forced to redeem all shares of the Portfolio held by the Eligible Variable
Account.
ANNUITY PAYMENTS ON THE ANNUITY COMMENCEMENT DATE
The Annuity Commencement Date is selected by the Owner. If the Owner does
not specify, the Annuity Commencement Date is the later of the Annuitant's age
70 or ten (10) years after the Date of Issue. For non-qualified contracts, the
Annuity Commencement Date may be no later than the contract anniversary
following the Annuitant's 85th birthday. For qualified contracts purchased in
connection with qualified plans under Code sections 401(a), 401(k), 403(a),
403(b) and 457, the Code requires that the Annuity Commencement Date must be no
later than April 1 of the calendar year following the later of the year in which
the Owner (i) reaches age 70 1/2 or (ii) retires. If the Owner is a "5 percent
owner" (as defined in the Code), or in the case of an IRA that satisfies Code
section 408, the Annuity Commencement Date must be no later than the date
described in (i).
If the Owner changes the Annuity Commencement Date to a date earlier than
the Maturity Benefit Date, then the Owner will lose his/her eligibility for the
Maturity Benefit.
The Annuity Commencement Date may be changed subject to the following
limitations: (1) the Owner's Written Request must be received at the Annuity
Service Office at least 31 days before the current Annuity Commencement Date,
and (2) the requested Annuity Commencement Date must be a Contract Anniversary
or the date on which the Owner fully withdraws the Surrender Value.
On the Annuity Commencement Date, the adjusted Contract Value will be
applied under the life income payout plan option with ten years guaranteed,
unless the Owner elects to have the proceeds paid under another payment option
or to receive the Surrender Value in a lump sum. (See "Payout Plan Options.") In
certain states, the Surrender Value will be applied to the payout plan option
rather than the adjusted Contract Value. Unless the Owner instructs the Company
otherwise, amounts in the Fixed Account will be used to provide a fixed-payout
plan option and amounts in the Separate Account will be used to provide a
variable payout plan option.
The adjusted Contract Value is the Contract Value:
(1) MINUS the pro-rated portion of the Contract Fee (unless the Annuity
Commencement Date falls on the contract quarter);
(2) MINUS any applicable premium taxes not yet deducted.
For Qualified Plans, the amount of any outstanding loan is also deducted,
and distributions must satisfy certain requirements specified in the Code.
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<PAGE> 42
PAYMENTS
Any full or partial withdrawal, Death Benefit payment, (or in the case of
Qualified Plans, payment of contract loan proceeds) will usually be paid within
seven days of receipt of a Written Request, any information or documentation
reasonably necessary to process the request, and (in the case of a Death
Benefit) receipt and filing of due proof of death. However, payments may be
postponed if:
1. the New York Stock Exchange is closed, other than customary weekend
and holiday closings, or trading on the exchange is restricted as
determined by the SEC; or
2. the SEC permits by an order the postponement for the protection of
Owners; or
3. the SEC determines that an emergency exists that would make the
disposal of securities held in the Separate Account or the
determination of the value of the Separate Account's net assets not
reasonably practicable.
If a recent check or draft has been submitted, the Company has the right to
delay payment until it has assured itself that the check or draft has been
honored.
The Company has the right to defer payment of any full or partial
withdrawal or transfer from the Fixed Account for up to six months from the date
of receipt of Written Request for such a surrender or transfer. If payment is
not made within 30 days after receipt of documentation necessary to complete the
transaction, or such shorter period required by a particular jurisdiction,
interest will be added to the amount paid from the date of receipt of
documentation at 3% or such higher rate required for a particular jurisdiction.
MODIFICATION
Upon notice to the Owner, the Company may modify the Contract if:
1. necessary to permit the Contract or the Separate Account to comply
with any applicable law or regulation issued by a government agency;
or
2. necessary to assure continued qualification of the Contract under the
Code or other federal or state laws relating to retirement annuities
or variable annuity contracts; or
3. necessary to reflect a change in the operation of the Separate
Account; or
4. the modification provides additional investment options.
In the event of most such modifications, the Company will make appropriate
endorsement to the Contract.
REPORTS TO OWNERS
At least annually, the Company will mail to each Owner, at such Owner's
last known address of record, a report setting forth the Contract Value
(including the Contract Value in each Variable Account and the Fixed Account) of
the Contract, Premium Payments paid and charges deducted since the last report,
partial withdrawals made since the last report and any further information
required by any applicable law or regulation.
INQUIRIES
Inquiries regarding a Contract may be made by writing to the Company at its
Annuity Service Office.
THE FIXED ACCOUNT
An Owner may allocate some or all of the Net Premium Payments and transfer
some or all of the Contract Value to the Fixed Account, which is part of the
Company's general account and pays interest at declared rates. The principal,
after deductions, is also guaranteed. The Company's general account supports its
insurance and annuity obligations. Since the Fixed Account is part of the
general account, the Company
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<PAGE> 43
assumes the risk of investment gain or loss on this amount. All assets in the
general account are subject to the Company's general liabilities from business
operations. The Fixed Account may not be available in all states.
The Fixed Account has not been, and is not required to be, registered with
the SEC under the Securities Act of 1933, and neither the Fixed Account nor the
Company's general account has been registered as an investment company under the
1940 Act. Therefore, neither the Company's general account, the Fixed Account,
nor any interests therein are generally subject to regulation under the 1933 Act
or the 1940 Act. The disclosures relating to the Fixed Account which are
included in this prospectus are for the Owner's information and have not been
reviewed by the SEC. However, such disclosures may be subject to certain
generally applicable provisions of federal securities laws relating to the
accuracy and completeness of statements made in prospectuses.
FIXED ACCOUNT VALUE
The portion of the Contract Value allocated to the Fixed Account is the
Fixed Account Value which is credited with interest, as described below. The
Fixed Account Value reflects interest credited to Contract Value in the Fixed
Account, Net Premium Payments allocated to or Contract Value transferred to the
Fixed Account, transfers of Contract Value out of the Fixed Account, full and
partial withdrawals from the Fixed Account, and charges assessed in connection
with the Contract. The Fixed Account Value is guaranteed to accumulate at a
minimum effective annual interest rate of 3%.
The Fixed Account Value is equal to: (1) Net Premium Payments allocated to
the Fixed Account, PLUS (2) amounts transferred to the Fixed Account, PLUS (3)
interest credited the Fixed Account, MINUS (4) any partial withdrawals or
transfers from the Fixed Account, and MINUS (5) any withdrawal charges, contract
fees or premium taxes deducted from the Fixed Account.
The Company intends to credit the Fixed Account with interest at current
rates in excess of the minimum guaranteed rate but is not obligated to do so.
These current interest rates are influenced by, but do not necessarily
correspond to, prevailing general market interest rates. Because the Company, in
its sole discretion, anticipates changing the current interest rate from time to
time, different allocations to the Fixed Account will be credited with different
current interest rates. The interest rate to be credited to each amount
allocated or transferred to the Fixed Account will apply to the end of the
calendar year in which such amount is received or transferred. At the end of the
calendar year, the Company will determine a new current interest rate on such
amount and accrued interest thereon (which may be a different current interest
rate from the current interest rate on new allocations to the Fixed Account on
that date). The rate declared on such amount and accrued interest will be
guaranteed for the following calendar year. Any interest credited on amounts in
the Fixed Account in excess of the minimum guaranteed effective rate of 3% per
year will be determined in the sole discretion of the Company. The Owner
therefore assumes the risk that interest credited may not exceed the minimum
guaranteed rate.
Amounts deducted from the Fixed Account for the administration fee,
withdrawals, transfers to the Variable Accounts, and other charges are
currently, for the purpose of crediting interest, accounted for on a last-in,
first-out ("LIFO") basis.
The Company reserves the right to change the method of crediting interest
from time to time, provided that such changes do not have the effect of reducing
the guaranteed rate of interest below 3% per annum or shorten the period for
which the interest rate applies to less than one calendar year (except for the
year in which such amount is received or transferred).
TRANSFER PRIVILEGES
General. Transfers to the Fixed Account must be at least $1,000. A
transfer charge of $25 will be imposed for the thirteenth and each subsequent
request made by the Owner to transfer Contract Value from one or more Variable
Accounts to the Fixed Account (or to one or more Variable Accounts) during a
single Contract Year prior to the Annuity Commencement Date.
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Prior to the Annuity Commencement Date, the Owner may transfer up to 20% of
the Fixed Account Value (as determined at the beginning of the Contract Year)
from the Fixed Account to one or more of the Variable Accounts in any Contract
Year. No fee is charged for transfers from the Fixed Account to one or more
Variable Accounts and such a transfer is not considered a transfer for purposes
of assessing a transfer charge.
Dollar-Cost Averaging. An Owner may elect to automatically transfer (on a
monthly or quarterly basis) specified dollar amounts from the Fixed Account (as
well as one or more Variable Accounts) to one or more Variable Accounts. The
minimum transfer amount for dollar-cost averaging is $100 to each Variable
Account. Once elected, dollar-cost averaging from the Fixed Account remains in
effect for the life of the Contract until the Fixed Account is depleted or until
the Owner cancels the election (by Written Request or by telephone if the
Company has the Owner's telephone authorization form on file). There is no
additional charge for dollar-cost averaging and a transfer under this program is
not considered a transfer for purposes of assessing a transfer charge. The
Company reserves the right to discontinue offering the dollar-cost averaging
facility at any time and for any reason. (See "Transfer Privileges -- Dollar
Cost Averaging.")
PAYMENT DEFERRAL
The Company has the right to defer payment of any full or partial
withdrawal or transfer from the Fixed Account for up to six months from the date
of receipt of Written Request for such a surrender or transfer. If payment is
not made within 30 days after receipt of documentation necessary to complete the
transaction, or such shorter period required by a particular jurisdiction,
interest will be added to the amount paid from the date of receipt of
documentation at 3% or such higher rate required for a particular jurisdiction.
CHARGES AND DEDUCTIONS
WITHDRAWAL CHARGE (CONTINGENT DEFERRED SALES CHARGE)
General. No charge for sales expenses is deducted from Premium Payments at
the time Premium Payments are paid. However, within certain time limits
described below, a Withdrawal Charge (contingent deferred sales charge) is
deducted from the Contract Value if a full or partial withdrawal is made before
the Annuity Commencement Date. Also, a Withdrawal Charge is deducted from
amounts applied to certain payout plan options. (See "Annuity Payments on the
Annuity Commencement Date".)
In the event Withdrawal Charges are not sufficient to cover sales expenses,
the loss will be borne by the Company; conversely, if the amount of such charges
proves more than enough to cover such expenses, the excess will be retained by
the Company. The Company does not currently believe that the Withdrawal Charges
imposed will cover the expected costs of distributing the Contracts. Any
shortfall will be made up from the Company's general assets which may include
amounts derived from the mortality and expense risk charge.
Charge for Partial or Full Withdrawal. A charge is imposed on the partial
or full withdrawal of Premium Payments during the first nine Contract Years. The
Withdrawal Charge is assessed as a percentage of the amount withdrawn based on
the number of years between the request for Withdrawal and the Date of Issue and
is based on the rates in the table below. The Withdrawal Charge is separately
calculated for each withdrawal of Contract Value within the first nine years
from the Contract's Date of Issue. Amounts subject to
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<PAGE> 45
the Withdrawal Charge will be deemed to be first from Premium Payments, then
from earnings. No Withdrawal Charge applies to Contract Value in excess of
aggregate Premium Payments.
<TABLE>
<CAPTION>
NUMBER OF CHARGE AS PERCENTAGE
CONTRACT YEARS OF PREMIUM PAYMENTS
------------------------------------------------------- --------------------
<S> <C>
0-6............................................... 7.0%
7 ............................................... 6.0%
8 ............................................... 4.0%
9 ............................................... 2.0%
10 ............................................... 0%
</TABLE>
Any applicable Withdrawal Charge is deducted pro-rata from the remaining
value in the Variable Accounts or Fixed Account from which the withdrawal is
being made. If such remaining Separate Account Value or Fixed Account Value is
insufficient for this purpose, the Withdrawal Charge is deducted pro-rata from
all Variable Accounts and the Fixed Account in which the Contract is invested
based on the remaining Contract Value in each Variable Account and the Fixed
Account.
Free Withdrawal Amount. In each Contract Year after the first Contract
Year, up to 10% of Contract Value, as determined at the beginning of the
Contract Year, may be withdrawn during that year without a Withdrawal Charge
(the "Annual Free Withdrawal Amount"). Any amounts withdrawn in excess of this
10% after the first and through the ninth full Contract Year from the Contract's
Date of Issue will be assessed a Withdrawal Charge. This right is not cumulative
from Contract Year to Contract Year. Such withdrawals may be subject to the 10%
federal penalty tax if made by an Owner before age 59 1/2. Withdrawals under the
Systematic Withdrawal Program are permitted an Annual Free Withdrawal Amount
during the first Contract Year.
Waiver of Withdrawal Charge. If permitted by state law, upon Written
Request from the Owner before the Annuity Commencement Date, the Withdrawal
Charge will be waived on any full or partial withdrawal if the Annuitant or the
Annuitant's spouse is confined for a specified period to a hospital (as
described in the Contract) or a long term care facility (as described in the
Contract). If the Annuitant becomes terminally ill (as described in the
Contract) prior to the Annuity Commencement Date and if permitted by state law,
the Company will waive the Withdrawal Charge on any full withdrawal or any
partial withdrawal, provided the partial withdrawal is at least $500 and a
$5,000 balance remains in the Accounts after the withdrawal.
Under the terms of the Post-Secondary Education Rider, if the Owner, the
Owner's spouse, the Owner's child or the Annuitant is enrolled in a college,
university, vocational, technical, trade or business school, the Company will
waive the Withdrawal Charge on one withdrawal of up to 20% of Contract Value in
each Contract Year prior to the Annuity Commencement Date while the Annuitant is
alive, so long as this waiver is permitted by state law. The maximum withdrawal
permitted under the Post-Secondary Education Rider, when combined with the
Annual Free Withdrawal Amount, is 20% of Contract Value. Prior to the
withdrawal, the Company must receive at its Home Office written proof of
enrollment satisfactory to the Company within one (1) year of the date of
enrollment. (See "Free Withdrawal Amount" and the "Statement of Additional
Information".)
Employee and Agent Purchases. If permitted by state law, the Withdrawal
Charge will be waived on any full or partial withdrawals from Contracts sold to
agents or employees of Indianapolis Life Insurance Company (or its affiliates
and subsidiaries).
CONTRACT FEE
At the end of each Contract quarter (or on the date of full surrender of
the Contract) prior to the Annuity Commencement Date, the Company deducts from
the Contract Value a quarterly contract fee of $7.50 to reimburse it for
administrative expenses relating to the Contract. The fee will be deducted from
each Variable Account and the Fixed Account based on the proportion that the
value in each such Variable Account and the Fixed Account bears to the total
Contract Value. The Company does not expect to make a
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<PAGE> 46
profit on this fee. The charge does not apply after an annuity payout plan has
begun. Deduction of the Contract Fee is currently waived for all Qualified
Contracts. The Company also currently waives deduction of the Contract Fee for
Non-Qualified Contracts whose cumulative Premium Payments on the date the
Contract Fee is assessed are equal to or greater than $100,000. The Company
reserves the right to modify this waiver upon 30 days written notice to Contract
Owners.
ASSET-BASED ADMINISTRATION CHARGE
The Company deducts a daily administration charge to compensate it for
certain expenses it incurs in administration of the Contract. The charge is
deducted from the assets of the Separate Account at an annual rate of 0.15%.
This charge will continue to be assessed after annuitization if annuity payments
are made on a variable basis. The Company does not expect to make a profit from
this charge.
TRANSFER FEE
A transfer fee of $25 will be imposed for the 13th and each subsequent
transfer during a Contract year. For the purpose of assessing such a transfer
fee, each Written Request would be considered to be one transfer, regardless of
the number of Variable Accounts affected by the transfer. The transfer fee would
be deducted from the Variable Account from which the transfer is made. If a
transfer is made from more than one Variable Account at the same time, the
transfer fee would be deducted pro-rata from the remaining Separate Account
Value in such Variable Account(s). The Company reserves the right to waive the
transfer fee.
MORTALITY AND EXPENSE RISK CHARGE
To compensate the Company for assuming mortality and expense risks, the
Company deducts a daily mortality and expense risk charge from the assets of the
Separate Account. The charge is at a daily rate of 0.003404%. If applied on an
annual basis this rate would be 1.25% (approximately 0.90% for mortality risk
and 0.35% for expense risk). This charge will continue to be assessed if annuity
payments are made on a variable basis either before or after the Annuity
Commencement Date.
The mortality risk the Company assumes is that Annuitants may live for a
longer period of time than estimated when the guarantees in the Contract were
established. Because of these guarantees, each Annuitant is assured that
longevity will not have an adverse effect on the annuity payments received. The
mortality risk that the Company assumes also includes a guarantee to pay a Death
Benefit if the Annuitant dies before the Annuity Commencement Date. The expense
risk that the Company assumes is the risk that the administrative fees and
transfer fees (if imposed) may be insufficient to cover actual future expenses.
FUND EXPENSES
Because the Separate Account purchases shares or units of the various
Funds, the net assets of the Separate Account will reflect the investment
advisory fees and other operating expenses incurred by such Funds. See the
accompanying current Prospectuses for the Funds.
PREMIUM TAXES
Various states and other governmental entities levy a premium tax,
currently ranging up to 3.5%, on annuity contracts issued by insurance
companies. Premium tax rates are subject to change from time to time by
legislative and other governmental action. In addition, other government units
within a state may levy such taxes.
The timing of tax levies varies from one taxing authority to another. If
premium taxes are applicable to a Contract, they will be deducted either (a)
from Premium Payments as they are received, (b) from Contract Value upon full or
partial withdrawal, (c) from adjusted Contract Value upon application to a
payout plan option, or (d) upon payment of a Death Benefit. The Company,
however, reserves the right to deduct premium taxes at the time such taxes are
paid to the taxing authority.
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<PAGE> 47
OTHER TAXES
Currently, no charge is made against the Separate Account for any federal,
state or local taxes (other than premium taxes) that the Company incurs or that
may be attributable to the Separate Account or the Contracts. The Company may,
however, make such a charge in the future from Surrender Value, Death Benefits
or annuity payments, as appropriate. Such taxes may include taxes (levied by any
government entity) which the Company determines to have resulted from: (1) the
establishment or maintenance of the Separate Account, (2) receipt by the Company
of Premium Payments, (3) issuance of the Contracts, or (4) the payment of
annuity payments.
PAYOUT PLAN OPTIONS
ELECTION OF PAYOUT PLAN OPTIONS
On the Annuity Commencement Date, the adjusted Contract Value will be
applied under a payout plan option, unless the Owner elects to receive the
Surrender Value in a single sum. (See "Annuity Payments on the Annuity
Commencement Date.") If an election of a payout plan option is not on file at
the Company's Annuity Service Office on the Annuity Commencement Date, the
proceeds will be paid as a life income annuity with payments for ten years
guaranteed. A payout plan option may be elected, revoked, or changed by the
Owner at any time before the Annuity Commencement Date while the Annuitant is
living. An election of a payout plan option and any revocation or change must be
made by Written Request signed by the Owner and/or beneficiary, as appropriate.
The Owner may elect to apply any portion of the adjusted Contract Value to any
payout plan described below or any other plan then being offered by the Company.
The payout plans currently offered by the Company provide either variable
annuity payments or fixed annuity payments or a combination of both.
Prior to the Annuity Commencement Date, the Owner can apply the entire
Surrender Value under a payout plan option, or a beneficiary can apply the Death
Benefit under a payout plan option. The payout plan options available are
described below.
The Company reserves the right to refuse the election of a payout plan
option other than paying the adjusted Contract Value in a lump sum if the total
amount applied to a payout plan option would be less than $2,500, or the amount
of payments would be less than $25.
FIXED ANNUITY PAYMENTS
Fixed annuity payments are periodic payments from the Company to the
designated Annuitant, the amount of which is fixed and guaranteed by the
Company. The amount of each payment depends only on the form and duration of the
payout plan option chosen, the age of the Annuitant, the sex of the Annuitant
(if applicable), the amount applied to purchase the annuity payments and the
applicable annuity purchase rates in the Contract. The annuity purchase rates in
the Contract are based on a minimum guaranteed interest rate of 3.0%. The
Company may, in its sole discretion, make annuity payments in an amount based on
a higher interest rate.
VARIABLE ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment is determined in
the same manner as that of a fixed annuity payment. Therefore, for any
particular amount applied to a particular payout plan option, the dollar amount
of the first variable annuity payment and the first fixed annuity payment
(assuming such fixed payment is based on the minimum guaranteed 3.0% interest
rate) would be the same. Variable annuity payments after the first payment are
similar to fixed annuity payments except that the amount of each payment varies
to reflect the net investment performance of the Variable Account(s) selected by
the Owner or Annuitant.
The net investment performance of a Variable Account is translated into a
variation in the amount of variable annuity payments through the use of annuity
units. The amount of the first variable annuity payment
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<PAGE> 48
associated with each Variable Account is applied to purchase annuity units at
the annuity unit value for the Variable Account on the Annuity Commencement
Date. The number of annuity units of each Variable Account attributable to a
Contract then remains fixed unless an exchange of annuity units is made as
described below. Each Variable Account has a separate annuity unit value that
changes with each valuation period in substantially the same manner as do
accumulation units of the Variable Account.
The dollar value of each variable annuity payment after the first is equal
to the sum of the amounts determined by multiplying the number of annuity units
under a Contract of a particular Variable Account by the annuity unit value for
the Variable Account for the valuation period which ends immediately preceding
the date of each such payment. If the net investment return of the Variable
Account for a payment period is equal to the pro-rated portion of the 3.0%
annual assumed investment rate, the variable annuity payment attributable to
that Variable Account for that period will equal the payment for the prior
period. To the extent that such net investment return exceeds an annualized rate
of 3.0% for a payment period, the payment for that period will be greater than
the payment for the prior period and to the extent that such return for a period
falls short of an annualized rate of 3.0%, the payment for that period will be
less than the payment for the prior period. The Owner may choose an assumed
interest rate of 3.0%, 4.0%, or 5.0% at the time a variable payout plan is
selected.
After the Annuity Commencement Date, a Annuitant may change the selected
Variable Account(s) by Written Request up to one time per contract year. No
charge is assessed for this transfer. Such a change will be made by exchanging
annuity units of one Variable Account for another Variable Account on an
equivalent dollar value basis. See the Statement of Additional Information for
examples of annuity unit value calculations and variable annuity payment
calculations.
DESCRIPTION OF PAYOUT PLAN OPTIONS
Option 1 -- Installment Income For a Fixed Period. To have the proceeds
paid out in equal monthly installments for a fixed number of years between 1 and
30 years. The amount of the payment is not guaranteed if a variable payout plan
is selected. If a fixed payout plan is selected, the payments for each $1,000
applied will not be less than those shown in the Fixed Period Table in Section
13 of the Contract. In the event of the Payee's death, a Successor Payee may
receive the payments or may elect to receive the present value of the remaining
payments in a lump sum. If there is no Successor Payee, the present value of the
remaining payments will be paid to the estate of the last surviving Payee.
Option 2 -- Installment Income In a Fixed Amount. To have the proceeds
paid out in equal monthly installments of $5.00 or more for each $1,000 applied
until the full amount is paid out. The number of payments is not guaranteed if a
variable payout plan is selected. If a fixed payout plan is selected, payments
will be made until the full amount applied with compound interest at an annual
rate of not less than 3% is paid out. In the event of the Payee's death, a
Successor Payee may receive the payments or may elect to receive the present
value of the remaining payments in a lump sum. If there is no Successor Payee,
the present value of the remaining payments will be paid to the estate of the
last surviving Payee.
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Option 3 -- One Life Income. To have the proceeds paid in monthly
installments during the Payee's lifetime for as long as the Payee lives,* or
while the Payee is living with the guarantee that payments will be made for a
period certain of ten years; or while the Payee is living with the guarantee
that payments will be made for a period certain of twenty years. The amount of
each payment is not guaranteed if a variable payout plan is selected. If a fixed
payout plan is selected, the payment for each $1,000 applied will not be less
than that shown in the One Life Table in Section 12 of the Contract. Payments
guaranteed for 10 or 20 years certain may be commuted. Payments guaranteed only
for the life of the Payee may not be commuted.
Option 4 -- Joint and Survivor Life Income. To have proceeds paid out in
monthly installments jointly to two Payees and after one dies to the surviving
Payee.* If one Payee dies before the due date of the first payment, the
surviving Payee will receive payments under the One Life Income Option 3 with
payments guaranteed for 10 years certain. The payments may not be commuted.
The amount of each payment will be determined from the tables in the
Contract that apply to the particular option using the Annuitant's age (and if
applicable, sex). Age will be determined from the last birthday at the due date
of the first payment.
HISTORICAL PERFORMANCE DATA
From time to time, the Company may advertise or include in sales literature
yields, effective yields and total returns for the Variable Accounts. These
figures are based on historical earnings and do not indicate or project future
performance. The Company also may, from time to time, advertise or include in
sales literature Variable Account performance relative to certain performance
rankings and indices compiled by independent organizations. More detailed
information as to the calculation of performance, as well as comparisons with
unmanaged market indices, appears in the Statement of Additional Information.
Performance data for the Variable Accounts is based on the investment
performance of the corresponding Portfolio of a Fund and reflects its expenses.
(See the Prospectuses for the Funds.)
The "yield" of the Money Market Variable Account refers to the annualized
income generated by an investment in the Variable Account over a specified
seven-day period. The yield is calculated by assuming that the income generated
for that seven-day period is generated each seven-day period over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but, when annualized, the income earned by an investment in
the Variable Account is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this assumed
reinvestment.
The yield of a Variable Account (other than the Money Market Variable
Account) refers to the annualized income generated by an investment in the
Variable Account over a specified 30-day or one-month period. The yield is
calculated by assuming that the income generated by the investment during that
30-day or one-month period is generated each period over a 12-month period and
is shown as a percentage of the investment.
Yield quotations do not reflect the Withdrawal Charge.
The "total return" of a Variable Account refers to return quotations
assuming an investment under a Contract has been held in the Variable Account
for various periods of time. For periods prior to the date the Separate Account
commenced operations, performance information will be calculated based on the
performance of the various Portfolios and the assumption that the Variable
Accounts were in existence for the same periods as those indicated for the
Portfolios, assuming that the current level of Contract charges were in effect
during those periods and assuming the monthly (rather than daily) deduction of
mortality and expense risk charges and administrative charges. When a Variable
Account or Portfolio has been in operation for one, five, and ten years,
respectively, the total return for these periods will be provided.
- ---------------
* IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE
PAYEE DIES (OR PAYEES DIE) BEFORE THE DUE DATE OF THE SECOND PAYMENT OR TO
RECEIVE ONLY TWO ANNUITY PAYMENTS IF THE PAYEE DIES (OR PAYEES DIE) BEFORE THE
DUE DATE OF THE THIRD PAYMENT, AND SO ON.
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The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average annual percentage change in
the value of an investment in the Variable Account from the beginning date of
the measuring period to the end of that period. This standardized version of
average annual total return reflects all historical investment results, less all
charges and deductions applied against the Variable Account (including any
Withdrawal Charge that would apply if an Owner terminated the Contract at the
end of each period indicated, but excluding any deductions for premium taxes).
In addition to the standard version described above, total return
performance information computed on different non-standard bases may be used in
advertisements or sales literature. Average annual total return information may
be presented, computed on the same basis as described above, except deductions
will not include the Withdrawal Charge. In addition, the Company may from time
to time disclose average annual total return in non-standard formats and
cumulative total return for Contracts funded by the Variable Accounts.
The Company may also disclose yield, standard total returns, and
non-standard total returns for the Portfolios of the Funds, including such
disclosures for periods prior to the date the Variable Account commenced
operations.
Non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For additional
information regarding the calculation of other performance data, please refer to
the Statement of Additional Information.
In advertising and sales literature (including illustrations), the
performance of each Variable Account may be compared with the performance of
other variable annuity issuers in general or to the performance of particular
types of variable annuities investing in mutual funds, or investment portfolios
of mutual funds with investment objectives similar to the Variable Account.
Lipper Analytical Services, Inc. ("Lipper"), CDA Investment Technology ("CDA"),
Variable Annuity Research Data Service ("VARDS") and Morningstar, Inc.
("Morningstar") are independent services which monitor and rank the performance
of variable annuity issuers in each of the major categories of investment
objectives on an industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance issuers
as well as variable annuity issuers. VARDS rankings compare only variable
annuity issuers. The performance analyses prepared by Lipper, CDA, VARDS and
Morningstar rank or illustrate such issuers on the basis of total return,
assuming reinvestment of distributions, but do not take sales charges,
redemption fees, or certain expense deductions at the separate account level
into consideration. In addition, VARDS prepares risk rankings, which consider
the effects of market risk on total return performance. This type of ranking
provides data as to which funds provide the highest total return within various
categories of funds defined by the degree of risk inherent in their investment
objectives.
Advertising and sales literature may also compare the performance of each
Variable Account to the Standard & Poor's Index of 500 Common Stocks, a widely
used measure of stock performance. This unmanaged index assumes the reinvestment
of dividends but does not reflect any "deduction" for the expense of operating
or managing an investment portfolio. Other independent ranking services and
indices may also be used as a source of performance comparison.
The Company may also report other information including the effect of
systematic withdrawals, systematic investments and tax-deferred compounding on a
Variable Account's investment returns, or returns in general, which may be
illustrated by tables, graphs, or charts. All income and capital gains derived
from Variable Account investments are reinvested and can lead to substantial
long-term accumulation of assets, provided that the Variable Account investment
experience is positive.
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FEDERAL TAX MATTERS
THE FOLLOWING DISCUSSION IS GENERAL AND
IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
This discussion is not intended to address the tax consequences resulting
from all of the situations in which a person may be entitled to or may receive a
distribution under the annuity contract issued by the Company. Any person
concerned about these tax implications should consult a competent tax advisor
before initiating any transaction. This discussion is based upon the Company's
understanding of the present federal income tax laws, as they are currently
interpreted by the Internal Revenue Service ("IRS"). No representation is made
as to the likelihood of the continuation of the present federal income tax laws
or of the current interpretation by the IRS. Moreover, no attempt has been made
to consider any applicable state or other tax laws.
The Contract may be purchased on a non-qualified basis or purchased and
used in connection with plans qualifying for favorable tax treatment. The
Qualified Contract is designed for use by individuals whose Premium Payments are
comprised solely of proceeds from and/or contributions under retirement plans
which are intended to qualify as plans entitled to special income tax treatment
under Sections 401(a), 403(b), or 408 of the Code. The ultimate effect of
federal income taxes on the amounts held under a Contract, or annuity payments,
and on the economic benefit to the Owner, the Annuitant, or the beneficiary
depends on the type of retirement plan, on the tax and employment status of the
individual concerned, and on the Company's tax status. In addition, certain
requirements must be satisfied in purchasing a Qualified Contract with proceeds
from a tax-qualified plan and receiving distributions from a Qualified Contract
in order to continue receiving favorable tax treatment. Some retirement plans
are subject to distribution and other requirements that are not incorporated
into our Contract administration procedures. Owners, participants and
beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the Contracts comply with applicable law.
Therefore, purchasers of Qualified Contracts should seek competent legal and tax
advice regarding the suitability of a Contract for their situation, the
applicable requirements, and the tax treatment of the rights and benefits of a
Contract. The following discussion assumes that Qualified Contracts are
purchased with proceeds from and/or contributions under retirement plans that
qualify for the intended special federal income tax treatment.
TAX STATUS OF THE CONTRACT
Diversification Requirements. Section 817(h) of the Code provides that
separate account investments underlying a contract must be "adequately
diversified" in accordance with Treasury regulations in order for the contract
to qualify as an annuity contract under Section 72 of the Code. The Separate
Account, through each underlying Fund, intends to comply with the
diversification requirements prescribed in regulations under Section 817(h) of
the Code, which affect how the assets in the various Variable Accounts may be
invested. Although the Company does not have direct control over the Funds in
which the Separate Account invests, we believe that each Fund in which the
Separate Account owns shares will meet the diversification requirements, and
therefore, the Contract will be treated as an annuity contract under the Code.
In certain circumstances, Owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includible in the variable
annuity contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
Department has also announced, in connection with the issuance of regulations
concerning investment 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
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also states
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<PAGE> 52
that guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular Variable Accounts
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 Contracts are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the Owner of a Contract has the choice of one or more Variable Accounts
in which to allocate Net Premium Payments and Contract Values, and may be able
to transfer among Variable Accounts more frequently than in such rulings. These
differences could result in an Owner being treated as the Owner of a pro rata
share of the assets of the Separate Account. In addition, the Company does not
know what standards will be set forth, if any, in the regulations or rulings
which the Treasury Department has stated it expects to issue. The Company
therefore reserves the right to modify the Contract as necessary to attempt to
prevent the contract Owner from being considered the Owner of any portion of the
assets of the Separate Account.
Required Distributions. In order to be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires any
Non-Qualified Contract to provide that: (a) if any Owner dies on or after the
Annuity Commencement Date but prior to the time the entire interest in the
contract has been distributed, the remaining portion of such interest will be
distributed at least as rapidly as under the method of distribution being used
as of the date of that Owner's death; and (b) if any Owner dies prior to the
Annuity Commencement Date, the entire interest in the Contract will be
distributed within five years after the date of the Owner's death. These
requirements will be considered satisfied as to any portion of the Owner's
interest which is payable to or for the benefit of a "designated beneficiary"
and which is distributed over the life of such beneficiary or over a period not
extending beyond the life expectancy of that beneficiary, provided that such
distributions begin within one year of that Owner's death. The Owner's
"designated beneficiary" is the person designated by such Owner as a beneficiary
and to whom Ownership of the contract passes by reason of death and must be a
natural person. However, if the Owner's "designated beneficiary" is the
surviving spouse of the Owner, the Contract may be continued with the surviving
spouse as the new Owner.
The Non-Qualified Contracts contain provisions which are intended to comply
with the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. The Company intends to
review such provisions and modify them if necessary to assure that they comply
with the requirements of Code Section 72(s) when clarified by regulation or
otherwise.
Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes.
TAXATION OF ANNUITIES
In General. Section 72 of the Code governs taxation of annuities in
general. The Company believes that an Owner who is a natural person is not taxed
on increases in the value of a Contract until distribution occurs by withdrawing
all or part of the Contract Value (e.g., partial and full withdrawals) or as
annuity payments under the payment option elected. For this purpose, the
assignment, pledge, or agreement to assign or pledge any portion of the Contract
Value (and in the case of a Qualified Contract, any portion of an interest in
the qualified plan) generally will be treated as a distribution. The taxable
portion of a distribution (in the form of a single sum payment or payment
option) is taxable as ordinary income.
The Owner of any annuity contract who is not a natural person generally
must include in income any increase in the excess of the Contract Value over the
"investment in the contract" during the taxable year. There are some exceptions
to this rule, and a prospective Owner that is not a natural person may wish to
discuss these with a competent tax advisor.
The following discussion generally applies to Contracts owned by natural
persons.
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Withdrawals. In the case of a partial withdrawal from a Qualified
Contract, under Section 72(e) of the Code, a ratable portion of the amount
received is taxable, generally based on the ratio of the "investment in the
contract" to the participant's total accrued benefit or balance under the
retirement plan. The "investment in the contract" generally equals the portion,
if any, of any Premium Payment paid by or on behalf of the individual under a
Contract which was not excluded from the individual's gross income. For
Contracts issued in connection with qualified plans, the "investment in the
contract" can be zero. Special tax rules may be available for certain
distributions from Qualified Contracts.
In the case of a partial withdrawal from a Non-Qualified Contract, under
Section 72(e), any amounts received are generally first treated as taxable
income to the extent that the Contract Value immediately before the partial
withdrawal exceeds the "investment in the contract" at that time. Any additional
amount withdrawn is not taxable.
In the case of a full withdrawal under a Qualified or Non-Qualified
Contract, the amount received generally will be taxable only to the extent it
exceeds the "investment in the contract."
Section 1035 of the Code generally provides that no gain or loss shall be
recognized on the exchange of one annuity contract for another. If the
surrendered contract was issued prior to August 14, 1982, the tax rules formerly
provided that the surrender was taxable only to the extent the amount received
exceeds the Owner's investment in the contract will continue to apply to amounts
allocable to investments in that contract prior to August 14, 1982. In contrast,
contracts issued after January 19, 1985 in a Code Section 1035 exchange are
treated as new contracts for purposes of the penalty and distribution-at-death
rules. Special rules and procedures apply to Section 1035 transactions.
Prospective Owners wishing to take advantage of Section 1035 should consult
their tax adviser.
