As filed with the Securities and Exchange Commission on April 30, 1998
File No. 33-89984
File No. 811-8994
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 3 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 3 [X]
KANSAS CITY LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
(Exact Name of Registrant)
KANSAS CITY LIFE INSURANCE COMPANY
(Name of Depositor)
3520 Broadway
Kansas City, Missouri 64141-6139
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number: (816) 753-7000
C. John Malacarne
3520 Broadway
Kansas City, Missouri 64141-6139
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to paragraph (b) of Rule 485 _X__ On May
1, 1998 pursuant to paragraph (b) of Rule 485 ____ 60 days after filing pursuant
to paragraph (a)(1) of Rule 485 ____ on (date) pursuant to paragraph (a)(1) of
Rule 485
Title of securities being registered: Individual Flexible Premium Deferred
Variable Annuity Contract
Cross Reference Sheet
Pursuant to Rules 481(a) and 495(a)
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
Item of Form N-4 Prospectus Caption
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis Expense Tables; Summary
4. Condensed Financial Information Condensed Financial Information; Yields and
Total Returns
5. General
(a) Depositor Kansas City Life Insurance Company
(b) Registrant Kansas City Life Variable Annuity
Separate Account
(c) Portfolio Company Federated Insurance Series,
TCI Portfolios, Inc. and Insurance
Management Trust
(d) Fund Prospectus Federated Insurance Series, TCI
Portfolios, Inc. and Insurance
Management Trust
(e) Voting Rights Voting Rights
(f) Administrators N/A
6. Deductions and Expenses
(a) General Charges and Deductions; Summary
(b) Sales Load % Charges and Deductions; Summary
(c) Special Purchase Plan N/A
(d) Commissions Distribution of the Policies
(e) Expenses - Registrant Charges and Deductions; Summary
(f) Fund Expenses Federated Insurance Series, TCI
Portfolios, Inc. and Insurance
Management Trust; Charges and
Deductions
(g) Organizational Expenses N/A
7. Contracts
(a) Persons with Rights Summary; Addition, Deletion or
Substitution of Investments;
Description of Annuity Policy;
Payment Options; Voting Rights
(b)(i) Allocation of Purchase Summary; Premiums; Free-Look Period;
Allocation of Premiums
Payments Summary; Transfer Privilege
Transfers, Assignments or Exchange of a Policy
(ii) Transfers Additions, Deletions or Substitutions of
(iii) Exchanges Investments; Description of Annuity Policy;
Modification;
(c) Changes Cover page; Inquiries
(d) Inquiries
8. Annuity Period Summary; Payment Options
9. Death Benefit Death Benefit Before the Retirement Date;
10. Purchases and Contract Value
(a) Purchases Summary; Issuance of a Policy; Premiums; Free
Look Period; Allocation of Premiums; Variable
Contract Value;
(b) Valuation Definitions; Variable Contract Value
(c) Daily Calculation Definitions; Variable Contract Value;
(d) Underwriter Issuance of a Policy, Distribution of the
Policies
11. Redemptions
(a) - By Owners Summary; Transfer Privilege; Full Cash
Surrenders, Partial Surrenders and Systematic
Partial Surrenders; Proceeds on the Maturity
Date; Payments; Payment Options; Federal Tax
Matters Summary; Transfer Privilege; Full Cash
Surrenders, Systematic
- By Annuitant Partial Surrender and Partial Surrenders;
Proceeds on the Maturity Date; Payments; Payment
Options; Federal Tax Matters
N/A
Payments
(b) Texas ORP N/A
(c) Check Delay Summary; Free Look Period
(d) Lapse
(e) Free Look
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
PART B
Item of Form N-4 Part B Caption
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and
History N/A
18. Services
(a) Fees and Expenses of
Registrant N/A
(b) Management Contracts N/A
(c) Custodian N/A
Independent Public
Accountant Experts
(d) Assets of Registrant N/A
(e) Affiliated Persons N/A
(f) Principal Underwriter Distribution of the Policies (prospectus)
19. Purchase of Securities
Being Offered Distribution of the Policies (prospectus)
Offering Sales Load N/A
20. Underwriters Distribution of the Policies (prospectus)
21. Calculation of Performance Calculation of Yields and Total Returns; Yields
Data and Total Returns (prospectus)
22. Annuity Payments Payment Options (prospectus)
23. Financial Statements Financial Statements
PART C -- OTHER INFORMATION
Item of Form N-4 Part C Caption
24. Financial Statements and
Exhibits Financial Statements and Exhibits
(a) Financial Statements (a) Financial Statements
(b) Exhibits (b) Exhibits
25. Directors and Officers of Directors and Officers of Kansas City Life
the Depositor Insurance Company
26. Persons Controlled By or
Under Common Control
with the Depositor or Persons Controlled By or In Common Control
Registrant with the Depositor or Registrant
27. Number of Contract Owners 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
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
Kansas City Life Insurance Company
Home Office:
3520 Broadway
Kansas City, Missouri 64111-2565
Telephone: (816) 753-7000_Correspondence to:
Variable Administration
P.O. Box 419364
Kansas City, Missouri 64141-6364
Telephone: (800) 616-3670__
This Prospectus describes the individual flexible premium deferred variable
annuity contract (the "Contract") being offered by Kansas City Life Insurance
Company ("Kansas City Life," "we," "us" or "our"), a stock life insurance
company domiciled in Missouri. The Contract is designed to meet investors'
long-term investment purposes, including retirement plans that may or may not
qualify for special federal tax treatment under the Internal Revenue Code.
Your premiums and Contract Value will be allocated according to your
instructions to one or more of the Subaccounts of the Kansas City Life Variable
Annuity Separate Account (the "Variable Account"), or to the Fixed Account
(which is part of Kansas City Life's General Account and pays interest at
declared rates guaranteed to equal or exceed 3%), or to both. The assets of each
Subaccount will be invested solely in a corresponding portfolio ("Portfolio") of
a designated mutual fund (the "Funds"). The accompanying Prospectuses for the
Funds describe the Portfolios. The Contract Value prior to the Maturity Date,
except for amounts in the Fixed Account, will vary according to the investment
performance of the Portfolios of the Funds in which the selected Subaccounts are
invested. The Owner bears the entire investment risk of amounts allocated to the
Variable Account.
This Prospectus sets forth basic information about the Contract and the Variable
Account that a prospective investor ought to know before investing. Additional
information about the Contract and the Variable Account is contained in the
Statement of Additional Information, which has been filed with the Securities
and Exchange Commission. The Statement of Additional Information is dated the
same as this Prospectus and is incorporated herein by reference. The Table of
Contents for the Statement of Additional Information is on page 36 of this
Prospectus. You may obtain a copy of the Statement of Additional Information
free of charge by writing to or calling Kansas City Life at the address or phone
number shown above.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE FUNDS.
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.
SHARES IN THE FUNDS AND INTERESTS IN THE CONTRACTS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, A BANK, AND THE SHARES AND
INTERESTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
The date of this Prospectus is May 1, 1998.
<PAGE>
TABLE OF CONTENTS
Page
DEFINITIONS
TABLE OF EXPENSES
HIGHLIGHTS
CONDENSED FINANCIAL INFORMATION
KANSAS CITY LIFE
THE VARIABLE ACCOUNT AND THE FUNDS
Kansas City Life Insurance Company
Kansas City Life Variable Annuity Separate Account
The Funds
MFS(Variable Insurance TrustSM)
American Century Portfolios, Inc. (formerly TCI Portfolios, Inc.)
Federated Insurance Series
Dreyfus Variable Investment Fund
Dreyfus Stock Index Fund
Resolving Material Conflicts
Addition, Deletion or Substitution of Investments
DESCRIPTION OF THE CONTRACT Issuance of a Contract Premiums Free-Look Period
Allocation of Premiums Variable Account Value Transfer Privilege Dollar Cost
Averaging Plan Portfolio Rebalancing Plan Partial and Full Cash Surrenders
Contract Termination Contract Loans Death Benefit Before Maturity Date Proceeds
on Maturity Date Payments Modifications Reports to Contract Owner Contract
Inquiries
THE FIXED ACCOUNT
Minimum Guaranteed and Current Interest Rates
Calculation of Fixed Account Value
Transfers from Fixed Account
Payment Deferral
Telephone Transfers and Premium Allocations
CHARGES AND DEDUCTIONS
Surrender Charge (Contingent Deferred Sales Charge) Transfer Processing Fee
Administrative Charges Mortality and Expense Risk Charge Premium Taxes Reduced
Charges for Eligible Groups Other Taxes Investment Advisory Fees and Other
Expenses of the Funds
PAYMENT OPTIONS
Election of Options
Description of Options
YIELDS AND TOTAL RETURNS
FEDERAL TAX STATUS
Introduction
Tax Status of the Contract
Taxation of Annuities
Transfers, Assignments or Exchanges of a Contract
Withholding
Multiple Contracts
Taxation of Qualified Contracts
Possible Charge for Kansas City Life's Taxes
Other Tax Consequences
DISTRIBUTION OF THE CONTRACTS
LEGAL PROCEEDINGS
VOTING RIGHTS
COMPANY HOLIDAYS
PREPARING FOR YEAR 2000
FINANCIAL STATEMENTS
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
<PAGE>
DEFINITIONS
Annuitant The person on whose life the annuity benefit for the Contract is
based.
Beneficiary The person the Owner has designated in the application or in the
last beneficiary designation filed with Kansas City Life to receive any proceeds
payable under the Contract at the death of the Annuitant or the Contract Value
at the death of an Owner.
Cash Surrender- Value The Contract Value at the time of surrender less any
applicable Surrender Charge, indebtedness, and premium taxes payable.
Contract Date- The date from which Contract Months, Years, and Anniversaries are
computed.
Contract Value- The sum of the Variable Account Value and the Fixed Account
Value.
Contract Year- Any period of twelve months starting with the Contract Date and
each Contract Anniversary thereafter.
Fixed Account This account is part of Kansas City Life's General Account. The
Fixed Account is not part of the Variable Account, and it does not depend upon
the Variable Account's investment performance. This account is not FDIC-insured
and is subject to claim from Kansas City Life's creditors.
Fixed Account Value -The value of a Contract allocated to the Fixed Account.
Home Office- Kansas City Life's office at 3520 Broadway, P.O. Box 419364, Kansas
City, Missouri 64141-6364.
Issue Age The age on the Annuitant's last birthday as of the Contract Date. If
the Contract Date falls on the Annuitant's birthday, the Issue Age will be the
age attained by the Annuitant on the Contract Date.
Life Payment Option A Payment Option based upon the life of the Annuitant.
Maturity Date The date when the Contract Value will be applied under a Life
Payment Option or the Cash Surrender Value will be applied under a Non-Life
Payment Option, unless the Owner has elected to receive a lump sum payment of
the Cash Surrender Value. The latest Maturity Date is the later of the Contract
Anniversary following the Annuitant's 85th birthday and the tenth Contract
Anniversary. (Certain states may place additional restrictions on the maximum
Maturity Date.) However, for Qualified Contracts, distributions may be required
to begin at age 70 1/2.
Non-Life Payment Option A Payment Option that is not based upon the life of the
Annuitant.
Non-Qualified Contract A Contract that is not a "Qualified Contract."
Owner The person entitled to exercise all rights and privileges provided in the
Contract. The terms "you" and "your" refer to the Owner.
Qualified Contract A Contract that is issued in connection with plans that
qualify for special federal income tax treatment under sections 401, 403, 408 or
408A of the Internal Revenue Code of 1986, as amended.
Subaccount The division of accounts making up the Variable Account. The assets
of each Subaccount are invested in a corresponding Portfolio of a designated
mutual fund.
Valuation Day Each day on which both the New York Stock Exchange and Kansas City
Life are open for business.
Valuation Period The interval of time commencing at the close of business on one
Valuation Day and ending at the close of business on the next succeeding
Valuation Day.
Variable Account The Kansas City Life Variable Annuity Separate Account, which
is not part of Kansas City Life's General Account. The Variable Account has
Subaccounts, each of which is invested in a corresponding Portfolio of a
designated mutual fund.
Variable Account Value The total value of a Contract allocated to Subaccounts of
the Variable Account.
Written Notice A written request or notice in a form satisfactory to Kansas City
Life that is signed by the Owner and received at the Home Office.
<PAGE>
TABLE OF EXPENSES
The following information regarding expenses assumes that the entire Contract
Value is in the Variable Account.
Contract Owner Transaction Expenses
Sales Charge Imposed on Premiums None
Surrender Charge
(Contingent Deferred Sales Charge) 1/
Surrender Charge as
Contract Year in Which Percentage of Amount
Surrender Occurs Surrendered
1 7%
2 7
3 7
4 6
5 5
6 4
7 2
8 and after 0
Transfer Processing Fee No fee for
first six transfers in
Contract Year; $25 for each
transfer thereafter during
Contract Year.
Annual Administration Fee $30 per
Contract Year -Waived if
Contract Value is equal to or
greater than $50,000.
Variable Account Annual Expenses
(as a percentage of Variable Account assets)
Mortality and Expense Risk Charge 1.25%
Asset-Based Administration Charge 0.15%
------
Total Variable Account Annual Expenses 1.40%
<TABLE>
<CAPTION>
MFS MFS MFS MFS
Emerging Research Total MFS World MFS
Growth Series Return Utilities Government Bond
Annual Fund Expenses Series Series Series Series Series
<S> <C> <C> <C> <C> <C> <C>
MFS( Variable Insurance TrustSM Annual
Expenses (as a percentage of average net assets)
Management Fees (Investment Advisory Fees) 0.75% 0.75% 0.75% 0.75% 0.75% 0.60%
Other Expenses (after any expense 0.12% 0.13% 0.25% 0.25% 0.25% 0.40%
reimbursement)2/3/
Total Fund Annual Expenses 2/ 0.87% 0.88% 1.00% 1.00% 1.00% 1.00%
<CAPTION>
American American
VP Capital Century VP
Appreciation International
<S> <C> <C>
American Century Variable Portfolios Annual Expenses
(as a percentage of average net assets)
Management Fees (Investment Advisory Fees) 1.00% 1.50%
Other Expenses 0.00% 0.00%
Total Fund Annual Expenses4/ 1.00% 1.50%
<CAPTION>
Federated Federated Federated
American Leaders High Income Prime Money
Fund II Bond Fund II Fund II
<S> <C> <C> <C>
Federated Insurance Series Annual Expenses
(as a percentage of average net assets)
Management Fees (Investment Advisory Fees) 0.66% 0.51% 0.30%
Other Expenses (after any expense reimbursement) 0.19% 0.29% 0.50%
Total Fund Annual Expenses5/ 0.85% 0.80% 0.80%
<CAPTION>
Dreyfus Dreyfus
Capital Small
Appreciation Cap
Portfolio Portfolio
<S> <C> <C>
Dreyfus Variable Investment Fund Annual Expenses
(as a percentage of average net assets)
Management Fees (Investment Advisory Fees) .75% .75%
Other Expenses (after any expense reimbursement) .05% .03%
Total Fund Annual Expenses .80% .78%
<CAPTION>
Dreyfus
Stock Index
Fund
<S> <C>
Dreyfus Stock Index Fund Annual Expenses
(as a percentage of average net assets)
Management Fees (Investment Advisory Fees) .25%
Other Expenses (after any expense reimbursement) .03%
Total Fund Annual Expenses .28
</TABLE>
Premium taxes, currently ranging up to 3.5%, may be applicable, depending on
various states' laws.
The above tables are intended to assist you in understanding the costs and
expenses that you will bear, directly or indirectly. The tables reflect expenses
of the Variable Account as well as for the Funds. The Contract Owner Transaction
Expenses, Annual Administration Fee, and Variable Account Annual Expenses are
based on charges described in the Contract. The Annual Expenses for the Funds
are expenses for the most recent fiscal year, except as noted below. For a more
complete description of the various costs and expenses, see "Charges and
Deductions" on page 24 of this Prospectus and the Prospectuses for the
underlying Funds that accompany this Prospectus.
- --------------------------
1/Subject to certain restrictions, up to 10% of the Contract Value will not be
subject to a Surrender Charge. (See "Amounts Not Subject to Surrender Charge,"
page 25).
2/ The investment adviser to MFS Variable Insurance Trust has agreed to bear
expenses for each Series, subject to reimbursement by each Series, such that
each Series' "Other Expenses" shall not exceed the following percentages of the
average daily net assets of the Series during the current fiscal year: .40% for
the Bond Series, and .25% for each remaining Series. Absent this expense
arrangement, "Other Expenses" for the Total Return Series, Utilities Series,
World Governments Series and Bond Series would be .27%, .45%, .40% and 2.98%,
respectively, and Total Annual Fund Expenses would be 1.02%, 1.20%, 1.15% and
3.58%, respectively, for these Series.
3/ Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses."
4/ The investment adviser to American Century Variable Portfolios pays all the
expenses of the Fund except brokerage, taxes, interest, fees and expenses of the
non-interested person directors (including counsel fees) and extraordinary
expenses. For its services, the adviser is paid a fee of 1.50% and 1.00% of the
average net assets of the Am Cent VP International and Am Cent VP Capital
Appreciation, respectively.
5/ The adviser to Federated Insurance Series has agreed to waive all or a
portion of its fee or reimburse the Fund for certain operating expenses so that
the Total Fund Annual Expenses would not exceed .85%, .80%, and .80%
respectively, of average net assets of those Portfolios. The adviser can
terminate this voluntary waiver at any time at its sole discretion. Without this
waiver, the Management Fees would be .75%, .60% and .50% of the average net
assets of Federated American Leaders Fund II, Federated High Income Bond Fund II
and the Federated Prime Money Fund II, respectively, and the Total Fund Annual
Expenses for these Portfolios would be .94%, .89%, and 1.00%, respectively, of
average net assets.
<PAGE>
Examples
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
1. If the Contract is surrendered or is annuitized under a Non-Life Payment
Option at the end of the applicable time period:
Subaccount 1 Year 3 Years 5 Years 10 Years
MFS Research Series $ 88.67 $140.11 $173.81 $261.11
MFS Emerging Growth Series $ 88.58 $139.82 $173.33 $260.10
MFS Total Return Series $ 89.79 $143.46 $179.51 $273.09
MFS Bond Series $ 89.79 $143.46 $179.51 $273.09
MFS World Governments Series $ 89.79 $143.46 $179.51 $273.09
MFS Utilities Series $ 89.79 $143.46 $179.51 $273.09
American Century VP International $ 94.45 $157.33 $202.89 $321.36
American Century VP Capital Appreciation $ 89.79 $143.46 $179.51 $273.09
Federated American Leaders Fund II $ 88.39 $139.26 $172.38 $258.08
Federated High Income Bond Fund II $ 87.92 $137.86 $169.99 $253.03
Federated Prime Money Fund II $ 87.92 $137.86 $169.99 $253.03
Dreyfus Capital Appreciation $ 87.92 $137.86 $169.99 $253.03
Dreyfus Small Cap $ 87.73 $137.30 $169.03 $251.00
Dreyfus Stock Index Fund $ 83.04 $123.12 $144.75 $198.78
2. If the Contract is not surrendered or is annuitized under a Life Option at
the end of the applicable time period:
Subaccount 1 Year 3 Years 5 Years 10 Years
MFS Research Series $ 24.08 $ 72.06 $122.61 $261.11
MFS Emerging Growth Series $ 23.97 $ 71.76 $122.11 $260.10
MFS Total Return Series $ 25.27 $ 75.67 $128.62 $273.09
MFS Bond Series $ 25.27 $ 75.67 $128.62 $273.09
MFS World Governments Series $ 25.27 $ 75.67 $128.62 $273.09
MFS Utilities Series $ 25.27 $ 75.67 $128.62 $273.09
American Century VP International $ 30.26 $ 90.54 $153.26 $321.36
American Century VP Capital Appreciation $ 25.27 $ 75.67 $128.62 $273.09
Federated American Leaders Fund II $ 23.77 $ 71.16 $121.11 $258.08
Federated High Income Bond Fund II $ 23.27 $ 69.65 $118.59 $253.03
Federated Prime Money Fund II $ 23.27 $ 69.65 $118.59 $253.03
Dreyfus Capital Appreciation $ 23.27 $ 69.65 $118.59 $253.03
Dreyfus Small Cap $ 23.07 $ 69.05 $117.58 $251.00
Dreyfus Stock Index Fund $ 18.05 $ 53.84 $ 92.00 $198.78
The Examples provided above assume that no transfer charges or premium taxes
have been assessed. The Examples also assume that the Annual Administration Fee
is $30 and that the Contract Value per Contract is $30,000, which translates the
Annual Administrative Fee into an assumed .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 less 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 the assumed amount.
The expense information regarding the Funds was provided by those Funds. The
Funds and their investment advisers are not affiliated with Kansas City Life.
While Kansas City Life has no reason to doubt the accuracy of these figures
provided by these non-affiliated Funds, Kansas City Life has not independently
verified the figures.
<PAGE>
HIGHLIGHTS
The Contract
Who Should Invest. The Contract is designed for investors seeking
long-term tax-deferred accumulation of funds, generally for retirement but also
for other long-term investment purposes. The tax-deferred feature of the
Contract is most attractive to investors in high federal and state marginal
income tax brackets. The Contract is offered as both a Qualified Contract and a
Non-Qualified Contract. Both Qualified and Non-Qualified Contracts offer tax
deferral on increases in the Contract's value prior to surrender or distribution
- -- however, premiums paid by Owners of Qualified Contracts may be deductible
from gross income in the year such payments are made, subject to certain
statutory restrictions and limitations. (See "Federal Tax Status," page 29.)
The Contract. The Contract is an individual flexible premium deferred
variable annuity issued by Kansas City Life. In order to purchase a Contract,
you must complete an application and submit it to Kansas City Life through a
licensed Kansas City Life representative, who is also a registered
representative of Sunset Financial Services, Inc. ("Sunset Financial"). The
minimum initial premium must be paid to Kansas City Life. The maximum Issue Age
is 80. (See "Issuance of a Contract," page 15.)
Free-Look Period. You have the right to return the Contract within 10
days after you receive it. We will treat the returned Contract as if it were
never issued. In most states the amount returned to you will be equal to the
Contract Value (plus the $30 Annual Administration Fee, if applicable). In some
states we are required to refund premium payments under the free look provision.
In other states we are required to refund the greater of premiums paid or
Contract Value. In addition, some states require that we pay interest on the
refund if the refund is made beyond a specified time frame. The Contract Value
will be determined as of the earlier of the date we receive the returned
Contract at our Home Office or the date the returned Contract is received by the
Kansas City Life representative who sold you the Contract. (See "Free-Look
Period," page 15.)
Premiums. The minimum amount that we will accept as an initial premium
is a single premium of $5,000 or annualized payments of $600. Subsequent
premiums of not less than $50 may be paid under the Contract at any time during
the Annuitant's lifetime and before the Maturity Date. (See "Premiums," page
15.)
Allocation of Premiums. Premiums under a Contract will be allocated
according to your instructions to one or more of the Subaccounts of the Variable
Account, to the Fixed Account, or to both. The assets of each Subaccount will be
invested solely in a corresponding Portfolio of a designated Fund. The Contract
Value, except for amounts in the Fixed Account, will vary according to the
investment performance of the Portfolios of the Fund in which the selected
Subaccounts are invested. We will credit interest to amounts in the Fixed
Account at a guaranteed minimum rate of 3% per year. We may declare a higher
current interest rate.
In states that require premium payments (or the greater of premium payments or
Contract Value) to be refunded under the free-look provision, the initial
premium will be allocated to the Federated Prime Money Fund II Subaccount for a
15-day period. At the end of that period, the amount in the Federated Prime
Money Fund II Subaccount will be allocated to the Subaccounts and Fixed Account
according to allocation instructions. (See "Allocation of Premiums," page 16.)
