AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 2013
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
MEMBERS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
IOWA 6311 39-1236386
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
MEMBERS Life Insurance Company
2000 Heritage Way
Waverly, Iowa 50677
(319) 352-4090
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Ross Hansen, Esq.
MEMBERS Life Insurance Company
2000 Heritage Way
Waverly, Iowa 50677
(319) 352-4090
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPY TO:
Stephen E. Roth, Esq.
Thomas E. Bisset, Esq.
Sutherland Asbill & Brennan LLP
700 Sixth Street, NW, Suite 700
Washington, DC 20001
(202) 383-0100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
CLASS OF SECURITIES REGISTERED MAXIMUM OFFERING MAXIMUM REGISTRATION FEE
TO BE REGISTERED PRICE AGGREGATE OFFERING
PER UNIT PRICE
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Single Premium * * $1 billion $ 128,800
Deferred Annuity
Contract
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* The maximum aggregate offering price is estimated solely for the purposes of
determining the registration fee. The amount to be registered and the proposed
maximum offering price per unit are not applicable since these securities are
not issued in predetermined amounts or units.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
MEMBERS(R) ZONE ANNUITY
ISSUED BY:
MEMBERS LIFE INSURANCE COMPANY
2000 HERITAGE WAY
WAVERLY, IOWA 50677
TELEPHONE NUMBER: 800-798-6600
OFFERED THROUGH: CUNA BROKERAGE SERVICES, INC.
This prospectus describes the MEMBERS(R) Zone Annuity, an individual or joint
owned, single premium deferred annuity contract (the "Contract") issued by
MEMBERS Life Insurance Company (the "Company", "we", "us", or "our"). The
Contract is designed for individuals, corporations, financial institutions,
trusts, and certain retirement plans that qualify for special federal income tax
treatment, as well as those that do not qualify for such treatment. The Contract
offers you the ability to allocate your monies among two interest crediting
options, accumulate interest earnings under the Contract and receive income
payments. The Contract is not an investment in the stock market or in any
securities index.
You may purchase the Contract with a single Purchase Payment that is at least
$5,000. You may allocate your Purchase Payment among two options - the Secure
Account and the Growth Account (the "Risk Control Accounts"). For each Risk
Control Account, we credit interest based in part on the performance of the S&P
500 Price Index (the "Index") over a one-year period. We hold reserves for Index
Interest Rate Floor and Cap guarantees for amounts allocated to each Risk
Control Account in a separate account (the "Separate Account"). Our general
account assets are also available to meet the guarantees under the Contract as
well as our other general obligations. THE GUARANTEES IN THIS CONTRACT ARE
SUBJECT TO THE COMPANY'S FINANCIAL STRENGTH AND CLAIMS-PAYING ABILITY.
We may offer additional Risk Control Accounts in the future. Not all Risk
Control Accounts may be available in all markets where we offer the Contract.
If you surrender your Contract or take a partial withdrawal during the Initial
Index Period, we will apply a Surrender Charge and a Market Value Adjustment
("MVA") to the amount being surrendered or withdrawn that is in excess of the
free annual withdrawal amount unless you qualify for the Nursing Home or
Hospital waiver or terminal illness waiver, described in the prospectus. See
"fees and charges" on page 19, "market value adjustment" on page 17 and "access
to your money" on page 20. The MVA may be either positive or negative, which
means the MVA may increase or decrease the amount you receive upon surrender or
partial withdrawal.
THERE ARE RISKS ASSOCIATED WITH THE CONTRACT. These risks include liquidity
risks, investment risks, market risks, company risks, and interest rate risks.
Also, Surrender Charges and an MVA may apply for a number of years, so that the
Contract should only be purchased for the long-term. Under some circumstances,
you may receive less than your Purchase Payment under the Contract. In addition,
partial withdrawals and surrenders will be subject to income tax and may be
subject to a 10% Internal Revenue Service ("IRS") penalty tax if taken before
age 59 1/2. Accordingly, you should carefully consider your income and liquidity
needs before purchasing a Contract. Additional information about these risks
appears under "highlights" on page 4, "access to your money" on page 20, and
"federal income tax matters" on page 25.
Please note that you could lose significantly more than 10% of your investment
in the Contract. For example, if you invested $10,000 in the Contract and
allocated your investment to the Growth Account and the Index then declined by
10% or more in each of three consecutive years, your investment in the Contract
at the end of the third year would be equal to $7,290. If you surrendered the
Contract at the end of that third year, you would pay a Surrender Charge equal
to 8% of your investment or $525 which would leave you with $6,765. That amount
would be reduced further if a negative MVA applied. In addition, if you were age
59 1/2 or younger at the time of the surrender, a ten persent tax penalty of
$677 would apply and would reduce the amount you would have from the Contract to
$6,088. This example, however, does not take into account your ability to
allocate some or all of your initial investment to the Secure Account which has
a floor that protects amounts allocated to that Account from declines in the
Index. The example also does not take into account your ability to transfer some
or all of your investment to the Secure Account after the first and second year.
We offer the Contract through CUNA Brokerage Services, Inc., which is the
principal underwriter. The principal underwriter is not required to sell any
specific number or dollar amount of Contracts but will use its best efforts to
sell the Contracts. There are no arrangements to place funds in an escrow,
trust, or similar account. This is a continuous offering.
This prospectus provides important information you should know before investing.
Please keep the prospectus for future reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
AN INVESTMENT IN THIS CONTRACT IS NOT A BANK DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY ANY BANK OR BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
The date of this prospectus is January __, 2014
TABLE OF CONTENTS
GLOSSARY.......................................................................1
HIGHLIGHTS.....................................................................4
How Your Contract Works......................................................4
Contract Charges ............................................................6
Change of Annuitant Endorsement Charge ......................................6
Benefits of Your Contract ...................................................6
Risk Factors ................................................................7
Other Important Information You Should Know .................................8
GETTING STARTED - THE ACCUMULATION PERIOD .....................................9
Purchasing a Contract........................................................9
Tax-Free "Section 1035" Exchanges ...........................................9
Owner .......................................................................9
Divorce ....................................................................10
Beneficiary.................................................................10
Right to Examine ...........................................................10
ALLOCATING YOUR PURCHASE PAYMENT..............................................10
AUTOMATIC REBALANCE PROGRAM...................................................11
CONTRACT VALUE................................................................11
RISK CONTROL ACCOUNTS.........................................................11
MARKET VALUE ADJUSTMENT ......................................................17
SURRENDER VALUE...............................................................19
FEES AND CHARGES..............................................................19
Surrender Charge............................................................19
Change of Annuitant Endorsement Charge .....................................20
Other Information ..........................................................20
ACCESS TO YOUR MONEY .........................................................20
Partial Withdrawals.........................................................20
Free annual withdrawal amount. ..........................................21
Waiver of Surrender Charges. ............................................21
o Nursing Home or Hospital Waiver. .....................................21
o Terminal Illness Waiver. .............................................21
Surrenders..................................................................22
Partial Withdrawal and Surrender Restrictions ..............................22
Right to Defer Payments ....................................................22
Bailout Provision ..........................................................22
DEATH BENEFIT ................................................................22
Death of the Owner .........................................................22
Death of Annuitant While the Owner is Living................................22
Death Benefit Payment Options ..............................................23
Death of Owner or Annuitant After the Payout Date ..........................23
Abandoned Property Requirements.............................................23
INCOME PAYMENTS - THE PAYOUT PERIOD ..........................................23
Payout Date.................................................................23
Terms of Income Payments ...................................................24
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INCOME PAYMENT OPTIONS .......................................................24
Election of an Income Payment Option........................................24
Options ....................................................................24
FEDERAL INCOME TAX MATTERS....................................................25
Tax Status of the Contracts.................................................25
Taxation of Non-Qualified Contracts ........................................26
Taxation of Qualified Contracts ............................................27
Same-Sex Spouses ...........................................................28
Medicare Tax................................................................28
Federal Defense of Marriage Act ............................................28
Annuity Purchases By Nonresident Aliens and Foreign Corporations............28
Possible Tax Law Changes....................................................29
OTHER INFORMATION.............................................................29
Distribution ...............................................................29
Authority to Change.........................................................30
Incontestability............................................................30
Misstatement of Age or Gender ..............................................30
Conformity with Applicable Laws ............................................30
Reports to Owners ..........................................................30
Change of Address...........................................................30
Inquiries ..................................................................30
CORPORATE HISTORY OF THE COMPANY .............................................31
Financial Information ......................................................32
Investments ................................................................32
Reinsurance ................................................................32
Policy Liability and Accruals...............................................32
POTENTIAL RISK FACTORS THAT MAY AFFECT OUR BUSINESS AND OUR FUTURE
RESULTS ......................................................................32
SELECTED FINANCIAL DATA ......................................................36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ...................................................................37
Cautionary Statement Regarding Forward-Looking Information..................37
Overview....................................................................38
Critical Accounting Policies ...............................................39
Financial Condition.........................................................43
MANAGEMENT ...................................................................49
Directors and Executive Officers............................................49
FINANCIAL STATEMENTS..........................................................57
APPENDIX A: EXAMPLES OF THE PARTIAL WITHDRAWALS, FULL SURRENDER, AND THE
MARKET VALUE ADJUSTMENT .....................................................A-1
THE CONTRACT MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL ANY CONTRACT AND IT IS NOT SOLICITING AN OFFER TO
BUY ANY CONTRACT IN ANY STATE IN WHICH THE OFFER OR SALE IS NOT PERMITTED. WE DO
NOT AUTHORIZE ANYONE TO PROVIDE ANY INFORMATION OR REPRESENTATIONS REGARDING THE
OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN THE INFORMATION AND
REPRESENTATIONS CONTAINED IN THIS PROSPECTUS.
ii
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GLOSSARY
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We have tried to make this prospectus as understandable as possible. However, in
explaining how the Contract works, we have had to use certain terms that have
special meanings. We define these terms below.
ACCUMULATION PERIOD - The Accumulation Period is the period of time that: (a)
begins on the Contract Issue Date as stated on your contract data page; and (b)
continues until the Payout Date, unless the Contract is terminated.
ADJUSTED INDEX VALUE - The Initial Index Value adjusted for the Index Interest
Rate Cap or Index Interest Rate Floor for the current Contract Year.
ADMINISTRATIVE OFFICE - MEMBERS Life Insurance Company, 2000 Heritage Way,
Waverly, Iowa 50677. Phone: 1-800-798-6600.
AGE - Age as of last birthday.
ANNUITANT (JOINT ANNUITANT) - The natural person(s) whose life (or lives)
determines the amount of annuity payments under the Contract.
AUTOMATIC REBALANCE PROGRAM - A program to automatically transfer values between
the Risk Control Accounts to achieve the balance of Contract Value equal to the
allocation percentages you requested. The Automatic Rebalance Program is only in
effect during the Initial Index Period.
BAILOUT PROVISION - If the Index Interest Rate Cap for your Risk Control Account
is set below the bailout rate prominently displayed on your contract data page
attached to the front of the cover page of the Contract, the Bailout Provision
allows you to make a withdrawal of some or all of the Contract Value
attributable to that Risk Control Account without a Surrender Charge and without
any MVA during the Initial Index Period.
BENEFICIARY - The person(s) (or entity) you named to receive proceeds payable
due to the death of the Owner. Before the Payout Date, if no Beneficiary
survives the Owner, we will pay the Death Benefit proceeds to the Owner's
estate.
BUSINESS DAY - Any day both the Company and the New York Stock Exchange are open
for business. The Company is closed on the following holidays: New Year's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The Company is closed on the day itself if those days fall Monday
through Friday, the day immediately preceding if those days fall on a Saturday,
and the day immediately following if those days fall on a Sunday.
COMPANY - MEMBERS Life Insurance Company; also referred to as "we", "our" and
"us".
CONTINGENT OWNER - A contingent owner assumes control of the Contract and
becomes the new Owner if the original Owner(s) dies before the Annuitant.
CONTRACT - The MEMBERS Zone Annuity, an individual or joint owned, single
premium deferred annuity contract issued by MEMBERS Life Insurance Company.
CONTRACT ANNIVERSARY - The same day and month as the Contract Issue Date for
each year the Contract remains in force.
CONTRACT ISSUE DATE - The date from which Contract Years and Contract
Anniversaries are determined. The contract issue date is shown on your contract
data page.
CONTRACT VALUE - The current value of your annuity as provided under this
Contract during the Accumulation Period. Contract Value will be impacted by the
Credited Index Interest, which may be positive or negative.
CONTRACT YEAR - Any twelve-month period beginning on the Contract Issue Date or
Contract Anniversary and ending one day before the next Contract Anniversary.
CREDITED INDEX INTEREST - The amount of index interest credited on each Contract
Anniversary and at time of partial withdrawal, surrender, death and
annuitization. Credited Index Interest may be positive or negative and will
impact Contract Value.
CREDITED INDEX INTEREST RATE - The rate used to determine the index interest to
be applied to Contract Value.
DEATH BENEFIT - The Contract Value adjusted for Credited Index Interest as of
the date death benefits are payable. We do not apply the Surrender Charge or MVA
in determining the death benefit payable.
DUE PROOF OF DEATH - Proof of death satisfactory to us. Such proof may consist
of the following if acceptable to us: a) a certified copy of the death record;
b) a certified copy of a court
1
decree reciting a finding of death; c) any other proof satisfactory to us.
GENERAL ACCOUNT - All of the Company's assets other than the assets in the
Separate Account.
GOOD ORDER - All necessary documents and forms that are complete and in our
possession. To be in "Good Order," an instruction must be sufficiently clear so
that we do not need to exercise any discretion to follow such instructions and
any payment amount must meet our minimum requirements to complete the request.
We reserve the right to change, from time to time, our requirements for what
constitutes Good Order and which documents, forms and payment amounts are
required in order for us to complete your request. We will provide you a written
notice of any change in our requirements for what constitutes "Good Order" at
least 10 days in advance of such change.
HOSPITAL - A facility that is licensed and operated as a Hospital according to
the law of the jurisdiction in which it is located.
INCOME PAYMENT OPTION - An option to receive income payments during the Payout
Period.
INDEX - The S&P 500 Composite Stock Price or any substituted suitable
alternative index. See "addition or Substitution of an Index" for the criteria
we would use to identify a suitable alternative index.
INDEX INTEREST - Interest we calculate that is based in part on the performance
of an Index.
INDEX INTEREST RATE CAP - The maximum index interest rate that we may use to
determine Credited Index Interest. We may change this rate at the beginning of a
Contract Year.
INDEX INTEREST RATE FLOOR - The minimum index interest rate that we may use to
determine the Credited Index Interest. This rate will equal the initial Index
Interest Rate Floor shown on your contract data page and will not change during
the life of your Contract. The Index Interest Rate Floors for the Secure Account
and Growth Account are currently 0% and -10% respectively.
INITIAL INDEX VALUE - The index value as of the beginning of the current
Contract Year.
INITIAL INDEX PERIOD - The period beginning on the Contract Issue Date and
ending on the Initial Index Period Expiration Date. This period coincides with
the Surrender Charge Period. See "fees and charges" for more details.
INITIAL INDEX PERIOD EXPIRATION DATE - The last day of the Initial Index Period
which coincides with the expiration of the Surrender Charge Period.
INTERNAL REVENUE CODE - The Internal Revenue Code of 1986, as amended.
ISSUE DATE - The date on which we issue the Contract. We will only issue the
Contract on the 10th and 25th of each month.
MARKET VALUE ADJUSTMENT ("MVA") - An adjustment that we will make to the amount
you receive if you surrender the Contract or take a partial withdrawal during
the Initial Index Period. The MVA helps offset our costs and risks of owning
fixed income and other investments used to back the guarantees under your
Contract from the Contract Issue Date to the date you surrender the Contract or
take a partial withdrawal. The MVA may be either positive or negative. This
means that the MVA may increase or decrease the amount payable to you upon
surrender or partial withdrawal.
MARKET VALUE ADJUSTMENT INDEX (INDICES) - The index (indices) that we use to
determine the rates of interest used in calculating the MVA.
NON-QUALIFIED CONTRACT - An annuity contract that is independent of any formal
retirement or pension plan.
NURSING HOME - A facility that is licensed and operates as a nursing facility
according to the law of the jurisdiction in which it is located.
OWNER - The person(s) (or entity) who owns this Contract and whose death
determines the Death Benefit. If there are multiple Owners, each Owner will be a
joint Owner of the Contract and all references to Owner will mean joint Owners.
The Owner has all rights, title and interest in this Contract during the
Accumulation Period. The Owner may exercise all rights and options stated in
this Contract, subject to the rights of any irrevocable Beneficiary. The Owner
is also referred to as "you" or "your."
PAYEE - The person(s) (or entity) who receives income payments during the Payout
Period while the Annuitant is living. The Payee is the Owner, unless otherwise
designated. A minor cannot be the Payee.
PAYOUT DATE - The date we begin making income payments to the Payee from the
Contract.
2
PAYOUT PERIOD - The phase the Contract is in once income payments begin.
PURCHASE PAYMENT - The initial payment that we require to issue the Contract. We
do not allow any payments under the Contract after the initial Purchase Payment.
QUALIFIED CONTRACT - An annuity that is part of an individual retirement plan,
pension plan or employer-sponsored retirement program.
RISK CONTROL ACCOUNT - An interest crediting option to which you may allocate
your contract value.
RISK CONTROL ACCOUNT VALUE - The amount of Contract Value allocated to a Risk
Control Account.
SEPARATE ACCOUNT - A separate account that we established within our General
Account and under the laws of Iowa in which we hold reserves for our guarantees
under the Contract. Our other General Account assets are also available to meet
the guarantees under the Contract and our other general obligations. The portion
of the assets of the separate account equal to the reserves and other contract
liabilities with respect to the separate account will not be chargeable with
liabilities arising out of any other business we may conduct. The Separate
Account is not registered under the Investment Company Act of 1940.
SURRENDER CHARGE - The charge we assess when you surrender the Contract or make
a partial withdrawal of Contract Value before the end of the Initial Index
Period.
SURRENDER CHARGE PERIOD - The number of Contract Years beginning on the Contract
Issue Date during which we may assess a Surrender Charge and apply an MVA if you
surrender the Contract or take a partial withdrawal. This period coincides with
the Initial Index Period See "fees and charges - Surrender Charge" for more
details.
SURRENDER VALUE - The amount you are entitled to receive under this Contract, in
the event this Contract is terminated during the Accumulation Period. It is
equal to your Contract Value, less any Surrender Charges and adjusted for any
MVA.
UNADJUSTED INDEX VALUE - The closing value of the Index on a date on which we
calculated Index Interest. If the closing value of the Index is not published on
that date, we will use the closing value of the Index from the next day on which
the closing value of the Index is published.
WRITTEN REQUEST - A request in writing and in a form satisfactory to us signed
by the Owner and received at our Administrative Office. A Written Request may
also include a telephone or fax request for specific transactions that you make
under the terms of an executed telephone or fax authorization with original
signature, on file at our Administrative Office.
3
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HIGHLIGHTS
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The following is a "summary" of the key features of the Contract. This summary
does not include all of the information you should consider before purchasing a
Contract. You should carefully read the entire prospectus, which contains more
detailed information concerning the Contract and the Company before making an
investment decision.
HOW YOUR CONTRACT WORKS
Your Contract is an individual or joint owned, single premium deferred annuity
contract. There are two periods to your Contract, an Accumulation Period and a
Payout Period. Your Contract can help you save for retirement because it can
allow your Contract Value to earn interest on a tax-deferred basis and you can
later elect to receive retirement income for life or a period of years. You
generally will not pay taxes on your earnings until you withdraw them.
Note: When you purchase the Contract, you are not buying shares in a securities
index or shares of stock.
During the Accumulation Period of your Contract, you allocate your Contract
Value to the Risk Control Accounts, where interest is credited, if any, each
Contract Year based, in part, on the investment performance of the Index
(currently the S&P 500 Composite Stock Price Index), subject to an Index
Interest Rate Cap and Floor that is unique to each Risk Control Account. The S&P
500 Index is a stock market index based on the market capitalizations of 500
leading companies publicly traded in the U.S. stock market, as determined by
Standard & Poors. The Index can go up or down based on the stock prices of the
500 companies that comprise the Index. The Index does not include dividends paid
on the stocks comprising the Index and therefore does not reflect the full
investment performance of the underlying stocks. We set the Index Interest Rate
Caps at the Contract Issue Date and upon each Contract Anniversary. Credited
Index Interest may be less than zero, depending on the Risk Control Account you
elect. The Accumulation Period begins on the Contract Issue Date and continues
until the Payout Date.
During the Payout Period of your Contract, you can elect to receive income
payments by applying Contract Value to the Income Payment Options offered in
your Contract. The Payout Period begins on the Payout Date and continues while
income payments are paid.
Please call your registered representative or the Company at 1-800-798-6600 if
you have questions about how your Contract works.
PURCHASE PAYMENT
----------------
You may purchase the Contract with a single initial Purchase Payment of $5,000
or more. A Purchase Payment of $1,000,000 or more requires our approval. We do
not allow any payments under the Contract after the initial Purchase Payment.
Multiple Contracts owned by the same individual where the sum of the Purchase
Payments exceed $1,000,000 also require our approval.
ALLOCATION OPTIONS
------------------
There are two Risk Control Accounts, the Secure Account and the Growth Account,
among which you may allocate all or a portion of your Purchase Payment and
Contract Value. Both Risk Control Accounts are available as allocation options
during the Initial Index Period. Under your Contract, you choose the duration of
the Initial Index Period. We currently offer Initial Index Periods with
durations of 5, 7 or 10 years, but may reduce or increase the durations offered
from time to time for new contracts that we issue. After the Initial Index
Period, only the Secure Account will be available as an allocation option under
the Contract. The Growth Account is not available after the Initial Index
Period.
You may allocate your Purchase Payment to either or both Risk Control Accounts
during the Initial Index Period, subject to the following restrictions. You must
specify the percentage of your Purchase Payment to be allocated to each Risk
Control Account on the Contract Issue Date. The amount you direct to a
particular Risk Control Account must be in whole percentages from 0% to 100% of
the Purchase Payment and your total allocation must
4
equal 100% of the Purchase Payment. If you do not indicate your allocations
on the application, our Administrative Office will attempt to contact your
adviser and/or you for clarification. We will not issue the Contract without
your allocation instructions.
Please note that at any time the Index Interest Rate Cap for your Risk Control
Account is less than the bailout rate specified on your contract data page, we
may, at our discretion, restrict transfer into that Risk Control Account. See
"access to your money - Bailout Provision" for more details.
The Index Interest Rate Floor is the minimum index interest rate that we may use
to determine Credited Index Interest. The Secure Account has an Index Interest
Rate Floor of 0%. Credited Index Interest for any Contract Year can never be
below 0%. This means that any negative investment performance of the Index over
the one-year period used in determining Credited Index Interest would not reduce
your Contract Value at the end of a Contract Year. The Secure Account provides
your Contract Value the most protection from negative investment performance of
the Index.
The Index Interest Rate Cap is the maximum index interest rate that we may use
to determine Credited Index Interest. The Index Interest Rate Cap for the Secure
Account will always be positive and will never be less than the minimum Index
Interest Rate Cap for the Secure Account equal to 1.0%.
On the other hand, the Growth Account has an Index Interest Rate Floor of -10%.
Credited Index Interest for any Contract Year can never be below -10%. This
means that negative investment performance of the Index over the one-year period
used in determining Credited Index Interest could result in negative Credited
Index Interest being credited that would reduce your Contract Value at the end
of the Contract Year. However, any negative Credited Index Interest would not
reduce your Contract Value in a Contract Year by more than 10% regardless of
whether the negative investment performance of the Index over the one-year
period was less than -10%. In return for accepting some risk of loss to your
Contract Value allocated to the Growth Account, the Index Interest Rate Cap
declared for the Growth Account would be higher than the Index Interest Rate Cap
declared for the Secure Account for the same Initial Index Period which allows
the potential for higher positive Credited Index Interest to be applied to your
Contract Value allocated to the Growth Account. The Index Interest Rate Cap for
the Growth Account will always be positive and will never be less than the
minimum Index Interest Rate Cap for the Growth Account equal to 1.0%.
WE RESERVE THE RIGHT TO ADD OR SUBSTITUTE THE INDEX. WE WILL SUBSTITUTE THE
INDEX IF THE INDEX IS DISCONTINUED OR CALCULATION OF THE INDEX IS MATERIALLY
CHANGED. IF WE SUBSTITUTE THE INDEX, THE PERFORMANCE OF THE NEW INDEX MAY DIFFER
FROM THE ORIGINAL INDEX. THIS, IN TURN, MAY AFFECT THE CREDITED INDEX INTEREST
YOU EARN.
RIGHT TO EXAMINE
----------------
The Contract provides for an initial "right to examine" period. The Owner may
reject the Contract for any reason by forwarding the Contract to us with a
Written Request at our Administrative Office within ten days of receiving it, or
such longer period as the state in which your Contract was issued may require.
If you exercise this "Right to Examine", the Contract will terminate and we will
refund your Purchase Payment. Some states may require that we refund the
Contract Value, which reflects interest, positive or negative, based on changes
in the Index. The state in which your Contract is issued will determine which
method we use. If your Contract is an IRA under the Internal Revenue Code, we
will refund your Purchase Payment. Refunds will not be subject to a Surrender
Charge or MVA and will be paid within seven Business Days following our receipt
of the Contract.
REBALANCING / REALLOCATION
--------------------------
Upon each Contract Anniversary, after Credited Index Interest has been applied,
the Automatic Rebalance Program will reallocate your Contract Value between the
Risk Control Accounts based on your most recent allocation instructions that we
have on file or the allocation applied on the Contract Issue Date if no
additional allocation change requests have been made.
You may change your allocation of Contract Value between Risk Control Accounts
once each Contract Year. Any such change will take effect on the next Contract
Anniversary. Your request to change your allocation instructions must be
received at our Administrative Office at least two Business Days prior to your
Contract Anniversary for the instructions to be effective for that Contract
Anniversary. If we do not receive your Written Request in time for the next
Contract Anniversary, your instructions will be effective the following Contract
Anniversary.
Please note that at any time the Index Interest Rate Cap for your Risk Control
Account is less than bailout rate specified on your contract data page, we may,
at our discretion, restrict transfers into that Risk Control Account and may not
reallocate your Contract Value between Risk Control Accounts under the Automatic
Rebalance Program.
5
WITHDRAWAL OPTIONS
------------------
The Contract offers the following liquidity features during the Accumulation
Period:
o Free annual withdrawal amount - Each Contract Year, beginning in Contract
Year 2, you may withdraw up to 10% of your Contract Value determined as
of the beginning of the Contract Year free of any Surrender Charge or
MVA. The free annual withdrawal amount may be larger for certain
Qualified Contracts to satisfy minimum distribution requirements set
forth in the Internal Revenue Code.
o Partial withdrawal option - You may take up to two withdrawals each
Contract Year beginning in Contract Year 2 to the beginning of the
Payout Period. We do not allow withdrawals in Contract Year 1. Amounts
withdrawn from your Contract Value in excess of the free annual
withdrawal amount in Contract Year 2 through the end of the Initial
Index Period, will be subject to a Surrender Charge and MVA.
o Full surrender option - You may surrender your Contract at any time prior
to beginning the Payout Period. Upon full surrender, Credited Index
Interest, a Surrender Charge, and an MVA may apply.
MARKET VALUE ADJUSTMENT (MVA)
-----------------------------
For partial withdrawals and upon full surrender of Contract Value in excess of
the free annual withdrawal amount during the Initial Index Period, we will apply
an MVA. The MVA can increase or decrease your amount withdrawn or the Surrender
Value, depending on how economic indicators have changed since your Contract was
issued (see "market value adjustment" section for more details). You may lose a
portion of your principal due to the MVA.
CONTRACT CHARGES
SURRENDER CHARGE
----------------
For partial withdrawals and surrenders during the Initial Index Period, we
deduct a Surrender Charge equal to a percentage of the Contract Value withdrawn
that is in excess of the free annual withdrawal amount (see the "fees and
charges" section for more details). We will deduct the Surrender Charge before
we apply any MVA. For an example of how we calculate the amount you receive when
you make a partial withdrawal during the Initial Index Period, see Examples 1
and 2 in "appendix a" to this prospectus.