Annuity Payments. Although tax consequences may vary depending on the
payment option elected under an annuity contract, under Code Section 72(b),
generally (prior to recovery of the investment in the contract) gross income
does not include that part of any amount received as an annuity under an annuity
contract that bears the same ratio to such amount as the investment in the
contract bears to the expected return at the annuity starting date. For variable
annuity payments, the taxable portion is generally determined by an equation
that establishes a specific dollar amount of each payment that is not taxed. The
dollar amount is determined by dividing the "investment in the contract" by the
total number of expected periodic payments. However, the entire distribution
will be taxable once the recipient has recovered the dollar amount of his or her
"investment in the contract." For fixed annuity payments, in general, there is
no tax on the portion of each payment which represents the same ratio that the
"investment in the contract" bears to the total expected value of the annuity
payments for the term of the payments; however, the remainder of each annuity
payment is taxable until the recovery of the investment in the contract, and
thereafter the full amount or each annuity payment is taxable. If death occurs
before full recovery of the investment in the contract, the unrecovered amount
may be deducted on the Annuitant's final tax return.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a
Contract because of the death of an Owner or Annuitant. Generally, such amounts
are includible in the income of the recipient as follows: (i) if distributed in
a lump sum, they are taxed in the same manner as a full surrender of the
contract or (ii) if distributed under a payment option, they are taxed in the
same way as annuity payments.
Other rules relating to distributions at death apply to Qualified
Contracts. Owners should consult their legal counsel and tax adviser regarding
these rules and their impact on Qualified Contracts.
Penalty Tax on Certain Withdrawals. In the case of a distribution pursuant
to a Non-Qualified Contract, there may be imposed a federal penalty tax equal to
10% of the amount treated as taxable income. In general, however, there is no
penalty on distributions:
1. made on or after the taxpayer reaches age 59 1/2;
2. made on or after the death of the holder (or if the holder is not an
individual, the death of the primary Annuitant);
3. attributable to the taxpayer's becoming disabled;
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4. a part of a series of substantially equal periodic payments (not less
frequently than annually) for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of the
taxpayer and his or her designated beneficiary;
5. made under certain annuities issued in connection with structured
settlement agreements; and
6. made under an annuity contract that is purchased with a single
Premium Payment when the Annuity Commencement Date is no later than a
year from purchase of the annuity and substantially equal periodic
payments are made, not less frequently than annually, during the
annuity payment period.
Other tax penalties may apply to certain distributions under a Qualified
Contract.
Possible Changes in Taxation. In past years, legislation has been proposed
that would have adversely modified the federal taxation of certain annuities.
For example, one such proposal would have changed the tax treatment of
non-qualified annuities that did not have "substantial life contingencies" by
taxing income as it is credited to the annuity. Although as of the date of this
prospectus Congress is not considering any legislation regarding 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, judicial decisions, etc.). Moreover, it is also possible that any
change could be retroactive (that is, effective prior to the date of the
change).
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer of Ownership of a Contract, the designation of an Annuitant,
Annuitant or other beneficiary who is not also the Owner, the selection of
certain Annuity Commencement 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, or exchange of a Contract should
contact a competent tax advisor with respect to the potential tax effects of
such a transaction.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for
the recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Effective January 1, 1994, distributions from certain qualified
plans are generally subject to mandatory withholding. Certain states also
require withholding of state income tax whenever federal income tax is withheld.
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts entered into after October 21,
1988 that are issued by the Company (or its affiliates) to the same Owner during
any calendar year are treated as one annuity Contract for purposes of
determining the amount includible in gross income under Section 72(e). The
effects of this rule are not yet clear; however, it could affect the time when
income is taxable and the amount that might be subject to the 10% penalty tax
described above. In addition, the Treasury Department has specific authority to
issue regulations that prevent the avoidance of Section 72(e) through the serial
purchase of annuity contracts or otherwise. There may also be other situations
in which the Treasury may conclude that it would be appropriate to aggregate two
or more annuity contracts purchased by the same Owner. Accordingly, a Contract
Owner should consult a competent tax advisor before purchasing more than one
annuity contract.
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans.
The tax rules applicable to participants in these qualified plans vary according
to the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; aggregate distributions in excess of a specified
annual amount; and in other
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specified circumstances. Therefore, no attempt is made to provide more than
general information about the use of the Contracts with the various types of
qualified retirement plans. Contract Owners, the Annuitants, and Beneficiaries
are cautioned that the rights of any person to any benefits under these
qualified retirement plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the Contract, but
the Company shall not be bound by the terms and conditions of such plans to the
extent such terms contradict the Contract, unless the Company consents. Brief
descriptions follow of the various types of qualified retirement plans in
connection with a Contract. The Company will amend the Contract as necessary to
conform it to the requirements of such plan.
Corporate Pension and Profit Sharing Plans and H.R. 10 Plans. Section
401(a) of the Code permits corporate employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish these plans for themselves and their employees. These retirement 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. Employers intending to use the Contract with such plans should seek
competent advice.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals and their employers to contribute to an individual retirement
program known as an "Individual Retirement Annuity" or "IRA". These IRAs are
subject to limits on the amount that may be contributed and deducted, the
persons who may be eligible, and on the time when distributions may commence.
Also, distributions from certain other types of qualified retirement plans may
be "rolled over" on a tax-deferred basis into an IRA. Sales of the Contract for
use with IRAs may be subject to special requirements of the Internal Revenue
Service. Employers may establish Simplified Employee Pension (SEP) Plans to
provide IRA contributions on behalf of their employees.
Simple Retirement Accounts. Beginning January 1, 1997, certain small
employers may establish Simple Retirement Accounts as provided by Section 408(p)
of the Code, under which employees may elect to defer up to $6,000 (as increased
for cost of living adjustments) as a percentage of compensation. The sponsoring
employer is required to make a matching contribution on behalf of contributing
employees. Distributions from a Simple Retirement Account are subject to the
same restrictions that apply to IRA distributions and are taxed as ordinary
income. Subject to certain exceptions, premature distributions prior to age
59 1/2 are subject to a 10% penalty tax, which is increased to 25% if the
distribution occurs within the first two years after the commencement of the
employee's participation in the plan. The failure of the Simple Retirement
Account to meet Code requirements may result in adverse tax consequences.
Tax Sheltered Annuities. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from their
gross income the Premium Payments paid, within certain limits, on a Contract
that will provide an annuity for the employee's retirement. These Premium
Payments may be subject to FICA (social security) tax.
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
At the present time, the Company makes no charge to the Variable Accounts
for any Federal, state, or local taxes that the Company incurs which may be
attributable to such Variable Accounts or the Contracts. The Company, however,
reserves the right in the future to make a charge for any such tax or other
economic burden resulting from the application of the tax laws that it
determines to be properly attributable to the Variable Accounts or to the
Contracts.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under these Contracts are not exhaustive, and special rules are provided with
respect to other tax situations not discussed in the Prospectus. Further, the
Federal income tax consequences discussed herein reflect the Company's
understanding of current law and the law may change. Federal estate and state
and local estate, inheritance and other tax
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consequences of Ownership or receipt of distributions under a Contract depend on
the individual circumstances of each Owner or recipient of the distribution. A
competent tax advisor should be consulted for further information.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be offered to the public on a continuous basis. The
Company does not anticipate discontinuing the offering of the Contracts, but
reserves the right to discontinue the offering. Applications for Contracts are
solicited by agents who are licensed by applicable state insurance authorities
to sell the Company's variable annuity contracts and who are also registered
representatives of IL Securities, Inc. or broker-dealers having selling
agreements with IL Securities, Inc. or broker-dealers having selling agreements
with such broker-dealers. IL Securities, Inc. is a wholly-owned subsidiary of
the Indianapolis Life Group of Companies, Inc., which, in turn, is a
wholly-owned subsidiary of Indianapolis Life Insurance Company and is registered
with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is
a member of the National Association of Securities Dealers, Inc.
IL Securities, Inc. acts as the principal underwriter, as defined in the
1940 Act, of the Contracts for the Separate Account pursuant to an Underwriting
Agreement between the Company and IL Securities, Inc. IL Securities, Inc. is not
obligated to sell any specific number of Contracts. The principal business
address for IL Securities, Inc. is P.O. Box 1230, 2960 North Meridian Street,
Indianapolis, Indiana 46208.
The Company may pay sales commissions to broker-dealers up to an amount
equal to 7.2% of the Premium Payments paid under a Contract. In addition,
asset-based trailer commissions of up to 1.25% may be paid. The Company may also
pay up to 1.00% on Premium Payments to IL Securities to compensate it for
certain distribution expenses. These broker-dealers are expected to compensate
sales representatives in varying amounts from these commissions. The Company
also may pay other distribution expenses such as production incentive bonuses,
agent's insurance and pension benefits, and agency expense allowances. These
distribution expenses do not result in any additional charges against the
Contracts that are not described under "Charges and Deductions."
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or
the assets of the Separate Account are subject. The Company is not involved in
any litigation that is of material importance in relation to its total assets or
that relates to the Separate Account.
VOTING RIGHTS
In accordance with its view of current applicable law, the Company will
vote Fund shares held in the Separate Account at regular and special shareholder
meetings of the Funds in accordance with instructions received from persons
having voting interests in the corresponding Variable Accounts. If, however, the
1940 Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or the Company otherwise determines that
it is allowed to vote the shares in its own right, it may elect to do so.
The number of votes that an Owner or Annuitant has the right to instruct
will be calculated separately for each Variable Account of the Separate Account,
and may include fractional votes. Prior to the Annuity Commencement Date, an
Owner holds a voting interest in each Variable Account to which the Contract
Value is allocated. After the Annuity Commencement Date, the Annuitant has a
voting interest in each Variable Account from which variable annuity payments
are made.
For each Owner, the number of votes attributable to a Variable Account will
be determined by dividing the Contract Value attributable to that Owner's
Contract in that Variable Account by the net asset value per share of the Fund
in which that Variable Account invests. For each Annuitant, the number of votes
attributable to a Variable Account will be determined by dividing the liability
for future variable annuity payments to be paid from that Variable Account by
the net asset value per share of the Fund in which that
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Variable Account invests. This liability for future payments is calculated on
the basis of the mortality assumptions, the 3.0% assumed investment rate used in
determining the number of annuity units of that Variable Account credited to the
Annuitant's Contract and annuity unit value of that Variable Account on the date
that the number of votes is determined. As variable annuity payments are made to
the Annuitant, the liability for future payments decreases as does the number of
votes.
The number of votes available to an Owner or Annuitant will be determined
as of the date coincident with the date established by the Fund for determining
shareholders eligible to vote at the relevant meeting of the Fund's
shareholders. Voting instructions will be solicited by written communication
prior to such meeting in accordance with procedures established for the Fund.
Each Owner or Annuitant having a voting interest in a Variable Account will
receive proxy materials and reports relating to any meeting of shareholders of
the Fund in which that Variable Account invests.
Fund shares as to which no timely instructions are received and shares held
by the Company in a Variable Account as to which no Owner or Annuitant has a
beneficial interest will be voted in proportion to the voting instructions which
are received with respect to all Contracts participating in that Variable
Account. Voting instructions to abstain on any item to be voted upon will be
applied to reduce the total number of votes eligible to be cast on a matter.
COMPANY HOLIDAYS
The Company is closed on the following holidays: the Friday following
Thanksgiving, the day preceding Christmas when Christmas falls on Tuesday
through Saturday, the day following Christmas when Christmas falls on Sunday or
Monday, and the day following New Year's Day when it falls on a Sunday, the
Monday following New Year's Day when New Year's Day falls on a Saturday, and the
day preceding or following Independence Day when it falls on Saturday or Sunday.
FINANCIAL STATEMENTS
IL Annuity and Insurance Company, formerly known as Sentry Investors Life
Insurance Company, became a wholly-owned subsidiary of the Indianapolis Life
Group of Companies, Inc. on November 1, 1994. Immediately prior thereto, the
Company entered into an assumption reinsurance agreement with Sentry Life
Insurance Company ("Sentry") whereby Sentry assumed all of the insurance
in-force and related assets and liabilities from the Company. The effect of the
reinsurance agreement was to transfer all of the insurance related assets and
liabilities to Sentry, leaving only bonds, cash and state insurance department
licenses to be acquired by the Indianapolis Life Group of Companies, Inc. No
business was issued by the Company through December 31, 1994.
The audited statement of net assets of IL Annuity and Insurance Co.
Separate Account 1 as of December 31, 1996 and the related statement of
operations for the year then ended and statements of changes in net assets for
the two years then ended, as well as the Report of the Independent Auditors, are
included in the Statement of Additional Information ("SAI"). The audited balance
sheets for the Company as of December 31, 1996 and 1995, and the related
statements of income, stockholder's equity, and cash flows for the years then
ended and the two months ended December 31, 1994, as well as the Report of the
Independent Auditors, are contained in the SAI. The financial statements of the
Company should be considered only as bearing on the ability of the Company to
meets its obligations under the Contracts. They should not be considered as
bearing on the investment performance of the assets held in the Separate
Account.
48
<PAGE> 58
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
Additional information about the Contract and the Separate Account is
contained in the Statement of Additional Information. A Statement of Additional
Information is available (at no cost) by writing the Company at the address
shown on the front cover or by calling 1-800-388-1331. The following is the
Table of Contents for that Statement.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADDITIONAL CONTRACT PROVISIONS....................................................... 1
The Contract.................................................................... 1
Incontestability................................................................ 1
Misstatement of Age or Sex...................................................... 1
Nonparticipation................................................................ 1
Riders.......................................................................... 2
CALCULATION OF HISTORICAL PERFORMANCE DATA........................................... 2
Money Market Variable Account Yields............................................ 2
Other Variable Account Yields................................................... 4
Average Annual Total Returns.................................................... 5
Other (Non-Standard) Total Returns.............................................. 6
Effect of the Annual Contract Fee on Performance Data........................... 7
Other Information............................................................... 7
NET INVESTMENT FACTOR................................................................
VARIABLE ANNUITY PAYMENTS............................................................ 8
Assumed Investment Rate......................................................... 8
Amount of Variable Annuity Payments............................................. 8
Annuity Unit Value.............................................................. 9
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS....................................
Resolving Material Conflicts....................................................
TERMINATION OF PARTICIPATION AGREEMENTS.............................................. 10
The Alger American Fund......................................................... 10
Fidelity Variable Insurance Products Fund....................................... 10
Fidelity Variable Insurance Products Fund II.................................... 10
OCC Accumulation Trust.......................................................... 11
Royce Capital Fund..............................................................
SAFECO Resource Series Trust....................................................
SoGen Variable Funds, Inc. .....................................................
T. Rowe Price Fixed Income Series, Inc. ........................................ 11
T. Rowe Price International Series, Inc. ....................................... 11
Van Eck Worldwide Insurance Trust............................................... 11
VOTING RIGHTS........................................................................
SAFEKEEPING OF ACCOUNT ASSETS........................................................ 12
DISTRIBUTION OF THE CONTRACTS........................................................
LEGAL MATTERS........................................................................ 12
EXPERTS.............................................................................. 13
OTHER INFORMATION.................................................................... 13
FINANCIAL STATEMENTS................................................................. 13
</TABLE>
49
<PAGE> 59
PROSPECTUS FOR THE
VISIONARY CHOICE
FLEXIBLE PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
ALSO KNOWN AS
MODIFIED SINGLE PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
Issued by
IL ANNUITY AND INSURANCE COMPANY
2960 North Meridian Street
Indianapolis, Indiana 46208
Telephone: (317) 927-6500
(800) XXX-XXXX
This prospectus describes the VISIONARY CHOICE variable annuity, an
individual deferred variable annuity contract (the "Contract") being offered by
IL Annuity and Insurance Company (the "Company," "we," "us," or "our"). Under
the terms of the Contract, we promise to pay the Annuitant a series of income
payments in the form of annuity payments starting on the Annuity Start Date you
choose. (You will be the Annuitant unless you state otherwise.) Until the
Annuity Start Date, the Contract is in the Pay-in Period and allows you to
accumulate assets on a tax-deferred basis for retirement and other long-term
purposes. VISIONARY CHOICE may be available to you when you participate in a
retirement plan that qualifies for deferral of federal income taxes.
Non-Qualified Contracts are also available.
You may direct your Premium Payments, as well as any value accumulated
under your Contract, to one or more of 19 Variable Accounts of the IL Annuity
and Insurance Co. Separate Account 1 (the "Separate Account") and/or to the
Fixed Account. The money you place in the Fixed Account will earn interest at a
rate guaranteed by the Company to equal or exceed 3% annually. The money you
place in a Variable Account will be invested solely in an investment portfolio
("Portfolio") of a mutual fund ("Fund"). The value of the assets you place in
the Variable Accounts will vary according to the investment performance of the
Portfolios. Currently you may choose among 19 Portfolios of 10 Funds:
The Alger American Fund:
MidCap Growth Portfolio and Small Capitalization Portfolio
Fidelity Variable Insurance Products ("VIP") Fund and Fidelity VIP
Fund II:
Equity-Income Portfolio, Growth Portfolio, Money Market Portfolio,
Asset Manager Portfolio, Contrafund Portfolio, Index 500 Portfolio
and Investment Grade Bond Portfolio
OCC Accumulation Trust:
Managed Portfolio and Small Cap Portfolio
Royce Capital Fund:
Royce Micro-Cap Portfolio
SAFECO Resources Series Trust:
SAFECO Equity Portfolio and SAFECO Growth Portfolio
SoGen Variable Funds, Inc.:
SoGen Overseas Variable Portfolio
T. Rowe Price Fixed Income Series, Inc.:
Limited-Term Bond Portfolio
T. Rowe Price International Series, Inc.:
International Stock Portfolio
Van Eck Worldwide Insurance Trust:
Worldwide Hard Assets Portfolio (formerly Gold and Natural Resources
Portfolio) and Worldwide Balanced Portfolio
<PAGE> 60
You bear the entire investment risk on the assets you place in the Variable
Accounts. This means that, depending on market conditions, you may increase or
lose the principal you have invested in any of these Portfolios.
With the VISIONARY CHOICE, you choose one of two withdrawal charge options
at the time you complete your application. You also choose, at no additional
charge, either an enhanced death benefit option or a living benefit option. And,
if your initial Premium Payment is $100,000 or more, you may choose one of two
free withdrawal options on your application. ONCE YOU CHOOSE YOUR OPTIONS, YOU
MAY NOT CHANGE THEM.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE FUNDS.
This prospectus contains important information about the Contract and the
Separate Account that you should know before investing. Additional information
about the Contract and the Separate Account is contained in the Statement of
Additional Information ("SAI") that has been filed with the Securities and
Exchange Commission. The SAI has the same date as this prospectus and is legally
a part of this prospectus. The table of contents for the SAI is on page of this
prospectus. You may obtain a free copy of the SAI by writing to us at the
address shown above or by calling [1-800-XXX-XXXX].
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Contract is not available in all states.
Unlike bank and credit union accounts, Contract Value invested in the
Separate Account is not insured. Investment of Contract Value in the Separate
Account involves certain risks including possible loss of Premium Payments.
Separate Account Value is not deposited in or guaranteed by any bank or credit
union and is not guaranteed by any government agency.
The date of this prospectus is , 1997
ii
<PAGE> 61
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS........................................................................... 2
FEE TABLE............................................................................. 5
SUMMARY OF THE VISIONARY CHOICE CONTRACT.............................................. 12
ABOUT IL ANNUITY AND THE SEPARATE ACCOUNT............................................. 16
THE PORTFOLIOS........................................................................ 17
THE PAY-IN PERIOD..................................................................... 21
TRANSFERS BETWEEN INVESTMENT OPTIONS.................................................. 23
FEES AND CHARGES...................................................................... 25
THE PAYOUT PERIOD..................................................................... 29
WITHDRAWAL OF CONTRACT VALUE.......................................................... 31
CONTRACT LOANS........................................................................ 32
DEATH BENEFITS........................................................................ 33
THE LIVING BENEFIT.................................................................... 35
THE FIXED ACCOUNT..................................................................... 37
HOW TO REVIEW INVESTMENT PERFORMANCE OF THE VARIABLE ACCOUNTS......................... 39
VOTING RIGHTS......................................................................... 41
FEDERAL TAX MATTERS................................................................... 41
OTHER INFORMATION..................................................................... 46
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.......................... 49
APPENDIX I: CONDENSED FINANCIAL INFORMATION........................................... A-1
</TABLE>
1
<PAGE> 62
DEFINITIONS
ACCUMULATION UNIT -- An accounting measure we use to calculate the value of a
Variable Account during the Pay-in Period.
ANNUITANT -- You are the Annuitant, unless you state otherwise in your
application. The Annuitant is the person or persons whose life (or lives)
determines the dollar amount of the annuity payments that will be paid under the
Contract. If the Annuitant dies before the Annuity Start Date, we will pay a
death benefit. The maximum number of joint annuitants is two. Provisions
referring to the death of an Annuitant mean the death of the last surviving
Annuitant. The Annuitant named in the application may not be changed.
ANNUITY START DATE -- The date when the Annuitant will begin to receive annuity
payments. (You are the Annuitant, unless you tell us otherwise at the time of
your application.) If you own a Non-Qualified Contract, we will ask you to
select an Annuity Start Date. If you do not select a date, the Annuity Start
Date is either the Annuitant's age 70 or 10 years after the Date of Issue,
whichever is later. If you own a Qualified Contract, the Annuity Start Date is
fixed at the Annuitant's age 70 1/2.
ANNUITY UNIT -- An accounting measure we use to calculate the value of your
annuity payments if you choose to receive annuity payments from the Variable
Accounts.
BENEFICIARY -- The person you name to receive the death benefit if the Owner or
Annuitant dies before the Annuity Start Date.
BUSINESS DAY -- Each day on which the New York Stock Exchange is open for
business, except for the holidays listed in this prospectus under "Holidays" and
except for any day on which the Portfolio in which a Variable Account invests
does not value its shares.
THE CODE -- The Internal Revenue Code of 1986, as amended.
THE COMPANY ("WE," "US," "OUR") -- IL Annuity and Insurance Company, a
Massachusetts stock life insurance company.
CONTRACT ANNIVERSARY -- The same month and day as the Date of Issue in each
calendar year during which the Contract is in force.
CONTRACT FEE -- During the Pay-in Period, we will deduct this charge from your
Contract Value at the end of each contract quarter and on the date you fully
withdraw all value from the Contract. We use the Contract Fee to cover our cost
of providing certain administrative services related to the Contracts and the
Separate Account.
CONTRACT VALUE -- The total amount you have accumulated under the Contract. It
is the sum of the Separate Account Value and the Fixed Account Value.
CONTRACT YEAR -- A twelve-month period that we measure from the anniversary of
the Date of Issue. The first Contract Year begins on the Date of Issue.
DATE OF ISSUE -- The date we issue your Contract. It is shown on the
specifications page of the Contract and is the date on which the first Contract
Year begins.
DEATH BENEFIT ANNIVERSARY -- Every third Contract Anniversary beginning on the
Date of Issue.
DUE PROOF OF DEATH -- Proof of death that is satisfactory to us. Such proof may
consist of the following if acceptable to us: (a) a certified copy of the death
record; (b) a certified copy of a court decree reciting a finding of death; (c)
any other proof satisfactory to us.
ELIGIBLE PREMIUM PAYMENT -- That part of a Premium Payment that you initially
allocated to a particular Eligible Variable Account at the time of payment,
provided you made the payment at least ten (10) years prior to the Living
Benefit Date. (See "Living Benefit.")
ELIGIBLE VARIABLE ACCOUNT -- Currently all Variable Accounts except the Van Eck
Worldwide Hard Assets Variable Account. (See "Living Benefit.")
2
<PAGE> 63
ENHANCED DEATH BENEFIT -- If you elect the three-year stepped-up Enhanced Death
Benefit option at the time of purchase, the Enhanced Death Benefit will equal
the greater of: (a) the Contract Value as of the date we receive due proof of
the deceased's death and payment instructions; or (b) the highest Contract Value
on any Death Benefit Anniversary preceding the date the death benefit is
determined, plus any Premium Payments and minus any withdrawals and charges
incurred between such Death Benefit Anniversary and the date the death benefit
is determined.
FIXED ACCOUNT -- Part of our General Account to which you may apportion Net
Premium Payments and to which you may transfer assets under the Contract. The
Fixed Account provides guarantees of principal and interest. Special limits
apply to transfers of Contract Value to and from the Fixed Account. (See "Fixed
Account.")
FIXED ACCOUNT CURRENT RATE -- The interest rate contained in a schedule of rates
we set from time to time. The rate of interest we will credit to the initial
Premium Payment, if allocated to the Fixed Account, is shown on the
specifications page of the Contract.
FIXED ACCOUNT VALUE -- The value of your Contract in the Fixed Account before
the Annuity Start Date.
FUNDS -- Each of (i) The Alger American Fund; (ii) Fidelity VIP Fund; (iii)
Fidelity VIP Fund II; (iv) OCC Accumulation Trust; (v) Royce Capital Fund; (vi)
SAFECO Resource Series Trust; (vii) SoGen Variable Funds, Inc.; (viii) T. Rowe
Price Fixed Income Series, Inc.; (ix) T. Rowe Price International Series, Inc.;
and (x) Van Eck Worldwide Insurance Trust. Each Variable Account invests in a
separate investment portfolio ("Portfolio") of a Fund. Each Fund is either an
open-end management investment company or a unit investment trust.
GENERAL ACCOUNT -- The account that contains all of our assets other than those
held in the separate accounts.
LIVING BENEFIT -- If you elect the Living Benefit option at the time of purchase
and if the Contract is in the Pay-in Period on the Living Benefit Date, the
Living Benefit for a particular Eligible Variable Account is equal to: (a) the
sum of the Eligible Premium Payments for that particular Eligible Variable
Account; MINUS (b) a percentage of any transfer or withdrawal from that Eligible
Variable Account; and MINUS (c) the value of that Eligible Variable Account on
the Living Benefit Date. (See "Living Benefit.")
LIVING BENEFIT DATE -- The Annuitant's age 70 or 10 years after the Date of
Issue, whichever is later. If the Contract is owned by Joint Owners who are
spouses at the time one Joint Owner dies, the Living Benefit Date will become
the date the surviving spouse attains age 70.
NET PREMIUM PAYMENT -- A Premium Payment minus any applicable premium tax.
NON-QUALIFIED CONTRACT -- A Contract that is not a "Qualified Contract."
OWNER ("YOU" OR "YOUR") -- The person(s) who owns the Contract and who is
entitled to exercise all rights and privileges provided in the Contract. The
term also includes any person designated as a Joint Owner. The maximum number of
Joint Owners is two. Joint Owners are not permitted under Qualified Contracts.
PAYEE -- The person or persons entitled to receive annuity payments. You may
name a "Successor Payee" to receive any guaranteed annuity payments after the
death of the sole surviving Payee.
PAY-IN PERIOD -- The period of time that begins when your Contract is issued and
continues until the date you begin to receive annuity payments on the Annuity
Start Date. The Pay-in Period will also end if you fully withdraw your Contract
before the Annuity Start Date.
PAYOUT PERIOD -- The period of time during which you will receive in a steady
stream of annuity payments the money you have accumulated under your Contract.
It begins on the Annuity Start Date.
PAYOUT OPTION -- The arrangement under which annuity payments are made to you.
You may choose to have your annuity payments made on a fixed, a variable, or a
combination payout basis.
PORTFOLIO -- The separate investment portfolios of the Funds. The Portfolios
currently offered through the Contract are listed on the front cover of this
prospectus.
3
<PAGE> 64
PREMIUM PAYMENT YEAR -- The twelve-month period beginning on the date we receive
any Premium Payment. It is used to calculate the Withdrawal Charge if you choose
the Date of Premium Payment Withdrawal Charge Option.
QUALIFIED CONTRACT -- A Contract issued in connection with retirement plans that
qualify for special federal income tax treatment under Sections 401(a), 403(b),
or 408 of the Code.
SEC -- U.S. Securities and Exchange Commission.
SEPARATE ACCOUNT -- IL Annuity and Insurance Co. Separate Account 1. It is not
part of our General Account. The Separate Account is divided into Variable
Accounts, each of which invests solely in shares of a designated Portfolio.
SEPARATE ACCOUNT VALUE -- The value of the Contract in the Separate Account
before the Annuity Start Date.
SERVICE CENTER -- The office of Johnson & Higgins/Kirke-Van Orsdel, Inc., an
administrator that provides administrative service for the Contracts. The
mailing address for the Service Center is .
SURRENDER VALUE -- The Contract Value MINUS (1) any applicable Withdrawal
Charges; MINUS (2) any premium taxes not previously deducted; and MINUS (3) the
Contract Fee. For a 403(b) Qualified Contract, the outstanding loan amount, if
any, is also deducted from Contract Value.
VARIABLE ACCOUNT -- A subdivision of the Separate Account. A Variable Account
invests solely in the shares of a designated Portfolio of a Fund.
WRITTEN REQUEST -- A written notice or request in a form satisfactory to us that
is signed by you and received at the Service Center.
4
<PAGE> 65
FEE TABLE
The following expense information assumes that you have invested your
entire Contract Value in the Separate Account.
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Withdrawal Charge (as a percentage of Premium Payments withdrawn(1))........... 7.0%
Transfer Fee(2) (No charge for first 12 transfers in a Contract Year; thereafter, $25
fee per transfer).................................................................... $ 0
Contract Fee ($7.50 per quarter, annualized)(3)........................................ $30
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of Separate Account Value)
<TABLE>
<S> <C>
Mortality and Expense Risk Charge..................................................... 1.25%
Administrative Expense Charge......................................................... 0.15%
Total Separate Account Annual Expenses........................................... 1.40%
</TABLE>
INVESTMENT PORTFOLIO ANNUAL EXPENSES
(as a percentage of average daily net assets of a Portfolio after expense
cap or reimbursement)
<TABLE>
<CAPTION>
MANAGEMENT FEES OTHER EXPENSES TOTAL ANNUAL
(INVESTMENT (AFTER EXPENSES (AFTER
NAME OF PORTFOLIO ADVISORY FEES) REIMBURSEMENT) REIMBURSEMENT)
- --------------------------------------------------- --------------- -------------- ---------------
<S> <C> <C> <C>
Alger American Fund
MidCap Growth Portfolio.......................... 0.80% 0.04% 0.84%
Small Capitalization Portfolio................... 0.85% 0.03% 0.88%
Fidelity VIP Fund
Equity Income Portfolio(4)....................... 0.51% 0.07% 0.58%
Growth Portfolio(4).............................. 0.61% 0.08% 0.69%
Money Market Portfolio........................... 0.21% 0.09% 0.30%
Fidelity VIP Fund II
Asset Manager Portfolio(4)....................... 0.64% 0.10% 0.74%
Contrafund Portfolio(4).......................... 0.61% 0.13% 0.74%
Index 500 Portfolio(5)........................... 0.13% 0.15% 0.28%
Investment Grade Bond Portfolio.................. 0.45% 0.13% 0.58%
OCC Accumulation Trust
Managed Portfolio(6)............................. 0.80% 0.10% 0.90%
Small Cap Portfolio(6)........................... 0.80% 0.22% 1.02%
Royce Capital Fund
Royce Micro-Cap Portfolio(7)..................... 0.00% 1.35% 1.35%
SAFECO Resources Series Trust
SAFECO Equity Portfolio.......................... 0.72% 0.03% 0.75%
SAFECO Growth Portfolio(8)....................... 0.72% 0.07% 0.79%
SoGen Variable Funds, Inc.
SoGen Overseas Portfolio(9)...................... 0.75% 1.00% 1.75%
T. Rowe Price Fixed Income Series, Inc.
Limited-Term Bond Portfolio(10).................. 0.70% 0.00% 0.70%
T. Rowe Price International Series, Inc.
International Stock Portfolio(10)................ 1.05% 0.00% 1.05%
Van Eck Worldwide Insurance Trust
Worldwide Hard Assets Portfolio.................. 1.00% 0.08% 1.08%
Worldwide Balanced Portfolio(11)................. 0.00% 0.00% 0.00%
</TABLE>
Premium taxes are not shown here, but may be charged by some states. (See
"Premium Taxes".)
5
<PAGE> 66
The purpose of the fee table is to assist you in understanding the costs
and expenses that you will pay directly or indirectly when you invest in the
Contract. The table reflects the actual charges and expenses for the Separate
Account and the Portfolios for the year ended December 31, 1996. For a more
complete description of these charges and expenses, see "Fees and Charges" in
this prospectus and the prospectus for each Portfolio that is attached to this
prospectus.
(1) In any Contract Year after the first Contract Year, you may withdraw a
portion of your Contract Value without incurring a Withdrawal Charge. This
amount is called the Free Withdrawal Amount. If your initial Premium
Payment is less than $100,000, the Free Withdrawal Amount is 10% of
Contract Value each year, as determined at the beginning of the Contract
Year. If you do not withdraw the full 10% in any Contract Year, the
remaining amount does not roll over to the next Contract Year. If your
initial Premium Payment is $100,000 or more, the Free Withdrawal Amount
will depend on the Free Withdrawal Option you choose at the time you
purchase your Contract. If you choose the CUMULATIVE 10% OPTION, you may
withdraw up to 10% of your Contract Value as of the beginning of each
Contract Year after the first Contract Year and we will not charge you a
Withdrawal Charge on that amount. If you do not withdraw the full 10% in
any one Contract Year, the remaining percentage may be rolled over to the
next Contract Year, up to a maximum of 50% after 5 years, as determined as
of the beginning of each Contract Year. If you choose the EARNINGS OPTION,
you may withdraw all your Contract earnings at any time after the first
Contract Year without incurring a Withdrawal Charge. (See "Fees and
Charges -- Withdrawal Charge.")
The Contract also gives you a choice between two Withdrawal Charge options.
If you choose the DATE OF ISSUE WITHDRAWAL CHARGE OPTION, we will calculate
the Withdrawal Charge from the Date of Issue. Under this option, we will
deduct the Withdrawal Charge from all withdrawals of Premium Payments that
occur during the first nine Contract Years and that are greater than the
Free Withdrawal Amount. No Withdrawal Charge is deducted from full or
partial withdrawals that occur in Contract Years ten and later. For the
first six Contract Years, the Withdrawal Charge is 7% of the amount
withdrawn, decreasing to 6% in the seventh Contract Year, and declining by
2% for each subsequent Contract Year until it is zero in Contract Year ten.
If you choose the DATE OF PREMIUM PAYMENT WITHDRAWAL CHARGE OPTION, we will
calculate the Withdrawal Charge from the date you make a Premium Payment.
Under this option, we will deduct a Withdrawal Charge from all withdrawals
of Premium Payments that we have held for less than seven years and that
are greater than the Free Withdrawal Amount. Premium Payments withdrawn
during the first year after receipt by us are subject to a 7% Withdrawal
Charge, decreasing by 1% annually until it is zero in Premium Payment Year
eight. (See "Fees and Charges -- Withdrawal Charge.")
(2) We will not charge you a transfer fee on the first twelve transfers in a
Contract Year. We will charge a $25 fee for each transfer you make after
the twelfth during a Contract Year.
(3) We will not charge a Qualified Contract for the Contract Fee. We also
currently will not charge a Non-Qualified Contract for the Contract Fee
once the total Premium Payments you have paid equals $100,000.
(4) A portion of the brokerage commissions paid by certain Portfolios was used
to reduce Portfolio expenses. In addition, certain Portfolios have entered
into arrangements with their custodian and transfer agent whereby interest
earned on uninvested cash balances was used to reduce custodian and
transfer agent expenses. Including these reductions, the total operating
expenses presented in the table above would have been 0.56% for Equity
Income Portfolio, 0.67% for Growth Portfolio, 0.73% for Asset Manager
Portfolio, and 0.71% for Contrafund Portfolio.
(5) The investment adviser to the Fidelity Index 500 Portfolio agreed to
reimburse a portion of that Portfolio's expenses during 1996. Without this
reimbursement, the Portfolio's Management Fee, Other Expenses and Total
Annual Portfolio Expenses would have been 0.28%, 0.15%, and 0.43%,
respectively.
(6) The Total Annual Portfolio Expenses of the OCC Accumulation Trust
Portfolios as of December 31, 1996 have been restated to reflect new
Management Fee and expense limitation arrangements in effect as of May 1,
1996. Additionally, Other Expenses are shown gross of certain expense
offsets afforded the Portfolios which effectively lowered overall custody
expenses. Effective May 1, 1996, the Total Annual
6
<PAGE> 67
Portfolio Expenses of the Managed and Small Cap Portfolios are
contractually limited by OpCap Advisors so that their respective
annualized operating expenses (net of any expense offsets) do not exceed
1.25% of their respective average daily net assets. Furthermore, through
December 31, 1997, the annualized operating expenses of the Managed and
Small Cap Portfolios will be voluntarily limited by OpCap Advisors so that
annualized operating expenses (net of any expense offsets) of these
Portfolios do not exceed 1.00% of their respective average daily net
assets. Without such contractual and voluntary expense limitations, and
without giving effect to any expense offsets, the Management Fees, Other
Expenses and Total Annual Portfolio Expenses incurred for the fiscal year
ended December 31, 1996 would have been: 0.80%, 0.10% and 0.90%,
respectively, for the Managed Portfolio; and 0.80%, 0.26 and 1.06%,
respectively, for the Small Cap Portfolio.