Transfers. Before the Maturity Date, you may request a transfer of all or
part of the amount in a Subaccount or the Fixed Account to another Subaccount or
the Fixed Account. Certain restrictions apply. Transfers are not available
during the free-look period.
The total amount transferred each time must be at least $250 or the entire
amount in the Subaccount or Fixed Account, if less. We allow only one transfer
from the Fixed Account each Contract Year and that transfer may not be for more
than 25% of the unloaned Fixed Account Value. We will assess a $25 Transfer Fee
for the seventh and subsequent transfers during a Contract Year. (See "Transfer
Privilege," page 17.)
Partial Surrender. At any time before the earlier of the death of the
Annuitant or the Maturity Date, you may surrender part of the Cash Surrender
Value, subject to certain limitations. (See "Partial Surrenders," page 19.)
Surrender. You may surrender the Contract for its Cash Surrender Value,
upon Written Notice received at our Home Office at any time before the earlier
of the death of the Annuitant or the Maturity Date. (See "Full Surrender," page
19.) Death Benefit If the Annuitant dies before the Maturity Date, the
Beneficiary will receive a death benefit. The death benefit is equal to the
greater of: (1) premiums paid, adjusted for any surrenders (including applicable
surrender charges) and less any indebtedness; and (2) the Contract Value on the
date we receive proof of Annuitant's death.
If the Owner dies before the Maturity 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 Maturity Date," page 21.)
Charges and Deductions
The following charges and deductions are assessed in connection with the
Contract:
Surrender Charge (Contingent Deferred Sales Charge). We do not deduct a
charge for sales expenses from premiums at the time they are paid. However, if a
Contract has not been in force for seven full Contract Years, upon surrenders
or, in certain instances, partial surrenders, we will deduct a Surrender Charge
from the amount surrendered or from the remaining Contract Value.
For the first three Contract Years, the Surrender Charge is 7% of the amount
surrendered. In the fourth, fifth, and sixth Contract Year, the Surrender Charge
is 6%, 5%, and 4%, respectively. In the seventh Contract Year, the Surrender
Charge is 2%. In the eighth Contract Year and after, there is no Surrender
Charge. In no event will the total Surrender Charges on any Contract exceed 8
1/2% of the total premiums paid under the Contract. (See "Charge for Surrender
or Partial Surrenders," page 24.)
Subject to certain restrictions, up to 10% of the Contract Value will not be
subject to a Surrender Charge. (See "Amounts Not Subject to Surrender Charge,"
page 25.)
Annual Administration Fee. At the beginning of each Contract Year, we
will deduct an Annual Administration Fee of $30 from the Contract Value. We will
waive this fee for Contracts with Contract Values of $50,000 or more at the
beginning of each Contract Year. (See "Annual Administration Fee," page 26.)
Transfer Processing Fee. The first six transfers of amounts in the
Subaccounts and the Fixed Account each Contract Year are free. We will assess a
$25 Transfer Processing Fee for each additional transfer during such Contract
Year. (See "Transfer Processing Fee," page 26.)
Asset-Based Administration Charge. We will deduct a daily Asset-based
Administration Charge to compensate us for certain expenses we incur in
administration of the Contract. Prior to the Maturity Date, we will deduct the
charge from the assets of the Variable Account at an annual rate of 0.15%. (See
"Asset-Based Administration Charge," page 26.)
Mortality and Expense Risk Charge. We will deduct a daily Mortality and
Expense Risk Charge to compensate us for assuming certain mortality and expense
risks. Prior to the Maturity Date, we will deduct this charge from the assets of
the Variable Account at an annual rate of 1.25% (approximately .70% for
mortality risk and .55% for expense risk). (See "Mortality and Expense Risk
Charge," page 26.)
Premium Taxes. If state or other premium taxes are applicable to a
Contract, they will be deducted either upon surrender or upon application of the
proceeds to a Payment Option. (See "Premium Taxes," page 26.)
Investment Advisory Fees and Other Expenses of the Funds. Because the
Variable Account purchases shares of the Funds, the net assets of each
Subaccount of the Variable Account will reflect the investment advisory fee
incurred by the corresponding Portfolio of the Funds. For each Portfolio, an
investment adviser 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 Account invests also pays other expenses. (See "Investment Advisory
Fees and Other Expenses of the Funds," page 27.)
<PAGE>
Annuity Provisions
Maturity Date. On the Maturity Date, if you elect a Life Payment
Option, we will apply the Contract Value to that option. If you elect a Non-Life
Payment Option or you elect to receive a lump sum payment, we will apply the
Cash Surrender Value. (See "Payment Options," page 27.)
Payment Options. The Payment Options are: Interest Payments; Installments
of a Specified Amount; Installments for a Specified Period; Life Income; and
Joint and Survivor Income. Payments under these options do not depend upon the
Variable Account's performance. (See "Payment Options," page 27.)
Federal Tax Status
Under existing tax law there generally should be no federal income tax on
increases (if any) in the Contract Value until a distribution under the Contract
occurs (for example, a surrender or annuity payment) or is deemed to occur (for
example, a pledge or assignment of a Contract). Generally, a portion of any
distribution or deemed distribution will be taxable as ordinary income. In
addition, a penalty tax of 10 percent of the amount withdrawn may apply to
certain distributions or deemed distributions under the Contract made prior to
the Owner's attaining age 59 1/2. Moreover, governing federal tax statutes, the
interpretation of which is, in all events, subject to a continual evolution
through judicial decisions and administrative interpretations, may be amended,
revoked, or replaced by new legislation. IN VIEW OF THE FOREGOING, ALL
PROSPECTIVE OWNERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS.
CONDENSED FINANCIAL INFORMATION
The Unit Values and the number of accumulation units outstanding for each
Subaccount for the periods shown are as follows:
<TABLE>
<CAPTION>
No. of Units Unit Value No. of Units Unit Value No. of Units Unit Value
as of as of as of as of as of as of
12-31-97 12-31-97 1-1-97 12-31-96 12-31-96 1-1-96 12-31-95 12-31-95 9-6-95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
American Leaders Fund II 341,341 $16.29 $12.43 94,537 $12.48 $10.50 15,359 $10.41 $10.00
High Income Bond Fund II 348,642 12.93 11.52 88,100 11.52 10.23 11,792 10.22 10.00
Prime Money Fund II 141,386 10.81 10.45 53,502 10.45 10.12 11,335 10.07 10.00
MFS
Research Series 516,667 14.99 12.51 190,114 12.64 10.49 19,430 10.48 10.00
Emerging Growth Series 518,578 14.79 12.17 253,083 12.31 10.65 13,900 10.66 10.00
Total Return Series 292,413 14.20 11.81 79,175 11.88 10.56 3,981 10.53 10.00
Bond Series 94,899 11.23 10.29 58,082 10.34 10.29 1,273 10.27 10.00
World Governments Series 36,847 10.17 10.39 22,139 10.44 10.39 9,423 10.17 10.00
Utilities Series 204,977 16.00 12.21 32,814 12.32 10.58 11,752 10.54 10.00
AmCent
VP International 188,540 13.41 11.37 77,422 11.47 10.24 12,190 10.16 10.00
VP Capital Appreciation 200,605 8.90 9.15 147,134 9.33 9.91 11,998 9.89 10.00
Dreyfus
Capital Appreciation 154,014 10.97 NA NA NA NA NA NA NA
Small Cap 349,294 11.50 NA NA NA NA NA NA NA
Stock Index Fund 355,380 11.52 NA NA NA NA NA NA NA
</TABLE>
KANSAS CITY LIFE,
THE VARIABLE ACCOUNT AND THE FUNDS
Kansas City Life Insurance Company
The Contracts are issued by Kansas City Life Insurance Company, which is a stock
life insurance company organized under the laws of the State of Missouri in
1895. Kansas City Life is currently licensed to transact life insurance business
in 48 states and the District of Columbia.
Kansas City Life is subject to regulation by the Department of Insurance of the
State of Missouri as well as by the insurance departments of all other states
and jurisdictions in which it does 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.
Kansas City Life Variable Annuity Separate Account
The Kansas City Life Variable Annuity Separate Account is a separate investment
account of Kansas City Life, established by the Board of Directors of Kansas
City Life on January 23, 1995, under Missouri law. Kansas City Life has caused
the Variable Account to be registered with the Securities and Exchange
Commission ("SEC") as a unit investment trust under the Investment Company Act
of 1940 (the "1940 Act"). Such registration does not involve supervision by the
SEC of the management or investment policies or practices of the Variable
Account.
We own the assets of the Variable Account. These assets, however, are held
separate from our other assets and are not part of our General Account. The
portion of the assets of the Variable Account equal to the reserves or other
contract liabilities of the Variable Account will not be charged with
liabilities that arise from any other business we conduct. We may transfer to
our General Account any assets of the Variable Account that exceed the reserves
and the Contract liabilities of the Variable Account (which will always be at
least equal to the aggregate Contract Value allocated to the Variable Account
under the Contracts).
The income, gains or losses, whether or not realized, from the assets of each
Subaccount of the Variable Account are credited to or charged against that
Subaccount without regard to any other income, gains or losses. We may
accumulate in the Variable Account charges under the Contracts and investment
results applicable to those assets that are in excess of the net assets
supporting the Contracts.
The Variable Account currently has 14 Subaccounts: MFS Research, MFS Emerging
Growth, MFS Total Return, MFS Bond, MFS World Governments, MFS Utilities,
American Century VP International, American Century VP Capital Appreciation,
Federated American Leaders Fund II, Federated High Income Bond Fund II,
Federated Prime Money Fund II, Dreyfus Capital Appreciation, Dreyfus Small Cap
and Dreyfus Stock Index Fund. The assets of each Subaccount are invested
exclusively in shares of a corresponding Portfolio of a designated Fund.
The Funds
The Variable Account currently invests in Portfolios of five series-type mutual
funds: MFS Variable Insurance Trust, American Century Variable Portfolios,
Federated Insurance Series, Dreyfus Variable Investment Fund and Dreyfus Stock
Index Fund. Each of these Funds is registered with the SEC under the 1940 Act as
an open-end diversified investment company. The SEC does not, however, supervise
the management or the investment practices and policies of the Funds.
The assets of each Portfolio of a Fund are separate from other Portfolios of
that Fund, and each Portfolio has separate investment objectives and policies.
As a result, each Portfolio operates as a separate investment portfolio, and the
investment performance 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 experience of each of the Subaccounts of
the Variable Account depends on the investment performance of its corresponding
Portfolio.
Each Fund sells its shares to the Variable Account in accordance with the terms
of a participation agreement between the Fund and Kansas City Life. A summary of
the termination provisions of those agreements is in the Statement of Additional
Information. Should the agreement between Kansas City Life and a Fund terminate,
the Variable Account may not be able to purchase additional shares of that
Fund. In that event, you will no longer be able to allocate premiums or transfer
Contract Value to Subaccounts investing in Portfolios of that Fund.
In certain circumstances, it is possible that a Fund or a Portfolio of a Fund
may refuse to sell its shares to the Variable Account despite the fact that the
participation agreement between the Fund and Kansas City Life has not been
terminated. Should a Fund or a Portfolio decide not to sell its shares to Kansas
City Life, Kansas City Life will not be able to honor your requests to allocate
premiums or transfer Contract Value to Subaccounts investing in shares of that
Fund or Portfolio.
Certain Subaccounts invest in Portfolios that have similar investment objectives
and/or policies. Therefore, before choosing Subaccounts, carefully read the
individual Prospectuses for the Funds along with this Prospectus.
The investment objectives and policies of certain Portfolios are similar to the
investment objectives and policies of mutual fund portfolios other than the
Portfolios that may be managed by the same investment adviser or manager. The
investment results of the Portfolios, however, may be higher or lower than the
results of such other portfolios. There can be no assurance, and no
representation is made, that the investment results of any of the Portfolios
will be comparable to the investment results of any other portfolios, even if
the other portfolio has the same investment adviser or manager.
MFS(Variable Insurance TrustSM
The MFS Research Subaccount, MFS Emerging Growth Subaccount, MFS Total Return
Subaccount, MFS Bond Subaccount, MFS World Governments Subaccount, and MFS
Utilities Subaccount invest in shares of the MFS Variable Insurance Trust. The
Fund currently issues twelve "series" or classes of shares, each of which
represents an interest in a separate Portfolio within the Fund. Six of these
series are available for investment under the Contracts: MFS Research Series,
MFS Emerging Growth Series, MFS Total Return Series, MFS Bond Series, MFS World
Governments Series, and MFS Utilities Series.
The investment objectives of the Portfolios are set forth below:
MFS Research Series. The Research Series' investment objective is to
provide long-term growth of capital and future income. The Series' assets are
allocated to selected economic sectors and then to industry groups within those
sectors.
MFS Emerging Growth Series. The Emerging Growth Series seeks to provide
long-term growth of capital. Dividend and interest income from portfolio
securities, if any, is incidental to the Series' investment objective of
long-term growth of capital. The Series' policy is to invest primarily (i.e., at
least 80% of its assets under normal circumstances) in common stocks of
companies that MFS believes are early in their life cycle but which have the
potential to become major enterprises (emerging growth companies).
MFS Total Return Series. The Total Return Series' primary investment
objective is to obtain above-average income (compared to a portfolio entirely
invested in equity securities) consistent with the prudent employment of
capital, and its secondary objective is to provide a reasonable opportunity for
growth of capital and income, since many securities offering a better than
average yield may also possess growth potential.
MFS Bond Series. The Bond Series' primary investment objective is to
provide as high a level of current income as is believed to be consistent with
prudent investment risk. The Series' secondary objective is to protect
shareholders' capital. Up to 20% of the Series' total assets may be invested in
lower-rated debt securities commonly known as junk bonds. The risks of investing
in these securities are described in the Prospectus for the MFS Variable
Insurance Trust, which should be read carefully before investing.
MFS World Governments Series. The World Governments Series' investment
objective is to seek not only preservation, but also growth of capital, together
with moderate current income. The Series seeks to achieve its investment
objective through a professionally managed, internationally diversified
portfolio consisting primarily of debt securities and to a lesser extent equity
securities. Although the percentage of the Series' assets invested in foreign
securities will vary, at least 65% of the Series' assets will be invested in at
least three different countries, one of which is the United States, except when
the Series' adviser believes that investing for defensive purposes is
appropriate.
MFS Utilities Series. The Utilities Series' investment objective is to
seek capital growth and current income (income above that available from a
portfolio invested entirely in equity securities). The Series will seek to
achieve its objective by investing, under normal circumstances, at least 65%
(but up to 100% at the discretion of the Series' adviser) of its assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry.
The Fund is advised by Massachusetts Financial Services Company ("MFS"). MFS is
registered with the SEC as an investment adviser under the Investment Advisers
Act of 1940 ("Advisers Act").
American Century Portfolios, Inc. (formerly TCI Portfolios, Inc.)
The American Century VP International Subaccount and American Century VP Capital
Appreciation Subaccount invest in shares of American Century Portfolios, Inc.
The Fund currently issues six "series" or classes of shares, each of which
represents an interest in a separate Portfolio within the Fund. Two of these
series are available for investment under the Contracts: American Century VP
International and American Century VP Capital Appreciation.
The investment objectives of the Portfolios are set forth below:
American Century VP International (formerly TCI International). The
investment objective of American Century VP International is capital growth. The
Portfolio will seek to achieve its investment objective by investing primarily
in securities of foreign companies that meet certain fundamental and technical
standards of selection and that have, in the opinion of the investment manager,
potential for appreciation.
American Century VP Capital Appreciation (formerly TCI Growth). The
investment objective of American Century VP Capital Appreciation is capital
growth. The Portfolio will seek to achieve its investment objective by investing
primarily in common stocks that are considered by the investment adviser to have
better-than-average prospects for appreciation.
The Fund is advised by American Century Investment Management, Inc. (formerly
Investors Research Corporation). American Century Investment Management, Inc. is
registered with the SEC as an investment adviser under the Advisers Act.
Federated Insurance Series
The Federated American Leaders Fund II Subaccount, Federated High Income Bond
Fund II Subaccount, and Federated Prime Money Fund II Subaccount invest in
shares of Federated Insurance Series. The Fund currently issues eight "series"
or classes of shares, each of which represents an interest in a separate
Portfolio within the Fund. Three of these series are available for investment
under the Contracts: Federated American Leaders Fund II, Federated High Income
Bond Fund II and Federated Prime Money Fund II.
The investment objectives of the Portfolios are set forth below:
Federated American Leaders Fund II. The primary investment objective of
the Federated American Leaders Fund II is to achieve long-term growth of
capital. The Fund's secondary objective is to provide income. The Fund pursues
its investment objectives by investing, under normal circumstances, at least 65%
of its total assets in common stock of "blue-chip" companies, which are
generally top-quality, established growth companies.
Federated High Income Bond Fund II. The investment objective of the
Federated High Income Bond Fund II is to seek high current income. The Fund
endeavors to achieve its objective by investing primarily in lower-rated
corporate debt obligations commonly referred to as "junk bonds." The risks of
investing in these securities is described in the Prospectus for Federated
Insurance Series, which should be read carefully before investing.
Federated Prime Money Fund II. The investment objective of the Federated
Prime Money Fund II is to provide current income consistent with stability of
principal and liquidity. The Fund pursues its investment objective by investing
exclusively in a portfolio of money market instruments maturing in 397 days or
less. The Fund is advised by Federated Advisers. Federated Advisers is
registered with the SEC as an investment adviser under the Advisers Act. Dreyfus
Variable Investment Fund
Capital Appreciation Portfolio. The primary investment objective of the
Capital Appreciation Portfolio is to provide long-term capital growth consistent
with the preservation of capital. Current income is a secondary investment
objective. This series invests primarily in the common stocks of domestic and
foreign issuers.
Small Cap Portfolio. The investment objective of the Small Cap
Portfolio is to maximize capital appreciation. This series invests primarily in
common stocks of domestic and foreign issuers. This series will be particularly
alert to companies that it considers to be emerging smaller-sized companies
which are believed to be characterized by new or innovative products, services
or processes which should enhance prospects for growth in future earnings.
The fund is advised by The Dreyfus Corporation. The Dreyfus Corporation is
registered with the SEC as an investment adviser under the Advisers Act.
Dreyfus Stock Index Fund
The primary investment objective of the Stock Index Fund is to provide
investment results that correspond to the price and yield performance of
publicly traded common stocks in the aggregate, as represented by the Standard &
Poor's 500 Composite Stock Price Index. In anticipation of taking a market
position, the Fund is permitted to purchase and sell stock index futures. The
Fund is neither sponsored by nor affiliated with Standard & Poor's.
THERE IS NO ASSURANCE THAT THE STATED OBJECTIVES AND POLICIES OF ANY OF THE
FUNDS WILL BE ACHIEVED.
More detailed information concerning the investment objectives, policies, and
restrictions pertaining to the Funds and their expenses, investment advisory
services and charges and the risks involved with investing in the Portfolios and
other aspects of their operations can be found in the current Prospectus for
each Fund that accompanies this Prospectus and the current Statement of
Additional Information for each Fund. The Funds' Prospectuses should be read
carefully before any decision is made concerning the allocation of premium
payments or transfers among the Subaccounts.
Please note that not all of the Portfolios described in the Prospectuses for the
Funds are available with the Contract. Moreover, Kansas City Life 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, Kansas City
Life will take reasonable steps to secure the availability of a comparable fund.
Shares of each Portfolio are purchased and redeemed at net asset value, without
a sales charge.
Kansas City Life has entered into agreements with either the investment adviser
or distributor for each of the Funds pursuant to which the adviser or
distributor pays Kansas City Life a fee based upon an annual percentage of the
average aggregate net amount invested by Kansas City Life on behalf of the
Variable Account and other separate accounts of Kansas City Life. These
percentages differ, and Kansas City Life is paid a greater percentage by some
investment advisers or distributors than other advisers or distributors. These
agreements reflect administrative services provided by Kansas City Life.
Resolving Material Conflicts
The Funds presently serve as the investment medium for the Contracts. In
addition, the Funds are available to registered separate accounts of insurance
companies, other than Kansas City Life, offering variable annuity contracts and
variable life insurance policies and, in some cases, to certain pension and
retirement plans.
We do not currently foresee any disadvantages to you resulting from the Funds'
selling shares to fund products other than the Contracts. However, there is a
possibility that a material conflict of interest may arise between Owners whose
Contract Values are allocated to the Variable Account and the owners of variable
life insurance policies and variable annuity contracts issued by other companies
whose values are allocated to one or more other separate accounts investing in
any one of the Funds. Shares of some of the Funds may also be sold to certain
pension and retirement plans. As a result, there is a possibility that a
material conflict may arise between the interests of Owners or owners of such
other contracts (including contracts issued by other companies), and such
pension or retirement plans or participants in such plans. In the event of a
material conflict, we will take any necessary steps, including removing the
Variable Account from that Fund, to resolve the matter. The Board of Directors
of each Fund will monitor events in order to identify any material conflicts
that may arise and determine what action, if any, should be taken in response to
those events or conflicts. See each individual Fund's Prospectus for more
information.
Addition, Deletion or Substitution of Investments
We reserve the right, subject to applicable law, to make additions to, deletions
from, or substitutions for the shares that are held in the Variable Account or
that the Variable Account may purchase. If the shares of a Portfolio of a Fund
are no longer available for investment or if, in our judgment, further
investment in any Portfolio should become inappropriate in view of the purposes
of the Variable Account, we may redeem the shares, if any, of that Portfolio and
substitute shares of another registered open-end management investment company.
We will not substitute any shares attributable to a Contract's interest in a
Subaccount of the 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.
We also reserve the right to establish additional Subaccounts of the Variable
Account, each of which would invest in shares corresponding to a Portfolio of a
Fund or in shares of another investment company having a specified investment
objective. Subject to applicable law and any required SEC approval, we may, in
our sole discretion, establish new Subaccounts or eliminate one or more
Subaccounts if marketing needs, tax considerations or investment conditions
warrant. Any new Subaccounts may be made available to existing Contract Owners
on a basis to be determined by Kansas City Life.
If any of these substitutions or changes are made, we may, by appropriate
endorsement, change the Contract to reflect the substitution or change. If we
deem it to be in the best interest of Contract Owners and Annuitants (subject to
any approvals that may be required under applicable law), the Variable 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, or it may be
combined with other Kansas City Life separate accounts.
DESCRIPTION OF THE CONTRACT
The Contract is a variable annuity that provides accumulation of Variable
Account Value based on the underlying performance of Subaccounts within the
Kansas City Life Variable Annuity Separate Account. You may also allocate a
portion of your premiums to our Fixed Account. You may elect to participate in
our Dollar Cost Averaging, Portfolio Rebalancing, and Systematic Partial
Surrender Plans. On the Maturity Date, only fixed annuity payout options will be
offered.
Issuance of a Contract
Contracts may be sold to or in connection with retirement plans that may or may
not qualify for special federal tax treatment under the Internal Revenue Code.
The maximum Issue Age is 80. However, for Qualified Contracts with an Issue Age
of 70 1/2 or greater, distributions may be required to begin immediately. (See
"Federal Tax Status," page 29.) The maximum Issue Age may be exceeded under
certain circumstances.
Premiums
The minimum initial premium that we will accept is a single premium of $5,000 or
annualized payments of $600. Subsequent premium payments may be paid under the
Contract at any time during the Annuitant's lifetime and before the Maturity
Date. These payments must be for at least $50. We reserve the right, where
permitted, to limit the number and amount of additional premium payments.
Free-Look Period
The Contract provides for an initial "free-look" period. You have the right to
return the Contract within 10 days after you receive it. When we receive the
returned Contract at our Home Office, we will cancel the Contract. The amount
that we will refund will vary according to state requirements. Most states allow
us to refund Contract Value. In those states, Kansas City Life will return to
the Owner an amount equal to the Contract Value, plus the $30 Annual
Administration Fee if it has been deducted, as of the earlier of the date the
returned Contract is received by us at our Home Office or the date the returned
Contract is received by the Kansas City Life representative through whom the
Contract was purchased.