SURRENDER CHARGE AND MARKET VALUE ADJUSTMENT HARDSHIP WAIVERS
-------------------------------------------------------------
We will not deduct a Surrender Charge or apply an MVA to a partial withdrawal or
surrender made in the case of the following life events:
o Confinement to a Nursing Home or Hospital for at least 180 consecutive
days; or
o Diagnosis of a terminal illness where life expectancy is 12 months or
less.
There are waiting periods and other restrictions that apply to these waivers,
which are discussed in greater detail in the "access to your money" section.
BAILOUT PROVISION
We will set a bailout rate for each Risk Control Account. The bailout rate will
be prominently displayed on your contract data page attached to the front of the
cover page of the Contract and will not change during the Initial Index Period.
If the Index Interest Rate Cap for your Risk Control Account is set below the
bailout rate for that Risk Control Account, the Bailout Provision allows you to
make a withdrawal of some or all of the Contract Value attributable to that Risk
Control Account during the Initial Index Period without incurring any Surrender
Charge and without the application of any MVA during the 30-day period following
a Contract Anniversary. However, if you are age 59 1/2 or younger at the time of
such withdrawal, a 10% tax penalty may apply. At any time the Index Interest
Rate Cap for your Risk Control Account is less than the bailout rate specified
on your contract data page, we may, at our discretion, restrict transfers into
that Risk Control Account. See "access to your money - Bailout Provision" for
more details.
CHANGE OF ANNUITANT ENDORSEMENT CHARGE
If you change the Annuitant within the first two Contract Years, we reserve the
right to assess a fee to offset the expenses incurred. This fee will not exceed
$150 and will be assessed on a pro-rata basis proportional to your Contract
Value in the Risk Control Accounts.
INCOME OPTIONS
--------------
You have several income options to choose from during the Payout Period. Income
payments will start on the Payout Date, and continue based on the option you
elect.
DEATH BENEFIT
-------------
The Contract provides a Death Benefit during the Accumulation Period. The Death
Benefit is equal to the Contract Value adjusted for Credited Index Interest as
of the date Death Benefits are payable. We do not apply the Surrender Charge or
MVA in determining the Death Benefit payable.
BENEFITS OF YOUR CONTRACT
Your Contract offers you several benefits.
6
o TAX DEFERRAL - Your Contract provides for tax-deferred growth. This may
allow your Contract Value to grow faster because you earn interest on
Contract Value that otherwise may have been paid in taxes. Your
Contract Value may earn interest, the interest would compound within
the Contract and the Contract Value you may have otherwise paid in
taxes earns interest. Credited Index Interest earned generally is not
taxed until it is withdrawn. We will apply any Credited Indexed
Interest earned at the time of a partial withdrawal or surrender. You
may use the Contract with certain tax qualified retirement plans,
including in Roth IRA accounts. If your Contract is used with a Roth
IRA or other Roth account in a tax qualified retirement plan, Credited
Index Interest may not be taxed even when distributed. Please note,
however, that tax qualified retirement plans provide their own tax
deferral or other tax benefit; the purchase of this Contract does not
provide additional tax benefits beyond those provided in the qualified
plan.
o FREE ANNUAL WITHDRAWALS AFTER FIRST CONTRACT YEAR - You may take a
maximum of two free annual withdrawals from your Contract Value each
Contract Year after the first Contract Year during the Initial Index
Period. In each such Contract Year, you may withdraw up to 10% of
Contract Value determined as of the beginning of the Contract Year
without the application of a Surrender Charge or MVA on those amounts.
Note that taxes and other penalties may apply to free annual
withdrawals and withdrawals may be restricted under certain Qualified
Contracts.
o DEATH BENEFIT - Your Contract provides a Death Benefit. Death Benefit
proceeds become payable to the Beneficiary upon our receipt of Due
Proof of Death of the Owner during the Accumulation Period (or the
first Owner to die if there are Joint Owners).
o PROTECTION FROM OUTLIVING YOUR INCOME - Your Contract provides you with
the opportunity to receive income payments during the Payout Period.
Annuitizing your Contract converts your Contract Value into a stream of
income which can be based on your life expectancy. Depending upon the
type of income benefit option you choose, annuitization of your
Contract can provide you with an income stream that you cannot outlive.
RISK FACTORS
Your Contract also has various risks associated with it. We list these
risk factors below, as well as other important information you should
know before purchasing a Contract.
o INDEX INTEREST CREDITING RISK - If the Index declines, it may or may not
reduce your Contract Value in a Risk Control Account. This depends on
the Risk Control Account to which you allocated your Contract Value.
Nevertheless, you always assume the investment risk that no Credited
Index Interest will be added to your Contract Value at the end of a
Contract Year. You also bear the risk that sustained declines in the
Index may result in Credited Index Interest not being credited to your
Accumulated Value for a prolonged period. If your Contract Value is
allocated to the Growth Account, you also assume the risk that we may
credit negative Credited Index Interest. This means that Contract Value
allocated to the Growth Account may decline. In addition, you assume the
risk that the Index Interest Rate Cap, the maximum index interest rate
that we may use to determine Credited Index Interest and which is set
annually, can be reduced to as little as 1.0%.
Please note that in an increasing interest rate environment, the MVA
could reduce the amount received to less than the protection provided by
the Index Interest Rate Floor.
o LIQUIDITY RISK - We designed your Contract to be a long-term investment
that you may use to help save for retirement. Your Contract is not
designed to be a short-term investment. While you are always permitted
to take two partial withdrawals from the Contract each Contract Year
after Contract Year 1 and to surrender the Contract at any time, a
surrender in Contract Year 1 and partial withdrawals and surrenders in
Contract Year 2 through the end of the Initial Index Period in excess of
the free annual withdrawal amount, will be subject to a Surrender Charge
and MVA (if applicable). We may defer payments made under this Contract
for up to six months if the insurance regulatory authority of the state
in which we issued the Contract approves such deferral.
7
o MARKET RISK - The historical performance of the Index should not be taken
as an indication of the future performance of the Index. While the
trading prices of the underlying stocks comprising the Index will
determine the level of the Index, it is impossible to predict whether
the level of the Index will fall or rise. Trading prices of the
underlying stocks comprising the Index will be influenced by complex
and interrelated economic, financial, regulatory, geographic, judicial,
political and other factors that can affect the capital markets
generally and the equity trading markets on which the underlying common
stocks are traded, and by various circumstances that can influence the
levels of the underlying common stocks in a specific market segment or
the level of a particular underlying stock.
o RISK THAT WE MAY ELIMINATE OR SUBSTITUTE AN INDEX - THERE IS NO GUARANTEE
THAT THE INDEX WILL BE AVAILABLE DURING THE ENTIRE TIME YOU OWN YOUR
CONTRACT. WE MAY REPLACE CURRENTLY AVAILABLE INDICES IF THEY ARE
DISCONTINUED OR THERE IS A MATERIAL CHANGE IN THE CALCULATION OF THE
INDEX. IF WE SUBSTITUTE THE INDEX, THE PERFORMANCE OF THE NEW INDEX MAY
DIFFER FROM THE ORIGINAL INDEX. THIS, IN TURN, MAY AFFECT THE CREDITED
INDEX INTEREST YOU EARN AND AFFECT HOW YOU WANT TO ALLOCATE CONTRACT
VALUE BETWEEN AVAILABLE RISK CONTROL ACCOUNTS. WE WILL NOT SUBSTITUTE
THE INDEX UNTIL THE NEW INDEX HAS BEEN APPROVED BY THE INSURANCE
DEPARTMENT IN YOUR STATE. IF WE SUBSTITUTE THE INDEX AND YOU DO NOT
WISH TO ALLOCATE YOUR CONTRACT VALUE TO THE RISK CONTROL ACCOUNTS
AVAILABLE UNDER THE CONTRACT, YOU MAY SURRENDER YOUR CONTRACT, BUT YOU
MAY BE SUBJECT TO A SURRENDER CHARGE AND AN MVA, WHICH MAY RESULT IN A
LOSS OF PRINCIPAL AND CREDITED INDEX INTEREST.
We will notify you in your annual report of any addition of an index or
substitution or removal of the Index or otherwise in writing where it
is necessary to provide advance written notification of the change
prior to your Contract Anniversary. See "Addition or Substitution of an
Index" for more details.
Note: When you purchase the Contract, you are not buying shares in a
securities index or shares of stock.
o RISK CONTROL ACCOUNT TRANSFER RESTRICTION - At any time the Index
Interest Rate Cap for your Risk Control Account is less than the bailout
rate specified on your contract data page, we may, at our discretion,
restrict transfers into that Risk Control Account. In that event, you
may not be able to reallocate your Contract Value between the Secure
Account and the Growth Account. See "access to your money - Bailout
Provision" for more details.
o CREDITOR AND SOLVENCY RISK - Our General Account assets support the
guarantees under the Contract and are subject to the claims of our
creditors. AS SUCH, THE GUARANTEES UNDER THE CONTRACT ARE SUBJECT TO
OUR FINANCIAL STRENGTH AND CLAIMS-PAYING ABILITY, AND THEREFORE, TO THE
RISK THAT WE MAY DEFAULT ON THOSE GUARANTEES. You need to consider our
financial strength and claims-paying ability in meeting the guarantees
under the Contract. You may obtain information on our financial
condition by reviewing our financial statements included in this
prospectus. Additionally, information concerning our business and
operations is set forth in the section of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
OTHER IMPORTANT INFORMATION YOU SHOULD KNOW
o NO OWNERSHIP RIGHTS - You have no ownership rights in the underlying
stocks comprising the Index. Purchasing the Contract is not equivalent to
investing in the underlying stocks comprising the Index. As the Owner
of the Contract, you will not have any ownership interest or rights in
the underlying stocks comprising the Index, such as voting rights,
dividend payments, or other distributions.
o NO AFFILIATION WITH INDEX OR UNDERLYING STOCKS - We are not affiliated
with the sponsor of the Index or the underlying stocks comprising that
Index. Consequently, the Index and the issuers of the underlying stocks
comprising the Index have no involvement with the Contract.
o POSSIBLE TAX LAW CHANGES - There always is the possibility that the tax
treatment of the Contract could change by legislation or otherwise. We
have the right to modify the Contract in response to legislative
changes that could diminish the favorable tax treatment that Owners
receive. You should consult a tax adviser with respect to legislative
developments and their effect on the Contract.
8
--------------------------------------------------------------------------------
GETTING STARTED - THE ACCUMULATION PERIOD
--------------------------------------------------------------------------------
The Contract is an individual or joint owned, single premium deferred annuity.
We describe your rights in your Contract below. Contracts issued in your state
may provide different features and benefits than those described in this
prospectus. A material difference may include the length of the right to examine
period, the amount of and ability to waive the Surrender Charge, the Payout
Date, or the availability of certain Income Payment Options. In addition,
certain benefit options may not be available in all states. We will include any
such state variations in your Contract. Your registered representative can
provide you with more information about those state variations.
PURCHASING A CONTRACT
We offer the Contract to individuals, certain retirement plans, and other
entities. To purchase a Contract, you and the Annuitant must be no older than
age 85.
We sell the Contract through registered representatives who also are agents of
the Company. To start the purchase process, you must submit an application to
your registered representative. The Purchase Payment must either be paid at the
Company's Administrative Office or delivered to your registered representative.
Your registered representative will then forward your completed application and
Purchase Payment (if applicable) to us. After we receive a completed
application, Purchase Payment, and all other information necessary to process a
purchase order, we will begin the process of issuing the Contract. There may be
delays in our processing of your application because of delays in receipt of
your application from the selling firm or because of delays in determining
whether your Contract is suitable to you. Any such delays will affect when we
issue your Contract.
IMPORTANT: YOU MAY USE THE CONTRACT WITH CERTAIN TAX QUALIFIED RETIREMENT PLANS.
THE CONTRACT INCLUDES ATTRIBUTES SUCH AS TAX DEFERRAL ON ACCUMULATED EARNINGS.
QUALIFIED RETIREMENT PLANS PROVIDE THEIR OWN TAX DEFERRAL BENEFIT; THE PURCHASE
OF THIS CONTRACT DOES NOT PROVIDE ADDITIONAL TAX DEFERRAL BENEFITS BEYOND THOSE
PROVIDED IN THE QUALIFIED RETIREMENT PLAN. ACCORDINGLY, IF YOU ARE PURCHASING
THIS CONTRACT THROUGH A QUALIFIED RETIREMENT PLAN, YOU SHOULD CONSIDER
PURCHASING THE CONTRACT FOR ITS OTHER FEATURES SUCH AS CREDITED INDEX INTEREST
THAT IS LOCKED-IN EACH CONTRACT YEAR, AND OTHER NON-TAX RELATED BENEFITS. PLEASE
CONSULT A TAX ADVISER FOR INFORMATION SPECIFIC TO YOUR CIRCUMSTANCES TO
DETERMINE WHETHER THE CONTRACT IS AN APPROPRIATE INVESTMENT FOR YOU.
If mandated by applicable law, including Federal laws designed to counter
terrorism and prevent money laundering, we may be required to reject your
Purchase Payment. We may also be required to provide additional information
about you or your Contract to government regulators. In addition, we may be
required to block an Owner's Contract and thereby refuse to honor any request
for transfers, partial withdrawals, surrender, income payments, and Death
Benefit payments, until instructions are received from the appropriate
government regulator.
TAX-FREE "SECTION 1035" EXCHANGES
You can generally exchange one annuity contract for another in a "tax-free
exchange" under Section 1035 of the Internal Revenue Code. Before making an
exchange, you should compare both contracts carefully. Remember that if you
exchange another contract for the one described in this prospectus, you might
have to pay a Surrender Charge or negative Market Value Adjustment on the
existing contract. If the exchange does not qualify for Section 1035 tax
treatment, you may have to pay federal income tax, including a possible penalty
tax, on your old contract. There will be a new Surrender Charge Period for this
Contract and other charges may be higher (or lower) and the benefits may be
different. There may be delays in our processing of the exchange. You should not
exchange another contract for this one unless you determine, after knowing all
the facts, that the exchange is in your best interest. In general, the person
selling you this Contract will earn a commission from us.
OWNER
Owner means the owner named in the application or any successor if ownership has
been assigned. The Owner names the Annuitant or Joint Annuitants. All rights may
be exercised by the Owner subject to the rights of any other Owner and any
irrevocably named Beneficiary.
9
Any change in Owner is subject to our acceptance and we reserve the right to
refuse such change on a non-discriminatory basis.
If an Owner who is a natural person dies during the Annuitant's lifetime, the
Beneficiary is entitled to the Death Benefit. The Death Benefit becomes payable
at the death of the Owner (if there are Joint Owners, the Death Benefit will
become payable after the first Joint Owner dies). If an Owner is not a natural
person and the Annuitant dies before the Payout Date, the Death Benefit will be
payable to the Beneficiary. If you have any questions concerning the criteria
you should use when choosing Annuitants under the Contract, consult your
registered representative.
DIVORCE
In the event of divorce, the former spouse must provide a copy of the divorce
decree (or a qualified domestic relations order if it is a qualified plan) to
us. The terms of the decree/order must identify the Contract and specify how the
Contract Value should be allocated among the former spouses.
BENEFICIARY
You name a Beneficiary when you apply for the Contract. At any time before the
Payout Date, you may change the Beneficiary by a Written Request sent to us, or
you may name one or more Beneficiaries. A change of Beneficiary will take effect
on the date the Written Request was signed. If there are multiple Owners, each
Owner must sign the Written Request. In addition, any irrevocable Beneficiary
must sign the Written Request. Any change is subject to payment or other actions
we took before we received the request to change the Beneficiary at our
Administrative Office.
Before the Payout Date, if no Beneficiary survives the Owner, we will pay the
Death Benefit proceeds to the Owner's estate (if Joint Owners, the surviving
Owner will receive the Death Benefit proceeds).
Use care when naming Beneficiaries. If you have any questions concerning the
criteria you should use when choosing Beneficiaries, consult your registered
representative.
RIGHT TO EXAMINE
You may cancel your Contract and return it to your registered representative or
to us within a certain number of days after you receive the Contract and receive
a refund of either the Purchase Payment you paid or your Contract Value
depending upon the state in which your Contract was issued. However, if your
Contract is an IRA under the Internal Revenue Code, we will refund your Purchase
Payment. Generally, you must return your Contract within 10 days of receipt,
but some states may permit a longer period.
--------------------------------------------------------------------------------
ALLOCATING YOUR PURCHASE PAYMENT
--------------------------------------------------------------------------------
PURCHASE PAYMENT
The minimum initial Purchase Payment for a Non-Qualified or Qualified Contract
is $5,000. Our approval is required for a Purchase Payment of $1,000,000 or
more. We do not allow any payments under the Contract after the initial Purchase
Payment.
PURCHASE PAYMENT ALLOCATION
You must specify the percentage of your Purchase Payment to be allocated to each
Risk Control Account on the Contract Issue Date. The amount you direct to a
particular Risk Control Account must be in whole percentages from 1% to 100% of
the Purchase Payment and your total allocation must equal 100% of the Purchase
Payment. You may allocate your Purchase Payment to either or both Risk Control
Accounts.
10
We will only issue the Contract on the 10th and 25th of each month (an "Issue
Date"). If we receive your Purchase Payment and all necessary paperwork to
process your Contract before the Issue Date, we will deposit your Purchase
Payment in our General Account. We then will transfer your Purchase Payment,
based on the allocation you specified, to the Risk Control Accounts on the
Contract Issue Date. Your Purchase Payment will begin to earn Index Interest, if
any, only after it has been allocated to a Risk Control Account(s).
--------------------------------------------------------------------------------
AUTOMATIC REBALANCE PROGRAM
--------------------------------------------------------------------------------
Each Contract Anniversary, during the Initial Index Period, we will
automatically rebalance your Contract Value among the Risk Control Accounts
based on your most recent allocation instructions that we have on file, or the
allocation applied on the Contract Issue Date if you have not made any
additional allocation change requests. This means, for example, that if your
allocation instructions require that 50% of your Contract Value be allocated to
the Secure Account and 50% of your Contract Value be allocated to the Growth
Account, we will transfer your Contract Values between those Accounts on the
Contract Anniversary so that 50% of your Contract Value has been allocated to
both the Secure Account and Growth Account following the transfer.
You may change your allocation of Contract Value between the Risk Control
Accounts once each Contract Year. Any new allocation change request will
supersede any prior allocation change requests you made. There are no limits on
the number of requests that you can make. However, your latest instructions will
take effect on the next Contract Anniversary. Your request must be received at
our Administrative Office at least two Business Days prior to your Contract
Anniversary for the new instructions to be effective for that Contract
Anniversary. If we do not receive your Written Request in time for the next
Contract Anniversary, your instructions will be effective on the following
Contract Anniversary.
Please note that at any time the Index Interest Rate Cap for your Risk Control
Account is less than the bailout rate specified on your contract data page, we
may, at our discretion, restrict transfers into that Risk Control Account and
may not rellocate your Contract Value between Risk Control Accounts under the
Automatic Rebalance Program.
--------------------------------------------------------------------------------
CONTRACT VALUE
--------------------------------------------------------------------------------
On the Contract Issue Date, your Contract Value equals the Purchase Payment.
Each Risk Control Account is established by an allocation of a portion or all of
your Purchase Payment to that Account. After the Contract Issue Date, during
the Accumulation Period, your Contract Value will equal the sum of the Risk
Control Account Values.
--------------------------------------------------------------------------------
RISK CONTROL ACCOUNTS
--------------------------------------------------------------------------------
You may allocate your Purchase Payment to one or both of the two Risk Control
Accounts we currently make available, the Secure Account and the Growth Account.
We hold reserves for the Index Interest Rate Floor and Cap guarantees for
amounts allocated to the Risk Control Accounts in the Separate Account. Our
General Account assets are also available to meet the guarantees under the
Contract as well as our other general obligations. The guarantees in this
Contract are subject to the Company's financial strength and claims-paying
ability.
We will apply Credited Index Interest to your Contract Value allocated to a Risk
Control Account on a Contract Anniversary based on the percentage change in the
Index during the Contract Year just completed, subject to the interest rate
calculation methodology, Index Interest Rate Cap, and Index Interest Rate Floor.
In the case of a partial withdrawal, surrender, annuitization or death of the
Owner that occurs during a Contract Year on a date other than a Contract
Anniversary, we will apply Credited Index Interest to your Contract Value
allocated to a Risk Control Account based on the percentage change in the Index
from the beginning of the Contract Year to the date of the partial withdrawal,
surrender, annuitization or death, as applicable, subject to the interest rate
calculation methodology, Index Interest Rate Cap and Index Interest Rate Floor.
Please note that the Index does not include dividends paid on the stocks
comprising the Index, and therefore does not reflect the full investment
performance of the underlying stocks.
WE RESERVE THE RIGHT TO ADD OR SUBSTITUTE THE INDEX. IF WE SUBSTITUTE THE INDEX,
THE PERFORMANCE OF THE NEW INDEX MAY DIFFER FROM THE ORIGINAL INDEX. THIS, IN
TURN, MAY AFFECT THE CREDITED INDEX INTEREST YOU EARN.
11
In the unlikely event that we substitute the Index, we will attempt to add a
suitable alternative index as a replacement to the Index on the same day that we
remove the Index. If we are unable to do so, so that there is a brief interval
between the date on which we remove the Index and add a suitable alternative
index as a replacement, your Contract Value will continue to be allocated to the
Risk Control Accounts. However, any Credited Index Interest we may credit your
Contract Value for that Contract Year will not reflect changes in the value of
the Index or the replacement index during that interim period. If you take a
partial withdrawal, surrender or annuitize the Contract, or die during the
interim period, we will apply Credited Index Interest to your Contract Value
allocated to a Risk Control Accounts based on the percentage change in the Index
from the beginning of the Contract Year to the date on which the Index became
unavailable under the Contract, subject to the interest rate calculation
methodology, Index Interest Rate Cap and Index Interest Rate Floor.
After the Initial Index Period, only the Secure Account will be available for
the allocation of your Contract Value.
Your Contract Value allocated to a Risk Control Account ("Risk Control Account
Value") equals:
o Your Risk Control Account Value as of the last Contract Anniversary; PLUS
o Any Credited Index Interest applied to Risk Control Account Value during
the current Contract Year; MINUS
o Gross Withdrawals from your Risk Control Account Value (the sum of all
partial withdrawals taken since the last Contract Anniversary, which
includes all Surrender Charges and adjusted for any MVA).
Your Risk Control Account Value as of the last Contract Anniversary equals your
Risk Control Account Value at the beginning of the current Contract Year.
INTEREST RATE CALCULATION METHODOLOGY. Each Risk Control Account uses an annual
point-to-point interest rate calculation methodology to determine the amount of
Credited Index Interest. Under the
annual point-to-point method, the Credited Index Interest, if any, is measured
based on the percentage change in the Index over a Contract Year, a one year
period. Credited Index Interest is subject to an:
o Index Interest Rate Cap, which is the maximum rate that we will use in
the calculation of Credited Index Interest; and
o Index Interest Rate Floor, which is the minimum interest rate that we
will use in the calculation of Credited Index Interest.
CREDITED INDEX INTEREST. We use Credited Index Interest to calculate Contract
Value. We calculate Credited Index Interest on each Contract Anniversary and at
the time of partial withdrawal, surrender, death and annuitization. Credited
Index Interest is based on two factors: the Credited Index Interest Rate and
your Risk Control Account Value. Specifically, Credited Index Interest equals
the Credited Index Interest Rate multiplied by your Risk Control Account Value
as of the last Contract Anniversary. Examples of how the Credited Index Interest
Rate and Credited Index Interest are calculated are set forth on pages 15 and 16
of the prospectus.
The Credited Index Interest Rate for a Risk Control Account equals:
(A/B) - 1 where:
A = the Adjusted Index Value as of the current date; and
B = the later of the Adjusted Index Value as of the last partial withdrawal
taken in the current Contract Year. If no partial withdrawals have been
taken in the current Contract Year, this will be equal to the Initial Index
Value.
YOU CAN FIND THE CREDITED INDEX INTEREST APPLIED TO YOUR CONTRACT VALUE ON THE
ANNUAL STATEMENT THAT WE WILL FORWARD TO YOU FOLLOWING YOUR CONTRACT
ANNIVERSARY. YOU MAY ALSO FIND THE CREDITED INDEX INTEREST THAT HAS ACCRUED TO
YOUR CONTRACT VALUE PRIOR TO A CONTRACT ANNIVERSARY BY CALLING THE CUSTOMER
SERVICE CENTER TOLL-FREE TELEPHONE NUMBER (800.798.6600) OR BY VIEWING ON-LINE
AT http://eservice.cunamutual.com.
12
ADJUSTED INDEX VALUE. The Adjusted Index Value depends on the Unadjusted Index
Value (or the last Adjusted Index Value in the case where one or more partial
withdrawals are made in a Contract Year). The Adjusted Index Value is
calculated each time Credited Index Interest is calculated. This can be as
frequently as daily and occurs on each Contract Anniversary or on any date when
a partial withdrawal, surrender, Death Benefit or annuitization is processed.
Unadjusted Index Value for a day on which we calculate Index Interest is the
closing value of the Index on that date. If the closing value of the Index is
not published on that date, we will use the closing value of the Index from the
next day on which the closing value of the Index is published if you made no
partial withdrawals during a Contract Year, we would calculate the Adjusted
Index Value as follows:
If the Unadjusted Index Value is greater than the Initial Index Value multiplied
by (1 + Index Interest Rate Cap), then the Adjusted Index Value will equal the
Initial Index Value multiplied by (1 + Index Interest Rate Cap).
If the Unadjusted Index Value is less than the Initial Index Value multiplied by
(1 + Index Interest Floor), then the Adjusted Index Value will equal the Initial
Index Value multiplied by (1 + Index Interest Rate Floor).
If the Unadjusted Index Value is less than the Initial Index Value multiplied by
(1 + Index Interest Rate Cap) but more than the Initial Index Value multiplied
by (1 + Index Interest Rate Floor), then the Adjusted Index Value will equal the
Unadjusted Index Value.
For example, assume the following:
o Initial Index Value = 1,000
o Index Interest Rate Cap = 15%
o Index Interest Rate Floor = -10%
At the time Credited Index Interest is calculated, the Adjusted Index Value will
be:
o Scenario 1: Unadjusted Index Value = 1,200
o 1,200 is greater than 1,150 (1,000 x (1 + 0.15)) so the Adjusted
Index Value is equal to 1,150.
o Scenario 2: Unadjusted Index Value = 850
o 850 is less than 900 (1,000 x (1 - 0.10)) so the Adjusted Index
Value is equal to 900.
o Scenario 3: Unadjusted Index Value = 1,100
o 1,100 is less than 1,150 (1,000 x (1 + 0.15)) and greater than 900
(1,000 x (1 - 0.10)) so the Adjusted Index Value is equal to
1,100.
The Adjusted Index Value will never exceed the Initial Index Value multiplied by
(1 + Index Interest Rate Cap) and will never be lower than the Initial Index
Value multiplied by (1 + Index Interest Rate Floor).
SETTING THE INDEX INTEREST RATE CAP AND THE INDEX INTEREST RATE FLOOR. We
consider various factors in determining the Index Interest Rate Caps and Index
Interest Rate Floors, including investment returns available at the time that we
issue the Contract, the costs of our risk management techniques, sales
commissions, administrative expenses, regulatory and tax requirements, general
economic trends, and competitive factors. We determine the Index Interest Rate
Cap and the Index Interest Rate Floor at our sole discretion. We set the Index
Interest Rate Cap at the beginning of each Contract Year and guarantee the Index
Interest Rate Cap for the duration of the Contract Year. We guarantee the Index
Interest Rate Floor for the life of your Contract.
SECURE ACCOUNT
--------------
If you choose to allocate all or a portion of your Purchase Payment or Contract
Value to the Secure Account, we will determine Credited Index Interest based on
the percentage change in the value of the Index from the Initial Index Value to
the Contract Anniversary (or date of partial withdrawal, surrender,
annuitization, or date of death of the Owner), subject to an Index Interest Rate
Cap and an Index Interest Rate Floor.
