<PAGE>
As Filed with the Securities and Exchange Commission on October 25, 1996
Registration No. 33-97852
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post-Effective Amendment No. 2 to
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
SOUTHLAND SEPARATE ACCOUNT L1
(Exact name of trust)
SOUTHLAND LIFE INSURANCE COMPANY
(Name of depositor)
5780 Powers Ferry Road, N.W.
Atlanta, GA 30340
(Complete address of depositor's principal executive offices)
(Name and complete address
of agent for service) Copy to:
B. Scott Burton, Esq. Stephen E. Roth, Esq.
Associate General Counsel Sutherland, Asbill & Brennan
Southland Life Insurance Company 1275 Pennsylvania Avenue, N.W.
5780 Powers Ferry Road, N.W. Washington, DC 20004-2404
Atlanta, GA 30340
Approximate date of proposed public offering:
As soon as practicable after the effective date of this Registration Statement
Securities Being Offered: Individual Variable Life Insurance Contracts
Pursuant to Rule 24f-2 of the Investment Company Act of 1940, the Registrant has
elected to register an indefinite amount of the securities being offered. The
$500 registration fee pursuant to Rule 24f-2 was paid with the initial filing on
October 6, 1995.
It is proposed that this filing will become effective:
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1) of rule (485)
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
SOUTHLAND SEPARATE ACCOUNT L1
SOUTHLAND LIFE INSURANCE COMPANY
Cross Reference to Items Required by form N-8B-2
N-8B-2 Item Caption in Prospectus
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1 Cover Page
2 Cover Page
3 Not applicable
4 Distribution of the Policies
5 The Variable Account
6 The Variable Account
7 Not applicable
8 The Variable Account
9 Legal Proceedings
10 Summary and Diagram; Facts About the Policy; Withdrawals;
Surrenders; Your Right to Transfer; Right to Convert Policy;
Premiums and Allocations; Reinstatement; Voting Privileges;
Authority to Change Policy Terms
11 The Portfolios
12 The Portfolios
13 Policy Charges and Fees
14 Facts About the Policy
15 Premiums and Allocations--Crediting Premiums
16 The Portfolios
17 Withdrawals; Surrenders; When We Make Payments
18 The Variable Account
19 Reports to Owners
20 Authority to Change Policy Terms; Other Policy Provisions
21 Policy Loans
22 Not applicable
23 Southland's Directors and Officers
24 Not applicable
25 Facts About Southland and the Variable Account
26 Policy Charges and Fees
27 Facts About Southland and the Variable Account
28 Southland's Directors and Officers
29 Facts About Southland and the Variable Account
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 Facts About Southland and the Variable Account
<PAGE>
36 Not applicable
37 Not applicable
38 Distribution of the Policies
39 Distribution of the Policies
40 Distribution of the Policies
41 Distribution of the Policies
42 Not applicable
43 Not applicable
44 Subaccount Accumulation Value; Facts About the Policy
45 Not applicable
46 Subaccount Accumulation Value; Facts About the Policy
47 The Variable Account; The Portfolios
48 Facts About Southland and the Variable Account
49 Not applicable
50 Not applicable
51 Facts About the Policy; Distribution of the Policies
52 Changes Relating to the Variable Account
53 Federal Tax Considerations
54 Not applicable
55 Hypothetical Illustrations
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
<PAGE>
A FLEXIBLE PREMIUM ADJUSTABLE COMBINATION FIXED AND
VARIABLE LIFE INSURANCE POLICY
issued by
Southland Life Insurance Company and
Southland Separate Account L1
5780 Powers Ferry Road, N.W., Atlanta, GA 30340
(770) 980-5100
This prospectus describes a flexible premium adjustable combination fixed and
variable life insurance policy (the "Policy") offered by Southland Life
Insurance Company ("Southland," "we," "us," or the "Company"). The Policy is
designed to provide lifetime insurance protection on the Insured named in the
Policy and at the same time provide flexibility to vary the amount and timing of
premiums and to change the amount of death benefits payable under the Policy.
This flexibility allows the purchaser ("you," "your," or the "Owner") to provide
for changing insurance needs under a single insurance policy.
The Owner may allocate net premiums and Policy values to one or more of the
Subaccounts of Southland Separate Account L1 (the "Variable Account") or to the
Guaranteed Interest Account, or to both within certain limits. Twenty-one (21)
Subaccounts are currently available under the Policy. The Subaccounts invest in
shares of corresponding Portfolios of The Alger American Fund, Fidelity Variable
Insurance Products Fund, Fidelity Variable Insurance Products Fund II, Janus
Aspen Series, and INVESCO Variable Investment Funds, Inc. The Guaranteed
Interest Account guarantees a minimum fixed rate of interest.
The Accumulation Value will vary daily with the investment results of the
Subaccounts and interest credited to any Guaranteed Interest Account
allocations. We do not guarantee any minimum Cash Surrender Value for amounts
allocated to the Subaccounts.
You can select from two death benefit options available under the Policy: a
level death benefit ("Stated Death Benefit or death benefit type A") and an
increasing death benefit ("Stated Death Benefit Plus Accumulation Value or death
benefit type B"). See "DEATH BENEFIT AND CHANGES IN DEATH BENEFIT TYPE," page
49. Southland guarantees that the death benefit will never be less than the
Stated Death Benefit (less any unrepaid policy loans and past due charges) so
long as the Policy is in force.
The Policy provides for a Cash Surrender Value that can be obtained by
surrendering the Policy. Because this value is based on the performance of the
Portfolios, to the extent of allocations to the Variable Account, there is no
guaranteed Cash Surrender Value. If the Cash Surrender Value is insufficient to
cover the charges due under the Policy, the Policy will lapse without value. The
Policy also provides for Policy loans and permits Withdrawals within limits.
It may not be advantageous to replace existing insurance with the Policy. Within
certain limits, you may return the Policy or convert it to a life insurance
policy with benefits that do not vary with the investment results of a separate
account.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This prospectus sets forth concisely the information you should know before
deciding to purchase a Policy. It should be retained for future reference.
This prospectus must be accompanied or preceded by current prospectuses for the
Portfolios. The Portfolio prospectuses should be read in conjunction with this
prospectus.
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TABLE OF CONTENTS
<TABLE>
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Page
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DEFINITIONS..................................................................1
SUMMARY AND DIAGRAM..........................................................6
HISTORICAL PERFORMANCE INFORMATION..........................................11
HYPOTHETICAL ILLUSTRATIONS..................................................21
FACTS ABOUT SOUTHLAND AND THE VARIABLE ACCOUNT..............................29
THE VARIABLE ACCOUNT...............................................29
THE PORTFOLIOS.....................................................30
CHANGES RELATING TO THE VARIABLE ACCOUNT...........................33
FACTS ABOUT THE POLICY......................................................34
PREMIUMS AND ALLOCATIONS...........................................34
YOUR ACCUMULATION VALUE............................................39
YOUR RIGHT TO TRANSFER.............................................42
DOLLAR COST AVERAGING FACILITY.....................................43
AUTOMATIC REBALANCING..............................................44
WITHDRAWALS........................................................45
SURRENDERS.........................................................47
POLICY LOANS.......................................................47
TELEPHONE PRIVILEGES...............................................49
DEATH BENEFIT AND CHANGES IN DEATH BENEFIT TYPE....................49
MATURITY BENEFIT...................................................55
PAYMENT OPTIONS....................................................55
WHEN WE MAKE PAYMENTS..............................................55
THE GUARANTEED INTEREST ACCOUNT.............................................56
POLICY CHARGES AND FEES.....................................................57
CHARGES DEDUCTED FROM PREMIUMS.....................................57
SURRENDER CHARGE...................................................58
MONTHLY DEDUCTIONS FROM YOUR NET ACCUMULATION VALUE................61
OTHER ADMINISTRATIVE CHARGES.......................................63
CHARGES DEDUCTED FROM THE SUBACCOUNTS..............................64
PORTFOLIO EXPENSES.................................................64
PERSISTENCY REFUND.................................................64
GROUP OR SPONSORED ARRANGEMENTS....................................65
</TABLE>
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<TABLE>
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ADDITIONAL POLICY INFORMATION...........................................66
THE OWNER......................................................66
THE BENEFICIARY................................................66
CHANGE OF OWNER OR BENEFICIARY.................................66
RIGHT TO CONVERT POLICY........................................67
REINSTATEMENT..................................................67
OTHER POLICY PROVISIONS........................................67
AUTHORITY TO CHANGE POLICY TERMS...............................68
ADDITIONAL BENEFITS.....................................................68
ACCIDENTAL DEATH BENEFIT RIDER.................................68
ADJUSTABLE TERM INSURANCE RIDER................................69
ADDITIONAL INSURED RIDER.......................................70
CHILDREN'S INSURANCE RIDER.....................................70
EXCHANGE OF INSURED RIDER......................................70
GUARANTEED INSURABILITY RIDER..................................71
WAIVER OF THE COST OF INSURANCE RIDER..........................71
WAIVER OF SPECIFIED PREMIUM RIDER..............................71
GUARANTEED MINIMUM DEATH BENEFIT RIDER.........................71
FEDERAL TAX CONSIDERATIONS..............................................71
OTHER INFORMATION.......................................................75
REPORTS TO OWNERS..............................................75
DISTRIBUTION OF THE POLICIES...................................76
VOTING PRIVILEGES..............................................76
LEGAL PROCEEDINGS..............................................77
SOUTHLAND'S DIRECTORS AND OFFICERS.............................79
EXPERTS........................................................82
LEGAL MATTERS..................................................82
FINANCIAL STATEMENTS...........................................82
</TABLE>
This prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No person is authorized to make any
representations in connection with this offering other than those contained in
this prospectus.
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<PAGE>
DEFINITIONS
Accumulation Value: The "Accumulation Value" is the combined value of your
Policy in all of the Subaccounts of the Variable Account, the Guaranteed
Interest Account and the values held in the General Account to secure Policy
loans.
Adjustable Term Insurance Rider: The "Adjustable Term Insurance Rider" is
available to add death benefit coverage to your Policy. The amount of death
benefit coverage provided under this rider is the difference between the Base
Death Benefit and the Target Death Benefit.
Age: The Insured's "Age" at any time is his or her age on the birthday nearest
the Policy Date increased by the number of full Policy Years elapsed since the
Policy Date.
Base Death Benefit: The "Base Death Benefit" depends on the death benefit type
you choose. Under type A, the Base Death Benefit is the greater of Stated Death
Benefit or a multiple of the Accumulation Value on the date of the Insured's
death. Under type B, the Base Death Benefit is the greater of the Stated Death
Benefit plus the Accumulation Value, or a multiple of the Accumulation Value, on
the date of the Insured's death. See "DEATH BENEFITS AND CHANGES IN DEATH
BENEFIT TYPE," page 49.
Beneficiary: The "Beneficiary" is the person to whom the death benefit (payable
on the death of an Insured) is paid.
Cash Surrender Value: The "Cash Surrender Value" of the Policy on any Valuation
Day is the Net Accumulation Value minus any Surrender Charge that would apply
that day.
Code: The "Code" is the Internal Revenue Code of 1986, as amended.
Customer Service Center: The Southland "Customer Service Center" is the
Company's offices at P.O. Box 173789, Denver, CO 80217-3789. For overnight
delivery, the address is 8515 East Orchard Road, 9T2, Denver, CO 80111.
Death Benefit: The "Death Benefit" is the Base Death Benefit plus any additional
life insurance proceeds provided by any riders. If the Adjustable Term Insurance
Rider is in effect, the Death Benefit is equal to the Target Death Benefit plus
any additional life insurance proceeds provided by any other riders.
Death Proceeds: The "Death Proceeds" are the proceeds payable to the Beneficiary
by us upon due proof of death of the Insured while the Policy is in force equal
to: [1] the Base Death Benefit (or Target Death Benefit, if applicable); plus
[2] any additional life insurance proceeds provided by any riders; minus [3] any
outstanding Policy Debt; minus [4] any monthly deductions due and not yet
deducted.
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Free Look Period: The "Free Look Period" is the period during which
you may return the Policy and receive a refund or cancel an increase in Stated
Death Benefit. See "Free Look Period," page 35.
General Account: The "General Account" represents our corporate assets other
than those segregated in any separate account established by us.
Gross Withdrawal: A "Gross Withdrawal" is the total of the amount of a
Withdrawal plus any applicable Withdrawal Transaction Charge and any applicable
Surrender Charge.
Guaranteed Interest Account: The "Guaranteed Interest Account" is a part of our
General Account, to which a portion of the Accumulation Value may be allocated
and which provides guarantees of principal and interest.
Guaranteed Interest Account Accumulation Value: The "Guaranteed Interest
Account Accumulation Value" is the value under the Policy in the Guaranteed
Interest Account.
Guaranteed Minimum Death Benefit: The "Guaranteed Minimum Death Benefit" is an
optional provision of the Policy provided by a rider which guarantees that the
Stated Death Benefit will remain in force for the Guarantee Period regardless of
the amount of the Cash Surrender Value, provided certain conditions are met.
Guarantee Period: The "Guarantee Period" is the period during which the Stated
Death Benefit is guaranteed under the Guaranteed Minimum Death Benefit
provision. The Policy offers two Guarantee Period options: (1) 10 Policy Years
or to the date the Insured reaches age 65, whichever is later; or (2) the
lifetime of the Insured up to the Maturity Date. The Guarantee Period will
terminate prior to the selected date any time the required premiums have not
been paid or on any Monthly Processing Date that the Net Accumulation Value is
not diversified according to our requirements.
Insured: The "Insured" means the person upon whose life the Policy is issued.
Maturity Date: The "Maturity Date" for the Policy is the Policy Anniversary on
which the Insured's age is 100.
Monthly Processing Date: The "Monthly Processing Date" is the date each month on
which the monthly deductions from the Accumulation Value are deducted. See
"Monthly Deductions," page 61. The first Monthly Processing Date will be the
Policy Date or the date on which the initial Net Premium is allocated to your
Policy, if later. Subsequent Monthly Processing Dates will be the same date as
the Policy Date each month thereafter unless this is not a Valuation Day, in
which case the Monthly Processing Date occurs on the next Valuation Day.
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Net Accumulation Value: The "Net Accumulation Value" on any Valuation Day is the
Accumulation Value on that day less Policy loans (and interest thereon) and if
other than the Monthly Processing Date, the monthly deduction that would be
deducted on the next Monthly Processing Date.
Net Premium: The "Net Premium" is the premium amount paid less any sales and tax
charges. These charges are deducted from each premium before the premium is
applied to your Accumulation Value.
No-Lapse Premium: The "No-Lapse Premium" is a benchmark monthly premium
calculated for each Policy based on the Age, sex and rate class of the Insured,
the requested Stated Death Benefit and any supplemental benefits. It is used for
purposes of the No-Lapse Guarantee.
No-Lapse Guarantee: The "No-Lapse Guarantee" refers to our guarantee to keep the
Policy in force during the first three Policy Years, regardless of the
sufficiency of the Cash Surrender Value, so long as total premiums paid, less
Withdrawals, are at least equal to the cumulative amount of No-Lapse Premiums
for the Policy months the Policy has been in force.
Owner: The "Owner" is the person(s) who owns the Policy and who is entitled to
exercise all rights and privileges provided in the Policy.
Policy Anniversary: The "Policy Anniversary" is the first day of each Policy
Year.
Policy Date: The "Policy Date" is shown on the Schedule and is the date the
Policy becomes effective.
Policy Debt: The "Policy Debt" is equal to unrepaid Policy loans (including
unpaid interest added to the loan) plus accrued interest not yet due.
Policy Year: Each "Policy Year" starts on the same day and month as the Policy
Date.
Portfolio: A "Portfolio" refers to a series of a mutual fund in which assets of
a corresponding Subaccount are invested.
SEC: The "SEC" is the Securities and Exchange Commission.
Stated Death Benefit: The "Stated Death Benefit" is a dollar amount used to
determine the death benefit under the Policy. On any day, it is the initial
Stated Death Benefit, as adjusted for any subsequent increases or decreases that
have taken effect.
Subaccount: A "Subaccount" is a subdivision of the Variable Account, the assets
of which are invested in a corresponding Portfolio.
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Subaccount Accumulation Value: The "Subaccount Accumulation Value" is the value
under a Policy in a particular Subaccount.
Surrender: A "Surrender" is a Written Request for the Cash Surrender Value that
terminates the Policy.
Target Death Benefit: The "Target Death Benefit" is the death benefit specified
by the Owner when an Adjustable Term Insurance Rider is added to the Policy. The
Target Death Benefit depends on the death benefit type you choose. Under type A,
the Target Death Benefit is equal to the death benefit specified by the Owner
when an Adjustable Term Insurance Rider is added to the Policy. Under type B,
the Target Death Benefit is equal to the death benefit specified by the Owner
when an Adjustable Term Insurance Rider is added to the Policy plus the
Accumulation Value.
Target Premium: The "Target Premium" refers to an annualized premium amount we
use to calculate the sales load charge, the sales surrender charge and the cost
of insurance charge. A Target Premium is determined for the initial Stated Death
Benefit, and an additional Target Premium is determined for each increase in
Stated Death Benefit. The Target Premium generally is less than planned premiums
for a Policy Year. It may be more or less than the No-Lapse Premium for a Policy
Year, depending on the supplemental benefits added to the Policy.
Valuation Day: For each Subaccount, a "Valuation Day" is each day on which the
New York Stock Exchange and Southland's Customer Service Center are both open
for business except for a day that a Subaccount's corresponding Portfolio does
not value its shares. The New York Stock Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving Day and Christmas
Day. Southland's Customer Service Center is normally not open on the following
days: the Monday before New Year's Day, July Fourth or Christmas Day, if any of
these holidays falls on a Tuesday; the Friday after New Year's Day, July Fourth
or Christmas Day, if any of these holidays falls on a Thursday; and the Friday
after Thanksgiving Day.
Valuation Period: A "Valuation Period" begins at 4:00 p.m. Eastern time on a
Valuation Day and ends at 4:00 p.m. Eastern time on the next succeeding
Valuation Day.
We, us, our, Southland and the Company: "We," "us," "our," "Southland," and
"the Company" refer to Southland Life Insurance Company.
Withdrawal: A "Withdrawal" refers to the surrender of a portion of the Net
Accumulation Value.
Written Notice or Written Request: A "Written Notice" or "Written Request" is a
notice or request in a form satisfactory to the Company which is signed by the
Owner and received at the Customer Service Center.
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You and your: "You" and "your" refer to the Owner of the Policy.
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SUMMARY AND DIAGRAM
The following summary of prospectus information and diagram of the Policy should
be read in conjunction with the detailed information appearing elsewhere in this
prospectus. Unless otherwise indicated, the description of the Policy in this
prospectus assumes that the Policy is in force and there is no outstanding
Policy Debt.
The Policy is similar in many ways to fixed-benefit life insurance. As with
fixed-benefit life insurance, the Owner of a Policy pays premiums for insurance
coverage on the person insured. Also like fixed-benefit life insurance, the
Policy provides for accumulation of Net Premiums and a Cash Surrender Value that
is payable if the Policy is surrendered during the Insured's lifetime. As with
fixed-benefit life insurance, the Cash Surrender Value during the early Policy
Years may be substantially lower than the premiums paid.
However, the Policy differs from fixed-benefit life insurance in several
important respects. Unlike fixed-benefit life insurance, the Death Benefit of a
Policy may, and the Accumulation Value will, increase or decrease to reflect the
investment performance of the Subaccounts to which Accumulation Value is
allocated. Also, there is no guaranteed minimum Cash Surrender Value.
Nonetheless, Southland guarantees to keep the Policy in force during the first
three (3) Policy Years so long as the No-Lapse Premium requirement has been met
and Policy Debt is not excessive. See "THREE-YEAR GUARANTEE," page 37.
Otherwise, if the Cash Surrender Value is insufficient to pay charges due, the
Policy will lapse without value after a grace period. See "PREMIUMS TO PREVENT
LAPSE," page 37.
Purpose of the Policy
The Policy is designed to be a long-term investment providing significant
insurance benefits. The Policy should be considered in conjunction with other
insurance policies owned by the Owner. It may not be advantageous to replace
existing insurance policies with the Policy.
Tax Considerations
Southland intends for the Policy to satisfy the definition of a life insurance
contract under section 7702 of the Code. Under certain circumstances, a Policy
could be treated as a "modified endowment contract." Southland will monitor
Policies and will attempt to notify an Owner on a timely basis if his or her
Policy is in jeopardy of becoming a modified endowment contract. For further
discussion of the tax status of a Policy and the tax consequences of being
treated as a life insurance contract or a modified endowment contract, see
"FEDERAL TAX CONSIDERATIONS," page 71.
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Free Look Period and Conversion Right
For a limited time after the Policy is issued, you have the right to cancel your
Policy and receive a refund equal to all premiums paid. See "FREE LOOK PERIOD,"
page 35. Until the end of this limited period, Net Premiums paid will be
invested in the Subaccount investing in the VIP Money Market Portfolio. See "NET
PREMIUM ALLOCATIONS," page 38. For a limited time after an increase in Stated
Death Benefit takes effect, you have the right to cancel the increase. See
"Changes in Death Benefit," page 51. At any time within the first 24 Policy
Months (or first 24 Policy Months after an increase in Stated Death Benefit),
you may convert your Policy to a flexible premium (non-variable) adjustable life
insurance policy. See "RIGHT TO CONVERT POLICY," page 67.
Owner Inquiries
If you have any questions, you may write to us at the Customer Service Center or
call us at (800) 224-3035.
Diagram
The following diagram illustrates how the Policy works.
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DIAGRAM OF POLICY
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PREMIUM PAYMENTS
* You select a payment plan but are not required to pay premiums according to
the plan. You can vary the amount and frequency and can skip planned
premiums. See "Planned Premiums" for rules and limits.
* Minimum initial premium and planned premium depend on the Insured's Age,
sex, underwriting class, Stated Death Benefit selected, and any supplemental
riders.
* Unplanned premiums may be made, within limits. See "Premiums."
* Under certain circumstances, extra premiums may be required to prevent
lapse. See "Premiums to Prevent Lapse."
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DEDUCTIONS FROM PREMIUMS
* For sales load (currently 4% of premiums up to an amount equal to 10 Target
Premiums and, after an increase in Stated Death Benefit, 4% of premiums up
to 10 Target Premiums for that increase - this is guaranteed never to exceed
4% of premiums paid).
* For state premium tax (2.5% of premiums).
* For DAC tax (1.5% of premiums). See "Policy Charges and Fees."
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NET PREMIUMS
* You direct the allocation of Net Premiums among 21 Subaccounts of the
Variable Account and the Guaranteed Interest Account. See "Net Premium
Allocations" for rules and limits and applicable charges.
* The Subaccounts invest in corresponding portfolios ("Funds") of The Alger
American Fund ("Alger"), Fidelity Variable Insurance Products Fund ("VIP
Fund"), Fidelity Variable Insurance Products II Fund ("VIP II Fund"), Janus
Aspen Series ("Janus"), and INVESCO Variable Investment Funds ("INVESCO").
See "The Portfolios." Funds available are:
<TABLE>
<S> <C>
Alger - American Small Capitalization Portfolio Fidelity - VIP II Fund - Asset Manager Portfolio
Alger - American MidCap Growth Portfolio Fidelity - VIP II Fund - Index 500 Portfolio
Alger - American Growth Portfolio Janus - Growth Portfolio
Alger - American Leveraged AllCap Portfolio Janus - Aggressive Growth Portfolio
Fidelity - VIP Fund - High Income Portfolio Janus - Worldwide Growth Portfolio
Fidelity - VIP Fund - Money Market Portfolio Janus - International Growth Portfolio
Fidelity - VIP Fund - Equity-Income Portfolio Janus - Balanced Portfolio
Fidelity - VIP Fund - Growth Portfolio Janus - Short-Term Bond Portfolio
Fidelity - VIP Fund - Overseas Portfolio INVESCO - Industrial Income Portfolio
Fidelity - VIP II Fund - Contrafund Portfolio INVESCO - Utilities Portfolio
Fidelity - VIP II Fund - Investment Grade Bond Portfolio
</TABLE>
* Interest is credited on amounts allocated to the Guaranteed Interest Account
at a minimum guaranteed rate of 3.5%. See "The Guaranteed Interest Account"
and "Your Right to Transfer" for rules and limits on Guaranteed Interest
Account allocations.
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DEDUCTIONS FROM ASSETS
* Monthly deduction for cost of insurance, $20 initial monthly charge during
the first Policy Year, $6 monthly charge for administrative expenses, and
supplemental benefit charges. See "Policy Charges and Fees."
* Daily charge at an annual rate of 0.90% from assets in the Subaccounts for
mortality and expense risks. See "Charges Deducted From the Subaccounts."
This charge is not deducted from Guaranteed Interest Account Accumulation
Value.
* If the Guaranteed Minimum Death Benefit provision is elected, a current
charge of $0.005 (guaranteed to be no greater than $0.01) per thousand of
Stated Death Benefit is deducted on each Monthly Processing Date. See
"Monthly Deductions From Your Net Accumulation Value."
* Investment advisory fees and fund expenses are deducted from the assets of
each Fund. See "Portfolio Expenses."
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ACCUMULATION VALUE
* Is the amount in the Subaccounts and in the Guaranteed Interest Account
credited to your Policy plus the values held in the General Account to
secure Policy Debt. It is equal to Net Premiums, as adjusted each Valuation
Day to reflect Subaccount investment experience, interest credited on any
Guaranteed Interest Account allocations, charges deducted and other Policy
transactions (such as Policy loans, transfers and withdrawals). See "Your
Accumulation Value," "Guaranteed Interest Account Accumulation Value," and
"Subaccount Accumulation Value."
* Varies from day to day. There is no minimum guaranteed Accumulation Value.
The Policy may lapse if the Cash Surrender Value is insufficient to cover
the monthly deduction then due.
* Accumulation Value can be transferred among the Subaccounts and the
Guaranteed Interest Account. See "Your Right to Transfer" for rules and
limits. Policy loans reduce the amount available for allocations and
transfers.
* Dollar cost averaging and automatic rebalancing programs are available. See
"Dollar Cost Averaging Facility" and "Automatic Rebalancing."
* Accumulation Value is the starting point for calculating certain values
under a Policy, such as the Cash Surrender Value, Net Accumulation Value,
and the Death Benefit used to determine Death Proceeds.
* A persistency refund may be credited each month the Policy or a coverage
segment of Stated Death Benefit remains in force after the tenth Policy
Anniversary. The persistency refund is equivalent to 0.35% on an annualized
basis (0.02917% monthly) of the Net Accumulation Value for that segment.
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CASH BENEFITS
* Loans may be taken for amounts up to 90% of Cash Surrender Value, at a
maximum net interest rate of 6%. See "Policy Loans" and "Tax Treatment of Policy
Benefits."
* Withdrawals generally can be made up to 12 times a Policy Year provided
there is sufficient remaining Cash Surrender Value. A Withdrawal transaction
charge equal to the lesser of $25 or 2% of the amount requested for Withdrawal
will apply to each Withdrawal after the first in a Policy Year. See
"Withdrawals" and "Withdrawal Transaction Charge" for rules and limits. If a
Withdrawal results in a decrease in Stated Death Benefit during the first 14
Policy Years or first 14 years following an increase in Stated Death Benefit, a
portion of the sales surrender charge may be deducted from Net Accumulation
Value. See "Surrender Charge."
* Payment options are available. See "Payment Options."
* The Policy can be surrendered at any time for its Cash Surrender Value
(Accumulation Value minus Policy Debt, any applicable Surrender Charge and the
next monthly deduction).
* The surrender charge consists of an administrative surrender charge and a
sales surrender charge. The administrative surrender charge is $4.00 per $1,000
of Stated Death Benefit (or increase in Stated Death Benefit) for the first nine
Policy Years (or first nine years following an increase in Stated Death
Benefit), and decreases annually during the following six years to $0. The
sales surrender charge is equal to 46% of actual premiums paid up to one Target
Premium plus 44% of premiums paid between one and two Target Premiums for the
Stated Death Benefit (or increase) during the first nine Policy Years (or the
first nine years following an increase in Stated Death Benefit), and decreases
annually during the following six years to 0%. In any case, the maximum sales
surrender charge for each death benefit segment is equal to 90% of one Target
Premium (46% of one Target Premium plus 44% of premiums paid between one and two
Target Premiums) for the death benefit segment. However, during the first two
Policy Years (or two years following an increase in Stated Death Benefit), the
sales surrender charge is limited to 26% of premiums paid up to one Target
Premium, plus 6% of premiums paid between one and two Target Premiums plus 5% of
premiums in excess of two Target Premiums. The sales surrender charge deducted
on a Surrender of a Policy takes into account any portion of the sales surrender
charge deducted on a prior decrease in Stated Death Benefit.
DEATH BENEFITS
* Death benefit should be excludable from the gross income of the Beneficiary.
See "Tax Treatment of Policy Benefits."
* Available as lump sum or under a variety of payment options. See "Payment
Options."
* Minimum Death Benefit available is $100,000.
* Death Benefit is equal to Base Death Benefit plus any additional insurance
provided by rider. If the Adjustable Term Insurance Rider is in effect, the
Death Benefit is equal to the Target Death Benefit plus any additional life
insurance proceeds provided by any other riders. See "Additional Benefits."
* Base Death Benefit available in two death benefit types: type A (larger of
Stated Death Benefit or a multiple of Accumulation Value); or type B (larger of
Stated Death Benefit plus Accumulation Value or a multiple of Accumulation
Value). See "Death Benefit and Changes in Death Benefit Type."
* Flexibility to change Stated Death Benefit and to change Death Benefit type.
See "Death Benefit and Changes in Death Benefit Type" for rules and limits.