A few states require a return of premium payments or, alternatively, the greater
of premium payments or Contract Value. In these states, Kansas City Life will
refund the greater of (a) the premiums paid under the Contract; and (b) the
Contract Value as of the earlier of the date when the returned Contract is
received by Kansas City Life at its Home Office or the date the returned
Contract is received by the Kansas City Life representative through whom the
Contract was purchased (except that some states may only permit the return of
premiums). We will also refund the $30 Annual Administration Fee, if it has been
deducted.
Allocation of Premiums
At the time of application, you select how we will allocate the initial premium
among the Subaccounts of the Variable Account and the Fixed Account. You can
change the allocation percentages at any time by sending Written Notice to the
Home Office. Changes in your allocation may also be made by telephone if proper
authorization has been provided. See "Telephone Transfers and Premium
Allocation," page 24.
For Contracts sold to residents of states where we will refund Contract Value
under the free-look provision, the initial premium will be allocated directly to
the Subaccounts and the Fixed Account. For contracts sold to residents of states
that require premiums paid or the greater of Contract Value or premiums paid to
be refunded under the free look provision, the initial premium, and any
subsequent premiums received during a 15-day period following the Contract Date,
will be allocated to the Federated Prime Money Fund II Subaccount for that
15-day period. At the expiration of such 15-day period, we will allocate the
amount in the Federated Prime Money Fund II Subaccount to the Subaccounts and
the Fixed Account according to your allocation instructions.
We will allocate the initial premium, either directly to the Subaccounts and the
Fixed Account or to the Federated Prime Money Fund II Subaccount for the 15-day
period, within two business days of receipt of such premium by us at our Home
Office. This assumes that 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. If the application is not properly completed, we
will retain the premium for up to five business days while we attempt to
complete the application. If the application is not complete at the end of the
5-day period, we will inform the applicant of the reason for the delay, and the
initial premium will be returned immediately, unless the applicant specifically
consents to our retaining the premium until the application is complete. Once
the application is complete, we will allocate the initial premium within two
business days.
We will allocate subsequent premiums at the end of the Valuation Period in which
we receive the premium payment according to your allocation instructions in
effect at that time.
The values of the Subaccounts of the Variable Account will vary with their
investment experience, so that you bear the entire investment risk with respect
to the Variable Contract Value. You should periodically review your premium
allocation schedule in light of market conditions and your overall financial
objectives.
Variable Account Value
The Variable Account Value will reflect the investment experience of the
selected Subaccounts of the Variable Account, any premiums paid, any surrenders,
any transfers, any charges assessed in connection with the Contract, and any
Contract indebtedness. There is no guaranteed minimum Variable Account Value,
and, because a Contract's Variable Account Value on any future date depends upon
a number of factors, it cannot be predetermined.
Calculation of Variable Account Value. The Variable Account Value is
determined on each Valuation Date. Its value will be the aggregate of the values
attributable to the Contract in each of the Subaccounts, determined for each
Subaccount by multiplying the Subaccount's Unit Value on the relevant Valuation
Date by the number of Subaccount accumulation units allocated to the Contract.
Determination of Number of Accumulation Units. Any amounts allocated to
a Subaccount will be converted into accumulation units of that Subaccount. The
number of accumulation units to be credited to the Contract is determined by
dividing the dollar amount being allocated to the Subaccount by the Unit Value
for that Subaccount at the end of the Valuation Period during which the amount
was allocated. The number of accumulation units in any Subaccount will be
increased at the end of the Valuation Period by any premiums allocated to the
Subaccount during the current Valuation Period and by transfers to the
Subaccount from another Subaccount or from the Fixed Account during the current
Valuation Period. The number of accumulation units in any Subaccount will be
decreased at the end of the Valuation Period by any amounts transferred from the
Subaccount to another Subaccount or the Fixed Account and any amounts
surrendered (including applicable charges) during the current Valuation Period.
The number of units in any Subaccount will also be reduced at the beginning of
each Contract Year by a pro rata share of the $30 Annual Administration Fee.
Net Investment Factor. Each Valuation Day, a Net Investment Factor will
be calculated. A Subaccount's Net Investment Factor measures the investment
performance of an accumulation unit in that Subaccount during a Valuation
Period. The Net Investment Factor is the ratio of the Subaccount's current value
to the immediately preceding Valuation Day's value, less the daily Mortality and
Expense Charge and the daily Asset-Based Administration Charge. The formula for
the Net Investment Factor equals:
X -- Z,
Y
where "X" equals the sum of:
1. the net asset value per accumulation unit held in the Subaccount at the end
of the current Valuation Day; plus
2. the per accumulation unit amount of any dividend or capital gain distribution
on shares held in the Subaccount during the current Valuation Day; minus
3. the per accumulation unit amount of any capital loss distribution on shares
held in the Subaccount during the current Valuation Day; minus
4. the per accumulation unit amount of any taxes or any amount set aside during
the Valuation Day as a reserve for taxes;
"Y" equals the net asset value per accumulation unit held in the Subaccount as
of the end of the immediately preceding Valuation Day; and
"Z" equals the charges deducted from the Subaccount on a daily basis. These two
charges, the Asset-Based Administration Charge and the Mortality and Expense
Risk Charge, are equal on an annual basis to 1.40% (0.15% for the Asset-Based
Administration Charge and 1.25% for the Mortality and Expense Risk Charge).
The Net Investment Factor may be greater or less than, or equal to 1. Therefore,
the value of the Subaccount may increase, decrease, or remain the same.
Determination of Unit Value. The value of an accumulation unit for each of
the Subaccounts was arbitrarily set at $10 when the first investments were
bought. The accumulation unit value for each subsequent Valuation Period is
equal to: A x B,
where "A" is equal to the Subaccount's accumulation unit value for the end of
the immediately preceding Valuation Day, and
"B" is equal to the Net Investment Factor for the current Valuation Day. This
accumulation unit value may increase or decrease from day to day based on
investment results.
Transfer Privilege
After the free-look period and prior to the Maturity Date, you may transfer all
or part of an amount in the Subaccount(s) to another Subaccount(s) or to the
Fixed Account, or transfer a part of an amount in the Fixed Account to the
Subaccount(s), subject to the following restrictions. The minimum transfer
amount is the lesser of $250 or the entire amount in that Subaccount or the
Fixed Account. A transfer request that would reduce the amount in a Subaccount
or the Fixed Account below $250 will be treated as a transfer request for the
entire amount in that Subaccount or the Fixed Account.
<PAGE>
We will make the transfer on the date that we receive Written Notice requesting
such transfer. Transfers may also be made by telephone if proper authorization
has been provided. See "Telephone Transfers and Premium Allocations," page 24.
There is no limit on the number of transfers that can be made between
Subaccounts or to the Fixed Account. However, only one transfer may be made from
the Fixed Account each Contract Year. (See "Transfers from Fixed Account," page
24, for restrictions). The first six transfers during each Contract Year are
free. Any unused free transfers do not carry over to the next Contract Year. We
will assess a $25 Transfer Processing Fee for the seventh and each subsequent
transfer during a Contract Year. For the purpose of assessing the fee, each
written request (or telephone request described in "Telephone Transfers and
Premium Allocations," page 24) is considered to be one transfer, regardless of
the number of Subaccounts or the Fixed Account affected by the transfer. The
processing fee will be deducted from the amount being transferred or from the
remaining Contract Value, according to your instructions. We reserve the right,
where permitted, to suspend or modify this transfer privilege at any time.
Dollar Cost Averaging Plan
The Dollar Cost Averaging Plan, if elected, enables you to transfer
systematically and automatically, on a monthly basis for a period of 3 to 36
months, specified dollar amounts from the Federated Prime Money Fund II
Subaccount to other Subaccounts. By allocating on a regularly scheduled basis,
as opposed to allocating the total amount at one particular time, you may be
less susceptible to the impact of market fluctuations. This technique will not,
however, assure a profit or protect against a loss in declining markets.
Moreover, for the Dollar Cost Averaging Plan to be effective, amounts should be
available for allocation from the Federated Prime Money Fund II Subaccount
through periods of low price levels as well as higher price levels.
At least $250 must be transferred from the Federated Prime Money Fund II
Subaccount each month. The required amounts may be allocated to the Federated
Prime Money Fund II Subaccount through initial or subsequent premium payments or
by transferring amounts into the Federated Prime Money Fund II Subaccount from
the other Subaccounts or from the Fixed Account (which may be subject to certain
restrictions).
You may elect this plan at the time of application by completing the
authorization on the application or at any time after the Contract is issued by
properly completing the election form and returning it to us. The election form
allows you to specify the number of months for the Dollar Cost Averaging Plan to
be in effect. Dollar Cost Averaging transfers may not commence until the later
of (a) 30 days after the Contract Date and (b) 5 days after the end of the
free-look period.
Once elected, transfers from the Federated Prime Money Fund II Subaccount will
be processed monthly until the number of designated transfers have been
completed, or the value of the Federated Prime Money Fund II Subaccount is
completely depleted, or you send us Written Notice instructing us to cancel the
monthly transfers.
Transfers made under the Dollar Cost Averaging Plan will not count toward the
six transfers permitted each Contract Year without imposing the Transfer
Processing Fee.
Portfolio Rebalancing Plan
You may elect to have the accumulated balance of each Subaccount redistributed
to equal a specified percentage of the Variable Account Value. This will be done
on a quarterly basis at three-month intervals from the Monthly Anniversary Day
on which the Portfolio Rebalancing Plan commences. If elected, this plan
automatically adjusts your Portfolio mix to be consistent with the allocation
most recently requested. The redistribution will not count toward the six
transfers permitted each Contract Year without imposing the Transfer Processing
Fee. If the Dollar Cost Averaging Plan has been elected and has not been
completed, the Portfolio Rebalancing Plan will commence on the Monthly
Anniversary Day following the termination of the Dollar Cost Averaging Plan.
You may elect this plan at the time of application by completing the
authorization on the application or at any time after the Contract is issued by
properly completing the election form and returning it to us. Portfolio
rebalancing will terminate when you request any transfer or the day we receive
Written Notice instructing us to cancel the Portfolio Rebalancing Plan. If the
Contract Value is negative at the time portfolio rebalancing is scheduled, the
re-distribution will not be completed.
Partial and Full Cash Surrenders
Partial Surrenders. At any time before the earlier of the death of the
Annuitant or the Maturity Date, you may surrender part of the Cash Surrender
Value. We will surrender the amount requested from the Contract Value on the
date we receive Written Notice for the surrender at our Home Office. Any
applicable Surrender Charge will be deducted from the amount surrendered or from
the remaining Contract Value, according to your instructions. If the remaining
Contract Value is less than the Surrender Charge, the amount surrendered will be
reduced. The surrender will be made from each Subaccount and the Fixed Account
based on your instructions.
Subject to certain restrictions, a partial surrender of up to 10% of the
Contract Value will not be subject to a Surrender Charge. (See "Amounts Not
Subject to Surrender Charge," page 25.)
Systematic Partial Surrender Plan. The Systematic Partial Surrender Plan
enables you to preauthorize a periodic exercise of the partial surrender right.
If you wish to participate in the plan, you should instruct us to surrender a
particular dollar amount from the Contract on a monthly, quarterly, semi-annual
or annual basis. The minimum distribution is $100. The surrender will be made
from each Subaccount and the Fixed Account based on your instructions.
Subject to certain restrictions, you may surrender up to 10% of the Contract
Value each Contract Year under the Systematic Partial Surrender Plan without
incurring a Surrender Charge. (See "Amounts Not Subject to Surrender Charge,"
page 25.)
You may discontinue participation in the Systematic Partial Surrender Plan at
any time by sending us Written Notice.
Certain federal income tax consequences may apply to partial and systematic
partial surrenders. Therefore, you should consult with your tax adviser before
requesting a partial or systematic partial surrender. (See "Federal Tax Status,"
page 29.)
Full Surrender. At any time before the earlier of the death of the
Annuitant or the Maturity Date, you may request a surrender of the Contract for
its Cash Surrender Value. The Cash Surrender Value will equal the Contract Value
less any applicable Surrender Charge, any indebtedness, any premium taxes
payable, and any withholding taxes. The Cash Surrender Value will be determined
on the date we receive Written Notice of surrender and the Contract at our Home
Office. The Cash Surrender Value will be paid in a lump sum unless the Owner
requests payment under a Payment Option.
Subject to certain restrictions, up to 10% of the Contract Value will not be
subject to a Surrender Charge. (See "Amounts Not Subject to Surrender Charge,"
page 25.)
Certain federal income tax consequences may apply to a surrender of the
Contract. Therefore, you should consult with your tax adviser before requesting
a surrender. (See "Federal Tax Status," page 29.)
Restrictions on Distributions from Certain Contracts. There are certain
restrictions on surrenders and partial surrenders from Contracts used as funding
vehicles for Internal Revenue Code Section 403(b) retirement plans. Section
403(b)(11) of the Internal Revenue Code of 1986, as amended, 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 Termination
We may end the Contract and pay you the Cash Surrender Value if, before the
Maturity Date, all of these events simultaneously exist:
1. no premiums have been paid for at least two years;
2. the Contract Value is less than $2,000; and
3. the total premiums paid, less any partial surrenders, is less than $2,000.
We will mail a termination notice to you at your last known recorded address and
to the holder of any assignment of record at least six months before such
termination. We reserve the right to automatically terminate the Contract on the
date specified in the notice, unless we receive an additional premium payment
before the termination date specified in the notice or the Contract Value has
increased to the amount specified above. This additional premium payment must be
for at least the required minimum amount.
Contract Loans
If your Contract is a 403(b) (TSA) Qualified Contract, you have the option of
taking a contract loan at any time after the first Contract Year. You may obtain
a contract loan by submitting a Written Notice to us at our Home Office. The
only security we require is an assignment of the Contract to us. Only one loan
per Contract Year will be allowed.
The current loan amount and any withdrawals for unpaid interest will be shown on
your annual report.
Amount of Loan Available. You may borrow up to the lesser of:
(1) $50,000, reduced by the excess (if any) of the highest outstanding loan
balance during the 1-year period ending on the day before the loan is made
over the outstanding loan balance on the day loan is made,
(2) the greater of 50% of the Cash Surrender Value of the Contract or $10,000,
or
(3) the Cash Surrender Value less any outstanding loans, determined as of the
date of the loan.
At any time a new loan is made, the sum of all prior loans and loan interest
outstanding, when added to the current loan applied for, may not exceed the
applicable limit described above. Each loan must be at least $2,500.
Loan Account. When a loan is made, an amount equal to the loan will be
withdrawn from the Fixed Account and Variable Account and transferred to the
loan account. The loan account is part of the Fixed Account. If allocation
instructions are not specified in your loan application, the loan will be
withdrawn pro rata from all Subaccounts of the Variable Account having
Subaccount values and from the Fixed Account. Amounts transferred to the loan
account do not participate in the investment experience of the Fixed Account and
Variable Account from which they were withdrawn.
Interest Credited on Loaned Amount. Amounts in the loan account will earn
interest at the minimum guaranteed effective annual interest rate of 3.0% per
year. Different interest rates may be applied to the loan account than the Fixed
Account. Any interest credited on loaned amounts will remain in the Fixed
Account.
Loan Interest Charged. On each Contract Anniversary, accrued interest will
be charged on a contract loan at the maximum rate of 8% per year. We may
establish a lower rate for any period during which the contract loan is
outstanding. Interest is payable at the end of each Contract Year and on the
date the loan is repaid.
If the loan interest payment is not received by the Contract Anniversary, we
will transfer the accrued loan interest from the Fixed Account and Variable
Accounts to the loan account on a pro rata basis.
Repayment of Loan. Any loan repayment must be specifically identified as
such in order to insure that it will be applied correctly. Each loan repayment
will result in a transfer of an amount equal to the loan repayment from the loan
account to the Fixed Account and/or Variable Account. Your current premium
allocation schedule will be used to allocate the loan repayment, unless you
provide specific instructions to allocate the loan repayment differently. Each
payment must be at least $25.
Principal and interest must be repaid in substantially equal monthly payments
over a 5-year period. You are allowed a 31-day grace period from the installment
due date. If a monthly installment is not received within the 31-day grace
period, a deemed distribution of the entire amount of the outstanding principal,
interest due, and any applicable charges under this Contract, including any
Surrender Charge, will be made. This deemed distribution may be subject to
income and penalty tax under the Code and may adversely affect the treatment of
the Contract under Internal Revenue Code section 403(b).
Indebtedness. Indebtedness means all unpaid contract loans and loan
interest. Any outstanding indebtedness will be deducted from the Contract
proceeds. Your Contract will be terminated whenever your total indebtedness
exceeds the Cash Surrender Value of the Contract. We will mail notice to your
last known address recorded with us at least 31 days before such termination.
ERISA Plans. If your 403(b) (TSA) Qualified Contract is part of a plan
subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), you
should consult with a qualified legal adviser about compliance with ERISA
requirements prior to requesting a contract loan.
Death Benefit Before Maturity Date
Death of Annuitant. If the Annuitant dies before the Maturity Date, we will
pay the death benefit under the Contract to the Beneficiary.
The death benefit is equal to the greater of: (i) the guaranteed death benefit
less any indebtedness; and (ii) the Contract Value less any indebtedness on the
date we receive due proof of the Annuitant's death. On the Contract Date, the
guaranteed death benefit is equal to the initial premium payment. Thereafter,
any subsequent premium payment will immediately increase the guaranteed minimum
death benefit by the amount of the premium payment. Any partial surrender will
immediately decrease the guaranteed death benefit by the same percentage that
the surrender decreases the Contract Value.
The proceeds will be paid to the Beneficiary in a lump sum unless you or the
Beneficiary elect a Payment Option. If the Annuitant is the Owner, the proceeds
must be distributed in accordance with the rules described below in "Death of
Owner" for the death of an Owner before the Maturity Date.
There is no death benefit payable if the Annuitant dies on or after the Maturity
Date.
Death of Owner. If an Owner dies before the Maturity Date, federal tax law
requires (for a Non-Qualified Contract) that the Contract Value (or if the Owner
is the Annuitant, the proceeds payable upon the Annuitant's death) be
distributed to the Beneficiary within five years after the date of the Owner's
death. If an Owner dies on or after the Maturity Date, any remaining payments
must be distributed at least as rapidly as under the Payment Option in effect on
the date of such Owner's death.
These distribution requirements will be considered satisfied as to any portion
of the proceeds payable to or for the benefit of the Beneficiary, and which is
distributed over the life (or a period not exceeding the life expectancy) of
that Beneficiary, provided that such distributions begin within one year of the
Owner's death and the Beneficiary is a natural person.
If the Owner's spouse is the designated Beneficiary, the Contract may be
continued with such surviving spouse as the new Owner. If the Contract has joint
Owners, the surviving joint Owner will be the Beneficiary, unless otherwise
specified in the application. Joint Owners must be husband and wife as of the
Contract Date.
If the Owner is not an individual, the Annuitant, as determined in accordance
with Section 72(s) of the Internal Revenue Code, will be treated as the Owner
for purposes of these distribution requirements, and any changes in the
Annuitant will be treated as the death of the Owner.
If the Beneficiary desires to leave the Contract in force and the death benefit
due to the Beneficiary is greater than the Contract Value because the Owner is
the Annuitant, we will increase the Contract Value to equal the death benefit.
This increase will be based upon the Contract Value on the date we are notified
of the death of the Owner.
Other rules may apply to a Qualified Contract.
Proceeds on Maturity Date
You select the Maturity Date. The Maturity Date is when the Contract Value, less
any indebtedness, will be applied under a Life Payment Option, unless you have
elected to receive the Cash Surrender Value as a lump sum payment or as a
Non-Life Payment Option. The latest Maturity Date is the later of the Contract
Anniversary following the Annuitant's 85th birthday and the tenth Contract
Anniversary. However, for Qualified Contracts, distributions may be required to
begin at age 70 1/2. Certain states limit the maximum Maturity Date.
On the Maturity Date, the proceeds will be applied under the Life Annuity with
Ten Year Certain Payment Option, unless you have chosen to have the proceeds
paid under another Payment Option or in a lump sum. (See "Payment Options," page
27.) If a Life Payment Option is elected, the amount that will be applied is the
Contract Value less any indebtedness as of the Maturity Date; if a Non-Life
Payment Option or a lump sum payment is chosen, the proceeds applied or the
amount paid will be the Cash Surrender Value as of the Maturity Date.
The Maturity Date may be changed subject to these limitations: your Written
Notice must be received at our Home Office at least 30 days before the current
Maturity Date; the requested Maturity Date must be a date that is at least 30
days after receipt of the Written Notice; and the requested Maturity Date must
be not later than any earlier Maturity Date required by law.
Payments
We will usually pay any partial surrender, full surrender, or death benefit
within seven days of receipt of a Written Notice of surrender or 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 contract
owners; or
3. the SEC determines that an emergency exists that would make the disposal of
securities held in the Variable Account or the determination of the value
of the Variable Account's net assets not reasonably practicable.
If a recent premium payment or loan repayment has been made by check or draft,
we reserve the right to defer payment until such check or draft has been
honored.
Under certain circumstances and in accordance with established administrative
procedures, we will pay death benefit proceeds through Kansas City Life's
Personal Growth Account, an interest bearing account. Proceeds paid through the
Personal Growth Account are placed in our general account. Check-writing
privileges are provided in the Personal Growth Account under which the bank that
pays the check will be reimbursed by Kansas City Life out of the proceeds held
in our general account. The Personal Growth Account is not a bank account and is
not insured nor guaranteed by the FDIC or any other government agency. A
Contract Owner or beneficiary (whichever applicable) will have immediate access
to the proceeds by writing a check on the account. We pay interest from the date
of death to the date the Personal Growth Account is closed.
We reserve the right to defer payment of any surrender, partial surrender, or
transfer from the Fixed Account for up to six months from the date of receipt of
Written Notice for a partial surrender, full 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 state.
Modifications
Upon notice to the Owner, Kansas City Life may modify the Contract, but only if
such modification is necessary to:
1. make the Contract or the Variable Account comply with any law or regulation
issued by a governmental agency to which we are subject;
2. 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 (except that Owner consent may be required by
some states);
3. reflect a change in the operation of the Variable Account; or
4. provide additional Variable Account and/or fixed accumulation options.
We reserve the right to modify the Contract as necessary to attempt to prevent
the Contract Owner from being considered the owner of the assets of the Variable
Account.
In the event of any such modifications, we will make appropriate endorsement to
the Contract, if required.
Reports to Contract Owner
At least annually, we will mail to you, at your last known address of record, a
report containing the Contract Value and Cash Surrender Value of the Contract
and any further information required by any applicable law or regulation. The
information will be as of a date not more than two months prior to the date of
mailing.
Contract Inquiries
Inquiries regarding a Contract may be made by writing to Kansas City Life at its
Home Office, 3520 Broadway, P.O. Box 419364, Kansas City, Missouri 64141-6364.
THE FIXED ACCOUNT
You may allocate some or all of the premiums and transfer some or all of the
Variable Account Value to the Fixed Account, which is part of our General
Account and pays interest at declared rates guaranteed for each calendar year
(subject to a minimum interest rate we guarantee to be 3%). The principal, after
deductions, is also guaranteed. Our General Account supports our insurance and
annuity obligations.
The Fixed Account has not been, and is not required to be, registered with the
SEC under the Securities Act of 1933 (the "1933 Act"), and neither the Fixed
Account nor our General Account has been registered as an investment company
under the 1940 Act. Therefore, neither Kansas City Life'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 these accounts
that are included in this Prospectus are for your 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.