(7) The Royce Micro-Cap Portfolio did not commence operations during 1997. The
numbers provided in the fee table are estimates of the expenses that the
Portfolio expects to incur during fiscal year 1997. Quest Advisory Corp.,
the investment adviser to the Portfolio, has voluntarily committed to waive
its management fees and reimburse Other Expenses through December 31, 1997
to the extent necessary to maintain Total Annual Expenses of the Portfolio
at or below 1.35%. Without such waiver and reimbursement, it is expected
that the Management Fee would be 1.25% and Total Annual Expenses would be
3.24% for fiscal year 1997.
(8) During the year ended December 31, 1996, SAFECO Life Insurance Company paid
for or reimbursed a portion of the Other Expenses of the SAFECO Growth
Portfolio. Without such reimbursement, Other Expenses for the year ended
December 31, 1996 were 0.12% of the Portfolio's net assets.
(9) The SoGen Overseas Portfolio did not commence operations during 1997. The
numbers provided in the fee table are estimates of the expenses that the
Portfolio expects to incur during fiscal year 1997. Other Expenses for this
Portfolio include a 0.25% charge for 12b-1 fees. The 12b-1 fee is imposed
to enable the Portfolio to recover certain sales expenses, including
compensation to broker-dealers, the cost of printing prospectuses,
advertising costs and shareholder servicing-related expenses for the
Portfolio. Over a long period of time, the total amount of 12b-1 fees paid
may exceed the amount of sales charges imposed by other portfolios.
(10) The Limited-Term Bond Portfolio pays T. Rowe Price an annual all-inclusive
fee of 0.70% based on its average daily net assets. The International Stock
Portfolio pays Rowe Price-Fleming International, Inc. ("Price-Fleming") an
annual all-inclusive fee of 1.05% based on its average daily net assets.
These fees pay for investment management services and other operating costs
of the Portfolios.
(11) The Worldwide Balanced Portfolio's expenses were voluntarily reduced by the
Portfolio's investment adviser. Absent such reimbursement, Management Fees,
Other Expenses, and Total Annual Portfolio Expenses would have been 1.00%,
1.49%, and 2.49%, respectively.
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<PAGE> 68
EXAMPLES
(NOTE: The examples shown below are entirely hypothetical. They are not
representations of past or future performance or expenses. Actual performance
and/or expenses may be more or less than shown.)
Examples 1 and 2 show expenses for Contracts with a DATE OF ISSUE
WITHDRAWAL CHARGE OPTION.
Examples: You would pay the following expenses on a $1,000
investment, assuming a 5% annual return on assets and the changes and
expenses listed on the Fee Table above.
1. If you fully withdraw all Contract Value (or if you elect to
annuitize under a period certain option for a period of less than 10
years) at the end of the stated time period:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
Alger American Fund
MidCap Growth Portfolio.......... $ 94.50 $143.44 $198.64 $273.95
Small Capitalization Portfolio... $ 94.92 $144.61 $200.74 $278.14
Fidelity VIP Fund
Equity-Income Portfolio.......... $ 91.77 $135.79 $184.89 $246.26
Growth Portfolio................. $ 92.92 $139.03 $190.73 $258.07
Money Market Portfolio........... $ 88.83 $127.50 $169.91 $215.62
Fidelity VIP Fund II
Asset Manager Portfolio.......... $ 93.45 $140.50 $193.37 $263.39
Contrafund Portfolio............. $ 93.45 $140.50 $193.37 $263.39
Index 500 Portfolio.............. $ 88.62 $126.90 $168.83 $213.40
Investment Grade Bond
Portfolio...................... $ 91.77 $135.79 $184.89 $246.26
OCC Accumulation Trust
Managed Portfolio................ $ 95.13 $145.20 $201.79 $280.23
Small Cap Portfolio.............. $ 96.39 $148.72 $208.07 $292.69
Royce Capital Fund
Royce Micro-Cap Portfolio........ $ 99.85 $158.33 N/A N/A
SAFECO Resources Series Trust
SAFECO Equity Portfolio.......... $ 93.55 $140.80 N/A N/A
SAFECO Growth Portfolio.......... $ 93.97 $141.97 N/A N/A
SoGen Variable Funds, Inc.
SoGen Overseas Variable
Portfolio...................... $104.04 $169.90 N/A N/A
T. Rowe Price Fixed Income Series
Limited-Term Bond Portfolio...... $ 93.03 $139.32 $191.26 $259.13
T. Rowe Price International
Series
International Stock Portfolio.... $ 96.70 $149.59 $209.64 $295.78
Van Eck Worldwide Insurance Trust
Worldwide Hard Assets
Portfolio...................... $ 97.01 $150.47 $211.20 $298.86
Worldwide Balanced Portfolio..... $ 85.69 $118.56 $153.65 $181.82
</TABLE>
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<PAGE> 69
2. If you do not fully withdraw all Contract Value (or if you elect
to annuitize under a payout plan with a life contingency or under a
period certain option with a period certain of at least 10 years) at the
end of the stated time:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Alger American Fund
MidCap Growth Portfolio........... $24.50 $ 75.31 $128.64 $273.95
Small Capitalization Portfolio.... $24.92 $ 76.57 $130.74 $278.14
Fidelity VIP Fund
Equity-Income Portfolio........... $21.77 $ 67.09 $114.89 $246.26
Growth Portfolio.................. $22.92 $ 70.57 $120.73 $258.07
Money Market Portfolio............ $18.83 $ 58.18 $ 99.91 $215.62
Fidelity VIP Fund II
Asset Manager Portfolio........... $23.45 $ 72.15 $123.37 $263.39
Contrafund Portfolio.............. $23.45 $ 72.15 $123.37 $263.39
Index 500 Portfolio............... $18.62 $ 57.55 $ 98.83 $213.40
Investment Grade Bond Portfolio... $21.77 $ 67.09 $114.89 $246.26
OCC Accumulation Trust
Managed Portfolio................. $25.13 $ 77.20 $131.79 $280.23
Small Cap Portfolio............... $26.39 $ 80.97 $138.07 $292.69
Royce Capital Fund
Royce Micro-Cap Portfolio......... $29.85 $ 91.30 N/A N/A
SAFECO Resources Series Trust
SAFECO Equity Portfolio........... $23.55 $ 72.47 N/A N/A
SAFECO Growth Portfolio........... $23.97 $ 73.73 N/A N/A
SoGen Variable Funds, Inc.
SoGen Overseas Variable
Portfolio....................... $34.04 $103.72 N/A N/A
T. Rowe Price Fixed Income Series
Limited-Term Bond Portfolio....... $23.03 $ 70.89 $121.26 $259.13
T. Rowe Price International Series
International Stock Portfolio..... $26.70 $ 81.91 $139.64 $295.78
Van Eck Worldwide Insurance Trust
Worldwide Hard Assets Portfolio... $27.01 $ 82.85 $141.20 $298.86
Worldwide Balanced Portfolio...... $15.69 $ 48.59 $ 83.65 $181.82
</TABLE>
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<PAGE> 70
Examples 3-4 show examples for Contracts with the DATE OF PREMIUM PAYMENT
WITHDRAWAL OPTION.
Examples: You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets and the charges and expenses listed on the
Fee Table above:
3. If you fully withdraw all Contract Value (or if you elect to
annuitize under a period certain option for a period of less than 10
years) at the end of the stated time period:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
Alger American Fund
MidCap Growth Portfolio.......... $ 94.50 $123.97 $158.64 $273.95
Small Capitalization Portfolio... $ 94.92 $125.17 $160.74 $278.14
Fidelity VIP Fund
Equity-Income Portfolio.......... $ 91.77 $116.16 $144.89 $246.26
Growth Portfolio................. $ 92.92 $119.47 $150.73 $258.07
Money Market Portfolio........... $ 88.83 $107.69 $129.91 $215.62
Fidelity VIP Fund II
Asset Manager Portfolio.......... $ 93.45 $120.97 $153.37 $263.39
Contrafund Portfolio............. $ 93.45 $120.97 $153.37 $263.39
Index 500 Portfolio.............. $ 88.62 $107.09 $128.83 $213.40
Investment Grade Bond
Portfolio...................... $ 91.77 $116.16 $144.89 $246.26
OCC Accumulation Trust
Managed Portfolio................ $ 95.13 $125.77 $161.79 $280.23
Small Cap Portfolio.............. $ 96.39 $129.36 $168.07 $292.69
Royce Capital Fund
Royce Micro-Cap Portfolio........ $ 99.85 $139.18 N/A N/A
SAFECO Resources Series Trust
SAFECO Equity Portfolio.......... $ 93.55 $121.27 N/A N/A
SAFECO Growth Portfolio.......... $ 93.97 $122.47 N/A N/A
SoGen Variable Funds, Inc.
SoGen Overseas Variable
Portfolio...................... $104.04 $150.99 N/A N/A
T. Rowe Price Fixed Income Series
Limited-Term Bond Portfolio...... $ 93.03 $119.77 $151.26 $259.13
T. Rowe Price International
Series
International Stock Portfolio.... $ 96.70 $130.26 $169.64 $295.78
Van Eck Worldwide Insurance Trust
Worldwide Hard Assets
Portfolio...................... $ 97.01 $131.15 $171.20 $298.86
Worldwide Balanced Portfolio..... $ 85.69 $ 98.57 $113.65 $181.82
</TABLE>
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<PAGE> 71
4. If you do not fully withdraw all Contract Value (or if you elect
to annuitize under a payout plan with a life contingency or under a
period certain option with a period certain of at least 10 years) at the
end of the stated time:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Alger American Fund
MidCap Growth Portfolio........... $24.50 $ 75.31 $128.64 $273.95
Small Capitalization Portfolio.... $24.92 $ 76.57 $130.74 $278.14
Fidelity VIP Fund
Equity-Income Portfolio........... $21.77 $ 67.09 $114.89 $246.26
Growth Portfolio.................. $22.92 $ 70.57 $120.73 $258.07
Money Market Portfolio............ $18.83 $ 58.18 $ 99.91 $215.62
Fidelity VIP Fund II
Asset Manager Portfolio........... $23.45 $ 72.15 $123.37 $263.39
Contrafund Portfolio.............. $23.45 $ 72.15 $123.37 $263.39
Index 500 Portfolio............... $18.62 $ 57.55 $ 98.83 $213.40
Investment Grade Bond Portfolio... $21.77 $ 67.09 $114.89 $246.26
OCC Accumulation Trust
Managed Portfolio................. $25.13 $ 77.20 $131.79 $280.23
Small Cap Portfolio............... $26.39 $ 80.97 $138.07 $292.69
Royce Capital Fund
Royce Micro-Cap Portfolio......... $29.85 $ 91.30 N/A N/A
SAFECO Resources Series Trust
SAFECO Equity Portfolio........... $23.55 $ 72.47 N/A N/A
SAFECO Growth Portfolio........... $23.97 $ 73.73 N/A N/A
SoGen Variable Funds, Inc.
SoGen Overseas Variable
Portfolio....................... $34.04 $103.72 N/A N/A
T. Rowe Price Fixed Income Series
Limited-Term Bond Portfolio....... $23.03 $ 70.89 $121.26 $259.13
T. Rowe Price International Series
International Stock Portfolio..... $26.70 $ 81.91 $139.64 $295.78
Van Eck Worldwide Insurance Trust
Worldwide Hard Assets Portfolio... $27.01 $ 82.85 $141.20 $298.86
Worldwide Balanced Portfolio...... $15.69 $ 48.59 $ 83.65 $181.82
</TABLE>
The examples provided above assume that no transfer charges or premium
taxes have been assessed. The examples reflect the annualized Contract Fee of
$30 assessed on an average Contract Value of $30,000. This translates the
Contract Fee into a 0.10% charge for the purposes of the examples based on a
$1,000 investment.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE ASSUMED
5% ANNUAL RATE OF RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THIS ASSUMED RATE.
There is a table of Condensed Financial Information that contains the
accumulated unit value history of the Separate Account. That table is found in
Appendix A -- Condensed Financial Information.
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<PAGE> 72
SUMMARY OF THE VISIONARY CHOICE CONTRACT
Purchasing Your Contract. The VISIONARY CHOICE Contract is an individual
deferred variable annuity issued by IL Annuity and Insurance Company. You may
purchase this Contract with $1,000 or more under most circumstances. We will not
issue a Contract if you are older than 85 on the Date of Issue.
The Contract provides a means for investing on a tax-deferred basis. This
means that you will not be taxed on earnings or appreciation in your Contract
until you withdraw your money. The Contract may be sold in connection with
retirement plans, some of which may qualify for special federal tax treatment
under the Code. (See "The Pay-In Period -- Issuing Your Contract.")
Cancellation -- The 10 Day Free-Look Period. You have the right to cancel
the Contract for any reason within 10 days after you receive it (or within 20
days if the Contract is replacing another annuity contract or insurance policy).
The Contract must be returned to our Service Center. Your Written Request to
cancel the Contract must accompany the Contract. The returned Contract will be
treated as if it were never issued. In certain states you may have more than 10
days to return the Contract for a refund. The amount that we refund will vary
according to state requirements. If we are required by state law to refund your
original Premium Payment, we will allocate your initial Premium Payment to the
Money Market Variable Account during the Free-Look Period. (See "The Pay-In
Period -- Cancellation -- The 10-Day Free-Look Period.")
Premium Payments. A Premium Payment is the money you pay us to buy the
Visionary Choice Contract. The Contract generally gives you the flexibility to
make Premium Payments as often as you like, although you may choose to make only
a single Premium Payment. After you buy the Contract, you may send us Premium
Payments of $1,000 or more at any time during the Pay-in Period, so long as they
do not exceed two times the amount of your initial Premium Payment in any year.
We generally will not accept total Premium Payments in excess of $250,000. We
reserve the right to waive these limitations. (See "Premium Payments.")
Designating Your Investment Options. When you purchase your Contract, we
will ask you to provide us with written instructions telling us how to allocate
your Premium Payments among the Portfolios of the Variable Accounts and the
Fixed Account. You may place your Premium Payments in one or more Variable
Accounts and/or the Fixed Account, subject to certain restrictions. (See "The
Pay-In Period.")
Transfers. During the Pay-in Period, you may transfer your Contract Value
from the Variable Accounts and the Fixed Account to other Variable Account(s)
and the Fixed Account, subject to certain restrictions. (See "Transfers Between
Investment Options.") If you transfer Contract Value from an Eligible Variable
Account, the transfer will reduce the amount of the Eligible Premium Payments on
which the Living Benefit is based. (See "Living Benefit.")
Transfers to the Fixed Account must be at least $1,000. During the Pay-in
Period, you may transfer up to 20% of the Fixed Account Value (as determined at
the beginning of the Contract Year) from the Fixed Account to one or more of the
Variable Accounts in any Contract Year. No fee is charged for transfers from the
Fixed Account to one or more Variable Accounts and such transfers are not
considered a transfer for purposes of assessing a transfer charge. (See
"Transfers Between Investment Options.")
Once you begin to receive annuity payments, you may make one transfer
between the Variable Accounts each Contract Year. (See "The Payout Period.")
Partial Withdrawals. During the Pay-in Period, you may withdraw part of
your Contract Value by sending a Written Request or making a telephone request
to the Service Center. The amount of your request must be at least $250. If the
Contract Value remaining after your partial withdrawal is less than $1,000, we
reserve the right to pay you the Surrender Value in a lump sum. Amounts
withdrawn may be subject to a Withdrawal Charge, depending the Withdrawal Charge
Option you chose at the time of purchase. In any Contract Year after the first
Contract Year, you may withdraw a portion of your Contract Value without
incurring a Withdrawal Charge, called the Free Withdrawal Amount. (See "Fees and
Charges -- Withdrawal Charge.")
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<PAGE> 73
Withdrawals from an Eligible Variable Account will reduce the amount of the
Eligible Premium Payments on which the Living Benefit is based. (See "Living
Benefit.")
The Federal tax laws may impose income taxes and tax penalties upon, and in
some cases prohibit, certain premature withdrawals from the Contract before or
after the Annuity Start Date. (See "Federal Tax Matters.")
Full Withdrawal. During the Pay-in Period, you may cancel the Contract and
receive its Surrender Value by sending us a Written Request. (See "Withdrawal of
Contract Value.") As with partial withdrawals, Federal tax laws may impose
income taxes and tax penalties upon, and in some cases prohibit, certain
premature withdrawals from the Contract before or after the Annuity Start Date.
(See "Federal Tax Matters.")
Death Benefit. If the Annuitant dies before the Annuity Start Date, the
Beneficiary will receive a Death Benefit. If you do not choose the Enhanced
Death Benefit option at the time of purchase, the Death Benefit will be
determined as of the date we receive due proof of the deceased's death and
payment instructions. The Death Benefit will equal the greater of:
(1) the sum of all Premium Payments made under the Contract, LESS
partial withdrawals as of the date the Death Benefit is determined;
or
(2) the Contract Value as of the date the Death Benefit is determined;
LESS any applicable premium taxes not previously deducted.
If you elect the three year stepped-up Enhanced Death Benefit option at the
time of purchase, the Enhanced Death Benefit payable upon the death of the
Annuitant before the Annuity Start Date will be determined as of the date we
receive due proof of the deceased's death and payment instructions. The Enhanced
Death Benefit will be the greater of:
(1) the Contract Value as of the date the Enhanced Death Benefit is
determined; or
(2) the highest Contract Value on any Death Benefit Anniversary
preceding the date the Enhanced Death Benefit is determined,
adjusted for any Premium Payments received, withdrawals taken and
charges incurred between such Death Benefit Anniversary and the date
the Enhanced Death Benefit is determined. This value is initially
set on the first Death Benefit Anniversary and equals the greater
of: (a) the sum of Premium Payments, MINUS partial withdrawals; or
(b) Contract Value, on that date. This value will be reset on every
future Death Benefit Anniversary (that is, every third year) to
equal Contract Value on that date only if Contract Value on that
Death Benefit Anniversary is greater than the Enhanced Death Benefit
Value on any previous Death Benefit Anniversary. Once reset, this
value will never decrease unless partial withdrawals are made;
LESS any applicable premium taxes not previously deducted.
Age Limitation on Death Benefit Provision: If the Annuitant dies at or
after age 75 (or ten years after the Date of Issue, whichever is later) but
before the Annuity Start Date, the Death Benefit under either Death Benefit
option will equal Contract Value LESS any applicable premium taxes not yet
deducted, as of the date we receive due proof of death and payment instructions.
(See "Death Benefits.")
Living Benefit. If you elect the Living Benefit option at the time of
purchase and the Contract is in the Paying Period on the Living Benefit Date, IL
Annuity will calculate the Living Benefit for each Eligible Variable Account in
which you have value as of that date. The Living Benefit will be credited to the
Contract Value of an Eligible Variable Account only if the value of the Eligible
Variable Account on the Living Benefit Date is less than: (a) the sum of the
Eligible Premium Payments for such Eligible Variable Account, MINUS (b) a
percentage of all prior withdrawals and transfers from such Eligible Variable
Account.
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<PAGE> 74
Eligible Premium Payments are those Premium Payments you initially
allocated to a particular Eligible Variable Account at the time of payment,
provided you made the payment at least ten (10) years prior to the Living
Benefit Date.
On the Living Benefit Date, the Living Benefit that will be credited to
each Eligible Variable Account will be equal to: (a) the sum of the Eligible
Premium Payments for that particular Eligible Variable Account; MINUS (b) a
percentage of all prior withdrawals and transfers from that Eligible Variable
Account; MINUS (c) the value of that Eligible Variable Account as of the Living
Benefit Date.
The Living Benefit Date is the later of the Annuitant's age 70 and 10 years
after the Date of Issue. If the Contract is owned by two persons who are spouses
at the time one dies, the Living Benefit Date will become the date the surviving
spouse attains age 70. If the Contract is owned by two persons who are not
spouses and one of them dies before the Living Benefit Date, the Living Benefit
is not available to the sole survivor. The Eligible Variable Accounts currently
include all Variable Accounts except the Van Eck Worldwide Hard Assets Variable
Account.
The Living Benefit will not be credited to Contract Value if you have
elected to begin receiving annuity payments before the Living Benefit Date. (See
"Living Benefit.")
Transfers and withdrawals from an Eligible Variable Account will reduce the
amount of the Eligible Premium Payments on which the Living Benefit is based.
(See "Living Benefit.")
FEES AND CHARGES
The following charges and deductions are assessed under the Contract:
Withdrawal Charge. We will deduct a Withdrawal Charge if you withdraw all
or part of your Contract Value during certain time periods. The amount of the
Withdrawal Charge depends on the Withdrawal Charge Option and Free Withdrawal
Option you choose at the time you purchase the Contract. We do not assess a
Withdrawal Charge in the event the Contract terminates due to your death or the
death of the Annuitant or if you decide to begin to receive annuity payments
under an annuity payout plan with a life contingency or an annuity payout plan
with at least 10 years of guaranteed payments.
The Contract gives you a choice between two Withdrawal Charge Options. If
you choose the DATE OF ISSUE WITHDRAWAL CHARGE OPTION, we will calculate the
Withdrawal Charge from the Date of Issue. We will deduct the Withdrawal Charge
from all withdrawals of Premium Payments that: (1) are greater than the Free
Withdrawal Amount, and (2) that occur during the first nine Contract Years.
Under this option, no Withdrawal Charge is deducted from full or partial
withdrawals that occur in Contract Years ten and later. For the first six
Contract Years, the Withdrawal Charge is 7% of the amount withdrawn that exceeds
the Free Withdrawal Amount, decreasing to 6% in the seventh Contract Year, and
declining by 2% for each subsequent Contract Year until it is zero in Contract
Year ten.
If you choose the DATE OF PREMIUM PAYMENT WITHDRAWAL CHARGE OPTION, we will
calculate the Withdrawal Charge from the date you make a Premium Payment and
deduct a Withdrawal Charge from all withdrawals of Premium Payments that we have
held for less than seven years and that are greater than the Free Withdrawal
Amount. Premium Payments in excess of the Free Withdrawal Amount that are
withdrawn during the first year after payment are subject to a 7% Withdrawal
Charge, decreasing by 1% annually, until it is zero in Premium Payment Year 8.
Under either option, for purposes of calculating the Withdrawal Charge, a
withdrawal is deemed to come first from Premium Payments and then from earnings.
In addition, the money that has been held the longest in the Contract will be
deemed to be the first money withdrawn. This is called the "first in, first out"
method of accounting or "FIFO." (See "Fees and Charges.")
In any Contract Year after the first Contract Year, you may withdraw a
portion of your Contract Value without incurring a Withdrawal Charge. This
amount is called the Free Withdrawal Amount. Withdrawals under the Systematic
Withdrawal Program are permitted a Free Withdrawal Amount, as determined below,
during the first Contract Year. If your initial Premium Payment is less than
$100,000, the Free Withdrawal
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<PAGE> 75
Amount is 10% of Contract Value each year, as determined at the beginning of the
Contract Year. If you do not withdraw the full 10% in any Contract Year, the
remaining amount does NOT roll over to the next Contract Year. If your initial
Premium Payment is $100,000 or more, the value of the Free Withdrawal Amount
depends on the Free Withdrawal Option you choose at the time you purchase your
Contract. If you choose the CUMULATIVE 10% OPTION, you may withdraw up to 10% of
your Contract Value as of the beginning of each Contract Year after the first
Contract Year and we will not charge you a Withdrawal Charge on that amount. If
you do not withdraw the full 10% in any one Contract Year, the remaining
percentage may be rolled over to the next Contract Year, up to a maximum of 50%
after 5 years as determined as of the beginning of each Contract Year. If you
choose the EARNINGS OPTION, you may withdraw all your Contract earnings at any
time after the first Contract Year without incurring a Withdrawal Charge. (See
"Fees and Charges -- Withdrawal Charge.")
The Withdrawal Charge also may be waived in cases of extended
hospitalization, long-term care, terminal illness, or to pay for post secondary
education, as provided in the Contract. (See "Fees and Charges -- Withdrawal
Charge.")
Contract Fee. At the end of each Contract quarter (and on the date of full
withdrawal from the Contract) during the Pay-in Period, we will deduct a
quarterly Contract Fee of $7.50 from the Contract Value. Currently we waive the
Contract Fee for Qualified Contracts. We also do not charge the Contract Fee if
the Contract is a Non-Qualified Contract whose cumulative Premium Payments on
the date the Contract Fee is charged are equal to or greater than $100,000. We
reserve the right to modify this waiver upon 30 days written notice to you. We
do not charge a Contract Fee after annuity payments have begun. (See "Fees and
Charges -- Contract Fee.")
Transfer Fee. During the Pay-in Period, you may make 12 transfers each
Contract Year at no charge. We will impose a transfer fee of $25 for the
thirteenth and each subsequent transfer you make during a Contract Year before
the Annuity Start Date. (See "Fees and Charges -- Transfer Fee.")
Mortality and Expense Risk Charge. We will deduct a daily mortality and
expense risk charge as compensation for our assuming certain mortality and
expense risks. The charge is deducted from the assets of the Separate Account at
a rate of 0.003404% per day. This is equal to an annual rate of 1.25%
(approximately 0.90% for mortality risk and 0.35% for expense risks). This
charge will continue to be assessed after the Annuity Start Date if annuity
payments are made on a variable basis. (See "Fees and Charges -- Mortality and
Expense Risk Charge.")
Asset-Based Administrative Charge. We will deduct a daily administrative
charge as compensation for certain expenses we incur in administrating the
Contract. The charge is deducted from the assets of each Variable Account at an
annual rate of 0.15%. This charge will continue to be assessed after you begin
to receive annuity payments if you choose to receive annuity payments on a
variable basis. (See "Fees and Charges -- Asset-Based Administrative Charge.")
Premium Taxes. Various states and other governmental entities charge a
premium tax on annuity contracts issued by insurance companies. Premium tax
rates currently range up to 3.5%, depending on the state. Tax rates are subject
to change from time to time by legislative and other governmental action. In
addition, other governmental units within a state may levy such taxes. We are
responsible for the payment of these taxes and, if necessary, we will make a
deduction from the value of your Contract either: (a) from Premium Payments as
we receive them, (b) from Contract Value upon partial or full withdrawal, (c)
when annuity payments begin, or (d) upon payment of a Death Benefit. (See "Fees
and Charges -- Premium Taxes.")
Investment Advisory Fees and Other Expenses of the Funds. Each Portfolio
pays investment management charges to its investment adviser based on a
percentage of the Portfolio's average daily net assets. These advisory fees and
other Portfolio charges and expenses are fully described in the attached
prospectuses for the Portfolios. These charges are indirectly passed on to you.
In addition, the SoGen Overseas Portfolio deducts a 12b-1 fee from the
Portfolio's assets at a maximum annual rate of 0.25% of the average daily value
of the
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<PAGE> 76
Portfolio's net assets. The 12b-1 fees may be used to reimburse IL Annuity for
certain administrative and distribution support services provided to the
Overseas Portfolio.
ANNUITY PROVISIONS
Payout Options. Under the Contract, you may choose to receive regular
annuity payments under one of several available payout plans. You may also
choose the month and year on which those payments are to begin. (This is the
Annuity Start Date.) On the Annuity Start Date, the Contract Value (adjusted as
described below) will be used to calculate the amount of your annuity payments
under the payment plan you choose, unless you choose to receive the Surrender
Value in a lump sum. Adjusted Contract Value is Contract Value, LESS applicable
premium tax not yet deducted, LESS the quarterly Contract Fee, and, for an
installment income annuity payout plan with a payout period of less than 10
years, less any applicable Withdrawal Charge. (See "Payout Period.")
FEDERAL TAX STATUS
Generally, a distribution (including a full or partial withdrawal or Death
Benefit payment) may result in taxable income. In certain circumstances, a 10%
penalty tax may apply. For a further discussion of the federal tax status of
variable annuity contracts, see "Federal Tax Status."
ABOUT IL ANNUITY AND THE SEPARATE ACCOUNT
IL ANNUITY AND INSURANCE COMPANY
IL Annuity and Insurance Company, formerly known as Sentry Investors Life
Insurance Company, is a stock life insurance company organized under the laws of
the Commonwealth of Massachusetts on December 21, 1965 and incorporated on March
9, 1966. We changed our name to "IL Annuity and Insurance Company" on January
17, 1995.
Effective October 31, 1994, we entered into an assumption reinsurance
agreement with Sentry Life Insurance Company ("Sentry") whereby Sentry assumed
all of our existing insurance in-force and related assets and liabilities.
On November 1, 1994, we became a wholly-owned subsidiary of the
Indianapolis Life Group of Companies, Inc., which is a wholly-owned subsidiary
of Indianapolis Life Insurance Company. Indianapolis Life Insurance Company is a
mutual life insurance company chartered under Indiana law in 1905 with assets as
of December 31, 1996 which exceeded $1.596 billion.
We are subject to regulation by the Insurance Department of the State of
Massachusetts as well as by the insurance departments of all other states and
jurisdictions in which we do business. We submit annual statements on our
operations and finances to insurance officials in such states and jurisdictions.
The forms for the Contract described in this prospectus are filed with and
(where required) approved by insurance officials in each state and jurisdiction
in which Contracts are sold.
IL ANNUITY AND INSURANCE CO. SEPARATE ACCOUNT 1
We established the IL Annuity and Insurance Co. Separate Account I (the
"Separate Account") as a separate account under Massachusetts insurance law on
November 1, 1994. The Separate Account will receive and invest Net Premium
Payments made under the Contracts. In addition, the Separate Account may receive
and invest Premium Payments for certain other variable annuity contracts we may
issue in the future.
Although the assets in the Separate Account are our property, the portion
of the assets in the Separate Account equal to the reserves and other contract
liabilities of the Separate Account are not chargeable with the liabilities
arising out of any other business that we may conduct and that has no specific
relation to or dependence upon the Separate Account. The assets of the Separate
Account are available to cover our general liabilities only to the extent that
the Separate Account's assets exceed its liabilities arising under the Contracts
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and any other contracts supported by the Separate Account. We have the right to
transfer to the general account any assets of the Separate Account which are in
excess of reserves and other contract liabilities. All obligations arising under
the Contracts are our general corporate obligations. Income, gains and losses,
whether or not realized, from assets allocated to the Separate Account are
credited to or charged against the Separate Account without regard to other
income, gains or losses of any other separate account or of the Company.
The Separate Account currently is divided into nineteen Variable Accounts
but may, in the future, include additional Variable Accounts. Each Variable
Account invests exclusively in shares of a single corresponding fund. The
income, gains and losses, whether or not realized, from the assets allocated to
each Variable Account are credited to or charged against that Variable Account
without regard to income, gains or losses from any other Variable Account.
The Separate Account has been registered with the SEC as a unit investment
trust under the Investment Company Act of 1940 (the "1940 Act") and meets the
definition of a separate account under the federal securities laws. Registration
with the SEC does not involve supervision of the management or investment
practices or policies of the Separate Account or the Company by the SEC. The
Separate Account is also subject to the laws of the State of Massachusetts which
regulate the operations of insurance companies domiciled in Massachusetts.
THE PORTFOLIOS
Each Variable Account of the Separate Account invests exclusively in shares
of a designated Portfolio of a series-type mutual fund ("Fund"). Shares of each
Portfolio are purchased and redeemed at net asset value, without a sales charge.
Each Fund currently available under the Contract is registered with the SEC
under the Investment Company Act of 1940 (the "1940 Act") as an open-end,
management investment company. Such registration does not involve supervision of
the management or investment practices or policies of the companies or their
funds by the SEC.
The assets of each Portfolio of each Fund are separate from the assets of
that Fund's other Portfolios, and each Portfolio has separate investment
objectives and policies. As a result, each Portfolio operates as a separate
investment Portfolio and the income or losses of one Portfolio has no effect on
the investment performance of any other Portfolio.
Each of the Funds is managed by an investment adviser registered with the
SEC under the Investment Advisers Act of 1940, as amended. Each investment
adviser is responsible for the selection of the investments of the Portfolio.
These investments must be consistent with the investment objective, policies and
restrictions of that Portfolio.
The investment objective of each Portfolio is summarized below. THERE IS NO
ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED OBJECTIVES. More detailed
information, including a description of risks, fees and expenses of each
Portfolio, may be found in the prospectuses for the Funds which are attached to
this prospectus.
CERTAIN PORTFOLIOS HAVE SIMILAR INVESTMENT OBJECTIVES AND/OR POLICIES. YOU
SHOULD READ THE PROSPECTUSES FOR THE PORTFOLIOS CAREFULLY BEFORE YOU INVEST.
THE ALGER AMERICAN FUND
The MidCap Growth Portfolio and the Small Capitalization Portfolio of The
Alger American Fund ("The Alger Fund") are available for investment under the
Contract. The investment objective of each Portfolio is:
MIDCAP GROWTH PORTFOLIO -- seeks to obtain long-term capital
appreciation. Except during temporary defensive periods, the Portfolio
invests at least 65% of its total assets in equity securities of companies
that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the S&P MidCap 400
Index, updated quarterly. The S&P MidCap 400 Index is
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designed to track the performance of medium capitalization companies. As of
March 31, 1997, the range of market capitalization of these companies was
$120 million to $7.19 billion.
SMALL CAPITALIZATION PORTFOLIO -- seeks to obtain long-term capital
appreciation. Except during temporary defensive periods, the Portfolio
invests at least 65% of its total assets in equity securities of companies
that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the Russell 2000
Growth Index, ("Russell Index") or the S&P SmallCap 600 Index updated
quarterly. Both indexes are broad indices of small capitalization stocks.
As of March 31, 1997, the range of market capitalization of the companies
in the Russell Index was $10 million to $1.94 billion; the range of
capitalization of the companies in the S&P SmallCap 600 Index at that date
was $32 million to $2.579 billion.
Fred Alger Management, Inc. ("Alger Management") serves as investment
adviser for the MidCap Growth and Small Capitalization Portfolios of The Alger
American Fund. Fred Alger & Company, Incorporated, an affiliate of Alger
Management, will serve as the Portfolios' broker in effecting substantially all
of the portfolio transactions on security exchanges.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND FIDELITY VARIABLE INSURANCE
PRODUCTS FUND II
The Equity-Income Portfolio, the Growth Portfolio and the Money Market
Portfolio of Fidelity's Variable Insurance Products Fund ("VIP Fund"), as well
as the Asset Manager Portfolio, the Contrafund Portfolio, the Index 500
Portfolio and the Investment Grade Bond Portfolio of the Variable Insurance
Products Fund II ("VIP Fund II") are available for investment under the
Contract. The investment objective of each Portfolio is:
EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities.
GROWTH PORTFOLIO -- seeks to achieve capital appreciation by investing
in common stocks and securities convertible into common stock of companies
that the adviser believes have above-average growth potential. The
Portfolio, however, is not restricted to any one type of security and may
pursue capital appreciation through the purchase of bonds and preferred
stocks.
MONEY MARKET PORTFOLIO -- seeks to earn a high level of current income
while maintaining a stable $1.00 share price by investing in high-quality,
short-term money market securities of different types.
ASSET MANAGER PORTFOLIO -- seeks to obtain high total return with
reduced risk over the long-term by allocating its assets among stocks,
bonds, short-term and other instruments of U.S. and foreign issuers.
CONTRAFUND PORTFOLIO -- seeks capital appreciation by investing in
companies that the adviser believes to be undervalued due to an overly
pessimistic appraisal by the public.
INDEX 500 PORTFOLIO -- seeks to match the total return of the S&P 500
while keeping expenses low. The adviser normally invests at least 80% (65%
if Portfolio assets are below $20 million) of the Portfolio's assets in
equity securities of companies that compose the S&P 500.
INVESTMENT GRADE BOND PORTFOLIO -- seeks high current income by
investing in fixed-income obligations of all types.
The Portfolios of the VIP Fund and the VIP Fund II are managed by Fidelity
Management & Research Company ("FMR"). On behalf of the Money Market Portfolio,
FMR has entered in a subadvisory agreement with FMR Texas, Inc., pursuant to
which FMR Texas, Inc. has primary responsibility for providing investment
management services to the Portfolio. On behalf of the Asset Manager Portfolio
and the Contrafund Portfolio, FMR has entered into subadvisory agreements with
Fidelity Investment Management and Research (U.K.) Inc. ("FMR (U.K.)") and
Fidelity Management and Research (Far East) Inc. ("FMR Far East"), pursuant to
which those entities provide research and investment recommendations with
respect to companies based outside the United States. FMR (U.K.) focuses
primarily on companies based in Europe, while FMR Far East focuses primarily on
companies based in Asia and the Pacific Basin.
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OCC ACCUMULATION TRUST
The Managed Portfolio and the Small Cap Portfolio of the OCC Accumulation
Trust ("OCC Trust") (formerly known as the Quest for Value Accumulation Trust)
are available for investment under the Contract. The investment objective of
each Portfolio is:
MANAGED PORTFOLIO -- seeks growth of capital over time through
investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based on management's
assessments of relative investment values.