13
INDEX INTEREST RATE CAP FOR THE SECURE ACCOUNT. The Index Interest Rate Cap
is the maximum rate that we will use in the calculation of Credited Index
Interest. The initial Index Interest Rate Cap is shown on your Contract Data
Page. On the first Contract Anniversary and on any subsequent Contract
Anniversary, we will declare an Index Interest Rate Cap which we guarantee for
the next Contract Year. We will forward advance written notice to you of the
Index Interest Rate Cap at least fifteen days prior to the start of that
Contract Year. The notice will also describe your right to transfer Contract
Value between the Secure Account and the Growth Account and your right to
exercise the Bailout Provision, if applicable. The Index Interest Rate Cap for
the Secure Account will always be positive and will never be less than the
minimum Index Interest Rate Cap for the Secure Account equal to 1.0%.
INDEX INTEREST RATE FLOOR FOR THE SECURE ACCOUNT. The Index Interest Rate
Floor for the Secure Account is zero. As a result, Credited Index Interest will
never be less than zero and your Contract Value in the Secure Account will never
be reduced by the application of Credited Index Interest.
GROWTH ACCOUNT
--------------
If you choose to allocate all or a portion of your Purchase Payment or Contract
Value to the Growth Account, we will determine Credited Index Interest based on
the percentage change in the value of the Index from the Initial Index Value to
the Contract Anniversary (or date of partial withdrawal, surrender,
annuitization, or date of death of the Owner), subject to an Index Interest Rate
Cap and an Index Interest Rate Floor. The Growth Account is not available after
the Initial Index Period Expiration Date.
INDEX INTEREST RATE CAP FOR THE GROWTH ACCOUNT. The Index Interest Rate Cap
is the maximum rate that we will use in the calculation of Credited Index
Interest. The initial Index Interest Rate Cap is shown on your contract data
page. On the first Contract Anniversary and on any subsequent Contract
Anniversary, we will declare an Index Interest Rate Cap which we guarantee for
the next Contract Year. We will forward advance written notice to you of the
Index Interest Rate Cap at least fifteen days prior to the start of that
Contract Year. The notice will also describe your right to transfer Contract
Value between the Secure Account and the Growth Account and your right to
exercise the Bailout Provision, if applicable. The Index Interest Rate Cap for
the Growth Account will always be positive and will never be less than the
minimum Index Interest Rate Cap for the Growth Account equal to 1.0%.
INDEX INTEREST RATE FLOOR FOR THE GROWTH ACCOUNT. The Index Interest Rate
Floor for the Growth Account is -10%. This means that your Credited Index
Interest could be negative, but it will never be less than -10% regardless of
whether the investment performance of the Index during the Contract Year is less
than -10%. If the Credited Index Interest is negative, your Contract Value in
the Growth Account would be reduced by the application of such negative Credited
Index Interest.
The following three examples illustrate how we credit Index Interest to the
Secure and Growth Accounts based on different levels of index performance. No
withdrawals are assumed to occur under these examples.
14
Example 1: This example illustrates the calculation of Credited Index Interest
when Index performance is greater than the Index Interest Rate Cap and the Index
Interest Rate Floor.
Assume the following information:
Prior Contract Anniversary: 9/30/2012
Initial Index Value: 1,000
Secure Account Value: $75,000
Index Interest Rate Floor: 0.00%
Index Interest Rate Cap: 4.00%
Growth Account Value: $25,000
Index Interest Rate Floor: -10.00%
Index Interest Rate Cap: 14.00%
-----------------------------------------------------------
Contract Anniversary: 9/30/2013
Unadjusted Index Value: 1,200
The return on the Index is equal to the Unadjusted Index Value divided by the
Initial Index Value minus 1. In this example, the return on the Index is 20%
[(1.200/1.000)-1]. This is greater than the Index Interest Rate Cap and above
the Index Interest Rate Floor for both the Secure and Growth Accounts. Thus,
Index Interest for both Accounts is set at the cap level. Contract Value
allocated to the Secure Account is credited with 4% Index Interest and Contract
Value allocated to the Growth Account is credited with 14% Index Interest.
Example 2: This example illustrates the calculation of Credited Index Interest
when Index performance is less than the Index Interest Rate Cap and greater than
the Index Interest Rate Floor.
Assume the following information:
Prior Contract Anniversary: 9/30/2012
Initial Index Value: 1,000
Secure Account Value: $75,000
Index Interest Rate Floor: 0.00%
Index Interest Rate Cap: 4.00%
Growth Account Value: $25,000
Index Interest Rate Floor: -10.00%
Index Interest Rate Cap: 14.00%
-----------------------------------------------------------
Contract Anniversary: 9/30/2013
Unadjusted Index Value: 1,030
The return on the Index is equal to the Unadjusted Index Value divided by the
Initial Index Value minus 1. In this example, the return on the Index is 3%
[(1.030/1.000)-1]. This is below the Index Interest Rate Cap and above the Index
Interest Rate Floor for both the Secure and Growth Accounts. Thus, Index
Interest for both accounts is equal to the return on the Index. Contract Value
allocated to the Secure Account is credited with 3% Index Interest and Contract
Value allocated to the Growth Account is credited with 3% Index Interest.
15
Example 3: This example illustrates the calculation of Credited Index Interest
when Index performance is less than the Index Interest Rate Floor.
Assume the following information:
Prior Contract Anniversary: 9/30/2012
Initial Index Value: 1,000
Secure Account Value: $75,000
Index Interest Rate Floor: 0.00%
Index Interest Rate Cap: 4.00%
Growth Account Value: $25,000
Index Interest Rate Floor: -10.00%
Index Interest Rate Cap: 14.00%
-----------------------------------------------------------
Contract Anniversary: 9/30/2013
Unadjusted Index Value: 800
The return on the Index is equal to the Unadjusted Index Value divided by the
Initial Index Value minus 1. In this example, the return on the Index is -20%
[(800/1.000)-1]. This is below the Index Interest Rate Floor for both the Secure
and Growth Accounts. Thus, Index Interest for both Accounts is equal to the
Index interest Rate Floor for each Risk Control Account. Contract Value
allocated to the Secure Account is credited with 0% Index Interest and Contract
Value allocated to the Growth Account is credited with - 10% Index Interest.
This results in negative Credited Index Interest of -$2,500 being applied to the
Contract Value in the Growth Account and thus is a decline in the Contract Value
allocated to the Growth Account of $2,500. No Credited Index Interest would be
applied to Contract Value in the Secure Account and thus the Contract Value in
the Secure Account remains unchanged.
The Company retains the right to change the current Index Interest Rate Cap for
both the Secure and Growth Accounts at its discretion, subject to the minimum
Index Interest Rate Cap of 1.0%. The Company would consider the following
factors when determining whether to make such a change:
o significant changes in derivative, equity and/or fixed income instrument
valuations;
o increases in hedging costs that have a material impact on the Company's
ability to offer the Contract;
o derivative market changes that materially impact availability and
structure of hedging instruments;
o significant negative fixed income instrument default experience realized
by the Company;
o meaningful changes in Company and/or Contract cost structure due to
regulatory or other business management concerns; and
o material unanticipated Owner experience.
ADDITION OR SUBSTITUTION OF AN INDEX. There is no guarantee that the Index will
be available during the entire time you own your Contract. If: (i) the Index is
discontinued, or (ii) the calculation of an Index is changed substantially, we
may substitute a suitable similar broad based U.S. stock market index for the
original Index. If we substitute an index, the performance of the new Index may
differ from the original Index. This, in turn, may affect the Credited Index
Interest you earn. We will not substitute an index until that index has been
approved by the insurance department in your state. The selection criteria for a
suitable alternative Index includes the following:
o A sufficiently large market in exchange traded and/or over-the-counter
options, futures and similar derivative instruments based on the index
to allow the company to hedge Credited Index Interest Rates;
o The Index should be recognized as a broad based index that tracks the
U.S. stock market if it is replacing an index such as the S&P 500
Index; and
o The publisher of the index must allow the Company to use the index in
contract and other materials for a reasonable fee.
Please note that we may add or substitute an Index associated with the Risk
Control Accounts by sending you written notice at your last known address
stating the effective date on which the Index will be added or substituted. We
will send you the notice in the annual report unless earlier written notice is
necessary.
16
--------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENT ("MVA")
--------------------------------------------------------------------------------
If you surrender your Contract or take a partial withdrawal in excess of the
free annual withdrawal amount during the Initial Index Period, we will apply the
MVA to the amount being surrendered or withdrawn in excess of the free annual
withdrawal amount. No MVA will apply after the end of the Initial Index Period.
NOTE: THE MVA WILL EITHER INCREASE OR DECREASE THE AMOUNT YOU RECEIVE FROM A
PARTIAL WITHDRAWAL OR YOUR SURRENDER VALUE. YOU MAY LOSE A PORTION OF
YOUR PRINCIPAL DUE TO THE MVA REGARDLESS OF THE RISK CONTROL ACCOUNT TO
WHICH YOU ALLOCATED CONTRACT VALUE. YOU DIRECTLY BEAR THE INVESTMENT
RISK ASSOCIATED WITH AN MVA. YOU SHOULD CAREFULLY CONSIDER YOUR INCOME
NEEDS BEFORE PURCHASING THE CONTRACT.
PURPOSE OF THE MVA
The MVA is an adjustment that may be made to the amount you receive in excess of
the free annual withdrawal amount if you surrender the Contract during the
Initial Index Period or take a partial withdrawal in excess of the free annual
withdrawal amount during the Initial Index Period. In general, if interest rate
levels have increased at the time of surrender or partial withdrawal over their
levels at the time we issued the Contract, the MVA will be negative. Similarly,
in general, if interest rate levels have decreased at the time of surrender or
partial withdrawal over their levels at the time we issued the Contract, the MVA
will be positive. The MVA reflects in part the difference between the effective
yield of the Constant Maturity Treasury rate, a rate representing the average
yield of various Treasury securities, on the Contract Issue Date for a duration
equal to the Initial Index Period and the effective yield of the Constant
Maturity Treasury rate for a duration equal to the remaining length of the
Initial Index Period at the time of surrender or partial withdrawal. In
addition, the MVA reflects in part the difference between the effective yield of
the BofA Merrill Lynch 1-10 Year US Corporate Constrained Index, Asset Swap
Spread, a rate representative of investment grade corporate debt credit spreads
in the U.S., on the Contract Issue Date and the effective yield of the BofA
Merrill Lynch 1-10 Year US Corporate Constrained Index, Asset Swap Spread at the
time of surrender or partial withdrawal. The greater the difference in those
effective yields, respectively, the greater the effect the MVA will have. We
will increase the amount you will be paid from a partial withdrawal by the
amount of any positive MVA, and in the case of a surrender of the Contract, we
will increase your Surrender Value by the amount of any positive MVA.
Conversely, we will decrease the amount you will be paid from a partial
withdrawal by the amount of any negative MVA, and in the case of a surrender of
the Contract, we will decrease your Surrender Value by the amount of any
negative MVA.
In general, if the Constant Maturity Treasury rate and BofA Merrill Lynch 1-10
Year US Corporate Constrained Index Asset Swap Spread have increased at the time
of surrender or partial withdrawal over their levels at the time we issued the
Contract, the MVA will be negative and will decrease the Surrender Value or
amount you receive from a partial withdrawal. Similarly, if the Constant
Maturity Treasury rate and BofA Merrill Lynch 1-10 Year US Corporate Constrained
Index, Asset Swap Spread have decreased at the time of surrender or partial
withdrawal over their levels at the time we issued the Contract, the MVA will be
positive and will increase the Surrender Value or amount you receive from a
partial withdrawal. The Company uses both the Constant Maturity Treasury rate
and BofA Merrill Lynch 1-10 Year US Corporate Constrained Index Asset Swap
Spread in determining any MVA since together both indices represent a broad mix
of investments whose values may be affected by changes in market interest rates.
The amount of the MVA also reflects in part the Credited Index Interest Rate
determined at the time of surrender or partial withdrawal. We use the Credited
Index Interest Rate to either decrease or increase the amount of the MVA. If the
Credited Index Interest Rate is positive, we divide the amount of the withdrawal
subject to the MVA by the Credited Index Interest Rate plus 1 which will
decrease the amount subject to the market value adjustment factor and therefore
reduce the amount of any positive or negative MVA. Conversely, if the Credited
Index Interest Rate is negative, we divide the amount of the withdrawal subject
to the MVA by the Credited Index Interest Rate plus 1 which will increase the
amount subject to the market value adjustment factor and therefore increase the
amount of any positive or negative MVA. If the Credited Index Interest Rate is
0%, we divide the amount of the withdrawal subject to the MVA by the Credited
Index Interest Rate plus 1 which will not change the amount subject to the
market value adjustment factor and therefore will not change the amount of any
positive or negative MVA. If the Index has increased since the date on which we
determined the Initial Index Value for the Current Contract Year, the Credited
Index Interest Rate will be positive. If the Index has decreased since the date
on which we determined the Initial Index Value for the Current Contract Year,
the Credited Index Interest Rate will be negative.
17
The MVA helps us offset our costs and risks of owning fixed income investments
and other investments we use to back the guarantees under your Contract from the
date we issue the Contract to the time of a surrender or partial withdrawal.
APPLICATION AND WAIVER
For each Risk Control Account, we will calculate the MVA as of the date we
receive your Written Request for surrender or partial withdrawal in Good Order
at our Administrative Office. If the MVA is positive, we will increase your
Surrender Value or amount you receive from a partial withdrawal by the amount of
the positive MVA. If the MVA is negative, we will decrease the Surrender Value
or amount you receive from a partial withdrawal by the amount of the negative
MVA.
We will NOT apply an MVA to:
1. free annual withdrawal amounts;
2. Death Benefit proceeds;
3. partial withdrawals that qualify for the Nursing Home or Hospital waiver
or terminal illness waiver, described in this prospectus;
4. withdrawals under the Bailout Provision;
5. partial withdrawals taken as required minimum distributions under the
Internal Revenue Code;
6. partial withdrawals or a surrender after the Initial Index Period; and
7. income payments during the Payout Period.
MVA FORMULA
An MVA is equal to the amount of the partial withdrawal or surrender in excess
of the free annual withdrawal amount (W) divided by 1 plus the Credited Index
Interest Rate (IIR*) then multiplied by the market value adjustment factor
(MVAF) minus 1 or (W/(1+IIR*))x(MVAF -1).
Where:
IIR* = Credited Index Interest Rate equal to (A/B) - 1 where:
A = The Adjusted Index Value; and
B = The Initial Index Value for the current Contract Year.
MVAF = ((1 + I + K)/(1 + J + L)) ^N where:
I = The Constant Maturity Treasury rate for a maturity
consistent with the Initial Index Period (shown on your
contract data page);
J = The Constant Maturity Treasury rate for a maturity
consistent with the remaining length of the Initial
Index Period;
(If there is no corresponding maturity of Constant Maturity
Treasury rate then the linear interpolation of the Index with
maturities closest to N will be used to determine I and J.)
K = The BofA Merrill Lynch 1-10 Year US Corporate Constrained
Index, Asset Swap Spread as of the Contract Issue Date (shown
on your contract data page);
L = The BofA Merrill Lynch 1-10 Year US Corporate Constrained
Index, Asset Swap Spread as of the withdrawal date; and
N = The number of years (whole and partial) from the current
date until the end of the Initial Index Period.
We determine I based on the Initial Index Period you have chosen. For example,
if you choose the 10- year Initial Index Period at issue, then I would
correspond to the 10-year Constant Maturity Treasury rate at the time we issue
the Contract. We determine J when you take a partial withdrawal or surrender.
For example, if you chose the 10-year Initial Index Period at issue and
surrender the Contract 2 years into the Initial Index Period, J would correspond
to the Constant Maturity Treasury rate consistent with the time remaining in the
Initial Index Period or 8 years (8 = 10 - 2). For I and J where there is no
Constant Maturity Treasury rate declared, we will use linear interpolation
between declared Constant Maturity rates to determine I and J.
18
The value of K and L on any Business Day will be equal to the closing value of
the BofA Merrill Lynch 1-10 Year US Corporate Constrained Index, Asset Swap
Spread on the previous Business Day.
If the publication of any component of the Market Value Adjustment Indices is
discontinued or if the calculation of the Market Value Adjustment Indices is
changed substantially, we may substitute a new index for the discontinued or
substantially changed index, subject to approval by the insurance department in
your state. Before we substitute an index, we will notify you in writing of the
substitution.
For examples of how we calculate MVAs, see "appendix a" to this prospectus.
--------------------------------------------------------------------------------
SURRENDER VALUE
--------------------------------------------------------------------------------
If you surrender the Contract, you will receive the Surrender Value. The
Surrender Value is equal to your Contract Value, less any Surrender Charges
(described under the "fees and charges" section below), and adjusted for any
MVA.
--------------------------------------------------------------------------------
FEES AND CHARGES
--------------------------------------------------------------------------------
We assess the following fees and charges under the Contract.
SURRENDER CHARGE
If you surrender the Contract or make a partial withdrawal of your Contract
Value during the Initial Index Period, we may assess a Surrender Charge.
Surrender Charges offset promotion, distribution expenses, and investment risks
born by the Company.
The amount of the Surrender Charge depends on the Initial Index Period that you
have chosen, the length of time you have owned your Contract, and the amount you
withdraw. The Surrender Charge amount is computed as a percentage of the amount
withdrawn in excess of the free annual withdrawal amount. The Surrender Charge
rates are as follows:
5-YEAR, 7-YEAR, AND 10-YEAR INITIAL INDEX PERIODS
-----------------------------------------------------------------------
IF YOU CHOOSE THE IF YOU CHOOSE THE IF YOU CHOOSE THE
5-YEAR PERIOD: 7-YEAR PERIOD: 10-YEAR PERIOD:
-----------------------------------------------------------------------
1 9% 1 9% 1 9%
-----------------------------------------------------------------------
2 9% 2 9% 2 9%
-----------------------------------------------------------------------
3 8% 3 8% 3 8%
-----------------------------------------------------------------------
4 7% 4 7% 4 7%
-----------------------------------------------------------------------
5 6% 5 6% 5 6%
-----------------------------------------------------------------------
6+ 0% 6 5% 6 5%
-----------------------------------------------------------------------
7 4% 7 4%
-----------------------------------------------------------------------
8+ 0% 8 3%
-----------------------------------------------------------------------
9 2%
-----------------------------------------------------------------------
10 1%
-----------------------------------------------------------------------
11+ 0%
-----------------------------------------------------------------------
IT IS IMPORTANT TO NOTE THAT WE ONLY ASSESS THE SURRENDER CHARGE AND APPLY AN
MVA DURING THE INITIAL INDEX PERIOD. THEREFORE, WHEN CHOOSING YOUR INITIAL INDEX
PERIOD, YOU SHOULD CAREFULLY CONSIDER THE LENGTH OF TIME YOU WOULD LIKE TO BE
SUBJECT TO THE SURRENDER CHARGE AND MVA. FOR MORE INFORMATION ON THE MVA, SEE
"MARKET VALUE ADJUSTMENT."
An Initial Index Period should be chosen based on an Owner's specific
investment, liquidity and retirement planning needs. For example, if you would
like the potential to earn the highest positive Credited Index Interest under
the Contract for as long as possible and do not foresee the need to make
withdrawals from the Contract, you may want to consider the 10-Year Initial
Index Period and allocate Contract Value to the Growth Account. In general, the
Index Interest Rate Cap for either the Secure Account or the Growth Account
increases with the duration of the Initial Index Period. In addition, in
general, the Index Interest Rate Cap for the Growth Account will
19
exceed the Index Interest Rate Cap for the Secure Account for the same Initial
Index Period. Also, it is important to keep in mind that the Growth Account is
only available during the Initial Index Period.
Conversely, if you would like the potential to earn positive Credited Index
Interest but also want to preserve your Contract Value and foresee the need to
make withdrawals in six or more years, you may want to consider the 5-Year
Initial Index Period and allocate Contract Value to the Secure Account.
We will deduct the Surrender Charge from your withdrawal proceeds. We will
deduct the Surrender Charge before we apply any MVA to your withdrawal proceeds.
For an example of how we calculate the amount you receive when you make a
partial withdrawal during the Initial Index Period, see Examples 1 and 2 in
"appendix a" to this prospectus.
We will not assess the Surrender Charge on:
o free annual withdrawal amounts;
o Death Benefit proceeds;
o partial withdrawals that qualify for the Nursing Home or Hospital
waiver or terminal illness waiver, described in this prospectus;
o withdrawals under the Bailout Provision;
o partial withdrawals taken as required minimum distributions under
the Internal Revenue Code;
o partial withdrawals or a surrender after the Initial Index Period;
and
o income payments during the Payout Period.
After the first Contract Anniversary and during the Initial Index Period, we
will provide you with a free annual withdrawal amount each year. We also may
waive the Surrender Charge in certain circumstances. For information on free
annual withdrawals and Surrender Charge waivers, see "access to your money."
CHANGE OF ANNUITANT ENDORSEMENT CHARGE
If you change the Annuitant within the first two Contract Years, we reserve the
right to assess a fee to offset the expenses incurred. This fee will not exceed
$150 and will be assessed on a pro-rata basis proportional to your Contract
Value in the Risk Control Accounts.
OTHER INFORMATION
We assume investment risks and costs in providing the guarantees under the
Contract. These investment risks include the risks we assume in providing the
floors to the Index Interest credited to the Risk Control Accounts, the
surrender rights available under the Contract, the Death Benefit and the income
benefits. We must provide the rates and benefits set forth in your Contract
regardless of how our General Account investments that support the guarantees we
provide perform. To help manage our investment risks, we engage in certain risk
management techniques. There are costs associated with those risk management
techniques. You do not directly pay the costs associated with our risk
management techniques. However, we take those costs into account when we set
rates and guarantees under your Contract.
--------------------------------------------------------------------------------
ACCESS TO YOUR MONEY
--------------------------------------------------------------------------------
PARTIAL WITHDRAWALS
At any time after the first Contract Anniversary and before the Payout Date you
may make two partial withdrawals each Contract Year. To make a partial
withdrawal, you must submit a Written Request in Good Order to our
Administrative Office. The written consent of all Owners and irrevocable
Beneficiaries must be obtained before we will process the partial withdrawal.
Your partial withdrawal request must specify the amount that is to be withdrawn
either as a total dollar amount or as a percentage of Contract Value. We will
take the partial withdrawal pro-rata from your Contract Value in the Risk
Control Accounts based on your Contract Value as of the date we received your
Written Request in Good Order at our Administrative Office.
20
Partial withdrawals taken during the Initial Index Period may be subject to
Surrender Charges and an MVA. (see "fees and charges" and "Market Value
Adjustment"). Partial withdrawals may also be subject to income tax and, if
taken before age 59 1/2, an additional 10% federal penalty tax. You should
consult your tax adviser before taking a partial withdrawal. See "federal income
tax matters."
FREE ANNUAL WITHDRAWAL AMOUNT. After the first Contract Anniversary, we will
provide you with a free annual withdrawal amount each year during the Initial
Index Period. As long as the partial withdrawals you take during a Contract Year
do not exceed the free annual withdrawal amount, we will not assess a Surrender
Charge or apply an MVA.
The free annual withdrawal amount for a Contract Year equals 10% of your
Contract Value calculated as of the start of the Contract Year. If you make a
partial withdrawal of less than the free annual amount, the remaining free
annual withdrawal amount will be applied to any subsequent partial withdrawal
which occurs during the same Contract Year. Any remaining free annual withdrawal
amount will not carry over to a subsequent Contract Year.
If a partial withdrawal would cause your Surrender Value to be less than $2,000,
we will treat your request for partial withdrawal as a request for full
surrender of your Contract.
WAIVER OF SURRENDER CHARGES. We will not deduct a Surrender Charge or apply an
MVA in the case of a partial withdrawal or surrender where the Owner or
Annuitant qualifies for the Nursing Home or Hospital waiver or terminal illness
waiver, as described below. Before granting the waiver, we may request a second
opinion or examination of the Owner or Annuitant by one of our examiners. We
will bear the cost of such second opinion or examination. You may exercise this
waiver only once during the time you own the Contract.
o NURSING HOME OR HOSPITAL WAIVER. We will not deduct a Surrender Charge or
apply an MVA in the case of a partial withdrawal or surrender where any
Owner or Annuitant is confined to a licensed Nursing Home or Hospital,
and has been confined to such Nursing Home or Hospital for at least 180
consecutive days after the latter of the Contract Issue Date or the date
of change of Owner or Annuitant. We may require verification of
confinement to the Nursing Home or Hospital.
The conditions that must be met are that:
o the confinement in a Nursing Home or Hospital is recommended by a
Physician who is duly licensed by the state to treat the injury or
sickness causing the confinement and who is not an employee of the
Nursing Home or Hospital where any Annuitant or Owner is confined;
and
o an additional free annual withdrawal amount request, accompanied
by written proof of confinement and the Physician's
recommendation, is received by us no later than 90 days following
the date that the qualifying confinement has ended.
o TERMINAL ILLNESS WAIVER. We will not deduct a Surrender Charge or apply
an MVA in the case of a partial withdrawal or surrender where any Owner
or Annuitant is diagnosed with a terminal illness and has a life
expectancy of 12 months or less. As proof, we may require a determination
of the terminal illness. Such determination must be signed by the
physician making the determination after the latter of Contract Issue
Date or the date of change of the Owner or Annuitant. The physician may
not be a member of your or the Annuitant's immediate family.
Please see your Contract for more information.
The laws of your state may limit the availability of the Surrender Charge
waivers and may also change certain terms and/or benefits under the waivers. You
should consult your Contract for further details on these variations. Also, even
if you do not pay a Surrender Charge because of the waivers, you still may be
required to pay taxes or tax penalties on the amount withdrawn. You should
consult a tax adviser to determine the effect of a partial withdrawal on your
taxes.
NOTE: We do not pro-rate Credited Index Interest, the Index Interest Rate Floor
or the Index Interest Rate Cap in the event of the death of the Owner during or
after the Initial Index Period.
21
SURRENDERS
At any time before the Payout Date and before the death of the Owner, you may
surrender your Contract for the Surrender Value described above in "surrender
value."
To surrender your Contract, you must make a Written Request in Good Order to our
Administrative Office. The consent of all Owners and irrevocable Beneficiaries
must be obtained before the Contract is surrendered.
Surrender Charges and a MVA may apply to your Contract surrender. See "market
value adjustment" and "fees and charges." A surrender may also be subject to
income tax and, if taken before age 59 1/2, an additional 10% federal penalty
tax. You should consult a tax adviser before requesting a surrender. See
"federal income tax matters."
PARTIAL WITHDRAWAL AND SURRENDER RESTRICTIONS
Your right to make partial withdrawals and surrender the Contract is subject to
any restrictions imposed by any applicable law or employee benefit plan.
RIGHT TO DEFER PAYMENTS
We may defer payments we make under this Contract for up to six months if the
insurance regulatory authority of the state in which we issued the Contract
approves such deferral. We will apply interest to the deferred payments, if
required by state law.
We do not pro-rate Credited Index Interest, the Index Interest Rate Floor or the
Index Interest Rate Cap.
BAILOUT PROVISION
We will set a bailout rate for each Risk Control Account. The bailout rate will
be prominently displayed on your contract data page attached to the front of the
cover page of the Contract and will not change during the Initial Index Period.
The Bailout Provision allows you to make a withdrawal of the Contract Value
attributable to a Risk Control Account without incurring any Surrender Charge
and without the application of any MVA. Specifically, if the Index Interest
Rate Cap for your Risk Control Account is set below the bailout rate for that
Risk Control Account, the Bailout Provision allows you to make a withdrawal of
some or all of the Contract Value attributable to that Risk Control Account
during the Initial Index Period without incurring any Surrender Charge and
without the application of any MVA during the 30-day period following the
Contract Anniversary. We must receive your Written Request for a withdrawal of
Contract Value under the Bailout Provision in Good Order during the 30-day
period following the Contract Anniversary. With respect to such withdrawal, your
Contract Value will be reduced by the amount of the withdrawal. At any time the
Index Interest Rate Cap for your Risk Control Account is less than the bailout
rate specified on your contract data page, we may, at our discretion, restrict
transfer into that Risk Control Account.