* A surrender charge will apply if Stated Death Benefit is decreased upon a
requested decrease or withdrawal or on surrender of the Policy, if, in any case,
it occurs within 14 Policy Years after the Policy was issued or 14 years after
an increase in Stated Death Benefit. See "Surrender Charge."
* One of two Guaranteed Minimum Death Benefit options to protect the Stated
Death Benefit may be elected at the time of application. One option has a
Guarantee Period of 10 Policy Years or to the date the Insured reaches age 65,
whichever is later; and the second option has a Guarantee Period for the life of
the Insured up to the Maturity Date. See "Guaranteed Minimum Death Benefits,"
page 52.
-10-
<PAGE>
HISTORICAL PERFORMANCE INFORMATION
The following information demonstrates how the historical investment experience
of the Portfolio underlying each Subaccount of the Variable Account would have
affected the Cash Surrender Value, Accumulation Value and Death Benefit of a
hypothetical Policy if issued on the date the Portfolio commenced operations.
The historical illustrations should be distinguished from the hypothetical
illustrations, which follow, which are based on assumed rates of return for the
30 years illustrated, rather than historical returns of the Portfolios. The
"average annual total return" of a Portfolio shown below refers to the income
generated by the Portfolio, net of Portfolio operating expenses, plus capital
gains or losses, realized or unrealized, expressed on an annual basis, and has
been calculated in accordance with SEC standardized rules. "Annual total return"
is the actual year-by-year results of the Portfolio=s performance and is
calculated in the same manner as average annual total return except that it is
limited to the return for the one year period ended on the date shown. Average
annual total return reflects the hypothetical annually compounded return that
would have produced the same cumulative return as the Portfolio achieved if the
Portfolio's performance had been constant over the entire period. The
calculation of average annual total return and annual total return assumes the
investment of all dividends and other distributions in additional shares of the
Portfolio. Because average annual total returns tend to smooth out variations in
the return of a Portfolio, they are not the same as actual year-by-year results.
Average annual total return and annual total return figures are based on
historical earnings and are not intended to indicate future performance.
The following illustrations are based on the payment of a $4,500 annual premium,
paid at the beginning of each year, for a hypothetical Policy with a $250,000
Stated Death Benefit, death benefit type A, issued to a standard, non-tobacco
male, Age 45. In each case, it is assumed that all premiums are and remain
allocated to the Subaccount illustrated for the periods shown and that no Policy
loans or Withdrawals are made during the periods shown. The amounts shown for
the Cash Surrender Value, Accumulation Value and Death Benefit take into account
the charges against premiums and monthly deductions (based on current cost of
insurance charges) for the hypothetical Policy, the daily charge against the
Variable Account for mortality and expense risks, and the Portfolio's charges
and expenses during the years shown. See "POLICY CHARGES AND FEES," page 57.
They are calculated as of the end of each yearly period shown.
Non-Tobacco Male, Age 45 Guideline Premium Test
Preferred Risk Class Death Benefit Option A
Stated Death Benefit $250,000 Annual Premium $4,500
-11-
<PAGE>
- - -------------------------------------------------
Alger American Small Capitalization Portfolio
- - -------------------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 17.94%
5 years ended 6/30/96: 18.31%
Since inception (9/21/88): 22.18%
</TABLE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/89 64.48% $5,266 $3,296 $250,000
12/31/90 8.71% 9,158 6,938 250,000
12/31/91 57.54% 19,509 15,359 250,000
12/31/92 3.55% 23,308 19,158 250,000
12/31/93 13.28% 29,827 25,677 250,000
12/31/94 -4.38% 31,303 27,153 250,000
12/31/95 44.31% 49,617 45,467 250,000
</TABLE>
- - ------------------------------------------
Alger American MidCap Growth Portfolio
- - ------------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 23.13%
Since inception (5/3/93): 27.15%
</TABLE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 -1.54% $2,924 $ 954 $250,000
12/31/95 44.45% 8,964 6,744 250,000
</TABLE>
- - -----------------------------------
Alger American Growth Portfolio
- - -----------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 16.01%
5 years ended 6/30/96: 19.99%
Since inception (9/21/88): 19.83%
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/89 1.30% $3,024 $1,054 $250,000
12/31/90 1.69% 6,270 4,050 250,000
12/31/91 0.52% 9,373 5,223 250,000
12/31/92 0.33% 12,452 8,302 250,000
12/31/93 22.47% 19,060 14,910 250,000
12/31/94 1.45% 22,373 18,223 250,000
12/31/95 36.37% 34,743 30,593 250,000
</TABLE>
- - ---------------------------------------------
Alger American Leveraged AllCap Portfolio
- - ---------------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 33.89%
Since inception (1/25/95): 58.96%
</TABLE>
- - ------------------------------------------
Fidelity - VIP Fund - Growth Portfolio
- - ------------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 21.09%
5 years ended 6/30/96: 19.93%
Since inception (10/9/86): 15.22%
</TABLE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/87 3.66% $3,107 $1,137 $250,000
12/31/88 15.58% 7,284 5,064 250,000
12/31/89 31.51% 13,744 9,594 250,000
12/31/90 -11.73% 14,737 10,587 250,000
12/31/91 45.51% 26,053 21,903 250,000
12/31/92 9.32% 31,752 27,602 250,000
12/31/93 19.37% 41,485 37,335 250,000
12/31/94 -0.02% 44,388 40,238 250,000
12/31/95 35.36% 64,370 60,220 250,000
</TABLE>
-13-
<PAGE>
- - ----------------------------------------
Fidelity - VIP Fund - Overseas
Portfolio
- - ----------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 13.02%
5 years ended 6/30/96: 10.11%
Since inception (1/28/87): 7.72%
</TABLE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/88 8.13% $3,263 $1,293 $250,000
12/31/89 26.28% 8,200 5,980 250,000
12/31/90 -1.67% 11,046 6,896 250,000
12/31/91 8.00% 15,239 11,089 250,000
12/31/92 -10.72% 16,239 12,089 250,000
12/31/93 37.35% 26,614 22,464 250,000
12/31/94 1.72% 30,079 25,929 250,000
12/31/95 9.68% 36,294 32,144 250,000
</TABLE>
- - ----------------------------------------
Fidelity - VIP Fund - Money Market
Portfolio
- - ----------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 5.55%
5 years ended 6/30/96: 4.54%
10 years ended 6/30/96: 5.99%
</TABLE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/85 8.11% $3,263 $1,293 $250,000
12.31/86 6.70% 6,855 4,635 250,000
12/31/87 6.44% 10,573 6,423 250,000
12/31/88 7.39% 14,644 10,494 250,000
12/31/89 9.12% 19,307 15,157 250,000
12/31/90 8.04% 24,124 19,974 250,000
12/31/91 6.09% 28,763 24,613 250,000
</TABLE>
-14-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
12/31/92 3.90% 32,996 28,846 250,000
12/31/93 3.23% 37,272 33,122 250,000
12/31/94 4.25% 42,079 38,622 250,000
12/31/95 5.87% 48,153 45,386 250,000
</TABLE>
- - ----------------------------------------
Fidelity - VIP II Fund - Asset Manager
Portfolio
- - ----------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 16.58%
5 years ended 6/30/96: 11.33%
Since inception (9/6/89): 11.29%
</TABLE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/90 6.72% $3,214 $1,244 $250,000
12/31/91 22.56% 7,884 5,664 250,000
12/31/92 11.71% 12,264 8,114 250,000
12/31/93 21.23% 18,635 14,485 250,000
12/31/94 -6.09% 20,278 16,128 250,000
12/31/95 16.96% 27,286 23,136 250,000
</TABLE>
- - ------------------------------------------------
Fidelity - VIP II Fund - Index 500 Portfolio
- - ------------------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 25.88%
Since inception (8/27/92): 16.19%
</TABLE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/93 9.74% $3,320 $1,350 $250,000
12/31/94 1.04% 6,525 4,305 250,000
12/31/95 37.19% 13,324 9,174 250,000
</TABLE>
-15-
<PAGE>
- - -----------------------------------------------
Fidelity - VIP Fund - High Income Portfolio
- - -----------------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 15.54%
5 years ended 6/30/96: 16.33%
10 years ended 6/30/96: 10.98%
</TABLE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/86 17.68% $3,600 $1,630 $250,000
12/31/87 1.22% 6,819 4,599 250,000
12/31/88 11.64% 11,074 6,924 250,000
12/31/89 -4.17% 13,494 9,344 250,000
12/31/90 -2.23% 16,130 11,980 250,000
12/31/91 35.08% 26,019 21,869 250,000
12/31/92 23.17% 35,797 31,647 250,000
12/31/93 20.40% 46,740 42,590 250,000
12/31/94 -1.64% 48,940 44,790 250,000
12/31/95 20.72% 62,819 59,361 250,000
</TABLE>
- - ---------------------------------------
Fidelity - VIP Fund - Equity-Income
Portfolio
- - ---------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 22.08%
5 years ended 6/30/96: 18.95%
Since inception (10/9/86): 13.27%
</TABLE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/87 -1.13% $2,939 $969 $250,000
12/31/88 22.71% 7,558 5,338 250,000
12/31/89 17.34% 12,527 8,377 250,000
12/31/90 -15.29% 13,099 8,949 250,000
12/31/91 31.44% 21,340 17,190 250,000
</TABLE>
-16-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
12/31/92 16.89% 28,505 24,355 250,000
12/31/93 18.29% 37,284 33,134 250,000
12/31/94 7.07% 43,094 38,944 250,000
12/31/95 35.09% 62,502 58,352 250,000
</TABLE>
- - --------------------------------------------------
Fidelity - VIP II Fund - Investment Grade Bond
Portfolio
- - --------------------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 4.49%
5 years ended 6/30/96: 7.75%
Since inception (12/5/88): 8.09%
</TABLE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- - ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/89 10.26% $3,338 $1,368 $250,000
12/31/90 6.21% 6,901 4,681 250,000
12/31/91 16.38% 11,660 7,510 250,000
12/31/92 6.65% 15,693 11,543 250,000
12/31/93 10.96% 20,799 16,649 250,000
12/31/94 -3.76% 22,865 18,715 250,000
12/31/95 17.32% 30,391 26,241 250,000
</TABLE>
- - -------------------------------------------------
Fidelity - VIP II Fund - Contrafund Portfolio
- - -------------------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 21.03%
Since inception (1/3/95): 31.88%
</TABLE>
- - ------------------------------------------
INVESCO Utilities Portfolio
- - ------------------------------------------
<TABLE>
<S> <C>
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 16.58%
Since inception (1/1/95): 11.75%
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
---------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/95 9.08% $3,297 $1,327 $250,000
</TABLE>
- - -------------------------------------------
INVESCO Industrial Income Portfolio
- - -------------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 26.54%
Since inception (8/10/94): 21.66%
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
---------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/95 29.25% $4,009 $2,039 $250,000
</TABLE>
- - ------------------------------
Janus Growth Portfolio
- - ------------------------------
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 26.61%
Since inception (9/13/93): 16.56%
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
---------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 2.76% $3,075 $1,105 $250,000
12/31/95 30.17% 8,223 6,003 250,000
</TABLE>
- - -----------------------------------------
Janus Aggressive Growth Portfolio
- - -----------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 33.84%
Since inception (9/13/93): 27.22%
-18-
<PAGE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
---------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 16.33% $3,552 $1,582 $250,000
12/31/95 27.48% 8,648 6,428 250,000
</TABLE>
- - -----------------------------------------
Janus Worldwide Growth Portfolio
- - -----------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 40.54%
Since inception (9/13/93): 24.73%
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
---------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 1.53% $3,032 $1,062 $250,000
12/31/95 27.37% 7,981 5,761 250,000
</TABLE>
- - --------------------------------------------
Janus International Growth Portfolio
- - --------------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 41.02%
Since inception (5/2/94): 18.85%
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
---------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/95 23.15% $3,793 $1,823 $250,000
</TABLE>
- - --------------------------------
Janus Balanced Portfolio
- - --------------------------------
Portfolio Average Annual Total Return for:
1 year ended 6/30/96: 10.84%
Since inception (9/13/93): 13.87%
-19-
<PAGE>
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
---------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 0.84% $3,008 $1,038 $250,000
12/31/95 24.79% 7,780 5,560 250,000
</TABLE>
- - ----------------------------------------
Janus Short-Term Bond Portfolio
- - ----------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/95: 4.28%
Since inception (9/13/93): 3.88%
<TABLE>
<CAPTION>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
---------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 0.92% $3,010 $1,040 $250,000
12/31/95 9.54% 6,775 4,555 250,000
</TABLE>
-20-
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
The following illustrations have been prepared to show how certain values under
a hypothetical Policy would change with varying levels of investment performance
over an extended period of time. In particular, the illustrations show how
Policy Values, Cash Surrender Values and Death Benefits under a Policy covering
an Insured of the male sex, non-tobacco and Age 45 on the Policy Date, would
vary over time if planned premiums were paid annually and the return on the
assets in the Funds were a uniform gross annual rate (before any expenses) of
0%, 6% or 12%. The illustrations also show values if planned premiums were
instead accumulated at 5% interest. The hypothetical investment rates of return
are for purposes of illustration only and should not be deemed a representation
of past or future investment rates of return. Actual rates of return for a
particular Policy may be more or less than the hypothetical investment rates of
return and will depend on a number of factors including the investment
allocations made by an Owner, prevailing rates and rates of inflation. Also,
values would be different from those shown if the gross annual investment
returns averaged 0%, 6%, and 12% over a period of years but fluctuated above and
below those averages for individual Policy Years.
The illustrations assume that the assets in the Funds are subject to an annual
expense ratio of 0.9033% of the average daily net assets. This annual expense
ratio is based on the average of the expense ratios of each of the Portfolios
available under the Policies for the last fiscal year and take into account
current expense reimbursement arrangements. For information on Portfolio
expenses, see the prospectuses for the Portfolios accompanying this prospectus.
The illustrations also reflect the deduction of sales load, premium tax and DAC
tax charges from premiums and the monthly administrative and cost of insurance
charges from Accumulation Value for the hypothetical Insured. Our current cost
of insurance charges and the higher guaranteed maximum cost of insurance charges
we have the contractual right to charge are reflected in separate illustrations
on each of the following pages. All the illustrations reflect the fact that no
other charges for federal or state income taxes are currently made against the
Variable Account and assume no Policy Debt or charges for supplemental benefits.
In particular, the illustrations assume that no Adjustable Term Insurance Rider
is in effect.
In addition, the illustrations reflect the daily charge to the Variable Account
for Southland's assumption of mortality and expense risks, which is equivalent
to an effective annual charge of 0.90%. The illustrations which assume current
charges also reflect monthly application of the persistency refund that is equal
to 0.35% (on an annualized basis) of the Variable Accumulation Value for
Policies held for more than 10 years. After deduction of Portfolio expenses and
the mortality and expense risk charge, the illustrated gross annual investment
rates of return of 0%, 6% and 12% would correspond to approximate net annual
rates for the Variable Account of -1.79%, 4.16% and 10.10%, respectively for
years one through ten and thereafter, -1.44%, 4.51%, and 10.45%, respectively.
The illustrations which assume guaranteed charges do not reflect the application
of the persistency refund. Net annual rates of return for the Variable Account
are not
-21-
<PAGE>
equal to net annual rates of return for the Policy because the Variable Account
rates do not reflect all charges to the Policy.
The illustrations are based on our sex distinct rates for non-tobacco users.
Upon request, we will furnish a comparable illustration based upon the proposed
Insured's individual circumstances. Such illustrations may assume different
hypothetical rates of return than those illustrated in the following
illustrations.
-22-
<PAGE>
FUTURE DIMENSIONS VUL
Male Age 45, Preferred Non-Tobacco, Band 2
Assuming Current Charges
<TABLE>
<CAPTION>
--- End of Policy Year ---
- - ---------------------------------------------------------------------------------------------------------------------
Accumulation Cash
Duration Attained Age Premium Paid Value Surrender Value Death Benefit
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 45 $4,500 $2,947 $977 $250,000
2 46 4,500 6,023 3,803 250,000
3 47 4,500 8,991 4,841 250,000
4 48 4,500 11,917 7,767 250,000
5 49 4,500 14,801 10,651 250,000
6 50 4,500 17,645 13,495 250,000
7 51 4,500 20,449 16,299 250,000
8 52 4,500 23,253 19,103 250,000
9 53 4,500 26,155 22,005 250,000
10 54 4,500 29,016 25,558 250,000
11 55 4,500 32,144 29,378 250,000
12 56 4,500 35,143 33,068 250,000
13 57 4,500 37,995 36,612 250,000
14 58 4,500 40,701 40,010 250,000
15 59 4,500 43,257 43,665 250,000
16 60 4,500 45,652 46,103 250,000
17 61 4,500 47,869 48,370 250,000
18 62 4,500 49,895 50,452 250,000
19 63 4,500 51,710 52,330 250,000
20 64 4,500 53,293 53,984 250,000
21 65 4,500 54,670 55,391 250,000
22 66 4,500 55,884 56,577 250,000
23 67 4,500 56,826 57,521 250,000
24 68 4,500 57,502 58,200 250,000
25 69 4,500 57,887 58,590 250,000
26 70 4,500 57,953 58,661 250,000
27 71 4,500 57,673 58,388 250,000
28 72 4,500 57,015 57,738 250,000
29 73 4,500 55,940 56,674 250,000
30 74 4,500 54,397 55,142 250,000
Age 65 4,500 53,293 53,984 250,000
</TABLE>
Gross Investment Rate: 0.00%
Average Fund Level Expense: 0.9033%
Net Rate of Return Years 1 - 10: -1.79%
Net Rate of Return Years 11+: -1.44%
The hypothetical investment rates of return shown above are illustrative only
and should not be deemed a representation of past or future investment rates of
return. Actual rates of return may be more or less than those shown and will
depend on a number of factors, including the investment allocations made by an
Owner and the investment experience of the Portfolios. The Death Benefit,
investment value and Cash Surrender Value for a Policy would be different from
those shown if the actual gross annual rates of return averaged 0%, 6% or 12%
over a period of years, but also fluctuated above or below those averages for
individual Policy Years. They would also be different if any Policy loans or
Withdrawals were made. No representations can be made by Southland Life
Insurance Company or the Variable Account or the Portfolios that these
hypothetical rates of return can be achieved for any one year or sustained over
a period of time.
-23-
<PAGE>
FUTURE DIMENSIONS VUL
Male Age 45, Preferred Non-Tobacco, Band 2
Assuming Current Charges
<TABLE>
<CAPTION>
--- End of Policy Year ---
- - ---------------------------------------------------------------------------------------------------------------------
Accumulation Cash
Duration Attained Age Premium Paid Value Surrender Value Death Benefit
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 45 $4,500 $3,157 $1,187 $250,000
2 46 4,500 6,635 4,415 250,000
3 47 4,500 10,204 6,054 250,000
4 48 4,500 13,935 9,785 250,000
5 49 4,500 17,837 13,687 250,000
6 50 4,500 21,917 17,767 250,000
7 51 4,500 26,182 22,032 250,000
8 52 4,500 30,684 26,534 250,000
9 53 4,500 35,537 31,387 250,000
10 54 4,500 40,612 37,153 250,000
11 55 4,500 46,262 43,495 250,000
12 56 4,500 52,094 50,019 250,000
13 57 4,500 58,102 56,719 250,000
14 58 4,500 64,299 63,607 250,000
15 59 4,500 70,693 71,267 250,000
16 60 4,500 77,288 77,931 250,000
17 61 4,500 84,085 84,807 250,000
18 62 4,500 91,090 91,900 250,000
19 63 4,500 98,308 99,214 250,000
20 64 4,500 105,744 106,757 250,000
21 65 4,500 113,466 114,538 250,000
22 66 4,500 121,468 122,604 250,000
23 67 4,500 129,770 130,975 250,000
24 68 4,500 138,395 139,676 250,000
25 69 4,500 147,372 148,734 250,000
26 70 4,500 156,734 158,186 250,000
27 71 4,500 166,527 168,078 250,000
28 72 4,500 176,803 178,463 250,000
29 73 4,500 187,626 189,406 250,000
30 74 4,500 199,069 200,981 250,000
Age 65 4,500 105,744 106,757 250,000
</TABLE>
Gross Investment Rate: 6.00%
Average Fund Level Expense: 0.9033%
Net Rate of Return Years 1 - 10: 4.16%
Net Rate of Return Years 11+: 4.51%
The hypothetical investment rates of return shown above are illustrative only
and should not be deemed a representation of past or future investment rates of
return. Actual rates of return may be more or less than those shown and will
depend on a number of factors, including the investment allocations made by an
Owner and the investment experience of the Portfolios. The Death Benefit,
investment value and Cash Surrender Value for a Policy would be different from
those shown if the actual gross annual rates of return averaged 0%, 6% or 12%
over a period of years, but also fluctuated above or below those averages for
individual Policy Years. They would also be different if any Policy loans or
Withdrawals were made. No representations can be made by Southland Life
Insurance Company or the Variable Account or the Portfolios that these
hypothetical rates of return can be achieved for any one year or sustained over
a period of time.
-24-
<PAGE>
FUTURE DIMENSIONS VUL
Male Age 45, Preferred Non-Tobacco, Band 2
Assuming Current Charges
<TABLE>
<CAPTION>
--- End of Policy Year ---
- - ---------------------------------------------------------------------------------------------------------------------
Accumulation Cash
Duration Attained Age Premium Paid Value Surrender Value Death Benefit
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 45 $4,500 $3,368 $1,398 $250,000
2 46 4,500 7,272 5,052 250,000
3 47 4,500 11,519 7,369 250,000
4 48 4,500 16,213 12,063 250,000
5 49 4,500 21,400 17,250 250,000
6 50 4,500 27,134 22,984 250,000
7 51 4,500 33,471 29,321 250,000
8 52 4,500 40,520 36,370 250,000
9 53 4,500 48,466 44,316 250,000
10 54 4,500 57,248 53,789 250,000
11 55 4,500 67,346 64,579 250,000
12 56 4,500 78,451 76,376 250,000
13 57 4,500 90,664 89,281 250,000
14 58 4,500 104,118 103,427 250,000
15 59 4,500 118,959 119,787 250,000
16 60 4,500 135,347 136,296 250,000
17 61 4,500 153,466 154,550 250,000
18 62 4,500 173,531 174,764 250,000
19 63 4,500 195,791 197,187 250,000
20 64 4,500 220,475 222,037 268,980
21 65 4,500 247,695 249,418 297,235
22 66 4,500 277,667 279,567 330,424
23 67 4,500 310,665 312,760 366,585
24 68 4,500 346,990 349,301 405,979
25 69 4,500 386,975 389,523 448,892
26 70 4,500 430,987 433,796 495,636
27 71 4,500 479,525 482,622 541,864
28 72 4,500 533,091 536,507 591,732
29 73 4,500 592,253 596,023 645,556
30 74 4,500 657,656 661,821 703,693
Age 65 4,500 220,475 222,037 268,980
</TABLE>
Gross Investment Rate: 12.00%
Average Fund Level Expense: 0.9033%
Net Rate of Return Years 1 - 10: 10.10%
Net Rate of Return Years 11+: 10.45%
The hypothetical investment rates of return shown above are illustrative only
and should not be deemed a representation of past or future investment rates of
return. Actual rates of return may be more or less than those shown and will
depend on a number of factors, including the investment allocations made by an
Owner and the investment experience of the Portfolios. The Death Benefit,
investment value and Cash Surrender Value for a Policy would be different from
those shown if the actual gross annual rates of return averaged 0%, 6% or 12%
over a period of years, but also fluctuated above or below those averages for
individual Policy Years. They would also be different if any Policy loans or
Withdrawals were made. No representations can be made by Southland Life
Insurance Company or the Variable Account or the Portfolios that these
hypothetical rates of return can be achieved for any one year or sustained over
a period of time.
-25-
<PAGE>
FUTURE DIMENSIONS VUL
Male Age 45, Preferred Non-Tobacco, Band 2
Assuming Guaranteed Charges
<TABLE>
<CAPTION>
--- End of Policy Year ---
- - --------------------------------------------------------------------------------------------------------------------
Accumulation Cash
Duration Attained Age Premium Paid Value Surrender Value Death Benefit
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 45 $4,500 $2,898 $928 $250,000
2 46 4,500 5,926 3,706 250,000
3 47 4,500 8,841 4,691 250,000
4 48 4,500 11,642 7,492 250,000
5 49 4,500 14,322 10,172 250,000
6 50 4,500 16,880 12,730 250,000
7 51 4,500 19,305 15,155 250,000
8 52 4,500 21,583 17,432 250,000
9 53 4,500 23,705 19,555 250,000
10 54 4,500 25,655 22,197 250,000
11 55 4,500 27,522 24,756 250,000
12 56 4,500 29,199 27,124 250,000
13 57 4,500 30,677 29,293 250,000
14 58 4,500 31,945 31,253 250,000
15 59 4,500 32,980 34,358 250,000
16 60 4,500 33,760 34,233 250,000
17 61 4,500 34,256 35,826 250,000
18 62 4,500 34,433 36,099 250,000
19 63 4,500 34,245 36,010 250,000
20 64 4,500 33,640 35,510 250,000
21 65 4,500 32,571 34,558 250,000
22 66 4,500 30,994 33,098 250,000
23 67 4,500 28,852 31,091 250,000
24 68 4,500 26,087 28,478 250,000
25 69 4,500 22,618 25,180 250,000
26 70 4,500 18,322 21,081 250,000
27 71 4,500 12,901 15,891 250,000
28 72 4,500 6,432 9,692 250,000
29 73 4,500 LAPSE 2,093 LAPSE
30 74 LAPSE LAPSE LAPSE LAPSE
Age 65 4,500 33,640 35,510 250,000
</TABLE>
Gross Investment Rate: 0.00%
Average Fund Level Expense: 0.9033%
Net Rate of Return Years 1 - 10: -1.79%
Net Rate of Return Years 11+: -1.44%
The expense charges and cost of insurance rates will never be greater than those
used to calculate the above values. The hypothetical investment rates of return
shown above are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations made by an Owner and the investment experience of the
Portfolios. The Death Benefit, investment value and Cash Surrender Value for a
Policy would be different from those shown if the actual gross annual rates of
return averaged 0%, 6% or 12% over a period of years, but also fluctuated above
or below those averages for individual Policy Years. They would also be
different if any Policy loans or Withdrawals were made. No representations can
be made by Southland Life Insurance Company or the Variable Account or the
Portfolios that these hypothetical rates of return can be achieved for any one
year or sustained over a period of time.
-26-
<PAGE>
FUTURE DIMENSIONS VUL
Male Age 45, Preferred Non-Tobacco, Band 2
Assuming Guaranteed Charges
<TABLE>
<CAPTION>
--- End of Policy Year ---
- - ---------------------------------------------------------------------------------------------------------------------
Accumulation Cash
Duration Attained Age Premium Paid Value Surrender Value Death Benefit
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 45 $4,500 $3,107 $1,137 $250,000
2 46 4,500 6,531 4,311 250,000
3 47 4,500 10,040 5,890 250,000
4 48 4,500 13,633 9,483 250,000
5 49 4,500 17,308 13,158 250,000
6 50 4,500 21,065 16,915 250,000
7 51 4,500 24,897 20,747 250,000
8 52 4,500 28,792 24,642 250,000
9 53 4,500 32,746 28,596 250,000
10 54 4,500 36,746 33,288 250,000
11 55 4,500 40,923 38,157 250,000
12 56 4,500 45,152 43,077 250,000
13 57 4,500 49,430 48,046 250,000
14 58 4,500 53,754 53,062 250,000
15 59 4,500 58,110 59,849 250,000
16 60 4,500 62,487 64,347 250,000
17 61 4,500 66,871 68,847 250,000
18 62 4,500 71,241 73,327 250,000
19 63 4,500 75,569 77,762 250,000
20 64 4,500 79,830 82,125 250,000
21 65 4,500 84,001 86,395 250,000
22 66 4,500 88,065 90,556 250,000
23 67 4,500 92,002 94,591 250,000
24 68 4,500 95,793 98,480 250,000
25 69 4,500 99,408 102,197 250,000
26 70 4,500 102,797 105,694 250,000
27 71 4,500 105,803 108,819 250,000
28 72 4,500 108,515 111,662 250,000
29 73 4,500 110,740 114,039 250,000
30 74 4,500 112,360 115,839 250,000
Age 65 4,500 79,830 82,125 250,000
</TABLE>
Gross Investment Rate: 6.00%
Average Fund Level Expense: 0.9033%
Net Rate of Return Years 1 - 10: 4.16%
Net Rate of Return Years 11+: 4.51%
The expense charges and cost of insurance rates will never be greater than those
used to calculate the above values. The hypothetical investment rates of return
shown above are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations made by an Owner and the investment experience of the
Portfolios. The Death Benefit, investment value and Cash Surrender Value for a
Policy would be different from those shown if the actual gross annual rates of
return averaged 0%, 6% or 12% over a period of years, but also fluctuated above
or below those averages for individual Policy Years. They would also be
different if any Policy loans or Withdrawals were made. No representations can
be made by Southland Life Insurance Company or the Variable Account or the
Portfolios that these hypothetical rates of return can be achieved for any one
year or sustained over a period of time.