SMALL CAP PORTFOLIO -- seeks capital appreciation through investment
in a diversified portfolio of equity securities of companies with market
capitalizations of under $1 billion.
The OCC Trust receives investment advice with respect to each of its
Portfolios from OpCap Advisors, a subsidiary of Oppenheimer Capital which is a
subsidiary of Oppenheimer Financial Corp.
ROYCE CAPITAL FUND
The Royce Micro-Cap Portfolio of the Royce Capital Fund is available for
investment under the Contract and has the following investment objective:
ROYCE MICRO-CAP PORTFOLIO -- seeks long-term capital appreciation,
primarily through investments in common stocks and convertible securities
of small and micro-cap companies. Production of income is incidental to
this objective.
Quest Advisory Corp. serves as the investment adviser to the Portfolio.
SAFECO RESOURCE SERIES TRUST
The SAFECO Equity Portfolio and the SAFECO Growth Portfolio of the SAFECO
Resource Series Trust are available for investment under the Contract. The
investment objective of each Portfolios is:
SAFECO EQUITY PORTFOLIO -- seeks long-term growth of capital and
reasonable current income. The Equity Portfolio ordinarily invests
principally in common stocks or securities convertible into common stocks.
SAFECO GROWTH PORTFOLIO -- seeks growth of capital and the increased
income that ordinarily follows from such growth. The Growth Portfolio
ordinarily invests a preponderance of its assets in common stock selected
for potential appreciation.
Each Portfolio is managed by SAFECO Asset Management Company.
SOGEN VARIABLE FUNDS, INC.
The SoGen Overseas Variable Portfolio of the SoGen Variable Funds, Inc. is
available for investment under the Contract and has the following investment
objective:
SOGEN OVERSEAS VARIABLE PORTFOLIO -- seeks long-term growth of capital
by investing primarily in securities of small and medium size non-U.S.
companies. It particularly seeks companies that have growth potential,
financial strength and stability, strong management and fundamental value.
The Portfolio may invest in securities traded in mature markets (for
example, Japan, Canada and the United Kingdom) and in emerging markets
(Mexico and Indonesia, for example). The Portfolio may invest up to 20% of
its total assets in debt securities, that may include lower-rated
securities, commonly referred to a "junk bonds" and securities that are not
rated. The greater risks involved in foreign investing should be understood
and carefully considered. See the Portfolio's Prospectus for a description
of these risks.
Societe Generale Asset Management Corp., which is indirectly owned by
Societe Generale, one of France's largest banks, serves as the Portfolio's
investment adviser.
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T. ROWE PRICE FIXED INCOME SERIES, INC.
The Limited-Term Bond Portfolio of the T. Rowe Price Fixed Income Series,
Inc. is available for investment under the Contract and has the following
investment objective:
LIMITED-TERM BOND PORTFOLIO -- seeks a high level of income consistent
with modest price fluctuations by investing primarily in short- and
intermediate-term investment-grade debt securities.
T. Rowe Price Associates, Inc. is responsible for the selection and
management of the portfolio investments of T. Rowe Price Limited-Term Bond
Portfolio and receives a single, all-inclusive fee based on the Portfolio's
average daily net assets to cover investment management and operating expenses.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
The International Stock Portfolio of the T. Rowe Price International
Series, Inc. is available for investment under the Contract and has the
following investment objective:
INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established non-U.S.
companies.
Rowe Price-Fleming International, Inc. ("Price-Fleming") is responsible for
the selection and management of the Portfolio's investments. Incorporated in
1979 as a joint venture between T. Rowe Price Associates, Inc. ("T. Rowe Price")
and Robert Fleming Holdings Limited ("Fleming"), Price-Fleming receives a
single, all-inclusive fee based on the Portfolio's average daily net assets to
cover investment management and operating expenses.
VAN ECK WORLDWIDE INSURANCE TRUST
The Worldwide Balanced Portfolio and the Worldwide Hard Assets Portfolio of
the Van Eck Worldwide Insurance Trust (the "Van Eck Trust") are available for
investment under the Contract. The investment objective of each Portfolio is:
WORLDWIDE HARD ASSETS (FORMERLY GOLD AND NATURAL RESOURCES)
PORTFOLIO -- seeks long-term capital appreciation by investing globally,
primarily in "Hard Asset Securities" of companies that are directly or
indirectly engaged to a significant extent in the exploration, development,
production or distribution of one or more of the following: (i) precious
metals, (ii) ferrous and non-ferrous metals, (iii) energy, (iv) forest
products, (v) real estate, and (vi) other basic non-agricultural
commodities.
WORLDWIDE BALANCED PORTFOLIO -- seeks long-term capital appreciation
together with current income by investing in equity securities, fixed
income securities and short-term instruments.
Van Eck Associates Corporation serves as investment adviser and manager to
the Van Eck Worldwide Hard Assets Portfolio pursuant to an Advisory Agreement
with the Van Eck Trust. Fiduciary International, Inc. is expected to serve as
sub-investment adviser to the Van Eck Worldwide Balanced Portfolio pursuant to a
Sub-Investment Advisory Agreement with the Van Eck Trust when the Portfolio's
assets reach a level at which it is appropriate to utilize the sub-investment
advisor's services.
An investment in a Portfolio, including the Money Market Portfolio, is not
insured or guaranteed by the U.S. Government and there can be no assurance that
the Money Market Portfolio will be able to maintain a stable net asset value per
share.
IL Annuity has entered into agreements with the investment adviser of
several of the Funds pursuant to which each such investment adviser will pay IL
Annuity a servicing fee based upon an annual percentage of the average aggregate
net assets invested by IL Annuity on behalf of the Separate Account. These
agreements reflect administrative services provided to the Funds by IL Annuity.
Payments of such amounts on behalf of the Funds will not increase the fees paid
by the Funds or their shareholders.
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AVAILABILITY OF THE FUNDS
We cannot guarantee that each Portfolio will always be available for
investment through the Contracts, but in the unlikely event that a Portfolio is
not available, we will do everything reasonably practicable to secure the
availability of a comparable portfolio. The Separate Account purchases shares of
each Portfolio in accordance with a participation agreement we have entered into
with each Fund. If a participation agreement terminates, the Separate Account
may not be able to purchase additional shares of the Portfolios of that Fund. In
such case, you will no longer be able to allocate Premium Payments or transfer
Contract Value to the Variable Account investing in that Portfolio.
We reserve the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares of a Portfolio that are held in
the Separate Account. If the shares of a Portfolio are no longer available for
investment or if, in our judgment, further investment in any Portfolio should
become inappropriate, we may redeem the shares of that Portfolio and substitute
shares of another portfolio. We will not substitute any shares without notice
and prior approval of the SEC and state insurance authorities, to the extent
required by the 1940 Act or other applicable law.
We also reserve the right in our sole discretion to establish additional
Variable Accounts, or eliminate or combine one or more Variable Accounts, if
marketing needs, tax considerations or investment conditions warrant. We will
determine if new or substituted Variable Accounts will be available to existing
Contract Owners. Subject to obtaining any approvals or consents required by law,
the assets of one or more Variable Accounts may also be transferred to any other
Variable Account if, in our sole discretion, marketing, tax, or investment
conditions warrant. Additional information regarding termination of
participation agreements, substitutions of investments and resolving conflicts
among Funds may be found in the Statement of Additional Information.
THE PAY-IN PERIOD
The Pay-in Period begins when your first Premium Payment is made and
continues until you begin to receive annuity payments during the Payout Period.
The Pay-in Period may also end when you fully withdraw all of your Contract
Value before the Payout Period.
PURCHASING A CONTRACT
You may purchase a Contract with a Premium Payment of $1,000 or more. The
maximum first Premium Payment is $250,000. To purchase a Contract, you must make
an application to us either through one of our licensed representatives who is
also a registered representative of IL Securities, Inc., or a broker-dealer
having a selling agreement with IL Securities, Inc. Contracts may be sold to or
in connection with retirement plans that do not qualify for special tax
treatment as well as retirement plans that qualify for special tax treatment
under the Code. We will not issue you a Contract if you are older than 85 on the
Date of Issue.
PREMIUM PAYMENTS
Premium Payments must be at least $1,000. You may make Premium Payments at
any time until the earliest of: (a) the Annuity Start Date; (b) the date you
fully withdraw all Contract Value; or (c) the date you reach age 85 (age 70 1/2
for Qualified Contracts). In any one Contract Year, we will not accept Premium
Payments that total more than two times your first Premium Payment. We will not
accept total Premium Payments in excess of $250,000. However, we reserve the
right to waive these limitations.
Under the Automatic Premium Payment Plan, you may select an annual,
semi-annual, quarterly or monthly payment schedule under which we will
automatically deduct Premium Payments from a bank or credit union account or
other source. The minimum amount of such payment is $1,000.
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CANCELLATION -- THE 10 DAY FREE-LOOK PERIOD
You have the right to cancel the Contract for any reason within 10 days
after you receive it (or within 20 days of receipt if the Contract is replacing
another annuity contract or insurance policy). In some jurisdictions, this
period may be longer than 10 days. To cancel the Contract, you must send a
Written Request for cancellation and the returned Contract to the Service Center
before the end of the Free-Look Period.
The amount that we will refund to you will vary according to state
requirements. In most states, we will refund to you an amount equal to the sum
of: (i) the difference between the Premium Payments paid and the amounts
allocated to the Variable Accounts and the Fixed Account under the Contract; and
(ii) the Contract Value as of the date the Contract and the Written Request for
cancellation are received at the Service Center. You bear the investment risk
for Premium Payments allocated to the Variable Accounts during the free-look
period.
A few states require us to return Premium Payments upon cancellation. If
state law requires that Premium Payments be returned, the amount of the refund
will be the greater of: (i) the Premium Payments made under the Contract; and
(ii) the Contract Value (without the deduction of a Withdrawal Charge) on the
date the Contract and the Written Request for cancellation is received at our
Service Center, plus any amount that may have been deducted for premium taxes.
In those states where Premium Payments must be returned, we will place any
portion of the initial Net Premium Payments allocated to a Variable Account into
the Money Market Variable Account for a 15-day period following the date on
which we credit the initial Premium Payment to your Contract. At the end of that
period, the amount in the Money Market Variable Account will be allocated to the
Variable Accounts you selected on your application based on the allocation
percentages you specified.
DESIGNATING YOUR INVESTMENT OPTIONS
When you fill out your application, you will give us instructions on how to
allocate your first Net Premium Payment among the nineteen Variable Accounts and
the Fixed Account. The amount you direct to a particular Variable Account and/or
to the Fixed Account must equal at least 1% of the Premium Payment and be in
whole percentages.
Once we receive your Premium Payment and your completed application at the
Service Center, we will issue your Contract and direct your first Net Premium
Payment within two (2) Business Days to the Variable Accounts and/or the Fixed
Account in accordance with your instructions, subject to the limitations set
forth above under "Cancellation -- The 10-Day Free Look Period."
If you did not give us all the information we need, we will contact you. If
we cannot complete the application within five (5) Business Days, we will either
send back your money immediately or obtain your permission to keep your money
until we receive all the necessary information. Once the application is
complete, we will direct your first Net Premium Payment to the Variable Accounts
and/or the Fixed Account according to your instructions within two Business
Days.
We will credit any additional Premium Payments you make to your Contract as
of the same Business Day we receive them. Our Business Day closes when the New
York Stock Exchange closes, usually at 4 p.m. Eastern Time. If we receive your
Premium Payments after the close of our Business Day, we will calculate and
credit them the next Business Day. We will direct your Premium Payment to the
Variable Accounts and/or the Fixed Account according to your written
instructions in effect at the time we receive it. However, you may direct
individual Premium Payments to a specific Variable Account or to the Fixed
Account (or any combination thereof) without changing your instructions. You may
change your instructions directing your investments at any time by sending us a
Written Request or by telephone authorization. Changing such instructions will
not change the way existing Contract Value is apportioned among the Variable
Accounts or the Fixed Account.
THE CONTRACT VALUE ALLOCATED TO A VARIABLE ACCOUNT WILL VARY WITH THE INVESTMENT
EXPERIENCE OF THAT VARIABLE ACCOUNT. YOU BEAR THE ENTIRE INVESTMENT RISK FOR
AMOUNTS YOU ALLO-
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CATE TO THE VARIABLE ACCOUNTS. YOU SHOULD PERIODICALLY REVIEW YOUR PREMIUM
PAYMENT ALLOCATION INSTRUCTIONS IN LIGHT OF MARKET CONDITIONS AND YOUR OVERALL
FINANCIAL OBJECTIVES.
SEPARATE ACCOUNT VALUE
The value of your investment in the Separate Account will go up or down
depending on the investment experience of the Portfolios underlying the Variable
Accounts you select for investment. Separate Account Value will be decreased by
any partial withdrawals, transfers and Separate Account charges. There is no
guaranteed minimum Separate Account Value. Because the value in the Separate
Account of your Contract on any future date depends upon market conditions, it
cannot be predetermined.
Calculating Separate Account Value. The Separate Account Value is
determined at the end of each Business Day. It is the sum of the assets you have
in each of the Variable Accounts. To measure the value of each Variable Account,
we use a unit of measure called an Accumulation Unit.
Determining the Number of Accumulation Units. Any money you allocate or
transfer to a Variable Account will be converted into Accumulation Units and
will increase the number of Accumulation Units credited to the Variable Account.
We determine the number of Accumulation Units to be credited to the Variable
Account by dividing the dollar amount of the payment or transfer by the
Accumulation Unit value for that Variable Account as of the end of that Business
Day. (See "Determining Accumulation Unit Value" below.)
Any amounts transferred, withdrawn or deducted from a Variable Account will
be processed by cancelling or liquidating Accumulation Units. The number of
Accumulation Units to be cancelled is determined by dividing the dollar amount
being removed from a Variable Account by the value of an Accumulation Unit for
that Variable Account as of the end of the Business Day during which the amount
was removed. The number of Accumulation Units in any Variable Account will be
decreased at the end of each Business Day by:
(a) any amounts transferred (and any applicable Transfer Fee) from that
Variable Account to another Variable Account or to the Fixed
Account,
(b) any amounts withdrawn during that Business Day,
(c) any Withdrawal Charge or premium tax assessed upon a full or partial
withdrawal, and
(d) the quarterly Contract Fee, if assessed on that Business Day.
Determining Accumulation Unit Value. On the first day of operation for
each Variable Account, the value of an Accumulation Unit for that Variable
Account is set at $10. We recalculate the value of an Accumulation Unit for each
Variable Account at the end of each Business Day. Accumulation Unit Value is
calculated by multiplying the value of an Accumulation Unit at the end of the
immediately preceding Business Day by the Variable Account's Net Investment
Factor for the current Business Day. The Net Investment Factor for each Variable
Account reflects the investment performance and capital gains and losses
(whether realized or unrealized) of the underlying Portfolio and certain
Separate Account charges for that Business Day. The formula for computing the
Net Investment Factor may be found in the Statement of Additional Information.
TRANSFERS BETWEEN INVESTMENT OPTIONS
General. Before the Annuity Start Date and subject to the restrictions
described below, you may transfer all or part of the amount in a Variable
Account or the Fixed Account to another Variable Account or the Fixed Account.
If you have chosen the Living Benefit option and you transfer Contract
Value from an Eligible Variable Account, you will reduce the amount of the
Eligible Premium Payments on which your Living Benefit is based. (See "Living
Benefit.") IT IS IMPORTANT THAT YOU READ THE SECTION ON "LIVING BENEFIT" SO THAT
YOU MAY BETTER UNDERSTAND HOW THIS FEATURE OF THE CONTRACT WORKS.
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Transfers to the Fixed Account must be at least $1,000. Before the Annuity
Start Date, you may transfer up to 20% of the Fixed Account Value (as determined
at the beginning of the Contract Year) from the Fixed Account to one or more of
the Variable Accounts in any Contract Year. We measure a Contract Year from the
anniversary of the day we issued your Contract. We do not charge a Transfer Fee
for transfers from the Fixed Account to one or more Variable Accounts and such a
transfer is not considered a transfer for purposes of assessing a transfer
charge.
Transfers will be made as of the Business Day on which we receive your
Written Request or telephone authorization to transfer, provided we receive it
before the close of our Business Day, usually 4:00 p.m. Eastern Time. If we
receive your request after the close of our Business Day, we will make the
transfer as of the next Business Day. There currently is no limit on the number
of transfers that you can make before the Annuity Start Date among or between
Variable Accounts or to the Fixed Account.
Telephone Transfers. We will make a transfer based upon instructions you
give us over the telephone, provided we have on file a currently valid telephone
transfer authorization that you have signed. If you have not completed such an
authorization on your application, you must send a telephone transfer
authorization form to our Service Center. Your authorization is valid until you
revoke it in writing or until the Service Center receives a subsequently dated
form that you have signed. You may use your telephone to authorize a transfer
from one Variable Account or the Fixed Account to another Variable Account or
the Fixed Account, to change the allocation instructions for future investments,
to change Dollar-Cost Averaging, interest sweep and Automatic Account Balancing
options and/or to request a partial withdrawal.
We will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If we follow such procedures we will not
be liable for any losses due to unauthorized or fraudulent instructions. We may
be liable for such losses if we do not follow those reasonable procedures. The
procedures that we may follow for telephone transfers include providing you with
a written confirmation of all transfers made according to telephone
instructions, requiring a form of personal identification prior to acting on
instructions received by telephone, and tape recording instructions received by
telephone.
We reserve the right to modify, restrict, suspend or eliminate the transfer
privileges (including the telephone transfer facility) at any time, for any
class of Contracts, for any reason. In particular, we reserve the right not to
honor transfers requested by a third party holding a power of attorney from you
where that third party requests simultaneous transfers on your behalf of two or
more Contracts.
Transfer Fee. We will impose a transfer fee of $25 for the thirteenth and
each subsequent transfer request you make. There is currently no limit on the
number of transfers you can make of Contract Value from one or more Variable
Accounts to another one or more of the Variable Accounts or the Fixed Account
during a single Contract Year before the Annuity Start Date. (See "Charges and
Deductions.")
Dollar-Cost Averaging. The Dollar-Cost Averaging Program permits you to
systematically transfer (on a monthly or quarterly basis) a set dollar amount
from one or more Variable Accounts or the Fixed Account to any other Variable
Accounts. The fixed dollar amount will purchase more Accumulation Units of a
Variable Account when their value is lower and fewer units when their value is
higher. Over time, the cost per unit averages out to be less than if all
purchases of units had been made at the highest value and greater than if all
purchases had been made at the lowest value. The dollar-cost averaging method of
investment reduces the risk of making purchases only when the price of
Accumulation Units is high. It does not assure a profit or protect against a
loss in declining markets.
You may elect to participate in the Dollar-Cost Averaging program when you
complete your application, or at any other time before the Annuity Start Date,
by sending us a Written Request. To use the Dollar-Cost Averaging program, you
must transfer at least $100 to each Variable Account. Once you elect the
program, it remains in effect for the life of the Contract until the value of
the Variable Account from which transfers are being made is depleted, and/or the
value of the Fixed Account is expended, or until you cancel the program by
Written Request or by telephone request if we have your telephone authorization
on file. There is no additional charge for dollar-cost averaging, and a transfer
under this program is not considered a transfer for purposes of
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assessing a transfer change. We reserve the right to discontinue offering the
dollar-cost averaging facility at any time and for any reason.
Dollar-Cost Averaging from an Eligible Variable Account will reduce the
amount of the Eligible Premium Payments on which the Living Benefit is based.
(See "Living Benefit.")
Interest Sweep. Before the Annuity Start Date, you may elect to have any
interest credited to the Fixed Account automatically transferred on a quarterly
basis to one or more Variable Accounts. There is no charge for interest sweep
transfers and an interest sweep transfer is not considered a transfer for
purposes of assessing a transfer charge. Amounts transferred out of the Fixed
Account due to an interest sweep transfer are counted toward the 20% of Fixed
Account Value that may be transferred out of the Fixed Account during any
Contract Year.
Automatic Account Balancing Service. Once your money has been allocated
among the Variable Accounts, the performance of each Variable Account may cause
your allocation to shift. You may instruct us to automatically rebalance (on a
monthly or quarterly basis) your Contract Value to return to the percentages
specified in your allocation instructions. You may elect to participate in the
Automatic Account Balancing Service when you complete your application or at any
other time before the Annuity Start Date by sending us a Written Request. Your
percentage allocations must be in whole percentages and be at least 1% per
allocation. You may start and stop Automatic Account Balancing at any time by
sending us a Written Request or by telephone request, if we have your telephone
authorization on file. There is no additional charge for using Automatic Account
Balancing, and an account balancing transfer is not considered a transfer for
purposes of assessing a transfer charge. We reserve the right to discontinue
offering the automatic account balancing service at any time and for any reason.
Automatic Account Balancing from an Eligible Variable Account will reduce
the amount of the Eligible Premium Payments on which the Living Benefit is
based. (See "Living Benefit.")
FEES AND CHARGES
WITHDRAWAL CHARGE
General. We do not deduct a charge for sales expenses from Premium
Payments at the time Premium Payments are paid to us. However, we do deduct a
Withdrawal Charge if you fully or partially withdraw Contract Value before the
Annuity Start Date. We do not assess a Withdrawal Charge on withdrawals made in
the event the Contract terminates due to your death or the death of the
Annuitant, or if you decide to begin to receive annuity payments and you choose
an annuity payout plan with a life contingency or an annuity payout plan with a
period certain of at least 10 years.
The amount of the Withdrawal Charge you may incur depends on the Withdrawal
Charge Option you choose at the time you purchase your Contract. ONCE YOU CHOOSE
YOUR WITHDRAWAL CHARGE OPTION, YOU CANNOT CHANGE IT. If your initial Premium
Payment is $100,000 or more, you may choose one of two Free Withdrawal Options
at the time you complete your application.
Withdrawal Charge Options. When you purchase your Contract, you must
choose between two Withdrawal Charge Options.
The DATE OF ISSUE WITHDRAWAL CHARGE OPTION is designed for the owner who
wishes to make additional Premium Payments periodically over the life of the
Contract. The charge expires after the ninth Contract Year, benefiting those
owners who intend to continue to make Premium Payments after the ninth Contract
Year.
The PREMIUM PAYMENT WITHDRAWAL CHARGE OPTION is more suitable for the owner
who currently intends to make only a single Premium Payment or several Premium
Payments close in time to the date the Contract is issued. This charge option is
not designed for the owner who intends to make additional Premium Payments over
an extended period of time because each time you make another Premium Payment,
the seven-year period for paying the Withdrawal Charge begins again.
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The Withdrawal Charge is separately calculated for each withdrawal you
make. For purposes of calculating the Withdrawal Charge, the money that has been
held the longest in the Contract will be deemed to be the first money withdrawn.
In addition, amounts subject to the Withdrawal Charge will be deemed to be first
from Premium Payments, and then from earnings. This means that we will not
deduct a Withdrawal Charge on withdrawals of that portion of your Contract Value
that exceeds the sum total of your Premium Payments.
IF YOU CHOOSE THE DATE OF ISSUE WITHDRAWAL CHARGE OPTION: We will impose a
Withdrawal Charge on all partial or full withdrawals of Premium Payments that
you make during the first nine Contract Years if the amount of the withdrawal
exceeds the Free Withdrawal Amount. The Withdrawal Charge is calculated as a
percentage of the amount you withdraw based on the number of years between the
date we receive your Written Request for withdrawal and the Date of Issue. The
rate of the Withdrawal Charge is listed in the table below. Under this option,
no Withdrawal Charge is deducted from full or partial withdrawals that you make
in Contract Years ten and later.
<TABLE>
<CAPTION>
CHARGE AS PERCENTAGE
CONTRACT YEAR OF PREMIUM PAYMENTS
------------------------------------------------------- --------------------
<S> <C>
1-6............................................... 7.0%
7................................................. 6.0
8................................................. 4.0
9................................................. 2.0
10+............................................... 0
</TABLE>
IF YOU CHOOSE THE DATE OF PREMIUM PAYMENT WITHDRAWAL CHARGE OPTION: We
will calculate the Withdrawal Charge by determining the length of time between
the date we receive your Written Request for a withdrawal and the date you made
the Premium Payment being withdrawn. We will deduct a Withdrawal Charge if you
withdraw a Premium Payment that we have held for less than seven Premium Payment
Years if it is greater than the Free Withdrawal Amount.
<TABLE>
<CAPTION>
CHARGE AS PERCENTAGE
PREMIUM PAYMENT YEAR OF PREMIUM PAYMENTS
------------------------------------------------------- --------------------
<S> <C>
1................................................. 7.0%
2................................................. 6.0
3................................................. 5.0
4................................................. 4.0
5................................................. 3.0
6................................................. 2.0
7................................................. 1.0
8+................................................ 0
</TABLE>
Any applicable Withdrawal Charge is deducted pro-rata from the remaining
value in the Variable Accounts or Fixed Account from which the withdrawal is
being made. If such remaining Separate Account Value or Fixed Account Value is
insufficient for this purpose, the Withdrawal Charge is deducted pro-rata from
all Variable Accounts and the Fixed Account in which the Contract is invested
based on the remaining Contract Value in each Variable Account and the Fixed
Account.
Free Withdrawal Amount. In any Contract Year after the first, you may
withdraw a portion of your Contract Value without incurring a Withdrawal Charge.
This amount is called the Free Withdrawal Amount. Withdrawals under the
Systematic Withdrawal Program are also permitted a Free Withdrawal Amount, as
determined below, during the first Contract Year. If your initial Premium
Payment is less than $100,000, the Free Withdrawal Amount is 10% of Contract
Value each year, as determined at the beginning of the Contract Year. If you do
not withdraw the full 10% in any Contract Year, the remaining amount does not
roll over to the next Contract Year.
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If your initial Premium Payment is $100,000 or more, the Free Withdrawal
Amount depends on the Free Withdrawal Option you choose at the time you purchase
your Contract. Once you choose an option, you cannot change it.
IF YOU CHOOSE THE CUMULATIVE 10% OPTION: After the first Contract Year,
you may withdraw up to 10% of your Contract Value as of the beginning of each
Contract Year and we will not charge you a Withdrawal Charge on that amount. If
you do not withdraw the full 10% in any one Contract Year, the remaining
percentage may be rolled over to the next Contract Year, up to a maximum of 50%
of Contract Value measured as of the beginning of each Contract Year.
IF YOU CHOOSE THE EARNINGS OPTION: After the first Contract Year, you may
withdraw part or all of your earnings under the Contract at any time without
incurring a Withdrawal Charge. Earnings are equal to your Contract Value minus
Premium Payments, transfers and partial withdrawals.
Any amounts withdrawn in excess of the Free Withdrawal Amount will be
assessed a Withdrawal Charge, depending on the Withdrawal Charge Option you
choose. (See "Withdrawal Charge.") Free withdrawals may be subject to the 10%
federal penalty tax if made before you reach age 59 1/2.
Waiver of Withdrawal Charge. If state law permits, we will waive the
Withdrawal Charge if the Annuitant or the Annuitant's spouse is confined for a
specified period to a hospital (as described in the Contract) or a long term
care facility (as described in the Contract). If the Annuitant becomes
terminally ill (as described in the Contract) before the Annuity Start Date and
if permitted by state law, we will waive the Withdrawal Charge on any full
withdrawal or any partial withdrawal, provided the partial withdrawal is at
least $500 and a $5,000 balance remains in the Accounts after the withdrawal. We
must receive your Written Request to waive the charge before the Annuity Start
Date.
Under the terms of the Post-Secondary Education Rider, if you, your spouse,
your child or the Annuitant is enrolled in a college, university, vocational,
technical, trade or business school, we will waive the Withdrawal Charge on one
withdrawal of up to 20% of Contract Value in each Contract Year before the
Annuity Start Date while the Annuitant is alive, so long as this waiver is
permitted by state law. The maximum withdrawal permitted under the
Post-Secondary Education Rider, when combined with the Free Withdrawal Amount,
is 20% of Contract Value. Before the withdrawal, we must receive at our Home
Office written proof of enrollment to our satisfaction within one (1) year of
the date of enrollment. (See "Free Withdrawal Amount" and the Statement of
Additional Information.)
Employee and Agent Purchases. If state law permits, we will waive the
Withdrawal Charge on any full or partial withdrawals from Contracts sold to
agents or employees of Indianapolis Life Insurance Company (or its affiliates
and subsidiaries).
CONTRACT FEE
At the end of each Contract quarter (or on the date of full withdrawal of
Contract Value) before the Annuity Start Date, we will deduct from the Contract
Value a quarterly contract fee of $7.50 as reimbursement for our administrative
expenses relating to the Contract. The fee will be deducted from each Variable
Account and the Fixed Account based on the proportion that the value in each
such Variable Account and the Fixed Account bears to the total Contract Value.
We will not charge the Contract Fee after an annuity payout plan has begun.
Deduction of the Contract Fee is currently waived for all Qualified Contracts.
We also currently waive deduction of the Contract Fee for Non-Qualified
Contracts whose cumulative Premium Payments on the date the Contract Fee is
assessed are equal to or greater than $100,000. We reserve the right to modify
this waiver upon 30 days written notice to you.
ASSET-BASED ADMINISTRATIVE CHARGE
We will deduct a daily administrative charge as compensation for certain
expenses we incur in the administration of the Contract. The charge is deducted
from the assets of the Separate Account at an annual rate of 0.15%. We will
continue to assess this charge after annuitization if annuity payments are made
on a
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<PAGE> 88
variable basis. There is no necessary relationship between the amount of this
administrative charge and the amount of expenses that may be attributable to a
particular Contract.
TRANSFER FEE
A transfer fee of $25 will be imposed for the 13th and each subsequent
transfer during a Contract Year. For the purpose of assessing the Transfer Fee,
each Written Request would be considered to be one transfer, regardless of the
number of Variable Accounts affected by the transfer. The transfer fee will be
deducted from the Variable Account from which the transfer is made. If a
transfer is made from more than one Variable Account at the same time, the
transfer fee would be deducted pro-rata from the remaining Separate Account
Value in such Variable Account(s). We reserve the right to waive the transfer
fee.
MORTALITY AND EXPENSE RISK CHARGE
As compensation for assuming mortality and expense risks, we will deduct a
daily mortality and expense risk charge from the assets of the Separate Account.
The charge is at a daily rate of 0.003404%. If applied on an annual basis this
rate would be 1.25% (approximately 0.90% for mortality risk and 0.35% for
expense risk). This charge will continue to be assessed if annuity payments are
made on a variable basis either before or after the Annuity Start Date.
The mortality risk we assume is that Annuitants may live for a longer
period of time than estimated when the guarantees in the Contract were
established. Because of these guarantees, each Annuitant is assured that
longevity will not have an adverse effect on the annuity payments received. The
mortality risk that we assume also includes a guarantee to pay a Death Benefit
if the Annuitant dies before the Annuity Start Date. The expense risk that we
assume is the risk that the administrative fees and transfer fees (if imposed)
may be insufficient to cover actual future expenses.
FUND EXPENSES
Because the Separate Account purchases shares or units of the various
Portfolios of the Funds, the net assets of the Separate Account will be reduced
by the investment advisory fees and other operating expenses incurred by such
Portfolios. See the attached prospectuses for the Portfolios.
PREMIUM TAXES
Various states and other governmental entities charge a premium tax on
annuity contracts issued by insurance companies. Premium tax rates currently
range up to 3.5%, depending on the state. Tax rates are subject to change from
time to time by legislative and other governmental action. In addition, other
governmental units within a state may levy such taxes. We are responsible for
the payment of these taxes and, if necessary, we will make a deduction from the
value of your Contract either: (a) from Premium Payments as we receive them, (b)
from Contract Value upon partial or full withdrawal, (c) when annuity payments
begin, or (d) upon payment of a Death Benefit. We, however, reserve the right to
deduct premium taxes at the time such taxes are paid to the taxing authority.
OTHER TAXES
Currently, no charge is made against the Separate Account for any federal,
state or local taxes (other than premium taxes) that we incur or that may be
attributable to the Separate Account or the Contracts. We may, however, make
such a charge in the future from Surrender Value, Death Benefits or annuity
payments, as appropriate. Such taxes may include taxes (levied by any government
entity) which we determine to have resulted from: (1) the establishment or
maintenance of the Separate Account, (2) receipt by us of Premium Payments, (3)
issuance of the Contracts, or (4) the payment of annuity payments.
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THE PAYOUT PERIOD
The Payout Period is that period of time during which you will receive in a
steady stream of annuity payments the money you have accumulated under your
Contract. It begins on the Annuity Start Date. You may choose to have your
annuity payments made on a fixed, a variable, or a combination payout basis.
When you choose to have your Payout Option on a variable basis, you may keep the
same Variable Accounts to which your Premium Payments were allocated, or
transfer to different ones.
THE ANNUITY START DATE. If you own a Non-Qualified Contract, you may
select the Annuity Start Date on which you will begin to receive annuity
payments. If you do not specify a date, the Annuity Start Date is the later of
the Annuitant's age 70 or 10 years after the Date of Issue. For Qualified
Contracts purchased in connection with qualified plans under Code sections
401(a), 401(k), 403(a), 403(b) and 457, the Code requires that the Annuity
Commencement Date must be no later than April 1 of the calendar year following
the later of the year in which the Owner (i) reaches age 70 1/2 or (ii) retires.
If the Owner is a "5 percent owner" (as defined in the Code), or in the case of
an IRA that satisfies Code section 408, the Annuity Commencement Date must be no
later than the date described in (i).
If you have chosen the Living Benefit option at the time you purchase the
Contract and you select an Annuity Start Date that is earlier than the Living
Benefit Date (i.e., the later of the Annuitant's age 70 or 10 years after the
Date of Issue), you will lose your eligibility for the Living Benefit. (See
"Living Benefit.")
You may change your Annuity Start Date if: (1) we receive your Written
Request at the Service Center at least 31 days before the current Annuity Start
Date, and (2) the Annuity Start Date you request is a Contract Anniversary or it
is the date on which you fully withdraw the Surrender Value.
ANNUITY PAYOUT OPTIONS. You may elect, revoke, or change your annuity
payout plan at any time before the Annuity Start Date while the Annuitant is
living by sending us a Written Request signed by you and/or your beneficiary, as
appropriate. You may choose one of the payout plans described below or any other
plan being offered by us as of the Annuity Start Date. The payout plans we
currently offer provide either variable annuity payments or fixed annuity
payments or a combination of both.
You may select to receive annuity payments on a monthly, quarterly,
semi-annual or annual basis. The first payment under any payout plan will be
made on the fifteenth day of the month immediately following the Annuity Start
Date. Subsequent payments shall be made on the fifteenth of the month.
If you do not select an annuity payout plan by the Annuity Start Date, we
will apply the adjusted Contract Value under Option 3, One Life Income with
payments guaranteed for 10 years, as described below.
Anytime before the Annuity Start Date, you may have the entire Surrender
Value paid to you as an annuity under one of the payout plans. A beneficiary may
have the Death Benefit paid as an annuity under one of the payout plans.
We reserve the right to pay you the adjusted Contract Value in a lump sum
and not as an annuity if your adjusted Contract Value after the Annuity Start
Date would be less than $2,500, or the amount of annuity payments would be less
than $25.
DETERMINING THE AMOUNT OF THE ANNUITY PAYMENT. On the Annuity Start Date,
the adjusted Contract Value will be used to calculate your annuity payments
under the payout plan you select, unless you choose to receive the Surrender
Value in a lump sum. In certain states, we must use the Surrender Value of your
Contract to calculate your annuity payments under the payout plan you choose,
rather than the adjusted Contract Value.
The adjusted Contract Value is the Contract Value on the Annuity Start
Date:
(1) MINUS the quarterly Contract Fee;
(2) MINUS any applicable premium taxes not yet deducted; and
(3) for an installment income annuity payout plan with a payout period
of less than 10 years, MINUS any applicable Withdrawal Charge.
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<PAGE> 90
For Qualified Contracts, the amount of any outstanding loan is also
deducted, and distributions must satisfy certain requirements specified in the
Code.
We do not assess a Withdrawal Charge if you choose an annuity payout plan
with a life contingency or an installment payout plan with a period certain of
at least 10 years.
FIXED ANNUITY PAYMENTS
Fixed annuity payments are periodic payments that we make to the Annuitant.
The amount of the fixed annuity payment is fixed and guaranteed by us. The
amount of each payment depends only on the form and duration of the payout plan
you choose, the age of the Annuitant, the sex of the Annuitant (if applicable),
the amount of your Contract Value and the applicable annuity purchase rates in
the Contract. The annuity purchase rates in the Contract are based on a minimum
guaranteed interest rate of 3.0%. We may, in our sole discretion, make annuity
payments in an amount based on a higher interest rate.