WITHDRAWALS TAKEN UNDER THE BAILOUT PROVISION MAY HAVE TAX CONSEQUENCES. The tax
treatment of a withdrawal under the Bailout Provision depends on whether the
Contract is a Non-Qualified Contract or a Qualified Contract. Generally, for a
withdrawal from a Non-Qualified Contract, the amount received will be treated as
ordinary income subject to tax up to an amount equal to the excess (if any) of
the Contract Value immediately before the distribution over the Owner's
investment in the Contract. If the Contract is a Qualified Contract, a portion
of the withdrawal is taxable as ordinary income, based on the ratio of the
"investment in the contract" to the individual's total account balance or
accrued benefit under the retirement plan. If taken prior to age 59 1/2, a
withdrawal from either a Non-Qualified or a Qualified Contract may be subject to
an additional 10% federal tax penalty. See discussion of "Withdrawals" and
"Penalty Tax on Certain Withdrawals" under "Federal Income Tax Matters."
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DEATH BENEFIT
--------------------------------------------------------------------------------
DEATH OF THE OWNER
If the Owner dies before the Payout Date (if there are joint Owners, the Death
Benefit will become payable after the first joint Owner dies), a Death Benefit
will become payable to the Beneficiary. We will pay the Death Benefit after we
receive the following at our Administrative Office in a form and manner
satisfactory to us:
o Due Proof of Death of the Owner while the Contract is in force;
o our claim form from each Beneficiary, properly completed; and
o any other documents we require.
The Death Benefit will equal your Contract Value adjusted for the application of
any Credited Index Interest on the date we receive Due Proof of Death.
No Surrender Charges or MVA will apply to the Death Benefit. NOTE: We do not
pro-rate Credited Index Interest, the Index Interest Rate Floor or the Index
Interest Rate Cap in the event of the death of the Contract Owner during or
after the Initial Index Period.
Within 60 days after we receive Due Proof of Death, the Beneficiary must elect
the payment method for the Death Benefit. Those options are described below. We
will pay the Death Benefit in a manner that complies with the requirements of
Section 72(s) or 401(a)(9) of the Internal Revenue Code, as applicable.
DEATH OF ANNUITANT WHILE THE OWNER IS LIVING
If the Annuitant dies during the Accumulation Period while the Owner is living
and no joint Annuitant has been named, the Owner will become the Annuitant,
until and unless we receive notice. If there are joint Annuitants, when an
Annuitant dies, the surviving joint Annuitant will become the sole Annuitant.
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If the Owner is not a natural person and the last surviving Annuitant dies
before the Payout Date, the Death Benefit will be payable to the Beneficiary.
DEATH BENEFIT PAYMENT OPTIONS
The following rules apply to the payment of the Death Benefit:
o SPOUSES - If the sole Beneficiary is the surviving spouse of the deceased
Owner, then he or she may choose to continue the Contract and become the
new Owner. At the death of the surviving spouse, this provision may not
be used again, even if that surviving spouse remarries. In that case, the
rules for non-spouses will apply. A surviving spouse may also elect to
receive the Death Benefit proceeds in a lump sum, apply the proceeds to
an Income Payment Option, or receive the Death Benefit proceeds within
five years of the date of the Owner's death.
o NON-SPOUSES - If the Beneficiary is not the surviving spouse of the
deceased Owner, then this Contract cannot be continued. Instead, upon the
death of any Owner, the Beneficiary must choose one of the following:
o Receive the Death Benefit in one lump sum following our receipt of
Due Proof of Death;
o Receive the Death Benefit (if the Beneficiary is a natural person)
pursuant to one of the Income Payment Options. Payments under an
Income Payment Option must begin within 1 year of the Owner's death
and must not extend beyond a period certain equal to the
Beneficiary's life expectancy; or
o Receive the Death Benefit within five years of the date of the
Owner's death.
Upon receipt of Due Proof of Death, the Beneficiary must instruct us how to
treat the proceeds subject to the distribution rules discussed above.
DEATH OF OWNER OR ANNUITANT AFTER THE PAYOUT DATE
If an Annuitant dies during the Payout Period, remaining income payments, if
any, will be distributed as provided by the Income Payment Option in effect.
If an Owner dies after the start of income payout, any remaining income payments
will be distributed at least as rapidly as provided by the Income Payment Option
in effect.
ABANDONED PROPERTY REQUIREMENTS
Every state has unclaimed property laws which generally declare annuity
contracts to be abandoned after a period of inactivity of three to five years
from the date the Death Benefit is due and payable. For example, if the payment
of a Death Benefit has been triggered, but, if after a thorough search, we are
still unable to locate the Beneficiary, or the Beneficiary does not come forward
to claim the Death Benefit in a timely manner, the Death Benefit will be paid to
the abandoned property division or unclaimed property office of the state in
which the Beneficiary or you last resided, as shown on our books and records, or
to our state of domicile. The "escheatment" is revocable, however, and the state
is obligated to pay the Death Benefit (without interest) if your Beneficiary
steps forward to claim it with the proper documentation. To prevent such
escheatment, it is important that you update your Beneficiary designations,
including addresses, if and as they change. To make such changes, please contact
us by writing to us or calling us at our Administrative Office.
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INCOME PAYMENTS - THE PAYOUT PERIOD
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PAYOUT DATE
When you purchase the Contract, we will set the Payout Date as the Contract
Anniversary following the Annuitant's 95th birthday. If there are Joint
Annuitants, we will set the Payout Date based on the age of the oldest Joint
Annuitant.
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You may change the Payout Date by sending a Written Request in Good Order to our
Administrative Office provided: (i) the request is made while an Owner is
living; (ii) the request is received at our Administrative Office at least 30
days before the anticipated Payout Date; and (iii) the requested Payout Date is
at least two years after the Contract Issue Date. Any such change is subject to
any maximum maturity age restrictions that may be imposed by law and cannot
extend past the Annuitant's 95th birthday or the original Payout Date.
TERMS OF INCOME PAYMENTS
We use fixed rates of interest to determine the amount of income payments
payable under the Income Payment Options. Income payments will vary; however,
depending on the number of Annuitants living on the Payout Date. Once income
payments begin, you cannot change the terms or method of those payments. We do
not apply a Surrender Charge or MVA to income payments.
If there is one Annuitant living on the Payout Date, we will apply your Contract
Value to provide for a Life Income Option with a 10-Year Guaranteed Period
Certain, unless you have elected an Income Payment Option before the Payout Date
or we are otherwise required under the Internal Revenue Code. If there are two
Annuitants living on the Payout Date, we will apply your Contract Value to a
Joint and Last Survivor Life Income Option with a 10-Year Guaranteed Period
Certain unless you have elected an Income Payment Option before the Payout Date
or we are otherwise required by the Internal Revenue Code. We describe the Life
Income Option and the Joint and Last Survivor Life Income Option under "income
payment options" below.
We will make the first income payment on the Payout Date. We may require proof
of age and sex of the Annuitant/Joint Annuitants before making the first income
payment. To receive income payments, the Annuitant/Joint Annuitant must be
living on the Payout Date and on the date that each subsequent payment is due as
required by the terms of the Income Payment Option. We may require proof from
time to time that this condition has been met.
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INCOME PAYMENT OPTIONS
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ELECTION OF AN INCOME PAYMENT OPTION
You and/or the Beneficiary may elect to receive one of the Income Payment
Options described under "Options" below. The Income Payment Option and
distribution, however, must satisfy the applicable distribution requirements of
Section 72(s) or 401(a)(9) of the Internal Revenue Code, as applicable.
The election of an Income Payment Option must be made by Written Request. The
election is irrevocable after the payments commence. The Payee may not assign or
transfer any future payments under any option.
The amount applied under each option must be at least $2,500, or the amount
required to provide an initial monthly income payment of $20.
We will make income payments monthly, quarterly, semiannually, or annually. We
will also furnish the amount of such payments on request. Payments that are less
than $20 will only be made annually.
If you do not specify an Income Payment Option in your application, the default
payment option will be Option 2 - Life Income Option with a 10-year guaranteed
period. You may change this payment option any time before payments begin on the
Payout Date.
OPTIONS
We offer the following Income Payment Options.
OPTION 1 -- INSTALLMENT OPTION. We will pay monthly income payments for a chosen
number of years, not less than 10, nor more than 30. If the Annuitant dies
before income payments have been made for the chosen number of years: (a) income
payments will be continued for the remainder of the period to the Payee; or (b)
the present value of the remaining income payments, computed at the interest
rate used to create the Option 1 rates, will be paid to the Payee or to the
Owner, if there is no surviving Payee. For purposes of the present value
calculation guaranteed rates will be used.
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OPTION 2 -- LIFE INCOME OPTION -- GUARANTEED PERIOD CERTAIN. We will pay monthly
income payments for as long as the Annuitant lives. If the Annuitant dies before
all the income payments have been made for the guaranteed period certain: (a)
income payments will be continued for the remainder of the guaranteed period to
the Payee; or (b) the present value of the remaining income payments, computed
at the interest rate used to create the Option 2 rates, will be paid to the
Payee or to the Owner, if there is no surviving Payee. For purposes of the
present value calculation guaranteed rates will be used. The guaranteed periods
are 0 (life income only), 5, 10, 15, or 20 years.
OPTION 3 -- JOINT AND LAST SURVIVOR LIFE INCOME OPTION -- GUARANTEED PERIOD
CERTAIN. We will pay monthly income payments for as long as either of the
Annuitants lives. If at the death of the second surviving Annuitant, income
payments have been made for less than 10 years: (a) income payments will be
continued for the remainder of the guaranteed period certain to the Payee; or
(b) the present value of the remaining income payments, computed at the interest
rate used to create the Option 3 rates, will be paid to the Payee or to the
Owner, if there is no surviving Payee. For purposes of the present value
calculation guaranteed rates will be used.
The options described above may not be offered in all states. Further, we may
offer other Income Payment Options. More than one option may be elected. Option
2 and Option 3 pay monthly income payments. We do allow partial annuitization.
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FEDERAL INCOME TAX MATTERS
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The following discussion is general in nature and is not intended as tax advice.
Each person concerned should consult a competent tax adviser. No attempt is made
to consider any applicable state or other income tax laws, any state and local
estate or inheritance tax, or other tax consequences of ownership or receipt of
distributions under a Contract.
When you invest in an annuity contract, you usually do not pay taxes on your
investment gains until you withdraw the money--generally for retirement
purposes. If you invest in an annuity as part of an individual retirement plan,
pension plan or employer-sponsored retirement program, your contract is called a
Qualified Contract. If your annuity is independent of any formal retirement or
pension plan, it is termed a Non-Qualified Contract. The tax rules applicable to
Qualified Contracts vary according to the type of retirement plan and the terms
and conditions of the plan. See "Non-Natural Person" below for a discussion of
Non-Qualified Contracts owned by persons such as corporations and trusts that
are not natural persons.
TAX STATUS OF THE CONTRACTS
Tax law imposes several requirements that annuities must satisfy in order to
receive the tax treatment normally accorded to annuity contracts.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
Federal income tax purposes, Section 72(s) of the Internal Revenue Code requires
any Non-Qualified Contract to contain certain provisions specifying how your
interest in the Contract will be distributed in the event of the death of an
Owner of the Contract. Specifically, section 72(s) requires that (a) if any
Owner dies on or after the annuity starting date, but prior to the time the
entire interest in the contract has been distributed, the entire interest in the
contract will be distributed at least as rapidly as under the method of
distribution being used as of the date of such Owner's death; and (b) if any
Owner dies prior to the annuity starting date, the entire interest in the
Contract will be distributed within five years after the date of such Owner's
death.
The Non-Qualified Contracts contain provisions that are intended to comply with
these Internal Revenue Code requirements, although no regulations interpreting
these requirements have yet been issued. We intend to review such provisions and
modify them if necessary to assure that they comply with the applicable
requirements when such requirements are clarified by regulation or otherwise.
Other rules may apply to Qualified Contracts.
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TAXATION OF NON-QUALIFIED CONTRACTS
NON-NATURAL PERSON. If a non-natural person (e.g., a corporation or a trust)
owns a Non-Qualified Contract, the taxpayer generally must include in income any
increase in the excess of the account value over the investment in the Contract
(generally, the Purchase Payment or other consideration paid for the contract)
during the taxable year. There are some exceptions to this rule and a
prospective Owner that is not a natural person should discuss these with a tax
adviser.
The following discussion generally applies to Contracts owned by natural
persons.
WITHDRAWALS. When a withdrawal from a Non-Qualified Contract occurs, the amount
received will be treated as ordinary income subject to tax up to an amount equal
to the excess (if any) of the Contract Value, without adjustment for any
applicable Surrender Charge, immediately before the distribution over the
Owner's investment in the Contract (generally, the Purchase Payments or other
consideration paid for the Contract, reduced by any amount previously
distributed from the Contract that was not subject to tax) at that time. The
Contract Value immediately before a withdrawal may have to be increased by any
positive MVA that results from a withdrawal. There is, however, no definitive
guidance on the proper tax treatment of MVAs and you may want to discuss the
potential tax consequences of an MVA with your tax adviser. In the case of a
surrender under a Non-Qualified Contract, the amount received generally will be
taxable only to the extent it exceeds the Owner's investment in the Contract.
In the case of a withdrawal under a Qualified Contract, a ratable portion of the
amount received is taxable, generally based on the ratio of the "investment in
the contract" to the individual's total account balance or accrued benefit under
the retirement plan. The "investment in the contract" generally equals the
amount of any non-deductible Purchase Payment paid by or on behalf of any
individual. In many cases, the "investment in the contract" under a Qualified
Contract can be zero.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
Non-Qualified Contract, there may be an imposed federal tax penalty equal to ten
percent of the amount treated as income. In general, however, there is no
penalty on distributions if they are:
o made on or after the taxpayer reaches age 59 1/2;
o made on or after the death of an Owner;
o attributable to the taxpayer's becoming disabled; or
o made as part of a series of substantially equal periodic payments
for the life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and special rules
may be applicable in connection with the exceptions enumerated above. Exceptions
may apply to distributions from a Qualified Contract. You should consult a
qualified tax adviser.
INCOME PAYMENTS. Although tax consequences may vary depending on the payout
option elected under an annuity contract, a portion of each income payment is
generally not taxed and the remainder is taxed as ordinary income. The
non-taxable portion of an income payment is generally determined in a manner
that is designed to allow you to recover your investment in the contract ratably
on a tax-free basis over the expected stream of income payments, as determined
when income payments start. Once your investment in the contract has been fully
recovered, however, the full amount of each income payment is subject to tax as
ordinary income.
PARTIAL ANNUITIZATION. Under a new tax provision enacted in 2010, if part of an
annuity contract's value is applied to an annuity option that provides payments
for one or more lives or for a period of at least ten years, those payments may
be taxed as annuity payments instead of withdrawals. The payment options under
the Contract are intended to qualify for this "partial annuitization" treatment.
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TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a Contract
because of your death or the death of the Annuitant. Generally, such amounts are
includible in the income of the recipient as follows: (i) if distributed in a
lump sum, they are taxed in the same manner as surrender of the Contract, or
(ii) if distributed under a payout option, they are taxed in the same way as
income payments.
WITHHOLDING. Annuity distributions are generally subject to withholding for the
recipient's federal income tax liability. Recipients can generally elect,
however, not to have tax withheld from distributions.
MULTIPLE CONTRACTS. All Non-Qualified deferred annuity contracts that are issued
by us (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
such Owner's income when a taxable distribution occurs.
FURTHER INFORMATION. We believe that the contracts will qualify as annuity
contracts for Federal income tax purposes and the above discussion is based on
that assumption.
TAXATION OF QUALIFIED CONTRACTS
The tax rules applicable to Qualified Contracts vary according to the type of
retirement plan and the terms and conditions of the plan. Your rights under a
Qualified Contract may be subject to the terms of the retirement plan itself,
regardless of the terms of the Qualified Contract. Adverse tax consequences may
result if you do not ensure that contributions, distributions and other
transactions with respect to the Contract comply with the law.
INDIVIDUAL RETIREMENT ANNUITIES (IRAs), as defined in Section 408 of the
Internal Revenue Code, permit individuals to make annual contributions of up to
the lesser of a specified dollar amount for the year or the amount of
compensation includible in the individual's gross income for the year. The
contributions may be deductible in whole or in part, depending on the
individual's income. Distributions from certain retirement plans may be "rolled
over" into an IRA on a tax-deferred basis without regard to these limits.
Amounts in the IRA (other than nondeductible contributions) are taxed when
distributed from the IRA. A 10% penalty tax generally applies to distributions
made before age 59 1/2, unless an exception applies.
ROTH IRAs, as described in Internal Revenue Code section 408A, permit certain
eligible individuals to contribute to make non-deductible contributions to a
Roth IRA 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 is generally subject
to tax and other special rules apply. The Owner may wish to 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 any Roth IRA. A 10% penalty tax
may apply to amounts attributable to a conversion from an IRA if they are
distributed during the five taxable years beginning with the year in which the
conversion was made.
SECTION 457 PLANS, while not actually providing for a qualified plan as that
term is normally used, provides for certain deferred compensation plans with
respect to service for state governments, local governments, political
subdivisions, agencies, instrumentalities and certain affiliates of such
entities, and tax exempt organizations. The Contract can be used with such
plans. Under such plans a participant may specify the form of investment in
which his or her participation will be made. Under a non-governmental plan, all
such investments, however, are owned by and are subject to, the claims of the
general creditors of the sponsoring employer.
OTHER TAX ISSUES. Qualified Contracts have minimum distribution rules that
govern the timing and amount of distributions. You should refer to your
retirement plan, adoption agreement, or consult a tax adviser for more
information about these distribution rules.
Distributions from Qualified Contracts generally are subject to withholding for
the Owner's federal income tax liability. The withholding rate varies according
to the type of distribution and the Owner's tax status. The Owner will be
provided the opportunity to elect not have tax withheld from distributions.
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"Eligible rollover distributions" from section 401(a), 403(a), and governmental
457 plans are subject to a mandatory federal income tax withholding of 20%. For
this purpose, an eligible rollover distribution is any distribution to an
employee (or employee' spouse or former spouse as Beneficiary or alternate
Payee) from such a plan, except certain distributions such as distributions
required by the Internal Revenue Code, distributions in a specified annuity
form, or hardship distributions. The 20% withholding does not apply, however, to
nontaxable distributions or if the employee chooses a "direct rollover" from the
plan to a tax-qualified plan, IRA or tax sheltered annuity or to a governmental
457 plan that agrees to separately account for rollover contributions.
FEDERAL ESTATE TAXES, GIFT AND GENERATION-SKIPPING TRANSFER TAXES
While no attempt is being made to discuss in detail the Federal estate tax
implications of the Contract, a purchaser should keep in mind that the value of
an annuity contract owned by a decedent and payable to a Beneficiary by virtue
of surviving the decedent is included in the decedent's gross estate. Depending
on the terms of the annuity contract, the value of the annuity included in the
gross estate may be the value of the lump sum payment payable to the Contingent
Owner or the actuarial value of the payments to be received by the Beneficiary.
Consult an estate planning adviser for more information.
Under certain circumstances, the Internal Revenue Code may impose a "generation
skipping transfer ("GST") tax" when all or part of an annuity contract is
transferred to, or a Death Benefit is paid to, an individual two or more
generations younger than the Owner. Regulations issued under the Internal
Revenue Code may require us to deduct the tax from your Contract, or from any
applicable payment, and pay it directly to the IRS. For 2013, the federal estate
tax, gift tax and GST tax exemptions and maximum rates are $5,250,000 and 40%,
respectively.
The potential application of these taxes underscores the importance of seeking
guidance from a qualified adviser to help ensure that your estate plan
adequately addresses your needs and those of your beneficiaries under all
possible scenarios.
MEDICARE TAX
Beginning in 2013, distributions from non-qualified annuity policies will be
considered "investment income" for purposes of the newly enacted Medicare tax on
investment income. Thus, in certain circumstances, a 3.8% tax may be applied to
some or all of the taxable portion of distributions (e.g., earnings) to
individuals whose income exceeds certain threshold amounts. Please consult a tax
advisor for more information.
SAME-SEX SPOUSES
The Contract provides that upon your death, a surviving spouse may have certain
continuation rights that he or she may elect to exercise for the Contract's
Death Benefit and any joint-life coverage under an optional living benefit. All
Contract provisions relating to spousal continuation are available only to a
person who meets the definition of "spouse" under federal law. The U.S. Supreme
Court has held Section 3 of the federal Defense of Marriage Act (which
purportedly did not recognize same-sex marriage, even those which are permitted
under individual state laws) to be unconstitutional. Therefore, same-sex
marriages recognized under state law will be recognized for federal law
purposes. The Department of Treasury and Internal Revenue Service have recently
determined that for federal tax purposes, same-sex spouses will be determined
based on the law of the state in which the marriage was celebrated irrespective
of the law of the state in which the person resides. However, some uncertainty
remains regarding the treatment of same-sex spouses. Consult a tax adviser for
more information on this subject.
ANNUITY PURCHASES BY NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
The discussion above provides general information regarding U.S. federal income
tax consequences to annuity purchasers that are U.S. citizens or residents.
Purchasers that are not U.S. citizens or residents will generally be subject to
U.S. federal withholding tax on taxable distributions from annuity contracts at
a 30% rate, unless a lower treaty rate applies. In addition, such purchasers may
be subject to state and/or municipal taxes and taxes that may be imposed by the
purchaser's country of citizenship or residence. Additional withholding may
occur with respect to entity purchasers (including foreign corporations,
partnerships and trusts) that are not U.S. residents. Prospective purchasers are
advised to consult with a qualified tax adviser regarding U.S., state, and
foreign taxation with respect to an annuity contract purchase.
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POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is always the
possibility that the tax treatment of the Contract could change by legislation
or otherwise. Consult a tax adviser with respect to legislative developments and
their effect on the Contract.
We have the right to modify the Contract in response to legislative changes that
could otherwise diminish the favorable tax treatment that annuity contract
owners currently receive. We make no guarantee regarding the tax status of any
contact and do not intend the above discussion as tax advice.
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OTHER INFORMATION
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DISTRIBUTION
We offer the Contract on a continuous basis. We have entered into a distribution
agreement with our affiliate, CUNA Brokerage Services, Inc., for the
distribution of the Contract. Contracts are sold by licensed insurance agents
(the "Selling Agents") in those states where the Contract may be lawfully sold.
Such Selling Agents will be registered representatives of affiliated and
unaffiliated broker-dealer firms (the "Selling Broker-Dealers") registered under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), who are
members of the Financial Industry Regulatory Authority, Inc. ("FINRA") and who
have entered into selling agreements with us and the principal underwriter, CUNA
Brokerage Services, Inc.
We and/or our affiliates pay the Selling Broker-Dealers compensation for the
promotion and sale of the Contract. The Selling Agents who solicit sales of the
Contract typically receive a portion of the compensation paid by the Company to
the Selling Broker-Dealers in the form of commissions or other compensation,
depending on the agreement between the Selling Broker-Dealer and the Selling
Agent. The Selling Agents are also licensed as insurance agents by applicable
state insurance authorities and appointed as agents of the Company. Selling
Agents who are registered representatives of CUNA Brokerage Services, Inc. or
our affiliates are also eligible for various cash benefits, such as bonuses,
insurance benefits and financing arrangements, and non-cash items that we may
jointly provide with CUNA Brokerage Services or our affiliates. Non-cash items
include conferences, seminars and trips (including travel, lodging and meals in
connection therewith), entertainment, merchandise and other similar items. Sales
of the Contracts may help registered representatives of CUNA Brokerage Services
qualify for such benefits.
The amount and timing of commissions we may pay to Selling Broker-Dealers may
vary depending on the selling agreement and the contract sold but is not
expected to be more than 7.25% of the Purchase Payment. We may pay or allow
other promotional incentives or payments in the form of cash or other
compensation to the extent permitted by FINRA rules and other applicable laws
and regulations.
We also pay compensation to wholesaling broker-dealers or other firms or
intermediaries, including payments to affiliates of ours, in return for
wholesaling services such as providing marketing and sales support, product
training and administrative services to the Selling Agents of the Selling
Broker-Dealers. These allowances may be based on a percentage of the Purchase
Payment.
In addition to the compensation described above, we may make additional cash
payments, in certain circumstances referred to as "override" compensations or
reimbursements to Selling Broker-Dealers in recognition of their marketing and
distribution, transaction processing and/or administrative services support.
These payments are not offered to all Selling Broker-Dealers, and the terms of
any particular agreement governing the payments may vary among Selling
Broker-Dealers depending on, among other things, the level and type of marketing
and distribution support provided. Marketing and distribution support services
may include, among other services, placement of the Company's products on the
Selling Broker-Dealers' preferred or recommended list, increased access to the
Selling Broker-Dealers' registered representatives for purposes of promoting
sales of our products, assistance in training and education of the Selling
Agents, and opportunities for us to participate in sales conferences and
educational seminars. The payments or reimbursements may be calculated as a
percentage of the particular Selling Broker-Dealer's actual or expected
aggregate sales of our indexed annuity contracts (including the Contract) and/or
may be a fixed dollar amount. Broker-dealers receiving these additional payments
may pass on some or all of the payments to the Selling Agent.
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You should ask your Selling Agent for further information about what commissions
or other compensation he or she, or the Selling Broker-Dealer for which he or
she works, may receive in connection with your purchase of a Contract.
Commissions and other incentives or payments described above are not charged
directly to you. We intend to recoup commissions and other sales expenses
through fees and charges deducted under the Contract.
AUTHORITY TO CHANGE
Only the President or Secretary of the Company may change or waive any of the
terms of your Contract. Any change must be in writing and signed by the
President or Secretary of the Company.
INCONTESTABILITY
We consider all statements in your application (in the absence of fraud) to be
representations and not warranties. We will not contest your Contract.
MISSTATEMENT OF AGE OR GENDER
If an Annuitant's date of birth or gender is misstated, we will adjust the
income payments under this Contract to be equal to the payout amount the
Contract would have purchased based on the Annuitant's correct date of birth
and/or gender. We will add any underpayments to the next payment. We will
subtract any overpayment from future payments. We will not credit or change any
interest to any underpayment or overpayment.
CONFORMITY WITH APPLICABLE LAWS
The provisions of the Contract conform to the minimum requirements of the state
of issue. The laws of the state of issue control any conflicting laws of any
other state in which the Owner may live on or after the Contract Issue Date. If
any provision of your Contract is determined not to provide the minimum benefits
required by the state in which the Contract is issued, such provision will be
deemed to be amended to conform or comply with such laws or regulations.
Further, the Company will amend the Contract to comply with any changes in law
governing the Contract or the taxation of benefits under the Contract.
REPORTS TO OWNERS
At least annually, we will mail a report to you at your last known address of
record, a report that will state the Contract Value, Surrender Value,
withdrawals made since the last report and any other information required by any
applicable law or regulation.
You also will receive confirmations of each financial transaction, such as
transfers, withdrawals, and surrenders.
CHANGE OF ADDRESS
You may change your address by writing to us at our Administrative Office. If
you change your address, we will send a confirmation of the address change to
both your old and new addresses.
INQUIRIES
You may make inquiries regarding your Contract by writing to us or calling us at
our Administrative Office.
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CORPORATE HISTORY OF THE COMPANY
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MEMBERS Life Insurance Company
We are a wholly-owned indirect subsidiary of CMFG Life Insurance Company ("CMFG
Life") and a direct wholly-owned subsidiary of CUNA Mutual Investment
Corporation ("CMIC"). We were formed by CMFG Life on February 27, 1976, as a
stock life insurance company under the laws of the State of Wisconsin for the
purpose of writing credit disability insurance. The original name of the Company
was CUDIS Insurance Society, Inc. On August 3, 1989, the Company's name changed
to CUMIS Life Insurance, Inc., and was subsequently changed to its current name
on January 1, 1993. League Life Insurance Company (Michigan) merged into the
Company on January 1, 1992 and MEMBERS Life Insurance Company (Texas) merged
into the Company on January 1, 1993. The Company re-domiciled from Wisconsin to
Iowa on May 3, 2007. The Company is 100% owned by CMIC, which is in turn 100%
owned by CMFG Life. On February 17, 2012, we amended and restated our Articles
of Incorporation pursuant to which we amended our purpose to be the writing of
any and all of the lines of insurance and annuity business authorized by Iowa
Code Chapter 508 and any other line of insurance or annuity business authorized
by the laws of the State of Iowa.