-27-
<PAGE>
FUTURE DIMENSIONS VUL
Male Age 45, Preferred Non-Tobacco, Band 2
Assuming Guaranteed Charges
<TABLE>
<CAPTION>
--- End of Policy Year ---
- - --------------------------------------------------------------------------------------------------------------------
Duration Attained Age Premium Paid Accumulation Cash Death Benefit
Value Surrender Value
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 45 $4,500 $3,316 1,346 $250,000
2 46 4,500 7,163 4,943 250,000
3 47 4,500 11,340 7,190 250,000
4 48 4,500 15,881 11,731 250,000
5 49 4,500 20,816 16,666 250,000
6 50 4,500 26,186 22,036 250,000
7 51 4,500 32,025 27,875 250,000
8 52 4,500 38,374 34,224 250,000
9 53 4,500 45,280 41,130 250,000
10 54 4,500 52,793 49,335 250,000
11 55 4,500 61,172 58,406 250,000
12 56 4,500 70,343 68,268 250,000
13 57 4,500 80,401 79,017 250,000
14 58 4,500 91,454 90,763 250,000
15 59 4,500 103,622 105,826 250,000
16 60 4,500 117,044 119,377 250,000
17 61 4,500 131,885 134,319 250,000
18 62 4,500 148,335 150,833 250,000
19 63 4,500 166,622 169,138 250,000
20 64 4,500 187,023 189,499 250,000
21 65 4,500 209,875 212,235 250,000
22 66 4,500 235,197 237,285 279,885
23 67 4,500 262,983 264,685 310,320
24 68 4,500 293,470 294,652 343,360
25 69 4,500 326,918 327,425 379,225
26 70 4,500 363,607 363,257 418,149
27 71 4,500 403,969 402,553 456,486
28 72 4,500 448,489 445,763 497,823
29 73 4,500 497,629 493,314 542,416
30 74 4,500 551,979 545,751 590,618
Age 65 4,500 187,023 189,499 250,000
</TABLE>
Gross Investment Rate: 12.00%
Average Fund Level Expense: 0.9033%
Net Rate of Return Years 1 - 10: 10.10%
Net Rate of Return Years 11+: 10.45%
The expense charges and cost of insurance rates will never be greater than those
used to calculate the above values. The hypothetical investment rates of return
shown above are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors, including the
investment allocations made by an Owner and the investment experience of the
Portfolios. The Death Benefit, investment value and Cash Surrender Value for a
Policy would be different from those shown if the actual gross annual rates of
return averaged 0%, 6% or 12% over a period of years, but also fluctuated above
or below those averages for individual Policy Years. They would also be
different if any Policy loans or Withdrawals were made. No representations can
be made by Southland Life Insurance Company or the Variable Account or the
Portfolios that these hypothetical rates of return can be achieved for any one
year or sustained over a period of time.
-28-
<PAGE>
FACTS ABOUT SOUTHLAND AND THE VARIABLE ACCOUNT
Southland Life Insurance Company is a stock life insurance company organized
under the laws of the State of Texas in 1908. Our headquarters are located at
5780 Powers Ferry Road, N. W., Atlanta, Georgia 30327-4390. We are admitted to
do business in the District of Columbia and all states except New York and
Vermont. Southland intends to sell the Policy in all states except Alabama, New
York and Vermont. Our total assets exceeded $1.8 billion, and our shareholder's
equity exceeded $364 million on a generally accepted accounting principles basis
as of June 30, 1996. (See Financial Statements.) We offer a complete line of
life insurance and retirement products, including annuities, individual and
group life, and pension products.
Southland may from time to time publish in advertisements, sales literature, and
reports to Owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's, Moody's, and Duff & Phelps. The purpose of the ratings is to reflect the
financial strength and/or claims-paying ability of Southland and should not be
considered as bearing on the investment performance of assets held in the
Variable Account. Each year the A.M. Best Company reviews the financial status
of thousands of insurers, culminating in the assignment of Best's Ratings. These
ratings reflect their current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of the
life/health insurance industry. In addition, the claims-paying ability of
Southland as measured by Standard & Poor's Insurance Ratings Services, Moody's,
or Duff & Phelps may be referred to in advertisements or sales literature or in
reports to Owners. These ratings are opinions of an operating insurance
company's financial capacity to meet the obligations of its insurance and
annuity policies in accordance with their terms, including its obligations under
the Guaranteed Interest Account provisions of this Contract. Such ratings do not
reflect the investment in the Variable Account.
Southland is a wholly-owned indirect subsidiary of Internationale Nederlanden
Group, N.V. ("ING"), one of the world's five largest diversified financial
services organizations. ING is headquartered in The Hague, Netherlands and has
consolidated assets exceeding $247.2 billion as of December 31, 1995.
THE VARIABLE ACCOUNT
All obligations under the Policy are general obligations of Southland. The
Variable Account is a separate investment account used to support our variable
life policies and for other purposes as permitted by applicable laws and
regulations. The assets of the Variable Account are our property, but are kept
separate from our General Account and our other variable accounts. We may offer
other variable life insurance policies supported by the Variable Account that
are not discussed in this prospectus. The Variable Account may also invest in
other portfolios that are not available to the Policy described in this
Prospectus.
-29-
<PAGE>
Income, gains and losses, realized or unrealized, from assets in the Variable
Account are credited to or charged against the Variable Account without regard
to other income, gains or losses of the Company. That portion of the assets of
the Variable Account which is equal to the reserves and other Policy liabilities
with respect to the Variable Account is not chargeable with liabilities arising
out of any other business Southland may conduct. It may, however, be subject to
liabilities arising from Subaccounts whose assets are attributable to other
variable life insurance policies offered by the Variable Account. If the assets
exceed the required reserves and other Policy liabilities, we may transfer the
excess to our General Account. The assets in the Variable Account will at all
times, equal or exceed the sum of the Subaccount Accumulation Values of all
Policies supported by the Variable Account.
The Variable Account was established on February 25, 1994, and may invest in
mutual funds or other investment portfolios which we determine to be suitable
for the Policy's purposes. The Variable Account meets the definition of a
separate account under federal securities laws. It is registered with the SEC
under the Investment Company Act of 1940 (the "1940 Act") as a unit investment
trust. Such registration does not involve any supervision by the SEC of the
management of the Variable Account or Southland. It is governed by the laws of
Texas, our state of domicile, and may also be governed by laws of other states
in which we do business. We have established other separate accounts, of which
Southland Separate Account A1 is registered with the SEC under the 1940 Act.
The Variable Account has twenty-one (21) Subaccounts, each of which invests in
shares of a corresponding Portfolio. Therefore, the investment experience of
your Policy depends on the experience of the Subaccounts you select. These
Portfolios are available only to serve as the underlying investment for variable
life insurance policies and variable annuity contracts issued through separate
accounts of Southland as well as other life insurance companies, and in some
cases, directly to certain qualified plans. They are not available directly to
investors.
THE PORTFOLIOS
Each Subaccount invests in a corresponding Portfolio. See the Prospectus for
each of the Portfolios being considered for details.
Shares of these Portfolios are sold to separate accounts of insurance companies,
which may or may not be affiliated with Southland or each other, a practice
known as "shared funding." They are also sold to separate accounts to serve as
the underlying investment for both variable life insurance policies and variable
annuity contracts, a practice known as "mixed funding." Shares also may be sold
directly to qualified pension and retirement plans. There is a possibility that
a material conflict may arise between the interests of Owners of our Policies,
whose Accumulation Values are allocated to a Subaccount investing in a
Portfolio, and of owners of other policies whose accumulation values are also
allocated to a separate account investing in that Portfolio, between the
interests of policyowners generally, or between certain classes of policyowners,
and retirement plans or participants in such retirement plans. In the event of
any such material
-30-
<PAGE>
conflict, Southland will consider what action may be appropriate, including
removing the Portfolio from the Variable Account or replacing the Portfolio with
another portfolio. There are certain risks associated with mixed and shared
funding and with the sale of shares to qualified pension and retirement plans,
as disclosed in the prospectuses for those Portfolios who sell to such plans.
Each of the Portfolios is a separate series of an open-end diversified
management investment company (mutual fund) which receives investment advice
from one or more registered investment advisers. The Portfolios as well as their
investment objectives are described below. There is no guarantee that any
Portfolio will meet its investment objectives. Meeting objectives depends on
various factors, including, in certain cases, how well the portfolio manager
anticipates changing economic and market conditions.
Southland may receive compensation from an affiliate(s) of certain of the
Portfolios based upon an annual percentage of the average assets held in that
Portfolio by Southland. These amounts are intended to compensate Southland for
administrative and other services provided by Southland to the Portfolios and/or
the affiliate(s).
Please refer to the prospectus for each of the Portfolios you are considering
for more information. A description of the objectives and investments of each
Portfolio follows:
The Alger American Fund
Alger American Small Capitalization Portfolio--seeks long-term capital
appreciation by investing at least 65% of its total assets in equity securities
of companies that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the Russell 2000 Growth
Index, updated quarterly.
Alger American Growth Portfolio--seeks long-term capital appreciation by
investing in a diversified, actively managed portfolio of equity securities,
primarily of companies with total market capitalization of $1 billion or
greater.
Alger American MidCap Growth Portfolio--seeks long-term capital appreciation by
investing at least 65% of its total assets in equity securities of companies
that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the S&P MidCap 400
Index, updated quarterly.
Alger American Leveraged AllCap Portfolio--seeks long-term capital appreciation
by investing in a diversified, actively managed portfolio of equity securities.
The Portfolio may engage in leveraging (up to 33-1/3% of its assets) and options
and futures transactions, which are deemed to be speculative and which may cause
the Portfolio's net asset value to be more volatile than the net asset value of
a fund that does not engage in these activities.
-31-
<PAGE>
Variable Insurance Products Fund ("VIP") &
Variable Insurance Products Fund II ("VIP II")
VIP Money Market Portfolio--seeks as high a level of current income as is
consistent with preserving capital and providing liquidity. The Portfolio will
invest only in high quality U.S. dollar-denominated money market securities of
domestic and foreign issuers.
VIP High Income Portfolio--seeks high income by investing primarily in
high-yielding, lower-rated, fixed-income securities. Growth of capital is also
considered in security selection.
VIP Equity-Income Portfolio--seeks reasonable income by investing primarily in
income-producing equity securities. In selecting investments, the Portfolio also
considers potential for capital appreciation.
VIP Growth Portfolio--seeks capital appreciation by investing primarily in
common stocks, although the Portfolio is not limited to any one type of
security.
VIP Overseas Portfolio--seeks long-term growth of capital primarily through
investments in foreign securities. It provides a means for investors to
diversify their own portfolios by participating in companies and economies
outside of the United States.
VIP II Investment Grade Bond Portfolio--seeks to obtain as high a level of
current income as is consistent with the preservation of capital by investing
primarily in a broad range of investment-grade fixed income securities.
VIP II Asset Manager Portfolio--seeks high total return with reduced risk over
the long term by allocating its assets among domestic and foreign stocks, bonds,
and short-term fixed-income instruments.
VIP II Index 500 Portfolio--seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's Composite Index of 500 Stocks while keeping transaction costs
and other expenses low. The Portfolio is designed as a long-term investment
option.
VIP II Contrafund Portfolio--seeks capital appreciation by investing mainly in
equity securities of companies that are considered undervalued or out-of-favor
by the Portfolio's manager.
-32-
<PAGE>
INVESCO Variable Investment Funds, Inc.
Industrial Income Portfolio--seeks the best possible current income while
following sound investment practices. Capital growth potential is an additional,
but secondary, consideration in the selection of portfolio securities. The
Portfolio seeks to achieve its investment objective by investing in securities
which will provide a relatively high yield and stable return and which, over a
period of years, also may provide capital appreciation.
Utilities Portfolio--seeks capital appreciation and income through investments
primarily in equity securities of corporations principally engaged in the public
utilities business.
Janus Aspen Series
Growth Portfolio--is a diversified fund that seeks long-term growth of capital
by investing primarily in common stocks, with an emphasis on companies with
larger market capitalizations.
Aggressive Growth Portfolio--is a non-diversified Portfolio that seeks long-term
growth of capital by investing primarily in common stocks, with an emphasis on
securities issued by medium-sized companies.
Worldwide Growth Portfolio--a diversified Portfolio that seeks long-term growth
of capital by investing primarily in common stocks of foreign and domestic
issuers.
International Growth Portfolio--a diversified Portfolio that seeks long-term
growth of capital by investing primarily in common stocks of foreign issuers.
Balanced Portfolio--is a diversified Portfolio that seeks a long-term growth of
capital balanced by current income. The Portfolio normally invests 40-60% of its
assets in securities selected primarily for their growth potential and 40-60% of
its assets in securities selected primarily for their income potential.
Short-Term Bond Portfolio--a diversified Portfolio that seeks a high level of
current income while minimizing interest rate risk while investing in shorter
term fixed-income securities. Its average weighted maturity is normally less
than three years.
CHANGES RELATING TO THE VARIABLE ACCOUNT
We may, from time to time, make the following changes, subject to obtaining any
required approvals from the SEC and any insurance regulatory authorities:
(1) create new separate accounts for the Policy;
(2) combine separate accounts, including the Variable Account;
-33-
<PAGE>
(3) add new Subaccounts to or remove existing Subaccounts from the Variable
Account or combine Subaccounts;
(4) make new Subaccounts or other Subaccounts available to such classes of
policies or contracts as we may determine;
(5) add new Portfolios or remove existing Portfolios;
(6) if shares of a Portfolio are no longer available for investment or if
we determine that investment in a Portfolio is no longer appropriate in
light of the purposes of the Variable Account, substitute a different
Portfolio for any existing Portfolio;
(7) deregister the Variable Account under the 1940 Act if such registration
is no longer required;
(8) operate the Variable Account as a management investment company under
the 1940 Act or as any other form permitted by law; and
(9) make any changes to the Variable Account or its operations as may be
required by the 1940 Act or other applicable law or regulations.
Owners will be notified of any changes.
FACTS ABOUT THE POLICY
PREMIUMS AND ALLOCATIONS
Applying for a Policy
If you want to purchase a Policy, you must complete an application and submit it
to one of our authorized agents. You also must pay an initial premium at least
equal to the minimum required. See "Premiums," below. Your initial premium can
be submitted with the application or at a later date, but Policy coverage will
not become effective until the Policy is delivered to you and the initial
premium in good order is received at our Customer Service Center while the
Insured is alive and prior to any change in health as shown in the application.
We require satisfactory evidence of the Insured's insurability, which may
include a medical examination of the Insured. Generally, we will issue a Policy
covering an Insured up to Age 75 if evidence of insurability satisfies our
underwriting rules. We may, in our sole discretion, issue a Policy covering an
Insured over Age 75. Acceptance of an application depends on our underwriting
rules, and we reserve the right to reject an application for any reason.
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When you complete an application, you select a premium payment plan (see
"Planned Premiums," below), designate Net Premium allocation percentages (see
"Net Premium Allocations," below), and select the initial Stated Death Benefit
(subject to a minimum of $100,000) and Death Benefit type (see "DEATH BENEFIT
AND CHANGES IN DEATH BENEFIT TYPE," page 49). You also may apply for
supplemental benefits (see "ADDITIONAL BENEFITS," page 68), dollar cost
averaging (see "DOLLAR COST AVERAGING FACILITY," page 43), and telephone
transfer privileges (see "TELEPHONE PRIVILEGES," page 49).
Free Look Period
You may cancel your Policy during your "free-look" period. This period expires
20 days after you receive your Policy, 45 days after your application is signed,
or 10 days after we mail or deliver a notice of withdrawal right, whichever is
latest. The Policy will be deemed to be received by you 15 days after it is
mailed from the Customer Service Center. If you decide to cancel the Policy, you
must return it by mail or other delivery to our Customer Service Center or to
our authorized agent who sold it. Immediately after mailing or delivering it to
our Customer Service Center or authorized agent, the Policy will be deemed void
from the beginning. The amount of the refund will equal the premiums paid. This
refund will be paid within seven days after our Customer Service Center receives
your cancellation request and Policy.
You also may cancel an increase in Stated Death Benefit during your "free-look"
period for the increase. The period will expire 20 days after you receive a new
schedule for your Policy reflecting the increase, 45 days after your application
for the increase is signed, or 10 days after we mail or deliver a notice of
withdrawal right for the increase, whichever is latest. If you cancel an
increase, we will refund to your Accumulation Value any charges deducted that
are attributable to the increase (e.g., sales load and cost of insurance
----
charges) and adjust the Stated Death Benefit.
Premiums
The minimum initial premium required depends on a number of factors, such as the
Age, sex and risk class of the proposed Insured, the desired Stated Death
Benefit, any supplemental benefits and the planned premiums you propose to make.
In any event, the initial premium must be at least equal to two No-Lapse
Premiums. See "Planned Premiums" and "Premiums to Prevent Lapse," below.
Additional premiums may be paid in any amount and at any time, subject to the
following limits. First, a premium must be at least $100 and must be sent to our
Customer Service Center. We may require satisfactory evidence of insurability
before accepting any premium which would result in an increase in the difference
between the Accumulation Value and the Death Benefit.
Second, we reserve the right to limit total premiums paid in a Policy Year to
the planned premiums selected (see "Planned Premiums," below). In addition,
total premiums paid in a
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Policy Year may not exceed guideline premium limitations for life insurance set
forth in Section 7702 of the Code or any successor provision thereto. We will
refund any portion of any premium that is determined to be in excess of the
premium limit established by law to qualify a Policy as life insurance. (The
amount refunded will be the excess premium plus any gain attributable to the
excess premium.) In addition, we will monitor Policies and will attempt to
notify the Owner on a timely basis if his or her Policy is in jeopardy of
becoming a modified endowment contract under the Code. See "FEDERAL TAX
CONSIDERATIONS," page 71.
Lastly, no premium will be accepted after the Maturity Date.
If you have a Policy loan outstanding, any payment submitted other than a
planned premium will be treated as a loan repayment unless you indicate
otherwise when submitting the payment. (See "POLICY LOANS," page 47). If no
Policy loan is outstanding, any payment submitted by you is treated as a premium
payment.
When applying for a Policy, you may elect to purchase one of two Guaranteed
Minimum Death Benefit options. The Guaranteed Minimum Death Benefit options
provide a guarantee that the Stated Death Benefit will remain in force for the
selected Guarantee Period regardless of the amount of the Policy's Cash
Surrender Value. This protects the Stated Death Benefit from adverse investment
experience realized by the Subaccounts of the Variable Account. The Guarantee
Periods available are as follows: (1) 10 Policy Years or the date the Insured
reaches age 65, whichever is later; and (2) the lifetime of the Insured up to
the Maturity Date. The required premium levels for these options vary depending
on the Guarantee Period chosen, Stated Death Benefit, Insured's Age, premium
class, death benefit type, and Policy rider coverage. See "Guaranteed Minimum
Death Benefits," page 52.
Planned Premiums
When applying for a Policy, you select a plan for paying level premiums at
specified intervals, e.g., monthly, quarterly, semi-annually or annually, until
the Maturity Date. You are not required to pay premiums in accordance with this
plan; rather, you can pay more or less than planned or skip a planned premium
entirely. You can change the amount and frequency of planned premiums whenever
you want by sending a Written Request specifying the requested change to our
Customer Service Center. However, we reserve the right to limit the amount of a
premium or the total premiums paid, as discussed above. We will send you
reminder notices for planned premiums, unless you have arranged to pay planned
premiums by pre-authorized checking account deductions.
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Three-Year Guarantee
We guarantee that a Policy will remain in force during the first three Policy
Years, regardless of the sufficiency of the Cash Surrender Value, if the total
premiums paid less any Withdrawals and Policy Debt are greater than the No-Lapse
Premium multiplied by the number of months the Policy has been in force. The
No-Lapse Premium for your Policy generally will be less than the monthly amount
of planned premiums you select to pay. The above is tested on each Monthly
Processing Date. If the Net Accumulation Value is less than or equal to zero,
the charges will be temporarily deferred until the Net Accumulation Value is
positive. Whenever the Net Accumulation Value becomes positive, a portion or all
of the charges deferred will be deducted from the Accumulation Value. This
process will continue until the end of the Three-Year Guarantee period. If there
is a balance of deferred charges at the end of this period and there is not
sufficient Accumulation Value to pay such charges, a grace period will begin.
The Three-Year Guarantee will not prevent the termination of the Policy if the
Cash Surrender Value becomes insufficient because of excessive Policy Debt. See
"POLICY LOANS," page 47.
Premiums upon Increase in Stated Death Benefit
Depending on the Accumulation Value at the time of an increase in the Stated
Death Benefit and the amount of the increase requested, an additional premium or
change in the amount of planned premiums may be advisable. See "CHANGES IN DEATH
BENEFIT," page 51. We will notify you if an additional premium is necessary or a
change appropriate.
An increase in your Policy's Stated Death Benefit during the first three Policy
Years does not extend the Three-Year Guarantee (see above) to three years after
the effective date of the increase.
Premiums to Prevent Lapse
Failure to pay planned premiums will not necessarily cause a Policy to lapse.
Conversely, paying all planned premiums will not necessarily guarantee that a
Policy will not lapse (except when the Three-Year Guarantee is in effect).
Rather, whether a Policy lapses depends on whether its Cash Surrender Value is
insufficient to cover the monthly deduction when due.
If the Cash Surrender Value on a Monthly Processing Date is less than the amount
of the monthly deduction to be deducted on that date (See "MONTHLY DEDUCTIONS
FROM NET ACCUMULATION VALUE") and the Three-Year Guarantee is not in effect, the
Policy will be in default and a grace period will begin. This could happen if
investment experience has been sufficiently unfavorable that it has resulted in
a decrease in the Cash Surrender Value or the Cash Surrender Value has decreased
because insufficient premiums have been paid to offset the monthly deductions.
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If the Guaranteed Minimum Death Benefit provision is in effect, the Stated Death
Benefit of the Policy will not lapse during the Guarantee Period even if the
Cash Surrender Value is insufficient to cover all of the monthly deductions on
any Monthly Processing Date. Any coverage provided by riders or any amount by
which the Base Death Benefit exceeds the Stated Death Benefit are not protected
by this provision. Therefore, these portions of the Policy benefits will lapse
if the Cash Surrender Value is insufficient to cover all of the monthly
deductions on any Monthly Processing Date. See "Guaranteed Minimum Death
Benefits," page 52.
When the Guaranteed Minimum Death Benefit provision is in effect, the Net
Accumulation Value may be reduced by monthly deductions, but may not be reduced
below zero. Any monthly deductions for the Stated Death Benefit during the
Guarantee Period that would reduce the Net Accumulation Value below zero will be
waived permanently.
The Guaranteed Minimum Death Benefit provision will be terminated if the Policy
does not meet the monthly premium test and is not diversified according to our
requirements as described in "Guaranteed Minimum Death Benefits," page 52. If
the Guaranteed Minimum Death Benefit provision is terminated, the normal premium
test for lapse (whether Cash Surrender Value is sufficient to pay monthly
deductions) will resume.
Grace Period
If your Policy goes into default, you will be allowed a 61-day grace period to
pay a premium sufficient to cover past due charges plus an amount sufficient to
keep the Policy and any riders in force for two (2) months following receipt. We
will send notice of the amount required to be paid during the grace period
("grace period premium") to your last known address and to any assignee of
record. The grace period will begin when the notice is sent. Your Policy will
remain in effect during the grace period. If the Insured should die during the
grace period before the grace period premium is paid, the Death Benefit will
still be payable to the Beneficiary, although the amount paid will reflect a
reduction for the monthly deductions due on or before the date of the Insured's
death. See "Amount of Death Proceeds," page 49. If the grace period premium is
not paid before the grace period ends, your Policy will lapse. It will have no
value and no benefits will be payable, although for a limited period you will
have the right to reinstate your Policy. See "REINSTATEMENT," page 67.
A grace period also may begin if Policy Debt becomes excessive. See "POLICY
LOANS," page 47.
Net Premium Allocations
In the application, you specify the percentage of Net Premium to be allocated to
each Subaccount or the Guaranteed Interest Account. The sum of your allocations
must equal 100%, and each allocation percentage must be a whole number. Net
Premiums received that are directed to be invested in the Guaranteed Interest
Account are allocated to that Account.
However, until the
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Free Look Period expires, all Net Premiums allocated to a Subaccount are
invested in the Subaccount investing in the VIP Money Market Portfolio (the
"Money Market Subaccount"). At the end of this period, the Accumulation Value in
the Money Market Subaccount is transferred to and allocated to the Subaccounts
based on the net premium allocation percentages in the application. See "Free
Look Period," page 35.
The Net Premium allocation percentages specified in the application will apply
to subsequent premiums until you change them. You can change the allocation
percentages at any time provided they total 100% and each is a whole number, by
sending a Written Notice specifying the new allocation percentage to our
Customer Service Center. The change will apply to all premiums received with or
after our receipt of your Written Notice. If you change your Net Premium
allocation percentages more than five times during a Policy Year, we have the
right to deduct a $25 charge proportionally from your Subaccount Accumulation
Values and Guaranteed Interest Account Accumulation Value as of the Valuation
Day the allocation change is effective. See "OTHER ADMINISTRATIVE CHARGES."
Crediting Premiums
The initial Net Premium will be credited to the Policy as of the Policy Date or
the date it is received at our Customer Service Center, if later. Planned
premiums and unplanned premiums not requiring additional underwriting will be
credited to the Policy and the resulting Net Premiums will be allocated on the
Valuation Day the premium is received by our Customer Service Center in
accordance with the Net Premium allocation percentages then in effect. However,
any premium requiring additional underwriting will be allocated to the Money
Market Subaccount until underwriting has been completed and the premium has been
accepted. When accepted, the Accumulation Value in the Money Market Subaccount
attributable to the resulting Net Premium will be credited to the Policy and
allocated to the Subaccounts and Guaranteed Interest Account in accordance with
the Net Premium allocation percentages then in effect. If an additional premium
is rejected, we will return the premium, without any adjustment for investment
experience.
YOUR ACCUMULATION VALUE
The Accumulation Value of your Policy is the sum of Variable Accumulation Value
and the Guaranteed Interest Account Accumulation Value and any values held in
the General Account to secure policy loans. The Variable Accumulation Value is
the sum of all the Subaccount Accumulation Values.
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Subaccount Accumulation Value
The Subaccount Accumulation Value for any Subaccount as of the Policy Date is
equal to the amount of the initial Net Premium allocated to that Subaccount.
On subsequent Valuation Days, the amount of the Subaccount Accumulation Value is
calculated as:
1. The number of Accumulation Units in that Subaccount as of the beginning
of the current Valuation Period multiplied by that Subaccount's
Accumulation Unit value for the current Valuation Period; plus
2. Any additional Net Premiums allocated to that Subaccount during the
current Valuation Period; plus
3. Any Accumulation Value transferred to the Subaccount during the current
Valuation Period (including any amounts released from the Policy Loan
Account and allocated to that Subaccount during the current Valuation
Period); minus
4. Any Accumulation Value transferred from the Subaccount during the
current Valuation Period (including any amounts transferred to the
Policy Loan Account and the portion of any Excess Transfer Charge
allocated to the Subaccount during the current Valuation Period); minus
5. The portion of any Gross Withdrawals allocated to that Subaccount
during the current Valuation Period (including the portion of the
Surrender Charge resulting from a decrease in Stated Death Benefit
allocated to the Subaccount during the current Valuation Period); minus
6. The portion of the monthly deduction allocated to such Subaccount, if a
Monthly Processing Date occurs during the current Valuation Period.
Accumulation Unit Value. Net Premiums allocated to a Subaccount or amounts
transferred to a Subaccount are converted into Accumulation Units. For any
Subaccount, the number of Accumulation Units credited is determined by dividing
the dollar amount directed to the Subaccount by the value of the Accumulation
Unit for that Subaccount for the Valuation Period on which the Net Premium is
received or the transfer is effective. In this manner, an increase in Subaccount
Accumulation Value under a Policy occurs by the addition of Accumulation Units
of that Subaccount.
The Accumulation Unit Value for each Subaccount was arbitrarily set initially at
$10 when the Subaccount began investing in the underlying Portfolio. Thereafter,
for any Subaccount, the Accumulation Unit Value for a Valuation Period equals
the Accumulation Unit Value for the
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preceding Valuation Period multiplied by the Accumulation Experience Factor
(described below) for the Valuation Period.
Decreases in Subaccount Accumulation Value under a Policy are effected by the
cancellation of Accumulation Units of a Subaccount. Therefore, Surrenders,
Withdrawals, loans, transfers out of a Subaccount, payment of a Death Benefit,
and the monthly deduction all result in the cancellation of an appropriate
number of Accumulation Units of one or more Subaccounts. Accumulation Units
generally are canceled as of the end of the Valuation Period in which the
Company received notice of or instructions regarding the event or the deduction
is made.
The Accumulation Experience Factor. For each Subaccount, the Accumulation
Experience Factor reflects the investment experience of the Portfolio in which
that Subaccount invests and the charges assessed against that Subaccount for a
Valuation Period. The Accumulation Experience Factor is calculated by dividing
(1) by (2) and subtracting (3) from the result, where:
(1) is the result of:
a. the net asset value per share of the Portfolio held in the Subaccount,
determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gains distributions
made by the Portfolio held in the Subaccount, if the "ex-dividend" date
occurs during the current Valuation Period; plus or minus
c. a per share charge or credit for any taxes reserved for, which is
determined by the Company to have resulted from the operations of the
Subaccount.
(2) is the net asset value per share of the Portfolio held in the
Subaccount, determined at the end of the last prior Valuation Period.
(3) is a daily factor representing the mortality and expense risk charge
deducted from the Subaccount, adjusted for the number of days in the
Valuation Period.