VARIABLE ANNUITY PAYMENTS
As with fixed annuity payments, variable annuity payout plans guarantee
income either for life or the number of years that you have chosen. The amount
of your variable annuity payments will depend on the current value of the
underlying investments, which varies over time. Your contract will contain
annuity tables which demonstrate how the initial annuity payment rate is
derived. This rate is different for each payout plan, and varies by age and sex
of the annuitant. The contract will also permit you to choose a benchmark rate
of return for the Payout Period. You may choose a benchmark rate of 3.0%, 4.0%
or 5.0% annually. If the net investment performance is greater than this
benchmark rate, your payments will increase. If the performance falls below this
benchmark, your payments will decline. Therefore, if you choose a 5.0% benchmark
rate, you assume more risk that your income check may occasionally decline than
if you choose a 3.0% benchmark rate. For further details on Variable Annuity
Payments, see the Statement of Additional Information.
Transfers. After the Annuity Start Date, an Annuitant may change the
Variable Account(s) in which the annuity payout plan is invested once per
Contract Year by sending us a Written Request. No charge is assessed for this
transfer. We will make the transfer by exchanging annuity units of one Variable
Account for another Variable Account on an equivalent dollar value basis. See
the Statement of Additional Information for examples of annuity unit value
calculations and variable annuity payment calculations.
DESCRIPTION OF ANNUITY PAYOUT OPTIONS
Option 1 -- Installment Income For a Fixed Period. Under this option, we
will make equal monthly annuity payments for a fixed number of years between 1
and 30 years. The amount of the payment is not guaranteed if a variable payout
plan is selected. If a fixed payout plan is selected, the payments for each
$1,000 of Contract Value will not be less than those shown in the Fixed Period
Table in Section 13 of the Contract. In the event of the Payee's death, a
Successor Payee may receive the payments or may elect to receive the present
value of the remaining payments in a lump sum. If there is no Successor Payee,
the present value of the remaining payments will be paid to the estate of the
last surviving Payee.
Option 2 -- Installment Income In a Fixed Amount. Under this option, we
will make equal monthly payments of $5.00 or more for each $1,000 of Contract
Value used to purchase the option until the full amount is paid out. The number
of payments is not guaranteed if a variable payout plan is selected. If a fixed
payout plan is selected, payments will be made until the full amount applied
with compound interest at an annual rate of not less than 3% is paid out. In the
event of the Payee's death, a Successor Payee may receive the payments or may
elect to receive the present value of the remaining payments in a lump sum. If
there is no Successor Payee, the present value of the remaining payments will be
paid to the estate of the last surviving Payee.
Option 3 -- One Life Income. Under this option, we will make an annuity
payment each month so long as the Payee is alive,* or for a guaranteed 10 or 20
year period. If when the Payee dies, we have made annuity
- ---------------
* IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE
PAYEE DIES (OR PAYEES DIE) BEFORE THE DUE DATE OF THE SECOND PAYMENT OR TO
RECEIVE ONLY TWO ANNUITY PAYMENTS IF THE PAYEE DIES (OR PAYEES DIE) BEFORE THE
DUE DATE OF THE THIRD PAYMENT, AND SO ON.
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payments for less than the selected guaranteed period, we will continue to
make annuity payments for the rest of the guaranteed period. The amount of each
payment is not guaranteed if a variable payout plan is selected. If a fixed
payout plan is selected, the payment for each $1,000 of Contract Value used to
purchase the option will not be less than that shown in the One Life Table in
Section 12 of the Contract. Payments guaranteed for 10 or 20 years certain may
be commuted. Payments guaranteed only for the life of the Payee may not be
commuted.
Option 4 -- Joint and Survivor Life Income. Under this option, we will
make annuity payments each month so long as two Payees are alive, or if one
Payee dies to the surviving Payee.* If one Payee dies before the due date of the
first payment, the surviving Payee will receive payments under Option 3 -- One
Life Income with payments guaranteed for 10 years. The payments may not be
commuted.
The amount of each payment will be determined from the tables in the
Contract that apply to the particular option using the Annuitant's age (and if
applicable, sex). Age will be determined from the last birthday at the due date
of the first payment.
WITHDRAWAL OF CONTRACT VALUE
Full Withdrawals. At any time before the Annuity Start Date, you may
withdraw fully from the Contract for its Surrender Value. The Surrender Value is
equal to the Contract Value MINUS (1) any applicable Withdrawal Charges; MINUS
(2) any premium taxes not previously deducted; and MINUS (3) the Contract Fee.
For Qualified Contracts, any outstanding loan balance is also deducted. The
Surrender Value will be determined as of the Business Day that we receive your
Written Request requesting full withdrawal and your Contract at our Service
Center. The Surrender Value will be paid in a lump sum unless you request
payment under a payout plan. (See "The Payout Period.") A full withdrawal may
have adverse federal income tax consequences, including a penalty tax. (See
"Federal Tax Matters.")
Partial Withdrawals. At any time before the Annuity Start Date, you may
send a Written Request or a telephone request to us to withdraw part of your
Contract Value. You must withdraw at least $250. We will withdraw the amount you
request from the Contract Value as of the Business Day on which we receive your
Written Request or telephone request for the partial withdrawal. We will then
reduce the amount remaining in the Contract by any applicable Withdrawal Charge.
Your Contract Value after a partial withdrawal must be at least $1,000. If your
Contract Value after a partial withdrawal is less than $1,000, we reserve the
right to pay you the Surrender Value in a lump sum. (See "Fees and
Charges -- Withdrawal Charge.")
You may specify how much you wish to withdraw from each Variable Account
and/or the Fixed Account. If you do not specify, or if you do not have
sufficient assets in the Variable Accounts or Fixed Account you specified to
comply with your request, we will make the partial withdrawal on a pro rata
basis from the Fixed Account and those Variable Accounts in which you have
invested. We will base the pro rata reduction on the ratio that the value in
each Variable Account and the Fixed Account has to the entire Contract Value
before the partial withdrawal.
If you have elected the Living Benefit option and you withdraw Contract
Value from an Eligible Variable Account, you will reduce the amount of the
Eligible Premium Payments on which your Living Benefit is based. IT IS IMPORTANT
THAT YOU READ THE SECTION ON "LIVING BENEFIT" SO THAT YOU MAY BETTER UNDERSTAND
HOW THIS FEATURE OF THE CONTRACT WORKS.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
WITHDRAWAL YOU MAKE. (See "Federal Tax Matters.")
Systematic Withdrawal Program. The Systematic Withdrawal Program provides
an automatic monthly or quarterly payment to you, the Owner, from the amounts
you have accumulated in the Variable Accounts and/or the Fixed Account. The
minimum amount you may withdraw is $100. The maximum amount that may be
transferred and withdrawn out of the Fixed Account in any Contract Year under
all circumstances (Dollar-Cost Averaging, Systematic Withdrawals and Partial
Withdrawals) is 20% of the Fixed Account Value as determined at the beginning of
the Contract Year. To use the program, you must maintain a $1,000
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balance in your Contract. You may elect to participate in the Systematic
Withdrawal Program at any time before the Annuity Start Date by sending a
Written Request to our Service Center. Once you elect the program, it remains in
effect unless the balance in your Contract drops below $1,000. You may cancel
the program at any time by sending us a Written Request or by calling us by
telephone if we have your telephone authorization on file.
We will assess a Withdrawal Charge on these withdrawals, unless the amount
you withdraw under the Systematic Withdrawal Program qualifies as a Free
Withdrawal Amount or unless Withdrawal Charges no longer apply to the amounts
withdrawn. Withdrawals under the Systematic Withdrawal Program are permitted a
Free Withdrawal Amount during the first Contract Year. (See "Fees and
Charges -- Withdrawal Charge.") We do not deduct any other charges for this
program.
All Systematic Withdrawals will be paid to you on the same day each month,
provided that day is a Business Day. If it is not, then payment will be made on
the next Business Day. Systematic withdrawals may be taxable, subject to
withholding, and subject to a 10% penalty tax. (See "Federal Tax Matters.") We
reserve the right to discontinue offering the Systematic Withdrawal Program at
any time and for any reason.
Systematic Withdrawals from an Eligible Variable Account will reduce the
amount of the Eligible Premium Payments on which the Living Benefit is based.
(See "Living Benefit.")
Full and Partial Withdrawal Restrictions. Your right to make full and
partial withdrawals is subject to any restrictions imposed by applicable law or
employee benefit plan.
Restrictions on Distributions from Certain Types of Contracts. There are
certain restrictions on full and partial withdrawals from Contracts used as
funding vehicles for Code Section 403(b) retirement programs. Section 403(b)(11)
of the Code restricts the distribution under Section 403(b) annuity contracts
of: (i) elective contributions made in years beginning after December 31, 1988;
(ii) earnings on those contributions; and (iii) earnings in such years on
amounts held as of the last year beginning before January 1, 1989. Distributions
of those amounts may only occur upon the death of the employee, attainment of
age 59 1/2, separation from service, disability, or financial hardship. In
addition, income attributable to elective contributions may not be distributed
in the case of hardship.
CONTRACT LOANS
If your Contract is issued to you in connection with retirement programs
meeting the requirements of Section 403(b) of the Code (other than those
programs subject to Title I of the Employee Retirement Income Security Act of
1974), you may borrow from us using your Contract as collateral. Loans such as
these are subject to the provisions of any applicable retirement program and to
the Code. You should, therefore, consult your tax and retirement plan advisers
before taking a contract loan.
At any time prior to the year the Owner reaches age 70 1/2, you may borrow
the lesser of (1) the maximum loan amount permitted under the Code, and (2) 90%
of the Surrender Value of your Contract less any existing loan amount,
determined as of the date of the loan. Loans in excess of the maximum amount
permitted under the Code will be treated as a taxable distribution rather than a
loan. The minimum loan amount is $1,000. We will only make contract loans after
approving your written application. The written consent of all assignees and
irrevocable beneficiaries must be obtained before a loan will be given.
When a loan is made, we will transfer an amount equal to the amount
borrowed from Separate Account Value or Fixed Account Value to the loan account.
The loan account is part of our general account, and Contract Value in the loan
account does not participate in the investment experience of any Variable
Account or Fixed Account. You must indicate in the loan application from which
Variable Accounts or Fixed Account, and in what amounts, Contract Value is to be
transferred to the loan account. In the absence of any such instructions from
you, the transfer(s) are made pro-rata on a last-in, first out ("LIFO") basis
from all Variable Accounts having Separate Account Value and from the Fixed
Account. Loans may be repaid by you at any time before the Annuity Start Date.
Upon the repayment of any portion of a loan, an amount equal to
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the repayment will be transferred from the loan account to the Variable
Account(s) or Fixed Account as designated by you or according to your current
Premium Payment allocation instructions.
We charge interest on contract loans at an effective annual rate of 6.0%.
We pay interest on the Contract Value in the loan account at rates we determine
from time to time but never less than an effective annual rate of 3.0%.
Consequently, the net cost of a loan is the difference between 6.0% and the rate
being paid from time to time on the Contract Value in the loan account. We may
declare from time to time higher current interest rates. Different current
interest rates may be applied to the loan account than the rest of the Fixed
Account. If not repaid, loans will automatically reduce the amount of any Death
Benefit, the amount payable upon a partial or full withdrawal of Contract Value
and the amount applied on the Annuity Start Date to provide annuity payments.
If at any time, the loan amount of a Contract exceeds the Surrender Value,
the Contract will be in default. In this event, we will send you a written
notice of default stating the amount of loan repayment needed to reinstate the
Contract, and you will have 60 days, from the day the notice is mailed, to pay
the stated amount. If we do not receive the required loan repayment within 60
days, we will terminate the Contract without value. In addition, in order to
comply with the requirements of the Code, loans must be repaid in substantially
equal installments, at least quarterly, over a period of no longer than five
years (which can be longer for certain home loans). If these requirements are
not satisfied, or if the Contract terminates while a loan is outstanding, the
loan balance will be treated as a taxable distribution and may be subject to
penalty tax, and the treatment of the Contract under Section 403(b) of the Code
may be adversely affected.
Any loan amount outstanding at the time of your death or the death of the
Annuitant is deducted from any Death Benefit paid. In addition, a contract loan,
whether or not repaid, will have a permanent effect on the Contract Value
because the investment experience of the Separate Account and the interest rates
applicable to the Fixed Account do not apply to the portion of Contract Value
transferred to the loan account. The longer the loan remains outstanding, the
greater this effect is likely to be.
DEATH BENEFITS
DEATH BENEFITS BEFORE THE ANNUITY START DATE
Death Benefit. If the Annuitant dies before the Annuity Start Date, the
Beneficiary will receive a Death Benefit. If you do not choose the Enhanced
Death Benefit option, the Death Benefit will be equal to the greater of:
(1) the sum of all Premium Payments made under the Contract, LESS
partial withdrawals, as of the date we receive due proof of the
deceased's death and payment instructions; or
(2) the Contract Value as of the date we receive due proof of the
deceased's death and payment instructions;
LESS any applicable premium taxes not previously deducted.
Enhanced Death Benefit. If you elect the three year stepped-up Enhanced
Death Benefit option at the time of purchase, the minimum Enhanced Death Benefit
payable upon the death of the Annuitant before the Annuity Start Date will be
reset every third year on the Death Benefit Anniversary if the Contract Value on
such Death Benefit Anniversary is greater than the Contract Value on the
previous Death Benefit Anniversary. The Enhanced Death Benefit will equal the
greater of:
(1) the Contract Value as of the date we receive due proof of the
deceased's death and payment instructions; or
(2) the highest Contract Value as of any Death Benefit Anniversary
preceding the date the Enhanced Death Benefit is determined, plus
any Premium Payments, and minus any withdrawals and charges,
incurred between such Death Benefit Anniversary and the date the
Enhanced Death Benefit is determined. This value is initially set on
the first Death Benefit Anniversary
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and equals the greater of: (a) the sum of Premium Payments, MINUS
partial withdrawals; or (b) Contract Value, on that date. This value
will be reset on every future Death Benefit Anniversary (that is,
every third year) to equal Contract Value on that date only if
Contract Value on that Death Benefit Anniversary is greater than the
Enhanced Death Benefit Value on any previous Death Benefit
Anniversary. Once reset, this value will never decrease unless
partial withdrawals are made;
LESS any applicable premium taxes not previously deducted.
Age Limitation Under Either Death Benefit Option. If the Annuitant dies at
or after age 75 (or ten years after the Date of Issue, whichever is later) but
before the Annuity Start Date, the Death Benefit will equal Contract Value, LESS
any applicable premium taxes not yet deducted, as of the date we receive due
proof of death and payment instructions.
Loans. If the Contract is a Qualified Contract, any outstanding loan
amount on the date the Death Benefit is paid will also be deducted from the
Death Benefit.
Distribution Upon the Owner's Death. If you own the Contract with another
person, and one of you dies before the Annuity Start Date, the survivor becomes
the sole Beneficiary regardless of your designation. If there is no surviving
Owner, your named Beneficiary will become the Beneficiary upon your death. (You
may name primary and contingent beneficiaries.) If you have named two or more
primary Beneficiaries, they will share equally in the death benefit (described
below) unless you have specified otherwise. If there are no living primary
Beneficiaries at the time of your death, payments will be made to those
contingent Beneficiaries who are living when payment of the death benefit is
due. If all the Beneficiaries have predeceased you, we will pay the death
benefit to your estate. If you or a Joint Owner who is the Annuitant dies before
the Annuity Start Date, then the provisions relating to the death of an
Annuitant (described below) will govern.
If you are not the Annuitant and you die before the Annuitant and before
the Annuity Start Date, then the following options are available to your
Beneficiary:
(1) If such Beneficiary is the spouse of the deceased Owner, the spouse
may continue the Contract as the new Owner.
(2) If such Beneficiary is not the spouse of the deceased Owner:
(a) such Beneficiary may elect to receive the Contract Value, LESS
any premium taxes not yet deducted, in a single sum within 5
years of the deceased Owner's death; or
(b) such Beneficiary may elect to receive the Contract Value paid out
under one of the approved payout plans, provided that
distributions begin within one year of the deceased Owner's death
and the distribution period under the payout plan is for the life
of, or for a period not exceeding the life expectancy of, the
Beneficiary.
If such Beneficiary does not elect one of the above options, we will
pay the Contract Value, LESS any premium taxes not yet deducted, within five
years from the date of the deceased Owner's death.
Under any of the distribution options in this section, "Distribution Upon the
Owner's Death," the Beneficiary may exercise all ownership rights and privileges
from the date of the deceased Owner's death until the date that the Contract
Value is paid. Similar rules apply to Qualified Contracts. The above
distribution requirements will apply only upon the death of the first Joint
Owner.
Distribution Upon the Death of the Annuitant. If the Annuitant (including
an Owner who is the Annuitant) dies before the Annuity Start Date, we will pay
the Death Benefit described above in "Death Benefits Before the Annuity Start
Date" in a lump sum to your named Beneficiaries within five years after the date
of the Annuitant's death. (You may name primary and contingent beneficiaries.)
If you have named two or more primary Beneficiaries, they will share equally in
the Death Benefit unless you have specified otherwise. If there are no living
primary Beneficiaries at the time of the Annuitant's death, payments will be
made to those contingent Beneficiaries who are living when payment of the Death
Benefit is due. If all the Beneficiaries have predeceased the Annuitant, we will
pay the Death Benefit to you, if living, or the
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Annuitant's estate. In lieu of a lump sum payment, the Beneficiary may elect,
within 60 days of the date we receive due proof of the Annuitant's death, to
apply the Death Benefit to a payout plan. (See "Payout Options.")
If you are also the Annuitant and you die, the provisions described
immediately above apply, except that the Beneficiary may only apply the Death
Benefit payment to a payout plan if:
(1) payments under the option begin within one (1) year of the
Annuitant's death; and
(2) payments under the option are payable over the Beneficiary's life or
over a period not greater than the Beneficiary's life expectancy.
DEATH OF PAYEE AFTER THE ANNUITY START DATE
If the Payee dies after the Annuity Start Date, any Joint Payee becomes the
sole Payee. If there is no Joint Payee, the Successor Payee becomes the sole
Payee. If there is no Successor Payee, the remaining benefits are paid to the
estate of the last surviving Payee. The death of the Payee after the Annuity
Start Date will have the effect stated in the payout plan pursuant to which
annuity payments are being made. If any Owner dies on or after the Annuity Start
Date, any payments that remain must be made at least as rapidly as under the
payout plan in effect on the date of the your death.
THE LIVING BENEFIT
If you elect the Living Benefit option at the time you purchase the
Contract and if, on the Living Benefit Date, you have not begun to receive
annuity payments, IL Annuity will calculate the Living Benefit for each Eligible
Variable Account in which you have value. The Living Benefit will be credited to
the Contract Value of an Eligible Variable Account only if the value of the
Eligible Variable Account on the Living Benefit Date is less than: (a) the sum
of the Eligible Premium Payments for such Eligible Variable Account, MINUS (b) a
percentage of all prior withdrawals and transfers from the Eligible Variable
Account.
Eligible Premium Payments are those Premium Payments that you initially
allocated to a particular Eligible Variable Account at the time of payment,
provided you made the payment at least ten (10) years prior to the Living
Benefit Date.
The Living Benefit that will be credited to each Eligible Variable Account
on the Living Benefit Date is equal to: (a) the sum of the Eligible Premium
Payments for that particular Eligible Variable Account; MINUS (b) a percentage
of all prior withdrawals and transfers from that Eligible Variable Account;
MINUS (c) the value of that Eligible Variable Account on the Living Benefit
Date.
The Living Benefit Date is the later of the Annuitant's age 70 and 10 years
after the Date of Issue. If you purchase a Contract at age 60 or older, only
your initial Premium Payment will be an Eligible Premium Payment for purposes of
calculating the Living Benefit. (See Example #5 below)
If the Contract is owned by persons who are spouses at the time one Joint
Owner dies, the Living Benefit Date will become the date the surviving spouse
attains age 70. If the Contract is owned by Joint Owners who are not spouses and
one of the Joint Owners dies before the Living Benefit Date, the Living Benefit
is not available to the sole surviving Owner. Eligible Variable Accounts are
those Variable Accounts shown on the specifications page of the Contract which
invest in Funds which, in turn, invest primarily in stocks, equity securities,
bonds or money market instruments. Currently, all Variable Accounts, except the
Van Eck Worldwide Hard Assets Variable Account, are Eligible Variable Accounts.
The Living Benefit will not be credited to Contract Value if you choose an
Annuity Start Date that is earlier than the Living Benefit Date.
A TRANSFER OR A PARTIAL WITHDRAWAL OF PREMIUM PAYMENTS OUT OF AN ELIGIBLE
VARIABLE ACCOUNT WILL REDUCE THE AMOUNT OF ELIGIBLE PREMIUM PAYMENTS HELD IN THE
ELIGIBLE VARIABLE ACCOUNT IN THE SAME PROPORTION AS THE TRANSFER OR WITHDRAWAL
REDUCED THE VALUE OF THE ELIGIBLE VARIABLE ACCOUNT. EXAMPLES #3, 4 AND 6 BELOW
ILLUSTRATE HOW THIS FEATURE OF THE LIVING BENEFIT WORKS.
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For purposes of calculating the value of an Eligible Variable Account, we
deem all transfers and withdrawals to be first a withdrawal of Premium Payments,
then of earnings. Transfers out of an Eligible Variable Account include
transfers resulting from Dollar Cost Averaging or Automatic Account Balancing;
withdrawals out of an Eligible Variable Account include withdrawals resulting
from the Systematic Withdrawal Payments.
The following examples illustrate how the Living Benefit works:
Example #1:
Suppose an Owner buys a Contract with a single Premium Payment of
$50,000 at age 55 and immediately allocates the $50,000 to an Eligible
Variable Account. The Owner does not withdraw or transfer any amounts from
the Eligible Variable Account. As of the Living Benefit Date (which is
fifteen years later when the Owner is age 70), the $50,000 qualifies as an
Eligible Premium Payment because it was made fifteen years prior to the
Living Benefit Date and so it meets the requirement that payment be made
ten years prior to the Living Benefit Date.
On the Living Benefit Date (Owner's age 70), IL Annuity will calculate
the Living Benefit for the Eligible Variable Account. IL Annuity will total
the value of all Eligible Premium Payments in the Eligible Variable
Account -- in this case $50,000. If the value of the Eligible Variable
Account on the Living Benefit Date is less than $50,000, IL Annuity will
automatically credit the difference to Contract Value.
Example #2:
Assume the same facts as in Example #1, except that the Owner
specifies an Annuity Start Date of age 65 and begins to receive payments
under one of the payout options available under the Contract. At age 70
(the Living Benefit Date), IL Annuity does not calculate the Living Benefit
and does not credit a Living Benefit to Contract Value. By selecting an
Annuity Start Date (age 65) that is earlier than the Living Benefit Date
(age 70), the Owner forfeited all eligibility for the Living Benefit.
Example #3:
Assume the same facts as in Example #1, except that the Owner
transfers $40,000 from the Eligible Variable Account at age 69. At that
time, the total value of the Eligible Variable Account is $100,000. The
transfer of $40,000 reduced the value of the Eligible Variable Account by
40% ($40,000/$100,000 = .40). No additional transfers or withdrawals are
made prior to the Living Benefit Date. On the Living Benefit Date, the sum
of the Eligible Premium Payments is $50,000 and is reduced by 40% to take
into account the transfer at age 69 ($50,000 X .40 = $20,000), leaving
$30,000 ($50,000 -- $20,000 = $30,000). If on the Living Benefit Date the
value of the Eligible Variable Account is less than $30,000, IL Annuity
will automatically credit the difference to Contract Value.
Example #4:
Assume the same facts as in Example #1, except that at age 65 the
Owner deposits (or transfers) an additional $50,000 Premium Payment into
the Eligible Variable Account. At age 69, when the value of the Eligible
Variable Account is $150,000, the Owner withdraws $40,000. The withdrawal
reduced the value of the Eligible Variable Account by 26.667%
($40,000/$150,000 = .26667). No additional transfers or withdrawals are
made before the Living Benefit Date. On the Living Benefit Date, the sum of
Eligible Premium Payments is $50,000. (The second Premium Payment of
$50,000 does not qualify as an Eligible Premium Payment because it was made
only five years prior to the Living Benefit Date and does not meet the
requirement that payment be made ten years prior to the Living Benefit
Date.) This sum is then reduced by 26.667% to take into account the
transfer at age 69 ($50,000 X .26667 = $13,333.33), leaving $36,666.67
($50,000 -- $13,333.33 = $36,666.67). If on the Living Benefit Date the
value of the Eligible Variable Account is less than $36,666.67, IL Annuity
will automatically credit the difference to Contract Value.
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Example #5:
Assume the Owner deposits Premium Payments of $5,000 per year into the
same Eligible Variable Account beginning at age 55 until the Living Benefit
Date. By age 70, the Owner had paid $75,000 in Premium Payments and had
taken no withdrawals or transfers. The sum of the Eligible Premium Payments
on the Living Benefit Date (age 70) is $25,000 because only the five
Premium Payments made prior to age 60 ($5,000 X 5 = $25,000) meet the
requirement that payment be made ten years prior to the Living Benefit
Date. If on the Living Benefit Date the value of the Eligible Variable
Account is less than $25,000, IL Annuity will automatically credit the
difference to Contract Value.
Example #6:
Assume the same facts as in Example #5, except that the Owner
transfers $10,000 out of the Eligible Variable Account at age 68 when the
value of the Eligible Variable Account is $100,000. The transfer reduced
the value of the Eligible Variable Account by 10% ($10,000/$100,000 = .10).
The next year, the Owner withdraws $9,000 when the value of the Eligible
Variable Account is $90,000. The withdrawal reduced the value of the
Eligible Variable Account by 10% ($9,000/$90,000 = .10). No additional
transfers or withdrawals are made prior to the Living Benefit Date. On the
Living Benefit Date the sum of the Eligible Premium Payments ($25,000) is
reduced by 20% to take into account both the 10% transfer at age 68 and the
10% withdrawal at age 69 ($25,000 x .20 = $5,000), leaving $20,000
($25,000 -- $5,000 = $20,000). If on the Living Benefit Date the value of
the Eligible Variable Account is less than $20,000, IL Annuity will
automatically credit the difference to Contract Value.
Example #7:
Spousal Joint Owners: If the Contract is owned by Joint Owners who are
spouses at the time one of the Joint Owners dies, the surviving spouse may
continue the Contract. The Living Benefit Date will become the date the
surviving spouse attains age 70. On that date, IL Annuity will calculate
the Living Benefit for each Eligible Variable Account with value.
Example #8:
If the Contract is owned by Joint Owners who are not spouses and one
of the Joint Owners dies, the Living Benefit is not available to the sole
surviving Owner.
We will continue to pay a Living Benefit on Premium Payments allocated to
an Eligible Variable Account if: (a) the Portfolio underlying an Eligible
Variable Account changes its investment objective; (b) we determine that an
investment in the Portfolio underlying an Eligible Variable Account is no longer
appropriate in light of the purposes of the Separate Account; or (c) shares of a
Portfolio underlying an Eligible Variable Account are no longer available for
investment by the Separate Account and IL Annuity is forced to redeem all shares
of the Portfolio held by the Eligible Variable Account.
THE FIXED ACCOUNT
You may allocate some or all of your Net Premium Payments and transfer some
or all of your Contract Value to the Fixed Account. The Fixed Account offers a
guarantee of principal (after deductions for fees and expenses) as well as
interest guaranteed by IL Annuity to be not less than 3% per year. The Fixed
Account is part of our general account. Our general account supports our
insurance and annuity obligations. Since the Fixed Account is part of the
general account, we assume the risk of investment gain or loss on this amount.
All assets in the general account are subject to our general liabilities from
business operations. The Fixed Account may not be available in all states.
The Fixed Account has not been, and is not required to be, registered with
the SEC under the Securities Act of 1933, and neither the Fixed Account nor our
general account have been registered as an investment company under the 1940
Act. Therefore, neither our general account, the Fixed Account, nor any
interests therein are generally subject to regulation under the 1933 Act or the
1940 Act. The disclosures relating to the Fixed Account which are included in
this prospectus are for your information and have not been reviewed by
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the SEC. However, such disclosures may be subject to certain generally
applicable provisions of federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
FIXED ACCOUNT VALUE
The Fixed Account Value is equal to: (1) Net Premium Payments allocated to
the Fixed Account, PLUS (2) amounts transferred to the Fixed Account, PLUS (3)
interest credited to the Fixed Account, MINUS (4) any partial withdrawals or
transfers from the Fixed Account, and MINUS (5) any Withdrawal Charges, contract
fees or premium taxes deducted from the Fixed Account.
We intend to credit the Fixed Account with interest at current rates in
excess of the minimum guaranteed rate of 3%, but we are not obligated to do so.
Current interest rates are influenced by, but do not necessarily correspond to,
prevailing general market interest rates. Because we, in our sole discretion,
anticipate changing the current interest rate from time to time, different
allocations you make to the Fixed Account will be credited with different
current interest rates. The interest rate we credit to amounts allocated or
transferred to the Fixed Account will apply to the end of the calendar year in
which we receive the amount. At the end of the calendar year, we will determine
a new current interest rate on such amount and accrued interest thereon (which
may be a different current interest rate from the current interest rate on new
allocations to the Fixed Account on that date). We will guarantee the rate of
interest we declare on such amount and accrued interest for the following
calendar year. We will determine, in our sole discretion, any interest to be
credited on amounts in the Fixed Account in excess of the minimum guaranteed
effective rate of 3% per year. You therefore assume the risk that interest
credited to amounts in the Fixed Account may not exceed the minimum 3%
guaranteed rate.
For purposes of making withdrawals, transfers or deductions of fees and
charges from the Fixed Account, we will consider such withdrawals to have come
from the last money into the contract, that is, on a last-in, first-out ("LIFO")
basis.
We reserve the right to change the method of crediting interest from time
to time, provided that such changes do not reduce the guaranteed rate of
interest below 3% per year or shorten the period for which the interest rate
applies to less than one calendar year (except for the year in which such amount
is received or transferred).
TRANSFER PRIVILEGES
General. Transfers to the Fixed Account must be at least $1,000. A
transfer charge of $25 may be imposed for the thirteenth and each subsequent
request you make to transfer Contract Value from one or more Variable Accounts
to the Fixed Account (or to one or more Variable Accounts) during a single
Contract Year before the Annuity Start Date.
Before the Annuity Start Date, you may transfer up to 20% of the Fixed
Account Value (as determined at the beginning of the Contract Year) from the
Fixed Account to one or more of the Variable Accounts in any Contract Year. No
fee is charged for transfers from the Fixed Account to one or more Variable
Accounts and such a transfer is not considered a transfer for purposes of
assessing a transfer charge.
Dollar-Cost Averaging. You may elect to participate in the Dollar-Cost
Averaging Program at the time of your application, or at any time thereafter
before the Annuity Start Date by sending us a Written Request. The Dollar-Cost
Averaging Program permits you to systematically transfer (on a monthly or
quarterly basis) a set dollar amount from the Fixed Account to any other
Variable Accounts. The minimum amount that may be transferred under the
Dollar-Cost Averaging Program is $100 to each Variable Account. The maximum
amount that may be transferred and withdrawn out of the Fixed Account in any
Contract Year under all circumstances (Dollar-Cost Averaging, Systematic
Withdrawals and Partial Withdrawals) is 20% of the Fixed Account Value as
determined at the beginning of the Contract Year. Once elected, dollar-cost
averaging from the Fixed Account remains in effect for the life of the Contract
until the value of the Fixed Account is depleted or until you cancel your
participation by Written Request or by telephone if we have your telephone
authorization on file. There is no additional charge for dollar-cost averaging,
and a transfer under this program
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is not considered a transfer for purposes of assessing a transfer change. We
reserve the right to discontinue offering the dollar-cost averaging facility at
any time and for any reason. (See "Transfer Privileges -- Dollar Cost
Averaging.")
PAYMENT DEFERRAL
We have the right to defer payment of any full or partial withdrawal or
transfer from the Fixed Account for up to six months from the date we receive
your Written Request for such a withdrawal or transfer at our Service Center. If
we do not give you a payment within 30 days after we receive all necessary
documentation, or such shorter period required by a particular jurisdiction, we
will credit interest at 3%, or such higher rate as is required for a particular
jurisdiction, to the amount to be paid from the date we received the
documentation.
HOW TO REVIEW INVESTMENT PERFORMANCE OF THE VARIABLE ACCOUNTS
From time to time, we may advertise or include in sales literature yields,
effective yields and total returns for the Variable Accounts. These figures are
based on historical earnings and do not indicate or project future performance.
We also may, from time to time, advertise or include in sales literature
Variable Account performance relative to certain performance rankings and
indices compiled by independent organizations. More detailed information as to
the calculation of performance, as well as comparisons with unmanaged market
indices, appears in the Statement of Additional Information.
Performance data for the Variable Accounts is based on the investment
performance of the corresponding Portfolio of a Fund and reflects its expenses.
(See the attached prospectuses for the Funds.)
The "yield" of the Money Market Variable Account refers to the annualized
income generated by an investment in the Variable Account over a specified
seven-day period. The yield is calculated by assuming that the income generated
for that seven-day period is generated each seven-day period over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but, when annualized, the income earned by an investment in
the Variable Account is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this assumed
reinvestment.
The yield of a Variable Account (other than the Money Market Variable
Account) refers to the annualized income generated by an investment in the
Variable Account over a specified 30-day or one-month period. The yield is
calculated by assuming that the income generated by the investment during that
30-day or one-month period is generated each period over a 12-month period and
is shown as a percentage of the investment.
Yield quotations do not reflect the Withdrawal Charge.
The "total return" of a Variable Account refers to return quotations
assuming an investment under a Contract has been held in the Variable Account
for various periods of time. For periods prior to the date the Separate Account
commenced operations, performance information will be calculated based on the
performance of the various Portfolios and the assumption that the Variable
Accounts were in existence for the same periods as those indicated for the
Portfolios, assuming that the current level of Contract charges were in effect
during those periods and assuming the monthly (rather than daily) deduction of
mortality and expense risk charges and administrative charges. When a Variable
Account or Portfolio has been in operation for one, five, and ten years,
respectively, the total return for these periods will be provided.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average annual percentage change in
the value of an investment in the Variable Account from the beginning date of
the measuring period to the end of that period. This standardized version of
average annual total return reflects all historical investment results, less all
charges and deductions applied against the Variable Account (including any
Withdrawal Charge that would apply if you terminated the Contract at the end of
each period indicated, but excluding any deductions for premium taxes).
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In addition to the standard version described above, total return
performance information computed on different non-standard bases may be used in
advertisements or sales literature. Average annual total return information may
be presented, computed on the same basis as described above, except deductions
will not include the Withdrawal Charge. In addition, we may from time to time
disclose average annual total return in non-standard formats and cumulative
total return for Contracts funded by the Variable Accounts.
We may also disclose yield, standard total returns, and non-standard total
returns for the Portfolios of the Funds, including such disclosures for periods
before the date the Variable Account commenced operations.
Non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For additional
information regarding the calculation of other performance data, please refer to
the Statement of Additional Information.
In advertising and sales literature (including illustrations), the
performance of each Variable Account may be compared with the performance of
other variable annuity issuers in general or to the performance of particular
types of variable annuities investing in mutual funds, or investment portfolios
of mutual funds with investment objectives similar to the Variable Account.
Lipper Analytical Services, Inc. ("Lipper"), CDA Investment Technologies
("CDA"), Variable Annuity Research Data Service ("VARDS") and Morningstar, Inc.
("Morningstar") are independent services which monitor and rank the performance
of variable annuity issuers in each of the major categories of investment
objectives on an industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance issuers
as well as variable annuity issuers. VARDS rankings compare only variable
annuity issuers. The performance analyses prepared by Lipper, CDA, VARDS and
Morningstar rank or illustrate such issuers on the basis of total return,
assuming reinvestment of distributions, but do not take sales charges,
redemption fees, or certain expense deductions at the separate account level
into consideration. In addition, VARDS prepares risk rankings, which consider
the effects of market risk on total return performance. This type of ranking
provides data as to which funds provide the highest total return within various
categories of funds defined by the degree of risk inherent in their investment
objectives.
Advertising and sales literature may also compare the performance of each
Variable Account to the Standard & Poor's Index of 500 Common Stocks, a widely
used measure of stock performance. This unmanaged index assumes the reinvestment
of dividends but does not reflect any "deduction" for the expense of operating
or managing an investment portfolio. Other independent ranking services and
indices may also be used as a source of performance comparison.
We may also report other information including the effect of systematic
withdrawals, systematic investments and tax-deferred compounding on a Variable
Account's investment returns, or returns in general, which may be illustrated by
tables, graphs, or charts. All income and capital gains derived from Variable
Account investments are reinvested and can lead to substantial long-term
accumulation of assets, provided that the Variable Account investment experience
is positive.
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VOTING RIGHTS
We are the legal owner of the Portfolio shares held in the Variable
Accounts. However, when a Portfolio is required to solicit the votes of its
shareholders through the use of proxies, we believe that current law requires us
to solicit you and other Contract Owners as to how we should vote the Portfolio
shares held in the Variable Accounts. If we determine that we no longer are
required to solicit your votes, we may vote the shares in our own right.