CMFG Life is a stock insurance company organized on May 20, 1935 and domiciled
in Iowa. CMFG Life is one of the world's largest direct underwriters of credit
life and disability insurance, and is a major provider of qualified pension
products to credit unions. Further, CMFG Life and its affiliated companies
currently offer deferred and immediate annuities, individual term and permanent
life insurance, and accident and health insurance. In 2012, CMFG Life was
reorganized as a wholly-owned subsidiary of CUNA Mutual Holding Company, a
mutual holding company.
The Company is authorized to sell life, health, and annuity policies in all
states in the U.S. and the District of Columbia, except New York. In 2012,
approximately 65% and 21% of the premiums paid under policies issued by the
Company were generated in Michigan and Texas, respectively. No other state
accounts for more than 5% of the premiums paid under the Company's policies for
any year in the three years ended December 31, 2012. As of December 31, 2012, we
had approximately $47 million in assets and we had more than $163 million of
life insurance in force.
Currently, the Company primarily services existing blocks of individual and
group life policies. In addition, in August, 2013, the Company began issuing the
Contract under the name "MEMBERS Zone Annuity".
CMFG Life provides significant services required in the conduct of the Company's
operations. We have entered into the following two contracts for the
administration of our business:
o a Cost Sharing Agreement, pursuant to which CMFG Life performs
certain administrative functions related to agent licensing, payment
of commissions, actuarial services, annuity policy issuance and
service, accounting and financial compliance, market conduct,
general and informational services and marketing as well as share
certain resources and personnel with us;
o a Procurement and Disbursement and Billing and Collection Services
Agreement, pursuant to which CMFG Life provides certain procurement,
disbursement, billing and collection services;
You may write us at 2000 Heritage Way, Waverly, Iowa 50677-9202 or call us at
1-800-798-6600.
We share space with our parent, CMFG Life. CMFG Life occupies office space in
Madison, Wisconsin and Waverly, Iowa that is owned by CMFG Life and its
affiliates. Expenses associated with the facilities are allocated to us through
the Cost Sharing Agreement described above.
31
FINANCIAL INFORMATION
Our financial statements have been prepared in accordance with U.S. GAAP.
INVESTMENTS
Our investment portfolio consists primarily of fixed income securities.
REINSURANCE
We reinsure portions of our life insurance exposure with affiliated insurance
companies under traditional indemnity reinsurance arrangements. We entered into
a Coinsurance Agreement with CMFG Life in 2012. Under this agreement, we agreed
to cede 95% of all insurance in force, including annuity contracts, as of
October 31, 2012 to CMFG Life. In 2013 we entered into a second Coinsurance
Agreement to cede 100% of all insurance issued on and after January 1, 2013 to
CMFG Life. These agreements do not relieve us of our obligations to our
policyholders under contracts covered by these agreements. However, they do
transfer nearly all of the Company's underwriting profits and losses to CMFG
Life and require CMFG Life to indemnify the Company for nearly all of its
liabilities.
POLICY LIABILITIES AND ACCRUALS
The applicable accounting standards and state insurance laws under which we
operate require that we record policy liabilities to meet the future obligations
associated with all of our outstanding policies.
--------------------------------------------------------------------------------
POTENTIAL RISK FACTORS THAT MAY AFFECT OUR BUSINESS AND OUR FUTURE RESULTS
--------------------------------------------------------------------------------
ALTHOUGH ECONOMIC CONDITIONS BOTH DOMESTICALLY AND GLOBALLY HAVE CONTINUED TO
IMPROVE SINCE THE FINANCIAL CRISIS IN 2008, WE REMAIN VULNERABLE TO MARKET
UNCERTAINTY AND CONTINUED FINANCIAL INSTABILITY OF NATIONAL, STATE AND LOCAL
GOVERNMENTS. CONTINUED DIFFICULT CONDITIONS IN THE GLOBAL CAPITAL MARKETS AND
ECONOMY COULD DETERIORATE IN THE NEAR FUTURE AND AFFECT OUR FINANCIAL POSITION
AND OUR LEVEL OF EARNINGS FROM OUR OPERATIONS.
Markets in the United States and elsewhere experienced extreme volatility and
disruption since the second half of 2007, due in part to the financial stresses
affecting the liquidity of the banking system and the financial markets. This
volatility and disruption reached unprecedented levels in late 2008 and early
2009. The United States entered a severe recession and recovery has proved to be
slow and long-term. High unemployment rates and lower average household income
levels have emerged as continued lagging indicators of a slow economic recovery.
One of the strategies used by the U.S. government to stimulate the economy has
been to keep interest rates low and increase the supply of United States
dollars. While these strategies have appeared to be somewhat successful, any
future economic downturn or market disruption could negatively impact our
ability to invest our funds.
Specifically, if market conditions deteriorate in 2013 or beyond:
o our investment portfolio could incur other than temporary
impairments;
o due to potential downgrades in our investment portfolio, we
could be required to raise additional capital to sustain our
current business in force and new sales of our annuity products,
which may be difficult in a distressed market. If capital would be
available, it may be at terms that are not favorable to us; or
o our liquidity could be negatively affected and we could be forced
to further limit our operations and our business could suffer, as
we need liquidity to pay our policyholder benefits and operating
expenses.
The principal sources of our liquidity are monthly settlements under the
coinsurance agreements with CMFG Life, annuity deposits, investment income,
proceeds from the sale, maturity and call of investments and capital
contributions from CMFG Life.
32
GOVERNMENTAL INITIATIVES INTENDED TO IMPROVE GLOBAL AND LOCAL ECONOMIES THAT
HAVE BEEN ADOPTED MAY NOT BE EFFECTIVE AND, IN ANY EVENT, MAY BE ACCOMPANIED BY
OTHER INITIATIVES, INCLUDING NEW CAPITAL REQUIREMENTS OR OTHER REGULATIONS, THAT
COULD MATERIALLY AFFECT OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION AND
LIQUIDITY IN WAYS THAT WE CANNOT PREDICT.
We are subject to extensive laws and regulations that are administered and
enforced by a number of different regulatory authorities including state
insurance regulators, the National Association of Insurance Commissioners
("NAIC") and the Securities and Exchange Commission ("SEC"). Some of these
authorities are or may in the future consider enhanced or new regulatory
requirements intended to prevent future crises or otherwise assure the stability
of institutions under their supervision. These authorities may also seek to
exercise their supervisory or enforcement authority in new or more robust ways.
All of these possibilities, if they occurred, could affect the way we conduct
our business and manage our capital, and may require us to satisfy increased
capital requirements, any of which in turn could materially affect our results
of operations, financial condition and liquidity.
WE FACE POTENTIAL COMPETITION FROM COMPANIES THAT HAVE GREATER FINANCIAL
RESOURCES, BROADER ARRAYS OF PRODUCTS, HIGHER RATINGS AND STRONGER FINANCIAL
PERFORMANCE, WHICH MAY IMPAIR OUR ABILITY TO ATTRACT NEW CUSTOMERS AND MAINTAIN
OUR PROFITABILITY AND FINANCIAL STRENGTH.
We operate in a highly competitive industry. Many of our competitors are
substantially larger and enjoy substantially greater financial resources,
claims-paying ability and financial strength, broader and more diversified
product lines and more widespread distribution relationships. Our annuity
products compete with fixed indexed, traditional fixed rate and variable
annuities sold by other insurance companies and also with mutual fund products,
traditional bank investments and other investment and retirement funding
alternatives offered by asset managers, banks and broker-dealers. Our annuity
products also compete with products of other insurance companies, financial
intermediaries and other institutions based on a number of factors, including
crediting rates, policy terms and conditions, service provided to distribution
channels and policyholders, ratings, reputation and distribution compensation.
Our ability to compete will depend in part on rates of interest credited to
policyholder account balances or the parameters governing the determination of
index credits which is driven by our investment performance. We will not be able
to accumulate and retain assets under management for our products if our
investment results underperform the market or the competition, since such
underperformance likely would result in asset withdrawals and reduced sales.
We compete for distribution sources for our products. We believe that our
success in competing for distributors will depend on factors such as our
financial strength, the services we provide to, and the relationships we develop
with these distributors and offering competitive commission structures. Our
distributors will generally be free to sell products from whichever providers
they wish, which makes it important for us to continually offer distributors
products and services they find attractive. If our products or services fall
short of distributors' needs, we may not be able to establish and maintain
satisfactory relationships with distributors of our annuity products. Our
ability to compete will also depend in part on our ability to develop innovative
new products and bring them to market more quickly than our competitors. In
order for us to compete in the future, we will need to continue to bring
innovative products to market in a timely fashion. Otherwise, our revenues and
profitability could suffer.
THE LOSS OF KEY EMPLOYEES COULD DISRUPT OUR OPERATIONS.
Our success depends in part on the continued service of key executives within
our Company and our ability to attract and retain additional executives and
employees. The loss of key employees, or our inability to recruit and retain
additional qualified personnel, could cause disruption in our business and
prevent us from fully implementing our business strategies, which could
materially and adversely affect our business, growth and profitability.
CHANGES IN STATE AND FEDERAL REGULATION MAY AFFECT OUR PROFITABILITY.
We are subject to regulation under applicable insurance statutes, including
insurance holding company statutes, in the various states in which we transact
business. Insurance regulation is intended to provide safeguards for
33
policyholders rather than to protect shareholders of insurance companies or
their holding companies. As increased scrutiny has been placed upon the
insurance regulatory framework, a number of state legislatures have considered
or enacted legislative proposals that alter, and in many cases increase, state
authority to regulate insurance companies and holding company systems.
Regulators oversee matters relating to trade practices, policy forms, claims
practices, guaranty funds, types and amounts of investments, reserve adequacy,
insurer solvency, minimum amounts of capital and surplus, transactions with
related parties, changes in control and payment of dividends.
State insurance regulators and the NAIC continually reexamine existing laws and
regulations and may impose changes in the future.
We are subject to the NAIC's risk-based capital requirements which are intended
to be used by insurance regulators as an early warning tool to identify
deteriorating or weakly capitalized insurance companies for the purpose of
initiating regulatory action. We also may be required, under solvency or
guaranty laws of most states in which we do business, to pay assessments up to
certain prescribed limits to fund policyholder losses or liabilities for
insolvent insurance companies.
Although the federal government does not directly regulate the insurance
business, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation, securities regulation and federal taxation, can significantly affect
the insurance business. In addition, legislation has been enacted which could
result in the federal government assuming some role in the regulation of the
insurance industry.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
"Dodd-Frank Act") was enacted and signed into law, making extensive changes to
the laws regulating the financial services industry. Among other things, the
Dodd-Frank Act imposes a comprehensive new regulatory regime on the
over-the-counter ("OTC") derivatives marketplace. The derivatives legislation is
set forth in Title VII of the Dodd-Frank Act entitled "Wall Street Transparency
and Accountability" (the "Derivatives Title"). With limited exceptions, the
provisions of the Derivatives Title become effective on the later of 360 days
following enactment and, to the extent a provision requires rulemaking, not less
than 60 days after publication in the Federal Register of the applicable final
rule. However, with respect to provisions of the Derivatives Title that do not
require rulemakings and therefore became effective in July 2011, the U.S.
Commodities Futures Trading Commission (the "CFTC") and the SEC have issued
orders temporarily exempting persons and entities from compliance with such
provisions while the regulators finalize key rulemakings necessary to implement
the Derivatives Title. Once effective, this legislation will subject "swap
dealers" and "major swap participants" (each as defined in the legislation and
further clarified by the rulemaking) to substantial supervision and regulation,
including capital standards, margin requirements, business conduct standards,
and recordkeeping and reporting requirements. It will also require central
clearing for certain derivatives transactions that the CFTC or SEC, as
applicable, determines must be cleared and are accepted for clearing by a
"derivatives clearing organization" (subject to certain exceptions). Many key
concepts, processes and issues under the Derivatives Title have been left to the
relevant federal regulators to define and address. Although it is not possible
at this time to assess the impact of the Dodd-Frank Act and any future
regulations implementing the new legislation, the Dodd-Frank Act and any such
regulations may subject us to additional restrictions on our hedging positions
which may have an adverse effect on our ability to hedge risks associated with
our business, including our indexed annuity business, or on the cost of our
hedging activity. Additionally, the definitions of "swap" and "security-based
swap" in the Derivatives Title are very broad and could be read to include
certain insurance and annuity products. Regulations further defining these terms
have not been finalized, but if certain insurance and annuity products are
ultimately included in the definition of swap or security-based swaps, such
products, and potentially the insurance companies that offer them, will be
subject to extensive federal regulation.
The Dodd-Frank Act also created a Financial Stability and Oversight Council. The
Council may designate by a 2/3 vote whether certain insurance companies and
insurance holding companies pose a grave threat to the financial stability of
the United States, in which case such companies would become subject to
prudential regulation by the Board of Governors of the U.S. Federal Reserve (the
"Federal Reserve Board") (including capital requirements, leverage limits,
liquidity requirements and examinations). The Federal Reserve Board may limit
such company's ability to enter into merger transactions, restrict its ability
to offer financial products, require it to terminate one or
34
more activities, or impose conditions on the manner in which it conducts
activities. The Dodd-Frank Act also established a Federal Insurance Office under
the U.S. Treasury Department to monitor all aspects of the insurance industry
and of lines of business other than certain health insurance, certain long-term
care insurance and crop insurance. The director of the Federal Insurance Office
will have the ability to recommend that an insurance company or an insurance
holding company be subject to heightened prudential standards. The Dodd-Frank
Act also provides for the preemption of state laws in certain instances
involving the regulation of reinsurance and other limited insurance matters. The
Dodd-Frank Act requires extensive rule-making and other future regulatory
action, which in some cases will take a period of years to implement. It is not
possible at this time to assess the impact on our business of the establishment
of the Federal Insurance Office and the Financial Stability and Oversight
Council. However, the regulatory framework at the state and federal level
applicable to our insurance products is evolving. The changing regulatory
framework could affect the design of such products and our ability to sell
certain products. Any changes in these laws and regulations could materially and
adversely affect our business, financial condition or results of operations.
CHANGES IN FEDERAL INCOME TAXATION LAWS MAY AFFECT SALES OF OUR PRODUCTS AND
PROFITABILITY.
The annuity products that we market generally provide the policyholder with
certain federal income tax advantages. For example, federal income taxation on
any increases in non-qualified annuity contract values (i.e., the "inside
build-up") is deferred until it is received by the policyholder. With other
savings and investments, such as certificates of deposit and taxable bonds, the
increase in value is generally taxed each year as it is earned.
From time to time, various tax law changes have been proposed that could have an
adverse effect on our business, including the elimination of all or a portion of
the income tax advantages for annuities. If legislation were enacted to
eliminate the tax deferral for annuities, such a change may have an adverse
effect on our ability to sell non-qualified annuities. Non-qualified annuities
are annuities that are not sold to a qualified retirement plan.
Beginning in 2013, distributions from non-qualified annuity policies will be
considered "investment income" for purposes of the newly enacted Medicare tax on
investment income contained in the Health Care and Education Reconciliation Act
of 2010. As a result, in certain circumstances a 3.8% tax ("Medicare Tax") may
be applied to some or all of the taxable portion of distributions from
non-qualified annuities to individuals whose income exceeds certain threshold
amounts. This new tax may have an adverse effect on our ability to sell
non-qualified annuities to individuals whose income exceeds these threshold
amounts and could accelerate withdrawals due to this impending additional tax.
The constitutionality of the Health Care and Education Reconciliation Act of
2010 is currently the subject of multiple litigation actions initiated by
various state attorneys general, and the Act is also the subject of several
proposals in the US Congress for amendment and/or repeal. The outcome of such
litigation and legislative action as it relates to the 3.8% Medicare Tax is
unknown at this time.
WE FACE RISKS RELATING TO LITIGATION, INCLUDING THE COSTS OF SUCH LITIGATION,
MANAGEMENT DISTRACTION AND THE POTENTIAL FOR DAMAGE AWARDS, WHICH MAY ADVERSELY
IMPACT OUR BUSINESS.
We may become involved in litigation, both as a defendant and as a plaintiff,
relating to claims arising out of our operations in the normal course of
business. In addition, state regulatory bodies, such as state insurance
departments, the SEC, the Financial Industry Regulatory Authority, Inc.
("FINRA"), the Department of Labor, and other regulatory bodies regularly make
inquiries and conduct examinations or investigations of companies in the annuity
business concerning compliance with, among other things, insurance laws,
securities laws, the Employee Retirement Income Security Act of 1974, as
amended, and laws governing the activities of broker-dealers. Companies in the
annuity business have faced litigation, including class action lawsuits,
alleging improper product design, improper sales practices and similar claims.
There can be no assurance that any future litigation will not have a material
adverse effect on our business, financial condition or results of operations
through distraction of our management or otherwise.
35
--------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------
The following selected financial data is derived from the Company's financial
statements and should be read in conjunction with the discussion under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The results of operations data for the years ended December 31,
2012, 2011 and 2010 and for the nine months ended September 30, 2013 and 2012
and the balance sheet data as of December 31, 2012 and 2011 and September 30,
2013 should be read in conjunction with our financial statements and related
notes appearing elsewhere in this prospectus. The results for the past periods
are not necessarily indicative of results that may be expected for future
periods. The Company entered into reinsurance agreements with CMFG Life in 2012
and 2013 which impact the Company's financial results. See the reinsurance
footnote within the Company's financial statements appearing elsewhere in this
prospectus.
---------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
RESULTS OF OPERATIONS DATA: 2012 2011 2010 2009 2008
---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
REVENUES
Life and health premiums $ (20,459) $ 3,409 $ 3,744 $ 3,720 $ 4,115
Contract charges 460 501 533 524 539
Net investment income 1,928 2,175 2,090 1,903 2,199
Net realized gains on investments 4,319 119 245 257 1,148
---------------------------------------------------------------------------------------------------------------------
Total revenues (13,752) 6,204 6,612 6,404 8,001
---------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Life and health insurance claims and benefits (20,028) 2,268 2,261 2,333 2,163
Interest credited to policyholder account balances 158 164 163 177 182
Operating and other expenses 1,087 1,040 827 992 1,034
---------------------------------------------------------------------------------------------------------------------
Total benefits and expenses (18,783) 3,472 3,251 3,502 3,379
---------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,031 2,732 3,361 2,902 4,622
Income tax expense 1,679 921 1,074 1,766 1,774
---------------------------------------------------------------------------------------------------------------------
Net income $ 3,352 $ 1,811 $ 2,287 $ 1,136 $ 2,848
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
DECEMBER 31,
BALANCE SHEET DATA: 2012 2011 2010 2009 2008
------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS:
Total investments $ 8,691 $ 53,678 $ 50,145 $ 38,696 $ 41,087
Reinsurance recoverable 26,391 - - - -
Total assets 47,405 64,248 62,416 61,016 60,418
LIABILITIES AND STOCKHOLDER'S EQUITY:
Claim and policy benefit reserves 24,112 23,974 24,896 25,829 26,806
Total liabilities 28,281 28,212 29,408 30,928 31,800
Total stockholder's equity 19,124 36,036 33,008 30,088 28,618
------------------------------------------------------------------------------------------------------
36
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
RESULTS OF OPERATIONS DATA: 2013 2012
(DOLLARS IN THOUSANDS)
REVENUES
Life and health premiums $ $
Contract charges
Net investment income
Net realized gains on investments
------------------------------------------------------------------------------------------------------
Total revenues
------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Life and health insurance claims and benefits
Interest credited to policyholder account balances
Operating and other expenses
------------------------------------------------------------------------------------------------------
Total benefits and expenses
------------------------------------------------------------------------------------------------------
Income before income taxes
Income tax expense
------------------------------------------------------------------------------------------------------
Net income $ $
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
-----------------------------------------
BALANCE SHEET DATA: 2013 2012
------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS:
Total investments $ $ 8,691
Reinsurance recoverable 26,391
Total assets 47,405
LIABILITIES AND STOCKHOLDER'S EQUITY:
Claim and policy benefit reserves 24,112
Total liabilities 28,281
Total stockholder's equity 19,124
------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations reviews our financial condition at December 31, 2012, December 31,
2011 and September 30, 2013; our results of operations for the years ended
December 31, 2012, 2011 and 2010 and for the nine months ended September 30,
2013 and 2012; and where appropriate, factors that may affect future financial
performance. This discussion should be read in conjunction with our financial
statements and notes thereto appearing elsewhere in this prospectus. The dollar
amounts disclosed in this Management's Discussion and Analysis of Financial
Condition and Results of Operations are "in thousands."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
All statements, trend analyses and other information contained in this
prospectus and elsewhere (such as in press releases, presentations by us, our
immediate parent CMIC, or CMFG Life, our management or oral statements)
37
relative to markets for our products and trends in our operations or financial
results, as well as other statements including words such as "anticipate",
"believe", "plan", "estimate", "expect", "intend", and other similar
expressions, constitute forward-looking statements. We caution that these
statements may vary from actual results and the differences between these
statements and actual results can be material. Accordingly, we cannot assure you
that actual results will not differ materially from those expressed or implied
by the forward-looking statements. Factors that could contribute to these
differences include, among other things:
o general economic conditions and other factors, including prevailing
interest rate levels and stock and credit market performance which may
affect (among other things) our ability to sell our products, our
ability to access capital resources and the costs associated therewith,
the fair value of our investments, which could result in other than
temporary impairments, and certain liabilities, and the lapse rate and
profitability of policies;
o customer response to new products and marketing initiatives;
o we have not previously issued or distributed a similar type of single
premium deferred annuity contract;
o changes in the Federal income tax laws and regulations which may affect
the relative income tax advantages of our products;
o increasing competition in the sale of annuities;
o regulatory changes or actions, including those relating to regulation of
financial services affecting (among other things) bank and credit union
sales and underwriting of insurance products and regulation of the sale,
underwriting and pricing of products; and
o the risk factors or uncertainties listed in this prospectus.
For a detailed discussion of these and other factors that might affect our
performance see the sections entitled "Risk Factors and Other Important
Information You Should Know" and "Potential Risk Factors That May Affect Future
Results."
OVERVIEW
We are a wholly-owned indirect subsidiary of CMFG Life and a direct wholly-owned
subsidiary of CMIC. On May 3, 2007, the Company re-domiciled from Wisconsin to
Iowa. On February 17, 2012, we amended and restated our Articles of
Incorporation pursuant to which we amended our purpose to be the writing of any
and all of the lines of insurance and annuity business authorized by Iowa Code
Chapter 508 as authorized by the laws of the State of Iowa. We currently intend
to focus our efforts on the annuity business, including the sale of the
Contracts.
The Company is authorized to sell life, health and annuity policies in all
states in the U.S. and the District of Columbia, except New York. In 2012,
approximately 65% and 21% of the premiums paid under policies issued by the
Company were generated in Michigan and Texas, respectively. No other state
accounts for more than 5% of the premiums paid under the Company's policies for
any year in the three years ended December 31, 2012. As of December 31, 2012,
we had approximately $47 million in assets and we had more than $163 million of
life insurance in force.
Currently, the Company primarily services existing blocks of individual and
group life policies and began marketing the Contract in August, 2013. We
distribute the Contract through multiple face-to-face distribution channels,
including:
o Managed Agents: employees of the Company who sell insurance and
investment products to members of credit unions that have contracted
with the Company and its affiliates to provide these services;
o Dual Employee Agents: employees of credit unions who sell insurance and
investment products to members of credit unions that have contracted
with the Company and its affiliates to provide these services. These
agents are registered representatives of the Company's affiliated broker
dealer; and
o Independent Agents: agents who also represent other insurance companies
and, along with or through an unaffiliated broker-dealer, contract with
the Company to offer its individual life insurance and annuity products
that are made available for distribution through this channel.
38
We entered into a coinsurance agreement with CMFG Life in 2012. Under this
agreement, we agreed to cede 95% of all insurance in force as of October 31,
2012 to CMFG Life. In 2013, we entered into a second coinsurance agreement to
cede 100% of all insurance issued on and after January 1, 2013 to CMFG Life.
These agreements do not relieve us of our obligations to our policyholders under
contracts covered by these agreements. However, they do transfer nearly all of
the Company's underwriting profits and losses to CMFG Life and require CMFG Life
to indemnify the Company for nearly all of its liabilities.
We believe that our profitability in 2013 and later will be minimal due to the
coinsurance agreements with CMFG Life, as the coinsurance agreements transfer
nearly all of our underwriting profits or losses to CMFG Life.
CMFG Life provides significant services required of personnel in the conduct of
the Company's operations. CMFG Life allocates expenses to us on the basis of
time spent by employees of CMFG Life on Company matters and the use of
operational resources. Management believes the allocations of expenses are
reasonable and that the results of the Company's operations may have materially
differed in a negative manner from the results reflected in the accompanying
financial statements if the Company did not have this relationship.
CRITICAL ACCOUNTING POLICIES
The increasing complexity of the business environment and applicable
authoritative accounting guidance requires us to closely monitor our accounting
policies. The following summary of our critical accounting policies is intended
to enhance your ability to assess our financial condition and results of
operations and the potential volatility due to changes in estimates.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates and in some cases the difference could be
material. Investment valuations, claim and policyholder benefit reserves and
deferred tax asset valuation reserves are most affected by the use of estimates
and assumptions.
INVESTMENT VALUATION - Investments in debt securities are classified as
available for sale and are carried at fair value. Unrealized gains and losses on
investments in debt securities, net of federal income taxes, are included in
accumulated other comprehensive income as a separate component of stockholder's
equity.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
The fair value hierarchy prioritizes the inputs to valuation techniques used to
measure fair value of assets and liabilities into three broad levels. The
Company has categorized its financial instruments, based on the degree of
subjectivity inherent in the valuation technique, as follows:
o Level 1: Inputs are directly observable and represent quoted prices for
identical assets or liabilities in active markets the Company has the
ability to access at the measurement date.
o Level 2: All significant inputs are observable, either directly or
indirectly, other than quoted prices included in Level 1, for the asset
or liability. This includes: (i) quoted prices for similar instruments
in active markets, (ii) quoted prices for identical or similar
instruments in markets that are not active, (iii) inputs other than
quoted prices that are observable for the instruments and (iv) inputs
that are derived principally from or corroborated by observable market
data by correlation or other means.
o Level 3: One or more significant inputs are unobservable and reflect the
Company's estimates of the assumptions that market participants would
use in pricing the asset or liability, including assumptions about risk.
For purposes of determining the fair value of the Company's investments,
observable inputs are those inputs used by market participants in valuing
financial instruments, which are developed based on market data obtained
39
from independent sources. In the absence of sufficient observable inputs,
unobservable inputs, reflecting the Company's estimates of the assumptions
market participants would use in valuing investments, are developed based on the
best information available in the circumstances. The Company uses prices and
inputs that are current as of the measurement date. In some instances, valuation
inputs used to measure fair value fall into different levels of the fair value
hierarchy. The category level in the fair value hierarchy is determined based on
the lowest level input that is significant to the fair value measurement in its
entirety.
The hierarchy requires the use of market observable information when available
for assessing fair value. The availability of observable inputs varies by
investment. In situations where the fair value is based on inputs that are
unobservable in the market or on inputs from inactive markets, the determination
of fair value requires more judgment and is subject to the risk of variability.
The degree of judgment exercised by the Company in determining fair value is
typically greatest for investments categorized in Level 3.
Our assets which are measured at fair value on a recurring basis as of December
31, 2012 are presented below based on the fair value hierarchy levels.
OTHER-THAN-TEMPORARY INVESTMENT IMPAIRMENTS - Investment securities are reviewed
for other than temporary impairment ("OTTI") on an ongoing basis. The Company
creates a watchlist of securities based largely on the fair value of an
investment security relative to its cost basis. When the fair value drops below
the Company's cost, the Company monitors the security for OTTI impairment. The
determination of OTTI requires significant judgment on the part of the Company
and depends on several factors, including:
o the existence of any plans to sell the investment security;
o the extent to which fair value is less than book value;
o the underlying reason for the decline in fair value (credit concerns,
interest rates, etc.);
o the financial condition and near term prospects of the issuer/borrower,
including the ability to meet contractual obligations, relevant industry
trends and conditions;
o the Company's intent and ability to retain the investment for a period
of time sufficient to allow for an anticipated recovery in fair value;
o the Company's ability to recover all amounts due according to the
contractual terms of the agreements; and
o the Company's collateral position in the case of bankruptcy or
restructuring.