The portion of the Contract Value allocated to the Fixed Account will be
credited with rates of interest, as described below. Since the Fixed Account is
part of our 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.
Minimum Guaranteed and Current Interest Rates
The Fixed Account Value is guaranteed to accumulate at a minimum effective
annual interest rate of 3%. We intend to credit the Fixed Account Value with
current rates in excess of the minimum guarantee but we are not obligated to do
so. Kansas City Life has no specific formula for determining current interest
rates. Since we, in our sole discretion, anticipate changing the current
interest rate from time to time, different allocations to and from the Fixed
Account Value will be credited with different current interest rates, based upon
the date amounts are allocated into the Fixed Account. While we may change the
interest rate credited to new deposits at any time, the interest rate credited
to amounts allocated to the Fixed Account and accrued interest thereon will not
change more often than once per year. Any interest credited on the amounts in
the Fixed Account in excess of the minimum guaranteed rate of 3% per year will
be determined in our sole discretion. You assume the risk that interest credited
may not exceed the guaranteed rate. The Fixed Account Value will not share in
the investment performance of the Company's General Account or any portion
thereof.
Amounts deducted from the Fixed Account for the Annual Administration Fee,
surrenders, transfers to the Subaccounts, or charges are currently, for the
purpose of crediting interest, accounted for on a last-in, first-out ("LIFO")
method. We reserve the right to change the method of crediting 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 a year (except for the year in which such
amount is received or transferred).
Calculation of Fixed Account Value
The Fixed Account Value at any time is equal to amounts allocated or transferred
to it, plus interest credited to it, minus amounts deducted, transferred, or
surrendered from it.
Transfers from Fixed Account
One transfer each Contract Year is allowed from the Fixed Account to any or all
of the Subaccounts. The amount transferred from the Fixed Account may not exceed
25% of the unloaned Fixed Account Value on the date of transfer, unless the
balance after the transfer is less than $250, in which case we will transfer the
entire amount.
Payment Deferral
We reserve the right to defer payment of any surrender, partial surrender, or
transfer from the Fixed Account for up to six months from the date of receipt of
the Written Notice for the partial or full surrender or transfer.
Telephone Transfers and Premium Allocations
Telephone transfers and changes in premium allocations will be based upon
instructions given by telephone, provided the appropriate election has been made
at the time of application or proper authorization has been provided to us. We
reserve the right to suspend telephone transfer and changes in premium
allocations privileges at any time, for any reason, if we deem such suspension
to be in the best interests of Contract Owners.
We will employ reasonable procedures to confirm that instructions communicated
by telephone are genuine, and if we follow those 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 we will follow for telephone transfers and changes in premium
allocations include requiring some form of personal identification prior to
acting on instructions received by telephone, providing written confirmation of
the transaction, and making a tape recording of the instructions given by
telephone.
CHARGES AND DEDUCTIONS
Surrender Charge (Contingent Deferred Sales Charge)
General. We do not deduct a charge for sales expense from premiums at
the time premiums are paid. However, within certain time limits described below,
we will deduct a Surrender Charge (contingent deferred sales charge) from the
Contract Value if a partial surrender is made, a Contract is surrendered, or if
a Non-Life Payment Option is elected. In the event Surrender Charges are not
sufficient to cover sales expenses, we will bear the loss. Conversely, if the
amount of such charges proves more than enough, we will retain the excess. We do
not currently believe that the Surrender Charges imposed will cover the expected
costs of distributing the Contracts. Any shortfall will be made up from our
general assets, which may include amounts derived from the Mortality and Expense
Risk Charge.
Charge for Partial Surrender or Surrender. If a partial surrender is
made or a Contract is surrendered, the applicable Surrender Charge will be as
follows:
Contract Year in Charge as
Which Surrender Percentage of
Occurs Amount Surrendered
1 7%
2 7
3 7
4 6
5 5
6 4
7 2
8 and after 0
We will not deduct a Surrender Charge if the surrender occurs after seven full
Contract Years.
In no event will the total Surrender Charges assessed under a Contract exceed 8
1/2% of the total premiums paid under that Contract.
If you surrender the Contract, we will deduct the Surrender Charge from the
Contract Value in determining the Cash Surrender Value. For a partial surrender,
we will deduct the Surrender Charge from the amount surrendered or from Contract
Value remaining after the amount requested is surrendered, according to your
instructions.
Amounts Not Subject to Surrender Charge. If you have not elected to
participate in the Systematic Partial Surrender Plan, your first partial
surrender during a Contract Year will not be subject to a Surrender Charge to
the extent that the amount surrendered is not in excess of 10% of the Contract
Value at the time of the surrender. This 10% free partial surrender is limited
to the first partial surrender per Contract Year, even if the amount surrendered
is less than 10% of the Contract Value. We will assess a Surrender Charge on any
amounts surrendered in excess of 10% or subsequent to the first partial
surrender in a Contract Year. The 10% free partial surrender is not cumulative
from Contract Year to Contract Year.
Similarly, if you have not elected to participate in the Systematic Partial
Surrender Plan and you have not received any partial surrenders during a
Contract Year, upon a full surrender, the Surrender Charge will not apply to 10%
of the Contract Value. That is, only 90% of the Contract Value will be subject
to a Surrender Charge.
If you have elected to participate in the Systematic Partial Surrender Plan, up
to 10% of the Contract Value may be surrendered each Contract Year without a
Surrender Charge. You are limited to one election of the Systematic Partial
Surrender Plan per Contract Year without being subject to the surrender charge,
even if the amount surrendered during that Contract Year is less than 10% of the
Contract Value. In the Contract Year in which you elect to participate in the
plan, the 10% limitation will be calculated based on the Contract Value at the
time of election. In each subsequent Contract Year in which you continue to
participate in the Plan, the 10% limitation will be calculated based on the
Contract Value as of the beginning of that year. We will notify you if the total
amount to be surrendered in a subsequent Contract Year will exceed 10% of the
Contract Value as of the beginning of such Contract Year. Unless you instruct us
to reduce the surrender amount for that year so that it does not exceed the 10%
limit, we will continue to process surrenders for the designated amount. Once
the amount of the surrender exceeds the 10% limit, we will deduct the applicable
Surrender Charge from the remaining Contract Value. After the seventh Contract
year, when the Surrender Charge reaches zero, we will not charge a Surrender
Charge on surrenders under the Systematic Partial Surrender Plan, regardless of
the amount of Contract Value surrendered under the plan.
If you elect to participate in the Systematic Partial Surrender Plan during a
Contract Year in which you have already received a partial surrender, that
partial surrender will not be subject to Surrender Charge (subject to the
restrictions discussed above), but the partial surrenders under the plan during
the remainder of that Contract Year will be subject to a Surrender Charge.
Nursing Home Waiver. If we receive satisfactory proof that the Owner is
admitted to a licensed nursing home, the full Contract Value may be paid out
equally over at least a three year period with no Surrender Charges. The Owner
must be confined for at least 90 days before the Surrender Charges will be
waived. This waiver may not be available in all states.
Transfer Processing Fee
The first six transfers during each Contract Year are free. We will assess a
Transfer Processing Fee for each additional transfer during such Contract Year.
For the purpose of assessing the fee, we will consider each Written Notice or
telephone request seeking a transfer to be one transfer, regardless of the
number of accounts affected by the transfer. We will deduct the Transfer
Processing Fee from the amount being transferred or from the remaining Contract
Value, according to your instructions. We do not expect a profit from this fee.
Administrative Charges
Annual Administration Fee. At the beginning of each Contract Year, we will
deduct from the Contract Value an Annual Administration Fee of $30 (or less if
required by applicable state law) to reimburse us for administrative expenses
relating to the Contract. We will waive this fee for Contracts with Contract
Values of $50,000 or more at the beginning of the applicable Contract Year. We
will deduct the charge from each Subaccount and the Fixed Account based on the
proportion that the value in each such account bears to the total Contract
Value. We do not expect to make a profit on this fee. No Annual Administration
Fee is payable after the Maturity Date.
Asset-Based Administration Charge. To compensate us for costs associated
with administration of the Contracts, prior to the Maturity Date we will deduct
a daily Asset-Based Administration Charge from the assets of the Variable
Account equal to an annual rate of .15%. We do not expect to make a profit from
this charge.
Mortality and Expense Risk Charge
To compensate us for assuming mortality and expense risks, prior to the Maturity
Date we will deduct a daily Mortality and Expense Risk Charge from the assets of
the Variable Account. We will impose a charge in an amount that is equal to an
annual rate of 1.25% (daily rate of 0.0034247%) (approximately 0.70% for
mortality risk and 0.55% for expense risk).
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 Payee is assured that longevity will not have
an adverse effect on the annuity payments received. The mortality risk also
includes a guarantee to pay a death benefit if the Annuitant dies before the
Maturity Date. The expense risk we assume is the risk that the Annual
Administration Fee, Asset-Based Administration Charge, and Transfer Processing
Fee may be insufficient to cover actual future expenses.
If the Mortality and Expense Risk Charge is insufficient to cover the actual
cost of the mortality and expense risks we undertake, we will bear the
shortfall. Conversely, if the charge proves more than sufficient, the excess
will be our profit and will be available for any proper corporate purpose
including, among other things, payment of sales expenses.
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 premium taxes are applicable to a Contract, we will deduct them upon
surrender or when we apply the Contract proceeds to a Payment Option or a lump
sum payment.
Reduced Charges for Eligible Groups
The charges otherwise applicable may be reduced with respect to Contracts issued
to a class of associated individuals or to a trustee, employer or similar entity
where Kansas City Life anticipates that the sales to the members of the class
will result in lower than normal sales or administrative expenses. These
reductions will be made in accordance with our rules in effect at the time of
the application for a Contract. The factors we will consider in determining the
eligibility of a particular group for reduced charges and the level of the
reduction are as follows: the nature of the association and its organizational
framework, the method by which sales will be made to the members of the class,
the facility with which premiums will be collected from the associated
individuals and the association's capabilities with respect to administrative
tasks, the anticipated persistency of the Contract, the size of the class of
associated individuals and the number of years it has been in existence and any
other such circumstances which justify a reduction in sales or administrative
expenses. Any reduction will be reasonable and will apply uniformly to all
prospective Contract purchases in the class and will not be unfairly
discriminatory to the interest of the Contract holder.
Other Taxes
Currently, no charge is made against the Variable Account for federal income
taxes. We may make such a charge in the future if income or gains within the
Variable Account result in any federal income tax liability to us. We may also
deduct charges for other taxes attributable to the Variable Account, if any.
Investment Advisory Fees and Other Expenses of the Funds
Because the Variable Account purchases shares of the Funds, the net assets of
each Subaccount of the Variable Account will reflect the investment advisory
fees and operating expenses incurred by the Funds. For each Portfolio, an
investment adviser is paid a daily fee by the Funds for its investment advisory
services. Each advisory fee is a percentage of a Portfolio's average daily net
assets, and thus the actual fee paid depends on the Portfolio and the assets of
such Portfolio. Each Portfolio of the Funds is also responsible for its
operating expenses. The accompanying current Prospectuses for the Funds give
further details.
PAYMENT OPTIONS
The Contract ends on the Maturity Date. If you have elected a Life Payment
Option (Options 4 and 5 described below), we will apply the Contract Value to
that option. If you have elected a Non-Life Payment Option (Options 1, 2, and 3
described below), or you have elected to receive a lump sum payment, we will
apply the Cash Surrender Value. If an election of a Payment Option has not been
filed at our Home Office on the Maturity Date, we will pay the Contract proceeds
as a life annuity with payments for ten years guaranteed. Prior to the Maturity
Date, you may have the Contract Value applied under a Life Payment Option, or
the Cash Surrender Value applied to a Non-Life Payment Option or you may receive
a lump sum payment. Upon the death of the Annuitant, the Beneficiary can have
the death benefit applied under a Payment Option. We will deduct any premium tax
applicable from the Cash Surrender Value or the Contract Value at the time
payments commence. The Contract must be surrendered so that the applicable
amount can be paid in a lump sum or a supplemental contract for the applicable
Payment Option can be issued.
The Payment Options available are described below. The term "Payee" means a
person who is entitled to receive payment under that option. The Payment Options
are fixed, which means that each option has a fixed and guaranteed amount to be
paid during the annuity payment period that is not in any way dependent upon the
investment experience of the Variable Account.
Election of Options
You may elect, revoke or change an option at any time before the Maturity Date
while the Annuitant is living. If the Payee is other than the Owner, the
election of a Payment Option requires our consent. If an election is not in
effect at the Annuitant's death or if payment is to be made in one sum under an
existing election, the Beneficiary may elect one of the options after the death
of the Annuitant.
An election of option and any revocation or change must be made by Written
Notice and filed with the Home Office. An option may not be elected if any
periodic payment under the election would be less than $50. Subject to this
condition, we will make payments annually or monthly at the end of such period.
Description of Options
Option 1 - Interest Payments. We will make guaranteed interest payments
to the Payee annually or monthly as elected. We will pay interest on the
proceeds at the guaranteed rate of 3.0% per year and we may pay additional
interest annually. The proceeds and any unpaid interest may be withdrawn in full
at any time.
Option 2: Installments of a Specified Amount. We will make annual or
monthly payments until the proceeds plus interest are fully paid. We will pay
interest on the proceeds at the guaranteed rate of 3.0% per year, and we may pay
additional interest. The present value of any unpaid installments may be
withdrawn at any time.
Option 3: Installments for a Specified Period. We will pay the proceeds
in equal annual or monthly payments for a specified number of years. We will pay
interest on the proceeds at the guaranteed rate of 3.0% per year. We may also
pay additional interest. The present value of any unpaid installments may be
withdrawn at any time.
Option 4: Life Income. We will pay an income during the Payee's
lifetime. A minimum guaranteed payment period may be chosen. Payments received
under the Installment Refund Option will continue until the total income
payments received equal the proceeds applied.
Option 5: Joint and Survivor Income. We will pay an income during the
lifetime of two persons and will continue to pay an income as long as either
person is living. A minimum guaranteed payment period of ten years may be
chosen.
YIELDS AND TOTAL RETURNS
From time to time, we may advertise or include in sales literature yields,
effective yields and total returns for the Subaccounts. These figures are based
on historical earnings and do not indicate or project future performance. Each
Subaccount may, from time to time, advertise or include in sales literature
performance relative to certain performance rankings and indices compiled by
independent organizations. More detailed information as to the calculation of
performance information, as well as comparisons with unmanaged market indices,
appears in the Statement of Additional Information.
Effective yields and total returns for the Subaccounts are based on the
investment performance of the corresponding Portfolio of the Funds. The Funds'
performance in part reflects the Funds' expenses. (See the Prospectuses for the
Funds.)
The yield of the Federated Prime Money Fund II Subaccount refers to the
annualized income generated by an investment in the Subaccount 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 Subaccount 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 Subaccount (except the Federated Prime Money Fund II Subaccount)
refers to the annualized income generated by an investment in the Subaccount
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.
The total return of a Subaccount refers to return quotations assuming an
investment under a Contract has been held in the Subaccount for various periods
of time including, but not limited to, a period measured from the date the
Subaccount commenced operations. When a Subaccount has been in operation for
one, five, and ten years, respectively, the total return for these periods will
be provided. For periods prior to the date the Variable Account commenced
operations, performance information for Contracts funded by the Subaccounts will
be calculated based on the performance of the Funds' Portfolios and the
assumption that the Subaccounts were in existence for the same periods as those
indicated for the Funds' Portfolios, with the level of Contract charges that
were in effect at the inception of the Subaccounts for the Contracts.
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 percentage change in the value
of an investment in the Subaccount 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 Subaccount (including any surrender charge that
would apply if you 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 two different non-standard bases may be used in
advertisements. Average annual total return information may be presented,
computed on the same basis as described above, except deductions will not
include the Surrender 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 Subaccounts.
We may, from time to time, 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.
Kansas City Life Insurance Company is a member of the Insurance Marketplace
Standards Association ("IMSA"), and as such may include the IMSA logo and
information about IMSA membership in its advertisements. Companies that belong
to IMSA subscribe to a set of ethical standards covering the various aspects of
sales and service for individually sold life insurance and annuities.
In advertising and sales literature, the performance of each Subaccount may be
compared to 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 series of mutual funds with investment objectives similar
to each of the Subaccounts. Lipper Analytical Services, Inc. ("Lipper"),
Morningstar, Inc. ("Morningstar"), and the Variable Annuity Research Data
Service ("VARDS") are independent services that 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, Morningstar and VARDS each
rank 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 and Morningstar prepare 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. Performance data published by CDA/Weisenberger also may be used in
advertisements and sales literature.
Advertising and sales literature may also compare the performance of each
Subaccount 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 tax-deferred
compounding on a Subaccount's investment returns, or returns in general, which
may be illustrated by tables, graphs, or charts. All income and capital gains
derived from Subaccount investments are reinvested and can lead to substantial
long-term accumulation of assets, provided that the underlying Portfolio's
investment experience is positive.
FEDERAL TAX STATUS
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 that we issued. Any person concerned
about these tax implications should consult a competent tax adviser 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. 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 Internal Revenue Service. 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 ("Non-Qualified
Contract") or purchased and used in connection with plans qualifying for
favorable tax treatment ("Qualified Contract"). 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), 408 or 408A of the Internal Revenue Code of 1986, as amended (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 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. 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 Variable
Account, through each Portfolio of the Funds, 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 Subaccounts may be
invested. Although we do not have control over the Funds in which the Variable
Account invests, we believe that each Portfolio in which the Variable Account
owns shares will meet the diversification requirements.
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. Several years ago, the IRS 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. More recently, the Treasury Department 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, rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which Contract Owners
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets."
The ownership rights under the Contracts are similar to, but different in
certain respects from, those described by the Service 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 more Subaccounts in which to
allocate premiums and Contract values, and may be able to transfer among
Subaccounts more frequently than in such rulings. These differences could result
in the Contract Owner's being treated as the owner of the assets of the Variable
Account. In addition, Kansas City Life 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. Therefore, we reserve the right to modify the
Contract as necessary to attempt to prevent the Contract Owner from being
considered the owner of the assets of the Variable Account.
Required Distributions. In addition to the requirements of Section
817(h) of the Code, 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 Maturity 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 Maturity 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 deceased 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. Kansas City Life 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. We believe that an Owner who is a natural person generally is not taxed
on increases in the value of a Contract until distribution occurs by
surrendering all or part of the Contract Value (e.g., partial surrenders and
surrenders) 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 adviser.
The following discussion generally applies to Contracts owned by natural
persons.
Partial Surrenders. In the case of a partial surrender 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 payments paid by or on behalf of any 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 surrender (including systematic withdrawals) from a
Non-Qualified Contract before the Maturity Date, under Code Section 72(e) amount
received are generally first treated as taxable income to the extent that the
Contract Value immediately before the partial surrender exceeds the "investment
in the contract" at that time. Any additional amount surrendered is not taxable.
In the case of a full surrender 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."
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. Stated
differently, prior to recovery of the investment in the contract, generally,
there is no tax on the amount 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 payment; however, the remainder of each
income payment is taxable. After the "investment in the contract" is recovered,
the full amount of any additional annuity payments is taxable.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a
Contract because of the death of an Owner or an 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. For these purposes, the investment in the
contract is not affected by the Owner's or Annuitant's death. That is, the
investment in the contract remains the amount of any purchase payments paid that
were not excluded from gross income.
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;
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 an annuity contract that is purchased with a single
premium when the annuity starting 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; and
6. made under certain annuities issued in connection with structured
settlement agreements.
Other tax penalties may apply to certain distributions under a Qualified
Contract, as well as to certain contributions, loans, and other circumstances.
Possible Tax Changes. Although the likelihood of legislative change is
uncertain, there is always the possibility that the tax treatment of the
Contracts could change by legislation or other means. For instance, the
President's 1999 Budget Proposal recommended legislation that, if enacted, would
adversely modify the federal taxation of the Contracts. It is also possible that
any change could be retroactive (that is, effective prior to the date of the
change). A tax adviser should be consulted with respect to legislative
developments and their effect on the Contract.
Transfers, Assignments or Exchanges of a Contract
A transfer of ownership of a Contract, the designation of an Annuitant, Payee or
other Beneficiary who is not also the Owner, the selection of certain Maturity
Dates or the exchange of a Contract may result in certain tax consequences to
the Owner that are not discussed herein. An Owner contemplating any such
transfer, assignment, selection or exchange of a Contract should contact a
competent tax adviser 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, 1993, distributions from certain qualified
plans are generally subject to mandatory withholding.
"Eligible rollover distributions" from section 401(a) plans and section 403(b)
tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. An eligible rollover distribution is the taxable portion of
any distribution from such a plan, except certain distributions such as
distributions required by the Code or distributions in a specified annuity form.
The 20% withholding does not apply, however, if the Owner chooses a "direct
rollover" from the plan to another tax-qualified plan or IRA.
Multiple Contracts
All non-qualified deferred annuity contracts that are issued by Kansas City Life
(or our 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, an Owner should consult a competent
tax adviser before purchasing more than one annuity contract.
Taxation of Qualified Contracts
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. 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;
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 Kansas City Life consents.
Some retirement plans are subject to distribution and other requirements that
are not incorporated into our 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. 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.
For qualified plans under Section 401(a) and 403(b), the Code requires that
distributions generally must commence no later than the later of April 1 of the
calendar year following the calendar year in which the Owner (or plan
participant) (i) reaches age 70 1/2 or (ii) retires, and must be made in a
specified form or manner. If the plan participant is a "5 percent owner" (as
defined in the Code), distributions generally must begin no later than April 1
of the calendar year following the calendar year in which the Owner (or plan
participant) reaches age 70 1/2. For IRAs described in Section 408,
distributions generally must commence no later than April 1 of the calendar
year following the calendar year in which the Owner (or plan participant)
reaches age 70 1/2. Roth IRAs under Section 408A do not require distributions at
any time prior to the Owner's death.
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. These retirement plans may permit the purchase
of the Contract to provide benefits 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 the transfer of the Contract. Corporate
employers intending to use the Contract with such plans should seek competent
advice.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." IRA contributions are generally
limited each year to the lesser of $2,000 or 100% of the Contract Owner's
adjusted gross income and may be deductible in whole or in part depending on the
individual's income. Distributions from certain other types of qualified plans,
however, may be "rolled over" on a tax-deferred basis into an IRA without regard
to this limit. Earnings in an IRA are not taxed while held in the IRA. All
amounts in the IRA (other than nondeductible contributions) are taxed when
distributed from the IRA. Distributions prior to age 59 1/2 (unless certain
exceptions apply) are also subject to a 10% penalty tax. Sales of the Contract
for use with IRAs may be subject to special requirements of the Internal Revenue
Service.
Simple IRAs. Certain small employers may establish SIMPLE plans as provided
by Section 408(p) of the Code, under which employees may elect to defer to a
SIMPLE IRA a percentage of compensation up to $6,000 (as increased for cost of
living adjustments). The sponsoring employer is required to make matching or
non-elective contributions on behalf of employees. Distributions from SIMPLE
IRAs 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 percent penalty tax,
which is increased to 25 percent of the distribution occurs within the first
two years after the commencement of the employee's participation in the plan.
Roth IRAs. Effective January 1, 1998, section 408A of the Code permits
certain eligible individuals to contribute to a Roth IRA. Contributions to a
Roth IRA, which are subject to certain limitations, are not deductible and must
be made in cash or as a rollover or transfer from another Roth IRA or other IRA.
A rollover from or conversion of an IRA to a Roth IRA may be subject to tax and
other special rules may apply. You should consult a tax adviser before combining
any converted amounts with any other Roth IRA contributions, including any other
conversion amounts from other tax years. Distributions from a Roth IRA
generally are not taxed, except that, once aggregate distributions exceed
contributions to the Roth IRA, income tax and a 10% penalty tax may apply to
distributions made (1) before age 59 1/2(subject to certain exceptions) or (2)
during the five taxable years starting with the year in which the first
contribution is made to the Roth IRA.