When we solicit your vote, the number of votes you have will be calculated
separately for each Variable Account in which you have an investment. The number
of your votes is based on the net asset value per share of the Portfolio in
which the Variable Account invests. It may include fractional shares. Before the
Annuity Start Date, you hold a voting interest in each Variable Account to which
the Contract Value is allocated. After the Annuity Start Date, the Annuitant has
a voting interest in each Variable Account from which variable annuity payments
are made. If you have a voting interest in a Variable Account, you will receive
proxy materials and reports relating to any meeting of shareholders of the
Portfolio in which that Variable Account invests.
If we do not receive timely voting instructions for Portfolio shares or if
we own the shares, we will vote those shares in proportion to the voting
instructions we receive. Instructions we receive to abstain on any item will
reduce the total number of votes being cast on a matter. For further details as
to how we determine the number of your votes, see the Statement of Additional
Information.
FEDERAL TAX MATTERS
THE FOLLOWING DISCUSSION IS GENERAL AND
IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
This discussion is not intended to address the tax consequences resulting
from all of the situations in which a person may be entitled to or may receive a
distribution under the annuity contract issued by us. Any person concerned about
these tax implications should consult a competent tax advisor before initiating
any transaction. This discussion is based upon our understanding of the present
federal income tax laws, as they are currently interpreted by the Internal
Revenue Service ("IRS"). No representation is made as to the likelihood of the
continuation of the present federal income tax laws or of the current
interpretation by the IRS. Moreover, no attempt has been made to consider any
applicable state or other tax laws.
The Contract may be purchased on a non-qualified basis or purchased and
used in connection with plans qualifying for favorable tax treatment. The
Qualified Contract is designed for use by individuals whose Premium Payments are
comprised solely of proceeds from and/or contributions under retirement plans
which are intended to qualify as plans entitled to special income tax treatment
under Sections 401(a), 403(b), or 408 of the Code. The ultimate effect of
federal income taxes on the amounts held under a Contract, or annuity payments,
and on the economic benefit to you, the Annuitant, or the beneficiary depends on
the type of retirement plan, on the tax and employment status of the individual
concerned, and on our tax status. In addition, certain requirements must be
satisfied in purchasing a Qualified Contract with proceeds from a tax-qualified
plan and receiving distributions from a Qualified Contract in order to continue
receiving favorable tax treatment. Some retirement plans are subject to
distribution and other requirements that are not incorporated into our Contract
administration procedures. Owners, participants and beneficiaries are
responsible for determining that contributions, distributions and other
transactions with respect to the Contracts comply with applicable law.
Therefore, purchasers of Qualified Contracts should seek competent legal and tax
advice regarding the suitability of a Contract for their situation, the
applicable requirements, and the tax treatment of the rights and benefits of a
Contract. The following discussion assumes that Qualified Contracts are
purchased with proceeds from and/or contributions under retirement plans that
qualify for the intended special federal income tax treatment.
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<PAGE> 102
TAX STATUS OF THE CONTRACT
Diversification Requirements. Section 817(h) of the Code provides that
separate account investments underlying a contract must be "adequately
diversified" in accordance with Treasury regulations in order for the contract
to qualify as an annuity contract under Section 72 of the Code. The Separate
Account, through each underlying Fund, intends to comply with the
diversification requirements prescribed in regulations under Section 817(h) of
the Code, which affect how the assets in the various Variable Accounts may be
invested. Although we do not have direct control over the Funds in which the
Separate Account invests, we believe that each Fund in which the Separate
Account owns shares will meet the diversification requirements, and therefore,
the Contract will be treated as an annuity contract under the Code.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includible in the variable
annuity contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
Department has also announced, in connection with the issuance of regulations
concerning investment 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
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also states that guidance would
be issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular variable accounts 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 Contracts are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the Owner of a Contract has the choice of one or more Variable Accounts
in which to allocate Net Premium Payments and Contract Values, and may be able
to transfer among Variable Accounts more frequently than in such rulings. These
differences could result in an Owner being treated as the Owner of a pro rata
share of the assets of the Separate Account. In addition, we do 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. We, therefore, reserve the
right to modify the Contract as necessary to attempt to prevent you from being
considered the Owner of any portion of the assets of the Separate Account.
Required Distributions. In order to be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires any
Non-Qualified Contract to provide that: (a) if any Owner dies on or after the
Annuity Start Date but before the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at least
as rapidly as under the method of distribution being used as of the date of that
Owner's death; and (b) if any Owner dies before the Annuity Start Date, the
entire interest in the Contract will be distributed within five years after the
date of your death. These requirements will be considered satisfied as to any
portion of the Owner's interest which is payable to or for the benefit of a
"designated beneficiary" and which is distributed over the life of such
beneficiary or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of that
Owner's death. The Owner's "designated beneficiary" is the person to whom
ownership of the Contract passes by reason of death. However, if a "designated
beneficiary" is the surviving spouse of a deceased Owner, the Contract may be
continued with the surviving spouse as the new Owner.
The Non-Qualified Contracts contain provisions which are intended to comply
with the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. We intend to review such
provisions and modify them if necessary to assure that they comply with the
requirements of Code Section 72(s) when clarified by regulation or otherwise.
Other rules may apply to Qualified Contracts.
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<PAGE> 103
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes.
TAXATION OF ANNUITIES
In General. Section 72 of the Code governs taxation of annuities in
general. We believe that if you are a natural person you are not taxed on
increases in the value of a Contract until distribution occurs by withdrawing
all or part of the Contract Value (e.g., partial and full withdrawals) or as
annuity payments under the payment option elected. For this purpose, the
assignment, pledge, or agreement to assign or pledge any portion of the Contract
Value (and in the case of a Qualified Contract, any portion of an interest in
the qualified plan) generally will be treated as a distribution. The taxable
portion of a distribution (in the form of a single sum payment or payment
option) is taxable as ordinary income.
The Owner of any annuity contract who is not a natural person generally
must include in income any increase in the excess of the Contract Value over the
"investment in the contract" during the taxable year. There are some exceptions
to this rule, and a prospective Owner that is not a natural person may wish to
discuss these with a competent tax advisor.
The following discussion generally applies to Contracts owned by natural
persons.
Withdrawals In the case of a partial withdrawal from a Qualified Contract,
under Section 72(e) of the Code, a ratable portion of the amount received is
taxable, generally based on the ratio of the "investment in the contract" to the
participant's total accrued benefit or balance under the retirement plan. The
"investment in the contract" generally equals the portion, if any, of any
Premium Payment paid by or on behalf of the individual under a Contract which
was not excluded from the individual's gross income. For Contracts issued in
connection with qualified plans, the "investment in the contract" can be zero.
Special tax rules may be available for certain distributions from Qualified
Contracts.
In the case of a partial withdrawal from a Non-Qualified Contract, under
Section 72(e), any amounts received are generally first treated as taxable
income to the extent that the Contract Value immediately before the partial
withdrawal exceeds the "investment in the contract" at that time. Any additional
amount withdrawn is not taxable.
In the case of a full withdrawal under a Qualified or Non-Qualified
Contract, the amount received generally will be taxable only to the extent it
exceeds the "investment in the contract."
Section 1035 of the Code generally provides that no gain or loss shall be
recognized on the exchange of one annuity contract for another. If the
surrendered contract was issued before August 14, 1982, the tax rules formerly
providing that the withdrawal was taxable only to the extent the amount received
exceeds your investment in the contract will continue to apply to amounts
allocable to investments in that contract before August 14, 1982. In contrast,
contracts issued after January 19, 1985 in a Code Section 1035 exchange are
treated as new contracts for purposes of the penalty and distribution-at-death
rules. Special rules and procedures apply to Section 1035 transactions. Persons
who may wish to take advantage of Section 1035 should consult their tax adviser.
Annuity Payments. Although tax consequences may vary depending on the
payment option elected under an annuity contract, under Code Section 72(b),
generally (prior to recovery of the investment in the contract) gross income
does not include that part of any amount received as an annuity under an annuity
contract that bears the same ratio to such amount as the investment in the
contract bears to the expected return at the annuity starting date. For variable
annuity payments, the taxable portion is generally determined by an equation
that establishes a specific dollar amount of each payment that is not taxed. The
dollar amount is determined by dividing the "investment in the contract" by the
total number of expected periodic payments. However, the entire distribution
will be taxable once the recipient has recovered the dollar amount of his or her
"investment in the contract." For fixed annuity payments, in general, there is
no tax on the portion of each payment which represents the same ratio that the
"investment in the contract" bears to the total expected value of the annuity
payments for the term of the payments; however, the remainder of each annuity
payment is taxable until the recovery of the investment in the contract, and
thereafter the full amount of each annuity
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<PAGE> 104
payment is taxable. If death occurs before full recovery of the investment in
the contract, the unrecovered amount may be deducted on the Annuitant's final
tax return.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a
Contract because of the death of an Owner or the Annuitant. Generally, such
amounts are includible in the income of the recipient as follows: (i) if
distributed in a lump sum, they are taxed in the same manner as a full
withdrawal from the contract or (ii) if distributed under a payment option, they
are taxed in the same way as annuity payments.
Other rules relating to distributions at death apply to Qualified
Contracts. You should consult your legal counsel and tax adviser regarding these
rules and their impact on Qualified Contracts.
Penalty Tax on Certain Withdrawals. In the case of a distribution from a
Non-Qualified Contract, there may be imposed a federal penalty tax equal to 10%
of the amount treated as taxable income. In general, however, there is no
penalty on distributions:
1. made on or after the taxpayer reaches age 59 1/2;
2. made on or after the death of the owner (or if the owner is not an
individual, the death of the primary Annuitant);
3. attributable to the taxpayer's becoming disabled;
4. a part of a series of substantially equal periodic payments (not less
frequently than annually) for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of the
taxpayer and his or her designated beneficiary;
5. made under certain annuities issued in connection with structured
settlement agreements; or
6. made under an annuity contract that is purchased with a single
Premium Payment when the Annuity Start Date is no later than a year
from purchase of the annuity and substantially equal periodic
payments are made, not less frequently than annually, during the
annuity payment period.
Other tax penalties may apply to certain distributions under a Qualified
Contract.
Possible Changes in Taxation. In past years, legislation has been proposed
that would have adversely modified the federal taxation of certain annuities.
For example, one such proposal would have changed the tax treatment of
non-qualified annuities that did not have "substantial life contingencies" by
taxing income as it is credited to the annuity. Although as of the date of this
prospectus Congress is not considering any legislation regarding 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, judicial decisions, etc.). Moreover, it is also possible that any
change could be retroactive (that is, effective before the date of the change).
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer of Ownership of a Contract, the designation of an Annuitant,
Annuitant 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 you that are not discussed herein. An Owner contemplating
any such transfer, assignment, or exchange of a Contract should contact a
competent tax advisor with respect to the potential tax effects of such a
transaction.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for
the recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Effective January 1, 1994, distributions from certain qualified
plans are generally subject to mandatory withholding. Certain states also
require withholding of state income tax whenever federal income tax is withheld.
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<PAGE> 105
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts entered into after October 21,
1988 that are issued by the us (or our affiliates) to you during any calendar
year are treated as one annuity contract for purposes of determining the amount
includible in gross income under Section 72(e). The effects of this rule are not
yet clear; however, it could affect the time when income is taxable and the
amount that might be subject to the 10% penalty tax described above. In
addition, the Treasury Department has specific authority to issue regulations
that prevent the avoidance of Section 72(e) through the serial purchase of
annuity contracts or otherwise. There may also be other situations in which the
Treasury may conclude that it would be appropriate to aggregate two or more
annuity contracts purchased by the same Owner. Accordingly, a Contract Owner
should consult a competent tax advisor before purchasing more than one annuity
contract.
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans.
The tax rules applicable to participants in these qualified plans vary according
to the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; aggregate distributions in excess of a specified
annual amount; and in other specified circumstances. Therefore, no attempt is
made to provide more than general information about the use of the Contracts
with the various types of qualified retirement plans. Contract Owners, the
Annuitants, and Beneficiaries are cautioned that the rights of any person to any
benefits under these qualified retirement plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract, but we shall not be bound by the terms and conditions of such
plans to the extent such terms contradict the Contract, unless the Company
consents. Brief descriptions follow of the various types of qualified retirement
plans in connection with a Contract. We will amend the Contract as necessary to
conform it to the requirements of such plan.
Corporate Pension and Profit Sharing Plans and H.R. 10 Plans. Section
401(a) of the Code permits corporate employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish these plans for themselves and their employees. These retirement 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. Employers intending to use the Contract with such plans should seek
competent advice.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals and their employers to contribute to an individual retirement
program known as an "Individual Retirement Annuity" or "IRA". These IRAs are
subject to limits on the amount that may be contributed and deducted, the
persons who may be eligible, and on the time when distributions may commence.
Also, distributions from certain other types of qualified retirement plans may
be "rolled over" on a tax-deferred basis into an IRA. Sales of the Contract for
use with IRAs may be subject to special requirements of the Internal Revenue
Service. Employers may establish Simplified Employee Pension (SEP) Plans to
provide IRA contributions on behalf of their employees. The Internal Revenue
Service has not reviewed the Contract for qualification as an IRA, and has not
generally ruled whether a death benefit provision such as the provision in the
Contract comports with IRA qualification requirements.
Simple Retirement Accounts. Beginning January 1, 1997, certain small
employers may establish Simple Retirement Accounts as provided by Section 408(p)
of the Code, under which employees may elect to defer up to $6,000 (as increased
for cost of living adjustments) as a percentage of compensation. The sponsoring
employer is required to make a matching contribution on behalf of contributing
employees. Distributions from a Simple Retirement Account are subject to the
same restrictions that apply to IRA distributions and are taxed as ordinary
income. Subject to certain exceptions, premature distributions prior to age
59 1/2 are subject
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<PAGE> 106
to a 10% penalty tax, which is increased to 25% if the distribution occurs
within the first two years after the commencement of the employee's
participation in the plan. The failure of the Simple Retirement Account to meet
Code requirements may result in adverse tax consequences.
Tax Sheltered Annuities. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from their
gross income the Premium Payments paid, within certain limits, on a Contract
that will provide an annuity for the employee's retirement. These Premium
Payments may be subject to FICA (social security) tax.
RESTRICTIONS UNDER QUALIFIED CONTRACTS
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Contracts or under the terms
of the plans in respect of which Qualified Contracts are issued.
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
At the present time, we make no charge to the Variable Accounts for any
Federal, state, or local taxes that we incur which may be attributable to such
Variable Accounts or the Contracts. We, however, reserve the right in the future
to make a charge for any such tax or other economic burden resulting from the
application of the tax laws that it determines to be properly attributable to
the Variable Accounts or to the Contracts.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under these Contracts are not exhaustive, and special rules are provided with
respect to other tax situations not discussed in this prospectus. Further, the
Federal income tax consequences discussed herein reflect our understanding of
current law, and the law may change. Federal estate and state and local estate,
inheritance and other tax consequences of Ownership or receipt of distributions
under a Contract depend on the individual circumstances of each Owner or
recipient of the distribution. A competent tax advisor should be consulted for
further information.
OTHER INFORMATION
HOLIDAYS
In addition to federal holidays, we are closed on the following days: the
Friday after Thanksgiving, the day before Christmas when Christmas falls on
Tuesday through Saturday, the day after Christmas when Christmas falls on Sunday
or Monday, and the day after New Year's Day when it falls on a Sunday, the
Monday after New Year's Day when New Year's Day falls on a Saturday, and the day
before or after Independence Day when it falls on Saturday or Sunday.
PAYMENTS
We will usually pay you any full or partial withdrawal, Death Benefit
payment, (or for Qualified Contracts only, payment of your loan proceeds) within
seven days after we receive your Written Request, any information or
documentation we reasonably need to process your request, and in the case of a
Death Benefit receipt and filing of due proof of death.
However, we may be required to suspend or postpone payments during any
period when:
1. the New York Stock Exchange is closed, other than customary weekend
and holiday closings;
2. trading on the New York Stock Exchange is restricted as determined by
the SEC;
3. the SEC determines that an emergency exists that would make the
disposal of securities held in the Separate Account or the
determination of the value of the Separate Account's net assets not
reasonably practicable; or
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<PAGE> 107
4. the SEC permits, by order, the suspension or postpone of payments for
your protection.
If a recent check or draft has been submitted, we have the right to delay
payment until we have assured ourselves that the check or draft has been
honored.
We have the right to defer payment for a full or partial withdrawal or
transfer from the Fixed Account for up to six months from the date we receive
your Written Request. If we do not make a payment within 30 days after we
receive the documentation we need to complete the transaction (or a shorter
period if required by a particular jurisdiction), we will credit interest to the
amount to be paid from the date we received the necessary documentation at a
rate of 3% (or such higher rate required for a particular jurisdiction).
MODIFICATION
Upon notice to you, we may modify the Contract to:
1. permit the Contract or the Separate Account to comply with any
applicable law or regulation issued by a government agency; or
2. assure continued qualification of the Contract under the Code or
other federal or state laws relating to retirement annuities or
variable annuity contracts; or
3. reflect a change in the operation of the Separate Account; or
4. provide additional investment options.
In the event of most such modifications, we will make appropriate
endorsement to the Contract.
DISTRIBUTION OF THE CONTRACTS
IL Securities, Inc. ("IL Securities"), P.O. Box 1230, 2960 North Meridian
Street, Indianapolis, Indiana 46208, acts as the distributor for the Contracts.
IL Securities is an affiliate of Indianapolis Life Insurance Company.
Sales commissions will be paid to broker-dealers who sell the Contracts.
Broker-dealers will be paid commissions of up to 7.2% of Premium Payments. Other
commissions of up to 1.25% may also be paid. We may also pay up to 1.00% of
Premium Payments to IL Securities to compensate it for certain distribution
expenses. These broker-dealers are expected to compensate sales representatives
in varying amounts from these commissions. In addition, we may pay other
distribution expenses such as production incentive bonuses, agent's insurance
and pension benefits, and agency expense allowances. These distribution expenses
do not result in any additional charges against the Contracts other than those
described under "Fees and Charges."
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or
the assets of the Separate Account are subject. We are not involved in any
litigation that is of material importance in relation to our total assets or
that relates to the Separate Account.
REPORTS TO OWNERS
We will mail a report to you at least annually at your last known address
of record. The report will state the Contract Value (including the Contract
Value in each Variable Account and the Fixed Account) of the Contract, Premium
Payments paid and charges deducted since the last report, partial withdrawals
made since the last report and any further information required by any
applicable law or regulation.
INQUIRIES
Inquiries regarding your Contract may be made by writing to us at our
Service Center.
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FINANCIAL STATEMENTS
IL Annuity and Insurance Company, formerly known as Sentry Investors Life
Insurance Company, became a wholly-owned subsidiary of the Indianapolis Life
Group of Companies, Inc. on November 1, 1994. Immediately prior thereto, we
entered into an assumption reinsurance agreement with Sentry Life Insurance
Company ("Sentry") whereby Sentry assumed all of the insurance in-force and
related assets and liabilities from us. The effect of the reinsurance agreement
was to transfer all of the insurance related assets and liabilities to Sentry,
leaving only bonds, cash and state insurance department licenses to be acquired
by the Indianapolis Life Group of Companies, Inc. No business was issued by us
through December 31, 1994.
The audited statement of net assets of IL Annuity and Insurance Co.
Separate Account 1 as of December 31, 1996 and the related statement of
operations for the year then ended and statements of changes in net assets for
the two years then ended, as well as the Report of the Independent Auditors, are
included in the Statement of Additional Information ("SAI"). The audited balance
sheets for the Company as of December 31, 1996 and 1995, and the related
statements of income, stockholder's equity, and cash flows for the years then
ended and the two months ended December 31, 1994, as well as the Report of the
Independent Auditors, are contained in the SAI. The financial statements of the
Company should be considered only as bearing on our ability to meet our
obligations under the Contracts. They should not be considered as bearing on the
investment performance of the assets held in the Separate Account.
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TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Contract and the Separate Account is
contained in the Statement of Additional Information (SAI). You may obtain a
free copy of the SAI by writing to us at the address shown on the front cover or
by calling 1-800-XXX-XXXX. The following is the Table of Contents for that
Statement.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADDITIONAL CONTRACT PROVISIONS........................................................
The Contract........................................................................
Incontestability....................................................................
Misstatement of Age or Sex..........................................................
Nonparticipation....................................................................
Options.............................................................................
CALCULATION OF HISTORICAL PERFORMANCE DATA............................................
Money Market Variable Account Yields................................................
Other Variable Account Yields.......................................................
Average Annual Total Returns........................................................
Other (Non-Standard) Total Returns..................................................
Effect of the Contract Fee on Performance Data......................................
Other Information...................................................................
NET INVESTMENT FACTOR.................................................................
VARIABLE ANNUITY PAYMENTS.............................................................
Assumed Investment Rate.............................................................
Amount of Variable Annuity Payments.................................................
Annuity Unit Value..................................................................
HISTORIC PERFORMANCE DATA
General Limitations.................................................................
Variable Account Performance Figures................................................
Hypothetical Variable Account Performance Figures...................................
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.....................................
Resolving Material Conflicts........................................................
TERMINATION OF PARTICIPATION AGREEMENTS...............................................
The Alger American Fund.............................................................
Fidelity Variable Insurance Products Fund...........................................
Fidelity Variable Insurance Products Fund II........................................
OCC Accumulation Trust..............................................................
Royce Capital Fund..................................................................
SAFECO Resource Series Trust........................................................
SoGen Variable Funds, Inc. .........................................................
T. Rowe Price Fixed Income Series, Inc..............................................
T. Rowe Price International Series, Inc.............................................
Van Eck Worldwide Insurance Trust...................................................
VOTING RIGHTS.........................................................................
SAFEKEEPING OF ACCOUNT ASSETS.........................................................
DISTRIBUTION OF THE CONTRACTS.........................................................
LEGAL MATTERS.........................................................................
EXPERTS...............................................................................
OTHER INFORMATION.....................................................................
FINANCIAL STATEMENTS..................................................................
</TABLE>
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APPENDIX I
CONDENSED FINANCIAL INFORMATION
The following condensed information includes Accumulation Unit values for
the periods indicated. This data is obtained from the financial statements of
the Separate Account. The data should be read together with the financial
statements, related notes and other financial information included in the
Statement of Additional Information. (See "Financial Statements" in the
Statement of Additional Information.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------------
ALGER ALGER FIDELITY FIDELITY FIDELITY
MIDCAP GROWTH SMALL CAPITALIZATION EQUITY-INCOME GROWTH MONEY MARKET
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT
---------------- -------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value at
Beginning of Period....... $10.00 $10.00 $10.00 $10.00 $10.00
Accumulation Unit Value at
End of Period............. $ 9.786 $ 9.675 $10.616 $ 9.604 0
Number of Accumulation Units
Outstanding at End of
Period.................... 2,764 1,709 3,789 2,199 0
</TABLE>
<TABLE>
<CAPTION>
OCC
FIDELITY FIDELITY FIDELITY FIDELITY ACCUMULATION*
ASSET MANAGER CONTRAFUND INDEX 500 INVESTMENT GRADE BOND MANAGED
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT
---------------- ---------------- ---------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value at
Beginning of Period..... $10.00 $10.00 $10.00 $10.00 $10.00
Accumulation Unit Value at
End of Period........... $ 8.224 $10.091 $10.514 $10.247 $10.380
Number of Accumulation
Units Outstanding at End
of Period............... 255 5,731 3,538 1,668 161
</TABLE>
<TABLE>
<CAPTION>
VAN ECK
OCC ACCUMULATION* T.ROWE PRICE T.ROWE PRICE WORLDWIDE VAN ECK
SMALL CAP LIMITED-TERM BOND INTERNATIONAL STOCK HARD ASSETS** WORLDWIDE BALANCED
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT
----------------- ----------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit
Value at Beginning
of Period.......... $10.00 $10.00 $10.00 $10.00 $10.00
Accumulation Unit
Value at End of
Period............. $10.388 $10.042 $10.487 $10.621 $10.010
Number of
Accumulation Units
Outstanding at End
of Period.......... 1,182 1,485 2,530 58 1,201
</TABLE>
- ---------------
* Prior to May 1, 1996, OCC Accumulation Trust was called Quest for Value
Accumulation Trust.
** Prior to May 1, 1997, Van Eck Worldwide Hard Assets Variable Account was
called Van Eck Gold and Natural Resources.
A-1
<PAGE> 111
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------------------------
ALGER ALGER FIDELITY FIDELITY FIDELITY
MIDCAP GROWTH SMALL CAPITALIZATION EQUITY-INCOME GROWTH MONEY MARKET
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT
---------------- -------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value at
Beginning of Period....... $ 9.786 $ 9.675 $ 10.616 $ 9.604 $ 10.00
Accumulation Unit Value at
End of Period............. $ 10.812 $ 9.955 $ 11.958 $ 10.868 $ 10.456
Number of Accumulation Units
Outstanding at End of
Period.................... 109,955 181,361 195,400 164,945 179,504
</TABLE>
<TABLE>
<CAPTION>
OCC
FIDELITY FIDELITY FIDELITY FIDELITY ACCUMULATION*
ASSET MANAGER CONTRAFUND INDEX 500 INVESTMENT GRADE BOND MANAGED
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT
---------------- ---------------- ---------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value at
Beginning of Period..... $ 8.224 $ 10.091 $ 10.514 $10.247 $ 10.380
Accumulation Unit Value at
End of Period........... $ 11.817 $ 12.105 $ 12.734 $10.422 $ 12.567
Number of Accumulation
Units Outstanding at End
of Period............... 61,512 203,860 193,803 57,476 133,102
</TABLE>
<TABLE>
<CAPTION>
VAN ECK
OCC ACCUMULATION* T.ROWE PRICE T.ROWE PRICE WORLDWIDE VAN ECK
SMALL CAP LIMITED-TERM BOND INTERNATIONAL STOCK HARD ASSETS** WORLDWIDE BALANCED
VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT VARIABLE ACCOUNT
----------------- ----------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit
Value at Beginning
of Period.......... $10.388 $10.042 $ 10.487 $10.621 $ 10.010
Accumulation Unit
Value at End of
Period............. $12.148 $ 9.946 $ 11.780 $12.356 $ 11.019
Number of
Accumulation Units
Outstanding at End
of Period.......... 40,024 27,325 122,831 29,990 26,719
</TABLE>
- ---------------
* Prior to May 1, 1996, OCC Accumulation Trust was called Quest for Value
Accumulation Trust.
** Prior to May 1, 1997, Van Eck Worldwide Hard Assets Variable Account was
called Van Eck Gold and Natural Resources.
A-2
<PAGE> 112
STATEMENT OF ADDITIONAL INFORMATION
for the
VISIONARY
A FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
Issued Through
IL ANNUITY AND INSURANCE CO. SEPARATE ACCOUNT 1
Offered by
IL ANNUITY AND INSURANCE COMPANY
2960 North Meridian Street
Indianapolis, Indiana 46208
--------------------
This Statement of Additional Information expands upon subjects
discussed in the current Prospectus for the Visionary flexible premium deferred
variable annuity contract (the "Contract") offered by IL Annuity and
Insurance Company.
The Owner may obtain a copy of the Prospectus for the Visionary
Contract dated May 1, 1997 by calling 1-800- 388-1331 or by writing to the
Annuity Service Center: IL Annuity and Insurance Company, P.O. Box 290764,
Wethersfield, CT 06129.
Terms used in the current Prospectus for the Contract are incorporated
into this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND
SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUSES
FOR THE OWNER'S CONTRACT AND THE FUNDS.
The date of this Statement of Additional Information is May 1, 1997.
<PAGE> 113
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL CONTRACT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Incontestability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Misstatement of Age or Sex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Nonparticipation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
CALCULATION OF HISTORICAL PERFORMANCE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Money Market Variable Account Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Other Variable Account Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Average Annual Total Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Other (Non-Standard) Total Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Effect of the Contract Fee on Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
NET INVESTMENT FACTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
VARIABLE ANNUITY PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Assumed Investment Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Amount of Variable Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Annuity Unit Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Resolving Material Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
TERMINATION OF PARTICIPATION AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The Alger American Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Fidelity Variable Insurance Products Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Fidelity Variable Insurance Products Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
OCC Accumulation Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Royce Capital Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SAFECO Resource Series Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SoGen Variable Funds, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
T. Rowe Price Fixed Income Series, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
T. Rowe Price International Series, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Van Eck Worldwide Insurance Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SAFEKEEPING OF ACCOUNT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
DISTRIBUTION OF THE CONTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
- i -
<PAGE> 114
<TABLE>
<S> <C>
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
- ii -
<PAGE> 115
ADDITIONAL CONTRACT PROVISIONS
THE CONTRACT
The entire contract is the Contract, the signed application, the data
page, the endorsements, options and all other attached papers. The statements
made in the application are deemed representations and not warranties. The
Company will not use any statement in defense of a claim or to void the
Contract unless it is contained in the application.
Any change in the Contract or waiver of its provisions must be in
writing and signed by the Company's President, a Vice President, Secretary or
Assistant Secretary. No other person -- no agent or Registered Representative
- -- has authority to change or waive any provision of this Contract.
Upon notice to the Contract Owner, the Company may modify the Contract
if necessary to permit the Contract or the Separate Account to comply with any
applicable law or regulation issued by a governmental agency; or if necessary
to assure continued qualification of the contract under the Internal Revenue
Code or other federal or state laws relating to retirement annuities or
variable annuity contracts; or if necessary to effect a change in the operation
of the Separate Account or to provide additional investment options.
In the event of such modifications, the Company will make the
appropriate endorsement to the Contract.
INCONTESTABILITY
The Company will not contest the Contract from the Date of Issue.
MISSTATEMENT OF AGE OR SEX
The Company may require proof of age, sex, and right to payments
before making any life annuity payments. If the age or sex (if applicable) of
the annuitant has been misstated, the Annuity Commencement Date and the amount
of the annuity payments will be determined using the correct age and sex. If
misstatement of age or sex results in annuity payments that are too large, the
overpayments will be charged with compound interest against subsequent
payments. If the Company has made payments that are too small, the
underpayments will be paid with compound interest upon receipt of notice of the
underpayments. Adjustments for overpayments or underpayments will be paid
interest at the rate then in use to determine the rate of payments.
NONPARTICIPATION
The Contract does not participate in the Company's surplus earnings or
profits.
- 1 -
<PAGE> 116
OPTIONS
Except in the limited circumstances described below, the Company will
issue four options automatically upon the issuance of each Contract. These
options provide for the waiver of the Withdrawal Charge in case of extended
hospitalization, long term care, terminal illness, or the post secondary
education of certain family members or the Annuitant, as provided in the
option. There is no additional charge for the issuance of the options, which
are available only at the issuance of the Contract. All options may not be
available in all states.
CALCULATION OF HISTORICAL PERFORMANCE DATA
The Company may advertise and disclose yields, total returns, and
other performance data pertaining to the Contract for a Variable Account.
Such performance data will be computed, or accompanied by performance data
computed, in accordance with the standards defined by the SEC.
MONEY MARKET VARIABLE ACCOUNT YIELDS
Advertisements and sales literature may quote the current annualized
yield of the Money Market Variable Account for a seven-day period in a manner
which does not take into consideration any realized or unrealized gains or
losses on shares of the Money Market Portfolio.
This current annualized yield is computed by determining the net
change (exclusive of realized gains and losses on the sale of securities and
unrealized appreciation and depreciation) at the end of the seven-day period in
the value of a hypothetical Variable Account under a Contract having a balance
of one unit of the Money Market Variable Account at the beginning of the
period, dividing such net change in Variable Account value by the value of the
hypothetical Variable Account at the beginning of the period to determine the
base period return, and annualizing this quotient on a 365-day basis. The net
change in account value reflects: 1) net income from the Portfolio
attributable to the hypothetical Variable Account; and 2) charges and
deductions imposed under the Contract which are attributable to the
hypothetical Variable Account. These charges and deductions include the per
unit charges for: 1) the annualized Contract Fee; 2) the mortality and expense
risk charge; and 3) the asset-based administration charge. For purposes of
calculating current yields for a Contract, an average per unit Contract Fee is
used based on the $30 annualized Contract Fee which is deducted in four equal
payments at the end of each Contract Quarter. Current Yield is calculated
according to the following formula:
- 2 -
<PAGE> 117
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Money Market
Portfolio (exclusive of realized gains or losses on
the sale of securities and unrealized appreciation
and depreciation) for the seven-day period
attributable to a hypothetical Variable Account
having a balance of one Variable Account unit.
ES = per unit expenses attributable to the hypothetical
Variable Account for the seven-day period.
UV = the unit value for the first day of the seven-day
period.
365/7
Effective yield = (1 + ((NCS-ES)/UV)) - 1
Where:
NCS = the net change in the value of the Money Market
Portfolio (exclusive of realized gains or losses on
the sale of securities and unrealized appreciation
and depreciation) for the seven-day period
attributable to a hypothetical Variable Account
having a balance of one Variable Account unit.
ES = per unit expenses attributable to the hypothetical
Variable Account for the seven-day period.
UV = the unit value for the first day of the seven-day
period.
Because of the charges and deductions imposed under the Contract, the
yield for the Money Market Variable Account is lower than the yield for the
Money Market Portfolio.
The current and effective yields on amounts held in the Money Market
Variable Account normally fluctuate on a daily basis. THEREFORE, THE DISCLOSED
YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF
FUTURE YIELDS OR RATES OF RETURN. The Money Market Variable Account's actual
yield is affected by changes in interest rates on money market securities,
average portfolio maturity of the Money Market Portfolio, the types and quality
of securities held by the Money Market Portfolio and that Portfolio's
operating expenses. Yields on amounts held in the Money Market Variable
Account may also be presented for periods other than a seven-day period.
- 3 -
<PAGE> 118
Yield calculations do not take into account the Withdrawal Charge that
is assessed on certain withdrawals of Contract Value. The amount of the
Withdrawal Charge depends on the Withdrawal Charge Option and the Free
Withdrawal Option chosen by the Owner at the time of purchase. See "Fees and
Charges" in the prospectus for further description of these options. No
Withdrawal Charge applies to Contract Value in excess of aggregate Premium
Payments.
OTHER VARIABLE ACCOUNT YIELDS
Sales literature or advertisements may quote the current annualized
yield of one or more of the Variable Accounts (except the Money Market Variable
Account) under the Contract for 30-day or one-month periods. The annualized
yield of a Variable Account refers to income generated by the Variable Account
during a 30-day or one-month period and is assumed to be generated each period
over a 12-month period.
The yield is computed by: 1) dividing the net investment income of
the Portfolio attributable to the Variable Account units less Variable Account
expenses for the period; by 2) the maximum offering price per unit on the last
day of the period times the daily average number of units outstanding for the
period; and 3) compounding that yield for a six-month period; and 4)
multiplying that result by 2. Expenses attributable to the Variable Account
include the annualized Contract Fee, the asset-based administration charge and
the mortality and expense risk charge. The yield calculation assumes a
Contract Fee of $30 per year per Contract deducted at the end of each Contract
Year. For purposes of calculating the 30-day or one-month yield, an average
Contract Fee based on the average Contract Value in the Variable Account is
used to determine the amount of the charge attributable to the Variable Account
for the 30-day or one-month period. The 30-day or one-month yield is
calculated according to the following formula:
6
Yield = 2 X (((NI - ES)/(U X UV)) + 1) - 1)
Where:
NI = net income of the Portfolio for the 30-day or
one-month period attributable to the Variable
Account's units.
ES = expenses of the Variable Account for the 30-day or
one-month period.
U = the average number of units outstanding.
UV = the unit value at the close (highest) of the last
day in the 30-day or one-month period.
Because of the charges and deductions imposed under the Contract, the
yield for the Variable Account is lower than the yield for the corresponding
Portfolio.
- 4 -
<PAGE> 119
The yield on the amounts held in the Variable Accounts normally
fluctuates over time. THEREFORE, THE DISCLOSED YIELD FOR ANY GIVEN PAST PERIOD
IS NOT AN INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. A
Variable Account's actual yield is affected by the types and quality of
securities held by the corresponding Portfolio and that Portfolio's operating
expenses.
Yield calculations do not take into account the Withdrawal
Charge that is assessed on certain withdrawals of Contract Value. The amount
of the Withdrawal Charge depends on the Withdrawal Charge Option and the Free
Withdrawal Option chosen by the Owner at the time of purchase. See "Fees and
Charges" in the prospectus for further description of these options.
AVERAGE ANNUAL TOTAL RETURNS
Sales literature or advertisements may also quote average annual
total returns for one or more of the Variable Accounts for various periods of
time.
When a Variable Account or underlying Portfolio has been in operation
for 1, 5, and 10 years, respectively, the average annual total return for these
periods will be provided. Average annual total returns for other periods of
time may, from time to time, also be disclosed.
Standard average annual total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods. The ending date for each period for which total return
quotations are provided will be for the most recent calendar quarter-end
practicable, considering the type of the communication and the media through
which it is communicated.