Guaranteed Interest Account Accumulation Value
The Guaranteed Interest Account Accumulation Value as of the Policy Date is
equal to the amount of the initial Net Premium allocated to the Guaranteed
Interest Account. On subsequent Valuation Days, the Guaranteed Interest Account
Accumulation Value is calculated as follows:
1. The Guaranteed Interest Account Accumulation Value as of the end of the
preceding Valuation Period plus any interest earned during the
Valuation Period; plus
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2. Any additional Net Premiums allocated to the Guaranteed Interest
Account plus interest credited to those premiums during the current
Valuation Period; plus
3. Any Accumulation Value transferred to the Guaranteed Interest Account
during the current Valuation Period (including any amounts released
from the Policy Loan Account and allocated to the Guaranteed Interest
Account during the current Valuation Period); minus
4. Any Accumulation Value transferred from the Guaranteed Interest Account
during the current Valuation Period (including any amounts transferred
to the Policy Loan Account and the portion of any Excess Transfer
Charge allocated to the Guaranteed Interest Account during the current
Valuation Period); minus
5. The portion of any Gross Withdrawals allocated to the Guaranteed
Interest Account during the current Valuation Period (including the
portion of any Surrender Charges resulting from a decrease in Stated
Death Benefit allocated to the Guaranteed Interest Account during the
current Valuation Period); minus
6. The portion of the monthly deduction allocated to the Guaranteed
Interest Account, if a Monthly Processing Date occurs during the
current Valuation Period.
YOUR RIGHT TO TRANSFER
After the initial Free Look Period, you may transfer your Net Accumulation Value
among the Subaccounts and, subject to the special rules described below, to and
from the Guaranteed Interest Account. The minimum amount that may be transferred
from each Subaccount or the Guaranteed Interest Account is $100 or the balance
in the Subaccount or the Guaranteed Interest Account, if less. The minimum
amount that can remain in a Subaccount or the Guaranteed Interest Account
following a transfer is $100. Percentages must be in whole numbers. Transfer
requests that do not comply with these requirements will not be effected.
Transfers due to the operation of Dollar Cost Averaging or Automatic Rebalancing
are not included in determining the limit on the number of transfers allowed
without a charge. (See "DOLLAR COST AVERAGING FACILITY," and "AUTOMATIC
REBALANCING," page 44.) All transfers effected during a single Valuation Period
will be counted as one transfer for purposes of determining the excess transfer
charge. We reserve the right to limit the number of transfers per Policy Year to
12. The table below summarizes the number of transfers permitted in any one
Policy Year without an excess transfer charge, the total number of transfers
permitted in a Policy Year and the excess transfer charge under current
rules.
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- - --------------------------------------------------------------------------------
Free Transfers 12
- - --------------------------------------------------------------------------------
Total Number of Transfers Unlimited
Permitted
- - --------------------------------------------------------------------------------
Excess Transfer Charge $25 for each transfer in excess of 12 during any
Policy Year
- - --------------------------------------------------------------------------------
Transfers may be made based upon instructions given by Written Notice or by
telephone.
Right to Restrict Transfers. The Company reserves the right to modify, restrict,
suspend or eliminate the transfer privileges (including the telephone transfer
facility) at any time, for any class of Policies, for any reason. In particular,
the Company reserves the right to not honor transfers requested by a third party
holding a power of attorney from an Owner where that third party requests
simultaneous transfers on behalf of the Owners of two or more Policies.
Special Rules for the Guaranteed Interest Account. Once during the first 30 days
of each Policy Year, you may transfer amounts from the Guaranteed Interest
Account. Transfer requests received within 30 days prior to the Policy
Anniversary will be considered requests to transfer on the Policy Anniversary. A
request to transfer from the Guaranteed Interest Account that is received on the
Policy Anniversary or within the following 30 days will be processed if it is
the first such transfer request received during the 30 day period. Requests for
transfers from the Guaranteed Interest Account received at any other time will
not be processed. Transfers to the Guaranteed Interest Account are not so
limited.
The maximum transfer amount from the Guaranteed Interest Account to the
Subaccounts of the Variable Account in any Policy Year is the greatest of:
(a) 25% of the Guaranteed Interest Account Accumulation Value immediately
prior to the first transfer or Withdrawal in that Policy Year from the
Guaranteed Interest Account;
(b) $100; or
(c) the sum of the amounts that were transferred out of and withdrawn from the
Guaranteed Interest Account in the prior Policy Year.
DOLLAR COST AVERAGING FACILITY
If elected at the time of the application or at any time thereafter by Written
Notice, an Owner may systematically transfer on a monthly basis, specified
dollar amounts from the Money Market Subaccount or the Janus Short-Term Bond
Subaccount to other Subaccounts. This is known as the dollar-cost averaging
("Dollar Cost Averaging") method of investment. The fixed dollar amount will
purchase more Accumulation Units of a Subaccount when their value is lower and
fewer units when their value is higher. Over time, the cost per unit averages
out to be less than if all purchases of units had been made at the highest value
and greater than if all purchases had
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been made at the lowest value. The Dollar Cost Averaging method of investment
reduces the risk of making purchases only when the price of Accumulation Units
is high. It does not assure a profit or protect against a loss in declining
markets.
Owners may elect Dollar Cost Averaging only if their Subaccount Accumulation
Value in either the Money Market Subaccount or the Janus Short-Term Bond
Subaccount is at least $10,000 at the time of the election. The minimum transfer
amount out of the appropriate Subaccount for Dollar Cost Averaging is $100 per
month. The maximum transfer amount out of the appropriate Subaccount for Dollar
Cost Averaging is the Subaccount Accumulation Value in that Subaccount, at the
time of election, divided by 12. If Dollar Cost Averaging transfers are to be
made to more than one Subaccount, allocations of the transfer amount must be
designated as whole number percentages. Dollar allocations may not be made. If
you elect to transfer to more than one Subaccount, the minimum percentage that
may be transferred to any Subaccount is 1% of the total amount transferred under
the facility.
Transfers for Dollar Cost Averaging will be effected on the Monthly Processing
Dates. Once elected, Dollar Cost Averaging remains in effect for a Policy until
the Subaccount Accumulation Value in the Subaccount from which the transfers are
made is depleted, the Maturity Date occurs or until the Owner cancels the
election by Written Notice received at least seven days in advance of the next
transfer date. There is no additional charge for using Dollar Cost Averaging.
The Company reserves the right to discontinue offering the Dollar Cost Averaging
facility at any time and for any reason.
You may change the transfer amount or the Subaccounts to which transfers are to
be made once each Policy Year, subject to the above limitations. Any transfer
under this facility will not be included for the purposes of computing the
excess transfer charge.
AUTOMATIC REBALANCING
You may implement an automatic rebalancing program for your Variable
Accumulation Value. Accumulation Value allocated to the Subaccounts can be
expected to increase or decrease at different rates. An automatic rebalancing
program automatically reallocates your Accumulation Value among the Subaccounts
each quarter to return the allocation to the most recent Net Premium allocation
percentages you specify for the Subaccounts. Automatic Rebalancing is intended
to transfer Accumulation Value from those Subaccounts that have increased in
value to those that have declined, or not increased as much, in value. Over
time, this method of investing may help an Owner "buy low and sell high,"
although there can be no assurance that this objective will be achieved.
Automatic Rebalancing does not guarantee profits, nor does it assure that an
Owner will not have losses.
You may select an automatic rebalancing program when you apply for the Policy or
at a later date by completing the Automatic Rebalancing form and returning it to
our Customer Service Center. We require that you allocate no more than 35% of
your Premiums to any one
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Subaccount and that you allocate your Net Premiums to at least five
Subaccounts while this feature is in effect. If at any time during the operation
of the Automatic Rebalancing feature you request a change in Net Premium
allocation which does not meet these requirements, we will notify you that your
request must be changed. We will not process such a request unless you also
request that the Automatic Rebalancing feature be discontinued. When you request
a change in premium allocation that meets these requirements, your Accumulation
Value will be reallocated as of the Valuation Day that we receive your written
allocation instructions. Amounts will be transferred among the Subaccounts to
match the allocation for Net Premiums. If you change your Net Premium allocation
more than five (5) times per Policy Year, there will be a $25 charge taken from
your Accumulation Value which will be deducted proportionately from the
Subaccount Accumulation Values and Guaranteed Interest Account Accumulation
Value as of the Valuation Day the allocation change is effective.
As of the first Valuation Day of each calendar quarter, we will transfer
Accumulation Value among the Subaccounts to the extent necessary to return the
allocation to your specifications. Automatic Rebalancing may not begin until the
first Monthly Processing Date following the end of the Free Look Period.
Automatic Rebalancing will continue until we receive a Written Request or
telephone request at our Customer Service Center to terminate. Other transfers
may not be made during the operation of Automatic Rebalancing.
You may select either Dollar Cost Averaging or Automatic Rebalancing, but not
both.
WITHDRAWALS
You may make Withdrawals under your Policy after the first Policy Year under the
following rules. You must submit a Written Request for the Withdrawal (unless
you have elected telephone privileges). We must receive your request during the
Insured's lifetime. The maximum Withdrawal is the amount which will leave $500
as Cash Surrender Value for the Policy. The amount withdrawn from the Guaranteed
Interest Account may not be greater than the total Withdrawal times the ratio of
the Accumulation Value in the Guaranteed Interest Account to the total
unborrowed Accumulation Value immediately prior to the Withdrawal. A Withdrawal
cannot cause the Stated Death Benefit to be reduced below the minimum Stated
Death Benefit of $50,000. No more than 12 Withdrawals may be made during a
Policy Year, and each Withdrawal must be at least $500. An administrative charge
(the withdrawal transaction charge) will be assessed on any Withdrawal made
during a Policy Year after the first Withdrawal. See "WITHDRAWAL TRANSACTION
CHARGE," page 63. If death benefit type A is in effect and a Withdrawal occurs
during the first 14 Policy Years or first 14 years following an increase in
Stated Death Benefit, a surrender charge will apply. See "SURRENDER CHARGE,"
page 58. Any withdrawal transaction charge and surrender charge will be deducted
along with the amount requested to be withdrawn and will be considered part of
the Gross Withdrawal. The following describes how Policy values will be reduced
by a Withdrawal and whether a surrender charge also may apply.
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When you request a Withdrawal, you can direct how the Gross Withdrawal will be
deducted from your Accumulation Value in the Subaccounts and the Guaranteed
Interest Account. If you provide no directions, the Gross Withdrawal will be
deducted from your Accumulation Value in the Subaccounts and the Guaranteed
Interest Account on a pro rata basis. See "THE GUARANTEED INTEREST ACCOUNT,"
page 41.
If death benefit type A is in effect, a Withdrawal will reduce the Accumulation
Value and may reduce the Stated Death Benefit. However, if the Withdrawal is the
first Withdrawal of that Policy Year, the Insured=s attained Age is less than 81
at the time of the Withdrawal, the Withdrawal occurs less than 16 years
following the Policy Date, and the amount of the Withdrawal is less than 5% of
the Death Benefit, then the Withdrawal will not reduce the Stated Death Benefit.
If the above conditions are met and the amount of the Withdrawal exceeds the
greater of 10% of the Accumulation Value immediately prior to the Withdrawal and
5% of the Stated Death Benefit, the Stated Death Benefit will only be reduced by
the amount by which the Withdrawal exceeds the greater of 10% of the
Accumulation Value immediately prior to the Withdrawal and 5% of the Stated
Death Benefit. The Accumulation Value will be reduced, dollar for dollar, by the
Gross Withdrawal amount. The Stated Death Benefit will be reduced in proportion
to the reduction in Accumulation Value caused by the Withdrawal. The decrease in
Accumulation Value will occur on the day we process the Withdrawal; however, the
decrease in Stated Death Benefit will be effective as of the next Monthly
Processing Date. See "Changes in Stated Death Benefit," page 51 for a discussion
of how a decrease is effected if there has been a prior increase in Stated Death
Benefit. If the reduction occurs while the surrender charge is in effect
(generally, during the first 14 Policy Years and the first 14 years after an
increase in Stated Death Benefit), a portion of the sales surrender charge may
be assessed. See "SURRENDER CHARGE," page 58.
If death benefit type B is in effect, a withdrawal will reduce the Accumulation
Value dollar for dollar but the Stated Death Benefit will not be reduced as the
Accumulation Value reflects the decrease.
If the Stated Death Benefit is reduced by a Withdrawal, the Base Death Benefit
scheduled in the Adjustable Term Insurance Rider, if any, for the current year
and all future years will be reduced by an equal amount. No Withdrawal will be
allowed if the Stated Death Benefit remaining in force after the Withdrawal
would be reduced below $50,000 and the Base Death Benefit scheduled in the
Adjustable Term Insurance Rider would be below $100,000, or the Stated Death
Benefit is reduced below $100,000 for Policies without the Adjustable Term
Insurance Rider.
We generally will pay a Withdrawal request within seven days following the
Valuation Day we receive the request. See "WHEN WE MAKE PAYMENTS," page 55.
Withdrawals may have adverse tax consequences. See "FEDERAL TAX CONSIDERATIONS,"
page 71.
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SURRENDERS
You may surrender your Policy at any time for its Cash Surrender Value. We must
receive the Policy and Written Request for the surrender during the Insured's
lifetime. A surrender charge may apply. See "SURRENDER CHARGE," page 58. We will
pay the Cash Surrender Value within seven (7) days following our receipt of the
request. We will cancel the Policy as of the date of the Written Request. Your
Policy will terminate and cease to be in force if it is surrendered. It cannot
be reinstated later. A surrender may have tax consequences. See "FEDERAL TAX
CONSIDERATIONS," page 71.
POLICY LOANS
You may obtain a Policy loan from us at any time after the first Policy
Anniversary by submitting a Written Request for a Policy loan to our Customer
Service Center. The minimum amount you may borrow is $100. The maximum loan
amount is 90% of your Cash Surrender Value on the Valuation Day we receive your
Written Request. Outstanding Policy loans reduce the amount available for new
loans. Policy loans will be processed as of the Valuation Day your Written
Request is received and loan proceeds generally will be sent to you within seven
days. See "WHEN WE MAKE PAYMENTS," page 55. Loans under a Policy classified as a
modified endowment contract may be subject to adverse tax consequences,
including a 10% penalty. See "Distributions From Policies Classified as Modified
Endowment Contracts," page 74.
We will charge interest daily on any outstanding Policy loan at a maximum annual
rate of 6%. Interest is due and payable on each Policy Anniversary date while a
Policy loan is outstanding. If interest is not paid when due, the amount of the
interest is added to the loan and becomes part of the outstanding Policy loan.
You may repay all or part of your Policy Debt at any time while the Insured is
living prior to the Maturity Date and the Policy is in force. Policy Debt is
equal to all outstanding policy loans and any accrued and unpaid interest on
those loans. Loan repayments must be sent to our Customer Service Center and
will be credited as of the date received. Such repayments will be credited first
to interest then to principal. If there is an outstanding Policy loan, any
payment which is not a planned premium received before the Maturity Date is
considered a loan repayment unless otherwise indicated. If the Death Benefit
becomes payable while a Policy loan is outstanding, the Policy Debt will be
deducted in calculating the Death Benefit. If the Policy Debt exceeds the
Accumulation Value less any Surrender Charges on any Valuation Day, the Policy
will be in default. We will send you, and any assignee of record, notice of the
default. You will have a 61-day grace period to submit a sufficient payment to
avoid termination. The notice will specify the amount that must be repaid to
prevent termination. If your Policy terminates because of excessive Policy Debt,
it cannot be reinstated.
When a Policy loan is made (or when interest is not paid when due), an amount
equal to the loan proceeds (or due and unpaid interest) is transferred from the
Accumulation Value in the
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Subaccounts or Guaranteed Interest Account. This withdrawal is made pro rata on
the basis of Accumulation Value in each Subaccount and the Guaranteed Interest
Account unless you direct a different allocation when requesting the loan and as
long as at least $100 remains in the Subaccount or Guaranteed Interest Account
after the deduction. The amount withdrawn is then transferred to the Policy Loan
Account in the General Account. Conversely, when a loan is repaid, an amount
equal to the repayment will be transferred from the Policy Loan Account to the
Subaccounts and the Guaranteed Interest Account and allocated as you direct when
submitting the repayment. If you provide no direction, the amount will be
allocated in accordance with your then effective Net Premium allocation
percentages. Thus, a loan or loan repayment will have no immediate effect on the
Accumulation Value, but other Policy values, such as the Net Accumulation Value
and Cash Surrender Value, will be reduced or increased immediately by the amount
transferred to or from the Policy Loan Account.
The amount in the Policy Loan Account will be credited with interest at a
minimum guaranteed annual rate of 4%. The interest earned is transferred to the
Subaccounts of the Variable Account and the Guaranteed Interest Account on each
Policy Anniversary in the same proportion that Net Premiums are being allocated.
Certain loan amounts taken after the earlier of:
1. the tenth Policy Anniversary, or
2. the fifth Policy Anniversary if the Insured's Age is 60 or greater,
will be considered preferred loan amounts as described below. During each Policy
Year of preferred loan eligibility, the first loan made during that year will be
considered a preferred loan amount up to a maximum of 10% of the Net
Accumulation Value. Any amount loaned later in that Policy Year will not be
considered a preferred loan amount. If the preferred loan amount made during any
Policy Year is less than the maximum allowed, the balance may not be carried
over to increase the eligible preferred loan amount of any subsequent Policy
Year. Beginning with the 21st Policy Year, all loan balances will be considered
to be preferred loan amounts. The amount of any Accumulation Value in the
Guaranteed Interest Account equal to any preferred loan amount on the Policy
will be credited with interest at the rate of 4%.
A Policy loan, whether or not repaid, will have a permanent effect on the Death
Benefit and Accumulation Values because the investment results of the
Subaccounts of the Variable Account and current interest rates credited on
Accumulation Value in the Guaranteed Interest Account will apply only to the
non-loaned portion of the Accumulation Value. The longer the loan is
outstanding, the greater the effect is likely to be. Depending on the investment
results of the Subaccounts or credited interest rates for the Guaranteed
Interest Account while the Policy loan is outstanding, the effect could be
favorable or unfavorable. Policy loans may increase the potential for lapse if
investment results of the Subaccounts are less than anticipated. Also, Policy
loans could, particularly if not repaid, make it more likely than otherwise for
a Policy to
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terminate. See "FEDERAL TAX CONSIDERATIONS," page 71, for a discussion of
adverse tax consequences if a Policy lapses with Policy loans outstanding.
TELEPHONE PRIVILEGES
If you have elected this privilege in a form required by us, you may make
transfers or request Withdrawals and Policy loans by telephoning our Customer
Service Center. Any telephone request for Withdrawals or Policy loans must be
for an amount less than $25,000.
Our Customer Service Center will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may include,
among others, requiring some form of personal identification prior to acting
upon instructions received by telephone, providing written confirmation of such
transactions, and/or tape recording of telephone instructions. Your request for
telephone privileges authorizes us to record telephone calls. If reasonable
procedures are not used in confirming instructions, we may be liable for any
losses due to unauthorized or fraudulent instructions. We reserve the right to
discontinue this privilege at any time.
DEATH BENEFIT AND CHANGES IN DEATH BENEFIT TYPE
Payment of Death Proceeds
As long as the Policy remains in force, we will pay the Death Proceeds after we
receive at our Customer Service Center satisfactory proof of the Insured's
death. We may require return of the Policy. The Death Proceeds will be paid in a
lump sum to the Beneficiary generally within seven days after receipt of such
proof (see "WHEN WE MAKE PAYMENTS," page 55) or, if a payment option is elected,
at different dates determined by the payment option elected (see "PAYMENT
OPTIONS," page 55.) See "Selecting and Changing the Beneficiary," page 55.
Amount of Death Proceeds
The Death Proceeds are equal to the sum of the Base Death Benefit on the date of
the Insured's death, plus any life insurance proceeds provided by rider, minus
any Policy Debt on that date and, if the date of death occurred during a grace
period, minus the past due monthly deductions. See "Grace Period," page 38. If
the Adjustable Term Insurance Rider is in effect, the Death Proceeds are
calculated as described above using the Target Death Benefit instead of the Base
Death Benefit. See "Selecting a Level of Death Benefits," page 54. Under certain
circumstances, the amount of the Death Proceeds may be further adjusted. See
"OTHER POLICY PROVISIONS," page 67.
If part or all of the Death Proceeds are paid in one sum, Southland will pay
interest on this sum from the date we determine the Death Proceeds to the date
of payment, or until a payment option is selected. Interest will be at the rate
we declare, or at any higher rate required by law.
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Base Death Benefit and Death Benefit Types
The Owner may choose one of two death benefit types, which will determine the
Base Death Benefit. Under death benefit type A, the Base Death Benefit is the
greater of the Stated Death Benefit or a multiple of the Accumulation Value on
the date of the Insured's death. Under death benefit type B, the Base Death
Benefit is the greater of the Stated Death Benefit plus the Accumulation Value,
or a multiple of the Accumulation Value, on the date of the Insured's death.
If investment performance is favorable, the amount of the Base Death Benefit may
increase. However, under type A, the Base Death Benefit ordinarily will not
change for several years as a result of any favorable investment performance and
may not change at all, whereas under type B, the Base Death Benefit will vary
directly with the investment performance of the Accumulation Value. To see how
and when investment performance may begin to affect the Base Death Benefit,
please see the illustrations beginning on page 21.
In both cases, the multiple of the Accumulation Value depends on the Insured's
attained Age at death. The table of multiples in effect as of the issue date is
shown below. If the table becomes inconsistent with any federal income tax laws
and/or regulations, we reserve the right to change it.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
Death Benefit Multiples
- - --------------------------------------------------------------------------------------------------------------------
Multiple of Multiple of Multiple of
Attained Accumulation Attained Accumulation Attained Accumulation
Age Value Age Value Age Value
- - --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
0 - 40 2.50 54 1.57 68 1.17
41 2.43 55 1.50 69 1.16
42 2.36 56 1.46 70 1.15
43 2.29 57 1.42 71 1.13
44 2.22 58 1.38 72 1.11
45 2.15 59 1.34 73 1.09
46 2.09 60 1.30 74 1.07
47 2.03 61 1.28 75 - 90 1.05
48 1.97 62 1.26 91 1.04
49 1.91 63 1.24 92 1.03
50 1.85 64 1.22 93 1.02
51 1.78 65 1.20 94 1.01
52 1.71 66 1.19 95 - 100 1.00
53 1.64 67 1.18
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
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Initial Stated Death Benefit and Death Benefit Type
The initial Stated Death Benefit is set at the time the Policy issued. The
minimum initial Stated Death Benefit is $100,000 unless the Policy contains the
Adjustable Term Insurance Rider. If the Policy contains the Adjustable Term
Insurance Rider, the minimum death benefit specified in the Adjustable Term
Insurance Rider is $100,000 and the minimum Stated Death Benefit is $50,000. You
select the Death Benefit Type when you apply for the Policy. You also may change
the Death Benefit Type as discussed below.
Changes in Death Benefit Type
After the first Policy Year, you may change the Death Benefit Type on your
Policy subject to the following rules. You must submit a Written Request. A
change from type A to type B may require evidence of insurability. After any
change, the Stated Death Benefit and the death benefit specified in the
Adjustable Term Insurance Rider must equal or exceed the specified minimums. See
"Initial Stated Death Benefit and Death Benefit Type," page 51. The effective
date of the change will be the Monthly Processing Date that coincides with or
next follows the Valuation Day after we approve the Written Request for the
change.
When a change from type A to type B is made, the Stated Death Benefit after the
change is effected will be equal to the Stated Death Benefit before the change
less the Accumulation Value on the effective date of the change. Similarly, the
death benefit specified in the Adjustable Term Insurance Rider after the change
is effected will be equal to the death benefit specified in the Adjustable Term
Insurance Rider before the change less the Accumulation Value on the effective
date of the change.
When a change from type B to type A is made, the Stated Death Benefit after the
change is effected will be equal to the Stated Death Benefit before the change
plus the Accumulation Value on the effective date of the change. Similarly, the
death benefit specified in the Adjustable Term Insurance Rider after the change
is effected will be equal to the death benefit specified in the Adjustable Term
Insurance Rider before the change plus the Accumulation Value on the effective
date of the change.
Changes in Death Benefit
After the first Policy Year, you may request a change in the Stated Death
Benefit and the death benefit specified in the Adjustable Term Insurance Rider
subject to the following conditions. After any change, the Stated Death Benefit
and the death benefit specified in the Adjustable Term Insurance Rider must
equal or exceed the specified minimums. See "Initial Stated Death Benefit and
Death Benefit Type," page 51. In addition, no change will be permitted that
would result in your Policy not satisfying the requirements of section 7702 of
the Code. An increase or decrease can be requested by Written Request only
during the 30-day period preceding a Policy Anniversary.
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Any increase in Stated Death Benefit or the death benefit specified in the
Adjustable Term Insurance Rider must be at least $10,000 and an application must
be submitted, along with evidence of insurability satisfactory to Southland.
Unless otherwise indicated, any increase to the death benefit specified in the
Adjustable Term Insurance Rider not scheduled at issue will be assumed to also
be a request for an increase to the Stated Death Benefit so that the difference
between the Target Death Benefit and the Base Death Benefit will be the same
before and after the increase. In such event, a change in planned premiums may
be advisable. See "Premiums Upon Increase in Stated Death Benefit," page 37. The
increase in Stated Death Benefit or death benefit specified in the Adjustable
Term Insurance Rider will become effective as of the Policy Anniversary on or
following the date the increase is approved. You must return your Policy so we
can amend it to reflect the increase. A Target Premium will be established for
the increase, and the portion of premiums paid thereafter allocated to the
increase will be subject to a 4% sales charge until premiums allocated to the
increase equal the sum of 10 Target Premiums for the increase. See "Sales
Surrender Charge," page 59.
Requested decreases will apply to the death benefit specified in the Adjustable
Term Insurance Rider on a last in, first out basis until it is reduced to zero.
Otherwise, requested decreases in Stated Death Benefit are only allowed if the
request occurs at least two years from the Policy Date and at least two years
after an increase in Stated Death Benefit. Any decrease in the Stated Death
Benefit or the death benefit specified in the Adjustable Term Insurance Rider
must be at least $10,000 and the Stated Death Benefit and death benefit
specified in the Adjustable Term Insurance Rider added to your Policy must equal
or exceed the specified minimums. See "Initial Stated Death Benefit and Death
Benefit Type," page 51. A decrease in Stated Death Benefit or the death benefit
specified in the Adjustable Term Insurance Rider will become effective as of the
Policy Anniversary on or following our receipt of Written Request.
If increases in the initial Stated Death Benefit are in effect, a decrease in
Stated Death Benefit will be allocated to each segment of the Stated Death
Benefit in the same proportion as the Stated Death Benefit for each segment
bears to the total Stated Death Benefit for the Policy.
If a decrease in Stated Death Benefit occurs during the first 14 Policy Years,
or during the first 14 years following an increase in Stated Death Benefit, a
Surrender Charge will apply. See "SURRENDER CHARGE," page 58.
Guaranteed Minimum Death Benefits
Generally, the length of time the Policy remains in force depends on the Cash
Surrender Value of the Policy. Because the charges that maintain the Policy are
deducted monthly from the Accumulation Value, coverage will last as long as the
Net Accumulation Value is sufficient to pay these charges. The investment
experience of any amounts in the Subaccounts of the Variable Account and the
interest earned in the Guaranteed Interest Account will affect the amount of the
Accumulation Value and, as a result, the length of time the Policy remains in
force without the payment of additional premiums.
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When applying for a Policy, one of two Guaranteed Minimum Death Benefit options
may be elected, which may extend the period that the Stated Death Benefit of the
Policy will remain in effect if the Subaccounts of the Variable Account suffer
adverse investment experience. The two options vary primarily by the length of
time which they cover, which we call the "Guarantee Period." The first option,
which protects the Stated Death Benefit of the Policy for a limited number of
Policy Years, has a Guarantee Period of 10 Policy Years or to the date the
Insured reaches age 65, whichever is later. The second option protects the
Stated Death Benefit for the life of the Insured to the Maturity Date.
The Guaranteed Minimum Death Benefit provision does not apply to the Adjustable
Term Insurance Rider or to any other riders. Therefore, if the Net Accumulation
Value is insufficient to pay all of the deductions as they come due, only the
Stated Death Benefit portion of the Policy will be guaranteed to stay in force
under the Guaranteed Minimum Death Benefit provisions. Any attached riders will
lapse.
Requirements to Maintain the Guarantee Period
The Guaranteed Minimum Death Benefit provisions require premium payment levels
that are higher than the premiums required for a Policy without a Guaranteed
Minimum Death Benefit. For Policies with no rider coverage and a 10 Policy
Year/Insured age 65 Guarantee Period, the required premium level will be equal
to the sum of the following: greater of the Target Premium or the minimum
premium for each segment of Stated Death Benefit, including the Guaranteed
Minimum Death Benefit provision. For Policies with no rider coverage and a
lifetime Guarantee Period, the required premium level will be equal to the
guideline annual premium determined in accordance with the federal income tax
law definition of life insurance. The guideline annual premium will always be
higher than the Target Premium so the required premium level for the lifetime
Guarantee Period will be greater than that required for the 10 Policy Year/
Insured age 65 Guarantee Period. For riders including the Guaranteed Minimum
Death Benefit provision, the required premium for both Guarantee Periods is
equal to the Target Premium for the rider, or the minimum premium for that rider
if greater.
While the required premium levels are different for the two Guarantee Periods,
the mechanics of the Guaranteed Minimum Death Benefit provisions are similar. On
each Monthly Processing Date, we will perform a test to see whether: (i) the
actual premiums paid, minus the amount of any Withdrawals and any Policy Debt,
equals or exceeds; (ii) the monthly required premium for the option you have
chosen multiplied by the number of complete months the Policy has been in
force. If the Policy fails to meet this test on any Monthly Processing Date, the
Guarantee Period and therefore the Guaranteed Minimum Death Benefit provision
will terminate.
The required premiums for the Guarantee Period chosen will be listed in the
schedule attached to your Policy. If the Policy benefits are increased, the
required premium will also be increased. In order to determine the required
premium to maintain the Guarantee Period, one twelfth of each
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required premium is multiplied by the number of months this amount was in
effect. Each of these resulting amounts is summed and the total is used in (ii)
above.