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 premiums paid, within certain limits, on a Contract that will
provide an annuity for the employee's retirement. However, these payments may be
subject to FICA (Social Security) taxes.
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 Kansas City Life's Taxes
At the present time, we do not assess a charge to the Subaccounts for any
federal, state, or local taxes that we incur which may be attributable to such
Subaccounts or the Contracts. However, we 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 we determine to be properly attributable to the
Subaccounts 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 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 adviser should be consulted for
further information.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be offered to the public on a continuous basis, and we do not
anticipate discontinuing the offering of the Contracts. However, we reserve the
right to discontinue the offering. Applications for Contracts are solicited by
agents who are licensed by applicable state insurance authorities to sell our
variable annuity contracts and who are also registered representatives of Sunset
Financial Services, Inc. ("Sunset Financial"), one of our wholly-owned
subsidiaries, or of broker-dealers who have entered into written sales
agreements with Sunset Financial. Sunset Financial 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. Sunset Financial acts as
the Principal Underwriter, as defined in the 1940 Act, of the Contracts for the
Variable Account pursuant to an Underwriting Agreement between Kansas City Life
and Sunset Financial. Sunset Financial is not obligated to sell any specific
number of Contracts. Sunset Financial's principal business address is 3520
Broadway, Kansas City, Missouri 64111. Sunset Financial will receive commissions
of up to 4.2%. Additional amounts may be paid in certain circumstances.
Underwriting commissions of the following amounts were paid to Sunset Financial
for sale of the Contracts; $18,392 in 1995, $905,864 in 1996 and $4,696,138 in
1997. None of these amounts were retained by Sunset Financial.
When policies are sold through other broker-dealers that have entered into
selling agreements with Sunset Financial Services, the commission which will be
paid by such broker-dealers to their representatives will be in accordance with
their established rules. The commission rates may be more or less than those set
forth above for Kansas City Life's representatives. In addition, their qualified
registered representatives may be reimbursed by the broker-dealers under expense
reimbursement allowance programs in any year for approved voucherable expenses
incurred. The broker-dealers will be compensated as provided in the selling
agreements, and Sunset Financial Services, Inc. will reimburse Kansas City Life
for such amounts and for certain other direct expenses in connection with
marketing the Contracts through other broker-dealers.
LEGAL PROCEEDINGS
Kansas City Life and its affiliates, like other life insurance companies, are
involved in lawsuits, including class action lawsuits. In some class action and
other lawsuits involving insurers, substantial damages have been sought and/or
material settlement payments have been made. Although the outcome of any
litigation cannot be predicted with certainty, Kansas City Life believes that at
the present time there are not pending or threatened lawsuits that are
reasonably likely to have a material adverse impact on the Variable Account or
Kansas City Life.
VOTING RIGHTS
In accordance with our view of current applicable law, we will vote the
Portfolio shares held in the Variable Account at special shareholder meetings of
the Funds in accordance with instructions received from persons having voting
interests in the corresponding Subaccounts. If, however, the 1940 Act or any
regulation thereunder should be amended, or if the present interpretation
thereof should change, or we determine that we are allowed to vote the Portfolio
shares in our own right, we may elect to do so.
The number of votes that are available to an Owner will be calculated separately
for each Subaccount of the Variable Account, and may include fractional shares.
The number of votes attributable to a Subaccount will be determined by applying
an Owner's percentage interest, if any, in a particular Subaccount to the total
number of votes attributable to that Subaccount. An Owner holds a voting
interest in each Subaccount to which the Variable Account is allocated. The
Owner only has a voting interest prior to the Maturity Date.
The number of votes of a Portfolio that are available to the Owner will be
determined as of the date coincident with the date established by the Portfolio
for determining shareholders eligible to vote at the relevant meeting of each
Fund. Voting instructions will be solicited by written communication prior to
such meeting in accordance with procedures established by the Funds.
Fund shares as to which no timely instructions are received and shares held by
Kansas City Life in a Subaccount as to which an Owner has no beneficial interest
will be voted in proportion to the voting instructions that are received with
respect to all Contracts participating in that Subaccount. Voting instructions
to abstain on any item to be voted upon will be applied on a pro rata basis to
reduce the votes eligible to be cast.
Each person having a voting interest in a Subaccount will receive proxy
materials, reports, and other material relating to the appropriate Portfolio.
PREPARING FOR YEAR 2000
Like all financial services providers, Kansas City Life utilizes systems that
may be affected by Year 2000 transition issues, and it relies on service
providers, including the Funds, that also may be affected. Kansas City Life has
developed, and is in the process of implementing, a Year 2000 transition plan,
and is confirming that its service providers are also so engaged. The resources
that are being devoted to this effort are substantial. It is difficult to
predict with precision whether the amount of resources ultimately devoted, or
the outcome of these efforts, will have any negative impact on Kansas City Life.
However, as of the date of this prospectus, it is not anticipated that Contract
Owners will experience negative effects of their investment, or on the services
provided in connection therewith, as a result of Year 2000 transition
implementation. Kansas City Life currently anticipates that its systems will be
Year 2000 compliant on or about January 1, 1999, but there can be no assurance
that we will be successful, or that interaction with other service providers
will not impair our services at that time.
COMPANY HOLIDAYS
We are closed on the following holidays: New Year's Day, President's Day,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additional holidays in 1998 will be September 25 and November 27. Holidays that
fall on a Saturday will be recognized on the previous Friday. Holidays that fall
on a Sunday will be recognized on the following Monday.
FINANCIAL STATEMENTS
Kansas City Life's consolidated balance sheet as of December 31, 1997 and 1996
and the related statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997, appearing in the
Statement of Additional Information should be considered only as bearing on
Kansas City Life's ability to meet its obligations under the contracts. They
should not be considered as bearing on the investment performance of the assets
held in the Account. Financial statements for the Variable Account for the year
ended December 31, 1997 and the related statements of operations and changes in
net assets for each of the two years in the period ended December 31, 1997 also
appear in the Statement of Additional Information.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
Page
Additional Contract Provisions 1
The Contract 1
Incontestability 1
Misstatement of Age or Sex 1
Non-Participation 1
Calculation of Yields and Total Returns 1
Federated Prime Money Fund II Subaccount Yields 1
Other Subaccount Yields 2
Average Annual Total Returns 3
Other Total Returns 5
Effect of the Administration Fee on Performance Data 6
Termination of Participation Agreements 6
Safekeeping of Account Assets 7
State Regulation 7
Records and Reports 8
Legal Matters 8
Experts 8
Other Information 8
Financial Statements 8
<PAGE>
- ---------------------------(---------------------------------------------------
To order a copy of the Statement of Additional Information you must complete and
mail the form below, or you may call (800) 616-3670 to order a copy.
To: Kansas City Life Insurance Company
Variable Administration Department
P.O. Box 419364
Kansas City, Missouri 64141-6364
Please mail a copy of the Statement of Additional Information for the Kansas
City Life Variable Annuity Separate Account to:
Name:__________________________________________________________________________
Address:_______________________________________________________________________
Street
- -------------------------------------------------------------------------------
City State Zip
Signature of Requestor:________________________________________________________
Date:__________________________________________________________________
- -------------------------------------------------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
Kansas City Life Insurance Company
3520 Broadway
P.O. Box 419364
Kansas City, Missouri 64141-6364
(800) 616-3670
STATEMENT OF ADDITIONAL INFORMATION
KANSAS CITY LIFE VARIABLE ANNUITY SEPARATE ACCOUNT
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
This Statement of Additional Information contains information in addition to the
information described in the Prospectus for the flexible premium deferred
variable annuity contract (the "Contract") offered by Kansas City Life Insurance
Company ("Kansas City Life"). This Statement of Additional Information is not a
Prospectus, and it should be read only in conjunction with the Prospectuses for
the Contract and MFS Variable Insurance Trust, American Century Variable
Portfolios, Inc., Federated Insurance Series, Dreyfus Variable Investment Fund
and Dreyfus Variable Stock Index Fund. The Prospectus is dated the same as this
Statement of Additional Information. You may obtain a copy of the Prospectus by
writing or calling Kansas City Life at the address or phone number shown above.
The date of this Statement of Additional
Information is May 1, 1998.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
ADDITIONAL CONTRACT PROVISIONS.............................................1
The Contract......................................................1
Incontestability..................................................1
Misstatement of Age or Sex........................................1
Non-Participation.................................................1
CALCULATION OF YIELDS AND TOTAL RETURNS....................................1
Federated Prime Money Fund II Subaccount Yields...................1
Other Subaccount Yields...........................................2
Average Annual Total Returns......................................3
Other Total Returns...............................................5
Effect of the Annual Administration Fee on Performance Data.......6
TERMINATION OF PARTICIPATION AGREEMENTS....................................6
SAFEKEEPING OF ACCOUNT ASSETS..............................................7
STATE REGULATION...........................................................7
RECORDS AND REPORTS........................................................8
LEGAL MATTERS..............................................................8
EXPERTS....................................................................8
OTHER INFORMATION..........................................................8
FINANCIAL STATEMENTS.......................................................8
8
1
ADDITIONAL CONTRACT PROVISIONS
The Contract
The entire Contract is made up of the contract and the application. The
statements made in the application are deemed representations and not
warranties. We cannot use any statement in defense of a claim or to void the
Contract unless it is contained in the application and a copy of the application
is attached to the Contract at issue.
Incontestability
We will not contest the Contract after it has been in force during the
Annuitant's lifetime for two years from the Contract Date of the Contract.
Misstatement of Age or Sex
If the age or sex of the Annuitant has been misstated, the amount that we will
pay is the amount that the proceeds would have purchased at the correct age and
sex.
If an overpayment is made because of an error in age or sex, the overpayment
plus interest at 3% compounded annually will be a debt against the Contract. If
the debt is not repaid, we will reduce future payments accordingly.
If an underpayment is made because of an error in age or sex, any annuity
payments will be calculated at the correct age and sex and we will adjust future
payments. We will pay the underpayment with interest at 3% compounded annually
in a single sum.
Non-Participation
The Contract is not eligible for dividends and will not participate in our
divisible surplus.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, we may disclose yields, total returns, and other performance
data pertaining to the Contracts for a Subaccount. Such performance data will be
computed, or accompanied by performance data computed, in accordance with the
standards defined by the SEC.
Because of the charges and deductions imposed under a Contract, the yield for
the Subaccounts will be lower than the yield for their respective Portfolios.
The calculations of yields, total returns, and other performance data do not
reflect the effect of any premium tax that may be applicable to a particular
Contract. Premium taxes currently range from 0% to 3.5% of premium based on the
state in which the Contract is sold.
Federated Prime Money Fund II Subaccount Yields
From time to time, advertisements and sales literature may quote the current
annualized yield of the Federated Prime Money Fund II Subaccount for a seven-day
period in a manner that does not take into consideration any realized or
unrealized gains or losses, or income other than investment income, on shares of
the Federated Prime Money Fund II or on its portfolio securities.
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 and exclusive of income other than investment
income) at the end of the seven-day period in the value of a hypothetical
account under a Contract having a balance of 1 unit of the Federated Prime Money
Fund II Subaccount at the beginning of the period, dividing such net change in
account value by the value of the hypothetical 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
Federated Prime Money Fund II attributable to the hypothetical account; and 2)
charges and deductions imposed under the Contract which are attributable to the
hypothetical account. The charges and deductions include the per unit charges
for the hypothetical account for: 1) the Annual Administration Fee, 2) the
Asset-Based Administration Charge, and (3) the Mortality and Expense Risk
Charge. For purposes of calculating current yields for a Contract, an average
per unit administrative fee is used based on the $30 Annual Administration Fee
deducted at the beginning of each Contract Year. Current Yield will be
calculated according to the following formula:
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Portfolio
(exclusive of realized gains or losses on the sale
of securities and unrealized appreciation and
depreciation and exclusive of income other than
investment income) for the seven-day period
attributable to a hypothetical account having
a balance of 1 subaccount unit.
ES = per unit expenses attributable to the hypothetical
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: F
NCS = the net change in the value of the Portfolio
(exclusive of realized gains or losses on the sale
of securities and unrealized appreciation and
depreciation and exclusive of income other than
investment income) for the seven-day period
attributable to a hypothetical account having a
balance of 1 subaccount unit.
ES = per unit expenses attributable to the hypothetical
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 Federated Prime Money Subaccount will be lower than the yield for the
Federated Prime Money Fund II.
The current and effective yields on amounts held in the Federated Prime Money
Fund II Subaccount normally will 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 Federated Prime Money Fund II
Subaccount's actual yield is affected by changes in interest rates on money
market securities, average portfolio maturity of the Federated Prime Money Fund
II, the types and quality of portfolio securities held by the Federated Prime
Money Fund II, and the Federated Prime Money Fund II's operating expenses.
Yields on amounts held in the Federated Prime Money Fund II Subaccount may also
be presented for periods other than a seven-day period.
Other Subaccount Yields
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the Subaccounts (except the Federated Prime
Money Fund II Subaccount) for a Contract for 30-day or one-month periods. The
annualized yield of a Subaccount refers to income generated by the Subaccount
during a 30-day or one-month period that 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 Subaccount units less Subaccount 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; by 3) compounding that
yield for a six-month period; and by 4) multiplying that result by 2. Expenses
attributable to the Subaccount include the Annual Administration Fee,
Asset-Based Administration Charge, and Mortality and Expense Risk Charge. The
yield calculation assumes an Annual Administration Fee of $30 per year per
Contract deducted at the beginning of each Contract Year. For purposes of
calculating the 30-day or one-month yield, an average Annual Administration Fee
per dollar of Contract value in the Account is used to determine the amount of
the charge attributable to the subaccount for the 30-day or one-month period.
The 30-day or one-month yield is calculated according to the following formula:
Yield = 2 X (((NI - ES)/(U X UV)) + 1)6 - 1)
Where:
NI = net income of the Portfolio for the 30-day or
one-month period attributable to the Subaccount's
units.
ES = expenses of the Subaccount for the 30-day or one-month
period.
U = the average number of units outstanding.
UV = the unit value at the close of the last day in the
30-day one-month period.
Because of the charges and deductions imposed under the Contracts, the yield for
the Subaccount will be lower than the yield for the corresponding Funds'
Portfolio.
The yield on the amounts held in the Subaccounts normally will fluctuate 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 Subaccount's
actual yield is affected by the types and quality of portfolio securities held
by the corresponding Portfolio and its operating expenses.
Yield calculations do not take into account the Surrender Charge under the
Contract equal to 2% to 7% of the amount surrendered during the first seven
Contract years. Subject to certain restrictions, a Surrender Charge will not be
imposed upon surrender or on the first partial surrender in any Contract year on
an amount up to 10% of the Contract Value as of the beginning of the Contract
Year.
Average Annual Total Returns
From time to time, sales literature or advertisements may also quote average
annual total returns for one or more of the Subaccounts for various periods of
time.
When a Subaccount 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 month-end practicable,
considering the type and media of the communication that will be stated in the
communication.
Standard average annual total returns will be calculated using Subaccount unit
values which Kansas City Life calculates on each valuation day based on the
performance of the Subaccount's underlying Portfolio, the deductions for the
Annual Administration Fee, Asset-Based Administration Charge, and Mortality and
Expense Risk Charge. The calculation assumes that the Annual Administration Fee
is $30 per year per Contract deducted at the beginning of each Contract year.
For purposes of calculating average annual total return, an average per dollar
Annual Administration Fee attributable to the hypothetical account for the
period is used. The calculation also assumes surrender of the Contract at the
end of the period for the return quotation. Total returns will therefore reflect
a deduction of the Surrender Charge for any period less than eight years. The
total return will then be calculated according to the following formula:
TR = ((ERV/P)1/N) - 1
Where:
TR = the average annual total return net of Subaccount
recurring charges.
ERV = the ending redeemable value (net of any
applicable Surrender Charge) of the hypothetical
account at the end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
The standard total returns for the Subaccounts for the period of each
Subaccount's operations during 1997 are presented below.
Standard Total Returns for the Subaccounts
RETURN FROM RETURN FROM
SUBACCOUNT 1/1/1997 TO 9/6/95 TO
12/31/1997 12/31/97
MFS RESEARCH 11.01% 16.59%
EMERGING GROWTH 12.54% 17.69%
TOTAL RETURN 12.01% 14.90%
BOND 1.69% 2.27%
WORLD GOVT - 8.72% - 1.11%
UTILITIES 21.62% 21.93%
AMERICAN CENTURY VP INTERNATIONAL 8.92% - 0.43%
VP CAPITAL APPRECIATION -11.25% - 7.20%
FEDERATED AMERICAN LEADERS FUND II 22.21% 0.69%
HIGH INCOME BOND FUND II 5.08% 9.70%
PRIME MONEY FUND II -3.12% 0.49%
DREYFUS CAPITAL APPRECIATION 18.21% 23.39%
SMALL CAPITALIZATION 7.78% 10.98%
STOCK INDEX 22.75% 23.16%
DREYFUS STOCK INDEX FUND
From time to time, sales literature or advertisements may also quote average
annual total returns for periods prior to the date the Variable Account
commenced operations. Such performance information for the Subaccounts will be
calculated based on the performance of the Portfolios and the assumption that
the Subaccounts were in existence for the same periods as those indicated for
the Portfolios, with the level of Contract charges currently in effect.
Such average annual total return information for the Subaccounts (including
deduction of the Surrender Charge) is as follows:
<TABLE>
<CAPTION>
Subaccount and Date For the For the For the period from
of Inception of 1-year period 5-year period Inception of the
Corresponding Portfolio ended 12/31/97 ended 12/31/97 Portfolio to 12/31/97
<S> <C> <C> <C>
MFS Research (July 28, 1995) 11.01% N/A 16.39%
MFS Emerging Growth (July 25, 1995) 12.54% N/A 18.01%
MFS Total Return (January 3, 1995) 12.01% N/A 16.57%
MFS Bond (October 24, 1995) 1.69% N/A 2.27%
MFS World Governments (June 14, 1994) -8.72% N/A 1.74%
MFS Utilities (January 3, 1995) 21.62% N/A 23.31%
American Century VP International (May 1, 1994) 8.92% N/A 7.67%
American Century VP Capital Appreciation -11.25% 3.10% 8.21%
(November 20, 1987)
Federated American Leaders Fund II
(February 10, 1994) 22.21% N/A 18.77%
Federated High Income Bond Fund II
(March 1, 1994) 5.08% N/A 8.12%
Federated Prime Money Fund II
(November 11, 1994) -3.12% N/A 1.55%
Dreyfus Capital Appreciation
(April 5, 1993) 18.21% N/A 16.92%
Dreyfus Small Cap (August 31, 1990) 7.78% 23.16% 41.93%
Dreyfus Stock Index Fund
(September 29, 1989) 22.75% 16.87% 14.16%
Other Total Returns
</TABLE>
From time to time, sales literature or advertisements may also quote average
annual total returns that do not reflect the Surrender Charge. These are
calculated in exactly the same way as the average annual total returns described
above, except that the ending redeemable value of the hypothetical account for
the period is replaced with an ending value for the period that does not take
into account any charges on amounts surrendered. Sales literature or
advertisements may also quote such average annual total returns for periods
prior to the date the Variable Account commenced operations, calculated based on
the performance of the Portfolios and the assumption that the Subaccounts were
in existence for the same periods as those indicated for the Portfolios, with
the level of Contract charges currently in effect except for the Surrender
Charge.
Such average annual total return information for the Subaccounts (not including
deduction of the Surrender Charge) is as follows:
<TABLE>
<CAPTION>
Subaccount and Date For the For the For the period from
of Inception of 1-year period 5-year period inception of the
Corresponding Portfolio ended 12/31/97 ended 12/31/97 Portfolio to 12/31/97
<S> <C> <C> <C>
MFS Research (July 28, 1995) 18.47% N/A 19.57%
MFS Emerging Growth (July 25, 1995) 20.11% N/A 21.12%
MFS Total Return (January 3, 1995) 19.54% N/A 19.13%
MFS Bond (October 24, 1995) 8.53% N/A 5.39%
MFS World Governments (June 14, 1994) -2.59% N/A 3.32%
MFS Utilities (January 3, 1995) 29.80% N/A 26.01%
American Century VP International
(May 1, 1994) 16.24% N/A 9.35%
American Century VP Capital Appreciation -5.28% 4.06% 8.21%
(November 20, 1987)
Federated American Leaders Fund II
(February 10, 1994) 30.42% N/A 20.50%
Federated High Income Bond Fund II
(March 1, 1994) 12.15% N/A 9.70%
Federated Prime Money Fund II
(November 11, 1994) 3.39% N/A 3.40%
Dreyful Capital Appreciation (April 5, 1993) 26.15% N/A 18.06%
Dreyfus Small Cap (August 31, 1990) 15.03% 24.30% 41.93%
Dreyfus Stock Index Fund
(September 29, 1989) 31.01% 17.95% 14.16%
</TABLE>
We 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 Subaccount
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.
Effect of the Annual Administration Fee on Performance Data
The Contract provides for a $30 Annual Administration Fee (waived for Contracts
with a Contract Value of at least $50,000 at the beginning of the Contract Year)
to be deducted annually at the beginning of each Contract Year, from the
Subaccounts and the Fixed Account based on the proportion that the value of each
such account bears to the total Contract Value. For purposes of reflecting the
Annual Administration Fee in yield and total return quotations, the annual
charge is converted into a per-dollar per-day charge based on the average
Contract Value in the Variable 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.
TERMINATION OF PARTICIPATION AGREEMENTS
The participation agreements pursuant to which the Funds sells their shares to
the Variable Account contain provisions regarding termination. The following
summarizes those provisions:
MFS Variable Insurance Trust. This agreement provides for termination:
(1) on six months' advance written notice by any party; (2) at Kansas
City Life's option if shares of the Fund are not reasonably available to
meet the requirements of the Contracts or are not "appropriate funding
vehicles" for the Contracts, as reasonably determined by Kansas City
Life; (3) at the option of the Fund or Massachusetts Financial Services
Company ("MFS"), the Fund's investment adviser, upon institution of
certain proceedings against Kansas City Life; (4) at Kansas City Life's
option upon institution of certain enforcement proceedings against the
Fund; (5) at the option of Kansas City Life, the Fund or MFS upon
receipt of any necessary regulatory approvals and/or the vote of
Contract Owners to substitute the shares of another investment company
for shares of the Fund; (6) by the Fund or MFS upon written notice to
Kansas City Life upon a determination that Kansas City Life has suffered
a material adverse change in its business, operations, financial
condition, or prospects; (7) by Kansas City Life upon written notice to
the Fund and MFS upon a determination that the Fund or MFS has suffered
a material adverse change in its business, operations, financial
condition, or prospects; (8) at any party's option upon another party's
material breach of any provision of the agreement; or (9) upon
assignment of the agreement, unless made with the written consent of all
parties.