A debt security is considered other-than-temporarily impaired when the fair
value is less than the amortized cost basis and its value is not expected to
recover through the Company's holding period of the security. If a credit loss
exists, but the Company does not intend to sell the impaired debt security and
is not more likely than not to be required to sell before recovery, it is
required to bifurcate the impairment into the loss that is attributable to
credit and non-credit related risk. The credit portion of the OTTI is the
difference between the present value of the expected future cash flows and
amortized cost. Only the estimated credit loss amount is recognized in earnings,
with the remainder of the loss amount recognized in other comprehensive income.
If the Company intends to sell, at the time this determination is made, the
Company records a realized loss equal to the difference between the amortized
cost and fair value. The fair value of the other-than-temporarily impaired
security becomes its new cost basis. In determining whether an unrealized loss
is expected to be other than temporary, the Company considers, among other
factors, any plans to sell the security, the severity of impairment, financial
position of the issuer, recent events affecting the issuer's business and
industry sector, credit ratings, and the ability of the Company to hold the
investment until the fair value has recovered.
For securitized debt securities, the Company considers factors including
commercial and residential property changes in value that vary by property type
and location and average cumulative collateral loss rates that vary by vintage
year. These assumptions require the use of significant management judgment and
include the probability of issuer default and estimates regarding timing and
amount of expected recoveries. In addition, projections of expected future debt
security cash flows may change based upon new information regarding the
performance of the issuer and/or underlying collateral.
40
For certain securitized financial assets with contractual cash flows, the
Company is required to periodically update its best estimate of cash flows over
the life of the security. If the fair value of a securitized financial asset is
less than its cost or amortized cost and there has been a decrease in the
present value of the estimated cash flows since the last revised estimate,
considering both timing and amount, an OTTI charge is recognized. The Company
also considers its intent to retain a temporarily impaired security until
recovery. Estimating future cash flows involves judgment and includes both
quantitative and qualitative factors. Such determinations incorporate various
information and assessments regarding the future performance of the underlying
collateral. In addition, projections of expected future cash flows may change
based upon new information regarding the performance of the underlying
collateral.
REINSURANCE - Reinsurance premiums, claims and benefits, commission expense
reimbursements, and reserves related to reinsured business ceded are accounted
for on a basis consistent with the accounting for the underlying direct policies
that have been ceded and the terms of the reinsurance contracts. Premiums and
insurance claims and benefits in the statements of operations and comprehensive
income are reported net of the amounts ceded to other companies under such
reinsurance contracts. Ceded insurance reserves and ceded benefits paid are
included in reinsurance recoverables. A prepaid reinsurance asset is also
recorded for the portion of unearned premiums related to ceded policies.
The Company entered into two coinsurance agreements with CMFG Life as described
in the Overview of this Management's Discussion and Analysis. As consideration
for the reinsurance provided under these agreements, we transfer nearly all of
our revenues to CMFG Life. Specifically, CMFG Life receives 95% of all premiums
and insurance claims and benefits received on account of our existing business
in force as of October 31, 2012 and 100% of all premiums and insurance claims
and benefits received on account of our new business issued on or after January
1, 2013.
INSURANCE RESERVES - Life and health claim and policy benefit reserves consist
principally of future policy benefit reserves and reserves for estimates of
future payments on incurred claims reported and unreported but not yet paid.
Such estimates are developed using actuarial principles and assumptions based on
past experience adjusted for current trends. Any change in the probable ultimate
liabilities is reflected in net income in the period in which the change is
determined.
When actual experiences indicate that existing contract liabilities, together
with the present value of future gross premiums will not be sufficient to
recover the present value of future benefits or recover unamortized deferred
acquisition costs, a premium deficiency will be recognized by either a reduction
in unamortized acquisition costs or an increase in liability of future benefits.
The Company entered into two coinsurance agreements with CFMG Life as described
in the Overview of this Management's Discussion and Analysis. These agreements
do not relieve the Company of its obligations to its policyholders under
contracts covered by these agreements. However, they do transfer nearly all of
the Company's underwriting profits and losses to CMFG Life and require CMFG Life
to indemnify the Company for nearly all of its liabilities.
INCOME TAXES - The Company recognizes taxes payable or refundable and deferred
taxes for the tax consequences of differences between the financial reporting
and tax basis of assets and liabilities. Deferred tax assets and liabilities are
measured by applying the enacted tax rates to the difference between the
financial statement and tax basis of assets and liabilities. The Company records
current tax benefits and deferred tax assets utilizing a benefits-for-loss
approach. Under this approach, current benefits are realized and deferred tax
assets are considered realizable by the Company when realized or realizable by
the consolidated group of which the Company is a member even if the benefits
would not be realized on a stand-alone basis. The Company records a valuation
allowance for deferred tax assets if it determines it is more likely than not
that the asset will not be realized by the consolidated group. Deferred income
tax assets can be realized through future earnings, including the generation of
future income, reversal of existing temporary differences and available tax
planning strategies.
The Company is subject to tax-related audits in the normal course of operations.
These audits may result in additional tax assets or liabilities. In establishing
tax liabilities, the Company determines whether a tax position is more likely
than not to be sustained under examination by the appropriate taxing authority.
Tax positions that do
41
not meet the more likely than not standard are not recognized. Tax positions
that meet this standard are recognized in the financial statements.
The Company is included in the consolidated life-nonlife federal income tax
return of CUNA Mutual Holding Company ("CMHC"), the Company's ultimate parent.
The Company has entered into a tax sharing agreement with CMHC and CMHC's
subsidiaries. The agreement provides for the allocation of expenses based on
each subsidiary's contribution to the consolidated federal income tax liability.
Pursuant to the agreement, subsidiaries that have incurred losses are reimbursed
regardless of the utilization of the loss in the current year. Federal income
taxes recoverable reported on the balance sheet are due from affiliates.
EXECUTIVE SUMMARY
The Company provides life and health insurance throughout the United States
servicing its existing blocks of individual and group life policies and began
marketing the Contract in August, 2013. The Company is managed as one life and
health business segment of CMFG Life.
In 2012 the Company entered into a reinsurance agreement with CMFG Life to cede
95% of its business in force as of October 31, 2013. In 2013 it entered into a
second agreement with CMFG Life to cede 100% of any new business written on or
after January 1, 2013. See Note 7 of the Notes to the Financial Statements
appearing elsewhere in this prospectus for information on the 2012 agreement.
See Note 7 of the Notes to the Unaudited Condensed Financial Statements
appearing elsewhere in this prospectus for information on the 2013 agreement.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010.
Total revenues, which consisted mainly of premiums, net realized investment
gains and investment income, were ($13,752), $6,204 and $6,612 for the years
ended December 31, 2012, 2011 and 2010, respectively. The decrease in total
revenues in 2012 from 2011 was primarily due to the reinsurance agreement that
became effective in October 2012. Premium revenue was ($20,459), $3,409 and
$3,744 for the years ended December 31, 2012, 2011 and 2010, respectively, and
consists of life and health direct (and ceded in 2012) written renewal premium.
The decline in 2012 premium revenue from 2011 was primarily due to the Company
ceding $23,667 of premium under the reinsurance agreement with CMFG Life. The
decline in 2011 premium revenue from 2010 was primarily due to the non-renewal
of insurance policies. Total net investment income was $1,928, $2,175 and $2,090
for the years ended December 31, 2012, 2011 and 2010, respectively, which
represents an average yield earned of 3.9%, 4.0% and 4.1% for the same periods,
respectively. Net realized investment gains were $4,319, $119 and $245 for the
years ended December 31, 2012, 2011 and 2010. The increase in net realized
investment gains in 2012 from 2011 was due to the transfer to CMFG Life in
payment of ceded premium for the Company's coinsurance agreement on its inforce
business and on investments transferred for the Company's return of capital to
CMIC. Net realized investment gains remained materially unchanged between 2011
and 2010.
Total benefits and expenses were ($18,783), $3,472 and $3,251 for the years
ended December 31, 2012, 2011 and 2010, respectively. The difference in life and
health benefits and expenses was primarily due to benefits being ceded to CMFG
Life and an increase in product launch expenses related to the Company's
expected new product, the Contract. Life and health benefits totaled ($20,028),
$2,268 and $2,261 for the years ended December 31, 2012, 2011 and 2010,
respectively. The Company ceded $23,114 of life and health benefits in 2012,
leading to the decline in benefits in 2012 from 2011. The Company's main expense
is the payment of claims related to life insurance policies. Operating expenses
totaled $1,087, $1,040 and $827 for the years ended December 31, 2012, 2011 and
2010, respectively. CMFG Life provides significant services required in the
conduct of the Company's operations. Operating expenses incurred by the Company
that are specifically identifiable are borne by the Company; other operating
expenses are allocated from CMFG Life on the basis of time and usage studies.
Operating expenses are primarily related to and include employee costs such as
wages and benefits, and credit union reimbursements whereby the Company
reimburses credit unions for certain administrative expenses they incur in the
production of new and renewal business sold for the Company and other operating
expenses such as rent, insurance and utilities. The slight increase in 2012 from
2011 is due to increased expenses of $319 related to the Contract launch offset
by the reimbursement of $188 of expenses from CMFG Life related to the
coinsurance agreement. The increase in 2011 from 2010 is primarily due to a
review of usage studies resulting in additional expense allocations to the
Company.
Income tax expense is recorded at 35% offset by prior year tax benefits related
to interest on accrued refunds.
42
Net income was $3,352, $1,811 and $2,287 for the years ended December 31, 2012,
2011 and 2010, respectively. The difference in the 2012 net income was primarily
due to a significant increase in realized gains on investments transferred to
CMFG Life in payment of ceded premium and on investments transferred for the
Company's return of capital to CMIC. The decrease in the 2011 net income was
primarily due to policyholder withdrawals.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012.
Total revenues were $___ and $___ for the nine months ended September 30, 2013
and 2012, respectively. The decline in total revenues was primarily due to the
coinsurance agreement that MLIC entered into with CMFG Life in October 2012.
Premium revenue was $___ and $___ for the nine months ended September 30, 2013
and 2012, respectively, and consists of life and health direct (and ceded in
2013 to CMFG Life) written renewal premium. The differences in premium revenue
were primarily due to the Company ceding $___ of premium during the nine months
ended September 30, 2013 to CMFG Life. Total net investment income was $___, and
$___ for the nine months ended September 30, 2013 and 2012, respectively, which
represents an average yield earned of ___% and ___% for the same periods,
respectively. The decrease in total net investment income was primarily due to
the Company transferring certain investments to CMFG Life to CMIC pursuant to
the coinsurance agreement and the return of capital to its parent resulting in a
lower asset base to generate net investment income.
Total benefits and expenses were $___ and $___ for the nine months ended
September 30, 2013 and 2012, respectively. The differences in life and health
benefits and operating expenses were primarily due to benefits being ceded to
CMFG Life and an increase in product launch expenses related to the Company's
expected new product, the Contract. Life and health benefits totaled $___ and
$___ for the nine months ended September 30, 2013 and 2012, respectively. The
Company ceded $___ of life and health benefits in the third quarter of 2013,
leading to the decline in benefits in the 2013 period from the 2012 period.
Operating expenses totaled $___ and $___ for the nine months ended September 30,
2013 and third quarter of 2012, respectively. The increase in operating expenses
in the third quarter of 2013 from the third quarter of 2012 is due to expenses
incurred in anticipation of the launch of the Contract.
Income tax expense for the nine months ended September 30, 2012 is recorded at
___% offset by prior year tax benefits related to interest on accrued refunds.
Net income (loss) was ($___), and $___ for the nine months ended September 30,
2013 and 2012, respectively. The difference in net income (loss) is primarily
due to a decline in the Company's investment income as a result of the transfer
of invested assets associated with the 2012 coinsurance agreement along with an
increase in expenses related to the expected launch of the Company's new
product, the Contract.
FINANCIAL CONDITION
Investments
Our investment strategy is based upon a strategic asset allocation framework
that considers the need to manage our General Account investment portfolio on a
risk-adjusted spread basis for the underwriting of contract liabilities and to
maximize return on retained capital. Our investment in bonds consists of
publicly traded corporate bonds, mortgage-backed securities, and U.S. Treasury
securities. While the investments are categorized as available for sale, we
generally hold our bond portfolio to maturity.
Insurance statutes regulate the type of investments that we are permitted to
purchase and limit the amount of funds that may be used for any one type of
investment. In light of these statutes and regulations and our business and
investment strategy, we generally seek to invest in United States government and
government-sponsored agency securities and debt securities rated investment
grade by established nationally recognized rating organizations or in securities
of comparable investment quality, if not rated.
43
The composition of our investment portfolio at September 30, 2013, December 31,
2012 and December 31, 2011 was as follows:
------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
---------------------------------------------------------------------
2013 % 2012 % 2011 %
------------------------------------------------------------------------------------------------------
Debt Securities $ % $ 8,574 98.7% $ 51,324 95.6%
Policy loans 110 1.2 2,339 4.3
Other investments 7 0.1 15 0.1
------------------------------------------------------------------------------------------------------
Total investments $ % $ 8,691 100.0% $ 53,678 100.0%
------------------------------------------------------------------------------------------------------
The table below presents our total debt securities by type at September 30,
2013, December 31, 2012 and December 31, 2011.
------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
---------------------------------------------------------------------
2013 % 2012 % 2011 %
------------------------------------------------------------------------------------------------------
U.S. government and agencies $ % $ 2,964 34.6% $ 8,055 15.7%
Domestic corporate securities - - 22,103 43.1
Mortgage-backed securities:
Residential mortgage-backed 5,610 65.4 11,598 22.6
Commercial mortgage-backed - - 6,790 13.2
Foreign corporate securities - - 2,778 5.4
------------------------------------------------------------------------------------------------------
Total investments $ % $ 8,574 100.0% $ 51,324 100.0%
------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of debt securities by contractual
maturity are shown below at September 30, 2013. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
------------------------------------------------------------------------------------------------------
AMORTIZATION COST ESTIMATED FAIR VALUE
------------------------------------------------------------------------------------------------------
Due in one year or less $ $
Due after one year through five years
Due after five years through ten years
Mortgage-backed securities:
Residential mortgage-backed
------------------------------------------------------------------------------------------------------
Total debt securities $ $
------------------------------------------------------------------------------------------------------
We have classified our debt securities as available for sale. Available for sale
securities are reported at fair value and unrealized gains and losses, if any,
on these securities (net of income taxes) are included as a separate component
of stockholder's equity, thereby exposing stockholder's equity to volatility for
changes in the reported fair value of securities classified as available for
sale.
We did not have any gross unrealized losses at September 30, 2013, December 31,
2012 or December 31, 2011.
44
LIQUIDITY AND CAPITAL RESOURCES
We entered into a coinsurance agreement with CMFG Life in 2012. Under this
agreement, we agreed to cede 95% of all insurance in force as of October 31,
2012 to CMFG Life. In 2013, we entered into an agreement to cede 100% of all
insurance issued on and after January 1, 2013 to CMFG Life. These agreements do
not relieve us of our obligations to our policyholders under contracts covered
by these agreements. However, they do transfer nearly all of the Company's
underwriting profits and losses to CMFG Life and require CMFG Life to indemnify
the Company for nearly all of its liabilities.
As consideration for the reinsurance provided under these agreements, we
transfer nearly all of our revenues to CMFG Life. Specifically, CMFG Life
receives 95% and 100% of all premiums and other amounts received on account of
our existing business and new business, respectively. As additional
consideration, we transferred assets equal to approximately 95% of our reserves
as of October 31, 2012 to CMFG Life. CMFG Life pays us a monthly expense
allowance to reimburse the Company for expenses and costs incurred on account of
its insurance business.
While the reinsurance transactions have a minimal impact on our surplus, they
substantially diminish our net liabilities and greatly decrease the amount of
capital and liquidity needed within the Company. As a result, the Company was
able to return $18,000 of capital to its shareholder, CMIC, on November 30,
2012. This reduction in capital was approved by the Iowa Insurance Division on
November 26, 2012.
The Company generated $1,840, $3,260 and $5,980 in cash flow from operations for
the years ended December 31, 2012, 2011, and 2010, respectively. The decreases
in cash flow were primarily due to increased benefit payments, increased
expenses and the non-renewal of business on the Company's older policies. The
Company's sources of funds include renewal premiums and investment income. The
Company's primary use of funds includes the payment of benefits and related
operating expenses.
The Company used $683, $1,781 and $10,390 of cash flow for investing activities
for the years ended December 31, 2012, 2011, and 2010, respectively. The
Company's main investing activities include the purchase and sale of debt
securities. The increase in the use of cash in 2010 was driven by the Company's
purchase of debt securities through the reinvestment of cash collected on
prepaid taxes from CMFG Life.
The Company used $84 of cash flow for financing activities for the year ended
December 31, 2012 and $115 and $211 of cash flow for the years ended December
31, 2011 and 2010, respectively. The Company's main financing activities include
the collection of deposits and payment of withdrawals from policyholder's
accounts. The Company provided a return of capital to its parent company in 2012
of which $296 was in cash.
The Company generated $____, and $____ in cash flow from operations for the nine
months ended September 30, 2013, and 2012, respectively. The increase in cash
flow was primarily due to the receipt of cash from the Company's parent company.
The Company's sources of funds include renewal premiums and investment income.
The Company's primary use of funds include the payment of benefits and related
operating expenses.
The Company received $___ and $____ of cash flow from its investing activities
for the nine months ended September 30, 2013 and 2012, respectively. The Company
received cash for its sale of debt securities. The Company's cash flow decreased
in 2013 due to a small investment portfolio because of the transfer of assets in
2012 for the coinsurance agreement and the return of capital to its parent.
The Company received $___ and $___ of cash flow from its financing activities
for the nine months ended September 30, 2013 and 2012, respectively. The
Company's main financing activities include the collection of deposits which
exceeded its payments of withdrawals from policyholder's accounts.
Going forward, liquidity requirements will be met primarily through monthly
settlements under the coinsurance agreements with CMFG Life. We anticipate
receiving adequate cash flow from these settlements and our investment income to
meet our obligations. However, a primary liquidity concern going forward will be
the risk of an extraordinary level of early policyholder withdrawals. We include
provisions within our policies, such as surrender charges, that help limit and
discourage early withdrawals.
45
We believe that cash flows generated from sources above will be sufficient to
satisfy the near term liquidity requirements of our operations, including
reasonable foreseeable contingencies. However, we cannot predict future
experience regarding benefits and surrenders since benefit and surrender levels
are influenced by such factors as the interest rate environment, our claims
paying ability and our financial credit ratings.
Most funds we receive going forward, funds which we will receive as annuity
deposits, will be invested in high quality investments, those identified by the
Company as investment grade, to fund our future commitments. We believe that the
settlement we receive under the reinsurance agreements with CMFG Life, the
diversity of our investment portfolio and a concentration of investments in high
quality securities should provide sufficient liquidity to meet foreseeable cash
requirements. Although there is no present need or intent to dispose of our
investments, we could readily liquidate portions of our investments, if such a
need arose. Sales of available for sale securities in an unrealized loss
position are subject to other than temporary impairment considerations including
our intent to sell.
STATUTORY FINANCIAL DATA AND DIVIDEND RESTRICTIONS
We are a life and health insurer domiciled in Iowa. We file statutory basis
financial statements with regulatory authorities. Our statutory capital and
surplus was $___, $16,995 and $28,061 as of September 30, 2013, December 31,
2012 and 2011, respectively. Our statutory basis net income (loss) was ($___)
and ($___) for the nine months ended September 30, 2013 and 2012, respectively,
and was $3,259, ($95) and ($1,219) for the years ended December 31, 2012, 2011,
and 2010, respectively.
We are subject to statutory regulations as to maintenance of equity and the
payment of dividends. Generally, ordinary dividends from an insurance subsidiary
to its parent company must meet notice requirements promulgated by the regulator
of the subsidiary's state of domicile ("Insurance Department"). Extraordinary
dividends, as defined by state statutes, must be approved by the Insurance
Department. The Company is subject to statutory dividend restrictions in Iowa
and is restricted to paying no more than $1,495 in 2013 in dividends, without
prior approval of the Iowa Insurance Commission.
Risk-based capital requirements promulgated by the National Association of
Insurance Commissioners require U.S. insurers to maintain minimum capitalization
levels that are determined based on formulas incorporating credit risk,
insurance risk, interest rate risk, and general business risk. At December 31,
2012 and 2011, the Company's adjusted equity exceeded the minimum capitalization
requirements.
CONTRACTUAL OBLIGATIONS
In December 2007, the Company entered into a Procurement and Disbursement and
Billing and Collection Services Agreement with CMFG Life and certain other
affiliated companies whereby CMFG Life has agreed to provide certain of our
operational requirements. In January 2008 the Company entered into a Cost
Sharing Agreement with CMFG Life and certain other affiliated companies.
Pursuant to this agreement, CMFG Life has agreed to provide the Company with
certain office and market services and personnel services. Additionally, we are
allocated a certain portion of the total compensation of each of our executive
officers and directors, based on various factors, the primary being the
estimated time allocated to providing services to the Company. In exchange for
providing these administrative functions and use of shared resources and
personnel, the Company reimburses CMFG Life for the cost of providing such
administrative functions, resources and personnel. The Company reimbursed CMFG
Life $1,044, $665 and $484 for these expenses for the years ended December 31,
2012, 2011 and 2010, respectively. The Company reimbursed CMFG Life $___ and
$___ for these expenses for the nine months ended September 30, 2013 and 2012,
respectively.
For detailed discussion of the management services agreement, the investment
advisory agreement and the coinsurance agreements, see "Certain Relationships
and Related Party Transactions."
Going forward, we may enter into financing transactions, lease agreements, or
other commitments in the normal course of our business.
46
The Company has the following future minimum estimated claim and benefit
payments as of December 31, 2012.
------------------------------------------------------------------------------------------------------
ESTIMATED FUTURE CLAIM
AND BENEFIT PAYMENTS
------------------------------------------------------------------------------------------------------
Due in one year or less $ 3,291
Due after one year through three years 5,895
Due after three years through five years 5,433
Due after five years 51,571
------------------------------------------------------------------------------------------------------
Total estimated payments $ 66,190
------------------------------------------------------------------------------------------------------
RECENTLY ADOPTED ACCOUNTING STANDARDS UPDATES
In October 2010, the Financial Account Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2010-26, Accounting for Costs Associated
with Acquiring or Renewing Insurance Contracts ("ASU 2010-26"), which provides
guidance regarding accounting for deferred acquisition costs and is effective in
2012, with prospective or retrospective application allowed. This guidance
modifies the definition of costs that can be deferred by insurance entities when
issuing and renewing insurance contracts. Capitalized costs can only include
incremental direct costs of contract acquisition, as well as certain costs
directly related to acquisition such as underwriting, policy issuance, and
medical and inspection fees, and sales force contract selling. This guidance
also specifies that only costs related directly to successful acquisition of new
or renewal contracts can be capitalized. All other acquisition related costs
should be expensed as incurred. Due to the age of MLIC's existing block of
policies, all of its deferred acquisition costs have been fully amortized for
the periods reported and adopting ASU 2010-26 had no impact on the financial
statements presented within this prospectus.
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair
Value Measurement and Disclosure requirements in U.S. GAAP and International
Financial Reporting Standards ("ASU 2011-04"), which creates a consistent
framework for the application of fair value measurement across jurisdictions.
The new guidance clarified existing fair value measurement requirements and
changed certain fair value measurement principles and disclosure requirements.
There are no additional fair value measurements required upon adoption of ASU
2011-04. The amendments became effective in 2012 and did not have a material
impact on MLIC's financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive
Income ("ASU 2011-05") which provides companies with the option to present the
total of comprehensive income, components of net income, and the components of
other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. The
objective of ASU 2011-05 is to increase the prominence of items reported in
other comprehensive income. ASU 2011-05 eliminates the option to present
components of other comprehensive income as part of the statement of changes in
stockholder's equity. The Company adopted ASU 2011-05 and replaced the statement
of operations with the statement of comprehensive income and modified the
statement of stockholder's equity for all years presented. The FASB issued ASU
No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation
of Reclassifications of Items Out of Accumulate Other Comprehensive Income in
Accounting Standards Update No. 2011-05, in December 2011 which delayed the
implementation of the portions of ASU 2011-05 that require presentation of
reclassification adjustments out of accumulated other comprehensive income.
ACCOUNTING STANDARDS UPDATES PENDING ADOPTION
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU
2013-02 requires companies to present information about reclassification
adjustments from accumulated other comprehensive income in their financial
statements in a single note or on the face of the financial statements. ASU
2013-02 is effective for periods beginning after December 15, 2012, with early
adoption permitted. ASU 2013-02 did not have an impact on the Company.
47
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Given our limited operations to date, we are not currently subject to any
material market risk exposures. However, in future periods, we expect to have
exposure to market risk through both our insurance operations and investment
activities, although a significant portion of this risk will be reinsured by
CMFG Life pursuant to the coinsurance agreements discussed above. In addition,
many of the measures described herein to offset these market risks will be taken
by CMFG Life as it will hold nearly all of the assets related to our insurance
business as a result of the coinsurance agreements.
Interest rate risk will be our primary market risk exposure. Substantial and
sustained increases and decreases in market interest rates will affect the
profitability of our annuity products and the fair value of our investments.
Most of the interest rate risk is absorbed by CMFG Life under the coinsurance
agreements. The profitability of most of our annuity products will depend on the
spreads between interest yield on investments and rates credited on the annuity
products. We will have the ability to adjust crediting rates (caps,
participation rates or asset fee rates for indexed annuities) on substantially
all of our annuity products at least annually (subject to minimum guaranteed
values). In addition, substantially all of our annuity products will have
surrender and withdrawal penalty provisions designed to encourage persistency
and to help ensure targeted spreads are earned. However, competitive factors,
including the impact of the level of surrenders and withdrawals, may limit our
ability to adjust or maintain crediting rates at levels necessary to avoid
narrowing of spreads under certain market conditions.
A major component of our interest rate risk management program is structuring
the general account investment portfolio with cash flow characteristics
consistent with the cash flow characteristics of our annuity products. We use
computer models to simulate cash flows expected from our existing business under
various interest rate scenarios. These simulations enable us to measure the
potential gain or loss in fair value of our interest rate-sensitive financial
instruments, to evaluate the adequacy of expected cash flows from our assets to
meet the expected cash requirements of our annuity products and to determine if
it is necessary to lengthen or shorten the average life and duration of our
investment portfolio. The "duration" of a security is the time weighted present
value of the security's expected cash flows and is used to measure a security's
sensitivity to changes in interest rates. When the durations of assets and
liabilities are similar, exposure to interest rate risk is minimized because a
change in value of assets should be largely offset by a change in the value of
liabilities. As of September 30, 2013, the Company's fixed debt investment
portfolio consisted of $_____ of U.S. government and agency securities and
$_____ of residential mortgage-backed securities and has an average duration of
3.2 years.
With respect to our indexed annuities, we intend to purchase call options on the
applicable indices to fund the annual index credits on such annuities. These
options will be primarily one-year instruments purchased to match the funding
requirements of the underlying policies. Fair value changes associated with
these investments should substantially be offset by an increase or decrease in
the amounts added to policyholder account balances for indexed products. We also
intend to utilize a hedging process in which we purchase options out of the
money to the extent of any anticipated annual index credits under the indexed
annuities. On the anniversary dates of the indexed annuities, we will purchase
new one-year call options to fund the next annual index credits. The risk
associated with these prospective purchases is the uncertainty of the cost,
which will determine whether we are able to earn our spread on our index
business. We will manage this risk through the terms of our annuities, which
will permit us to change caps, participation rates and asset fees, subject to
contractual features. By modifying caps, participation rates or asset fees, we
can limit option costs to budgeted amounts, except in cases where the
contractual features would prevent further modifications.
48
--------------------------------------------------------------------------------
MANAGEMENT
--------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
NAME AGE POSITION
------------------------------------------ ----- ----------------------
Robert N. Trunzo 57 President and Director
Steven R. Suleski 59 Secretary
Brian J. Borakove 34 Treasurer
Stephen W. Koslow 57 Director
Thomas J. Merfeld 56 Director
James M. Power 51 Director
Richard R. Roy 51 Director
All executive officers and directors are elected annually.