The Guarantee Period and the Guaranteed Minimum Death Benefit provision will
terminate if the Net Accumulation Value on any Monthly Processing Date is not
diversified according to the following rules:
a) No more than 35% of the Net Accumulation Value may be invested in any one
Subaccount or the Guaranteed Interest Account; and
b) The Net Accumulation Value must be invested in at least five (5) Subaccounts
(or in four (4) Subaccounts and the Guaranteed Interest Account).
These diversification requirements will be satisfied if you are participating in
the Automatic Rebalancing feature or if you have elected Dollar Cost Averaging
and directed the resulting transfers into at least four other Subaccounts with
no more than 35% of any transfer being made to any one Subaccount. If Automatic
Rebalancing or Dollar Cost Averaging are terminated, the diversification rules
must still be satisfied in order to maintain the Guarantee Period. See "Dollar
Cost Averaging," page 43, and "Automatic Rebalancing," page 44.
A charge is deducted monthly from your Net Accumulation Value for the Guaranteed
Minimum Death Benefit. See "MONTHLY DEDUCTIONS FROM YOUR NET ACCUMULATION
VALUE," page 55.
Once terminated, the Guaranteed Minimum Death Benefit provision cannot be
reinstated.
Selecting a Level of Death Benefits
When you apply for a Policy, you may select a level of death benefits in excess
of the Base Death Benefit for the Policy by adding to the Policy an Adjustable
Term Insurance Rider on the life of the Insured. The Adjustable Term Insurance
Rider specifies a fixed dollar amount of Death Benefit in excess of the initial
Base Death Benefit called the Target Death Benefit. The amount of the Target
Death Benefit may be set to vary as often as each Policy Year. The amount of
Death Benefit provided by the Adjustable Term Insurance Rider on any day is the
difference between the Target Death Benefit specified and the Base Death Benefit
then in effect. The amount provided therefore adjusts daily for variations in
the Base Death Benefit under the Policy.
Adding the Adjustable Term Insurance Rider will increase insurance coverage
without increasing the Base Death Benefit. There is no defined premium for the
amount of coverage provided by the Adjustable Term Insurance Rider, and,
therefore, no sales or Surrender Charges associated with such coverage. However,
a cost of insurance charge is deducted monthly from your Accumulation Value for
the Adjustable Term Insurance Rider amount in effect. See "Cost of
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Insurance Charge," page 61 and "ADDITIONAL BENEFITS," page 68. Owners should
consult their sales representatives when deciding whether to add the Adjustable
Term Insurance Rider to their Policy.
Selecting and Changing the Beneficiary
You select a Beneficiary in your application. You may later change the
Beneficiary in accordance with the terms of the Policy. If the Insured dies and
there is no surviving Beneficiary, the Owner's estate will be the Beneficiary.
MATURITY BENEFIT
If the Insured is living at Age 100 and the Policy is in force, Southland will
pay you the Net Accumulation Value and the Policy will terminate unless you
exercise your right to continue the Policy. The tax consequences associated with
continuing a Policy beyond attained Age 100 are unclear. A tax advisor should be
consulted before exercising this right.
PAYMENT OPTIONS
The Policy offers a wide variety of optional ways of receiving proceeds payable
under the Policy, such as on surrender, death or maturity, other than in a lump
sum. Any agent authorized to sell this Policy can explain these options upon
request. None of these options vary with the investment performance of a
separate account because they are all forms of fixed-benefit annuities.
WHEN WE MAKE PAYMENTS
Payments of Withdrawals, Surrenders or Death Proceeds from the Subaccounts will
usually be made within seven days of the Valuation Day the Company receives a
Written Request and all required information at our Customer Service Center.
However, we may postpone the processing of any such transactions for any of the
following reasons:
a) When the New York Stock Exchange ("NYSE") is closed for trading other than
for customary holiday or weekend closings, or trading on the NYSE is
otherwise restricted, as determined by the SEC;
b) When the SEC determines that an emergency exists that would make the
disposal of securities held in the Variable Account or the determination of
the value of the Variable Account's assets not reasonably practicable; or
c) When the SEC by order permits a delay for the protection of Policyowners.
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We may defer up to six months the payment of any Withdrawal or proceeds from the
Guaranteed Interest Account. Interest will be credited at the currently declared
rate of interest for the Guaranteed Interest Account until payment is made.
THE GUARANTEED INTEREST ACCOUNT
You may allocate all or a portion of your Net Premiums and transfer your Net
Accumulation Value to or from the Guaranteed Interest Account, which is part of
our General Account and which pays interest at a declared rate. The General
Account supports our non-variable insurance and annuity obligations. Because of
exemptive and exclusionary provisions, interests in the Guaranteed Interest
Account have not been registered under the Securities Act of 1933, and neither
the Guaranteed Interest Account nor the General Account has been registered as
an investment company under the 1940 Act. Accordingly, neither the General
Account, the Guaranteed Interest Account nor any interest therein are generally
subject to regulation under these Acts. As a result, the staff of the SEC has
not reviewed the disclosures which are included in this prospectus which relate
to the General Account and the Guaranteed Interest Account. These disclosures,
however, may be subject to certain provisions of the federal securities laws
relating to the accuracy and completeness of statements made in this prospectus.
For more details regarding the General Account, see your Policy.
You may accumulate amounts in the Guaranteed Interest Account by (i) allocating
Net Premiums, (ii) transferring amounts from the Subaccounts, and (iii) earning
interest on amounts you already have in the Guaranteed Interest Account. (See
"PREMIUMS AND ALLOCATIONS," page 34.)
The amount you have in the Guaranteed Interest Account at any time is the sum of
all Net Premiums allocated to this Account, all transfers, and earned interest.
This amount is reduced by amounts transferred out of or withdrawn from the
Guaranteed Interest Account and deductions allocated to the Guaranteed Interest
Account. (See "GUARANTEED INTEREST ACCOUNT ACCUMULATION VALUE," page 41.)
We pay a declared interest rate on all amounts that you have in the Guaranteed
Interest Account. These interest rates will never be less than the minimum
guaranteed effective annual interest rate of 3.5%. When a Net Premium is
received or an amount is transferred into the Guaranteed Interest Account, an
interest rate will be credited to that amount. The rate will be guaranteed for a
twelve-month period. Thereafter, interest rates credited to that amount (and
amounts earned on that amount) will be similarly guaranteed for successive
periods of at least twelve-months at the then current interest rate. Therefore,
different interest rates may apply to different amounts in the Guaranteed
Interest Account, depending on when and how the amount was initially allocated.
For purposes of crediting interest, amounts deducted, transferred or withdrawn
from the Guaranteed Interest Account are accounted for on a first-in-first-out
basis. Interest at the guaranteed minimum rate or such higher rate as Southland
may determine will be paid regardless
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of the actual investment experience of the General Account. We bear the full
amount of the investment risk for the amount allocated to the Guaranteed
Interest Account while the Owner assumes the risk that interest credited may not
exceed the guaranteed minimum rate.
POLICY CHARGES AND FEES
CHARGES DEDUCTED FROM PREMIUMS
Certain expenses are deducted from your premium payments. The remainder of each
premium (the Net Premium) is then added to your Accumulation Value. The expenses
which are deducted from your premium include the tax charges and the sales
charge.
State Premium Tax Charge. All states levy taxes on life insurance premium
payments. The amount of these taxes vary from state to state, and may vary from
jurisdiction to jurisdiction within a state. We currently deduct an amount equal
to 2.5% of each premium to pay applicable premium taxes.
DAC Tax Charge. A charge currently equal to 1.5% of each premium payment is
deducted to cover our estimated cost for the federal income tax treatment of
deferred acquisition costs determined solely by the amount of life insurance
premiums we receive. This charge for deferred acquisition costs is reasonable in
relation to Southland's increased federal income tax burden under Section 848 of
the Code resulting from the receipt of premium payments.
We reserve the right to increase or decrease the premium expense charge for
taxes due to any change in tax law. We further reserve the right to increase or
decrease the premium expense charge for the federal income tax treatment of
deferred acquisition costs due to any change in the cost to us.
Sales Charge. Currently a charge equal to 4.0% of each premium paid up to an
aggregate amount equal to ten Target Premiums for your Policy, or to ten Target
Premiums for an increase after an increase in Stated Death Benefit, is deducted
to compensate us for a portion of the cost of selling the Policy. This charge is
guaranteed to never exceed 4% of each premium paid. This deduction from premiums
is only a portion of the total sales charge that will be assessed against your
Accumulation Value in the event you surrender your Policy during the 14 Policy
Years following the Policy Date or 14 years following an increase in the Stated
Death Benefit. See "Sales Surrender Charge," page 59.
For a Policy with an increase in Stated Death Benefit, premiums paid are
allocated to the initial Stated Death Benefit and each increase in the Stated
Death Benefit (each portion of the Death Benefit is referred to as a "segment")
in the same proportion that the Target Premium for each segment bears to the
total Target Premium for the Policy after the increase is taken into account.
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The sales charge covers the cost of distribution, costs of preparing our sales
literature, other promotional expenses, and other direct and indirect expenses.
The amount of this charge cannot be specifically related to sales expenses in a
particular year since we recover these costs over the period the Policies remain
in effect. We pay the sales expenses from our own resources, including the sales
charge, any sales Surrender Charge we may collect and any profit we may earn on
the mortality and expense risk charge deducted under the Policy. The sales
charge may be reduced or waived for certain group or sponsored arrangements or
corporate purchasers.
SURRENDER CHARGE
We assess a surrender charge against your Accumulation Value upon a Surrender or
lapse of your Policy in the first 14 Policy Years, or the 14 years following an
increase in Stated Death Benefit. An increase in the Stated Death Benefit as a
result of a change in the death benefit type is not treated as an increase for
purposes of the surrender charge. The surrender charge consists of two charges:
an administrative surrender charge and a sales surrender charge.
If the Stated Death Benefit of your Policy is reduced due to a requested
decrease or a Withdrawal effected during the first 14 Policy Years or 14 years
following an increase in the Stated Death Benefit, we may deduct a portion of
the surrender charge from your Accumulation Value. We also may recalculate the
sales surrender charge in effect after the reduction is taken into account. See
"CHANGES IN DEATH BENEFIT," page 51. Decreases in the Stated Death Benefit as a
result of a change in your death benefit option do not result in a surrender
charge deduction from your Accumulation Value or in a recalculation of the
remaining sales surrender charge.
The surrender charge is designed to recover our expenses in issuing and
distributing the Policies.
Administrative Surrender Charge
The administrative surrender charge is calculated separately for the initial
Stated Death Benefit and for each increase in Stated Death Benefit (the initial
Stated Death Benefit and each increase in Stated Death Benefit is referred to as
a "death benefit segment"). The charge is equal to $4.00 per $1,000 of Stated
Death Benefit for each death benefit segment. The administrative surrender
charge in effect on any Valuation Day is taken into account when calculating the
Cash Surrender Value payable on a Surrender. Upon a reduction in Stated Death
Benefit, the administrative surrender charge for each death benefit segment will
be reduced by the same proportion that the Stated Death Benefit is reduced. The
administrative surrender charge remains level for the first 9 Policy Years or 9
years after an increase in Stated Death Benefit, then decreases by one-sixth of
the amount in effect at the end of the 9th Policy Year or 9th year after the
increase in Stated Death Benefit until it reaches zero at the beginning of the
15th Policy Year or the 15th year after the increase in Stated Death Benefit, or
the year in which the Insured reaches Age 98, whichever is earlier.
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Sales Surrender Charge
The sales surrender charge is calculated separately for the Target Premium for
the Policy as issued, and for the Target Premium for each death benefit segment
for any increase in Stated Death Benefit. Target Premiums are not based on the
planned premiums you determine when you purchase the Policy. Target Premiums are
actuarially determined based on the Age and sex of the Insured. See "PREMIUMS,"
page 35. The Target Premium for your Policy, as originally issued, and for any
increase in Stated Death Benefit made after the Policy Date will be listed in
the schedule attached to your Policy. The amount of the sales surrender charge
that may be deducted in a Policy Year is not necessarily related to our actual
sales expenses in that year.
In the case of each death benefit segment, the sales surrender charge is equal
to 46% of actual premiums paid up to one Target Premium, plus 44% of any
premiums paid between one and two Target Premiums for the death benefit segment.
The maximum sales surrender charge for each death benefit segment will be shown
in the schedule attached to your Policy. Like the administrative surrender
charge, the dollar amount of the maximum sales surrender charge for a death
benefit segment remains level for the first 9 Policy Years or 9 years after the
death benefit segment takes effect, then decreases each year for the next six
(6) years (by one-sixth of the dollar amount of the maximum sales surrender
charge at the end of the 9th Policy Year or the 9th year after the death benefit
segment takes effect) until it reaches zero at the beginning of the 15th Policy
Year or the 15th year after the death benefit segment takes effect, or the year
in which the Insured reaches Age 98, whichever is earlier.
In the first two Policy Years or first two years after an increase in Stated
Death Benefit, the sales surrender charge is capped at 26% of premiums paid up
to one Target Premium, plus 6% of premiums paid between one and two Target
Premiums plus 5% of premiums in excess of two Target Premiums.
The entire amount of the sales surrender charge in effect on any Valuation Day
is taken into account when calculating the Cash Surrender Value payable on a
Surrender. A portion of the sales surrender charge may be deducted upon a
decrease in Stated Death Benefit resulting from a requested decrease in Stated
Death Benefit or a Withdrawal, depending in part on whether premiums paid and
allocated to a death benefit segment are more or less than the Target Premium
for the segment. The following rules explain when a sales surrender charge is
deducted on a decrease in Stated Death Benefit, how the amount deducted is
calculated, and how the remaining sales surrender charge is adjusted.
o When the Stated Death Benefit is decreased, each death benefit segment
and corresponding Target Premium is reduced in the same proportion that
the Stated Death Benefit is decreased (e.g., if the Stated Death
Benefit is reduced by 10%, the Target Premium and each death benefit
segment are reduced by 10% of their respective amounts). The sales
surrender charge will be calculated based on the reduced Target
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Premium for each death benefit segment, as reduced, as if the decreased
Stated Death Benefit was always in effect.
o If after a reduction in the Stated Death Benefit the reduced Target
Premium for each reduced death benefit segment is greater than or equal
to the sum of premiums paid that were allocated to the death benefit
segment before the reduction, the maximum sales surrender charge you
pay in the future will be reduced (due to the reduction in Target
Premium), but no sales surrender charge will be deducted from your
Accumulation Value.
o If after a reduction in the Stated Death Benefit the reduced Target
Premium for each death benefit segment is less than the sum of premiums
paid that were allocated to the death benefit segment, the maximum
sales surrender charge you pay in the future will be reduced (due to
the reduction in Target Premium), and a sales surrender charge will be
deducted from your Accumulation Value. The amount of this charge is the
difference between the sales surrender charge in effect immediately
before the decrease in Stated Death Benefit and the sales surrender
charge calculated after the decrease in Stated Death Benefit.
An example of the calculation of surrender charges follows:
If the Stated Death Benefit is $200,000 for an insured age 45 on the Policy Date
and the Target Premium on this Policy is $2,800, the surrender charge assuming
that a $2,500 premium is paid at the beginning of each Policy Year is shown in
the table below:
<TABLE>
<CAPTION>
Policy Year Administrative Sales Surrender Charge Actual Surrender
Surrender Charge Charge
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 800 650 1450
2 800 860 1660
3 800 2520 3320
4 800 2520 3320
5 800 2520 3320
6 800 2520 3320
7 800 2520 3320
8 800 2520 3320
9 800 2520 3320
10 667 2100 2767
11 533 1680 2213
12 400 1260 1660
</TABLE>
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<TABLE>
<CAPTION>
Policy Year Administrative Sales Surrender Charge Actual Surrender
Surrender Charge Charge
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
13 267 840 1107
14 133 420 553
15 0 0 0
</TABLE>
MONTHLY DEDUCTIONS FROM YOUR NET ACCUMULATION VALUE
The following charges are deducted from your Net Accumulation Value on each
Monthly Processing Date. These deductions are taken from the Subaccounts of the
Variable Account and the Guaranteed Interest Account in the same proportion that
your Net Accumulation Value in each Subaccount and the Guaranteed Interest
Account bears to the total Net Accumulation Value as of the Monthly Processing
Date.
Initial Policy Charge. The initial Policy charge is $20 per month for the first
Policy Year. This charge covers the costs of setting up your Policy, other than
sales expenses, such as application processing, medical examinations,
establishment of Policy records and insurance underwriting costs.
Monthly Administrative Charge. The monthly administrative charge is $6 per month
and is guaranteed never to exceed $10 a month. This charge is designed to cover
the ongoing costs of maintaining your Policy, such as premium billing and
collections, claim processing, Policy transactions, record keeping, reporting
and other communications with Owners, and other expenses and overhead. The
initial amount of this charge is not more than the average expected cost of the
services to be provided this year.
Cost of Insurance Charge. The cost of insurance charge compensates us for the
anticipated cost of paying the amount of the Death Benefit that exceeds your
Accumulation Value upon the death of the Insured. The cost of insurance charges
are calculated monthly, and depend on a number of variables. The charge on a
Monthly Processing Date is equal to our current monthly cost of insurance rate
multiplied by the net amount at risk under the Policy for the Death Benefit.
Because the monthly rate and the net amount at risk vary, the charge varies from
month to month and from Policy to Policy.
- - -- Net Amount At Risk. Generally, the net amount at risk is the difference
between the Accumulation Value and the Death Benefit. If the Adjustable Term
Insurance Rider is in effect, the net amount at risk is determined separately
for the Base Death Benefit and for the insurance provided by the rider. The net
amount at risk for the Base Death Benefit is equal to the difference between the
current Base Death Benefit and the amount of your Accumulation Value on the
Monthly Processing Date. For this purpose, the amount of your Accumulation Value
is determined after deduction of administrative charges and other supplemental
benefit charges due on that date, but before deduction of the cost of insurance
charges for the Base Death Benefit and for any Adjustable Term Insurance Rider.
The net amount at risk for the Adjustable Term Insurance Rider is equal to the
amount of the benefit provided. If the Base Death Benefit of your
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Policy consists of more than one death benefit segment because there has been an
increase in Stated Death Benefit (see "DEATH BENEFIT AND CHANGES IN DEATH
BENEFIT TYPE," page 49), the net amount at risk is allocated to each death
benefit segment in the same proportion that the death benefit segment bears to
the sum of all death benefit segments as of the Monthly Processing Date.
If the Base Death Benefit at the beginning of the month is increased, for
example, due to the requirements of federal income tax law definition of life
insurance, the net amount at risk for the Base Death Benefit that month will
also increase, but the net amount at risk for any Adjustable Term Insurance
Rider may be reduced. Changes in the relative makeup of the death benefit may
affect the cost of insurance charge.
- - -- Cost of Insurance Rate. The cost of insurance rate for your Policy (or for a
death benefit segment) is based on the Age, sex and risk class of the Insured.
Separate cost of insurance rates apply to the Base Death Benefit, the Adjustable
Term Insurance Rider (See, "ADDITIONAL BENEFITS," page 68), and any additional
death benefit segments. We place the Insured in a risk class when we issue the
Policy, based on our underwriting of the application. This original risk class
applies to the initial Stated Death Benefit and any Adjustable Term Insurance
Rider then added to the Policy. When an increase in Stated Death Benefit is
requested, we conduct underwriting before approving the increase to determine
whether a different risk class will apply to the increase. If the risk class for
the increase has lower cost of insurance rates than the original risk class, the
risk class for the increase also will be applied to the initial Stated Death
Benefit. If the risk class for the increase has higher cost of insurance rates
than the original risk class, the risk class for the increase will apply only to
the increase in Stated Death Benefit, and the original risk class will continue
to apply to the initial Stated Death Benefit. We currently place Insureds in the
following risk classes, based on our underwriting: a smoker (tobacco) or
nonsmoker (non-tobacco) standard risk class or a risk class involving a higher
mortality risk (a "substandard class").
Cost of insurance rates may change from time to time, but they will never be
more than the guaranteed maximum rates set forth in your Policy. The guaranteed
rates for standard risk classes are based on the 1980 Commissioners' Standard
Ordinary Mortality Tables, Age Nearest Birthday ("1980 CSO Tables"),
sex-distinct. The guaranteed rates for substandard risk classes are based on
multiples or additives of the 1980 CSO Tables. Unisex rates are used where
appropriate under applicable law, currently including the state of Montana and
any Policies purchased by employers and employee organizations in connection
with employment-related insurance or benefit programs. Our current cost of
insurance rates may be less than the guaranteed rates. In addition, current
rates are less for Policies with a Stated Death Benefit (or Target Death
Benefit, if any) that is at least $250,000 on the Policy Date. Our current cost
of insurance rates will be determined based on our expectations as to future
mortality, investment, expense and persistency experience.
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Cost of insurance rates (whether guaranteed or current) for an Insured in a
nonsmoker standard risk class are lower than guaranteed rates for an Insured of
the same Age and sex in a smoker standard risk class. Cost of insurance rates
(whether guaranteed or current) for an Insured in a nonsmoker or smoker standard
risk class are generally lower than guaranteed rates for an Insured of the same
Age and sex and smoking status in a substandard risk class. Cost of insurance
rates (whether guaranteed or current) generally increase as the Age of the
Insured increases.
Guaranteed Minimum Death Benefit Charge. If the Guaranteed Minimum Death Benefit
provision is elected, we currently charge $0.005 per thousand of Stated Death
Benefit each month during the Guarantee Period. This charge is guaranteed never
to exceed $0.01 per thousand of Stated Death Benefit each month during the
Guarantee Period.
Supplemental Benefit Charges. If any additional benefits are added to your
Policy, charges for these benefits will be deducted monthly as part of the
monthly deduction. See "ADDITIONAL BENEFITS," page 68.
OTHER ADMINISTRATIVE CHARGES
The following describes other administrative charges that may be imposed on
certain transactions or requests. We do not expect to earn a profit from these
charges.
Withdrawal Transaction Charge. Prior to the Maturity Date and after the Free
Look Period, you may take one Withdrawal each Policy Year without a withdrawal
transaction charge. We impose a withdrawal transaction charge equal to the
lesser of $25 or 2% of the amount requested on each additional Withdrawal in
that Policy Year. The withdrawal transaction charge will be deducted from your
Net Accumulation Value on the same basis as the Withdrawal is taken.
Excess Transfer Charge. We allow you 12 free transfers among and between the
Subaccounts and the Guaranteed Interest Account each Policy Year. For each
additional transfer, we will charge you $25 at the time each such transfer is
processed. The charge will be deducted from your Subaccount Accumulation Value
and Guaranteed Interest Account Accumulation Value in the same proportion as
amounts transferred from those values. Any transfer(s) due to the election of
Dollar Cost Averaging will not be included in determining if the excess transfer
charge should apply.
Change in Net Premium Allocation Percentages. If you change your Net Premium
allocation percentages more than five times during a Policy Year, we may impose
an administrative charge of $25. If imposed, this charge will be deducted
proportionally from your Subaccount Accumulation Values and Guaranteed Interest
Account Accumulation Value as of the Valuation Day the allocation change is
effective.
Automatic Rebalancing Charge. If you change the Automatic Rebalancing allocation
more than five times in a Policy Year, a $25 charge is deducted from your
Accumulation Value in
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proportion to the Subaccount Accumulation Values and the Guaranteed Interest
Account Accumulation Value as of the Valuation Day the allocation change is
effective.
CHARGES DEDUCTED FROM THE SUBACCOUNTS
Mortality and Expense Risk Charge. We deduct a daily charge from the assets in
the Subaccounts to compensate Southland for mortality and expense risks that we
assume under the Policy. The daily charge is at the rate of 0.002466%
(equivalent to an annual rate of 0.90%) on the assets of the Variable Account.
The mortality and expense risk charge is not deducted from the Guaranteed
Interest Account. If the mortality and expense risk charge is insufficient to
cover the cost of mortality and expense risks undertaken by Southland, the
Company will bear the shortfall. Conversely, if the charge proves more than
sufficient, the excess will be profit to the Company and will be available for
any proper corporate purpose including, among other things, payment of sales
expenses.
The mortality risk assumed is the risk that Insureds, as a group, will live for
a shorter period of time than estimated and, therefore, the cost of insurance
charges specified in the Policy will be insufficient to meet our actual claims.
The expense risk assumed is the risk that it will cost us more to issue and
administer the Policy and the Variable Account than we expected in setting
certain of the charge levels guaranteed in the Policy.
PORTFOLIO EXPENSES
There are fees and charges deducted from the Portfolios. Please read the
prospectus for the Portfolios you are considering for complete details.
PERSISTENCY REFUND
Southland will provide a persistency refund to long-term Owners of the Policy.
Each month the Policy or a coverage segment of Stated Death Benefit remains in
force after the tenth Policy Anniversary, Southland will credit the Net
Accumulation Value with a refund equivalent to 0.35% on an annualized basis
(0.02917% monthly) of the Net Accumulation Value for that segment. The Net
Accumulation Value will be allocated to each coverage segment based upon the
number of completed Policy Years that segment has been in force and the size of
the guideline annual premium as defined by the Federal income tax law definition
of life insurance.
The persistency refund will be added to the Subaccounts of the Variable Account
in the same proportion that the Accumulation Value in each Subaccount bears to
the Net Accumulation Value in the Variable Account as of the Monthly Processing
Date.
The following are examples of how the persistency refund affects a $10,000 Net
Accumulation Value each month if: (a) there is no Policy loan outstanding; and
(b) there is an outstanding Policy loan:
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Accumulation Value = $10,000 (all in the Variable Account)
Monthly persistency refund rate = .0002917
Persistency refund = 10,000 x .0002917 = $2.92
Variable Account
----------------
Before Persistency Refund $10,000.00
After Persistency Refund $10,002.92
The following is an example of how the persistency refund affects the
Accumulation Value each month if the Policy has a loan:
Accumulation Value = $10,000
Accumulation Value in the Variable Account = $5,000
Policy Loan Account Value = $5,000
Monthly persistency refund rate = .0002917
Persistency refund = 5,000 x .0002917 = $1.46
Variable Account Loan Division
---------------- -------------
Before Persistency Refund $5,000.00 $5,000.00
After Persistency Refund $5,001.46 $5,000.00
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, we may reduce any sales, surrender,
administrative, and mortality and expense risk charges. We may also change the
minimum initial and additional premium requirements, or accept a lower minimum
initial Stated Death Benefit. Group arrangements include those in which a
trustee or an employer, for example, purchases Policies covering a group of
individuals on a group basis. Sponsored arrangements include those in which an
employer allows us to sell Policies to its employees on an individual basis.
Our costs for sales, administration, and mortality generally vary with the size
and stability of the group among other factors. We take all these factors into
account when reducing charges. To qualify for reduced charges, a group or
sponsored arrangement must meet certain requirements,
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including our requirements for size and number of years in existence. Group or
sponsored arrangements that have been set up solely to buy Policies or that have
been in existence less than six months will not qualify for reduced charges.
We will make these and any similar reductions according to our rules in effect
when an application or enrollment form for a Policy is approved. We may change
these rules from time to time. Any variation in the administrative charge will
reflect differences in costs or services and will not be unfairly
discriminatory.
ADDITIONAL POLICY INFORMATION
THE OWNER
The original Owner is the person named as the Owner in the application. You, as
Owner, can exercise all rights and receive the benefits during the Insured's
life before the Maturity Date. All rights of the Owner are subject to the rights
of any assignee and any irrevocable Beneficiary.
THE BENEFICIARY
The Beneficiary is the person to whom we pay the Death Proceeds upon the death
of the Insured prior to the Maturity Date.
The original Beneficiary and any Contingent Beneficiaries are named in the
application. Contingent Beneficiaries are paid Death Proceeds only if no
Beneficiary survives. If more than one Beneficiary in a class survives, they
will share the Death Proceeds equally, unless the Owner's designation provides
otherwise. If there is no designated Beneficiary or Contingent Beneficiary
surviving, we will pay the Death Proceeds to the Owner's estate. We will pay the
Death Proceeds to the most recent Beneficiary designation on file with us.
CHANGE OF OWNER OR BENEFICIARY
Prior to the Maturity Date and after the Free Look Period, you may transfer
ownership of the Policy subject to our published rules at the time of the
change.
The Owner may name a new Beneficiary unless an irrevocable Beneficiary has
previously been named. When an irrevocable Beneficiary has been designated, the
Owner and the irrevocable Beneficiary must act together to make any Beneficiary
changes.
To make any of these changes, you must send us Written Notice. The change will
take effect as of the day the notice is signed. The change will not affect any
payment made or action taken by us before recording the change at our Customer
Service Center. For possible tax consequences, see "FEDERAL TAX CONSIDERATIONS,"
page 71.
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RIGHT TO CONVERT POLICY
At any time within the first 24 Policy Months after issuance of the Policy or
after an increase in Stated Death Benefit, while the Policy is in force during
the life of the Insured, the Owner may convert the Policy without evidence of
insurability to a new Policy on the life of the Insured providing benefits which
do not vary with the investment experience of the Variable Account. This
conversion is accomplished by the transfer of the entire amounts in the
Subaccounts of the Variable Account to the Guaranteed Interest Account and the
allocation of all future premium payments to the Guaranteed Interest Account.
This will, in effect, serve as a conversion of the Policy to the equivalent of a
flexible premium universal life insurance policy. No charge will be imposed on
the transfer in exercising this exchange privilege. The converted policy will be
on the flexible premium adjustable life insurance plan being issued by
Southland. The converted policy will provide the same amount of death benefit or
the same net amount at risk to Southland as the Policy and will have the same
issue Age and date of issue as the Policy. The cost of insurance rates for the
converted policy will be those applicable to flexible premium adjustable life
policies in the same risk classification as the Policy and issued on the same
date as the Policy. All Policy Debt must be paid. The contestable period,
suicide period, and surrender charge period of the converted policy will be
measured from the date of issue of the Policy. The effective date of the
conversion will be the date Southland received a Written Request to convert at
its Customer Service Center. When exercising your conversion right, you are
required to return the Policy to our Customer Service Center, and we will send
to you a new policy form which will not allow you to allocate future premiums to
Subaccounts of the Variable Account.