American Century Variable Portfolios, Inc. This agreement provides for
termination: (1) on six months' advance written notice by any party; (2)
at Kansas City Life's option if the Fund's shares are not available for
any reason to meet the requirements of the Contracts; (3) at the option
of either Kansas City Life, the Fund, or American Century Investment
Management, Inc. upon institution of certain proceedings against any
person marketing the Contracts, the Variable account, Kansas City Life,
the Fund, or American Century Investment Management, Inc.; (4) upon
termination of the advisory agreement between the Fund and American
Century Investment Management, Inc.; (5) upon vote of Contract Owners to
substitute the shares of another investment company for the shares of
the Fund, or similar regulatory approval; (6) upon assignment of the
agreement, unless made with written consent of all parties, (7) upon a
determination that continuing to perform under the agreement would
violate applicable federal or state law, rule, regulation, or judicial
order; (8) at the option of Kansas City Life if the Fund fails to meet
the requirements of applicable diversification requirements; (9) upon a
determination that a party has experienced a material adverse change in
its business operations or financial condition, or is the subject of
substantial adverse publicity; or (10) as a result of any other breach
by a non-affiliated party. Federated Insurance Series. This agreement
provides for termination: (1) on 180 days advance written notice by any
party; (2) at Kansas City Life's option if the Fund's shares are not
reasonably available to meet the requirements of the Contracts; (3) at
the option of the Fund or Federated Securities Corp., the Fund's
distributor (the "Distributor") upon institution of certain proceedings
against Kansas City Life or its agent; (4) at Kansas City Life's option
upon institution of certain proceedings against the Fund or the
Distributor; (5) upon vote of Contract Owners to substitute the shares
of another investment company for the shares of the Fund, or similar
regulatory approval; (6) in the event any of the Fund's shares are not
registered, issued or sold in accordance with applicable law, or such
law precludes the use of such shares to fund the Contracts; (7) by any
party upon a determination by a majority of the Fund's trustees, or a
majority of its disinterested trustees, that an irreconcilable conflict
exists; (8) at the option of Kansas City Life if the Fund fails to meet
the requirements of applicable diversification requirements; or (9) by
any party upon another party's failure to cure a material breach of the
agreement within 30 days after written notice thereof.
Dreyfus Variable Investment Fund and Dreyfus Stock Index Fund. This
agreement provides for termination as to either Fund or both Funds: (1)
on 180 days' advance written notice by any party; (2) at Kansas City
Life's option if the Fund's shares are not available for any reason to
meet the requirements of the Contracts; (3) at the option of the Fund or
The Dreyfus Corporation upon institution of certain proceedings against
Kansas City Life; (4) at Kansas City Life's option upon institution of
certain enforcement proceedings against the Fund; (5) upon termination
of the Investment Advisory Agreement between the Fund and The Dreyfus
Corporation or its successors unless Kansas City Life specifically
approves the selection of a new Fund investment adviser; (6) upon a
determination that shares of the Fund or the variable products are not
registered, issued or sold in conformity with federal or state laws or
that Fund shares may no longer be used as an investment medium for
variable products; (7) at the option of the Fund or The Dreyfus
Corporation upon a determination that Kansas City Life has suffered a
material adverse change in its business, operations, financial
condition, or prospects; (8) at Kansas City Life's option a
determination that the Fund or The Dreyfus Corporation has suffered a
material adverse change in its business, operations, financial
condition, or prospects; (9) at either party's option upon the other
party's material breach of any provision of the Agreement and failure to
remedy the breach within 30 days; or (10) upon assignment of the
agreement, unless made with the written consent of all parties; (11) at
the option of the Fund upon a determination by its Board in good faith
that it is no longer advisable and in the best interests of shareholders
of that Fund to continue to operate pursuant to this agreement; (12) at
the option of the Fund if the Contracts cease to qualify as annuity
contracts or life insurance policies, as applicable, under the Internal
Revenue Code, or if the Fund reasonably believes that the Contracts may
fail to qualify; or (13) if the Fund fails to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code, or
fails to manage and invest in a manner that complies with the
requirements of Section 817(h) of the Internal Revenue Code.
SAFEKEEPING OF ACCOUNT ASSETS
We hold the title to the assets of the Variable Account. The assets are kept
physically segregated and held separate and apart from our 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 Subaccounts.
Our officers and employees are covered by an insurance company blanket bond
issued by Fidelity and Deposit Company of Maryland to Kansas City Life in the
amount of $5,000,000. The bond insures against dishonest and fraudulent acts of
officers and employees.
STATE REGULATION
We are subject to regulation and supervision by the Department of Insurance of
the State of Missouri, which periodically examines our affairs. We are also
subject to the insurance laws and regulations of all jurisdictions where we are
authorized to do business. A copy of the Contract form has been filed with, and
where required approved by, insurance officials in each jurisdiction where the
Contracts are sold. We are required to submit annual statements of our
operations, including financial statements, to the insurance departments of the
various jurisdictions in which we do business for the purposes of determining
solvency and compliance with local insurance laws and regulations.
RECORDS AND REPORTS
We will retain all records and accounts relating to the Variable Account. As
presently required by the Investment Company Act of 1940 and regulations
promulgated thereunder, reports containing such information as may be required
under the Act or by any other applicable law or regulation will be sent to
Contract Owners semi-annually at the Owner's last known address of record.
LEGAL MATTERS
All matters relating to Missouri law pertaining to the Contracts, including the
validity of the Contracts and Kansas City Life's authority to issue the
Contracts, have been passed upon by C. John Malacarne, General Counsel of Kansas
City Life. Sutherland, Asbill & Brennan of Washington, D.C. has provided advice
on certain matters relating to the federal securities laws.
EXPERTS
The consolidated balance sheets for Kansas City Life as of December 31, 1997 and
1996 and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997, and the financial statements of the Variable Account at December 31, 1997
and for each of the two years in the period ended December 31, 1997, appearing
herein have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included
herein in reliance upon such reports given 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 Contracts 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 Contracts 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
Kansas City Life's consolidated balance sheet as of December 31, 1997 and 1996
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997
appearing herein, should be considered only as bearing on Kansas City Life's
ability to meet its obligations under the Contracts. They should not be
considered as bearing on the investment performance of the assets held in the
Account. The statement of net assets of the Variable Account at December 31,
1997 and for each of the two years in the period ended December 31, 1997, are
also included herein.
CONSOLIDATED INCOME STATEMENT
1997 1996 1995
REVENUE
Insurance revenues:
Premiums:
Life insurance $106 051 103 263 101 341
Accident and health 44 931 37 575 29 475
Contract charges 93 713 78 755 74 642
Investment revenues:
Investment income, net 193 696 186 743 188 087
Realized investment gains, net 14 505 3 013 4 950
Other 9 998 9 768 10 290
TOTAL REVENUES 462 894 419 117 408 785
BENEFITS AND EXPENSES
Policy benefits:
Death benefits 100 037 87 940 85 388
Surrenders of life insurance 14 999 15 488 16 345
Other benefits 71 338 65 437 53 441
Increase in benefit and contract reserves 86 804 85 614 89 139
Amortization of policy acquisition costs 35 712 30 086 27 992
Insurance operating expenses 91 381 75 227 76 557
TOTAL BENEFITS AND EXPENSES 400 271 359 792 348 862
Income before Federal income taxes 62 623 59 325 59 923
Federal income taxes:
Current 15 073 26 073 22 038
Deferred 2 689 (9 063) (3 853)
17 762 17 010 18 185
NET INCOME $ 44 861 42 315 41 738
Basic and diluted earnings per share $7.25 6.84 6.76
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
1997 1996
ASSETS
Investments:
Fixed maturities:
Available for sale, at fair value
(amortized cost $1,952,741,000;
$1,762,091,000 - 1996) $2 004 516 1 759 153
Held to maturity, at amortized cost
(fair value $151,495,000;
$256,042,000 - 1996) 145 661 248 433
Equity securities available for sale,
at fair value (cost $107,034,000;
$71,522,000 - 1996) 114 986 79 018
Mortgage loans on real estate, net 270 054 246 493
Real estate, net 36 764 43 750
Real estate joint ventures 43 347 28 356
Policy loans 123 186 94 412
Short-term 74 341 19 642
Other 7 500 -
TOTAL INVESTMENTS 2 820 355 2 519 257
Cash 50 927 4 577
Accrued investment income 42 385 41 847
Receivables, net 10 204 6 854
Property and equipment, net 23 628 24 791
Deferred acquisition costs 209 826 207 020
Value of purchased insurance in force 108 458 38 031
Reinsurance assets 99 593 93 328
Other 16 096 5 089
Separate account assets 57 980 13 916
$3 439 452 2 954 710
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits:
Life insurance $ 766 583 671 204
Accident and health 37 155 30 356
Accumulated contract values 1 755 133 1 544 714
Policy and contract claims 37 569 35 223
Other policyholders' funds:
Dividend and coupon accumulations 62 056 43 141
Other 68 861 60 970
Income taxes:
Current 16 113 3 537
Deferred 39 917 19 748
Other 67 491 69 037
Separate account liabilities 57 980 13 916
TOTAL LIABILITIES 2 908 858 2 491 846
Stockholders' equity:
Common stock, par value $2.50 per share
Authorized 18,000,000 shares,
issued 9,248,340 shares 23 121 23 121
Paid-in capital 16 256 14 761
Unrealized gains on securities
available for sale, net 36 448 2 963
Retained earnings 543 715 509 748
Less treasury stock, at cost
(3,055,275 shares; 3,058,871 shares -1996) (88 946) (87 729)
TOTAL STOCKHOLDERS' EQUITY 530 594 462 864
$3 439 452 2 954 710
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
1997 1996 1995
COMMON STOCK, beginning and end of year $ 23 121 23 121 23 121
PAID IN CAPITAL:
Beginning of year 14 761 13 039 11 847
Excess of proceeds over
cost of treasury stock sold 1 495 1 722 1 192
End of year 16 256 14 761 13 039
UNREALIZED GAINS (LOSSES ON SECURITIES
AVAILABLE FOR SALE:
Beginning of year 2 963 29 740 (51 345)
Unrealized appreciation (depreciation)
on securities available for sale, net 33 485 (26 777) 81 085
End of year 36 448 2 963 29 740
RETAINED EARNINGS:
Beginning of year 509 748 477 826 446 149
Net income 44 861 42 315 41 738
Stockholder dividends of $1.76 per share
($1.68 - 1996 and $1.63 - 1995) (10 894) (10 393) (10 061)
End of year 543 715 509 748 477 826
TREASURY STOCK, at cost:
Beginning of year (87 729) (86 599) (86 077)
Cost of 20,090 shares acquired
(27,876 shares - 1996 and
17,240 shares - 1995) (1 440) (1 501) (829)
Cost of 23,686 shares sold
(39,440 shares - 1996 and
32,709 shares - 1995) 223 371 307
End of year (88 946) (87 729) (86 599)
TOTAL STOCKHOLDERS' EQUITY $530 594 462 864 457 127
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
1997 1996 1995
OPERATING ACTIVITIES
Net income $ 44 861 42 315 41 738
Adjustments to reconcile net income to
net cash from operating activities:
Amortization of investment discount, net (1 290) (4 071) (5 215)
Depreciation 5 379 4 995 5 265
Policy acquisition costs capitalized (42 170) (38 639) (40 388)
Amortization of deferred
policy acquisition costs 35 712 30 086 27 992
Realized investment gains (14 505) (3 013) (4 950)
Changes in assets and liabilities:
Future policy benefits 16 227 15 831 15 071
Accumulated contract values (9 933) 3 183 8 135
Other policy liabilities 7 137 5 294 3 852
Income taxes payable and deferred 4 768 (8 322) (1 595)
Other, net (3 685) 5 886 4 318
NET CASH PROVIDED 42 501 53 545 54 223
INVESTING ACTIVITIES Investments called, matured or repaid:
Fixed maturities available for sale 163 867 131 545 136 574
Fixed maturities held to maturity 106 188 79 017 63 433
Equity securities available for sale 31 473 8 899 13 727
Mortgage loans on real estate 47 048 53 430 67 722
Other 278 (100) 1 542
Investments sold:
Fixed maturities available for sale 503 351 140 372 165 563
Fixed maturities held to maturity - - 4 207
Other 19 969 11 503 22 326
Investments purchased or originated:
Fixed maturities available for sale (855 980) (431 916) (495 766)
Equity securities available for sale (69 434) (18 071) (12 896)
Real estate joint ventures (16 731) (6 439) (8 093)
Mortgage loans on real estate (68 599) (54 161) (31 053)
Decrease (increase) in
short-term investments, net (54 699) 17 256 (17 558)
Other (9 144) (2 150) (1 068)
Acquisition of life block:
Cash received net of purchase price paid 213 092 - -
Net additions to property and equipment (2 872) (527) (2 918)
NET CASH PROVIDED (USED) 7 807 (71 342) (94 258)
FINANCING ACTIVITIES
Proceeds from borrowings 245 050 1 650 22 730
Repayment of borrowings (245 050) (1 650) (22 730)
Policyowner contract deposits 169 699 164 677 179 135
Withdrawals of policyowner
contract deposits (163 041) (142 114) (127 347)
Cash dividends to stockholders (10 894) (10 393) (10 061)
Disposition of treasury stock, net 278 592 670
NET CASH PROVIDED (USED) (3 958) 12 762 42 397
Increase (decrease) in cash 46 350 (5 035) 2 362
Cash at beginning of year 4 577 9 612 7 250
CASH AT END OF YEAR $ 50 927 4 577 9 612
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are generally stated in thousands,
except per share data.)
SIGNIFICANT ACCOUNTING POLICIES
Organization
Kansas City Life Insurance Company is a Missouri domiciled stock life insurance
company which, with its affiliates, is licensed to sell insurance products in 48
states and the District of Columbia. The Company offers a diversified portfolio
of individual insurance, annuity and group products distributed through numerous
general agencies. In recent years, the Company's new business activities have
been concentrated in interest sensitive and variable products.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the
basis of generally accepted accounting principles (GAAP) and include the
accounts of Kansas City Life Insurance Company and its subsidiaries. Significant
intercompany transactions have been eliminated in consolidation. Certain
reclassifications have been made to prior year results to conform with the
current year's presentation. GAAP requires management to make certain estimates
and assumptions which affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Recognition of Revenues
Traditional life insurance products include whole life insurance, term life
insurance and certain annuities. Premiums for these products are recognized as
revenues when due. Accident and health insurance premiums are recognized as
revenues over the terms of the policies. Universal life-type products include
universal life insurance and flexible annuities. Revenues for these products are
amounts assessed against contract values for cost of insurance, policy
administration and surrenders, as well as amortization of deferred front-end
contract charges.
Future Policy Benefits
For traditional life insurance products, reserves have been computed by a net
level premium method based upon estimates at the time of issue for investment
yields, mortality and withdrawals. These estimates include provisions for
experience less favorable than actually expected. Investment yield assumptions
for new issues are graded and range from 5.75 percent to 7.75 percent. Mortality
assumptions are based on standard mortality tables. The 1965-70 Select and
Ultimate Basic Table is used for business issued since 1977.
Reserves and claim liabilities for accident and health insurance include
estimated unpaid claims and claims incurred but not reported. For traditional
life and accident and health insurance, benefits and claims are charged to
expense in the period incurred.
Liabilities for universal life-type products represent accumulated contract
values, without reduction for potential surrender charges, and deferred
front-end contract charges which are amortized over the term of the policies.
Benefits and claims are charged to expense in the period incurred net of related
accumulated contract values. Interest on accumulated contract values is credited
to contracts as earned. Crediting rates for universal life insurance and
flexible annuity products ranged from 4.75 percent to 6.50 percent during 1997
(4.75 percent to 6.75 percent during 1996 and 4.79 percent to 7.00 percent
during 1995).
Withdrawal assumptions for all products are based on corporate experience.
Policy Acquisition Costs
The costs of acquiring new business, principally commissions, certain policy
issue and underwriting expenses and certain variable agency expenses, are
deferred. For traditional life products, deferred acquisition costs are
amortized in proportion to premium revenues over the premium-paying period of
related policies, using assumptions consistent with those used in computing
benefit reserves. Acquisition costs for universal life-type products are
amortized over a period not exceeding 30 years in proportion to estimated gross
profits arising from interest spreads and mortality, expense and surrender
charges expected to be realized over the term of the contracts.
Value of Purchased Insurance in Force
The value of purchased insurance in force arising from the acquisition of a life
insurance subsidiary and, in 1997, the acquisition of a life insurance block of
business is being amortized in proportion to projected future gross profits.
This asset was increased $76,533,000 for the acquisition of the life insurance
block of business and $8,856,000 ($5,030,000 -1996 and $5,157,000 - 1995) for
accrual of interest and reduced $14,962,000 ($6,082,000 - 1996 and $6,088,000 -
1995) for amortization. The increase for accrual of interest was calculated
using a 13.0 percent interest rate for the life insurance subsidiary and, on the
acquired block, a 7.0 percent interest rate on the traditional life portion and
a 5.4 percent rate on the interest sensitive portion. Through 1997, total
accumulated accrual of interest and amortization equal $35,496,000 and
$47,071,000, respectively. The percentage of the asset's current carrying amount
which will be amortized in each of the next five years is 6.9 percent - 1998,
6.8 percent - 1999, 6.7 percent - 2000, 6.5 percent - 2001 and 6.1 percent -
2002.
Participating Policies
Participating business at year end approximates 15 percent of the consolidated
life insurance in force. The amount of dividends to be paid is determined
annually by the Board of Directors. Provision has been made in the liability for
future policy benefits to allocate amounts to participating policyholders on the
basis of dividend scales contemplated at the time the policies were issued.
Additional provisions have been made for policyholder dividends in excess of the
original scale which have been declared by the Board of Directors.
Investments
Securities held to maturity and short-term investments are stated at cost
adjusted for amortization of premium and accrual of discount. Securities
available for sale are stated at fair value. Unrealized gains and losses on
securities available for sale are reduced by deferred income taxes and related
adjustments in deferred acquisition costs, and are included in a separate
stockholders' equity account.
Mortgage loans are stated at cost adjusted for amortization of premium and
accrual of discount less an allowance for possible losses. Foreclosed real
estate is stated at fair value at the date of foreclosure (cost) or net
realizable value, whichever is lower. Other real estate investments are carried
at depreciated cost. Real estate joint ventures are valued at cost adjusted for
the Company's equity in earnings since acquisition. Policy loans are carried at
cost less payments received. Realized gains and losses on disposals of
investments, determined by the specific identification method, are included in
investment revenues.
Federal Income Taxes
Income taxes have been provided using the liability method. Under that method,
deferred tax assets and liabilities are determined based on the differences
between their financial reporting and their tax bases and are measured using the
enacted tax rates.
Income Per Share
In 1997 the Company adopted Financial Accounting Standard No. 128, "Earnings per
Share". Due to the Company's capital structure and lack of other potentially
dilutive securities, there is no difference between basic and diluted earnings
per common share for any of the years or periods reported. The weighted average
number of shares outstanding during the year was 6,190,793 shares (6,188,489
shares - 1996 and 6,173,294 shares - 1995).
Statutory Information and
Stockholder Dividends Restriction
The Company's earnings, unassigned surplus (retained earnings) and stockholders'
equity, on the statutory basis used to report to regulatory authorities, follow.
1997 1996 1995
Net gain (loss) from operations for the year $(21 214) 27 345 29 307
Net income (loss) for the year (18 681) 25 574 29 484
Unassigned surplus at December 31 246 717 284 417 268 239
Stockholders' equity at December 31 197 147 234 570 217 801
The statutory loss reported in 1997 arose from the acquisition of a block of
business as discussed in a following Note. In accordance with statutory
accounting guidelines for coinsurance transactions, the acquisition reduced
statutory earnings and stockholders' equity at the date of acquisition $51.4
million, the purchase price paid less related tax benefits.
Stockholder dividends may not exceed statutory unassigned surplus. Additionally,
under Missouri law, the Company must have the prior approval of the Missouri
Director of Insurance in order to pay a dividend exceeding the greater of
statutory net gain from operations for the preceding year or 10 percent of
statutory stockholders' equity at the end of the preceding year. The maximum
payable in 1998 without prior approval is $19,715,000. The Company believes
these statutory limitations impose no practical restrictions on its dividend
payment plans.
The Company is required to deposit a defined amount of assets with state
regulatory authorities. Such assets had an aggregate carrying value of
approximately $36,000,000 ($36,000,000 - 1996 and $100,000,000 - 1995).
INVESTMENTS
Investment Revenues Major categories of investment revenues are summarized as
follows.
1997 1996 1995
Investment income:
Fixed maturities $154 393 150 421 144 242
Equity securities 7 288 5 503 6 259
Mortgage loans 23 984 23 127 31 378
Real estate 10 350 13 237 12 342
Policy loans 7 296 6 372 6 174
Short-term 3 612 2 353 2 753
Other 3 132 2 222 2 533
210 055 203 235 205 681
Less investment expenses (16 359) (16 492) (17 594)
$193 696 186 743 188 087
Realized gains (losses:
Fixed maturities $ 4 778 (1 862) (1 718)
Equity securities 3 702 961 4 634
Mortgage loans - 2 000 (108)
Real estate 6 025 1 894 2 172
Other - 20 (30)
$ 14 505 3 013 4 950
Unrealized Gains and Losses
Unrealized gains (losses) on the Company's securities follow.
1997 1996 1995
Available for sale:
End of year $ 59 726 4 558 51 744
Deferred income taxes (19 626) (1 595) (16 013)
Effect on deferred acquisition costs (3 652) - (5 991)
$ 36 448 2 963 29 740
Increase (decrease) in net unrealized gains during the year:
Fixed maturities $ 33 209 (26 216) 78 876
Equity securities 276 (561) 2 209
$ 33 485 (26 777) 81 085
Held to maturity:
End of year $ 5 834 7 609 19 517
Increase (decrease) in
net unrealized gains during the year $ (1 775) (11 908) 16 667
The Company's securities categorized as available for sale are stated at fair
value. The resulting adjustment to fair value results in significant volatility
on stockholders' equity and the various calculations that are dependent on
stockholders' equity, such as return on equity.
Securities
The amortized cost and fair value of investments in securities at December 31,
1997, follow.
Gross
Amortized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U.S. government bonds $ 135 182 3 166 297 138 051
Public utility bonds 281 781 6 956 662 288 075
Corporate bonds 1 130 938 34 827 3 315 1 162 450
Mortgage-backed bonds 315 621 9 416 375 324 662
Other bonds 81 469 2 260 425 83 304
Redeemable preferred stocks 7 750 261 38 7 974
Total fixed maturities 1 952 741 56 886 5 112 2 004 516
Equity securities 107 034 8 709 757 114 986
2 059 775 65 595 5 869 2 119 502
Held to maturity:
Public utility bonds 50 291 2 494 56 52 729
Corporate bonds 92 350 3 727 641 95 436
Other bonds 3 020 310 - 3 330
145 661 6 531 697 151 495
$2 205 436 72 126 6 566 2 270 997
The amortized cost and fair value of investments in securities at December 31,
1996, follow.
Gross
Amortized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U.S. government bonds $ 144 299 1 633 518 145 414
Public utility bonds 254 875 2 755 3 631 253 999
Corporate bonds 981 157 10 122 17 161 974 118
Mortgage-backed bonds 253 810 6 473 1 532 258 751
Other bonds 114 539 850 2 238 113 151
Redeemable preferred stocks 13 411 419 110 13 720
Total fixed maturities 1 762 091 22 252 25 190 1 759 153
Equity securities 71 522 8 340 844 79 018
1 833 613 30 592 26 034 1 838 171
Held to maturity:
Public utility bonds 138 592 5 619 306 143 905
Corporate bonds 104 713 3 387 1 416 106 684
Other bonds 5 128 325 - 5 453
248 433 9 331 1 722 256 042
$2 082 046 39 923 27 756 2 094 213
All fixed maturity securities produced income in 1997.
The distribution of the fixed maturity securities' contractual maturities
follows. However, expected maturities may differ from these contractual
maturities since borrowers may have the right to call or prepay obligations.
Amortized Fair
Cost Value
Available for sale:
Due in one year or less $ 60 259 60 510
Due after one year through five years 290 534 295 928
Due after five years through ten years 706 504 717 050
Due after ten years 579 823 606 366
Mortgage-backed bonds 315 621 324 662
$1 952 741 2 004 516
Held to maturity:
Due in one year or less $ 27 043 27 342
Due after one year through five years 50 554 53 023
Due after five years through ten years 28 944 30 892
Due after ten years 39 120 40 238
$ 145 661 151 495
Sales of investments in securities available for sale, excluding normal
maturities and calls, follow.