Robert N. Trunzo has served as our President since May 30, 2009. Mr. Trunzo
was appointed director as of November 19, 2012. He also serves as the Executive
Vice President since 2005 and President since August, 2012 for CMFG Life. The
CUNA Mutual Holding Company Board has announced he will become President and CEO
of CUNA Mutual Group effective January 1, 2014. Mr. Trunzo has also served as
the Executive Vice President of Frank F. Haack and Associates, the largest
insurance-benefits and property-casualty brokerage and consulting firm in
Wisconsin, from September, 2002 to June, 2005. Before joining Frank F. Haack and
Associates, Mr. Trunzo served as Secretary of Commerce under Wisconsin Governor
Tommy Thompson, where he directed Wisconsin's economic development efforts. He
has served on the board of directors of the U.S. Chamber of Commerce.
Additionally, he is a member of the American Council of Life Insurers and sits
on the Council's CEO Steering Committee on Retirement and Financial Security.
Steven R. Suleski has served as our Secretary and Senior Vice President
since February 1, 2012. He has served as Associate General Counsel for the past
13 years at CMFG Life, from March, 1999 to present. Before joining the Company,
Mr. Suleski spent 12 years at Foley & Lardner, LLP, in Madison, Wisconsin, where
he was a partner specializing in securities law, mergers and acquisitions and
general corporate law.
Brian J. Borakove has served as our Treasurer since November 19, 2012 and
VP-Corporate Treasurer since 2007. Prior to joining the Company, he was a Senior
Manager, Investment Finance at Liberty Mutual Insurance in Boston, Massachusetts
from 2005 to 2007. Prior to joining Liberty Mutual Insurance, Mr. Borakove
served as a Senior Analyst, Treasury at FM Global in Johnston, Rhode Island from
2003-2005. Mr. Borakove held various positions at State Street Bank in Boston,
Massachusetts from 2001-2003.
Steven W. Koslow has been director of the Company since February 16, 2011.
He has served as Chief of Ethics & Compliance for CMFG Life since December,
2007. Prior to joining the Company, from September, 1999 to December, 2007, Mr.
Koslow worked as a director in the Governance, Risk & Compliance department of
PricewaterhouseCoopers, Inc. in Chicago, Illinois. Previously, he held positions
as counsel for MetLife, Inc. and as an attorney for law firms in Chicago and
Denver. He is currently a Chairman of the Board on the Compliance and Ethics
Forum for Life Insurance (CEFLI).
Thomas J. Merfeld has been a director of the Company since February 16,
2011. He also has serves as the Senior Vice President and Chief Investment Risk
Officer for CMFG Life where he assesses, coordinates, and manages all investment
risks for CMFG Life. Mr. Merfeld served as head of asset/liability management
for MEMBERS Capital Advisors, an affiliate of the Company. Prior to joining CMFG
Life, Mr. Merfeld served as the Chief Financial Officer for Savers Life
Insurance Company in Kansas City, Missouri. Mr. Merfeld served an
49
investment analyst for Franklin Savings Association in Ottawa, Kansas. Mr.
Merfeld served as an assistant economist for the Federal Reserve Bank in Kansas
City, Missouri.
James M. Power has been director of the Company since February 16, 2011. Mr.
Power has also served as the Senior Vice President, Chief Products Officer for
CMFG Life since August, 2005. Mr. Power spent seven years, from April, 1998 to
April, 2005, with Fireman's Fund Insurance Company, ultimately serving as that
company's top regional executive in the Midwest. Mr. Power has more than 20
years of progressive leadership experience in strategic planning, underwriting,
marketing and agency and distribution management for Fortune 100 companies, as
well as other leading national insurance companies.
Richard R. Roy has been director of the Company since February 1, 2012. Mr.
Roy has served as the Chief Information Officer for CMFG Life since December,
2003. Prior to joining CMFG Life, Mr. Roy served as SVP - General Manager at
Metavante Corporation in Milwaukee, Wisconsin from 1991 to 2003. Mr. Roy has
over 30 years of technology industry experience including 20 years in the IT
vendor community working for software, services and outsourcing companies. He is
an adjunct professor at Marquette University in the Graduate School of
Management and has served as director of several CMFG Life subsidiaries.
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
POLICY REGARDING RELATED PERSON TRANSACTIONS
It is our policy to enter into or ratify related person transactions only when
our Board of Directors determines that the transaction either is in, or is not
inconsistent with, our best interests, including but not limited to situations
where we may obtain products or services of a nature, quantity or quality, or on
other terms, that are not readily available from alternative sources or when we
provide products or services to related persons on an arm's length basis on
terms comparable to those provided to unrelated third parties or on terms
comparable to those provided to employees generally.
Therefore, we have adopted the following procedures for the review, approval or
ratification of related person transactions. For purposes of the related person
transaction policy, a related person transaction is a transaction, arrangement,
or relationship (or any series of similar transactions, arrangements, or
relationships) in which (i) we were, are or will be a participant, (ii) the
amount of the transaction, arrangement or relationship exceeds $120,000, and
(iii) in which a related person had, has or will have a direct or indirect
material interest in the transaction.
A related person means:
o any person who is, or at any time since the beginning of our last fiscal
year was, a member of our Board of Directors or an executive officer or
a nominee to become a member of our Board of Directors;
o any person who is known to be the beneficial owner of more than 5% of
any class of our voting securities;
o any immediate family member of any of the foregoing persons; or
o any firm, corporation, or other entity in which any of the foregoing
persons is employed or is a general partner or principal or in a similar
position or in which such person has a 5% or greater beneficial
ownership interest.
Any proposed transaction with a related person shall be consummated or amended
only if the following steps are taken:
o Counsel (either inside or outside) will assess whether the proposed
transaction is a related person transaction for purposes of this policy.
50
o If counsel determines that the proposed transaction is a related person
transaction, the proposed transaction shall be submitted to the Board of
Directors for consideration at the next meeting or, in those instances
in which counsel, in consultation with the President or the Treasurer,
determines that it is not practicable or desirable for us to wait until
the next committee meeting, to the President of the Company (who has
been delegated authority to act between meetings).
o The Board of Directors shall consider all of the relevant facts and
circumstances available, including (if applicable) but not limited to:
(i) the benefits to the Company; (ii) the impact on a director's
independence in the event the related person is a director, an immediate
family member of a director, or an entity in which a director is a
partner, shareholder, or executive officer; (iii) the availability of
other suppliers or customers for comparable products or services; (iv)
the terms of the transaction; and (v) the terms available to unrelated
third parties or to employees generally.
o The Board of Directors shall approve only those related person
transactions that are in, or are not inconsistent with, the best
interests of the Company and its shareholders, as the Board of
Directors determines in good faith. The Board of Directors shall convey
the decision to counsel, who shall convey the decision to the
appropriate persons within the Company.
At the Board of Director's first meeting of each fiscal year, it shall review
any previously approved related person transactions that remain ongoing and have
a remaining term of more than six months or remaining amounts payable to or
receivable from the Company of more than $120,000. Based on all relevant facts
and circumstances, taking into consideration the Company's contractual
obligations, the Board of Directors shall determine if it is in the best
interests of the Company and its shareholders to continue, modify, or terminate
the related person transaction.
No member of the Board of Directors shall participate in any review,
consideration, or approval of any related person transaction with respect to
which such member or any of his or her immediate family members is the related
person.
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Except for the agreements noted below, there have been no transactions between
the Company and any related person since January 1, 2011, nor are any such
related person transactions currently being contemplated for which disclosure
would be required.
We entered into a coinsurance agreement with CMFG Life in 2012. Under this
agreement, we agreed to cede 95% of all insurance in force as of October 31,
2012 to CMFG Life. In 2013, we entered into a second coinsurance agreement to
cede 100% of all insurance issued on and after January 1, 2013 to CMFG Life.
These agreements do not relieve us of our obligations to our policyholders under
contracts covered by these agreements. However, they do transfer nearly all of
the Company's underwriting profits and losses to CMFG Life and require CMFG Life
to indemnify the Company for nearly all of its liabilities.
As consideration for the reinsurance provided under these agreements, we
transfer nearly all of our revenues to CMFG Life. Specifically, CMFG Life
receives 95% and 100% of all premiums and other amounts received on account of
our existing business and new business, respectively. As additional
consideration, we transferred assets equal to 95% of our reserves as of October
31, 2012 to CMFG Life. CMFG Life pays us a monthly expense allowance to
reimburse the Company for expenses and costs incurred on account of its
insurance business. For the nine months ended September 30, 2013 and year ended
December 31, 2012, we ceded $_____ and $23,114, respectively. See Note 7 to the
Financial Statements and Note 7 to the Unaudited Condensed Financial Statements
appearing elsewhere in this prospectus.
In December 2007, the Company entered into a Procurement and Disbursement and
Billing and Collection Services Agreement with CMFG Life and certain other
affiliated companies whereby CMFG Life has agreed to provide certain of our
operational requirements. In January 2008 the Company entered into a Cost
Sharing Agreement with CMFG Life and certain other affiliated companies.
Pursuant to this agreement, CMFG Life has agreed to provide the Company with
certain office and market services and personnel services. Additionally, we are
allocated a certain portion of the total compensation of each of our executive
officers and directors, based on
51
various factors, the primary being the estimated time allocated to providing
services to the Company. In exchange for providing these administrative
functions and use of shared resources and personnel, the Company reimburses CMFG
Life for the cost of providing such administrative functions, resources and
personnel. The Company reimbursed CMFG Life $1,044, $665 and $484 for these
expenses in 2012, 2011 and 2010, respectively. The Company reimbursed CMFG Life
$___ and $180 for these expenses for the nine months ended September 30, 2013
and 2012, respectively.
The Company has hired MEMBERS Capital Advisors, Inc. ("MCA") to provide
investment advisory services with respect to the Company's general account
assets. MCA, which is 100% owned by CMIC, manages substantially all of the
Company's invested assets in accordance with policies, directives and guidelines
established by the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has not established any committees. Our Board of
Directors relies on the committees of CMFG Life's Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors has not established a compensation committee. None of our
executive officers has served on the board of directors or compensation
committee (or other committee serving an equivalent function) of any other
entity whose executive officers served on our Board of Directors.
EXECUTIVE COMPENSATION
We share personnel with our parent company, CMFG Life, pursuant to a Cost
Sharing Agreement between CMFG Life and us. Our operational needs are met by
CMFG Life and certain of its affiliates pursuant to the Cost Sharing Agreement
and the Procurement and Disbursement and Billing and Collection Services
Agreement. Certain employees who provide services to us under such agreement are
CMFG Life executive officers or employees and are paid by CMFG Life. Their
compensation-related costs are allocated to us based on various factors, the
primary being the estimated time allocated to providing services to us. The
Company has not been issuing new policies for several years and its primary
business has been managing its block of existing business. As a result, some of
the current officers have not devoted any significant amounts of time to the
Company and its operations. The introduction of the new product, the Contract,
and filing of this registration statement will result in all officers and
directors devoting more time in the future to the Company's business and more of
their compensation-related costs will be allocated to the Company based upon the
increased time devoted to development of this business.
In order to help you understand our compensation-related costs, we have set
forth below a discussion of CMFG Life's compensation policies and programs as
such policies and programs relate to our named executive officers.
Compensation Discussion and Analysis. These compensation policies and programs
are designed to attract and retain highly qualified and motivated executive
officers and employees and encourage and reward achievement of annual and
long-term goals.
Federal income tax law limits deductibility of compensation in excess of $1
million paid to certain named executive officers unless this compensation
qualifies as "performance-based compensation." It is the intent of CMFG Life to
qualify its executives' compensation for deductibility under applicable tax
laws, while recognizing that there may be situations in which compensation for
executive officers may not be tax deductible.
NAMED EXECUTIVE OFFICERS. The primary elements of compensation for our named
executive officers, who are officers of and compensated by CMFG Life, include
base pay and incentive compensation.
52
BASE PAY. The Board of Directors of CUNA Mutual Holding Company, the parent of
CMFG Life, engages Mercer (US) Inc. ("Mercer") as a compensation consultant to
provide advice and data with respect to compensation bench-marking and market
practices for executives of CMFG Life. The most recent executive compensation
review was presented to the Compensation Committee of CUNA Mutual Holding
Company's Board of Directors by Mercer on May 7, 2013. Mercer develops a blended
market consensus base salary for each of the positions of the named executive
officers. Mercer utilizes proxy data and private survey data from selected peer
insurance companies public and private survey data from 2012 for the financial
service and insurance industries of companies.
As a result of the Company not actively marketing new business in 2012 and the
limited time devoted by our President, Mr. Trunzo, to the Company, no part of
his base salary was allocated to the Company during 2012. It is anticipated that
this allocation will increase as a result of the launch of the Contract by the
Company in the future. The amount of compensation allocated to the Company for
Mr. Borakove, the Treasurer, was $800.30. This represents an allocation of gross
wages, and Corporate Success Sharing Plan ("CSSP)" payment.
INCENTIVE COMPENSATION. On November 7, 2013, the CUNA Mutual Holding Company
Board of Directors approved the structure of the 2013 CSSP for management
personnel, which includes our named executive officers. Under the CSSP for 2012
and 2013, objectives were established in three different areas and weighting
factors are set for each of the objectives (Operating Revenue - 40%; Operating
Gain - 40%; Total Adjusted Capital - 20%). In addition, there are specific
performance levels established for each objective, "Threshold", "Target" and
"Superior". Depending upon the level of CMFG Life's success in meeting these
objectives an incentive compensation pool is created and compensation is paid
out of this pool as a percentage of each executive's base salary according to
the level of individual performance. Our management and the Board of Directors
believe that the combination of Operating Revenue, Operating Gain and Total
Adjusted Capital create the proper focus and alignment for maximizing short-term
and long-term shareholder value creation to benefit the policyholders who own
CUNA Mutual Holding Company, the ultimate parent of both CMFG Life and the
Company.
The costs of the CSSP and other incentive programs and benefits that have been
allocated to the Company for the Treasurer for 2012 and 2013 is less than
$500.00, respectively. This small allocation is a reflection of the fact that
the named executives have historically devoted little time to the operations of
the Company. These allocations are expected to increase as management is
required to devote more time to the operations of the Company in the future.
There is an additional incentive program for senior management personnel of CMFG
Life, which includes some of the named executives, known as the Long Term
Incentive Plan ("LTIP"). This plan is formula driven like the CSSP plan and is
based upon CMFG Life meeting certain financial objectives but differs from the
CSSP plan because the payments are not based upon individual performance but on
whether or not CMFG Life meets the pre-determined corporate objectives.
At the time the performance goals for the different incentive plans were
approved by the Board of Directors, it was believed that the performance targets
reflected an appropriate degree of stretch but that they were attainable based
on successful execution of the Company's business plan and the realization of
macro-economic and market conditions reasonably aligned with the Company's near
term expectations.
CHANGE IN CONTROL, SEPARATION AND RETIREMENT ARRANGEMENTS. CMFG Life has a
written employment contract with Mr. Trunzo. None of the other named executive
officers have employment contracts or separation agreements with CMFG Life. No
costs associated with this employment contract have previously been allocated to
the Company.
NON-QUALIFIED DEFERRED COMPENSATION ARRANGEMENTS. CMFG Life permits eligible
employees to defer on an elective basis a specified portion of their base
salaries and incentive compensation. Any such deferrals must be made pursuant to
a non-qualified deferred compensation plan between the officer and the Company.
The investment of deferred amounts is directed by the individual officers and
the returns on such investments is reflected in the deferred account balance of
such officer. The balance of the deferred compensation accounts will be
distributed to each executive who has elected to make such deferrals upon his or
her death, disability or separation from service.
53
OTHER COMPENSATION. CMFG Life has a qualified 401(k) plan for all eligible
employees who are eligible after thirty days of employment and attainment of age
18. CMFG Life matches 100% of employee contributions to the plan up to 5% of the
employee's total compensation, subject to the limitations specified in the
Internal Revenue Code. CMFG Life also maintains a Supplemental 401(k) plan in
which some of the named executive officers participate that provides additional
benefits and a company match within the limits prescribed by the Internal
Revenue Code. In addition to the 401(k) plan, all employees of CMFG Life
participate in a Defined Benefit Pension Plan. There is a non-qualified plan to
which CMFG Life contributes for some of the named executives amounts that would
otherwise be paid into the Defined Benefit Pension Plan but for limitations on
qualified plan contributions by CMFG Life. CMFG Life offers a package of
insurance benefits to all employees including health, dental, long-term
disability and life insurance. Some of the named executive officers receive an
annual retention payment which is a flat fee. Several of the named executive
officers receive perquisites including car allowances, use of Company owned
aircraft, travel to company conventions for themselves and their spouse, tax
benefits and tax preparation fees.
COMPENSATION SUMMARY
The following table sets forth the allocated compensation based upon the
estimated percentage of time the following officers devote to the affairs of
MEMBERS Life Insurance Company for the 2012 fiscal year:
SALARY BONUS TOTAL**
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
---------------------------------------------------------------------------------------
(a) (b) (c) (d) (j)
---------------------------------------------------------------------------------------
Robert N. Trunzo, President and Director* 2012 - - $0
---------------------------------------------------------------------------------------
Brian J. Borakove, Treasurer** 2012 $500 $300 $800
---------------------------------------------------------------------------------------
* No costs associated with Mr. Trunzo's compensation were allocated to the
Company for 2012.
** Includes compensation paid by CMFG Life that was allocated to the Company for
service rendered by Mr. Borakove.
DIRECTOR COMPENSATION
The following directors of the Company are all officers of CMFG Life. The
Company's directors receive no compensation for their service as directors of
the Company but are compensated by CMFG Life for their services as officers of
that company. Accordingly, no costs were allocated to the Company for services
of these persons in their role as directors.
Stephen W. Koslow, Thomas J. Merfeld, James M. Power, Richard R. Roy, and
Robert N. Trunzo.
LEGAL PROCEEDINGS
Like other insurance companies, we routinely are involved in litigation and
other proceedings, including class actions, reinsurance claims and regulatory
proceedings arising in the ordinary course of our business. In recent years, the
life insurance and annuity industry, including us and our affiliated companies,
has been subject to an increase in litigation pursued on behalf of both
individual and purported classes of insurance and annuity purchasers,
questioning the conduct of insurance companies and their agents in the marketing
of their products. In addition, state and federal regulatory bodies, such as
state insurance departments and attorneys general, periodically make inquiries
and conduct examinations concerning compliance by us and others with applicable
insurance and other laws.
In connection with regulatory examinations and proceedings, government
authorities may seek various forms of relief, including penalties, restitution
and changes in business practices. The Company has established procedures and
policies to facilitate compliance with laws and regulations and to support
financial reporting. These actions are based on a variety of issues and involve
a range of the Company's practices. We respond to such inquiries and cooperate
with regulatory examinations in the ordinary course of business. In the opinion
of management, the ultimate liability, if any, resulting from all such pending
actions will not materially affect the financial statements of the Company.
54
IMPORTANT INFORMATION ABOUT THE INDEX
The Product is not sponsored, endorsed, sold or promoted by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("BofA Merrill Lynch"). BofA Merrill Lynch
has not passed on the legality or suitability of, or the accuracy or adequacy of
descriptions and disclosures relating to, the Product, nor makes any
representation or warranty, express or implied, to the owners of Product or any
member of the public regarding the Product or the advisability of investing in
the Product, particularly the ability of the ("Indices") to track performance of
any market or strategy. BofA Merrill Lynch's only relationship to Members Life
Insurance Company ("Licensee") is the licensing of certain trademarks and trade
names and indices or components thereof. The Indices are determined, composed
and calculated by BofA Merrill Lynch without regard to the Licensee or the
Product or its holders. BofA Merrill Lynch has no obligation to take the needs
of the Licensee or the holders of the Product into consideration in determining,
composing or calculating the Indices. BofA Merrill Lynch is not responsible for
and has not participated in the determination of the timing of, prices of, or
quantities of the Product to be issued or in the determination or calculation of
the equation by which the Product is to be priced, sold, purchased, or redeemed.
BofA Merrill Lynch has no obligation or liability in connection with the
administration, marketing, or trading of the Product.
BOFA MERRILL LYNCH DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE INDICES OR ANY DATA INCLUDED THEREIN AND BOFA MERRILL LYNCH SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, UNAVAILABILITY, OR INTERRUPTIONS THEREIN.
BOFA MERRILL LYNCH MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY LICENSEE, HOLDERS OF THE PRODUCT OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE INDICES OR ANY DATA INCLUDED THEREIN. BOFA MERRILL LYNCH MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, WITH RESPECT TO THE
INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN
NO EVENT SHALL BOFA MERRILL LYNCH HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, INCIDENTAL, CONSEQUENTIAL DAMAGES, OR LOST PROFITS, EVEN IF NOTIFIED
OF THE POSSIBILITY OF SUCH DAMAGES.
THE BOfA MERRILL LYNCH MARKS ARE TRADEMARKS OF MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE BY MEMBERS
LIFE INSURANCE COMPANY.
The Product is not sponsored, endorsed, sold or promoted by Standard & Poor's, a
division of the McGraw-Hill companies, Inc. ("S&P"). S&P makes no representation
or warranty, express or implied, to the owners of the Product or any member of
the public regarding the advisability of investing in securities generally or in
the Product particularly or the ability of the S&P 500 Index to track general
stock market performance. S&P's only relationship to the Company is the
licensing of certain trademarks and trade names of S&P and of the S&P 500 Index
which is determined, composed and calculated by S&P without regard to the
Company or Product. S&P has no obligation to take the needs of the Company or
the owners of the Product into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Product or the
timing of the issuance or sale of the Product or in determination or calculation
of the equation by which the Product is to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the Product.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
The S&P 500 Index is a stock market index based on the market capitalizations of
500 leading companies publicly traded in the U.S. stock market, as determined by
Standard & Poors. The Index can go up or down based on the stock prices of the
500 companies that comprise the Index. The Index does not include dividends paid
on the
55
stocks comprising the Index and therefore does not reflect the full investment
performance of the underlying stocks.
WE DO NOT FILE REPORTS UNDER THE 1934 ACT IN RELIANCE ON RULE 12h-7 UNDER THE
1934 ACT, WHICH PROVIDES AN EXEMPTION FROM THE REPORTING REQUIREMENTS OF
SECTIONS 13 AND 15 OF THE 1934 ACT.
56
[Financial statements to be updated by amendment]
--------------------------------------------------------------------------------
APPENDIX A: EXAMPLES OF PARTIAL WITHDRAWALS AND FULL SURRENDER WITH APPLICATION
OF SURRENDER CHARGE AND MARKET VALUE ADJUSTMENT
--------------------------------------------------------------------------------
EXAMPLE 1 - PARTIAL WITHDRAWAL WITH A NEGATIVE MARKET VALUE ADJUSTMENT ("MVA")
------------------------------------------------------------------------------
Assume the following information at the last Contract Anniversary (9/1/2013):
-------------------------------------------------------------------------------------------------------------------------
(Initial Index (Initial Index
Value) x (1 + Value) x (1 +
Risk Control Risk Control Initial Index Initial Index S&P 500 Index Index Interest Index Interest
Account Account Allocation Rate Floor Rate Cap Value Rate Floor) Rate Cap)
-------------------------------------------------------------------------------------------------------------------------
Secure 75% 0% 3.50% 1,000.00 1,000.00 1,035.00
Account
-------------------------------------------------------------------------------------------------------------------------
Growth 25% -10% 14.00% 1,000.00 900.00 1,140.00
Account
-------------------------------------------------------------------------------------------------------------------------
Total Contract Value = $100,000
10-Year Initial Index Period
I = 10-Year Constant Maturity Treasury Rate = 3.50%
K = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 1.00%
-------------------------------------------------------------------
Assume the following information at the time of partial withdrawal (3/1/2014):
Gross partial withdrawal = $50,000.00
Unadjusted S&P 500 Index Value = 1,200.00
J = 8.5 Year Constant Maturity Treasury Rate = 4.00%
L = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 1.50%
N = Years Remaining in Initial Index Period = 8.50 Years
Surrender Charge Percent = 9.00%
A-1
We take the following steps to determine the net partial withdrawal amount
(excluding taxes) payable to the Owner from each Risk Control Account in
connection with a partial withdrawal resulting in a negative MVA.
First, we determine Credited Index Interest and Contract Value for each Risk
Control Account at the time of the partial withdrawal. With respect to the
Secure Account, because the Unadjusted Index Value is greater than the
Initial Index Value multiplied by the sum of 1 + Index Interest Rate Cap,
Credited Index Interest equals the Contract Value held in the Secure Account
($75,000) multiplied by the Initial Index Rate Cap (3.50%) or $2,625.00. We
then add the Credited Index Interest ($2,625.00) to the Contract Value in
the Secure Account ($75,000) to determine the Contract Value in the Secure
Account at the time of partial withdrawal ($77,625.00).
We follow the same steps in determining Credited Index Interest and Contract
Value for the Growth Account at the time of the partial withdrawal. With
respect to the Growth Account, because the Unadjusted Index Value is greater
than the Initial Index Value multiplied by the sum of 1 + Index Interest
Rate Cap, Credited Index Interest equals the Contract Value held in the
Secure Account ($25,000) multiplied by the Initial Index Rate Cap (14.00%)
or $3,500.00. We then add the Credited Index Interest ($3,500.00) to the
Contract Value in the Secure Account ($25,000) to determine the Contract
Value in the Growth Account at the time of partial withdrawal ($28,500).
Second, we determine the free annual withdrawal amount available in
connection with a partial withdrawal from each Risk Control Account at the
time of the partial withdrawal. We determine the free annual withdrawal
amount for each Risk Control Account on a proportional basis based on the
Contract Value held in each Risk Control Account. The free annual withdrawal
amount is equal to 10% of the Contract Value at the beginning of the
Contract Year ($100,000.00) or $10,000. We determine the portion of the free
annual withdrawal amount available from the Secure Account by calculating
the percentage of Contract Value held in the Secure Account. We divide the
Secure Account Value ($77,625.00) by the sum of the Secure Account Value
($77,625.00) and the Growth Account Value ($28,500.00). The result is then
multiplied by the free annual withdrawal amount (10,000.00) to determine the
free annual withdrawal amount available in connection with a withdrawal from
the Secure Account ($7,314.49).
We follow the same steps in determining the free annual withdrawal amount
available in connection with a partial withdrawal from the Growth Account at
the time of the partial withdrawal. We determine the portion of the free
annual withdrawal amount available from the Growth Account by calculating
the percentage of Contract Value held in the Growth Account. We divide the
Growth Account Value ($28,500.00) by the sum of the Secure Account Value
($77,625.00) and the Growth Account Value ($28,500.00). The result is then
multiplied by the free annual withdrawal amount ($10,000.00) to determine
the free annual withdrawal amount available in connection with a withdrawal
from the Growth Account ($2,685.51).
Third, we calculate the amount of the partial withdrawal to be taken from
each Risk Control Account. We determine the gross partial withdrawal amount
for each Risk Control Account on a proportional basis based on the Contract
Value held in each Risk Control Account. We determine the portion of the
gross partial withdrawal to be taken from the Secure Account by multiplying
the percentage of Contract Value held in the Secure Account by the gross
partial withdrawal amount) ($50,000.00), which equals $36,572.44.
A-2
We follow the same steps in determining the amount of the gross partial
withdrawal to be taken from the Growth Account at the time of the partial
withdrawal. We determine the portion of the gross partial withdrawal to be
taken from the Growth Account by multiplying the percentage of Contract
Value held in the Growth Account by the gross partial withdrawal amount
($50,000.00), which equals $13,427.56.
Fourth, we determine the amount of the gross partial withdrawal that may be
subject to a Surrender Charge and MVA for each Risk Control Account. We do
this by subtracting the free annual withdrawal amount available from the
Risk Control Account from the gross partial withdrawal amount for the Risk
Control Account. For the Secure Account, the gross partial withdrawal amount
($36,572.44) minus the portion of free annual withdrawal amount available
from the Secure Account in connection with the partial withdrawal
($7,314.49) equals $29,257.95. For the Growth Account, the gross partial
withdrawal amount ($13,427.56) minus the portion of free annual withdrawal
amount available from the Growth Account in connection with the partial
withdrawal ($2,685.51) equals $10,742.05.