REINSTATEMENT
If coverage ends because a sufficient premium is not paid during a grace period,
the Policy may be reinstated within five (5) years after the lapse, subject to
compliance with certain conditions, including the payment of a necessary premium
and submission of satisfactory evidence of insurability. See your Policy for
further information.
OTHER POLICY PROVISIONS
If an Age or sex given in the application is misstated, the amounts payable or
benefits provided by the Policy shall be those that the premium would have
bought at the correct Age or sex.
We cannot contest this Policy after is has been in force for two years from the
Policy Date during the Insured's lifetime except for non-payment of premium. No
benefits added to your Policy after the Policy Date can be contested after they
have been in force for two years from the effective date of such benefit, during
the Insured's lifetime except for non-payment of premium.
We must receive any election, designation, change, assignment, or any other
change request you make in writing. We may require a return of your Policy for
any Policy change or for paying Death Benefits. If your Policy has been lost, we
will require that you complete and return a
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"Policy Replacement Form." The effective date of any change will be the date the
request was signed. Any change will not affect payments made or action taken by
us before the change is recorded at our Customer Service Center.
You may assign this Policy as collateral security upon Written Notice to us.
Once it is recorded with us, the rights of the Owner and Beneficiary are subject
to the assignment. It is your responsibility to make sure the assignment is
valid.
AUTHORITY TO CHANGE POLICY TERMS
Only the President, a Vice President, or the Secretary of the Company has
authority to agree on behalf of the Company to any alteration of the Policy or
to any waiver of the right or requirements of the Company.
This Policy is intended to qualify as a life insurance policy under the Code. To
that end, all terms and provisions of the Policy shall be interpreted or
implemented to ensure or maintain such qualification.
We reserve the right to amend this Policy, to reflect any clarifications or
changes that may be needed or are appropriate, or to conform it to any
applicable changes in the tax requirements, in order to qualify the Policy as a
life insurance policy under the Code. We will send you Written Notice of such
amendments.
ADDITIONAL BENEFITS
Your Policy may include additional benefits, which are also attached to the
Policy by Rider. A charge will be deducted monthly from your Accumulation Value
for each additional benefit you choose. These benefits may be canceled at any
time. More details will be included in your Policy if you choose any of these
benefits. A Policy may not contain both the Waiver of Specified Premium Rider
and the Waiver of Cost of Insurance Rider at the same time.
From time to time we may make available Riders other than those listed below.
Contact your registered representative for a complete list of the Riders
available.
ACCIDENTAL DEATH BENEFIT RIDER
This Rider will pay the benefit amount selected by you if the Insured dies as a
result of an accident or if the Insured dies within 90 days of an injury
sustained in an accident and the death occurs prior to the Insured's Age 70. The
minimum amount of coverage is $5,000 and the maximum amount is the Stated Death
Benefit.
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ADJUSTABLE TERM INSURANCE RIDER
The Death Proceeds may be increased by adding the Adjustable Term Insurance
Rider on the life of the Insured. As the name suggests, the Adjustable Term
Insurance Rider adjusts over time.
At issue, you determine a schedule of death benefits called the Target Death
Benefit which you establish at levels to meet your projected needs in the
future. You may set the Target Death Benefit to vary as often as each Policy
Year. The Target Death Benefit will be listed in the schedule attached to the
Policy.
Subject to our rules, the Target Death Benefit schedule may be changed after
issue. See "DEATH BENEFIT AND CHANGES IN DEATH BENEFIT TYPE," page 49.
The amount of Adjustable Term Insurance in force at any time is the amount
needed to fill the difference between the Target Death Benefit you have selected
and the Base Death Benefit then in effect. The Adjustable Term Insurance Rider
is dynamic in that it adjusts daily for variations in the Base Death Benefit
under the Policy (i.e., changes resulting from the federal income tax law
definition of life insurance test you have chosen under option 1 or 2).
For example, assume the Base Death Benefit varies according to the following
schedule. The Adjustable Term Insurance Rider will adjust to provide Death
Proceeds equal to the Target Death Benefit in each year:
Base Death Benefit Target Death Benefit Adjustable Term Insurance
Rider Amount
$201,500 $250,000 $48,500
$202,500 $250,000 $47,500
$202,250 $250,000 $47,750
Since the Adjustable Term Insurance Rider is dynamic, it is possible that the
Term Rider amount may be eliminated entirely as a result of increases in the
Base Death Benefit under the Policy. Using the example outlined above, if the
Base Death Benefit under the Policy grew to $250,000, the Adjustable Term
Insurance Rider amount would be reduced to zero. (It can never be reduced below
zero.) Even though the Adjustable Term Insurance Rider amount is reduced to
zero, the Rider will remain in effect until you choose to remove it from your
Policy. Therefore, if the Base Death Benefit under the Policy is subsequently
reduced below the Target Death Benefit you have applied for, the Adjustable Term
Insurance Rider amount will reappear as needed to maintain the Target Death
Benefit at the requested level. Withdrawals may reduce the amount of the Target
Death Benefit. See "WITHDRAWALS," page 45.
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We generally restrict the amount of the Target Death Benefit to an amount not
more than 500% of the Stated Death Benefit. For example, if the Stated Death
Benefit is $100,000 then the maximum amount of Target Death Benefit we will
allow will be $500,000.
Given the flexible nature of the Adjustable Term Insurance Rider, there is no
defined premium for the amount of coverage. Instead, a cost of insurance charge
is deducted monthly from your Accumulation Value for the Adjustable Term
Insurance Rider amount in effect. These cost of insurance charges may be lower
than the rates applicable to the Base Death Benefit in the early Policy Years,
and may be higher in the later Policy Years. See "Cost of Insurance Charge,"
page 61. Since there is no defined premium related to the Adjustable Term
Insurance Rider, there are no sales or Surrender Charges associated with this
coverage; therefore, any increase in the Target Death Benefit which does not
increase the Stated Death Benefit will not increase the total Surrender Charge
for your Policy; any decrease in the Adjustable Term Insurance Rider coverage
will not cause a Surrender Charge to be incurred. See "DEATH BENEFIT AND CHANGES
IN DEATH BENEFIT TYPE," page 49.
The Adjustable Term Insurance Rider provides life insurance coverage on the
Insured as long as the Cash Surrender Value is sufficient to pay all of the
deductions that are taken out of your Net Accumulation Value each month.
ADDITIONAL INSURED RIDER
This Rider allows you to provide for death benefits upon the death of immediate
family members of the Insured. A maximum of nine Additional Insured Riders may
be added to your Policy.
The minimum amount of coverage for each Rider is $10,000 and the maximum
coverage for all Additional Insured Riders combined equals five times the Stated
Death Benefit of your Policy.
CHILDREN'S INSURANCE RIDER
This Rider will allow you to add death benefit coverage on your children. It
also provides that you may cover children upon birth or legal adoption without
presenting evidence of insurability to us. The minimum amount of coverage is
$1,000 per child and the maximum amount of coverage is $10,000 per child.
EXCHANGE OF INSURED RIDER
This Rider allows you to change the person insured under your Policy. If you do
so, the cost of insurance charge may change, but we will not change the Policy
values or the Surrender Charge. There is no charge for this Rider. The exercise
of this Rider may have adverse tax consequences. For federal tax purposes, the
exercise of this Rider is treated as a surrender of the Policy. Consult your tax
advisor. See "FEDERAL TAX CONSIDERATIONS," page 71.
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GUARANTEED INSURABILITY RIDER
This Rider will allow you to increase your Stated Death Benefit without
providing us with evidence that the Insured remains insurable during the Policy.
Increases are limited in amount and timing.
WAIVER OF THE COST OF INSURANCE RIDER
This Rider provides that during the total disability of the Insured, while the
Policy remains in force, the monthly expense charges, cost of insurance charges
and Rider charges will be waived and therefore not deducted from your Net
Accumulation Value.
WAIVER OF SPECIFIED PREMIUM RIDER
This Rider provides that during the total disability of the Insured, while the
Policy remains in force, a specified premium will be credited monthly to the
Policy. In your application you select the amount of premium, within limits,
that will be waived.
GUARANTEED MINIMUM DEATH BENEFIT RIDER
This Rider provides that the Policy will remain in force for the selected
Guarantee Period regardless of the amount of the Cash Surrender Value, provided
certain conditions are met.
FEDERAL TAX CONSIDERATIONS
The Following Discussion is General and
Is Not Intended as Tax Advice
Introduction
The following summary provides a general description of the federal income tax
considerations associated with your purchase of the Policy and does not purport
to be complete or to cover all situations. Southland advises that counsel or
other competent tax advisors should be consulted for more complete information.
This discussion is based upon Southland's understanding of the present federal
income tax laws as they are currently interpreted by the Internal Revenue
Service (the "Service"). No representation is made as to the likelihood of
continuation of the present federal income tax laws or of the current
interpretations by the Service.
Tax Status of the Policy
Code section 7702 sets forth the definition of a life insurance contract for
federal tax purposes. The Secretary of the Treasury (the "Treasury") is
authorized to prescribe regulations implementing section 7702. While proposed
regulations and other interim guidance has been
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<PAGE>
issued, final regulations have not been adopted. In short, guidance as to how
section 7702 is to be adopted is limited. If a Policy were determined not to be
a life insurance contract for purposes of section 7702, such Policy would not
qualify for the favorable tax treatment normally provided to a life insurance
policy.
With respect to a Policy issued on the basis of a standard rate class, Southland
believes (largely in reliance on IRS Notice 88-128 and the proposed regulations
under section 7702, issued on July 5, 1991) that such a Policy should meet the
section 7702 definition of a "life insurance contract."
With respect to a Policy that is issued on a substandard basis (i.e., a premium
class involving higher than standard mortality risk), there is less guidance, in
particular as to how the mortality and other expense requirements of section
7702 should be applied in determining whether such a Policy meets the section
7702 definition of a life insurance contract.
If it is subsequently determined that a Policy does not satisfy section 7702,
Southland may take whatever steps are appropriate and necessary to attempt to
cause such a Policy to comply with section 7702. For these reasons, Southland
reserves the right to restrict Policy transactions as necessary to attempt to
continue its qualification as a life insurance contract under section 7702.
In addition to the definitional test described above, section 817(h) mandates
that the investments of the Variable Account must be "adequately diversified" in
accordance with Treasury regulations in order for the Policy to qualify as a
life insurance contract under section 7702 of the Code. The Variable Account,
through the Portfolios, intends to comply with the diversification requirements
prescribed in Treas. Reg. '1.817-5, which affect how the Portfolio's assets are
to be invested.
In certain circumstances, owners of variable life insurance contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includable in the variable
contract owner's gross income. The Service has stated in published rulings that
a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
also announced, in connection with the issuance of temporary regulations
concerning diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (i.e., the Policyowner), rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular subaccounts without being treated as owners of the
underlying assets."
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<PAGE>
The ownership rights under the Policy are similar to, but different in certain
respects from, those described by the Service in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating premium payments and
policy values. These differences could result in an Owner being treated as the
owner of a pro rata portion of the assets of the Variable Account. In addition,
Southland does not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury has stated it expects to issue.
Southland therefore reserves the right to modify the Policy as necessary to
attempt to prevent an Owner from being considered the owner of a pro rata share
of the assets of the Variable Account or to otherwise qualify the Policy for
favorable tax treatment.
The Policies may be used in various arrangements, including nonqualified
deferred compensation or salary continuance plans, split dollar insurance plans,
executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Southland does not guarantee the
tax treatment of any such arrangement. Therefore, if you are contemplating the
use of the Policies in any arrangement the value of which depends in part on its
tax consequences, you should be sure to consult a qualified tax advisor
regarding the tax attributes of the particular arrangement.
The following discussion assumes that the Policy will qualify as a life
insurance contract for federal income tax purposes.
Tax Treatment of Policy Benefits
In General. Southland believes that the proceeds and cash value increases of a
Policy should be treated in a manner consistent with a flexible-benefit life
insurance policy for federal income tax purposes. Thus, the Death Benefit under
the Policy should be excludable from the gross income of the Beneficiary under
Code section 101(a)(1).
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Death Benefit Option (i.e., a change from type A to type B or vice
versa), a policy loan, a Withdrawal, a surrender, or an assignment of the Policy
may have federal income tax consequences. In addition, federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on the circumstances of each Owner or Beneficiary.
Generally, the Owner will not be deemed to be in constructive receipt of the
Accumulation Value, including increments thereof, until there is a distribution.
The tax consequences of distributions from, and loans taken from or secured by a
Policy, depend on whether the Policy is classified as a "Modified Endowment
Contract." Whether a Policy is or is not a modified endowment contract, upon a
complete surrender or lapse of a Policy, or when benefits are paid at such a
Policy's maturity, if the amounts received plus the amount of indebtedness
exceeds the
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<PAGE>
total investment in the Policy the excess will generally be treated as ordinary
income subject to tax.
Modified Endowment Contracts. Code section 7702A establishes a class of life
insurance contracts designated as "Modified Endowment Contracts," which applies
to Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified Endowment Contract
will depend on the individual circumstances of each Policy. In general, a Policy
will be a Modified Endowment Contract if the accumulated premiums paid at any
time during the first seven Policy Years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. The determination of whether a Policy will be a Modified Endowment
Contract after a material change generally depends upon the relationship of the
Death Benefit and Policy Value at the time of such change and the additional
premiums paid in the seven years following the material change. The rules
relating to whether a Policy will be treated as a Modified Endowment Contract
are extremely complex and cannot be adequately described in the limited confines
of this summary. Therefore, a current or prospective Owner should consult with a
competent advisor to determine whether a policy transaction will cause the
Policy to be treated as a Modified Endowment Contract. Southland will, however,
monitor Policies and will attempt to notify an Owner on a timely basis if his or
her Policy is in jeopardy of becoming a Modified Endowment Contract.
Distributions from Policies Classified as Modified Endowment Contracts. Policies
classified as Modified Endowment Contracts will be subject to the following tax
rules. First, all distributions, including distributions upon surrender and
partial surrenders from such a Policy, are treated as ordinary income subject to
tax up to the amount equal to the excess (if any) of the Accumulation Value
immediately before the distribution over the investment in the Policy (described
below) at such time. Second, loans taken from or secured by, such a Policy are
treated as distributions from such a Policy and taxed accordingly. Past due loan
interest that is added to the loan amount will be treated as a loan. Third, a 10
percent additional income tax is included in income except where the
distribution or loan is made on or after the Owner attains age 59 1/2, is
attributable to the Owner's becoming disabled, or is part of a series of
substantially equal periodic payments for the life (or life expectancy) of the
Owner or the joint lives (or joint life expectancies) of the Owner and the
Owner's Beneficiary.
If a Policy becomes a modified endowment contract after it is issued,
distributions that occur during the policy year it becomes a modified endowment
contract and any subsequent policy year will be taxed as distributions from a
modified endowment contract. In addition, distributions from a Policy within two
years before it becomes a modified endowment contract will be taxed as
distributions from a modified endowment contract.
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<PAGE>
Distributions From Policies Not Classified as Modified Endowment Contracts.
Distributions from a Policy that is not a Modified Endowment Contract, are
generally treated as first recovering the investment in the Policy (described
below) and then, only after the return of all such investment in the Policy, as
distributing taxable income. An exception to this general rule occurs in the
case of a decrease in the Policy's Death Benefit or any other change that
reduces benefits under the Policy in the first fifteen years after the Policy is
issued and that results in a cash distribution to the Owner in order for the
Policy to continue complying with the section 7702 definitional limits. Such a
cash distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment Contract
are not treated as distributions. Instead, such loans generally are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender) nor
loans from, or secured by, a Policy that is not Modified Endowment Contract are
subject to the 10 percent additional tax.
Policy Loans. Generally, consumer interest paid on any loan under a Policy which
is owned by an individual is not deductible. The deduction of interest on Policy
loans is further restricted by section 264 of the Code. Before taking a Policy
loan, an Owner should consult a tax adviser as to the tax consequences of such a
loan.
Investment in the Policy. Investment in the Policy means (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Owner (except that the amount of any loan from, or secured by, a Policy
that is a Modified Endowment Contract, to the extent such amount is excluded
from gross income, will be disregarded), plus (iii) the amount of any loan from,
or secured by a Policy that is a Modified Endowment Contract to the extent that
such amount is included in the gross income of the Owner.
Multiple Policies. All Modified Endowment Contracts that are issued by Southland
(and its affiliates) to the same Owner during any calendar year are treated as
one Modified Endowment Contract for purposes of determining the amount
includable in the gross income under Code section 72(e).
OTHER INFORMATION
REPORTS TO OWNERS
Southland maintains records and accounts of all transactions involving the
Policy, the Guaranteed Interest Account and the Variable Account. Each year, we
will send you a report that shows current information regarding your Policy.
This report will show for the last Policy Year the current Accumulation Value,
Cash Surrender Value and Premiums paid since the last report.
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<PAGE>
The report will also show the allocation of your Accumulation Value as of the
date of the report and the amounts added to or deducted from your Subaccount
Accumulation Values and Guaranteed Interest Account Accumulation Value since the
last report. The report will include any other information that may be currently
required by the insurance supervisory official of the jurisdiction in which the
Policy is delivered.
We will also send you copies of any shareholder reports of the Portfolios in
which the Subaccounts invest, as well as any other reports, notices or documents
required by law to be furnished to Policyowners.
DISTRIBUTION OF THE POLICIES
ING America Equities, Inc. is principal underwriter and distributor of the
Policies as well as of other contracts issued through the Variable Account and
other separate accounts of Southland. ING America Equities, Inc. is an affiliate
of Southland. It is a corporation organized under the laws of the State of
Colorado in 1993. Its officers are located at 1290 Broadway, Denver,
Colorado, 80203-1290. It is registered with the SEC as a broker-dealer and is a
member of the National Association of Securities Dealers, Inc. ("NASD").
ING America Equities, Inc. serves as underwriter/distributor for other separate
accounts registered with the SEC. We pay ING America Equities, Inc. for acting
as principal underwriter under a distribution agreement. The Policy will be
offered on a continuous basis and Southland does not anticipate discontinuing
the offer.
ING America Equities, Inc. will enter into sales agreements with broker-dealers
to solicit for the sale of the Policies through registered representatives who
are licensed to sell securities and variable insurance products. Registered
representatives who sell the Policy will be paid a maximum sales commission of
approximately 85% of all premiums paid in the first Policy Year up to one Target
Premium, and 3% of premiums paid in the first Policy Year in excess of one
Target Premium. An additional 3% is paid on premiums received in Policy Years 2
through 10. In addition, certain bonuses and managerial compensation may be
paid.
VOTING PRIVILEGES
In accordance with its view of current applicable law, the Company will vote
Portfolio shares held in the Variable Account at regular and special shareholder
meetings of the Portfolios in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts. If, however, the 1940
Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or the Company otherwise determines that
it is allowed to vote the shares in its own right, it may elect to do so.
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<PAGE>
The number of votes that an Owner has the right to instruct will be calculated
separately for each Subaccount, and may include fractional votes. An Owner holds
a voting interest in each Subaccount to which the Variable Accumulation Value is
allocated.
For each Owner, the number of votes attributable to a Subaccount will be
determined by dividing the Accumulation Value attributable to that Owner's
Policy in that Subaccount by the net asset value per share of the Portfolio in
which that Subaccount invests.
The number of votes available to an Owner will be determined as of the date
coincident with the date established by the Portfolio for determining
shareholders eligible to vote at the relevant meeting of the Portfolio's
shareholders. Voting instructions will be solicited by written communication
prior to such meeting in accordance with procedures established for the
Portfolio. Each Owner having a voting interest in a Subaccount will receive
proxy materials and reports relating to any meeting of shareholders of the
Portfolio in which that Subaccount invests.
Portfolio shares as to which no timely instructions are received and shares held
by the Company in a Subaccount as to which no Owner has a beneficial interest
will be voted in proportion to the voting instructions which are received with
respect to all Policies participating in that Subaccount. Voting instructions to
abstain on any item to be voted upon will be applied to reduce the total number
of votes eligible to be cast on a matter. Under the 1940 Act, certain actions
affecting the Variable Account (such as some of those described under "CHANGES
RELATING TO THE VARIABLE ACCOUNT," page 33) may require Owner approval. In that
case, you will be entitled to vote in proportion to your Variable Accumulation
Value.
We may, if required by state insurance officials, disregard Owner voting
instructions if such instructions would require shares to be voted so as to
cause a change in sub-classification or investment objectives of one or more of
the Portfolios, or to approve or disapprove an investment advisory agreement. In
addition, we may under certain circumstances disregard voting instructions that
would require changes in the investment policy or investment adviser of one or
more of the Portfolios, provided that we reasonably disapprove of such changes
in accordance with applicable federal regulations. If we ever disregard voting
instructions, we will advise Owners of that action and of our reasons for such
action in the next semiannual report. Finally, we reserve the right to modify
the manner in which we calculate the weight to be given to pass-through voting
instructions where such a change is necessary to comply with current federal
regulations or the current interpretation thereof.
LEGAL PROCEEDINGS
There are no legal or administrative proceedings to which the Variable Account
is a party or to which the assets of the Variable Account are subject.
Southland, as an insurance company, is ordinarily involved in litigation. We do
not believe that any current litigation or administrative proceeding is material
to Southland's ability to meet its obligations under the Policy or to the
Variable Account nor do we expect to incur significant losses from such actions.
ING America
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<PAGE>
Equities, Inc. is not involved in any legal or administrative proceedings that
are material with respect to the Variable Account or the Variable Account's
assets.
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<PAGE>
SOUTHLAND'S DIRECTORS AND OFFICERS
Southland Life Insurance Company is managed by a board of directors. The
following table sets forth the name, address and principal occupations during
the past five years of each of Southland's directors.
<TABLE>
<CAPTION>
Position with Principal Occupation During the
Name and Address Southland Life Past Five Years
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
R. Glenn Hilliard Chairman Director, Life of Georgia (since 1994);
5780 Powers Ferry Road, N.W. President & Chief Executive Officer, ING
Atlanta, GA 30327-4390 North America Insurance Corp. (since 1993);
Chief Executive Officer & Director, ING
America Life Corp. (since 1993); Chairman
of the Board and Chief Executive Officer,
Southland Life (since 1993); Chief
Executive Officer, ING America Life Corp.
(1993); Chief Executive Officer & Director,
Security Life and Denver Insurance Company
(since 1989).
- - --------------------------------------------------------------------------------------------------------------------
Robert J. St. Jacques Vice Chief Executive Officer, Southland Life
5780 Power Ferry Road, N.W. Chairman Insurance Company (since 1995); President &
Atlanta, GA 30327-4390 Chief Executive Officer, ING America Life
Corporation (since 1994); President & Chief
Executive Officer, The Laurentian Group
(1990 - 1994); Chairman & Chief Executive
Officer, The Imperial Life Insurance Co. of
Canada (1990-1994).
- - --------------------------------------------------------------------------------------------------------------------
Michael W. Cunningham Director Executive Vice President, Chief Financial
5780 Powers Ferry Road, N.W. Officer, ING North America Insurance
Atlanta, GA 30327-4390 Corporation (since June, 1991); Executive
Vice President, Chief Financial Officer,
American Income Life (1991); Senior Vice
President, Chief Financial Officer,
Integon Corporation (1987-1991).
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation During the
Name and Address Southland Life Past Five Years
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Linda B. Emory Director Executive Vice President, ING North America
5780 Powers Ferry Road, N.W. Insurance Corporation (since 1994);
Atlanta, GA 30327-4390 Director, Life of Georgia (since 1991);
Senior Vice President, Life of Georgia
(1990-1994).
- - --------------------------------------------------------------------------------------------------------------------
James D. Thompson Director President & Chief Operating Officer,
5780 Powers Ferry Road, N.W. Southland Life Insurance Company (since
Atlanta, GA 30327-4390 1995); Executive Vice President & Chief
Financial Officer, ING America Life Corporation
(1993-1995); Vice President, ITT Corporation
(1992-1993); Executive Vice President, ITT
Corporation (1990-1993).
- - --------------------------------------------------------------------------------------------------------------------
P. Randall Lowery Director Senior Vice President & Corporate Actuary,
5780 Powers Ferry Road, N.W. ING America Life Corporation (since 1994);
Atlanta, GA 30327-4390 Vice President & Actuary, Southland Life
Insurance Company (1990-1994).
- - --------------------------------------------------------------------------------------------------------------------
Francis J. Mulcahy Director Vice President, General Counsel &
5780 Powers Ferry Road, N.W. Secretary, Life of Georgia (since 1995);
Atlanta, GA 30327-4390 Vice President, General Counsel &
Secretary, Southland Life Insurance Company
(since 1995); Vice President & Secretary, Life
Insurance Company of Georgia (since 1994);
Vice President & Secretary, Southland Life
Insurance Company (since 1994); General Counsel,
Southland Life Insurance Company (1989-1994);
Associate General Counsel, Southland Life
Insurance Company (1989-1994); Associate General
Counsel, Life Insurance Company of Georgia
(1983-1994).
</TABLE>
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<PAGE>
The following table sets forth the names, addresses and principal occupations
during the last five years of the senior officers of Southland (other than
officers who are members of Southland's board of directors).
<TABLE>
<CAPTION>
<S> <C> <C>
Position with Principal Occupation During the Past Five
Name and Address Southland Life Years
- - --------------------------------------------------------------------------------------------------------------------
John R. Barmeyer Senior Vice President, Director, Life of Georgia (since 1992);
5780 Powers Ferry Road, N.W. Chief Legal Officer General Counsel, ING America Life
Atlanta, GA 30327-4390 Insurance Corporation, and Senior Vice
President, General Counsel & Secretary,
Life of Georgia (since 1992); Vice President,
General Counsel & Secretary,
Life of Georgia (1990-1992).
- - ------------------------------------------------------------------------------------------------------------------
Alan Jeglinski Senior Vice President Senior Vice President, Operations (since
5780 Powers Ferry Road, N.W. - Operations 1995); Vice President - Administration
Atlanta, GA 30327-4390 (1994-1995); Vice President, Property and
Casualty (1993-1994); General Manager,
Orion Insurance, PLC (1985-1993)
- - ------------------------------------------------------------------------------------------------------------------
James J. Carey Senior Vice President Senior Vice President - Marketing/Chief
5780 Powers Ferry Road, N.W. - Marketing/Chief Marketing Officer (since 1996); President,
Atlanta, GA 30327-4390 Marketing Officer United Securities Alliance (1994-1996);
Independent Consulting (1992-1994); Executive
Vice President - Marketing , Primerica
Financial Services (1987-1992)
- - --------------------------------------------------------------------------------------------------------------------
Pamela Crane Senior Vice President Senior Vice President - Actuarial (since
5780 Powers Ferry Road, N.W. - Actuarial 1995); Vice President - BIO (1994 - 1995);
Atlanta, GA 30327-4390 Consultant, Tillinghast (1988-1994)
- - --------------------------------------------------------------------------------------------------------------------
Allen W. Rightmeyer Vice President Vice President (since 1996); Senior Vice
5780 Powers Ferry Road, N.W. President, Aegon USA (1988-1996)
Atlanta, GA 30327-4390
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
A fidelity bond in the amount of $6 million in Guilders covering Southland's
officers and employees has been issued by NN Reinsurance Company, N.V.
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<PAGE>
EXPERTS
The financial statements of Southland Life Insurance Company at December 31,
1995 and 1994, and for each of the three years in the period ended December 31,
1995, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
Actuarial matters in this prospectus have been examined by Pamela M. Crane, who
is Senior Vice President - Finance/Actuarial of Southland Life Insurance
Company. Her opinion on actuarial matters is filed as an exhibit to the
Registration Statement we filed with the SEC.
LEGAL MATTERS
The legal matters in connection with the Policy described in this Prospectus
have been passed on by Francis J. Mulcahy, Vice President, Secretary and General
Counsel of Southland. Sutherland, Asbill & Brennan of Washington, D.C. has
provided advice on certain matters relating to the federal securities laws.
FINANCIAL STATEMENTS
The audited financial statements of Southland Life Insurance Company at December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995, (as well as the auditors' report thereon) plus unaudited interim
financial statements of Southland Life Insurance Company as of June 30, 1996
are included beginning on the next page.
This prospectus does not contain financial statements for the Southland Separate
Account L1 because it has not yet commenced operations, has no assets or
liabilities and has received no income nor incurred any expenses as of the date
of this prospectus.