1997 1996 1995
Proceeds $509 502 141 335 184 547
Gross realized gains 11 597 1 400 6 416
Gross realized losses 2 349 1 420 6 527
At December 31, 1997, the Company did not hold securities of any corporation and
its affiliates which exceeded 10 percent of stockholders' equity.
Kansas City Life employs no derivative financial instruments.
The Company maintains a $60 million bank line of credit which may be used to
support investment strategies. This line is unused at December 31, 1997, and
will expire in April 1998.
Mortgage Loans
The Company holds non-income producing mortgage loans equaling $327,000
($2,077,000 - 1996). Mortgage loans are carried net of a valuation reserve of
$8,500,000 ($8,500,000 - 1996).
At December 31, 1997 and 1996, the mortgage portfolio is diversified
geographically and by property type as follows.
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Geographic region:
East north central $ 26 937 27 421 21 890 22 162
Mountain 64 602 66 321 75 058 76 163
Pacific 91 963 94 366 81 955 82 599
West south central 32 997 33 961 36 155 36 940
West north central 55 320 56 485 35 463 36 003
Other 6 735 7 017 4 472 4 662
Valuation reserve (8 500) (8 500) (8 500) (8 500)
$270 054 277 071 246 493 250 029
Property type:
Industrial $170 199 174 278 136 266 137 633
Retail 29 532 30 531 45 555 46 681
Office 58 658 60 267 54 332 55 280
Other 20 165 20 495 18 840 18 935
Valuation reserve (8 500) (8 500) (8 500) (8 500)
$270 054 277 071 246 493 250 029
As of December 31, 1997, the Company has commitments which expire in 1998 to
originate mortgage loans of $13,794,000 and to advance $10,454,000 on an
existing short-term line of credit.
Mortgage loans foreclosed upon and transferred to real estate investments during
the year equaled $3,189,000 ($2,977,000 - 1996 and $4,322,000 - 1995).
Mortgage loans acquired in the sale of real estate assets during the year
totaled $4,299,000 ($6,579,000 - 1996 and $9,571,000 - 1995).
Real Estate
Detail concerning the Company's real estate investments follows.
1997 1996
Penntower office building, at cost:
Land $ 1 106 1 106
Building 18 068 17 644
Less accumulated depreciation (9 809) (9 303)
Foreclosed real estate, at lower of
cost or net realizable value 13 362 18 218
Other investment properties, at cost:
Land 3 214 3 370
Buildings 24 216 25 907
Less accumulated depreciation (13 393) (13 192)
$ 36 764 43 750
Investment real estate, other than foreclosed properties, is depreciated on a
straight-line basis. Penntower office building is depreciated over 60 years and
all other properties from 10 to 35 years. Foreclosed real estate is carried net
of a valuation allowance of $3,686,000 ($5,227,000 - 1996) to reflect net
realizable value.
The Company held non-income producing real estate equaling $820,000 ($758,000 -
1996).
PROPERTY AND EQUIPMENT
1997 1996
Land $ 1 029 1 029
Home office buildings 23 149 23 131
Furniture and equipment 27 502 24 760
51 680 48 920
Less accumulated depreciation (28 052) (24 129)
$23 628 24 791
Property and equipment are stated at cost and depreciated using the
straight-line method. Home office buildings are depreciated over 25 to 50 years
and furniture and equipment over 3 to 10 years, their estimated useful lives.
POSTRETIREMENT BENEFIT PLANS
The Company has defined benefit postretirement plans providing medical benefits
for substantially all its employees, full-time agents, and their dependents, and
life insurance coverage for its employees. The Company and retirees share the
cost of the postretirement medical plan which incorporates cost-sharing features
such as annually adjusted contributions, deductibles and coinsurance. The
medical benefits for agents are contributory, incorporating cost-sharing
features similar to the retired employees' medical plan. The life insurance
benefit is non-contributory. The Company pays the cost of the postretirement
health care benefits as they occur. The Company makes level annual contributions
to its life insurance plan over the plan participants' expected service periods.
The plans' funded status, reconciled with the amounts recognized in the
Company's balance sheet, follows.
1997 1996
Accumulated postretirement benefit obligation:
Retirees $ 6 516 7 750
Fully eligible active plan participants 2 914 1 904
Other active plan participants 8 242 5 803
17 672 15 457
Unrecognized net loss (1 735) (590)
$15 937 14 867
The net periodic postretirement benefit cost included the following components.
1997 1996 1995
Service cost $ 560 536 314
Interest cost 930 794 669
Net amortization of experience gains (6) - (93)
$1 484 1 330 890
The weighted average annual assumed rate of increase in the per capita cost of
covered benefits for the medical plans is 10 percent for 1998, and is assumed to
decrease gradually to 6 percent in 2004. Increasing the assumed health care cost
growth rates by one percentage point increases the accrued postretirement
benefit costs $2,207,000 and $2,040,000 as of December 31, 1997 and 1996,
respectively. The aggregate service and interest cost components of the net
periodic postretirement benefit cost for 1997 would increase $312,000. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25 percent and 7.75 percent at December
31, 1997 and 1996, respectively.
EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all its
employees. The benefits are based on years of service and the employee's
compensation during the last five years of employment. The Company annually
funds an amount greater than the minimum required by ERISA but no more than the
maximum deductible for Federal income tax purposes. Contributions provide not
only for benefits attributed to service to date, but also for those expected to
be earned in the future. The table below outlines the plan's funded status and
those amounts recognized in the Company's financial statements.
1997 1996
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$94,698,000 ($79,913,000 - 1996) $102 846 86 635
Projected benefit obligation for service
rendered to date $119 651 100 571
Plan assets at fair value, primarily
listed corporate and U.S. bonds 95 899 85 241
Plan assets less than projected benefit obligation (23 752) (15 330)
Items not yet recognized in earnings:
Net loss from past experience 25 452 15 571
Prior service costs 12 14
Net asset at January 1, 1987, being recognized
over 16 years (1 030) (1 236)
Net prepaid (unfunded) pension costs $ 682 (981)
1997 1996 1995
Net pension cost includes:
Service costs - benefits earned
during the period $ 3 150 3 369 2 403
Interest cost on projected benefit obligation 7 823 6 647 6 156
Actual return on plan assets (9 752) (2 951)(14 139)
Net amortization and deferral 2 354 (4 547) 7 412
Net periodic pension cost $ 3 575 2 518 1 832
Assumptions were as follows:
Weighted average discount rate 7.25 % 7.75 7.00
Weighted average compensation increase 4.50 4.50 5.50
Weighted average expected
long-term return on plan assets 9.00 9.00 9.00
At December 31, 1996, the Company utilized more recent mortality experience
which caused some increase in the benefit obligations.
The 1997 contribution to the pension plan was $4,967,000 (none - 1996 and
$992,000 - 1995).
Non-contributory defined contribution retirement plans are offered for general
agents and eligible sales agents which provide supplemental payments based upon
earned agency first-year individual life and annuity commissions. Contributions
to these plans were $133,000 ($174,000 -1996 and $287,000 - 1995). The Company
also sponsors a non-contributory deferred compensation plan for eligible agents
based upon earned first-year commissions. Contributions to this plan were
$226,000 ($318,000 - 1996 and $405,000 - 1995).
Savings plans for eligible employees and agents are sponsored in which the
Company matches employee contributions up to 10 percent of salary and agent
contributions up to 2.5 percent of prior year paid commissions. Contributions to
the plans were $2,102,000 ($2,082,000 -1996 and $1,826,000 - 1995). The
employees' plan will change for 1998 in that the Company will match employee
contributions up to 6 percent of salary and the Company may contribute a profit
sharing amount up to 4 percent of salary depending upon the Company's profit
performance.
The Company also has a non-contributory trusteed employee stock ownership plan
covering substantially all salaried employees. The Company made no contributions
to this plan between 1995 and 1997.
Effective January 1, 1998, the Company amended the defined benefit plan for all
employees other than those who are age 55 or over with at least 15 years of
vested service. For these employees the defined benefit pension plan is
converted to a cash balance plan whereby each employee will have a cash balance
account. Generally, the cash balance account consists of credits to the account
based on an employee's years of service and compensation, and interest credits,
which for 1998 will be 7 percent.
FEDERAL INCOME TAXES
A reconciliation of the Federal income tax rate and the actual tax rate
experienced is shown below.
1997 1996 1995
Federal income tax rate 35% 35 35
Special tax credits (6) (5) (4)
Other permanent differences (1) (1) (1)
Actual income tax rate 28% 29 30
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are presented below.
1997 1996
Deferred tax assets:
Future policy benefits $ 53 923 46 518
Employee retirement benefits 13 104 13 055
Other 2 882 5 176
Gross deferred tax assets 69 909 64 749
Deferred tax liabilities:
Capitalization of policy acquisition
costs, net of amortization 40 844 49 175
Basis differences between tax and GAAP
accounting for investments 28 080 20 093
Property and equipment, net 1 704 1 770
Value of insurance in force 36 551 11 790
Other 2 647 1 669
Gross deferred tax liabilities 109 826 84 497
Net deferred tax liability $ 39 917 (19 748)
Federal income taxes paid for the year were $14,335,000 ($25,332,000 - 1996 and
$19,981,000 - 1995).
Policyholders' surplus, which is frozen under the Deficit Reduction Act of 1984,
is $40,500,000 for Kansas City Life, $2,800,000 for Sunset Life Insurance
Company of America (Sunset Life) and $13,700,000 for Old American Insurance
Company (Old American). The Companies do not plan to distribute their
policyholders' surplus. Consequently, the possibility of such surplus becoming
subject to tax is remote, and no provision has been made in the financial
statements for taxes thereon. Should the balance in policyholders' surplus
become taxable, the tax computed at current rates would approximate $19,950,000.
Income taxed on a current basis is accumulated in "shareholders' surplus" and
can be distributed to stockholders without tax to the Company. At December 31,
1997, this shareholders' surplus was $348,057,000 for Kansas City Life,
$73,170,000 for Sunset Life and $44,703,000 for Old American.
SEPARATE ACCOUNTS
These accounts arise from the variable line of business. Their assets are
legally segregated and are not subject to the claims which may arise from any
other business of the Company. These assets are reported at fair value since the
underlying investment risks are assumed by the policyholders. Therefore the
related liabilities are recorded at amounts equal to the underlying assets.
Investment income and gains or losses arising from separate accounts accrue
directly to the policyholders and are, therefore, not included in investment
earnings in the accompanying consolidated income statement. Revenues to the
Company from separate accounts consist principally of contract maintenance
charges, administrative fees and mortality and risk charges.
REINSURANCE
1997 1996 1995
Life insurance in force (in millions):
Direct $ 22 800 22 121 20 991
Ceded (3 375) (2 742) (2 442)
Assumed 3 796 28 33
Net $ 23 221 19 407 18 582
Premiums:
Life insurance:
Direct $128 491 127 150 124 504
Ceded (26 262) (24 380) (23 292)
Assumed 3 822 493 129
Net $106 051 103 263 101 341
Accident and health:
Direct $ 55 022 48 694 42 971
Ceded (10 091) (11 370) (13 496)
Assumed - 251 -
Net $ 44 931 37 575 29 475
Contract charges arise generally from directly issued business. However contract
charges also arise from a block of business assumed during 1997 as described
below. Ceded benefit recoveries were $39,483,000 ($37,829,000 - 1996 and
$27,613,000 - 1995).
Old American has a coinsurance agreement with Employers Reassurance Corporation
which reinsures certain whole life policies issued by Old American prior to
December 1, 1986. As of December 31, 1997, these policies had a face value of
$136,519,000. The reserve for future policy benefits ceded under this agreement
was $51,003,000 ($52,556,000 - 1996).
As discussed in a following Note, the Company acquired a block of life insurance
business through a reinsurance treaty during 1997. At December 31, 1997, the
block had $3.8 billion of insurance in force, future policy benefits of
$88,476,000 and accumulated contract values of $213,300,000. During 1997, life
insurance premiums of $3,096,000 and contract charges of $9,997,000 were
recognized related to this block.
The maximum retention on any one life is $350,000 for ordinary life plans and
$100,000 for group coverage. A contingent liability exists with respect to
reinsurance, which may become a liability of the Company in the unlikely event
that the reinsurers should be unable to meet obligations assumed under
reinsurance contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, short-term investments and policy loans as
reported in the accompanying balance sheet approximate their fair values. The
fair values for securities are based on quoted market prices, where available.
For those securities not actively traded, fair values are estimated using values
obtained from independent pricing services or, in the case of private
placements, are estimated by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality and maturity of the
investments. Fair values for mortgage loans are based upon discounted cash flow
analyses using an interest rate assumption 2 percent above the comparable U.S.
Treasury rate.
Fair values for the Company's liabilities under investment-type insurance
contracts, included with accumulated contract values for flexible annuities and
with other policyholder funds for supplementary contracts without life
contingencies, are estimated to be their cash surrender values.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The carrying amounts and fair values of the financial instruments follow.
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Investments:
Securities available
for sale $2 119 502 2 119 502 1 838 171 1 838 171
Securities held
to maturity 145 661 151 495 248 433 256 042
Mortgage loans 270 054 277 071 246 493 250 029
Liabilities:
Individual and
group annuities 830 495 802 461 862 605 829 261
Supplementary contracts
without life contingencies 21 526 21 526 21 835 21 835
The Investments Note provides further details regarding the investments above.
QUARTERLY CONSOLIDATED FINANCIAL DATA
(unaudited)
First Second Third Fourth
1997:
Total revenues $108 379 108 836 124 932 120 747
Operating income $ 10 299 8 548 7 639 8 946
Realized gains, net 1 835 957 4 119 2 517
Net income $ 12 134 9 505 11 758 11 463
Per common share:
Operating income $ 1.66 1.39 1.23 1.44
Realized gains, net .30 .15 .67 .41
Net income $ 1.96 1.54 1.90 1.85
1996:
Total revenues $106 434 101 263 104 924 106 497
Operating income $ 11 933 10 002 8 643 9 777
Realized gains (losses), net 614 (308) 671 982
Net income $ 12 547 9 694 9 314 10 759
Per common share:
Operating income $ 1.93 1.62 1.39 1.58
Realized gains (losses), net .10 (.05) .11 .16
Net income $ 2.03 1.57 1.50 1.74
CONTINGENT LIABILITIES
The Company and certain of its subsidiaries are defendants in lawsuits involving
claims and disputes with policyholders that may include claims seeking punitive
damages. Some of these lawsuits arise in jurisdictions that permit punitive
damages disproportionate to the actual damages alleged. Although no assurances
can be given and no determinations can be made at this time as to the outcome of
any particular lawsuit or proceeding, the Company and its subsidiaries believe
that there are meritorious defenses for these claims and are defending them
vigorously. Management believes that the amounts that would ultimately be paid,
if any, would have no material effect on the Company's consolidated results of
operations and financial position.
ACQUISITION OF A BLOCK OF BUSINESS
In September 1997, the Company acquired a block of traditional life and
universal life-type products through a reinsurance treaty. The ceding company
transferred $331,434,000 in liabilities and $254,901,000 in assets, principally
cash. The difference was recorded as value of purchased insurance inforce and is
being amortized in proportion to projected future gross profits over 30 years,
the estimated life of the business.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Kansas City Life Insurance Company
We have audited the accompanying consolidated balance sheet of Kansas City Life
Insurance Company (the Company) as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kansas
City Life Insurance Company at December 31, 1997 and 1996 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
January 26, 1998
Ernst & Young LLP
See accompanying Notes to Financial Statements
Kansas City Life
Variable Annuity
Separate Account
Financial Statements
Years ended December 31, 1997 and 1996
Table of Contents
Statement of Net Assets 1
Statement of Operations and Changes in Net Assets 3
Notes to Financial Statements 5
Report of Independent Auditors 9
Kansas City Life Variable Annuity Separate Account
Statement of Net Assets
December 31, 1997
(in thousands except shares, net asset value per share, and cost)
Assets
Investments:
Federated Securities - Federated Insurance Series:
American Leaders Fund II - 283,250 shares at net asset
value of $19.63 per share (cost $4,754,000) $ 5,560
High Income Bond Fund II - 411,769 shares at net asset
value of $10.95 per share (cost $4,295,000) 4,509
Prime Money Fund II - 1,528,624 shares at net asset
value of $1.00 per share (cost $1,529,000) 1,529
Massachusetts Financial Services (MFS):
Research Series - 490,387 shares at net asset value
$15.79 per share (cost $6,824,000) 7,743
Emerging Growth Series - 475,261 shares at net asset
value of $16.14 per share (cost $6,584,000) 7,671
Total Return Series - 249,763 shares at net asset value
of $16.63 per share (cost $3,703,000) 4,153
Bond Series - 96,205 shares at net asset value of
$11.08 per share (cost $982,000) 1,066
World Governments Series - 36,720 shares at net asset
value of $10.21 per share (cost $378,000) 375
Utilities Series - 182,299 shares at net asset value
of $17.99 per share (cost $2,804,000) 3,279
American Century - ACI Variable Portfolios:
VP Capital Appreciation - 184,472 shares at net asset
value of $9.68 per share (cost $1,918,000) 1,786
VP International - 369,711 shares at net asset value
of $6.84 per share (cost $2,328,000) 2,529
Dreyfus Corporation:
Capital Appreciation Portfolio - 60,544 shares at net
asset value of $27.90 per share (cost $1,670,000) 1,689
Small Cap Portfolio - 70,301 shares at net asset value
of $57.14 per share (cost $4,244,000) 4,017
Stock Index Fund - 158,991 shares at net asset value
of $25.75 per share (cost $4,030,000) 4,094
Total Assets $ 50,000
See accompanying Notes to Financial Statements
Kansas City Life Variable Annuity Separate Account
Statement of Net Assets
(Continued)
Net Assets
Federated Securities - Federated Insurance Series:
American Leaders Fund II $ 5,560
High Income Bond Fund II 4,509
Prime Money Fund II 1,529
Massachusetts Financial Services (MFS):
Research Series 7,743
Emerging Growth Series 7,671
Total Return Series 4,153
Bond Series 1,066
World Governments Series 375
Utilities Series 3,279
American Century - ACI Variable Portfolios:
VP Capital Appreciation 1,786
VP International 2,529
Dreyfus Corporation:
Capital Appreciation Portfolio 1,689
Small Cap Portfolio 4,017
Stock Index Fund 4,094
Total Net Assets $ 50,000
See accompanying Notes to Financial Statements
<TABLE>
Kansas City Life Variable Annuity Separate Account
Statement of Operations and Changes in Net Assets
Year ended December 31, 1997
(in thousands)
<CAPTION>
Federated Insurance Series MFS Variable Insurance Trust ACI Port- Dreyfus Corporation
High folios Capital Small
American Income Prime Emerging Total World Util- VP Apprec. Cap
Leaders Bond Money Research Growth Return Bond Gov'ts ities Capital VP Port- Port- Stock
Fund II Fund II Fund II Series Series Series Series Series Series Apprec Int'l folio folio Index Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Distributions $ 13 92 63 - - - - 7 - - 12 13 4 21 225
Capital Gains Distributions 35 6 - - - - - - - 31 22 1 222 80 397
Realized Gain (Loss) on
Investments 36 6 - 21 40 10 2 (1) 11 (4) 21 (1) 3 2 146
Unrealized Appreciation
(Depreciation) on
Investments 691 176 - 727 1,008 402 82 (4) 459 (46) 131 19 (227) 64 3,482
Net Investment Income 775 280 63 748 1,048 412 84 2 470 (19) 186 32 2 167 4,250
Expenses:
Mortality and Expense
Fees 44 31 18 65 75 31 12 5 20 21 22 6 14 13 377
Administrative Fees 6 3 6 11 12 4 1 - 3 3 4 2 8 2 65
Expenses 50 34 24 76 87 35 13 5 23 24 26 8 22 15 442
Increase (Decrease) in Net
Assets from Operations 725 246 39 672 961 377 71 (3) 447 (43) 160 24 (20) 152 3,808
Deposits 3,110 2,845 6,149 4,275 3,356 2,445 331 156 2,134 601 1,396 1,178 3,226 3,653 34,855
Payments and Withdrawals:
Death Benefits - (28) (17) (2) (23) (4) - - (26) (4) (23) - - - (127)
Withdrawals (66) (63) (136) (107) (204) (43) (16) (6) (24) (67) (40) (3) (49) (10) (834)
Transfers in (out) 611 494 (5,065) 502 467 438 79 (3) 344 (74) 148 490 860 299 (410)
Total Payments and
Withdrawals 545 403 (5,218) 393 240 391 63 (9) 294 (145) 85 487 811 289 (1,371)
Net Assets:
Net Increase 4,380 3,494 970 5,340 4,557 3,213 465 144 2,875 413 1,641 1,689 4,017 4,094 37,292
Beginning of Year 1,180 1,015 559 2,403 3,114 940 601 231 404 1,373 888 - - - 12,708
End of Year $ 5,560 4,509 1,529 7,743 7,671 4,153 1,066 375 3,279 1,786 2,529 1,689 4,017 4,094 50,000
See accompanying Notes to Financial Statements
</TABLE>
<TABLE>
Kansas City Life Variable Annuity Separate Account
Statement of Operations and Changes in Net Assets
Year ended December 31, 1996
(in thousands)
<CAPTION>
Federated Insurance Series MFS Variable Insurance Trust ACI Port-
High folios
American Income Prime Emerging Total World Util- VP
Leaders Bond Money Research Growth Return Bond Gov'ts ities Capital VP
Fund II Fund II Fund II Series Series Series Series Series Series Apprec Int'l Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income:
Dividend Distributions $ 8 48 18 3 - 14 19 - 9 - 4 123
Capital Gains Distributions 2 - - 30 26 6 - - 24 38 2 128
Realized Gain (Loss) on
Investments 1 1 - 3 16 - - - - (5) - 16
Unrealized Appreciation
(Depreciation) on
Investments 113 37 - 191 80 48 2 8 22 (86) 68 483
Net Investment Income 124 86 18 227 122 68 21 8 55 (53) 74 750
Expenses:
Mortality and Expense
Fees 8 8 5 16 21 6 4 2 4 9 6 89
Administrative Fees 2 1 2 4 6 1 1 - 1 1 1 20
Expenses 10 9 7 20 27 7 5 2 5 10 7 109
Increase (Decrease) in Net
Assets from Operations 114 77 11 207 95 61 16 6 50 (63) 67 641
Deposits 866 790 2,070 1,786 2,531 685 457 105 220 1,038 605 11,153
Payments and Withdrawals:
Withdrawals (7) (47) (83) (14) (35) (8) (6) (1) (2) (17) (10) (230)
Transfers in (out) 47 75 (1,533) 220 375 160 121 25 12 296 102 (120)
Total Payment and
Withdrawals 40 28 (1,636) 206 340 152 115 24 10 279 92 (350)
Net Assets:
Net Increase 1,020 895 445 2,199 2,996 898 588 135 280 1,254 764 11,444
Beginning of Year 160 120 114 204 148 42 13 96 124 119 124 1,264
End of Year $ 1,180 1,015 559 2,403 3,114 940 601 231 404 1,373 888 12,708
See accompanying Notes to Financial Statements
</TABLE>
Kansas City Life Variable Annuity Separate Account
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Organization
Kansas City Life Variable Annuity Separate Account, marketed as Century II
Variable Annuity, (the Account) is a separate account of Kansas City Life
Insurance Company (KCL). The Account is registered as a unit investment trust
under the Investment Company Act of 1940, as amended. All deposits received by
the Account have been directed by the contract owners into subaccounts of four
series-type mutual funds, as listed below, or into KCL's Fixed Account. The
Dreyfus Corporation subaccounts were added in May, 1997.