Fifth, we determine the amount of the Surrender Charge that would be
deducted from the gross partial withdrawal amount for each Risk Control
Account. We do this by multiplying the amount of the gross partial
withdrawal that may be subject to a Surrender Charge by the applicable
Surrender Charge percentage for each Risk Control Account. For the Secure
Account, the amount of the gross partial withdrawal subject to a Surrender
Charge ($29,257.95) multiplied by the Surrender Charge percentage (9%)
equals $2,633.22. For the Growth Account, the amount of the gross partial
withdrawal subject to a Surrender Charge ($10,742.05) multiplied by the
Surrender Charge percentage (9%) equals $966.78. The total Surrender Charge
deducted in connection with the partial withdrawal equals $3,600.00
($2,633.22 plus $966.78).
Sixth, we determine the MVA that would be applied to the gross partial
withdrawal amount for each Risk Control Account. For each Risk Control
Account, we do this by dividing the amount of the gross partial withdrawal
that may be subject to an MVA by the sum of 1 plus the cumulative Index
Interest Rate credited to date in the current Contract Year and multiply the
result by the Market Value Adjustment factor ("MVAF"). (The MVAF is equal to
(((1 + I + K) / (1 + J + L))^N) - 1 and for this example is equal to
-0.0778.) For the Secure Account, we would divide $29,257.95 by 1.035 then
multiply the result by -0.0778 which equals a negative MVA of $2,198.25. For
the Growth Account, we would divide $10,742.05 by 1.14 then multiply the
result by -0.0778 which equals a negative MVA of $732.75. The total MVA
applied in connection with the partial withdrawal is a negative MVA of
$2,931.00 (-$2,198.25 plus -$732.75).
The amount of the net partial withdrawal paid the Owner from each Risk
Control Account equals the gross partial withdrawal amount less the
Surrender Charge and MVA. For the Secure Account, that equals $36,572.44 -
$2,633.22 - $2,198.25 or $31,740.97. For the Growth Account, that equals
$13,427.56 - $966.78 - $732.75 or $11,728.03. The total net partial
withdrawal paid the Owner is $43,469.00 ($31,740.97 plus $11,728.03).
The Contract Value remaining in each Risk Control Account after the partial
withdrawal equals the Contract Value in the Risk Control Account at the
beginning of the Contract Year plus any Credited Indexed Interest and less
the gross partial withdrawal amount. For the Secure Account, that equals
$75,000.00 + $2,625.00 - $36,572.44 or $41,052.56. For the Growth Account,
that equals $25,000 + $3,500.00 - $13,427.56 or $15,072.44. The total
Contract Value in both Risk Control Accounts after the partial withdrawal is
$56,125.00 ($41,052.56 plus $15,072.44).
A-3
EXAMPLE 2 - PARTIAL WITHDRAWAL WITH POSITIVE MVA
------------------------------------------------
Assume the following information at the last Contract Anniversary (9/1/2013):
-------------------------------------------------------------------------------------------------------------------------
(Initial Index (Initial Index
Value) x (1 + Value) x (1 +
Risk Control Risk Control Initial Index Initial Index S&P 500 Index Index Interest Index Interest
Account Account Allocation Rate Floor Rate Cap Value Rate Floor) Rate Cap)
-------------------------------------------------------------------------------------------------------------------------
Secure 75% 0% 3.50% 1,000.00 1,000.00 1,035.00
Account
-------------------------------------------------------------------------------------------------------------------------
Growth 25% -10% 14.00% 1,000.00 900.00 1,140.00
Account
-------------------------------------------------------------------------------------------------------------------------
Total Contract Value = $100,000
10-Year Initial Index Period
I = 10-Year Constant Maturity Treasury Rate = 3.50%
K = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 1.00%
-------------------------------------------------------------------
Assume the following information at the time of partial withdrawal (3/1/2014):
Gross partial withdrawal = $50,000.00
Unadjusted S&P 500 Index Value = 1,200.00
J = 8.5-Year Constant Maturity Treasury Rate = 3.00%
L = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 0.85%
N = Years Remaining in Initial Index Period = 8.50
Surrender Charge Percent = 9.00%
A-4
We take the following steps to determine the net partial withdrawal amount
(excluding taxes) payable to the Owner from each Risk Control Account in
connection with a partial withdrawal resulting in a positive MVA.
First, we determine Credited Index Interest and Contract Value for each Risk
Control Account at the time of the partial withdrawal. With respect to the
Secure Account, because the Unadjusted Index Value is greater than the
Initial Index Value multiplied by the sum of 1 + the Index Interest Rate
Cap, Credited Index Interest equals the Contract Value held in the Secure
Account ($75,000) multiplied by the Initial Index Rate Cap (3.50%) or
$2,625.00. We then add the Credited Index Interest ($2,625.00) to the
Contract Value in the Secure Account ($75,000) to determine the Contract
Value in the Secure Account at the time of partial withdrawal ($77,625.00).
We follow the same steps in determining Credited Index Interest and Contract
Value for the Growth Account at the time of the partial withdrawal. With
respect to the Growth Account, because the Unadjusted Index Value is greater
than the Initial Index Value multiplied by the sum of 1 + Index Interest
Rate Cap, Credited Index Interest equals the Contract Value held in the
Growth Account ($25,000) multiplied by the Initial Index Rate Cap (14.00%)
or $3,500.00. We then add the Credited Index Interest ($3,500.00) to the
Contract Value in the Growth Account ($25,000) to determine the Contract
Value in the Growth Account at the time of partial withdrawal ($28,500).
Second, we determine the free annual withdrawal amount available in
connection with a partial withdrawal from each Risk Control Account at the
time of the partial withdrawal. We determine the free annual withdrawal
amount for each Risk Control Account on a proportional basis based on the
Contract Value held in each Risk Control Account. The free annual withdrawal
amount is equal to 10% of the Contract Value at the beginning of the
Contract Year ($100,000.00) or $10,000. We determine the portion of the free
annual withdrawal amount available from the Secure Account by calculating
the percentage of Contract Value held in the Secure Account. We divide the
Secure Account Value ($77,625.00) by the sum of the Secure Account Value
($77,625.00) and he Growth Account Value ($28,500.00). The result is then
multiplied by the free annual withdrawal amount $10,000.00) to determine the
free annual withdrawal amount available in connection with a withdrawal from
the Secure Account ($7,314.49).
We follow the same steps in determining the free annual withdrawal amount
available in connection with a partial withdrawal from the Growth Account at
the time of the partial withdrawal. We determine the portion of the free
annual withdrawal amount available from the Growth Account by calculating
the percentage of Contract Value held in the Growth Account. We divide the
Growth Account Value ($28,500.00) by the sum of the Secure Account Value
($77,625.00) and the Growth Account Value ($28,500.00). The result is then
multiplied by the free annual withdrawal amount $10,000.00) to determine the
free annual withdrawal amount available in connection with a withdrawal from
the Growth Account ($2,685.51).
Third, we calculate the amount of the partial withdrawal to be taken from
each Risk Control Account. We determine the gross partial withdrawal amount
for each Risk Control Account on a proportional basis based on the Contract
Value held in each Risk Control Account. We determine the portion of the
gross partial withdrawal to be taken from the Secure Account by multiplying
the percentage of Contract Value held in the Secure Account (73.14%) by the
gross partial withdrawal amount ($50,000.00) to determine the amount of the
partial withdrawal to be taken from the Secure Account ($36,572.44).
A-5
We follow the same steps in determining the amount of the gross partial
withdrawal to be taken from the Growth Account at the time of the partial
withdrawal. We determine the portion of the gross partial withdrawal to be
taken from the Growth Account by multiplying the percentage of Contract
Value held in the Growth Account (26.86%) by the gross partial withdrawal
amount ($50,000.00) to determine the amount of the partial withdrawal to be
taken from the Growth Account ($13,427.56).
Fourth, we determine the amount of the gross partial withdrawal that may be
subject to a Surrender Charge and MVA for each Risk Control Account. We do
this by subtracting the free annual withdrawal amount available from the
Risk Control Account from the gross partial withdrawal amount for the Risk
Control Account. For the Secure Account, the gross partial withdrawal amount
($36,572.44) minus the portion of free annual withdrawal amount available
from the Secure Account in connection with the partial withdrawal
($7,314.49) equals $29,257.95. For the Growth Account, the gross partial
withdrawal amount ($13,427.56) minus the portion of free annual withdrawal
amount available from the Growth Account in connection with the partial
withdrawal ($2,685.51) equals $10,742.05.
Fifth, we determine the amount of the Surrender Charge that would be
deducted from the gross partial withdrawal amount for each Risk Control
Account. We do this by multiplying the amount of the gross partial
withdrawal that may be subject to a Surrender Charge by the applicable
Surrender Charge percentage for each Risk Control Account. For the Secure
Account, the amount of the gross partial withdrawal subject to a Surrender
Charge ($29,257.95) multiplied by the Surrender Charge percentage (9%)
equals $2,633.22. For the Growth Account, the amount of the gross partial
withdrawal subject to a Surrender Charge ($10,742.05) multiplied by the
Surrender Charge percentage (9%) equals $966.78. The total Surrender Charge
deducted in connection with the partial withdrawal equals $3,600.00
($2,633.22 plus $966.78).
Sixth, we determine the MVA that would be applied to the gross partial
withdrawal amount for each Risk Control Account. For each Risk Control
Account, we do this by dividing the amount of the gross partial withdrawal
that may be subject to an MVA by the sum of 1 plus the cumulative Index
Interest Rate credited to date in the current Contract Year and multiply the
result by the Market Value Adjustment factor ("MVAF"). (The MVAF is equal to
(((1 + I + K) / (1 + J + L))^N) - 1 and for this example is equal to
0.0545.) For the Secure Account, we would divide $29,257.95 by 1.035 then
multiply the result by 0.0545 which equals a positive MVA of $1,539.72. For
the Growth Account, we would divide $10,742.05 by 1.14 then multiply the
result by 0.0545 which equals a positive MVA of $513.24. The total MVA
applied in connection with the partial withdrawal is a positive MVA of
$2,052.96 ($1,539.72 plus $513.24).
The amount of the net partial withdrawal paid the Owner from each Risk
Control Account equals the gross partial withdrawal amount less the
Surrender Charge plus the MVA. For the Secure Account, that equals
$36,572.44 - $2,633.22 + $1,539.72 or $35,478.94. For the Growth Account,
that equals $13,427.56 - $966.78 + $513.24 or $12,974.02. The total net
partial withdrawal paid the Owner is $48,452.96 ($35,478.94 plus
$12,974.02).
The Contract Value remaining in each Risk Control Account after the partial
withdrawal equals the Contract Value in the Risk Control Account at the
beginning of the Contract Year plus any Credited Indexed Interest and less
the gross partial withdrawal amount. For the Secure Account, that equals
$75,000.00 + $2,625.00 - $36,572.44 or $41,052.56. For the Growth Account,
that equals $25,000 + $3,500.00 - $13,427.56 or $15,072.44. The total
Contract Value in both Risk Control Accounts after the partial withdrawal is
$56,125.00 ($41,052.56 plus $15,072.44).
A-6
EXAMPLE 3 -FULL SURRENDER OF CONTRACT ON FIRST DAY OF SECOND CONTRACT YEAR WITH
-------------------------------------------------------------------------------
NEGATIVE MVA
------------
Assume the following information at Contract Issue (9/1/2012):
-------------------------------------------------------------------------------------------------------------------------
(Initial Index (Initial Index
Value) x (1 + Value) x (1 +
Risk Control Risk Control Initial Index Initial Index S&P 500 Index Index Interest Index Interest
Account Account Allocation Rate Floor Rate Cap Value Rate Floor) Rate Cap)
-------------------------------------------------------------------------------------------------------------------------
Secure 75% 0% 3.50% 1,000.00 1,000.00 1,035.00
Account
-------------------------------------------------------------------------------------------------------------------------
Growth 25% -10% 14.00% 1,000.00 900.00 1,140.00
Account
-------------------------------------------------------------------------------------------------------------------------
Purchase Payment = $100,000
10-Year Initial Index Period
I = 10-Year Constant Maturity Treasury Rate = 3.50%
K = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 1.00%
-------------------------------------------------------------------
Assume at time of first Contract Anniversary (9/1/2013):
Unadjusted S&P 500 Index Value = 950.00
The Unadjusted S&P 500 Index Value on the last day of the first Contract
Anniversary is equal to the Unadjusted S&P 500 Index Value on the first day of
the second Contract Anniversary.
J = 9-Year Constant Maturity Treasury Rate = 4.00%
L = The BofA Merrill Lynch 1-10 Year US Corporate
Constrained Index Asset Swap Spread = 1.50%
N = Years Remaining in Initial Index Period = 9.00
Surrender Charge Percent = 9.00%
A-7
We take the following steps to determine the Surrender Value (excluding taxes)
payable to the Owner from each Risk Control Account in connection with a full
surrender of the Contract. For purposes of this example, we assume the surrender
takes place on the first day of the second Contract Year.
Upon the Contract Anniversary, we calculate and apply Credited Index
Interest to each Risk Control Account. The Automatic Rebalancing Program
then transfers Contract Value between the Risk Control Accounts in
accordance with the Owner's most recently communicated allocation
instructions. First, we determine Credited Index Interest and Contract Value
for each Risk Control Account on the Contract Anniversary. With respect to
the Secure Account, because the Unadjusted Index Value is less than the
Initial Index Value multiplied by the sum of 1 + the Index Interest Rate
Floor, no Credited Index Interest would be credited to Contract Value held
in the Secure Account ($75,000). With respect to the Growth Account, because
the Unadjusted Index Value is greater than the Initial Index Value
multiplied by the sum of 1 + Index Interest Rate Floor and the Unadjusted
Index Value is less than the Initial Index Value multiplied by the sum of 1
+ Index Interest Rate Cap, we would apply Credited Index Interest to
Contract Value held in the Growth Account ($25,000). Because the Unadjusted
Index Value is less than the Initial Index Value, we will credit negative
Credited Index Interest to the Contract Value held in the Growth Account.
The negative Credited Index Interest we will credit equals the Contract
Value held in the Growth Account ($25,000) multiplied by the Unadjusted
Index Value (950) divided by Initial Index Value (1,000) minus 1 or
-$1,250.00. We then apply the negative Credited Index Interest (-$1,250.00)
to the Contract Value in the Growth Account ($25,000) to determine the
Contract Value in the Growth Account on the Contract Anniversary ($23,750).
The Automatic Rebalancing Program then transfers Contract Value between the
Risk Control Accounts as noted in the chart below:
--------------------------------------------------
Before Rebalancing:
Risk Control Account Account Value Percentage
-------------------- ------------- ----------
Secure $75,000.00 75.95%
Growth $23,750.00 24.05%
------------------------------------------------
Contract Value $98,750.00 100.00%
After Rebalancing:
Risk Control Account Account Value Percentage
-------------------- ------------- ----------
Secure $74,062.50 75.00% (-$937.50)
Growth $24,687.50 25.00% (+$937.50)
Contract Value $98,750.00 100.00%
Second, we determine the free annual withdrawal amount available in
connection with a full surrender from each Risk Control Account at the time
of surrender. We determine the free annual withdrawal amount for each Risk
Control Account on a proportional basis based on the Contract Value held in
each Risk Control Account. The free annual withdrawal amount is equal to 10%
of the Contract Value at the beginning of the Contract Year ($98,750.00) or
$9,875.00. We determine the portion of the free annual withdrawal amount
available from the Secure Account by calculating the percentage of Contract
Value held in the Secure Account. We divide the Secure Account Value
($74,062.50) by the sum of the Secure Account Value
A-8
($74,062.50) and the Growth Account Value ($24,687.50). The result is then
multiplied by the free annual withdrawal amount $9,875.00) to determine the
free annual withdrawal amount available from the Secure Account ($7,406.25)
in connection with the surrender of the Contract.
We follow the same steps in determining the free annual withdrawal amount
available from the Growth Account at the time of surrender. We determine the
portion of the free annual withdrawal amount available from the Growth
Account by calculating the percentage of Contract Value held in the Growth
Account. We divide the Growth Account Value ($24,687.50) by the sum of the
Secure Account Value ($74,062.50) and the Growth Account Value ($24,687.50).
The result is then multiplied by the free annual withdrawal amount
$9,875.00) to determine the free annual withdrawal amount available from the
Growth Account ($2,468.75).
Third, we determine the amount of the withdrawal that may be subject to a
Surrender Charge and MVA for each Risk Control Account. We do this by
subtracting the free annual withdrawal amount available from the Contract
Value in the Risk Control Account. For the Secure Account, the Secure
Account Value ($74,062.50) minus the portion of free annual withdrawal
amount available from the Secure Account in connection with the surrender
($7,406.25) equals $66,656.25. For the Growth Account, the Growth Account
Value ($24,687.50) minus the portion of free annual withdrawal amount
available from the Growth Account in connection with the surrender
($2,468.75) equals $22,218.75.
Fourth, we determine the amount of the Surrender Charge that would be
deducted from the Contract Value in each Risk Control Account. We do this by
multiplying the amount of the Contract Value that may be subject to a
Surrender Charge by the applicable Surrender Charge percentage for each Risk
Control Account. For the Secure Account, the Secure Account Value subject to
a Surrender Charge ($66,656.25) multiplied by the Surrender Charge
percentage (9%) equals $5,999.06. For the Growth Account, the Growth Account
Value subject to a Surrender Charge ($22,218.75) multiplied by the Surrender
Charge percentage (9%) equals $1,999.69. The total Surrender Charge deducted
in connection with the surrender of the Contract equals $7,998.75 ($5,999.06
plus $1,999.69).
Fifth, we determine the MVA that would be applied to the Contract Value in
each Risk Control Account. For each Risk Control Account, we do this by
dividing the amount of the Contract Value that may be subject to an MVA by
the sum of 1 plus the cumulative Index Interest Rate credited to date in the
current Contract Year and multiply the result by the Market Value Adjustment
factor ("MVAF"). (The MVAF is equal to (((1 + I + K) / (1 + J + L))^N) - 1
and for this example is equal to -0.0821.) For the Secure Account, we would
divide $66,656.25 by 1.00 then multiply the result by -0.0821 which equals a
negative MVA of $5,475.42. For the Growth Account, we would divide
$22,218.75 by 1.00 then multiply the result by -0.0821 which equals a
negative MVA of $1,825.14. The total MVA applied in connection with the
surrender of the Contract is a negative MVA of $7,300.56 ($5,475.42 plus
$1,825.14).
The net amount paid the Owner from the surrender of the Contract from each
Risk Control Account equals the Contract Value in the Risk Control Account
less the Surrender Charge and the MVA. For the Secure Account, that equals
$74,062.50 - $5,999.06 - $5,475.42 or $62,588.02. For the Growth Account,
that equals $24,687.50 - $1,999.69 - $1,825.14 or $20,862.67. The total net
amount paid the Owner from the surrender of the Contract is $83,450.69
($62,588.02 plus $20,862.67). Following the surrender of the Contract, there
would be no Contract Value remaining under the Contract.
A-9
MEMBERS Life Insurance Company
2000 Heritage Way
Waverly, IA 50677
1-800-798-6600
Dealer Prospectus Delivery Obligations
All dealers that effect transactions in these securities are required to
deliver a prospectus.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The expenses for the issuance and distribution of the Contracts,
other than any underwriting discounts and commissions, are as follows:
Securities and Exchange Commission Registration Fees $128,800
Printing and engraving $ 66,468
Accounting fees and expenses $115,000
Legal fees and expenses $ 15,000
Miscellaneous $ 39,732
--------
TOTAL EXPENSES $365,000
========
--------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 490.202 of the Iowa Business Corporation Act (the "IBCA"), provides that
a corporation's articles of incorporation may contain a provision eliminating or
limiting the personal liability of a director to the corporation or its
shareholders for monetary damages for any action taken, or failure to take
action, as a director, except liability for (1) the amount of a financial
benefit received by a director to which the director is not entitled, (2) an
intentional infliction of harm on the Company or the shareholders, (3) a
violation of Section 490.833 of the IBCA or (4) an intentional violation of
criminal law.
Further, Section 490.851 of the IBCA provides that a corporation may indemnify
its directors who may be party to a proceeding against liability incurred in the
proceeding by reason of such person serving in the capacity of director, if such
person has acted in good faith and in a manner reasonably believed by the
individual to be in the best interests of the corporation, if the director was
acting in an official capacity, and in all other cases that the individual's
conduct was at least not opposed to the best interests of the corporation, and
in any criminal proceeding if such person had no reasonable cause to believe the
individual's conduct was unlawful or the director engaged in conduct for which
broader indemnification has been made permissible or obligatory under a
provision of the articles of incorporation. The indemnity provisions under
Section 490.851 do not apply (i) in the case of actions brought by or in the
right of the corporation except for reasonable expenses incurred in connection
with the proceeding if it is determined that the director has met the relevant
standard of conduct set forth above or (ii) in connection with any proceedings
with respect to conduct for which the director was adjudged liable on the basis
that the director received a financial benefit to which the director was not
entitled, whether or not involving action in the director's official capacity.
In addition, Section 490.852 of the IBCA provides mandatory indemnification of
reasonable expenses incurred by a director who is wholly successful in defending
any action in which the director was a party because the director is or was a
director of the corporation. A director who is a party to a proceeding because
the person is a director may also apply for court-ordered indemnification and
advance of expenses under Section 490.854 of the IBCA.
Section 490.853 of the IBCA provides that a corporation may, before final
disposition of a proceeding, advance funds to pay for or reimburse the
reasonable expenses incurred by a director who is a party to a proceeding
because such person is a director if the director delivers the following to the
corporation: (1) a written affirmation that the director has met the standard of
conduct described above or that the proceeding involved conduct for which
liability has been eliminated under the corporation's articles of
incorporation and (2) the director's written undertaking to repay any funds
advanced if the director is not entitled to mandatory indemnification under
Section 490.852 of the IBCA and it is ultimately determined that the director
has not met the standard of conduct described above.
Under Section 490.856 of the IBCA, a corporation may indemnify and advance
expenses to an officer of the corporation who is a party to a proceeding because
such person is an officer, to the same extent as a director. In addition, if the
person is an officer but not a director, further indemnification may be provided
by the corporation's articles of incorporation or bylaws, a resolution of the
board of directors or by contract, except liability for (1) a proceeding by or
in the right of the corporation other than for reasonable expenses incurred in
connection with the proceeding and (2) conduct that constitutes receipt by the
officer of a financial benefit to which the officer is not entitled, an
intentional infliction of harm on the corporation or the shareholders or an
intentional violation of criminal law. Such indemnification is also available to
an officer who is also a director if the basis on which the officer is made a
party to a proceeding is an act taken or a failure to take action solely as an
officer.
Our Amended and Restated Articles of Incorporation provide that our directors
will not be liable to us or our shareholders for money damages for any action
taken, or any failure to take any action, as a director, except liability for
(1) the amount of a financial benefit received by a director to which the
director is not entitled, (2) an intentional infliction of harm on the Company
or the shareholders, (3) a violation of Section 490.833 of the IBCA or (4) an
intentional violation of criminal law.
Our Amended and Restated Articles of Incorporation also provide that we
indemnify each of our directors or officers for any action taken, or any failure
to take any action, as a director or officer except liability for (1) the amount
of a financial benefit received by a director to which the director is not
entitled, (2) an intentional infliction of harm on the Company or the
shareholders, (3) a violation of Section 490.833 of the IBCA or (4) an
intentional violation of criminal law. Additionally, the Company is required to
exercise all of its permissive powers as often as necessary to indemnify and
advance expenses to its directors and officers to the fullest extent permitted
by law.
Our Bylaws also provide indemnification to our directors on the same terms as
the indemnification provided in our Amended and Restated Articles of
Incorporation. Our Bylaws also provide for advances of expenses to our directors
and officers. The indemnification provisions of our Bylaws are not exclusive of
any other right which any person seeking indemnification may have or acquire
under any statute, our Amended and Restated of Incorporation or any agreement,
vote of stockholders or disinterested directors or otherwise.
Section 490.857 of the IBCA provides that a corporation may purchase and
maintain insurance on behalf of a person who is a director or officer of a
corporation, or who, while a director or officer of a corporation, serves at the
corporation's request as a director, officer, partner, trustee, employee or
agent of another domestic or foreign corporation, partnership, joint venture,
trust, employee benefit plan or other entity, against liability asserted against
or incurred by that person in that capacity or arising from that person's status
as a director or officer, whether or not the corporation would have the power to
indemnify or advance expenses to that person against the same liability under
the IBCA. As permitted by and in accordance with Section 490.857 of the IBCA, we
maintain insurance coverage for our officers and directors as well as insurance
coverage to reimburse us for potential costs for indemnification of directors
and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS.
(1) (i) Distribution Agreement dated June 11, 2013. Incorporated herein by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed June 12, 2013. (File No. 333-186477)
(ii) Selling Agreement. Incorporated herein by reference to Pre-Effective
Amendment No. 1 to the Registration Statement on Form S-1, filed
June 12, 2013. (File No. 333-186477)
(iii) Distribution Agreement dated September 9, 2013. (filed herewith)
(3) (i) Articles of Incorporation of MEMBERS Life Insurance Company.
Incorporated herein by reference to the initial filing of the
Registration Statement on Form S-1, filed February 6, 2013. (File No.
333-186477)
(ii) Bylaws of MEMBERS Life Insurance Company. Incorporated herein by
reference to the initial filing of the Registration Statement on Form
S-1, filed February 6, 2013. (File No. 333-186477)
(4) (i) Forms of Contract. Incorporated herein by reference to Pre-Effective
Amendment No. 1 to the Registration Statement on Form S-1, filed
June 12, 2013. (File No. 333-186477)
(ii) Form of Application. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(iii) Form of Change of Annuitant Endorsement. Incorporated herein by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed June 12, 2013. (File No. 333-186477)
(iv) Form of Roth IRA Endorsement, Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(v) Form of IRA Endorsement. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(vi) Form of Amendment to Application Endorsement. Incorporated herein by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed June 12, 2013. (File No. 333-186477)
(vii) Bailout Provision Rider. Incorporated herein by reference to Pre-
Effective Amendment No. 2 to the Registration Statement on Form S-1,
filed August 2, 2013. (File No. 333-186477)
(5) Legality Opinion. (to be filed by amendment)
(10) Material Contracts
(i) Coinsurance Agreement dated October 31, 2012. Incorporated herein by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed June 12, 2013. (File No. 333-186477)
(ii) Coinsurance Agreement dated January 1, 2013. Incorporated herein by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1, filed June 12, 2013. (File No. 333-186477)
(iii) Cost Sharing Agreement. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-1, filed June 12, 2013. (File No. 333-186477)
(iv) Investment Advisory Agreement. Incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
S-1, filed June 12, 2013. (File No. 333-186477)
(v) Procurement and Disbursement and Billing and Collection Services
Agreement. Incorporated herein by reference to Pre-Effective
Amendment No. 1 to the Registration Statement on Form S-1, filed
June 12, 2013. (File No. 333-186477)
(23) (i) Consent of Ross D. Hansen. (to be filed by amendment)
(ii) Consent of Deloitte & Touche LLP independent public accounting firm.
(to be filed by amendment)
(24) Powers of Attorney (filed herewith)
ITEM 17. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) That, for the purpose of determining liability under the Securities Act of
1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of
a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
(5) That, for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant
to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned registrant or used or referred to by
the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
(B) Insofar as indemnification for liabilities 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 that 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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, MEMBERS Life
Insurance Company has duly caused this registration statement to be signed on
its behalf by the undersigned, duly authorized, in the City of Madison, and
State of Wisconsin on the 27 day of November, 2013.
MEMBERS Life Insurance Company
By: /s/ Robert N. Trunzo
---------------------------
Robert N. Trunzo, President
*Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons on November 27, 2013 in
the capacities indicated.
NAME TITLE
---- -----
/s/ * President/Director
-----------------------
Robert N. Trunzo
/s/ * Treasurer
-----------------------
Brian J. Borakove
/s/ * Director
-----------------------
Stephen W. Koslow
/s/ * Director
-----------------------
Thomas J. Merfeld
/s/ * Director
-----------------------
James M. Power
/s/ * Director
-----------------------
Richard R. Roy
* By: /s/ Ross D. Hansen
------------------
Ross D. Hansen As Attorney-in-Fact pursuant to powers
of attorney
EXHIBIT LIST
(1)(iii) Distribution Agreement dated September 9, 2013.
(24) Powers of Attorney