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<PAGE>
Southland Life Insurance Company
Condensed Financial Statements (Unaudited)
Six Months ended June 30, 1996
Contents
Unaudited Financial Statements
Condensed Balance Sheet....................................................1
Condensed Statements of Income.............................................3
Condensed Statement of Stockholder's Equity................................4
Condensed Statements of Cash Flows.........................................5
Condensed Notes to Financial Statements....................................6
<PAGE>
Southland Life Insurance Company
Condensed Balance Sheet (Unaudited)
June 30, 1996
(In Thousands)
<TABLE>
<S> <C>
Assets
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost:
1996 - $803,241; 1995 - $793,055) $ 830,530
Equity securities, at fair value (cost: 1996 - $416;
1995 - $614) 664
Mortgage loans on real estate 317,869
Investment real estate, at cost, less accumulated
depreciation (1996 - $12; 1995 - $10) 188
Policy loans 81,465
Other long-term investments 165
Short-term investments 10,000
----------------
1,240,881
Cash 1,255
Accrued investment income 18,802
Reinsurance recoverable:
Paid benefits 9,334
Unpaid benefits and IBNR 2,610
Prepaid reinsurance premiums 286,111
Deferred policy acquisition costs 164,513
Present value of future profits less accumulated
amortization (1996 - $171,881; 1995 - $163,605) 80,293
Goodwill less accumulated amortization (1996 - $10,311;
1995 - $9,540) 50,150
Other assets 8,533
----------------
Total assets $1,862,482
================
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Liabilities and stockholder's equity
Liabilities:
Future policy benefits:
Life and annuity reserves $1,110,211
Accident and health reserves 10,481
Guaranteed investment contracts 279,360
Policyholders' funds 3,133
Advance premiums 87
Accrued dividends and dividends on deposit 764
Unpaid claims 15,952
----------------
1,419,988
Accounts payable and accrued expenses 4,129
Indebtedness to related parties 6,605
Other liabilities 19,169
Federal income taxes payable:
Current 4,922
Deferred 42,872
----------------
Total liabilities 1,497,685
Stockholder's equity:
Common stock, $3 par value:
Authorized - 2,550,000 shares
Issued and outstanding - 2,500,000 shares 7,500
Additional paid-in capital 254,353
Net unrealized investment gains 15,049
Retained earnings 87,895
----------------
Total stockholder's equity 364,797
----------------
Total liabilities and stockholder's equity $1,862,482
================
</TABLE>
See accompanying notes.
2
<PAGE>
Southland Life Insurance Company
Condensed Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30
1996 1995
--------------------------------------------
(In Thousands)
<S> <C> <C>
Revenues:
Traditional life insurance premiums $ 22,237 $ 18,296
Health insurance premiums 30,395 27,107
Universal life and investment product charges 40,220 32,808
Reinsurance assumed - 2,010
--------------------------------------------
92,852 80,221
Reinsurance ceded premiums (28,718) (22,134)
--------------------------------------------
64,134 58,087
Net investment income 50,277 50,356
Net realized gains (losses) on investments 2,383 332
Other revenues 5,158 531
--------------------------------------------
Total revenues 121,952 109,306
Benefits and expenses:
Insurance claims and benefits incurred:
Traditional life insurance:
Death benefits 13,942 16,040
Other benefits 10,876 11,708
Universal life and investment contracts:
Interest credited to account balances 18,243 13,995
Death benefit incurred in excess of account balances 9,483 10,852
Health benefits 16,704 10,391
Increase (decrease) in policy reserves and other funds 4,729 (2,340)
Reinsurance recoveries (13,753) (8,801)
--------------------------------------------
60,224 51,845
Commissions 8,310 6,936
Insurance operating expenses 13,509 10,217
Amortization of goodwill 771 771
Amortization of present value of future profits, net of
accrued interest 4,777 5,077
Amortization of deferred policy acquisition costs 8,551 7,393
--------------------------------------------
96,142 82,239
--------------------------------------------
Income before federal income taxes 25,810 27,067
Federal income taxes 9,300 9,739
--------------------------------------------
Net income $ 16,510 $ 17,328
============================================
</TABLE>
See accompanying notes.
3
<PAGE>
Southland Life Insurance Company
Condensed Statement of Stockholder's Equity (Unaudited)
Six Months ended June 30, 1996
(In Thousands)
<TABLE>
<S> <C>
Common stock:
Balance at December 31, 1995 and June 30, 1996 $ 7,500
======================
Additional paid-in capital:
Balance at December 31, 1995 and June 30, 1996 $254,353
======================
Net unrealized investment gains (losses):
Balance at December 31, 1995 $ 37,906
Change in net unrealized investment gains, net of taxes (33,276)
Effect on DPAC and PVFP of unrealized gains on fixed
maturities, net of taxes 10,419
----------------------
Balance at June 30, 1996 15,049
======================
Retained earnings:
Balance at December 31, 1995 $ 86,385
Net income 16,510
Dividends to stockholder (15,000)
----------------------
Balance at June 30, 1996 87,895
======================
Total stockholder's equity $364,797
======================
</TABLE>
See accompanying notes.
4
<PAGE>
Southland Life Insurance Company
Condensed Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30
1996 1995
--------------------------------------
(In Thousands)
<S> <C> <C>
Operating activities
Net cash provided by operating activities $ 16,493 $ 24,676
Investing activities
Securities available-for-sale:
Sales:
Fixed maturities 38,400 52,417
Equity securities 200 1,105
Maturities - fixed maturities 38,927 7,545
Purchases:
Fixed maturities (85,722) (99,063)
Equity securities - (187)
Securities held-to-maturity:
Maturities - fixed maturities - 6,889
Sale, maturity or repayment of investments:
Mortgage loans on real estate 10,465 6,834
Investment real estate - 450
Purchase or issuance of investments:
Mortgage loans on real estate (27,515) (28,375)
Policy loans, net (1,301) (499)
Other long-term investments (165) -
Short-term investments, net (10,000) -
--------------------------------------
Net cash used by investing activities (36,711) (52,884)
--------------------------------------
Financing activities
Increase in indebtedness to related parties 666 -
Dividends paid (15,000) (6,995)
Receipts from universal life and investment products credited to
policyholder account balances 46,472 57,193
Return of policyholder account balances on universal life and
investment products (11,933) (10,751)
--------------------------------------
Net cash provided by financing activities 20,205 39,447
--------------------------------------
Increase (decrease) in cash (13) 11,239
Cash at beginning of period 1,268 10,831
--------------------------------------
Cash at end of period $ 1,255 $ 22,070
======================================
</TABLE>
See accompanying notes.
5
<PAGE>
Southland Life Insurance Company
Condensed Notes to Financial Statements (Unaudited)
June 30, 1996
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1995. For further information, refer to the financial statements
and footnotes thereto included in the Company's audited financial statements for
the year ended December 31, 1995.
2. Service Agreement with Affiliate
The Company has a service agreement with Life Insurance Company of Georgia
("LOG"), an affiliated company, whereby LOG provides personnel, certain services
and facilities for the conduct of the Company's operations in return for
payment representing the cost incurred in providing such services and
facilities. Substantially all insurance operating expenses and employment taxes
are incurred under the terms of this service agreement.
6
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Southland Life Insurance Company
We have audited the accompanying balance sheets of Southland Life Insurance
Company as of December 31, 1995 and 1994, and the related statements of
income, stockholder's equity, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southland Life Insurance
Company at December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1994 and 1993 the
Company changed its method of accounting for investments in debt and equity
securities and income taxes, respectively.
Ernst & Young LLP
Atlanta, Georgia
April 5, 1996
<PAGE>
Southland Life Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
--------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Investments (Notes 1, 2, 3 and 4):
Fixed maturities:
A vailable-for-sale, at fair value (amortized cost: 1995-
$793,055; 1994 - $645,554) $ 871,637 $ 623,831
Held-to-maturity, at amortized cost (fair value: 1994 -
$201,704) - 200,554
Equity securities, at fair value (cost: 1995 - $614; 1994 -
$1,532) 764 1,602
Mortgage loans on real estate 300,671 231,406
Investment real estate, at cost, less accumulated
depreciation (1995 - $10; 1994 - $6) 190 515
Policy loans 80,164 79,437
Other long-term investments - 59
-----------------------
Total investments 1,253,426 1,137,404
Cash 1,268 10,831
Accrued investment income 15,951 16,728
Reinsurance recoverable:
Paid benefits 8,886 188
Unpaid benefits and IBNR 16,400 2,614
Prepaid reinsurance premiums 282,943 240,824
Deferred policy acquisition costs 145,431 133,543
Present value of future profits less accumulated
amortization (1995 - $163,605; 1994 - $145,535) 78,204 100,602
Goodwill less accumulated amortization (1995 - $9,540;
1994 - $7,999) 50,921 52,462
Property and equipment, at cost, less accumulated
depreciation (1994 - $105) - 626
Current federal income taxes (Note 8) - 1,797
Other assets 5,841 6,634
-----------------------
Total assets $1,859,271 $1,704,253
=======================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
--------------------------
(In Thousands,
Except Share Amounts)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Life and annuity reserves $1,052,649 $ 944,710
Accident and health reserves 10,473 10,996
Guaranteed investment contracts 276,365 233,691
Policyholders' funds 2,890 3,292
Advance premiums 83 91
Accrued dividends and dividends on deposit 764 808
Unpaid claims 30,383 11,001
-----------------------
Total future policy benefits 1,373,607 1,204,589
Accounts payable and accrued expenses 5,383 3,987
Indebtedness to related parties 5,9 39 11,200
Other liabilities 27,146 31,946
Federal income taxes payable (Note 8):
Current 5,816 -
Deferred 55,236 29,130
-----------------------
Total liabilities 1,473,127 1,280,852
Stockholder's equity (Note 9):
Common stock, $3 par value:
Authorized-2,550,000 shares
Issued and outstanding-2,500,000 shares 7,500 7,500
Additional paid-in capital 254,353 366,536
Net unrealized investment gains (losses) (Note 1) 37,906 (8,874)
Retained earnings 86,385 58,239
-----------------------
Total stockholder's equity 386,144 423,401
-----------------------
Total liabilities and stockholder's equity $1,859,271 $1,704,253
=======================
</TABLE>
See accompanying notes.
3
<PAGE>
Southland Life Insurance Company
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
--------------------------------
(In Thousands)
--------------
<S> <C> <C> <C>
Revenues:
Traditional life insurance premiums $ 39,182 $ 36,116 $ 38,343
Health insurance premiums 60,318 18,495 10,002
Universal life and investment product charges 67,073 56,735 45,184
Reinsurance assumed 201 1,740 1,519
-----------------------------------
166,774 113,086 95,048
Reinsurance ceded premiums (45,419) (17,501) (10,669)
-----------------------------------
121,355 95,585 84,379
Net investment income 103,279 93,802 89,169
Net realized gains (losses) on investments 2,880 (1,345) 6,254
Other revenues 797 2,148 1,923
-----------------------------------
Total revenues 228,311 190,190 181,725
Benefits and expenses:
Insurance claims and benefits incurred:
Traditional life insurance:
Death benefits 24,305 24,124 26,634
Other benefits 21,661 21,830 22,444
Universal life and investment contracts:
Interest credited to account balances 31,465 25,181 21,462
Death benefit incurred in excess of account balances 33,902 12,690 13,697
Health benefits 28,883 8,841 6,730
Increase in policy reserves and other funds 94 3,757 57
Reinsurance recoveries (39,883) (9,489) (8,092)
-----------------------------------
100,427 86,934 82,932
Commissions 15,229 8,178 6,457
Insurance operating expenses (Note 11) 20,924 18,945 19,273
-------
Amortization of goodwill 1,541 1,541 1,361
Amortization of present value of future profits, net of
accrued interest 10,155 10,414 11,253
Amortization of deferred policy acquisition costs 13,326 10,060 8,595
-----------------------------------
161,602 136,072 129,871
-----------------------------------
Income before federal income taxes and the cumulative
effect of changes in accounting methods 66,709 54,118 51,854
Federal income taxes (Note 8) 23,828 18,722 12,551
-----
-----------------------------------
Net income before the cumulative effect of the changes
in accounting methods 42,881 35,396 39,303
Cumulative effect of the changes in accounting
methods (Note 1) - - (7,823)
-------
-----------------------------------
Net income $ 42,881 $ 35,396 $ 31,480
===================================
</TABLE>
See accompanying notes.
- - ----------------------
4
<PAGE>
Southland Life Insurance Company
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
-----------------------------------
(In Thousands)
------------
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year $ 7,500 $ 7,500 $ 7,500
===================================
Additional paid-in capital:
Balance at beginning of year $ 366,536 $366,536 $366,536
Return of capital to stockholder (112,183) - -
-----------------------------------
Balance at end of year $ 254,353 $366,536 $366,536
===================================
Net unrealized investment gains (losses) on securities:
Balance at beginning of year $ (8,874) $ (23) $ 328
Adjustment to beginning balance for adoption of SFAS
115, net of income taxes of $20,440 and effect on
DPAC and PVFP of $14,692 (net of income taxes of
$7,911) (Note 1) - 23,268 -
------
Change in net unrealized investment gains (losses),
net of tax 65,248 (52,010) (351)
Effect on DPAC and PVFP of unrealized gains
(losses) on fixed maturities, net of tax (18,468) 19,891 -
-----------------------------------
Balance at end of year $ 37,906 $ (8,874) $ (23)
===================================
Retained earnings:
Balance at beginning of year $ 58,239 $ 51,543 $ 36,663
Net income 42,881 35,396 31,480
Dividends to stockholder (14,735) (28,700) (16,600)
-----------------------------------
Balance at end of year $ 86,385 $ 58,239 $ 51,543
===================================
Total stockholder's equity $ 386,144 $423,401 $425,556
</TABLE>
See accompanying notes.
- - ----------------------
5
<PAGE>
Southland Life Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
-----------------------------------
(In Thousands)
-----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 42,881 $ 35,396 $ 31,480
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in future policy benefits 92,996 189,867 96,138
Net increase (decrease) in federal income taxes 8,528 (5,682) 1,946
Increase (decrease) in accounts payable and accrued
expenses and other liabilities (3,404) 3,967 (3,186)
(Increase) decrease in accrued investment income 777 (2,092) 584
Net realized investment (gains) losses (2,880) 1,345 (6,254)
(Increase) decrease in reinsurance recoverable (22,484) 197 907
Increase in prepaid reinsurance premiums (42,119) (161,654) (71,341)
Depreciation and amortization expense 11,708 12,001 12,722
Policy acquisition costs deferred (41,581) (38,423) (41,439)
Amortization of deferred policy acquisition costs 13,326 10,060 8,594
Cumulative effect of accounting changes - - 7,823
Other, net (1,057) (7,313) 5,485
--------------------------------
Net cash provided by operating activities 56,691 37,669 43,459
INVESTING ACTIVITIES
Securities available-for-sale:
Sales:
Fixed maturities 118,212 34,553 27,952
Equity securities 1,105 50,485 60,641
Maturities - fixed maturities 36,740 38,925 67,554
Purchases:
Fixed maturities (201,698) (143,013) (132,809)
Equity securities (186) (43,893) (55,893)
Securities held-to-maturity:
Maturities - fixed maturities 19,202 40,114 -
Purchases - fixed maturities - (43,000) -
Sale, maturity or repayment of investments:
Mortgage loans on real estate 16,613 22,069 20,975
Investment real estate 450 3,068 2,937
Other long-term investments - 250 -
</TABLE>
6
<PAGE>
Southland Life Insurance Company
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
----------------------------------
(In Thousands)
--------------
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Purchase or issuance of investments:
Mortgage loans on real estate (85,580) (76,403) (50,928)
Investment real estate - (462) (374)
Policy loans, net (727) 2,812 1,945
Short-term investments, net - 14,600 (11,400)
Additions to property and equipment (62) (9) (12)
Disposal of property and equipment 780 206 75
-----------------------------------
Net cash used by investing activities (95,151) (99,490) (69,337)
FINANCING ACTIVITIES
(Decrease) increase in indebtedness to related parties (5,261) 3,968 4,410
Receipts from interest sensitive products credited to 101,462 81,927 75,635
policyholder account balances
Return of policyholder account balances on interest
sensitive policies (25,244) (16,305) (15,295)
Return of capital and dividends paid to stockholder (42,060) (23,700) (16,600)
-----------------------------------
Net cash provided by financing activities 28,897 45,890 48 ,150
-----------------------------------
Net (decrease) increase in cash (9,563) (15,931) 22,272
Cash at beginning of year 10,831 26,762 4,490
-----------------------------------
Cash at end of year $ 1,268 $ 10,831 $ 26,762
===================================
</TABLE>
SIGNIFICANT NONCASH TRANSACTIONS
During 1995, the Company transferred fixed maturity securities having a fair
value plus accrued interest of $92,305,000 and $27,325,000 of cash to the parent
company as a return of capital. This transaction was approved by state
regulatory authorities and is reflected in the accompanying statement of
stockholder's equity as a reduction to additional paid-in capital and unrealized
investment gains on securities.
Held-to-maturity fixed maturity securities having an amortized cost value of
$182,430,000 and a fair value of $199,206,000 were transferred to the available-
for-sale category on December 26, 1995.
The Company declared a $5,000,000 dividend to its parent company during 1994
which was unpaid as of December 31, 1994 and was presented as indebtedness to
related parties in the accompanying balance sheet. The dividend was paid in
cash by the Company in January 1995.
See accompanying notes.
- - -----------------------
7
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements
December 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENTS
Southland Life Insurance Company (the Company) is a wholly-owned subsidiary of
Internationale Nederlanden America Life Corporation (America Life), an indirect,
wholly-owned subsidiary of Internationale Nederlanden Groep. The accompanying
financial statements have been prepared on the basis of generally accepted
accounting principles.
NATURE OF OPERATIONS
The Company's market focus is on the middle-income consumer. The life insurance
products offered address retirement accumulation, wealth transfer and estate
planning, and death protection needs. Products include universal life,
survivorship and traditional life. The Company also provides stop-loss coverage
on group health insurance. Operations are conducted through independent
producers. The Company is presently licensed in forty-eight states (all states
except for New York and Vermont), the District of Columbia, and Puerto Rico.
The significant accounting policies followed by the Company that materially
affect the financial statements are summarized below:
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
8
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
Effective January 1, 1993, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 109, Accounting for Income Taxes. Prior to 1993, the
Company accounted for income taxes under the provisions of APB Opinion No. 11,
Accounting for Income Taxes. As permitted under the new rules, prior years'
financial statements have not been restated. The cumulative effect of adopting
FASB Statement 109 as of January 1, 1993 was to decrease net income by
$7,800,000.
In 1993 the Company adopted FASB Statement No. 113, Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts. This statement
eliminates the practice of reporting amounts for reinsured contracts net of the
effects of reinsurance. The statement requires that reinsurance receivables and
prepaid reinsurance premiums are to be reported as assets. The statement
establishes conditions required for a contract with a reinsurer to qualify for
reinsurance accounting. Contacts that do not result in the possibility that the
reinsurer may realize significant gain or loss from the insurance risk assumed
would be accounted for as deposits. The adoption of this statement had no
effect on income before the cumulative effect of accounting changes or net
income.
In May 1993, the Financial Accounting Standards Board issued FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities. The
Company adopted the provisions of the new standard for investments held as of or
acquired after January 1, 1994. In accordance with the statement, prior period
financial statements have not been restated to reflect the change in accounting
principle. The cumulative effect as of January 1, 1994 of adopting Statement
115 had no impact on income. The opening balance of stockholder's equity was
increased by $37,960,000 (net of tax of $20,440,000) to reflect the net
unrealized holding gains on securities classified as available-for-sale
previously carried at amortized cost less an adjustment for $14,692,000 (net of
tax of $7,911,000) to deferred policy acquisition costs and present value of
future profits (PVFP) for the change in expected future gross profits.
In 1994, the Company adopted the provisions of FASB Statement No. 119,
Disclosures about Derivative Financial Instruments and Fair Value of Financial
Instruments, which require disclosures about derivative financial instruments
such as futures, forwards,
9
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES (CONTINUED)
swaps and options and other financial instruments with similar characteristics.
The statement also amends existing disclosure requirements of FASB Statement No.
105, Disclosure of Information about Financial Instruments with Off-Balance
Sheet Risk and No. 107, Disclosures about Fair Value of Financial Instruments.
Beginning in 1995, the Company adopted FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan, and FASB Statement No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures, which
amends Statement No. 114. Under the amended statement, the 1995 allowance for
credit losses related to loans that are identified for evaluation in accordance
with Statement 114 is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. Adoption of this standard had no impact on net
income or stockholder's equity.
INVESTMENTS
Investments are shown on the following bases:
The carrying value of fixed maturities depends on the classification of the
security: securities held-to-maturity, securities available-for-sale, and
trading securities. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax, and
deferred acquisition cost and present value of future profit adjustments,
reported in a separate component of stockholder's equity.
The Company does not hold trading securities.
10
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income from investments. Interest and dividends are included in net investment
income as earned.
Equity securities are reported at fair value. Mortgage loans are carried at the
unpaid balances. Investment real estate is carried at cost, less accumulated
depreciation. Investment real estate is depreciated on a straight line basis
over the estimated useful life of the respective properties. Policy loans are
carried at unpaid balances. Short-term investments are carried at cost, which
approximates fair value. Derivatives are accounted for on the same basis as the
asset hedged.
Realized gains and losses, and declines in value judged to be other-than-
temporary are included in net realized gains (losses) on investments. The cost
of securities sold is based on the specific identification method.
RECOGNITION OF PREMIUM REVENUES AND COSTS
For life and annuity contracts other than universal life or investment-type
contracts, premiums are recognized as revenues over the premium-paying period,
with valuation reserves for future benefits established on a pro-rata basis from
such premiums.
Revenues for universal life and investment-type contracts consist of policy
charges for the cost of insurance and policy administration and surrender
charges assessed during the period. Expenses include interest credited to
policy account balances and benefits incurred in excess of policy account
balances. Certain profits on limited-payment policies are deferred and
recognized over the policy term.
For accident and health policies, gross premiums are prorated over the contract
term of the policies with the unearned premium included in the policy reserves.
Anticipated investment income is considered in determining if a premium
deficiency related to short-term contracts exists.
11
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring traditional life insurance, universal
life insurance (including interest sensitive products) and investment products
that vary with and are primarily related to the production of new and renewal
business have been deferred. Traditional life insurance acquisition costs are
being amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policy benefit reserves.
For universal life insurance and investment products, acquisition costs are
being amortized generally in proportion to the present value (using the assumed
crediting rate) of expected gross profits from surrender charges and investment,
mortality, and expense margins. This amortization is adjusted retrospectively
when estimates of current or future gross profits to be realized from a group of
products are revised.
Deferred policy acquisition costs are adjusted to reflect changes that would
have been necessary if unrealized investment gains and losses related to
available-for-sale securities had been realized. The Company has reflected
those adjustments in the asset balance with the offset as a direct adjustment to
stockholder's equity.
FUTURE POLICY BENEFITS
Benefit reserves, with the exception of reserves for universal life-type
policies and investment products, are computed using a net level premium method
including assumptions as to investment yields, mortality, withdrawals and other
assumptions based on the Company's and industry experience, modified as
necessary to reflect anticipated trends to include provisions for possible
unfavorable deviations. Reserve interest assumptions are those deemed
appropriate at the time of policy issue, and range from 2.5% to 5%. Policy
benefit claims are charged to expense in the year that the claims are incurred.
Health reserves consist principally of unearned premiums and claim reserves.
Benefit reserves for interest sensitive products (including universal life-type
policies) and investment products are computed under a retrospective deposit
method and represent policy account balances before applicable surrender
charges. Policy benefits and claims that are charged to expense include benefit
claims incurred during the year in
12
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE POLICY BENEFITS (CONTINUED)
excess of related policy account balances. Interest crediting rates for
universal life and investment products range from 4.5% to 8.18% during 1995 and
1994, and 5% to 8.75% during 1993.
Included in life and annuity reserves is an unearned revenue reserve that
reflects the unamortized balance of excess first year policy service fees over
renewal period policy service fees on universal life and investment products.
These excess fees have been deferred and are being recognized in income over the
periods benefited, using the same assumptions and factors used to amortize
deferred policy acquisition costs.
UNPAID CLAIMS
The liabilities for unpaid claims include estimates of amounts due on reported
claims and claims that have been incurred but were not reported as of December
31. Such estimates are based on actuarial projections applied to historical
claim payment data. Such liabilities are reasonable and adequate to discharge
the Company's obligations for claims incurred but unpaid as of December 31.
GOODWILL
The excess cost of acquired subsidiaries over the sum of amounts assigned to
identifiable assets at acquisition, less liabilities assumed, is recorded as
goodwill. Generally, goodwill is amortized using the straight-line method over
forty years.
PRESENT VALUE OF FUTURE PROFITS
The present value of future profits (PVFP) represents the profits to be realized
from future premiums on insurance in-force (at the date of acquisition) from
businesses acquired. The PVFP arises from the acquisition of the Company by
America Life.
13
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRESENT VALUE OF FUTURE PROFITS (CONTINUED)
The PVFP is being amortized over the years that it is anticipated such profits
will be received. In general, this value is determined using the same
assumptions applied to compute benefit reserves and deferred policy acquisition
costs, discounted to provide an appropriate rate of return. Interest for
traditional life business is accrued at a rate of 8.45% and 9% in 1995 and 1994,
respectively, grading down to 6% over the next 14 years. Interest for universal
life business is amortized based on the credited rate.
An analysis of the PVFP for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $100,602 $107,318 $118,571
Interest accrued on unamortized balance 7,915 8,882 10,381
Amortization (18,070) (19,296) (21,634)
FAS 115 adjustment (12,243) 3,698 -
------------------------------
Balance at end of year $ 78,204 $100,602 $107,318
==============================
The estimated amount to be amortized during each of the next five years is shown below (in
thousands):
AMORTIZATION OF
PVFP
---------------
(In Thousands)
1996 $16,552
1997 14,746
1998 13,051
1999 11,579
2000 10,103
</TABLE>
14
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation for major classes of assets is calculated on a straight-line basis
over the estimated useful lives of the respective assets.
FEDERAL INCOME TAXES
Deferred federal income taxes have been provided or credited to reflect
significant temporary differences between income reported for tax and financial
reporting purposes using reasonable assumptions.
CASH FLOW INFORMATION
Cash includes cash on hand and demand deposits.
PENDING ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts.
Statement No. 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt Statement No. 121 in the
first quarter of 1996, and based on current circumstances, management does not
believe the effect of adoption will be material.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1994 financial statements have been reclassified
to conform to the 1995 presentation.
15
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Available-for-sale $871,637 $871,637 $62 3,831 $623,831
Held-to-maturity - - 200,554 201,704
Equity securities 764 764 1,602 1,602
Commercial mortgages 300,445 331,584 231,171 231,068
Residential mortgages 226 226 235 235
Policy loans 80,164 69,383 79,437 67,279
LIABILITIES
Supplemental contracts without
life contingencies 934 934 966 966
Other policyholder funds left on
deposit 2,992 2,992 3,208 3,208
Individual and group annuities,
net of reinsurance 22,452 22,220 26,032 25,690
</TABLE>
The following methods and assumptions were used by the Company in estimating the
fair value disclosures for financial instruments:
FIXED MATURITIES AND EQUITY SECURITIES: The fair values for fixed maturities
(including redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturities not actively traded, fair values are estimated
using values obtained from independent pricing services or, in the case of
private placements and collateralized mortgage obligations and other mortgage
derivative investments, are estimated by discounting expected future cash flows
using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values of equity securities are based on
quoted market prices.
16
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE: Estimated fair values for commercial real
estate loans are generated using a discounted cash flow approach. Loans in
good standing are discounted using interest rates determined by U.S. Treasury
yields on December 31 and spreads required on new loans with similar
characteristics. The amortizing features of all loans are incorporated in the
valuation. Where data on options features is available, option values are
determined using a binomial valuation method and are incorporated into the
mortgage valuation. Restructured loans are valued in the same manner; however,
these are discounted at a greater spread to reflect increased risk. Fair values
for residential loans are based on discounted cash flows and approximate
carrying value.
POLICY LOANS: The fair values for policy loans are estimated by discounting
cash flows at the interest rates charged on policy loans of similar policies
currently being issued. Loans with similar characteristics are aggregated for
purposes of the calculations.
DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet derivative
financial instruments (swaps hedging fixed maturities) are based on
broker/dealer valuations or on internal discounted cash flow pricing models
taking into account current cash flow assumptions and the counterparties' credit
standing. Swaps with a fair value of $1,544,000 at December 31, 1995 and
$(4,690,000) at December 31, 1994 represent asset hedges and are reported as a
component of fixed maturity securities on the accompanying balance sheets.
OTHER INVESTMENT-TYPE INSURANCE CONTRACTS: The fair values of the Company's
deferred annuity contracts and supplemental contracts without life contingencies
are estimated based on the cash surrender value. The carrying values of other
liabilities including immediate annuities, dividend accumulations, and premium
deposits approximate their fair values.
17
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS
The amortized cost and estimated fair value of investments in fixed maturities
and equity securities are as follows at December 31, 1995:
<TABLE>
<CAPTION>
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED GAINS UNREALIZED LOSSES FAIR
COST VALUE
-------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 41,415 $ 8,310 $ - $ 49,725
States, municipalities and political
subdivisions 6,208 232 - 6,440
Public utilities securities 48,451 6,217 - 54,668
Corporate securities 418,769 47,814 64 466,519
Mortgage-backed securities 239,419 12,677 397 251,699
Other asset-backed securities 38,793 2,284 35 41,042
Derivatives hedging fixed maturities - 1,774 230 1,544
-------------------------------------------------------------
Total fixed maturities 793,055 79,308 726 871,637
Preferred stocks 530 73 12 591
Common stocks 84 108 19 173
-------------------------------------------------------------
Total $793,669 $79,489 $757 $872,401
=============================================================
</TABLE>
18
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of investments in fixed maturities
and equity securities are as follows at December 31, 1994:
<TABLE>
<CAPTION>
COST OR ESTIMATED
AMORTIZED GROSS GROSS FAIR
COST UNREALIZED GAINS UNREALIZED LOSSES VALUE
------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 43,654 $ 1,159 $ 298 $ 44,515
Public utilities securities 29,493 801 658 29,636
Corporate securities 326,240 3,385 11,658 317,967
Mortgage-backed securities 227,008 4,514 13,171 218,351
Other asset-backed securities 19,159 116 1,223 18,052
Derivatives hedging fixed maturities - - 4,690 (4,690)
------------------------------------------------------------
Total fixed maturities 645,554 9,975 31,698 623,831
Preferred stocks (nonredeemable) 1,532 7 18 1,521
Common stocks - 81 - 81
------------------------------------------------------------
Total $647,086 $10,063 $31,716 $625,433
============================================================
Held-to -maturity:
Public utilities securities $ 23,391 $ 1,008 $ - $ 24,399
Corporate securities 168,229 3,881 3,537 168,573
Other asset-backed securities 8,934 56 258 8,732
------------------------------------------------------------
Total $200,554 $ 4,945 $ 3,795 $201,704
============================================================
</TABLE>
19
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Held-to-maturity fixed maturity securities having an amortized cost of
$182,430,000 and a fair value of $199,206,000 were transferred to the available-
for-sale category on December 26, 1995, resulting in a net unrealized gain of
$10,904,000 (net of $5,872,000 of deferred taxes). The Company reassessed the
appropriateness of its classification of securities as held-to-maturity upon
reviewing the interpretive guidance provided in the FASB publication A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities.