Federated Insurance Series
American Leaders Fund II Long-term growth of capital
High Income Bond Fund II High current income
Prime Money Fund II Current income with stability of principal and
liquidity
MFS Variable Insurance Trust
MFS Research Series Long-term growth of capital and future income
MFS Emerging Growth Series Long-term growth of capital
MFS Total Return Series Income and opportunities for growth of capital
and income
MFS Bond Series Current income and protection of shareholders'
capital
MFS World Governments Series Preservation and growth of capital with moderate
current income
MFS Utilities Series Capital growth and current income
ACI Variable Portfolios, Inc.
VP Capital Appreciation Capital growth through investment in common
(formerly TCI Growth) stocks
VP International Capital growth through investment in foreign
(formerly TCI International) securities
Dreyfus Corporation
Capital Appreciation Portfolio Long-term capital growth with preservation of
capital
Small Cap Portfolio Capital appreciation
Stock Index Fund Price and yield performance that corresponds to
the Standard & Poor's 500 Composite Stock
Price Index
Basis of Presentation and Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Kansas City Life Variable Annuity Separate Account
Notes to Financial Statements (continued)
Reinvestment of Dividends
Interest and dividend income and capital gains distributions paid by the mutual
funds to the Account are reinvested in additional shares of each respective
subaccount. Capital gains distributions are recorded as income on the date of
receipt.
Federal Income Taxes
Under current law, no Federal income taxes are payable with respect to the
Account.
Investment Valuation
Investments in mutual fund shares are carried in the statement of net assets at
quoted market value (net asset value of the underlying mutual fund). The average
cost method is used to determine gains and losses.
The aggregate cost of purchases and proceeds from sales and the number of shares
thereon were as follows:
Cost of Proceeds Shares
1997: Purchases from Sales Purchased Sold
(in thousands)
American Leaders Fund II $4,562 909 256,597 50,664
High Income Bond Fund II 4,113 801 389,219 76,575
Prime Money Fund II 7,805 6,835 7,805,235 6,835,583
MFS Research Series 5,477 885 366,608 59,208
MFS Emerging Growth Series 4,849 1,340 328,308 88,258
MFS Total Return Series 3,235 434 208,824 27,641
MFS Bond Series 483 102 46,160 9,667
MFS World Governments Series 238 89 23,656 8,775
MFS Utilities Series 2,713 308 172,192 19,487
ACI VP Capital Appreciation 1,189 726 121,059 70,661
ACI VP International 2,035 546 302,444 81,669
Dreyfus Capital Apprec-
iation Portfolio 1,976 305 71,787 11,243
Dreyfus Small Cap Portfolio 4,961 720 82,355 12,054
Dreyfus Stock Index 4,334 306 171,026 12,036
Cost of Proceeds Shares
1996: Purchases from Sales Purchased Sold
(in thousands)
American Leaders Fund II $1,114 208 80,305 15,481
High Income Bond Fund II 1,098 241 111,304 24,492
Prime Money Fund II 2,872 2,427 2,871,785 2,426,951
MFS Research Series 2,336 331 192,136 27,843
MFS Emerging Growth Series 3,498 628 270,880 48,659
MFS Total Return Series 953 103 73,319 8,161
MFS Bond Series 659 73 65,728 7,300
MFS World Governments Series 143 16 14,011 1,601
MFS Utilities Series 276 18 21,082 1,345
ACI VP Capital Appreciation 1,511 166 139,543 15,311
ACI VP International 809 113 146,506 20,815
2. Accumulation Unit Value
The Accumulation Unit Values and the number of Accumulation units outstanding
for each Investment Subaccount as of December 31, 1997 are as follows:
Unit Value Number of Units
American Leaders Fund II $16.29 341,341
High Income Bond Fund II 12.93 348,642
Prime Money Fund II 10.81 141,386
MFS Research Series 14.99 516,667
MFS Emerging Growth Series 14.79 518,578
MFS Total Return Series 14.20 292,413
MFS Bond Series 11.23 94,899
MFS World Governments Series 10.17 36,847
MFS Utilities Series 16.00 204,977
ACI VP Capital Appreciation 8.90 200,605
ACI VP International 13.41 188,540
Dreyfus Capital Apprec-
iation Portfolio 10.97 154,014
Dreyfus Small Cap Portfolio 11.50 349,294
Dreyfus Stock Index Fund 11.52 355,380
Kansas City Life Variable Annuity Separate Account
Notes to Financial Statements(continued)
3. Variable Annuity Contract Charges
KCL deducts an administrative fee of $30 per year for each contract under
$50,000. Mortality and expense risks assumed by KCL are compensated for by a fee
equivalent to an annual rate of 1.25 percent of the asset value of each
contract, of which 0.70 percent is for assuming mortality risks and 0.55 percent
is for expense risk. Additionally, KCL is compensated for administration
expenses by a fee based on an annual rate of 0.15 percent of the asset value of
each contract.
When applicable, an amount for state premium taxes is deducted as provided by
pertinent state law upon surrender.
Other charges are deducted from each contract when certain events occur, such as
the seventh fund transfer in a contract year.
A contingent deferred sales charge is assessed against certain withdrawals
during the first seven years of the contract, declining from 7 percent in the
first three years to 2 percent in the seventh year. During 1997, $35,000 ($5,000
- - 1996) was assessed in surrender charges and other contract charges totaled
$442,000 ($109,000 - 1996).
Report of Independent Auditors
The Contract Owners of Kansas City Life Variable
Annuity Separate Account and The Board of Directors
of Kansas City Life Insurance Company
We have audited the accompanying statement of net assets of Kansas City Life
Variable Annuity Separate Account (the Company) as of December 31, 1997, and the
related statements of operations and changes in net assets for the year ended
December 31, 1997 and 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments owned as of December 31, 1997 by correspondence with
the custodians. 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 Kansas City Life Variable
Annuity Separate Account at December 31, 1997, and the results of its operations
and changes in its net assets for the year ended December 31, 1997 and 1996, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
April 17, 1998
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
All required financial statements are included in Part B.
(b) Exhibits
(1) Resolutions of the board of directors of Kansas City Life
Insurance Company ("Kansas City Life") establishing Kansas City
Life Variable Annuity Separate Account (the "Variable
Account").*
(2) Not Applicable.
(3) Underwriting Agreement between Kansas City Life and Sunset
Financial Services, Inc. ("Sunset Financial").**
(4) Contract Form.*
(5) Contract Application.**
(6) (a) Articles of Incorporation of Bankers Life Association of
Kansas City.*
(b) Restated Articles of Incorporation of Kansas City Life.*
(c) By-Laws of Kansas City Life.*
(7) Not Applicable.
(8) (a) Form of Participation Agreement with MFS Variable
Insurance Trust.**
(b) Form of Participation Agreement with TCI Portfolios,
Inc.**
(c) Form of Participation Agreement with Federated Insurance
Series.**
(9) Opinion and Consent of Counsel.
(10) (a) Consent of Sutherland, Asbill & Brennan. (b) Consent of
Ernst & Young LLP.
(11) Not Applicable.
(12) Not Applicable.
(13) Schedule for computation of performance quotations.***
(14) Not applicable.
- ----------------
*Incorporated by reference to the Registrant's initial registration
statement filed with the Securities and Exchange Commission on March 3,
1995 (File No. 33-89984).
**Incorporated by reference to the Registrant's Pre-Effective
Amendment No.1 to its Registration statement filed with the
Securities and Exchange Commission on August 25, 1995
(File No. 33-89984).
***Incorporated by reference to the Registrant's Post-Effective
Amendment No. 2 to its Registration Statement filed with the Securities
and Exchange Commission on April 30, 1996. (File No. 33-89984).
Item 25. Directors and Officers of the Depositor
Name and Principal
Business Address* Position and Offices with Depositor
Joseph R. Bixby Director, Chairman of the Board
W. E. Bixby Director, Vice Chairman of the Board
R. Philip Bixby Director, President and CEO
Richard L. Finn Director, Senior Vice President, Finance
Jack D. Hayes Director, Senior Vice President,
Marketing
Francis P. Lemery Director, Senior Vice President, Actuary
Robert C. Miller Senior Vice President, Administrative
Services
Charles R. Duffy, Jr. Senior Vice President, Operations
Michael P. Horton Vice President, Group
John K. Koetting Vice President and Controller
C. John Malacarne Director, Vice President, General
Counsel and Secretary
Walter E. Bixby, III Director
Ronald E. Hiatt Treasurer
Daryl D. Jensen Director
Nancy Bixby Hudson Director
Webb R. Gilmore Director
Warren J. Hunzicker Director
Michael J. Ross Director
Elizabeth T. Solberg Director
Larry Winn Jr. Director
Peter Hathaway, M.D. Vice President and Medical Director
Scott M. Stone Assistant Vice President, Director,
Securities
Mark A. Milton Vice President and Associate Actuary
Glenda R. Cline Assistant Vice President, Special Plan
Administration
Robert J. Milroy Vice President, Policy Administration
Robert E. Janes Assistant Vice President, Assistant
Controller
David A. Laird Assistant Vice President, Assistant
Controller
* The principal business address of all the persons listed above is
3520 Broadway, Kansas City, Missouri 64141-6139.
Item 26. Persons Controlled by or Under Common Control With the Depositor or
Registrant
Percent of Voting
Name Jurisdiction Securities Owned Principal Business
Sunset Life Insurance Washington Ownership of all voting Insurance
Company of America securities by depositor
Sunset Financial Ownership of all voting
Services, Inc. Washington securities by Sunset Life
Insurance Company of
America Broker/Dealer
KCL Service Ownership of all voting
Company Missouri securities by depositor Marketing Insurance
Lioness Realty Ownership of all voting Real Estate
Group, Inc. Missouri securities by depositor Services
Property Operating Ownership of all voting Real Estate
Company Missouri securities by depositor Services
Old American Ownership of all voting
Insurance Company Missouri securities by depositor Insurance
Contact Data, Inc. Missouri Ownership of all voting
securities by depositor Direct Marketing
Kansas City Life
Financial Group, Inc. Missouri Ownership of all voting
securities by depositor Insurance Marketing
Item 27. Number of Contract owners
1,499--As of December 31, 1997
Item 28. Indemnification
The By-Laws of Kansas City Life Insurance Company provide, in part, in
Article XII:
1. The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, or proceeding, whether civil, criminal, administrative or investigative,
other than an action by or in the right of the Company, by reason of the fact
that he or she is or was a Director, Officer or employee of the Company, or is
or was serving at the request of the Company as a Director, Officer or employee
of another company, partner ship, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his or her conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his or her conduct was
unlawful.
2. The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the company to procure a judgment in its favor by
reason of the fact that he or she is or was a director, officer or employee of
the company, or is or was serving at the request of the company as a director,
officer or employee of another company, partnership, joint venture, trust or
other enterprise against expenses, including attorneys' fees, actually and
reasonably incurred by him or her in connection with the defense or settlement
of the action or suit if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
company; except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the
company unless and only to the extent that the court in which the action or suit
was brought determines upon application that, despite the adjudication of
liability and in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for such expenses which the court shall
deem proper.
3. To the extent that a Director, Officer or employee of the Company has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, he or she shall be indemnified against
expenses, including attorneys' fees, actually and reasonably incurred by him or
her in connection with the action, suit or proceeding.
4. Any indemnification under Sections 1 and 2 of this Article, unless
ordered by a court, shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the director, Officer
or employee is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in this Article. The determination
shall be made by the Board of Directors of the Company by a majority vote of a
quorum consisting of Directors who were not parties to the action, suit or
proceeding, or, if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested Directors so directs, by independent legal counsel in a
written opinion, or by the Stockholders of the Company .
5. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Company in advance of the final disposition of the
action, suit or proceeding as authorized by the Board of Directors in the
specific case up on receipt of an undertaking by or on behalf of the Director,
Officer or employee to repay such amount unless it shall ultimately be
determined that he or she is entitled to be indemnified by the Company as
authorized in this Article.
6. The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under the Articles of Incorporation or Bylaws, or any agreement, vote
of Stockholders or disinterested Directors or otherwise, both as to action in
his or her official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer or employee and shall inure to the benefit of the heirs, executors and
administrators of such a person.
7. The Company shall have the power to give any further indemnity, in
addition to the indemnity authorized or contemplated under this Article,
including subsection 6, to any person who is or was a Director, Officer,
employee or agent of the Company, or to any person who is or was serving at the
request of the Company as a Director, Officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, provided
such further indemnity is either (i) authorized, directed, or provided for in
the Articles of Incorporation of the Company or any duly adopted amendment
thereof or (ii) is authorized, directed, or provided for in any bylaw or
agreement of the Company which has been adopted by a vote of the Stockholders of
the Company, and provided further that no such indemnity shall indemnify any
person from or on account of such person's conduct which was finally adjudged to
have been knowingly fraudulent, deliberately dishonest, or willful misconduct .
Nothing in this paragraph shall be deemed to limit the power of the Company
under subsection 6 of this Bylaw to enact Bylaws or to enter into agreement
without Stockholder adoption of the same.
8. The Company may purchase and maintain insurance on behalf of any
person who is or was a Director, Officer, employee or agent of the Company, or
is or was serving at the request of the Company as a Director, Officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him or her and incurred by him
or her in any such capacity, or arising out of his or her status as such,
whether or not the Company would have the power to indemnify him or her against
such liability under the provisions of this Article.
9. For the purpose of this Article, references to "the Company" include
all constituent corporations absorbed in a consolidation or merger as well as
the resulting or surviving corporation so that any person who is or was a
Director, Officer , employee or agent of such constituent corporation or is or
was serving at the request of such constituent corporation as a Director,
Officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise shall stand in the same position under the provisions
of this Article with respect to the resulting or surviving corporation as he or
she would if he or she had served the resulting or surviving corporation in the
same capacity.
10. For purposes of this Article, the term "other enterprise" shall
include employee benefit plans; the term "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and the term
"serving at the request of the Company" shall include any service as a
Director, Officer or employee of the Company which imposes duties on, or
involves services by, such Director, Officer or employee with respect to an
employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he or she reasonable believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Article.
11. Any Director, Officer or employee of the Company shall be
indemnified under this Article for any act taken in good faith and upon reliance
upon the books and records of the Company, upon financial statements or other
reports prepared by the Officers of the Company, or on financial statements
prepared by the Company's independent accountants, or on information or
documents prepared or provided by legal counsel to the Company.
12. To the extent that the indemnification of Officers, Directors or
employees as permitted under Section 351.355 (as amended or superseded) of The
General and Business Corporation Law of Missouri, as in effect from time to
time, provides for greater indemnification of those individuals than the
provisions of this Article XII, then the Company shall indemnify its Directors,
Officers, employees as provided in and to the full extent allowed by Section
351.355.
13. The indemnification provided by this Article shall continue as to a
person who has ceased to be a Director or Officer of the Company and shall inure
to the benefit of the heirs, executors, and administrators of such a person. All
rights to indemnification under this Article shall be deemed to be provided by a
contract between the Company and the person who serves in such capacity at any
time while these Bylaws and other relevant provisions of the applicable law, if
any, are in effect. Any repeal or modification thereof shall not affect any
rights or obligations then existing.
14. If this Article or any portion or provision hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify each person entitled to indemnification
pursuant too this Article to the full extent permitted by any applicable portion
of this Article that shall not have been invalidated, or to the fullest extent
provided by any other applicable law.
Missouri law authorizes Missouri corporations to provide indemnification
to directors, officers and other persons.
Kansas City Life owns a directors and officers liability insurance
policy covering liabilities that directors and officers of Kansas City Life and
its subsidiaries and affiliates may incur in acting as directors and officers.
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) Sunset Financial Services, Inc. is the registrant's principal
underwriter.
(b) Officers and Directors of Sunset Financial.
Name and Principal Positions and Offices
Business Address* With the Underwriter
Gregory E. Smith President, Director
Daryl D. Jensen Director
Gary K. Hoffman Secretary, Director
Robert E. Janes Treasurer
Jack D. Hayes Chairman of the Board and Director
Walter E. Bixby, III Director
R. Philip Bixby Director
Bret L. Benham Vice President
Billy J. Dahle Assistant Vice President
Kelly T. Ullom Vice President
Ronald E. Hiatt Assistant Treasurer
* The principal business address of all of the persons listed above is 3200
Capitol Boulevard South, Olympia, Washington 98501-3396.
Item 30. Location 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 Kansas City Life at 3520 Broadway, Kansas City,
Missouri 64141-6139.
Item 31. Management Services
All management contracts are discussed in Part A or Part B of this
registration statement.
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 policies
offered herein are being accepted.
(b) The registrant undertakes that it will include either (1) as part of
any application to purchase a policy 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 Kansas City Life 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 Kansas City Life at the
address or phone number listed in the prospectus.
(d) Kansas City Life represents that in connection with its offering of
the policies 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) Kansas City Life Insurance Company hereby represents that the fees
and charges deducted under the Contracts described in this post-effective
amendment are, in the aggregate, reasonable in relationship to the services
rendered, the expenses expected to be incurred, and the risks assumed by Kansas
City Life Insurance Company.
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets all of the requirements of
Securities Act Rule 485(b) for effectiveness of the Post-Effective Amendment to
its Registration Statement and has caused this Registration Statement to be
signed on its behalf, in the City of Kansas City, and the State of Missouri, on
this 27th day of April, 1998.
KANSAS CITY LIFE INSURANCE COMPANY
Attest: /s/C. J. Malacarne By: /s/R. Philip Bixby
R. Philip Bixby
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the duties
indicated.
Signature Title Date
/s/R. Philip Bixby President, CEO, and Director April 27, 1998
R. Philip Bixby
/s/Richard L. Finn Senior Vice President, Finance April 27, 1998
Richard L. Finn and Director
(Principal Financial Officer)
/s/John K. Koetting Vice President and Controller April 27, 1998
John K. Koetting (Principal Accounting Officer)
/s/ J. R. Bixby Chairman of the Board and April 27, 1998
J.R. Bixby Director
/s/W. E. Bixby Vice Chairman of the Board April 27, 1998
W. E. Bixby and Director
/s/W. E. Bixby III Director April 27, 1998
W. E. Bixby III
/s/Daryl D. Jensen Director April 27, 1998
Daryl D. Jensen
/s/Francis P. Lemery Director April 27, 1998
Francis P. Lemery
/s/C. John Malacarne Director April 27, 1998
C. John Malacarne
/s/Jack D. Hayes Director April 27, 1998
Jack D. Hayes
/s/ Webb R. Gilmore Director April 27, 1998
Webb R. Gilmore
/s/ Warren J. Hunzicker, M.D. Director April 27, 1998
Warren J. Hunzicker, M.D.
/s/ Michael J. Ross Director April 27, 1998
Michael J. Ross
/s/ Elizabeth T. Solberg Director April 27, 1998
Elizabeth T. Solberg
/s/ E. Larry Winn Jr. Director April 27, 1998
E. Larry Winn Jr.
/s/ Nancy Bixby Hudson Director April 27, 1998
Nancy Bixby Hudson
EXHIBIT INDEX
Page No.*
9. Opinion and Consent of Counsel
10(a). Consent of Sutherland, Asbill & Brennan
10(b). Consent of Ernst & Young LLP.
* Page numbers included only in manually executed original in compliance with
Rule 403(d) under the Securities Act of 1933.
Exhibit 9
Opinion and Consent of Counsel
Exhibit 10(a)
Consent of Sutherland, Asbill & Brennan
Exhibit 10(b) Consent of Ernst & Young LLP.
Exhibit 9
April 28, 1998
Kansas City Life Insurance Company
3520 Broadway
Kansas City, MO 64111
Re: Registration Statement
To Whom It May Concern:
In connection with the proposed registration under the Securities Act of 1933,
as amended, of individual variable annuity contracts ("the Contracts") and
interests in the Kansas City Life Annuity Separate Account (the "Separate
Account"), I have examined the documents relating to the establishment of the
Separate Account by the Board of Directors of Kansas City Life Insurance Company
(the "Company") as a separate account for assets applicable to variable annuity
contracts, pursuant to Section 376.309 RSMo., as amended, and the Registration
Statement, on Form N-4 (the "Registration Statement"), and I have examined such
other documents and reviewed such matters of law as I deem necessary for this
opinion, and I advise you that in my opinion:
1. The Separate Account is a separate account of the Company duly created and
validly existing pursuant to the laws of the State of Missouri.
2. The Contracts, when issued in accordance with the Prospectus constituting a
part of the Registration Statement and upon compliance with applicable
local law, will be legal and binding obligations of the Company in
accordance with their respective terms.
3. The portion of the assets held in the Separate Account equal to reserves
and other contract liabilities with respect to the Separate Account are not
chargeable with liabilities arising out of any other business the Company
may conduct.
I consent to the filing of this opinion as an exhibit to the Registration
Statement and the use of my name under the heading "Legal Matters" in the
Prospectus constituting a part of the Registration Statement and to the
references to me wherever appearing therein.
Yours very truly,
/s/ C. John Malacarne
C. John Malacarne
Exhibit 10(a)
Consent of Sutherland, Asbill & Brennan
April 28, 1998
Board of Directors
Kansas City Life Insurance Company
3520 Broadway
Kansas City, MO 64141-6139
Re: Kansas City Life Variable Annuity Separate Account
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 Post- Effective
Amendment No. 3 to the registration statement on Form N-4 for Kansas City
Variable Annuity Separate Account (File No. 33-89984). In giving this consent,
we do not admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN, LLP
By:/s/ Stephen E. Roth
Stephen E. Roth
Exhibit 10(b)
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts", to the use
of our report dated January 26, 1998, with respect to the consolidated financial
statements of Kansas City Life Insurance Company and to the use of our report
dated April 17, 1998 with respect to the financial statements of Kansas City
Life Variable Annuity Separate Account, included in the Post-Effective Amendment
No. 3 to the Registration Statement (Form N-4 No. 33- 89984) and the related
Statement of Additional Information accompanying the Prospectus.
Ernst & Young LLP
Kansas City, Missouri
April 28, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000940338
<NAME>Kansas City Life Insurance Company
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 2,004,516<F1>
<DEBT-CARRYING-VALUE> 145,661<F2>
<DEBT-MARKET-VALUE> 151,661<F2>
<EQUITIES> 114,986<F3>
<MORTGAGE> 270,054
<REAL-ESTATE> 80,111<F4>
<TOTAL-INVEST> 2,746,014
<CASH> 125,268
<RECOVER-REINSURE> 99,593
<DEFERRED-ACQUISITION> 209,826
<TOTAL-ASSETS> 3,439,452
<POLICY-LOSSES> 803,738
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 37,569
<POLICY-HOLDER-FUNDS> 1,886,050<F5>
<NOTES-PAYABLE> 0
0
0
<COMMON> 23,121
<OTHER-SE> 507,473
<TOTAL-LIABILITY-AND-EQUITY> 3,439,452
150,982
<INVESTMENT-INCOME> 193,696
<INVESTMENT-GAINS> 14,505
<OTHER-INCOME> 103,711
<BENEFITS> 273,178
<UNDERWRITING-AMORTIZATION> 35,712
<UNDERWRITING-OTHER> 4,894<F6>
<INCOME-PRETAX> 62,623
<INCOME-TAX> 17,762
<INCOME-CONTINUING> 44,861
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,861
<EPS-PRIMARY> 7.25
<EPS-DILUTED> 7.25
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
Footnotes:
<F1> Debt securities held for sale represent FASB 115 available for sale fixed
maturity securities reported on a current value basis, and do not include
trading securities or securities held to maturity.
<F2> Debt securities represent FASB 115 held to maturity fixed maturity
securities, and do not include trading securities or securities available
for sale.
<F3> Equity securities include equity securities that are available for sale
under FASB 115.
<F4> Real estate includes real estate joint ventures.
<F5> Policyholder funds include accumulated contract values as defined by FASB
97, dividend and coupon accumulations and other policyowner funds.
<F6> Underwriting expenses - other represent amortization of the value of
purchased insurance in force.
</FN>
</TABLE>