Standard average annual total returns are calculated using Variable
Account unit values which the Company calculates on each valuation day based on
the performance of the Variable Account's underlying Portfolio, the deductions
for the mortality and expense risk charge, the deductions for the asset-based
administration charge and the annualized Contract Fee. The calculation assumes
that the Contract Fee is $7.50 per quarter per Contract deducted at the end of
each Contract quarter. For purposes of calculating average annual total return,
an average per-dollar per-day Contract Fee attributable to the hypothetical
Variable Account for the period is used. The calculation also assumes total
withdrawal of the Contract at the end of the period for the return quotation
and will take into account the Withdrawal Charge applicable to the Contract
that is assessed on certain withdrawals of Contract Value.
Standard total return is calculated according to the following formula:
- 5 -
<PAGE> 120
1/N
TR = ((ERV/P) ) - 1
Where:
TR = the average annual total return net of Variable
Account recurring charges.
ERV = the ending redeemable value (net of any applicable
Withdrawal Charge) of the hypothetical Variable
Account at the end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
Sales literature or advertisements may quote average annual total
returns for periods prior to the date the Variable Accounts commenced
operations. Such performance information for the Variable Accounts is
calculated based on the performance of the various Portfolios and the
assumption that the Variable Accounts were in existence for the same periods as
those of the Portfolios, with the level of Contract charges that were in
effect at the inception of the Variable Accounts, except that, in some
instances, the mortality and expense risk charge will be deducted on a monthly
(rather than daily) basis.
OTHER (NON-STANDARD) TOTAL RETURNS
Sales literature or advertisements may also quote average annual
total returns that do not reflect any Withdrawal Charges available under the
Contract. Such non-standard total returns are calculated in exactly the same
way as average annual total returns described above, except that the ending
redeemable value of the hypothetical Variable Account for the period is
replaced with an ending value for the period that does not take into account
any Withdrawal Charges.
The Company may disclose cumulative total returns in conjunction with
the standard formats described above. The cumulative total returns will be
calculated using the following formula:
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of Variable Account
recurring charges for the period.
ERV = The ending redeemable value of the hypothetical investment
at the end of the period.
P = A hypothetical single payment of $1,000.
- 6 -
<PAGE> 121
For periods prior to the date the Separate Account commenced
operations, performance information may be calculated based on the performance
of the various Portfolios, assuming that the Variable Accounts were in
existence for the same periods as the Portfolios, assuming that the current
level of Contract charges were in effect during those periods and assuming the
monthly (rather than daily) deduction of mortality and expense risk charges and
administrative charges.
EFFECT OF THE CONTRACT FEE ON PERFORMANCE DATA
The Contract provides for a $7.50 Contract Fee to be deducted at the
end of each Contract Quarter from the Fixed and Variable Accounts based on the
proportion that the value of each such Account bears to the total Contract
Value. For purposes of reflecting the Contract Fee in yield and total return
quotations, the Contract Fee is converted into a per-dollar per-day charge
based on the average Contract Value in the Separate Account of all Contracts on
the last day of the period for which quotations are provided. The per-dollar
per-day average charge will then be adjusted to reflect the basis upon which
the particular quotation is calculated.
OTHER INFORMATION
The following is a partial list of those publications which may be
cited in the Funds' advertising shareholder materials which contain articles
describing investment results or other data relative to one or more of the
Variable Accounts. Other publications may also be cited.
<TABLE>
<S> <C>
Broker World Financial World
Across the Board Advertising Age
American Banker Barron's
Best's Review Business Insurance
Business Month Business Week
Changing Times Consumer Reports
Economist Financial Planning
Forbes Fortune
Inc. Institutional Investor
Insurance Forum Insurance Sales
Insurance Week Journal of Accountancy
Journal of the American Society of Journal of Commerce
CLU & ChFC
Life Insurance Selling Life Association News
MarketFacts Manager's Magazine
National Underwriter Money
Morningstar, Inc. Nation's Business
New Choices (formerly 50 Plus) New York Times
Pension World Pensions & Investments
Rough Notes Round the Table
U.S. Banker VARDs
Wall Street Journal Working Woman
</TABLE>
- 7 -
<PAGE> 122
NET INVESTMENT FACTOR
The Net Investment Factor is an index that measures the investment
performance of a Variable Account from one Business Day to the next. Each
Variable Account has its own Net Investment Factor, which may be greater or
less than one. The Net Investment Factor for each Variable Account equals 1
plus the fraction obtained by dividing (a) by (b) where:
(a) is the net result of:
1. the investment income, dividends, and capital gains,
realized or unrealized, credited at the end of the current
Business Day; PLUS
2. the amount credited or released from reserves for taxes
attributed to the operation of the Variable Account; MINUS
3. the capital losses, realized or unrealized, charged at the
end of the current Business Day, MINUS
4. any amount charged for taxes or any amount set aside
during the Business Day as a reserve for taxes
attributable to the operation or maintenance of the
Variable Account; MINUS
- 8 -
<PAGE> 123
5. the amount charged for mortality and expense risk on that
Business Day; MINUS
6. the amount charged for administration on that Business
Day; and
(b) is the value of the assets in the Variable Account at the end of
the preceding Business Day, adjusted for allocations and transfers
to and withdrawals and transfers from the Variable Account
occurring during that preceding Business Day.
VARIABLE ANNUITY PAYMENTS
The dollar amount of the first variable annuity payment is determined in
the same manner as that of a fixed annuity payment. Therefore, for any
particular amount applied to a variable payout plan, the dollar amount of the
first variable annuity payment and the first fixed annuity payment (assuming
the fixed payment is based on the minimum guaranteed 3.0% interest rate) will
be the same. Later variable annuity payments, however, will vary to reflect
the net investment performance of the Variable Account(s) selected by the Owner
or the Annuitant.
The net investment performance of a Variable Account is translated into a
variation in the amount of variable annuity payments through the use of annuity
units. The adjusted Contract Value for each Variable Account is used to
purchase annuity units at the annuity unit value for that Variable Account on
the Annuity Start Date. The number of annuity units in each Variable Account
then remains fixed unless an exchange of annuity units is made as described
below. Each Variable Account has a separate annuity unit value that changes
each Business Day in substantially the same way as does the value of an
accumulation unit of a Variable Account.
The dollar value of each variable annuity payment after the first is
determined by multiplying the number of annuity units of a particular Variable
Account by the annuity unit value for that Variable Account on the Business Day
immediately preceding the date of each payment. If the net investment return
of the Variable Account for a payment period is equal to the pro-rated portion
of the 3.0% annual assumed investment rate, the variable annuity payment for
that Variable Account for that period will equal the payment for the prior
period. If the net investment return exceeds an annualized rate of 3.0% for a
payment period, the payment for that period will be greater than the payment
for the prior period. Similarly, if the return for a period falls short of an
annualized rate of 3.0%, the payment for that period will be less than the
payment for the prior period. The Owner may choose an assumed interest rate
of 3.0%, 4.0%, or 5.0% at the time a variable payout plan is selected.
ASSUMED INVESTMENT RATE
The discussion concerning the amount of variable annuity payments which
follows this section is based on an assumed investment rate of 3.0% per year.
Under the Contract, the Contract Owner may choose an assumed interest rate of
3.0%, 4.0% or 5.0% at the time a variable payout plan is selected. The assumed
investment rate is used merely in order to determine
- 9 -
<PAGE> 124
the first monthly payment per thousand dollars of applied value. THIS RATE
DOES NOT BEAR ANY RELATIONSHIP TO THE ACTUAL NET INVESTMENT EXPERIENCE OF THE
SEPARATE ACCOUNT OR OF ANY VARIABLE ACCOUNT.
AMOUNT OF VARIABLE ANNUITY PAYMENTS
The amount of the first variable annuity payment to a payee will depend on
the amount (i.e., the adjusted Contract Value, the Surrender Value, the death
benefit) applied to effect the variable annuity payment as of the Annuity
Commencement Date, the annuity payout plan option selected, and the age and sex
(if applicable) of the annuitant. The Contract contains tables indicating the
dollar amount of the first annuity payment under each annuity payment option
for each $1,000 applied at various ages. These tables are based upon the 1983
Table A (promulgated by the Society of Actuaries) and an assumed investment
rate of 3.0% per year.
The portion of the first monthly variable annuity payment derived from a
Variable Account is divided by the annuity unit value for that Variable Account
(calculated as of the date of the first monthly payment). The number of such
units will remain fixed during the annuity period, assuming the Annuitant makes
no exchanges of annuity units for annuity units of another Variable Account or
to provide a fixed annuity payment.
In any subsequent month, for any Contract, the dollar amount of the
variable annuity payment derived from each Variable Account is determined by
multiplying the number of annuity units of that Variable Account attributable
to that Contract by the value of such annuity unit at the end of the valuation
period immediately preceding the date of such payment.
The annuity unit value will increase or decrease from one payment to the
next in proportion to the net investment return of the Variable Account or
Variable Accounts supporting the variable annuity payments, less an adjustment
to neutralize the 3.0% assumed investment rate referred to above. Therefore,
the dollar amount of annuity payments after the first will vary with the amount
by which the net investment return of the appropriate Variable Accounts is
greater or less than 3.0% per year. For example, for a Contract using only one
Variable Account to generate variable annuity payments, if that Variable
Account has a cumulative net investment return of 5% over a one year period,
the first annuity payment in the next year will be approximately 2% greater
than the payment on the same date in the preceding year. If such net
investment return is 1% over a one year period, the first annuity payment in
the next year will be approximately 2 percentage points less than the payment
on the same date in the preceding year. (See also "Variable Annuity Payments"
in the Prospectus.)
ANNUITY UNIT VALUE
The value of an annuity unit is calculated at the same time that the value
of an accumulation unit is calculated and is based on the same values for fund
shares and other assets and liabilities. (See "Separate Account Value" in the
Prospectus.) The annuity unit value for each Variable Account's first
valuation period was set at $100. The annuity unit value for a Variable
Account
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<PAGE> 125
is calculated for each subsequent valuation period by dividing (1) by (2), then
multiplying this quotient by (3) and then multiplying the result by (4), where:
(1) is the accumulation unit value for the current valuation period;
(2) is the accumulation unit value for the immediately preceding
valuation period;
(3) is the annuity unit value for the immediately preceding valuation
period; and
(4) is a special factor designed to compensate for the assumed
investment rate of 3.0% built into the table used to compute the
first variable annuity payment.
The following illustrations show, by use of hypothetical examples, the
method of determining the annuity unit value and the amount of several variable
annuity payments based on one Variable Account.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
<TABLE>
<S> <C> <C>
1. Accumulation unit value for current
valuation period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.15
2. Accumulation unit value for immediately preceding valuation period . . . . . . . . . . . . . . . . . . . . . . $11.10
3. Annuity unit value for immediately preceding
valuation period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105.00
4. Factor to compensate for the assumed
investment rate of 3.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9975
5. Annuity unit value of current valuation
period ((1) / (2)) x (3) x (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105.2093
</TABLE>
ILLUSTRATION OF VARIABLE ANNUITY PAYMENTS
<TABLE>
<S> <C> <C>
1. Number of accumulation units at Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
2. Accumulation unit value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.1500
3. Adjusted Contract Value (1)x(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $111,500
4. First monthly annuity payment per $1,000
of adj. Contract Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.89
5. First monthly annuity payment (3)x(4) / 1,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $656.74
6. Annuity unit value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105.2093
7. Number of annuity units (5)/(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2422
8. Assume annuity unit value for second month equal to . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105.3000
9. Second monthly annuity payment (7)x(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $657.30
10. Assume annuity unit value for third month equal to . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104.9000
11. Third monthly annuity payment (7)x(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $654.81
</TABLE>
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
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<PAGE> 126
In the event of any such substitution or change, the Company may (by
appropriate endorsement, if necessary) change the Contract to reflect the
substitution or change. If the Company considers it to be in the best interest
of Owners and Annuitants, and subject to any approvals that may be required
under applicable law, the Separate Account may be operated as a management
investment company under the 1940 Act, it may be deregistered under that Act if
registration is no longer required, it may be combined with other of the
Company's separate accounts, or the assets may be transferred to another
separate account. In addition, the Company may, when permitted by law,
restrict or eliminate any voting rights the Owner has under the Contract.
The Company will continue to pay a Maturity Benefit under the
Visionary Contract on Premium Payments allocated to an Eligible Variable
Account if: (a) the Portfolio underlying an Eligible Variable Account changes
its investment objective; (b) the Company determines that an investment in the
Portfolio underlying an Eligible Variable Account is no longer appropriate in
light of the purposes of the Separate Account; or (c) shares of a Portfolio
underlying an Eligible Variable Account are no longer available for investment
by the Separate Account and the Company is forced to redeem all shares of the
Portfolio held by the Eligible Variable Account. (See the Prospectus for the
Owner's Contract.)
RESOLVING MATERIAL CONFLICTS
The Funds currently sell shares to registered separate accounts of
insurance companies other than IL Annuity to support other variable annuity
contracts and variable life insurance contracts. In addition, some of the
Funds may in the future be sold to the Company's other separate accounts and
may in the future be sold to separate accounts of other affiliated life
insurance companies to support other variable annuity or variable life
insurance contracts. Moreover, shares of some of the Funds may in the future
be sold to qualified retirement plans. As a result, there is a possibility
that an irreconcilable material conflict may arise between the Owner's
interests in owning a Contract whose Contract Value is allocated to the
Separate Account and of persons owning Contract whose Contract Values are
allocated to one or more other separate accounts investing in any one of the
Funds. There is also the possibility that a material conflict may arise
between the interests of Contract Owners generally, or certain classes of
Contract Owners, and participating qualified retirement plans or participants
in such retirement plans.
The Company currently does not foresee any disadvantages to the
Owner that would arise from the sale of Fund shares to support variable life
insurance contracts or variable annuity contracts of other companies or to
qualified retirement plans. However, the management of the Funds will each
monitor events related to their Fund in order to identify any material
irreconcilable conflicts that might possibly arise as a result of such Fund
offering its shares to (1) support both variable life insurance contracts and
variable annuity contracts, or (2) support the variable life insurance
contracts and/or variable annuity contracts issued by various unaffiliated
insurance companies. In addition, the management of the Funds will monitor the
Funds in order to identify any material irreconcilable conflicts that might
possibly arise as a result of the sale of its shares to qualified retirement
plans, if applicable. In the event of such a conflict, the
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<PAGE> 127
management of the appropriate Fund would determine what action, if any, should
be taken in response to the conflict. In addition, if the Company believes
that the response of the Funds to any such conflict does not sufficiently
protect the Owner, the Company will take appropriate action on its own,
including withdrawing the Separate Account's investment in such Funds, as
appropriate. (See the individual Fund prospectuses for greater detail.)
TERMINATION OF PARTICIPATION AGREEMENTS
The participation agreements pursuant to which the Funds sell their
shares to the Variable Account contain varying provisions regarding
termination. The following summarizes those provisions:
THE ALGER AMERICAN FUND. This agreement provides for termination: (1)
on six months' advance written notice by any party; (2) at IL Annuity's option
if shares of any Portfolio are not reasonably available to meet the
requirements of the Contracts or are not registered, issued or sold in
accordance with applicable state and/or federal law; (3) at IL Annuity's option
if any Portfolio ceases to be qualified as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code (the "Code"); (4) at IL Annuity's
option if any Portfolio fails to meet certain diversification requirements of
the Code; (5) at the option of the Fund or Fred Alger & Company, Inc. (the
"Distributor"), upon a determination that IL Annuity has suffered a material
adverse change in its business, operations, financial condition or prospects or
is the subject of material adverse publicity; (6) by IL Annuity upon a
determination that either the Fund or the Distributor has suffered a material
adverse change in its business, operations, financial condition or prospects or
is the subject of material adverse publicity; (7) by the Fund or the
Distributor if the Contracts cease to qualify as annuity contracts or endowment
contracts under the Code or if the Contracts are not registered, issued or sold
in accordance with state and/or federal law; or (8) on 180 days written notice
upon a determination by any party that a material irreconcilable conflict
exists.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND FIDELITY VARIABLE
INSURANCE PRODUCTS FUND II. These agreements provide for termination: (1) on
six months' advance written notice by any party; (2) at IL Annuity's option if
shares of any Portfolio are not reasonably available to meet the requirements
of the Contracts or are not registered, issued or sold in accordance with
applicable state and/or federal law; (3) at IL Annuity's option if any
Portfolio ceases to be qualified as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code (the "Code"); (4) at IL Annuity's
option if any Portfolio fails to meet certain diversification requirements of
the Code; (5) at the option of the Fund or Fidelity Distributors Corporation
(the "Underwriter") upon a determination that IL Annuity has suffered a
material adverse change in its business, operations, financial condition or
prospects or is the subject of material adverse publicity; (6) by IL Annuity
upon a determination that either the Fund or the Underwriter has suffered a
material adverse change in its business, operations, financial condition or
prospects or is the subject of material adverse publicity; or (7) by the Fund
or the Underwriter if IL Annuity provides written notice of its intent to use
another investment company as a funding vehicle for the Contracts.
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<PAGE> 128
OCC ACCUMULATION TRUST. This agreement provides for termination:
(1) on six months' advance written notice by any party; (2) at IL Annuity's
option if shares of any Portfolio are not reasonably available to meet the
requirements of the Contracts; (3) at IL Annuity's option if any Portfolio
ceases to be qualified as a Regulated Investment Company under Subchapter M of
the Internal Revenue Code (the "Code"); (4) at IL Annuity's option if any
Portfolio fails to meet certain diversification requirements of the Code; (5)
at the option of the Fund upon a determination that IL Annuity has suffered a
material adverse change in its business, operations, financial condition or
prospects or is the subject of material adverse publicity; (6) by IL Annuity
upon a determination that the Fund has suffered a material adverse change in
its business, operations, financial condition or prospects or is the subject of
material adverse publicity; (7) by the Fund or IL Annuity if IL Annuity
receives necessary regulatory approvals to substitute shares of another
investment company as a funding vehicle for the Contracts; (8) by the Fund upon
institution of certain proceedings against IL Annuity; (9) at IL Annuity's
option upon institution of certain administrative proceedings against the Fund
or the Underwriter; (10) by the Fund or IL Annuity upon a determination that
certain irreconcilable conflicts exist; or (11) at the option of the Fund or IL
Annuity, upon the other party's material breach of any provision in the
Participation Agreement.
ROYCE CAPITAL FUND. This agreement provides for termination: (1) at
the option of IL Annuity or the Royce Trust (the "Trust") upon 180 days'
notice; (2) at the option of IL Annuity, if the Trust shares are not reasonably
available to meet the requirements of the Contracts; (3) at the option of IL
Annuity, upon the institution of certain formal proceedings against the Trust
by the SEC, the National Association of Securities Dealers, Inc. ("NASD"), or
any other regulatory body; (4) at the option of the Advisor or Distributer of
the Trust or the Trust, upon the institution of certain formal proceedings
against IL Annuity by the SEC, the NASD or any other regulatory body; (5) in
the event the Trust's shares are not registered, issued or sold in accordance
with applicable state or federal law, or such law precludes the use of such
shares as the underlying investment medium of Contracts; (6) at the option of
the Adviser or Distributer of the Trust or the Trust if the Contracts cease to
qualify as annuity contracts or life insurance contracts, as applicable, under
the Code; (7) at the option of IL Annuity, upon the Trust's unremedied breach
of any material provision of this agreement; (8) at the option of the Adviser
or Distributer of the Trust or the Trust, upon IL Annuity's unremedied breach
of any material provision of this agreement; (9) at the option of the Adviser
or Distributer of the Trust or the Trust, if the Contracts are not registered,
issued or sold in accordance with applicable federal and/or state law; (10) in
the event this agreement is assigned without the prior written consent of IL
Annuity and the Trust.
SAFECO RESOURCE SERIES TRUST. This agreement shall terminate as to
the sale and issuance of new Contracts: (1) at the option of either IL Annuity
or the SAFECO Trust, upon six months advance written notice to the other; (2)
at the option of IL Annuity, upon one week advance written notice to the Trust
if shares of the Portfolios are not available for any reason to meet the
requirements of the Contracts as determined by IL Annuity; (3) at the option of
either IL Annuity or the Trust, immediately upon institution of certain formal
proceedings against the broker-dealer or broker-dealers marketing the
Contracts, the Separate Account, IL Annuity, the SAFECO Trust or its investment
adviser, by the NASD, the SEC or any other regulatory body
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<PAGE> 129
having jurisdiction over the operations of such entities; (4) upon the receipt
of any necessary regulatory approvals, or the requisite vote of Contract owners
having an interest in the Portfolios, to substitute for shares of the
Portfolios the shares of another investment company in accordance with the
terms of the applicable Contracts; (5) upon assignment of this agreement,
unless made with the written consent of all other parties hereto; (6) if the
shares of the Portfolios are not registered, issued or sold in conformance with
Federal law or such law precludes the use of the Portfolios' shares as
underlying investment media for the Contracts.
SOGEN VARIABLE FUNDS, INC. This agreement shall continue in full
force and effect until the first to occur of: (1) termination by any party, for
any reason with respect to the Portfolio, by 120 days advance written notice
delivered to the other parties; or (2) termination by IL Annuity by written
notice to the SoGen Fund and its Underwriter based upon IL Annuity's
determination that shares of the Portfolio are not reasonably available to meet
the requirements of the Contracts; or (3) termination by IL Annuity by written
notice to the SoGen Fund and its Underwriter in the event the Portfolio's
shares are not registered, issued or sold in accordance with applicable state
and/or federal law or such law precludes the use of such shares as the
underlying investment media of the Contracts; or (4) termination by the SoGen
Fund or its Underwriter in the event that certain formal administrative
proceedings are instituted against IL Annuity by the NASD, the SEC, the
Insurance Commissioner or like official of any state or any other regulatory
body; or (5) termination by IL Annuity in the event that certain formal
administrative proceedings are instituted against the SoGen Fund or Underwriter
by the NASD, the SEC, or any state securities or insurance department or any
other regulatory body; or (6) termination by IL Annuity by written notice to
the SoGen Fund and its Underwriter in the event that the Portfolio ceases to
qualify as a Regulated Investment Company under Subchapter M or fails to comply
with the Section 817(h) diversification requirements of the Code; or (7)
termination by the SoGen Fund or its Underwriter by written notice to IL
Annuity in the event that the Contracts fail to meet certain qualifications; or
(8) termination by either the SoGen Fund or its Underwriter by written notice
to IL Annuity if either one or both of the SoGen Fund or its Underwriter
respectively, shall determine, in their sole judgment exercised in good faith,
that IL Annuity has suffered a material adverse change in its business,
operations, financial condition, or prospects since the date of the
Participation Agreement or is the subject of material adverse publicity; or (9)
termination by IL Annuity by written notice to the SoGen Fund and its
Underwriter, if the Company shall determine, in its sole judgment exercised in
good faith, that the SoGen Fund, its Adviser, or its Underwriter has suffered a
material adverse change in its business, operations, financial condition or
prospects since the date of this agreement or is the subject of material
adverse publicity; or (10) termination by IL Annuity upon any substitution of
the shares of another investment company or series thereof for shares of the
Portfolio in accordance with the terms of the Contracts; or (11) termination by
any party in the event that the SoGen Fund's Board of Directors determines that
a material irreconcilable conflict exists.
T. ROWE PRICE FIXED INCOME SERIES, INC. AND T. ROWE PRICE
INTERNATIONAL SERIES, INC. These agreements provide for termination: (1) on
six months' advance written notice by any party; (2) at IL Annuity's option if
shares of any Portfolio are not reasonably available to meet the requirements
of the Contracts or are not registered, issued or sold in accordance with
applicable state and/or federal law; (3) at IL Annuity's option if any
Portfolio ceases to be
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<PAGE> 130
qualified as a Regulated Investment Company under Subchapter M of the Internal
Revenue Code (the "Code"); (4) at IL Annuity's option if any Portfolio fails to
meet certain diversification requirements of the Code; (5) at the option of the
Fund or T. Rowe Price Investment Services, Inc. (the "Underwriter") upon a
determination that IL Annuity has suffered a material adverse change in its
business, operations, financial condition or prospects or is the subject of
material adverse publicity; (6) by IL Annuity upon a determination that either
the Fund or the Underwriter has suffered a material adverse change in its
business, operations, financial condition or prospects or is the subject of
material adverse publicity; (7) by the Fund or the Underwriter if IL Annuity
provides written notice of its intent to use another investment company as a
funding vehicle for the Contracts; (8) by the Fund or the Underwriter upon
institution of certain proceedings against IL Annuity; or (9) at IL Annuity's
option upon institution of certain administrative proceedings against the Fund
or the Underwriter.
VAN ECK WORLDWIDE INSURANCE TRUST. This agreement provides for
termination: (1) on six months' advance written notice by any party; (2) at IL
Annuity's option if shares of any Portfolio are not reasonably available to
meet the requirements of the Contracts or are not registered, issued or sold in
accordance with applicable state and/or federal law; (3) at IL Annuity's option
if any Portfolio ceases to be qualified as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code (the "Code"); (4) at IL Annuity's
option if any Portfolio fails to meet certain diversification requirements of
the Code; (5) at the option of the Trust or Van Eck Associates Corporation (the
"Adviser") upon a determination that IL Annuity has suffered a material adverse
change in its business, operations, financial condition or prospects or is the
subject of material adverse publicity; (6) by IL Annuity upon a determination
that either the Trust or the Adviser has suffered a material adverse change in
its business, operations, financial condition or prospects or is the subject of
material adverse publicity; (7) by IL Annuity, the Adviser or the Trust, upon
institution of certain proceedings against the broker-dealers marketing the
Contracts, the Adviser or the Trust; (8) upon a decision by IL Annuity to
substitute the Trust's shares with the shares of another investment company; or
(9) upon assignment of the Agreement.
VOTING RIGHTS
The number of the Owner's votes is determined by dividing the
Contract Value the Owner has in a Variable Account by the net asset value per
share of the Portfolio in which that Variable Account invests. For each
Annuitant, the number of votes attributable to a Variable Account will be
determined by dividing the liability for future variable annuity payments to be
paid from that Variable Account by the net asset value per share of the
Portfolio in which that Variable Account invests. This liability for future
payments is calculated on the basis of the mortality assumptions. The assumed
investment rate the Owner selected is used in determining the number of
annuity units of that Variable Account credited to the Annuitant's Contract and
annuity unit value of that Variable Account on the date that the number of
votes is determined. As variable annuity payments are made to the Annuitant,
the liability for future payments decreases as does the number of votes.
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<PAGE> 131
The number of votes available to the Owner or an Annuitant will be
determined as of the date coincident with the date established by the Fund for
determining shareholders eligible to vote at the relevant meeting of the
Portfolio's shareholders. Voting instructions will be solicited by written
communication prior to such meeting in accordance with procedures established
for the Fund.
SAFEKEEPING OF ACCOUNT ASSETS
The Company holds the title to the assets of the Separate Account.
The assets are kept physically segregated and held separate and apart from the
Company's General Account assets and from the assets in any other separate
account.
Records are maintained of all purchases and redemptions of Portfolio
shares held by each of the Variable Accounts.
The officers and employees of the Company are covered by an insurance
company blanket bond issued by National Union Fire Insurance Company of
Pittsburgh Pennsylvania to Indianapolis Life Insurance Company and its various
subsidiaries in the amount of twenty million dollars. The bond insures against
dishonest and fraudulent acts of officers and employees.
DISTRIBUTION OF THE CONTRACT
IL Securities, Inc., P.O. Box 1230, 2960 North Meridian Street,
Indianapolis, Indiana 46208, acts as the distributor for the Contract. IL
Securities, Inc. is wholly-owned by the Indianapolis Life Group of Companies,
Inc., which, in turn, is wholly-owned by Indianapolis Life Insurance Company.
IL Securities, Inc. is registered with the SEC under the Securities Exchange
Act of 1934 as a broker-dealer and is a member of the National Association of
Securities Dealers, Inc.
The Company offers the Contract to the public on a continuous basis.
The Company does not anticipate discontinuing the offering of the Contract,
but reserves the right to discontinue the offering. Agents who sell the
Contract are licensed by applicable state insurance authorities to sell the
Contract and are registered representatives of IL Securities, Inc. or
broker-dealers having selling agreements with IL Securities, Inc. or
broker-dealers having selling agreements with such broker-dealers.
The Company may pay sales commissions to broker-dealers up to an
amount equal to 7.2% of the Premium Payments paid under a Contract. In
addition, asset-based trailer commissions of up to 1.25% may be paid. The
Company may also pay up to 1.00% of Premium Payments to IL Securities to
compensate it for certain distribution expenses. The broker-dealers are
expected to compensate sales representatives in varying amounts from these
commissions. The Company may also pay other distribution expenses such as
production incentive bonuses, an agent's insurance and pension benefits, and
agency expense allowances. These distribution expenses do not result in any
additional charges against the Contract other than those described
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<PAGE> 132
in the prospectus under "Fees and Charges." IL Securities, Inc, received and
retained $195,937.53 in underwriting commissions during fiscal year 1996, and
$2,900.68 in fiscal year 1995.
LEGAL MATTERS
All matters relating to Massachusetts law pertaining to the Contract,
including the validity of the Contract and the Company's authority to issue
the Contract, have been passed upon by Margaret M. McKinney, Vice President,
General Counsel and Secretary of the Company. Sutherland, Asbill & Brennan,
L.L.P. of Washington, D.C. has provided advice on certain matters relating to
the federal securities laws.
EXPERTS
The balance sheets of IL Annuity and Insurance Company as of December
31, 1996 and 1995 , and the related statements of income, stockholder's equity,
and cash flows for the year ended December 31, 1996 and 1995 and the two months
ended December 31, 1994, and the statement of net assets of IL Annuity and
Insurance Co. Separate Account 1 as of December 31, 1996, and the related
statements of operations and changes in net assets for the year then ended,
appearing in this Statement of Additional Information and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon the authority of such firm as experts in accounting and auditing.
OTHER INFORMATION
A registration statement has been filed with the SEC under the
Securities Act of 1933, as amended, with respect to the Contract discussed in
this Statement of Additional Information. Not all the information set forth in
the registration statement, amendments and exhibits thereto has been included
in this Statement of Additional Information. Statements contained in this
Statement of Additional Information concerning the content of the Contract and
other legal instruments are intended to be summaries. For a complete statement
of the terms of these documents, reference should be made to the instruments
filed with the SEC.
FINANCIAL STATEMENTS
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<PAGE> 133
Financial Statements
IL Annuity and Insurance Company
Years ended December 31, 1996 and 1995
and Two Months Ended December 31, 1994
With Report of Independent Auditors
<PAGE> 134
IL Annuity and Insurance Company
Financial Statements
Years ended December 31, 1996 and 1995
and Two Months ended December 31, 1994
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Audited Financial Statements
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Stockholder's Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
<PAGE> 135
Report of Independent Auditors
Board of Directors
IL Annuity and Insurance Company
We have audited the accompanying balance sheets of IL Annuity and Insurance
Company, wholly owned by Indianapolis Life Group of Companies, Inc. (which is
wholly owned by Indianapolis Life Insurance Company), as of December 31, 1996
and 1995, and the related statements of income, stockholder's equity, and cash
flows for the years then ended and the two months ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IL Annuity and Insurance
Company at December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended and the two months ended December 31,
1994 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
April 4, 1997
1
<PAGE> 136
IL Annuity and Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------------
<S> <C> <C>
ASSETS
Fixed maturity securities $ 57,530,548 $ 6,478,844
Cash 3,283,442 440,601
Accrued investment income 565,974 81,030
Deferred acquisition costs 4,860,881 -
Goodwill, net of accumulated amortization of $237,285
in 1996 and $127,769 in 1995 1,953,034 2,062,550
Receivables and other assets 5,681 -
Separate account assets 19,804,429 287,171
----------------------------------
Total assets $ 88,003,989 $ 9,350,196
==================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefit reserves $ 45,729,780 $ 7,500
Payable to affiliate - 89,437
Accounts payable and other liabilities 3,855,498 68,003
Federal income taxes 93,278 72,352
Separate account liabilities 19,804,429 287,171
----------------------------------
Total liabilities 69,482,985 524,463
Stockholder's equity:
Common stock, $250 par value:
Authorized and issued--10,000 shares 2,500,000 2,500,000
Additional paid-in capital 17,262,659 6,762,659
Net unrealized gains on investments 155,340 134,367
Retained earnings (deficit) (1,396,995) (571,293)
----------------------------------
Total stockholder's equity 18,521,004 8,825,733
----------------------------------
Total liabilities and stockholder's equity $ 88,003,989 $ 9,350,196
==================================
</TABLE>
See accompanying notes.
2
<PAGE> 137
IL Annuity and Insurance Company
Statements of Income
<TABLE>
<CAPTION>
TWO MONTHS
ENDED
YEARS ENDED DECEMBER 31 DECEMBER 31
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Revenue:
Annuity considerations $ 346,265 $ - $ -
Investment income 884,450 402,408 47,728
Net realized capital gains 131,664 936 -
---------------------------------------------------
1,362,379 403,344 47,728
Expenses:
Annuity benefits 168,089 - -
Interest on policy or contract funds 381,690 - -
Commissions 916,084 17,044 -
General expenses and other 1,275,445 772,011 1,904
Amortization of deferred acquisition costs 366,562 - -
Amortization of goodwill 109,516 109,516 18,253
Taxes, licenses and fees 94,737 97,527 624
Change in reserve credits (1,133,676) 996,098 20,781
---------------------------------------------------
2,178,447 996,098 20,781
---------------------------------------------------
Loss before federal income taxes (816,068) (592,754) 26,947
Federal income taxes (benefit) 9,634 (3,909) 9,395
---------------------------------------------------
Net loss $ (825,702) $ (588,845) $ 17,552
===================================================
</TABLE>
See accompanying notes.
3
<PAGE> 138
IL Annuity and Insurance Company
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
NET UNREALIZED RETAINED
ADDITIONAL PAID- GAINS (LOSSES) EARNINGS
COMMON STOCK IN CAPITAL ON INVESTMENTS (DEFICIT) TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at November 1, 1994 $ 1,500,000 $ 6,112,659 $ - $ - $ 7,612,659
Net income - - - 17,552 17,552
Change in unrealized losses - - (32,908) - (32,908)
----------------------------------------------------------------------------------------
Balance at December 31, 1994 1,500,000 6,112,659 (32,908) 17,552 7,597,303
Net loss - - - (588,845) (588,845)
Capital contribution 1,000,000 650,000 - - 1,650,000
Change in unrealized gains net of
deferred taxes - - 167,275 - 167,275
----------------------------------------------------------------------------------------
Balance at December 31, 1995 2,500,000 6,762,659 134,367 (571,293) 8,825,733
Net loss - - - (825,702) (825,702)
Capital contribution - 10,500,000 - - 10,500,000
Change in unrealized gains net of
deferred taxes - - 20,993 - 20,993
----------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 2,500,000 $ 17,262,659 $ 155,360 $ (1,396,995) $ 18,521,024
========================================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 139
IL Annuity and Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
TWO MONTHS
ENDED
YEARS ENDED DECEMBER 31 DECEMBER 31
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (825,702) $ (588,845) $ 17,552
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Amortization of discount on investments 56,760 (77,287) (10,386)
Amortization of goodwill 109,516 109,516 18,253
Changes in operating assets and liabilities:
Deferred acquisition costs (4,860,881) - -
Accrued investment income (484,944) (52,155) 51,376
Receivables and other assets (5,681) 100,000 (100,000)
Future policy benefit reserves 45,722,280 7,500 -
Accounts payable and accrued liabilities 3,698,235 157,269 171
Federal income taxes 20,926 (9,395) 9,395
---------------------------------------------------
Net cash provided (used) by operating activities 43,430,509 (353,397) (13,639)
INVESTING ACTIVITIES
Sales and maturity of investments 81,055,536 5,247,404 -
Purchase of investments (132,143,204) (6,243,672) (2,922,685)
---------------------------------------------------
Net cash used for investing activities (51,087,668) (996,268) (2,922,685)
FINANCING ACTIVITIES
Capital and surplus contributed by parent 10,500,000 1,650,000 -
---------------------------------------------------
Net cash provided by financing activities 10,500,000 1,650,000 -
---------------------------------------------------
Net increase (decrease) in cash 2,842,841 300,335 (2,936,324)
Cash at beginning of period 440,601 140,266 3,076,590
---------------------------------------------------
Cash at end of year $ 3,283,442 $ 440,601 $ 140,266
===================================================
</TABLE>
See accompanying notes.
5
<PAGE> 140
IL Annuity and Insurance Company
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION, BASIS OF PRESENTATION AND ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Effective November 1, 1994, Indianapolis Life Group of companies, Inc. (ILGC),
a wholly owned subsidiary of Indianapolis Life Insurance Company, acquired all
of the outstanding stock of Sentry Investors Life Insurance Company (the
Company), a stock life insurance company wholly owned by the Sentry life
Insurance Company (Sentry). Prior to the acquisition, Sentry entered into an
assumption reinsurance agreement with the Company whereby Sentry assumed all of
the insurance in-force and related assets and liabilities from the Company. The
effect of the reinsurance agreement was to transfer all of the insurance
related assets and liabilities to Sentry, leaving only bonds, cash and state
insurance department licenses to be acquired by ILGC. No business was issued by
the Company through December 31, 1994. The Company, when acquired by ILGC, was
accounted for using the purchase method of accounting which resulted in a new
basis of accounting for assets and liabilities of the Company using push down
accounting. Accordingly, only operations from the date of acquisition have
been presented for 1994. In January 1995, the name of the Company was changed
to IL Annuity and Insurance Company. The Company exists under the laws of the
State of Massachusetts and is licensed to do business in forty-one states and
the District of Columbia.
The Company offers flexible premium deferred annuity contracts which may be
offered in connection with retirement plans. The premiums collected on variable
annuity contracts are invested primarily in various mutual funds held in a
Separate Account at the direction of the policyholder.
Preparation of the financial statements requires management to make estimates
and assumptions that effect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future
as more information becomes known, which could impact the amounts reported and
disclosed herein.
ACCOUNTING POLICIES
FIXED MATURITY SECURITIES
Fixed maturity securities are classified as "available-for-sale" securities and
are reported at fair value. Fair values are based on quoted market prices. The
unrealized gains or losses on these securities are included as a separate
component of stockholder's equity unless there is deemed to be an other than
temporary decline in value, in which case the loss is charged to income.
6
<PAGE> 141
IL Annuity and Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
CASH
Cash includes cash on hand and demand deposits.
DEFERRED ACQUISITION COSTS
Costs relating to the acquisition of annuity products, primarily commissions
and certain costs of marketing, policy issuance and underwriting, which vary
with and are directly related to the production of new business, are deferred
and included in the deferred acquisition cost asset to the extent that such
cost are recoverable from future policy related revenues. Deferred acquisition
costs, with interest, are amortized over the lives of the policies in a
relationship to the present value of estimated future gross profits, discounted
using the interest rate credited to the policy.
GOODWILL
Goodwill is amortized over the period of 20 years using the straight-line
method.
FUTURE POLICY BENEFIT RESERVES
Future policy benefit reserves for annuity products represent policy account
balances before applicable surrender charges. Interest was credited on annuity
products at 5.5%.
THIRD-PARTY ADMINISTRATORS
The Company has contractual arrangements with two third-party administrators to
distribute its annuity products.
SEPARATE ACCOUNTS
Separate account assets and liabilities represent funds that are separately
administered, principally for variable annuity contracts, and for which the
contractholder, rather than the Company, bears the investment risk. Separate
account contractholders have no claim against the assets of the general account
of the Company. Separate account assets are reported at market value. The
operations of the Separate Account are not included in the accompanying
financial statements.
7
<PAGE> 142
IL Annuity and Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue for annuity products consist of policy charges for the cost of
insurance, policy administration charges, and surrender charges assessed
against policyholder account balances.
FEDERAL INCOME TAXES
The Company files a stand-alone federal income tax return.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. FIXED MATURITY SECURITIES
Fixed maturity securities at December 31 consist of:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government $ 29,027,551 $ 117,666 $ 172 $ 29,145,045
Public Utilities 980,073 3,278 1,055 982,296
Industrial and miscellaneous 27,283,940 199,881 80,614 27,403,207
----------------------------------------------------------
$ 57,291,564 $ 320,825 $ 81,841 $ 57,530,548
==========================================================
<CAPTION>
1995
----------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government $ 6,272,125 $ 206,719 $ -- $ 6,478,844
==========================================================
</TABLE>
8
<PAGE> 143
IL Annuity and Insurance Company
Notes to Financial Statements (continued)
2. FIXED MATURITY SECURITIES (CONTINUED)
Fixed maturity securities by date of scheduled maturity consist of the
following at December 31, 1996.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------------------------------
<S> <C> <C>
Due in one year or less $ 20,188,916 $ 20,193,375
Due after one year through five years 12,959,868 13,117,043
Due after five years through ten years 17,127,953 17,115,815
Due after ten years 7,014,827 7,104,315
----------------------------------
$ 57,291,564 $ 57,530,548
==================================
</TABLE>
3. FEDERAL INCOME TAXES
Significant components of the provision for federal income taxes consist of the
following:
<TABLE>
<CAPTION>
TWO MONTHS
ENDED
YEARS ENDED DECEMBER 31 DECEMBER 31
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Federal income taxes (benefit) at 35% $ (285,624) $ (207,464) $ 9,431
Effect of net operating loss 297,882 203,677 -
Other, net (2,624) (122) (36)
--------------------------------------------
Federal income taxes (benefit) $ 9,634 $ (3,909) $ 9,395
============================================
</TABLE>
At December 31, 1996 and 1995 the financial statements included deferred tax
assets of $2,235,015 and $219,527, offset by a valuation allowance of $501,560
and $203,678 and deferred tax liabilities of $1,817,099 and $88,201,
respectively. The significant components of the Company's deferred tax assets
and liabilities were net operating losses, deferred acquisition costs,
amortization of goodwill and bond discount and unrealized investment gains and
losses.
At December 31, 1996, the Company has unused federal tax net operating loss
carryforwards of approximately $500,000, expiring in the year 2014.
9
<PAGE> 144
IL Annuity and Insurance Company
Notes to Financial Statements (continued)
4. STOCKHOLDER'S EQUITY
Massachusetts insurance regulations require the Company to maintain a minimum
capital and surplus of $1,200,000. Statutory capital and surplus at December
31, 1996 and 1995 was $13,683,197 and $6,705,332, respectively. Statutory net
income (loss) for 1996, 1995 and 1994 was $(3,252,584), $(489,852) and
$601,876, respectively.
Generally, the maximum amount of dividends which can be paid to its stockholder
without prior approval of the Insurance Commissioner of the State of
Massachusetts is 10% of statutory surplus at the prior year end.
5. RELATED PARTY TRANSACTIONS
The Company was allocated expenses of $1,436,861 and $607,027 from
Indianapolis Life Insurance Company for 1996 and 1995, respectively, in
conjunction with expense allocation agreements for various administrative
assistance.
6. SUBSEQUENT EVENT
Effective March 31, 1997, the Company signed a binding letter of intent to
enter into a modified coinsurance agreement with Transamerica Occidental Life
Insurance Company (Transamerica), whereby Transamerica will reinsure the
Company's new annuity product, retroactive to August 1, 1996. The agreement
must be signed within 90 days of the date of the letter of intent.
10
<PAGE> 145
Financial Statements
IL Annuity and Insurance Co. Separate Account 1
Years ended December 31, 1996 and 1995
with Report of Independent Auditors
<PAGE> 146
IL Annuity and Insurance Co. Separate Account 1
Financial Statements
Years ended December 31, 1996 and 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors ............................................. 1
Audited Financial Statements
Statement of Net Assets .................................................... 2
Statement of Operations .................................................... 3
Statements of Changes in Net Assets ........................................ 5
Notes to Financial Statements .............................................. 7
</TABLE>
<PAGE> 147
Report of Independent Auditors
Board of Directors
IL Annuity and Insurance Co.
We have audited the accompanying statement of net assets of IL Annuity and
Insurance Co. Separate Account 1 (the Account) as of December 31, 1996, and the
related statement of operations for the year then ended, and statements of
changes in net assets for each of the two years in the period then ended. These
financial statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities 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 IL Annuity and Insurance Co.
Separate Account 1 at December 31, 1996, the results of its operations for the
year then ended and the changes in its net assets for each of the two years in
the period then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG, LLP
April 4, 1997
1
<PAGE> 148
IL Annuity and Insurance Co. Separate Account 1
Statement of Net Assets
December 31, 1996
<TABLE>
<CAPTION>
VALUE IN
ACCUMULATION UNITS IN
PERCENT OF PERIOD AND ACCUMULATION
NET ASSETS NET ASSETS PERIOD UNIT VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments at net asset value:
Alger American Fund:
Alger American Midcap Growth Portfolio--55,683.32
shares at $21.35 per share (cost--$1,143,917) 6.00% $ 1,188,839 109,955 $ 10.812
Alger Small Capitalization Portfolio--44,130.49 shares at
$40.91 per share (cost--$1,809,559) 9.12 1,805,378 181,361 9.955
Fidelity Variable Insurance Products Fund and Fund II:
Fidelity Asset Manager Portfolio--42,935.35 shares at
$16.93 per share (cost--$678,964) 3.67 726,896 61,512 11.817
Fidelity Contra Portfolio--149,018.62 shares
at $16.56 per share (cost--$2,233,998) 12.46 2,467,748 203,860 12.105
Fidelity Equity Income Portfolio--111,107.87 shares at
$21.03 per share (cost--$2,189,705) 11.80 2,336,599 195,400 11.958
Fidelity Growth Portfolio--57,566.65 shares at $31.14
per share (cost--$1,718,234) 9.05 1,792,626 164,945 10.868
Fidelity Index 500 Portfolio--27,688.39 shares
at $89.13 per share (cost--$2,316,389) 12.46 2,467,866 193,803 12.734
Fidelity Investment Grade Bond Portfolio--48,940.94
shares at $12.24 per share (cost--$579,753) 3.02 599,037 57,476 10.422
Fidelity Money Market Portfolio--1,876,845.33 shares
at $1.00 per share (cost--$1,876,845) 9.48 1,876,845 179,504 10.456
Oppenheimer Capital Accumulation Trust:
OCC Managed Portfolio--46,192.71 shares at $36.21
per share (cost--$1,561,738) 8.44 1,672,638 133,102 12.567
OCC Small Capitalization Portfolio--21,504.33 shares
at $22.61 per share (cost--$451,876) 2.46 486,213 40,024 12.148
T. Rowe Price International Series, Inc.:
T. Rowe Price International Stock Portfolio--114,476.76
shares at $12.64 per share (cost--$1,375,498) 7.31 1,446,986 122,831 11.780
T. Rowe Price Fixed Income Series, Inc.:
T. Rowe Price Limited-term Bond Portfolio--55,128.24
shares at $4.93 per share (cost--$ 269,534) 1.37 271,782 27,325 9.946
Van Eck Worldwide Insurance Trust:
Van Eck Gold and Natural Resources Portfolio--
22,161.97 shares at $16.72 per share (cost--$357,605) 1.87 370,548 29,990 12.356
Van Eck Worldwide Balanced Portfolio--26,429.75
shares at $11.14 per share (cost--$271,927) 1.49 294,427 26,719 11.019
------------------------------
Total investments and net assets (cost--$18,835,534) 100.00% $ 19,804,428
==============================
</TABLE>
See accompanying notes.
2
<PAGE> 149
IL Annuity and Insurance Co. Separate Account 1
Statement of Operations
Year ended December 31, 1996
<TABLE>
<CAPTION>
ALGER
AMERICAN FIDELITY
MIDCAP ALGER SMALL ASSET
GROWTH CAPITALIZATION MANAGER
COMBINED PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dividend income $ 60,811 $ - $ - $ 302
Mortality and expense charges (105,371) (6,658) (10,322) (4,254)
Net realized gain on investments 23,983 6,277 1,331 249
Net change in unrealized appreciation
(depreciation) on investments 971,570 45,600 (3,859) 48,435
---------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $ 950,993 $ 45,219 $ (12,850) $ 44,732
=================================================================================
<CAPTION>
FIDELITY
FIDELITY EQUITY FIDELITY FIDELITY
CONTRA INCOME GROWTH INDEX 500
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dividend income $ - $ 93 $ 96 $ 760
Mortality and expense charges (14,269) (13,031) (10,781) (9,452)
Net realized gain on investments 1,185 2,672 2,434 1,952
Net change in unrealized appreciation
(depreciation) on investments 234,561 146,988 74,508 151,359
------------------------------------------------------------------------
Net increase in net assets
resulting from operations $ 221,477 $ 136,722 $ 66,257 $ 144,619
========================================================================
</TABLE>
See accompanying notes.
3
<PAGE> 150
IL Annuity and Insurance Co. Separate Account 1
Statement of Operations (continued)
Year ended December 31, 1996
<TABLE>
<CAPTION>
FIDELITY FIDELITY T. ROWE PRICE
INVESTMENT MONEY OCC OCC SMALL INTERNATIONAL
GRADE BOND MARKET MANAGED CAPITALIZATION STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dividend income $ 1,427 $ 37,449 $ 27 $ 464 $ 11,229
Mortality and expense charges (3,531) (10,051) (6,402) (2,004) (8,956)
Net realized gain on investments - - 17 1,193 6,672
Net change in unrealized appreciation
(depreciation) on investments 19,544 9 110,869 34,676 71,734
---------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $ 17,440 $ 27,407 $ 104,511 $ 34,329 $ 80,679
=======================================================================================
<CAPTION>
T. ROWE PRICE VAN ECK GOLD VAN ECK
LIMITED-TERM AND NATURAL WORLDWIDE
BOND RESOURCES BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------
<S> <C> <C> <C>
Dividend income $ 7,667 $ 1,164 $ 133
Mortality and expense charges (1,814) (1,738) (2,108)
Net realized gain on investments - - -
Net change in unrealized appreciation
(depreciation) on investments 1,258 12,945 22,943
--------------------------------------------------------
Net increase in net assets
resulting from operations $ 7,111 $ 12,371 $ 20,968
========================================================
</TABLE>
See accompanying notes.
4
<PAGE> 151
IL Annuity and Insurance Co. Separate Account 1
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
ALGER
AMERICAN
MIDCAP ALGER SMALL FIDELITY ASSET
GROWTH CAPITALIZATION MANAGER
COMBINED PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Changes from 1995 operations:
Dividend income $ 9 $ - $ - $ -
Mortality and expense charges (8) (3) (1) -
Net realized gain on investments 18 - - -
Net change in unrealized appreciation
(depreciation) on investments 1,926 336 234 69
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,945 333 233 69
Net increase from contract purchases 296,235 28,694 16,298 4,030
Net decrease from
redemptions-withdrawals (11,009) (1,975) - (2,004)
--------------------------------------------------------------------------------
Total increase in net assets 287,171 27,052 16,531 2,095
--------------------------------------------------------------------------------
Net assets at December 31, 1995 287,171 27,052 16,531 2,095
Changes from 1996 operations:
Dividend income 60,811 - - 302
Mortality and expense charges (105,371) (6,658) (10,322) (4,254)
Net realized gain on investments 23,983 6,277 1,331 249
Net change in unrealized appreciation
(depreciation) on investments 971,570 45,600 (3,859) 48,435
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 950,993 45,219 (12,850) 44,732
Net increase from contract purchases 25,697,169 1,400,011 2,250,168 1,057,510
Net decrease from
redemptions-withdrawals (7,130,905) (283,443) (448,471) (377,441)
--------------------------------------------------------------------------------
Total increase in net assets 19,517,257 1,161,787 1,788,847 724,801
--------------------------------------------------------------------------------
Net assets at December 31, 1996 $ 19,804,428 $ 1,188,839 $ 1,805,378 $ 726,896
================================================================================
<CAPTION>
FIDELITY FIDELITY EQUITY FIDELITY
CONTRA INCOME GROWTH FIDELITY INDEX
PORTFOLIO PORTFOLIO PORTFOLIO 500 PORTFOLIO
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Changes from 1995 operations:
Dividend income $ 9 $ - $ - $ -
Mortality and expense charges - - - -
Net realized gain on investments 18 - - -
Net change in unrealized appreciation
(depreciation) on investments 369 209 133 119
--------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 396 209 133 119
Net increase from contract purchases 59,441 40,017 22,983 37,081
Net decrease from
redemptions-withdrawals (2,005) - (2,000) -
--------------------------------------------------------------------------
Total increase in net assets 57,832 40,226 21,116 37,200
--------------------------------------------------------------------------
Net assets at December 31, 1995 57,832 40,226 21,116 37,200
Changes from 1996 operations:
Dividend income - 93 96 760
Mortality and expense charges (14,269) (13,031) (10,781) (9,452)
Net realized gain on investments 1,185 2,672 2,434 1,952
Net change in unrealized appreciation
(depreciation) on investments 234,561 146,988 74,508 151,359
--------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 221,477 136,722 66,257 144,619
Net increase from contract purchases 2,620,184 2,563,577 1,898,462 2,475,413
Net decrease from
redemptions-withdrawals (431,745) (403,926) (193,209) (189,366)
--------------------------------------------------------------------------
Total increase in net assets 2,409,916 2,296,373 1,771,510 2,430,666
--------------------------------------------------------------------------
Net assets at December 31, 1996 $ 2,467,748 $ 2,336,599 $ 1,792,626 $ 2,467,866
==========================================================================
</TABLE>
See accompanying notes.
5
<PAGE> 152
IL Annuity and Insurance Co. Separate Account 1
Statements of Changes in Net Assets (Continued)
<TABLE>
<CAPTION>
FIDELITY FIDELITY
INVESTMENT MONEY OCC OCC SMALL
GRADE BOND MARKET MANAGED CAPITALIZATION
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Changes from 1995 operations:
Dividend income $ - $ - $ - $ -
Mortality and expense charges - - (1) (1)
Net realized gain on investments - - - -
Net change in unrealized appreciation
(depreciation) on investments 41 - 31 117
-------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 41 - 30 116
Net increase from contract purchases 17,049 - 1,642 14,181
Net decrease from
redemptions-withdrawals - - - (2,023)
-------------------------------------------------------------------------------------
Total increase in net assets 17,090 - 1,672 12,274
-------------------------------------------------------------------------------------
Net assets at December 31, 1995 17,090 - 1,672 12,274
Changes from 1996 operations:
Dividend income 1,427 37,449 27 464
Mortality and expense charges (3,531) (10,051) (6,402) (2,004)
Net realized gain on investments - - 17 1,193
Net change in unrealized appreciation
(depreciation) on investments 19,544 9 110,869 34,676
-------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 17,440 27,407 104,511 34,329
Net increase from contract purchases 811,171 5,071,581 1,815,229 562,799
Net decrease from
redemptions-withdrawals (246,664) (3,222,143) (248,774) (123,189)
-------------------------------------------------------------------------------------
Total increase in net assets 581,947 1,876,845 1,670,966 473,939
-------------------------------------------------------------------------------------
Net assets at December 31, 1996 $ 599,037 $ 1,876,845 $ 1,672,638 $ 486,213
=====================================================================================
<CAPTION>
T. ROWE PRICE T. ROWE PRICE VAN ECK GOLD VAN ECK
INTERNATIONAL LIMITED-TERM AND NATURAL WORLDWIDE
STOCK BOND RESOURCES BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Changes from 1995 operations:
Dividend income $ - $ - $ - $ -
Mortality and expense charges - - - (2)
Net realized gain on investments - - - -
Net change in unrealized appreciation
(depreciation) on investments 257 1 (1) 11
-----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 257 1 (1) 9
Net increase from contract purchases 26,272 14,915 613 12,018
Net decrease from
redemptions-withdrawals - - - -
-----------------------------------------------------------------------------
Total increase in net assets 26,529 14,916 612 12,027
-----------------------------------------------------------------------------
Net assets at December 31, 1995 26,529 14,916 612 12,027
Changes from 1996 operations:
Dividend income 11,229 7,667 1,164 133
Mortality and expense charges (8,956) (1,814) (1,738) (2,108)
Net realized gain on investments 6,672 - - -
Net change in unrealized appreciation
(depreciation) on investments 71,734 1,258 12,945 22,943
-----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 80,679 7,111 12,371 20,968
Net increase from contract purchases 1,836,213 347,111 500,604 487,137
Net decrease from
redemptions-withdrawals (496,435) (97,356) (143,039) (225,705)
-----------------------------------------------------------------------------
Total increase in net assets 1,420,457 256,866 369,936 282,400
-----------------------------------------------------------------------------
Net assets at December 31, 1996 $ 1,446,986 $ 271,782 $ 370,548 $ 294,427
=============================================================================
</TABLE>
See accompanying notes.
6
<PAGE> 153
IL Annuity and Insurance Co. Separate Account 1
Notes to Financial Statements
December 31, 1996
1. ACCOUNTING POLICIES
THE ACCOUNT
IL Annuity and Insurance Co. Separate Account 1 (the Account) is a segregated
investment account of the IL Annuity and Insurance Company (the Company) and is
registered under the Investment Company Act of 1940, as amended, as a unit
investment trust. The Account was established under Massachusetts law on
November 1, 1994 and commenced operations in November, 1995.
INVESTMENTS
The Account invests in the following Funds:
Alger American Portfolio--Midcap Growth Portfolio, Small Capitalization
Portfolio
Fidelity Variable Insurance Products Fund and Fund II--Asset Manager
Portfolio, Contra Portfolio, Equity Income Portfolio, Growth Portfolio,
Index 500 Portfolio, Investment Grade Bond Portfolio, Money Market
Portfolio
Oppenheimer Capital Accumulation Trust--Managed Portfolio, Small
Capitalization Portfolio
T. Rowe Price International Series, Inc.--International Stock Portfolio
T. Rowe Price Fixed Income Series, Inc.--Limited-term Bond Portfolio
Van Eck Worldwide Investment Trust--Gold and Natural Resources Poerfolio,
Worldwide Balanced Portfolio
Investments in funds are stated at the closing net asset value per share on
December 31.
Investment transactions are accounted for on a trade date basis and the cost of
investments sold is determined by the average cost method.
DIVIDENDS
Dividends paid to the Account are automatically reinvested in shares of the
Funds on the payable date.
7
<PAGE> 154
IL Annuity and Insurance Co. Separate Account 1
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Operations of the Account form a part of, and are taxed with, operations of the
Company, which is taxed as a "life insurance company" as defined by the Internal
Revenue Code. Using current law, no federal income taxes are payable with
respect to the Account's net investment income and the net realized gain on
investments.
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS
WITH AFFILIATE
Amounts are paid to the Company for mortality and expense guarantees at the rate
of 0.003404% of the current value of the Account per day (1.25% on an annual
basis). The Account also pays the Company for other expenses such as contract
fees ($7.50 per contract at the end of each quarter), and asset-based
administration and investment advisory fees (.15% on an annual basis).
Accordingly, the Company is responsible for all sales, general and
administrative expenses applicable to the Account.
8
<PAGE> 155
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
All required financial statements are included in Part B of this
Registration Statement.
(b) Exhibits
(1) Certified resolution of the Board of Directors of IL Annuity
and Insurance Company (the "Company") authorizing
establishment of IL Annuity and Insurance Co. Separate Account
1 (the "Separate Account").1/
(2) Not applicable.
(3) (a) Form of Distribution Agreement among the Company, the
Separate Account and IL Securities, Inc. ("IL
Securities").2/
(b) Form of Sales Agreement among the Company, IL
Securities, Inc. and a broker-dealer.2/
(4) (a) (i) Form of Contract for the Visionary Flexible
Premium Deferred Variable Annuity.2/
(ii) Form of Contract for the Visionary Choice
Flexible Premium Deferred Variable Annuity.4/
(b) Form of Qualified Plan Endorsement, IRA Endorsement,
Endorsement for Qualified 403(b) Annuity, Unisex
Rider, Additional Waiver of Withdrawal Charge Rider -
Hospitalization, Additional Waiver of Withdrawal
Charge Rider - Terminal Illness, Additional Waiver of
Withdrawal Charge Rider - Long Term Care, Additional
Waiver of Withdrawal Charge Rider - Post Secondary
Education.1/
(5) (a) Form of Application for the Visionary Flexible
Premium Deferred Variable Annuity.2/
(b) Form of Application for the Visionary Choice Flexible
Premium Deferred Variable Annuity.4/
(6) (a) Articles of Incorporation of IL Annuity and Insurance
Company.1/
(b) By-Laws of IL Annuity and Insurance Company.1/
(7) Not Applicable.
C-1
<PAGE> 156
(8) (a) Form of Participation Agreement between Fidelity
Variable Insurance Products Fund and IL Annuity and
Insurance Company.2/
(b) Form of Participation Agreement between Fidelity
Variable Insurance Products Fund II and IL Annuity
and Insurance Company.2/
(c) Form of Participation Agreement between Van Eck
Investment Trust and IL Annuity and Insurance
Company.2/
(d) Form of Participation Agreement between T. Rowe Price
International Series, Inc. and IL Annuity and
Insurance Company.2/
(e) Form of Participation Agreement between T. Rowe Price
Fixed Income Series, Inc. and IL Annuity and
Insurance Company.2/
(f) Form of Participation Agreement between Quest for
Value Accumulation Trust and IL Annuity and Insurance
Company.2/
(g) Form of Participation Agreement between The Alger
American Fund and IL Annuity and Insurance Company.2/
(h) Form of Services Agreement between Financial
Administration Services, Inc. and IL Annuity and
Insurance Company.2/
(i) Form of Participation Agreement between Royce Capital
Fund and IL Annuity and Insurance Company. 6/
(j) Form of Participation Agreement among SAFECO Resource
Series Trust, SAFECO Asset Management Company, and IL
Annuity and Insurance Company. 6/
(k) Form of Participation Agreement among SoGen Variable
Funds, Inc., Societe Generale Securities Corporation,
and IL Annuity and Insurance Company. 6/
(l) Form of Services Agreement between [Third Party
Administrator for Visionary Choice] and IL Annuity
and Insurance Company. 6/
(9) Opinion and Consent of Margaret M. McKinney, Esquire.1/
(10) (a) Consent of Sutherland, Asbill & Brennan, L.L.P.5/
(b) Consent of Ernst & Young LLP. 5/
C-2
<PAGE> 157
(11) No financial statements will be omitted from Item 23.
(12) Not applicable.
(13) Performance Data Schedules. 6/
(14) Not applicable.
(15) Powers of Attorney.1/ 3/ 5/
- --------------------
1/ Incorporated by reference to the like-numbered exhibit to the initial
filing of this Form N-4 Registration Statement of IL Annuity and Insurance Co.
Separate Account 1, File No. 33-89028 (January 31, 1995).
2/ Incorporated by reference to the like-numbered exhibit to
Pre-Effective Amendment No. 1 to this Form N-4 Registration Statement of IL
Annuity and Insurance Co. Separate Account 1, File No. 33-89028 (August 29,
1995).
3/ Incorporated by reference to the like-numbered exhibit to
Post-Effective Amendment No. 1 to this Form N-4 Registration Statement of IL
Annuity and Insurance Co. Separate Account 1, File No. 33-89028 (April 26,
1996).
4/ Incorporated by reference to the like-numbered exhibit to
Post-Effective Amendment No. 2 to this Form N-4 Registration Statement of IL
Annuity and Insurance Co. Separate Account 1, File No. 33-89028 (October 23,
1996).
5/ Filed herewith.
6/ To be filed by subsequent Post-Effective Amendment.
ITEM 25. DIRECTORS AND OFFICERS OF IL ANNUITY AND INSURANCE COMPANY
<TABLE>
<CAPTION>
Name and Principal Business Address* Position and Office with Depositor
- ------------------------------------ ----------------------------------
<S> <C>
Larry R. Prible Chairman of the Board and Director
Gregory J. Carney President, Chief Executive Officer and
Director
Margaret M. McKinney Secretary
John J. Fahrenbach Director
Larry A. Halbach Director
Garrett P. Ryan Director
Stephen J. Shorrock** Director
Karla K. Vest Director
Richard G. Darragh Controller
Gene E. Trueblood Treasurer
Rebecca Rissen Assistant Secretary
</TABLE>
- -----------
C-3
<PAGE> 158
* Unless otherwise indicated, the principal business address is 2960 North
Meridian Street, Indianapolis, Indiana 46208.
** The Principal Business Address of Mr. Shorrock is 65 Froehlich Farm
Blvd., Woodbury, NY 11797-9847.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
DEPOSITOR OR REGISTRANT
<TABLE>
<CAPTION>
Percent of Voting
Name Jurisdiction Securities Owned Principal Business
- ---- ------------ ------------------ ------------------
<S> <C> <C> <C>
Indianapolis Life Indiana Mutual Company Life & Health
Insurance Company* Insurance
("Indianapolis Life")
The Indianapolis Life Group Indiana All voting securities Holding Company
of Companies, Inc. owned by Indianapolis
("The Indianapolis Group") Life
IL Securities, Inc.* Indiana All voting securities Broker/Dealer
owned by The
Indianapolis Group
IL Term Insurance Indiana All voting securities Life & Health
Company* owned by The Insurance
Indianapolis Group
Bankers Life Insurance New York All voting securities Life & Health
Company of New York* owned by Insurance
Indianapolis Life
Western Security Life Arizona All voting securities Life & Health
Insurance Company* owned by Indianapolis Insurance
Life
</TABLE>
- ----------
* File Separate Financial Statements.
ITEM 27. NUMBER OF CONTRACTOWNERS
As of April 1, 1997, there were a total of 1,088 Visionary Contracts in
force -- 376 non-qualified and 712 qualified. No Visionary Choice Contracts
have been sold.
C-4
<PAGE> 159
ITEM 28. INDEMNIFICATION
The By-Laws of IL Annuity and Insurance Company provide, in Article X,
as follows:
ARTICLE X
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Any director or officer or his legal representative shall be
indemnified by the Company against reasonable expenses including the
cost of any settlement and counsel fees paid or incurred in connection
with any action, suit or proceeding to which any such director or
officer or his legal representative may be made a party by reason of
his being or having been such director or officer, provided it shall
not be determined by a final determination thereof on the merits that
such director or officer was in any substantial way derelict in the
performance of his duties, or provided that such action, suit or
proceeding shall be settled without a final determination on the
merits and it shall be determined that such officer or director had
not in any substantial way been derelict in the performance of his
duties as charged therein, such determination to be made by a majority
of the members of the Board of Directors who were not parties to such
action, suit or proceedings, though less than a quorum, or by any one
or more disinterested persons to whom the question may be referred by
the Board of Directors. The foregoing right of indemnification shall
not be exclusive of any other rights to which any director or officer
may be entitled as a matter of law or which may be lawfully granted to
him.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) IL Securities, Inc. is the registrant's principal underwriter.
(b) Officers and Directors of IL Securities, and their addresses, are as
follows:
C-5
<PAGE> 160
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* With the Underwriter with Registrant
- ------------------ --------------------- ---------------
<S> <C> <C>
Larry R. Prible Chairman of the Board Chairman of the Board
Gregory J. Carney President, Chief Executive President, Chief Executive
Officer and Director Officer and Director
Margaret M. McKinney Secretary and Director Secretary
William L. Boyd Director Director
John J. Fahrenbach Director Director
Garrett P. Ryan Director Director
Joe C. Lowe Vice-President None
Gene E. Trueblood Treasurer Treasurer
</TABLE>
- ------------
* All of the persons listed above have as their principal business address:
P.O. Box 1230, 2960 North Meridian Street, Indianapolis, Indiana 46208.
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Net Underwriting
Principal Discounts and Compensation on Brokerage
Underwriter Commissions Redemption Commissions Compensation
- ----------- ----------- --------------- ------------- ------------
<S> <C>
IL Securities, $195,937.53
Inc.
</TABLE>
Commissions are paid by the Company directly to agents who are registered
representatives of the principal underwriter, or to broker-dealers that have
entered into a selling agreement with the principal underwriter, or
broker-dealers having selling agreements with such broker-dealers with respect
to the sales of the Visionary Contracts.
ITEM 30. LOCATION OF BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be
kept by Section 31(a) of the Investment Company Act of 1940 and rules
thereunder, are maintained by IL Annuity and Insurance Company at its home
office and at the offices of Financial Administrative Services, Inc., 1290
Silas Deane Highway, Wethersfield, CT 06109-4303.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B of this
registration statement.
C-6
<PAGE> 161
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
(a) The registrant undertakes that it will file a post-effective
amendment to this registration statement as frequently as is
necessary to ensure that the audited financial statements in
the registration statement are never more than 16 months old
for as long as purchase payments under the contracts offered
herein are being accepted.
(b) The registrant undertakes that it will include either (1) as
part of any application to purchase a contract offered by the
prospectus, a space that an applicant can check to request a
statement of additional information, or (2) a post card or
similar written communication affixed to or included in the
prospectus that the applicant can remove and send to IL
Annuity and Insurance Company for a statement of additional
information.
(c) The registrant undertakes to deliver any statement of
additional information and any financial statements required
to be made available under this Form N-4 promptly upon written
or oral request to the Company at the address or phone number
listed in the prospectus.
(d) The Company represents that in connection with its offering of
the contracts as funding vehicles for retirement plans meeting
the requirements of Section 403(b) of the Internal Revenue
Code of 1986, it is relying on a no-action letter dated
November 28, 1988, to the American Council of Life Insurance
(Ref. No. IP-6-88) regarding Sections 22(e), 27(c)(1), and
27(d) of the Investment Company Act of 1940, and that
paragraphs numbered (1) through (4) of that letter will be
complied with.
(e) IL Annuity and Insurance Company ("IL Annuity") hereby
represents that the fees and charges deducted under the
Contracts, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and
the risks assumed by IL Annuity.
C-7
<PAGE> 162
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant, IL Annuity and Insurance Co. Separate Account 1,
certifies that it meets the requirements of Securities Act Rule 485(b) for
effectiveness of this registration statements and has caused this
Post-Effective Amendment No. 4 to its registration statement to be signed on
its behalf, in the City of Indianapolis, and the State of Indiana, on this 28th
day of April, 1997.
IL ANNUITY AND INSURANCE CO.
SEPARATE ACCOUNT 1 (Registrant)
Attest: /s/ Margaret M. McKinney By: /s/ Gregory J. Carney
------------------------ ---------------------
Margaret M. McKinney Gregory J. Carney
President
By: IL ANNUITY AND INSURANCE
COMPANY (Depositor)
Attest: /s/ Margaret M. McKinney By: /s/ Gregory J. Carney
------------------------ ---------------------
Margaret M. McKinney Gregory J. Carney
President
As required by the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board and April 28, 1997
- --------------------------- Director
Larry R. Prible
* President, Chief Executive April 28, 1997
- --------------------------- Officer and Director
Gregory J. Carney
* Treasurer April 28, 1997
- --------------------------- (Principal Financial Officer)
Gene E. Trueblood
* Controller April 28, 1997
- --------------------------- (Chief Accounting Officer)
Richard G. Darragh
</TABLE>
<PAGE> 163
<TABLE>
<S> <C>
* Secretary April 28, 1997
- ---------------------------
Margaret M. McKinney
* Director April 28, 1997
- ---------------------------
John J. Fahrenbach
* Director April 28, 1997
- ---------------------------
Larry A. Halbach
* Director April 28, 1997
- ---------------------------
Garrett P. Ryan
* Director April 28, 1997
- ---------------------------
Stephen J. Shorrock
* Director April 28, 1997
- ---------------------------
Karla K. Vest
/s/ Margaret M. McKinney On April 28, 1997, as Attorney-in-Fact pursuant
- -------------------------- to powers of attorney previously filed and in her own
* By Margaret M. McKinney capacity as Secretary.
</TABLE>
C-9
<PAGE> 164
EXHIBIT INDEX
(10) (a) Consent of Sutherland, Asbill & Brennan, L.L.P.
(b) Consent of Ernst & Young LLP
(15) Powers of Attorney
<PAGE> 1
EXHIBIT 10(a)
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
STEPHEN E. ROTH
DIRECT LINE: (202) 333-0158
Internet: [email protected]
April 28, 1996
Board of Directors
IL Annuity and Insurance Company
2960 North Meridian Street
Indianapolis, Indiana 46208
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption
"Legal Matters" in the Statement of Additional Information filed as part of the
Post-Effective Amendment No. 4 to the registration statement on Form N-4 for IL
Annuity and Insurance Co. Separate Account 1. In giving this consent, we do
not admit that we are in the category of the persons whose consent is required
under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
By: /s/ Stephen E. Roth
-------------------
Stephen E. Roth
<PAGE> 1
Exhibit 10(b)
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated April 4, 1997, in Post Effective Amendment No. 4 to the
Registration Statement (Form N-4 No. 33-89028) and related Statement of
Additional Information of IL Annuity and Insurance Co. Separate Account 1 dated
April 28, 1997.
Ernst & Young LLP
April 25, 1997
<PAGE> 1
EXHIBIT 15
POWER OF ATTORNEY
We, the undersigned directors and officers of IL Annuity and
Insurance Company, a Massachusetts corporation, hereby constitute and appoint
Margaret M. McKinney, our true and lawful attorney, with full power to her to
sign for us and in our names and in the capacities indicated below, the
Registration Statements filed with the Securities and Exchange Commission for
the purpose of registering IL Annuity and Insurance Company Separate Account 1,
established by IL Annuity and Insurance Company on November 1, 1994 as a unit
investment trust under the Investment Company Act of 1940 and the variable
annuity contracts issued by said separate account under the Securities Act of
1933, and any and all amendments thereto, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to said Registration
Statements and any and all amendments thereto.
Witness our hands on the date set forth below.
Signature Title Date
--------- ----- ----
/s/ Larry A. Halbach Director April 22, 1997
--------------------
Larry A. Halbach
/s/ Stephen J. Shorrock Director April 22, 1997
-----------------------
Stephen J. Shorrock
/s/ Karla K. Vest Director April 22, 1997
-----------------
Karla K. Vest