The amortized cost and estimated fair value of debt securities by contractual
maturity and marketable equity securities at December 31, 1995 are shown in the
following table. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------------------
(In Thousands)
<S> <C> <C>
Available-for-sale:
Due in one year or less $ 3,989 $ 4,098
Due after one year through five years 94,604 102,648
Due after five years through ten years 231,262 253,977
Due after ten years 184,988 218,173
----------------------
514,843 578,896
Mortgage-backed securities 239,419 251,699
Other asset-backed securities 38,793 41,042
Equity securities 614 764
----------------------
Total available-for-sale $793,669 $872,401
======================
</TABLE>
20
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Changes in unrealized gains (losses) on investments in available-for-sale
securities for the years ended December 31, 1995 and 1994 are summarized as
follows:
DECEMBER 31, 1995
FIXED EQUITY TOTAL
----------------------------
(In Thousands)
Gross unrealized gains $ 79,308 $181 $ 79,489
Gross unrealized losses 726 31 757
----------------------------
Net unrealized gains 78,582 150 78,732
Deferred income tax expense (27,504) (53) (27,557)
----------------------------
Net unrealized gains after taxes 51,078 97 51,175
Less:
Balance at beginning of year (14,120) 47 (14,073)
----------------------------
Change in net unrealized gains $ 65,198 $ 50 $ 65,248
============================
DECEMBER 31, 1994
FIXED EQUITY TOTAL
----------------------------
(In Thousands)
Gross unrealized gains $ 9,975 $ 88 $ 10,063
Gross unrealized losses 31,698 18 31,716
----------------------------
Net unrealized gains (losses) (21,723) 70 (21,653)
Deferred income tax benefit
(expense) 7,603 (23) 7,580
----------------------------
Net unrealized gains (losses) after
taxes (14,120) 47 (14,073)
Less:
Balance at beginning of year - (23) (23)
Adjustments for change in
accounting method 37,960 - 37,960
----------------------------
Change in net unrealized gains
(losses) $(52,080) $ 70 $(52,010)
============================
21
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
As part of its overall investment management strategy, the Company has entered
into agreements to purchase securities as follows:
DECEMBER 31
1995 1994
-----------------
(In Thousands)
Investment purchase commitments $21,865 $12,340
Major categories of investment income for the years ended December 31 are
summarized as follows:
1995 1994 1993
--------------------------------
(In Thousands)
Fixed maturities $ 74,911 $69,031 $67,570
Equity securities 73 - -
Mortgage loans on real estate 23,851 19,139 15,848
Policy loans 4,775 4,735 4,821
Other investments 1,457 2,986 2,839
--------------------------------
105,067 95,891 91,078
Investment expenses (1,788) (2,089) 1,909
--------------------------------
Net investment income $103,279 $93,802 $89,169
================================
22
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Net realized gains (losses) on investments for the years ended December 31 are
summarized as follows:
1995 1994 1993
--------------------------
(In Thousands)
Fixed maturities $2,824 $ 1,248 $ 1,820
Equity securities - (2,577) (1,066)
Real estate and other 56 (16) 5,500
--------------------------
Net realized gain (losses) on investments $2,880 $(1,345) $ 6,254
==========================
During 1995 and 1994, debt and marketable equity securities available-for-sale
were sold with a fair value at the date of sale of $119,317,000 and $85,038,000,
respectively. Gross gains of $3,494,000 and $1,940,000 and gross losses of
$670,000 and $3,269,000 were realized on those sales in 1995 and 1994,
respectively. Proceeds from sales of investments in fixed maturities during
1993 were $27,952,000. Gross gains of $5,085,000 and gross losses of
$3,265,000 were realized on those sales.
4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company enters into interest rate contracts to reduce and manage interest
rate risk associated with individual assets and liabilities and its overall
aggregate portfolio.
Interest rate swap agreements generally involve the exchange of fixed and
floating interest payments over the life of the agreement without an exchange of
the underlying principal amount. The differential to be paid or received is
accrued as interest rates change and is recognized as an adjustment to interest
expense or income. The related amount payable to or receivable from
counterparties is included in other liabilities or assets.
23
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
(CONTINUED)
The Company manages the potential credit exposure from interest rate contracts
through careful evaluation of the counterparty credit standing and master
netting agreements. The Company is exposed to credit loss in the event of
nonperformance by counterparties on interest rate contracts; however, the
Company does not anticipate nonperformance by any of these counterparties. The
amount of such exposure is generally the unrealized gains in such contracts.
The table below summarizes the Company's interest rate contracts at December 31,
1995 and 1994:
DECEMBER 31, 1995
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
-------------------------------------------------
Interest rate contracts:
Swaps $28,000,000 $ - $ 1,774,425 $ 1,774,425
Swaps-affiliates 25,000,000 - (230,300) (230,300)
-------------------------------------------------
Total swaps $53,000,000 $ - $ 1,544,125 $ 1,544,125
=================================================
DECEMBER 31, 1994
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
-------------------------------------------------
Interest rate contracts:
Swaps $28,000,000 $ - $(1,866,315) $(1,866,315)
Swaps-affiliates 25,000,000 - (2,823,186) (2,823,186)
-------------------------------------------------
Total swaps $53,000,000 $ - $(4,689,501) $(4,689,501)
=================================================
24
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
5. CONCENTRATIONS OF CREDIT RISK
At December 31, 1995, the Company held less-than-investment-grade bonds
classified as available-for-sale with a carrying value of $11,625,000 and a fair
value of $11,826,000. These holdings amounted to 1.4% of the Company's
investment in bonds and less than 1% of total assets. The holdings of less-
than-investment-grade bonds are widely diversified and of satisfactory quality
based on the Company's investment policies and credit standards.
At December 31, 1995, the Company's commercial mortgages involved a
concentration of properties located in Florida (23%), Pennsylvania (12%) and
Georgia (11%). The remaining commercial mortgages relate to properties located
in 22 other states. The portfolio is well diversified, covering many different
types of income-producing properties on which the Company has first mortgage
liens. The maximum mortgage outstanding on any individual property is
$6,900,000.
6. EMPLOYEE BENEFIT PLANS
The Company does not sponsor an employee retirement plan. Home office and field
office services are provided to the Company by employees of Life Insurance
Company of Georgia (Life of Georgia), an affiliated insurer. The Company
reimburses Life of Georgia for the actual cost of salaries and fringe benefits
of employees utilized in providing administrative services to the Company.
The Company does not sponsor a deferred compensation plan, but reimburses Life
of Georgia for the actual cost of fringe benefits for employees providing
administrative services to the Company. The Company has an unfunded
noncontributory, nonqualified deferred compensation plan covering certain agents
in the General Agency Sales Division.
7. REINSURANCE
The Company is involved in both ceded and assumed reinsurance with other
companies for the purpose of diversifying risk and limiting exposure on larger
risks. Substantially all of the guaranteed investment contracts and the
associated prepaid reinsurance premiums are ceded under a reinsurance agreement
with an affiliate. As of
25
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
7. REINSURANCE (CONTINUED)
December 31, 1995, the Company's retention limit for acceptance of risk on life
insurance policies had been set at various levels up to $250,000. Reinsurance
premiums, commissions, expense reimbursements, and reserves related to reinsured
business are accounted for on bases consistent with those used in accounting for
the original policies issued and the terms of the reinsurance contacts.
To the extent that the assuming companies become unable to meet their
obligations under these treaties, the Company remains contingently liable to its
policyholders for the portion reinsured. Consequently, allowances are
established for amounts deemed uncollectible. To minimize its exposure to
significant losses from reinsurer insolvencies, the Company evaluates the
financial condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic characteristics
of the reinsurer.
The carrying values of amounts recoverable from reinsurers approximate their
fair value.
26
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
7. REINSURANCE (CONTINUED)
Additional information regarding the Company's reinsurance activity for the
years ended December 31, 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
CEDED TO ASSUMED AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
--------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1995
Life insurance in
force $18,048,076 $4,138,717 $ 809 $13,910,168 0.01%
==========================================================================
Premiums:
Life insurance $ 39,182 $ 8,073 $ 201 $ 31,310 0.64%
Health insurance 60,318 37,346 - 22,972 0.00%
--------------------------------------------------------------------------
Total premiums $ 99,500 $ 45,419 $ 201 $ 54,282 0.37%
==========================================================================
1994
Life insurance in
force $15,284,670 $3,396,943 $2,307 $11,890,034 0.02%
==========================================================================
Premiums:
Life insurance $ 36,116 $ 7,356 $1,740 $ 30,500 5.70%
Health insurance 18,495 10,145 - 8,350 0.00%
--------------------------------------------------------------------------
Total premiums $ 54,611 $ 17,501 $1,740 $ 38,850 4.48%
==========================================================================
1993
Life insurance in
force $13,952,869 $2,405,218 $1,078 $11,548,729 0.01%
==========================================================================
Premiums:
Life insurance $ 38,343 $ 7,660 $1,519 $ 32,202 4.72%
Health insurance 10,002 3,009 - 6,993 0.00%
--------------------------------------------------------------------------
Total premiums $ 48,345 $ 10,669 $1,519 $ 39,195 3.87%
==========================================================================
</TABLE>
8. INCOME TAXES
The Company, which was acquired by America Life in 1989, filed a separate
federal income tax return for years prior to 1995 due to consolidated return
eligibility regulations.
The Company will file a consolidated federal income tax return in 1995 with
Internationale Nederlanden U.S. Insurance Holdings (the direct parent of America
Life) and other U.S. affiliates and subsidiaries, with the exception of First
ING Life Insurance Company of New York. The affiliated companies that join in
the filing of the consolidated federal return have entered into a tax sharing
agreement which provides for an allocation of taxes among life and nonlife
members. Under the agreement, a life member may not receive the full benefit of
a taxable loss in the year the loss is incurred. The agreement provides that a
loss member will receive at least 50% of the loss utilized by other members and
that any remaining benefit will be fully repaid when the loss member could have
used the loss had they filed a separate federal income tax return. The deferred
payments or receipts for the use of losses are accounted for as a component of
the Company's deferred tax liability.
The current tax liability of $5,816,000 is payable to the parent company,
America Life, under the terms of the tax sharing agreement.
27
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31
1995 1994
-----------------
(In Thousands)
Deferred income tax liability:
Deferred policy acquisition costs $34,700 $33,400
PVFP 7,500 5,60 0
Deferred investment gains 2,300 -
Unrealized investment gains and losses 24,800 -
Reserves - 3,400
Bond/mortgage loans market discount 700 900
Other reserves 2,100 2,300
-----------------
Total deferred income tax liability 72,100 45,600
Deferred income tax asset:
Unrealized investment gains and losses - 8,200
Reinsurance liability - 5,3 00
Benefit reserves 14,100 -
Other assets 2,764 1,900
Other liabilities - 1,070
-----------------
Total deferred income tax asset 16,864 16,470
Valuation allowance for deferred tax asset - -
-----------------
Deferred income tax asset after allowance 16,864 16,470
-----------------
Net deferred income tax liability $55,236 $29,130
=================
28
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation of the income tax attributable to continuing operations
computed at U.S. federal statutory tax rates to the income tax expense included
in the accompanying statements of income follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
--------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-preferred investment income - (.1) (.1)
Goodwill .7 1.0 .9
Change in deferred liability due to tax settlement - - (7.2)
Other items, net - (1.3) (4.4)
--------------------------
Effective tax rate 35.7% 34.6% 24.2%
==========================
The components of federal income tax expense consist of the following:
YEAR ENDED DECEMBER 31
1995 1994 1993
----------------------------
<S> <C> <C> <C>
Current $22,913 $13,768 $11,649
Deferred 915 4,954 902
----------------------------
Federal income tax expense $23,828 $18,722 $12,551
============================
</TABLE>
The Company made net income tax payments of $16,254,000 during 1995, $22,585,000
during 1994, and $10,604,000 during 1993 for current income taxes and
settlements of prior year returns.
9. STATUTORY ACCOUNTING INFORMATION AND PRACTICES
Statutory capital and surplus was $78,992,000 and $159,223,000 at December 31,
1995 and 1994, respectively. Statutory net income was $42,182,000, $36,539,000,
and $36,871,000 for the years ended December 31, 1995, 1994, and 1993,
respectively.
29
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
9. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED)
The Company exceeded its minimum statutory capital and surplus requirements at
December 31, 1995. Additionally, the amount of dividends which can be paid by
the Company to its stockholder without prior approval of the state insurance
department is generally limited to the greater of 10% of statutory surplus or
the statutory net gain from operations.
The Company, which is domiciled in Texas, prepares its statutory-basis financial
statements in accordance with accounting principles and practices prescribed or
permitted by the state of Texas. "Prescribed" statutory accounting practices
include state laws, regulations and general administrative rules, as well as a
variety of publications of the National Association of Insurance Commissioners
(NAIC). "Permitted" statutory accounting practices encompass all accounting
practices that are not prescribed; such practices may differ from state to
state, from company to company within the state, and may change in the future.
The NAIC is currently in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which
is expected to be completed in 1997, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting practices that insurance companies use to prepare their statutory
financial statements. The Company does not currently apply permitted statutory
practices which differ from prescribed accounting practices.
During 1992 and 1993, the NAIC approved certain Risk-Based Capital (RBC)
requirements for life/health insurance companies. Those requirements were
effective in 1993 and require that the amount of capital maintained by an
insurance company is to be determined based on the various risk factors related
to it. At December 31, 1995, the Company met RBC requirements.
At December 31, 1995 and 1994, bonds with an amortized cost of $8,376,000 and
$7,634,000 , respectively, were on deposit with various state insurance
departments to meet regulatory requirements.
30
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
10. COMMITMENTS AND CONTINGENT LIABILITIES
The increase in the number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. Those mandatory assessments may
be partially recovered through a reduction in future premium taxes in certain
states. The Company has accrued for estimated future assessments net of future
premium tax deductions.
11. SERVICE AGREEMENT WITH AFFILIATE
The Company has a service agreement with Life of Georgia whereby this affiliate
provides personnel, certain services and facilities for the conduct of the
Company's operations in return for payment representing the costs incurred in
providing such services and facilities. Substantially all insurance operating
expenses and employment taxes are incurred under the terms of this service
agreement. During 1995, 1994, and 1993, the Company reimbursed Life of Georgia
$24,573,000, $28,000,000, and $27,843,000, respectively, under this agreement.
The Company has a payable to Life of Georgia of $5,894,000 and $6,200,000 at
December 31, 1995 and 1994, respectively, related to this agreement. This
payable is included within indebtedness to related parties in the accompanying
balance sheets.
12. FINANCING ARRANGEMENTS
The Company has a revolving line of credit totaling $40,000,000 which matures 30
days from the date of advancement. This line of credit expires February 29,
1996. Interest rates on these borrowings are tied to the Federal Funds rate
plus .25%. Outstanding borrowings under this agreement were $0 at December 31,
1995 and 1994.
31
<PAGE>
Part II
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Texas Business Corporations Act Article 2.02-1 is a comprehensive
provision that defines the power of Texas corporations to provide for the
indemnification of its directors, officers, employees and agents. This Article
also grants to corporations the power to purchase director and officer
insurance.
Article XXVIII of the Southland Life Insurance Company Bylaws provides as
follows:
ARTICLE XXVIII
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
SECTION 1. Authorization for indemnification of Directors and officers
in actions by or in the right of a company to procure a judgment in its favor.
(a) Any person made party to an action by or in the right of the Company
to procure a judgment in its favor by reason of the fact that he, his testator
or intestate, is or was a Director or officer of the Company, shall be
indemnified against the reasonable expenses, including attorneys' fees, actually
and necessarily incurred by him in connection with the defense
-1-
<PAGE>
of such action, or in connection with an appeal therein, except in relation to
matters as to which such Director or officer is adjudged to have breached his
duty to the Company.
(b) The indemnification authorized under paragraph (a) shall in no case
include:
(1) Amounts paid in settling or otherwise disposing of a
threatened or a pending action with or without court approval; or
(2) Expenses incurred in defending a threatened action or a
pending action which is settled or otherwise disposed of without court approval.
SECTION 2. Authorization for indemnification of Directors and
officers in actions or proceedings other than by or in the right of a company to
procure a judgment in its favor.
(a) Any person made, or threatened to be made, a party in an
action or proceeding other than one by or in the right of the company to procure
a judgment in its favor, whether civil, criminal or administrative, including an
action by or in the right of any other company of any type or kind, domestic or
foreign, which any Director or officer of the Company, served in any capacity at
the request of the Company, by reason of the fact that he, his testator or
intestate, was a Director or officer of the Company, or served such other
company in any capacity, shall be indemnified against judgments, fines, amounts
paid in settlement and reasonable expenses, including attorneys' fees actually
and necessarily incurred as a result of such action or proceeding, or any appeal
therein, if such Director or officer acted, in good faith, for a purpose which
he reasonably believed to be in the best interests of the Company and, in
criminal actions or proceedings, in addition, had no reasonable cause to believe
that his conduct was unlawful.
(b) The termination of any such civil or criminal action or proceeding
by judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such Director or
officer did not act in good faith for a purpose which he reasonably believed to
be in the best interests of the Company or that he had reasonable cause to
believe that this conduct was unlawful.
SECTION 3. Payment of indemnification other than by court award.
(a) A person who has been wholly successful, on the merits or otherwise,
in the defense of a civil, criminal, or administrative action or proceeding of
the character described in Section 1 or Section 2 above shall be entitled to
indemnification as authorized in such Section 1 or Section 2.
-2-
<PAGE>
(b) Except as provided in Paragraph (a) of this Section 3, any
indemnification under Section 1 or Section 2 above, unless ordered by a court,
shall be made by the Company only if authorized in the specific case:
(1) By the Board of Directors acting by a quorum consisting of
Directors who are not parties to such action or proceeding upon a finding that
the Director or officer has met the standard of conduct set forth in Section 1
or Section 2, as the case may be; or
(2) If a quorum of the Board of Directors is not obtainable
with due diligence:
(A) By the Board of Directors upon the opinion in
writing of independent legal counsel that indemnification is proper in the
circumstances because the applicable standard of conduct set forth in Section 1
or Section 2 above has been met by such Director or officer, or
(B) By the stockholder (excluding the director or
officer) upon a finding that the Director or officer has met the applicable
standard of conduct set forth in Section 1 or Section 2 above.
(c) Reasonable expenses incurred in defending a civil, criminal or
administrative action or proceeding may be paid by the Company in advance of the
final disposition of such action or proceeding if authorized under paragraph (b)
of this Section 3 and if the Director or officer submits a written affirmation
that he meets the standards necessary for indemnification and if the facts known
to those making the determination would not preclude indemnification, but
subject to a written undertaking of repayment if ultimately found not to be
entitled to indemnification under the provisions hereof.
SECTION 4. General
The foregoing provisions of this Article XXVIII shall be deemed to be a
contract between the Company and each Director and officer who serves in such
capacity at any time while this bylaw is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or therefore existing or any action,
suit or proceeding theretofore or thereafter brought based in whole or in part
upon any such state of facts.
The foregoing rights of indemnification shall not be deemed exclusive of
any other rights to which any Director or officer may be entitled apart from the
provisions of this Article XXVIII.
The Board of Directors in its discretion shall have the power on behalf
of the Company to indemnify any person, other than a Director or officer, made a
party to any action,
-3-
<PAGE>
suit or proceeding by reason of the fact that he, his testator or intestate, is
or was an employee of the company. Such indemnification shall be to the same
extent and subject to the same standards as indemnification for a director or
officer.
SECTION 5. Liability Insurance
The company and/or the Board of Directors may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the company or who is or was serving at the request of the company
as a director, officer, partner, venturer, proprietor, trustee, employee, agent,
or similar functionary of another foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, other enterprise or employee benefit
plan, against any and all liability asserted against him and/or incurred by him
in such capacity or arising out of his status as such a person, whether or not
such person would be subject to or eligible for indemnification under the other
provisions of this Article XXVIII.
REPRESENTATIONS PURSUANT TO SECTION 26(e)(2)(A)
Southland Life Insurance Company hereby represents that the fees and
charges deducted under the Policy, in the aggregate, are reasonable in relation
to the services rendered, the expenses expected to be incurred, and the risks
assumed by the Company.
-4-
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectus consisting of 82 pages.
Undertaking to file reports.
Rule 484 undertaking.
Representations pursuant to Section 26(e)(2)(A).
The signatures.
Written consents of the following persons: Francis J. Mulcahy, Esquire;
Pamela Crane, Senior Vice President, Actuarial; Ernst & Young, LLP;
and Sutherland, Asbill & Brennan, LLP.
The following exhibits, corresponding to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
1.
A.
(1) Resolution of the Board of Directors of Southland
Life Insurance Company establishing Southland
Separate Account L1 *
(2) Not Applicable
(3) (a) Form of Underwriting Agreement between
Southland Life Insurance Company and ING
America Equities, Inc. **
(b) Form of Distribution Agreement ***
(c) Schedule of Sales Commissions ****
(4) Not applicable
(5) (a) Specimen Flexible Premium Adjustable
Combination Fixed and Variable Life
Insurance Policy *****
(b) Adjustable Term Insurance Rider ****
(c) Accidental Death Benefit Rider ****
(d) Additional Insured Rider ****
(e) Children's Insurance Rider ****
(f) Exchange of Insured Rider ****
(g) Guaranteed Insurability Rider ****
(h) Waiver of the Cost of Insurance Rider ****
(i) Waiver of Specified Premium Rider ****
-5-
<PAGE>
(j) Guaranteed Minimum Death Benefit Rider
(6) (a) Amended and restated Articles of
Incorporation of Southland Life Insurance
Company ***
(b) By-laws of Southland Life Insurance
Company **
(7) Not applicable
(8) (a) Form of participation/distribution agreement
between The Alger American Fund and the
Company ***
(b) Form of participation/distribution agreement
between Fidelity Variable Insurance Products
Fund and the Company ***
(c) Form of participation/distribution agreement
between Fidelity Variable Insurance Products
Fund II and the Company ***
(d) Form of participation/distribution agreement
between INVESCO Variable Investment Funds,
Inc. and the Company ***
(e) Form of participation/distribution agreement
between Janus Aspen Series and
the Company ***
(9) Not applicable
(10) Application form *****
(11) Description of issuance, transfer and redemption
procedures ****
B. Not applicable
C. Not applicable
2. Opinion and Consent of Francis J. Mulcahy, Esquire
3. Not applicable
4. Not applicable
5. Not applicable
6. Opinion and consent of Pamela Crane, Senior Vice President,
Actuarial, of Southland Life Insurance Company, as to
actuarial matters pertaining to the securities being
registered
7. (a) Consent of Ernst & Young LLP
(b) Consent of Sutherland, Asbill & Brennan, LLP
- - ----------------------
* Incorporated by reference to the Registration Statement on Form S-6 for
Southland Separate Account L1 (File No. 33-97852) filed with the
Commission on October 6, 1995.
-6-
<PAGE>
** Incorporated by reference to the Registration Statement on Form N-4 for
Southland Separate Account A1 (File No. 33-89574) filed with the
Commission on February 17, 1995.
*** Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 for Southland Separate Account A1
(File No. 33-89574) filed with the Commission on September 29, 1995.
**** Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-6 for Southland Separate Account L1
(File No. 33-97852) filed with the Commission on May 10, 1996.
***** Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form S-6 for Southland Separate Account L1
(File No. 33-97852) filed with the Commission on July 30, 1996.
-7-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, Southland Separate Account L1, has duly
caused this Post-Effective Amendment Number 2 to the Registration Statement to
be signed on its behalf by the undersigned thereunto duly authorized, and its
seal to be hereunto affixed and attested, all in the County of Fulton, State of
Georgia, this 25th day of October, 1996.
Southland Separate Account L1
Southland Life Insurance Company
(SEAL) (Depositor)
Attest: /s/ Francis J. Mulcahy By: /s/ James D. Thompson
-------------------------- -----------------------------
Francis J. Mulcahy, Vice President James D. Thompson, President
Secretary & General Counsel & Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, Southland Life
Insurance Company has duly caused this Post-Effective Amendment Number 2 to the
Registration Statement to be signed on its behalf by the undersigned persons in
their capacities with Southland Life Insurance Company thereunto authorized, and
its seal to be hereunto affixed and attested, all in the County of Fulton, State
of Georgia, this 25th day of October, 1996.
(SEAL) Southland Life Insurance Company
Attest: /s/ Francis J. Mulcahy By: /s/ James D. Thompson
-------------------------- ------------------------------
Francis J. Mulcahy, Vice President James D. Thompson, President
Secretary & General Counsel & Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment Number 2 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the date(s) set forth
below.
Principal Officers
Signature Title Date
- - --------- ----- ----
/s/ James D. Thompson President & October 25, 1996
- - --------------------- Chief Operating Officer
James D. Thompson
<PAGE>
/s/ Robert J. St. Jacques Chief Executive Officer October 25, 1996
- - -------------------------
Robert J. St. Jacques
/s/ Francis J. Mulcahy Vice President, Secretary October 25, 1996
- - ------------------------- & General Counsel
Francis J. Mulcahy
Board of Directors
/s/ R. Glenn Hilliard Chairman of the Board October 25, 1996
- - -------------------------
R. Glenn Hilliard
/s/ Robert J. St. Jacques Vice Chairman October 25, 1996
- - -------------------------
Robert J. St. Jacques
/s/ Michael W. Cunningham Director October 25, 1996
- - -------------------------
Michael W. Cunningham
/s/ Linda B. Emory Director October 25, 1996
- - -------------------------
Linda B. Emory
/s/ James D. Thompson Director October 25, 1996
- - -------------------------
James D. Thompson
Director , 1996
- - ------------------------- -----------
P. Randall Lowery
/s/ Francis J. Mulcahy Director October 25, 1996
- - -------------------------
Francis J. Mulcahy
<PAGE>
Exhibit Index
1.A.(5)(j) Guaranteed Minimum Death Benefit Rider
2. Opinion and Consent of Francis J. Mulcahy, Esquire
6. Opinion and Consent of Pamela Crane, Senior Vice President,
Actuarial, of Southland Life Insurance Company, as to actuarial
matters pertaining to the securities being registered
7.(a) Consent of Ernst & Young LLP
7.(b) Consent of Sutherland, Asbill & Brennan, L.L.P.
<PAGE>
EXHIBIT 1.A(5)(j)
GUARANTEED MINIMUM DEATH BENEFIT RIDER
This benefit is part of your Policy if listed as a benefit on the Policy
Schedule. It is effective from the Policy Date. This benefit provides that your
Policy's Stated Death Benefit will remain in force for the years of coverage as
selected in your application and approved by us even if your Policy's Cash
Surrender Value is zero. Premium requirements and Subaccount diversification
requirements apply as stated below.
All the terms below apply and all the terms of your Policy apply except as
otherwise provided in this benefit. This benefit has no loan provision or Cash
Surrender Value.
DESCRIPTION
Subject to the "Termination" provision below, your Policy will not end prior to:
June 1, 2026, the date this benefit will expire based on the years of coverage
selected in your application for this benefit and approved by us.
The annual Policy premium basis applicable to this benefit as of the Policy Date
is: $800.00.
If any Stated Death Benefit segments or additional benefits are added after the
Policy Date, an additional annual premium will be computed for each addition and
will be applicable to this benefit from the date of each respective addition.
TERMINATION
This benefit will end prior to the date shown above if on any Monthly Processing
Date:
(1) Total premiums less any Withdrawals and any Policy Debt are less
than:
One-twelfth of the annual premium amount shown above multiplied by
the number of complete months the Policy has been in force; plus
One-twelfth of the annual premium applicable to any Stated Death
Benefit segment or additional benefit added after the Policy Date
multiplied by the number of months each has been in effect. (The
annual premium will be reduced for any decrease in Stated Death
Benefit or deletion of additional benefit);
or
(2) More than 35% of your total Subaccount Accumulation Value is invested
in any one Subaccount; or your total Subaccount Accumulation Value is
invested in less than five Subaccounts.
The requirements in this section will be met if: Automatic
Rebalancing is in effect; or Dollar Cost Averaging is in effect which
transfers amounts into at least four Subaccounts and with no more
than 35% of any transfer to any one Subaccount.
This benefit will end earlier than stated above on the first to occur of: Our
receipt of your Written Request to end this benefit; the Insured's Age 100; or
Policy termination.
If this benefit terminates, it may not be reinstated.
1
<PAGE>
COST OF THIS BENEFIT
The cost of this benefit is deducted as part of the Monthly Deduction for your
Policy while this benefit is in force. The maximum monthly charge is $.01 per
thousand of the Stated Death Benefit.
Signed for SOUTHLAND LIFE INSURANCE COMPANY by
[SIGNATURE APPEARS HERE]
Secretary
2
<PAGE>
[LETTERHEAD OF SOUTHLAND LIFE APPEARS HERE]
EXHIBIT 2
October 21, 1996
Southland Life Insurance Company
5780 Powers Ferry Road, N.W.
Atlanta, Georgia 30327-4390
Dear Sir or Madam:
This opinion is furnished in connection with Post-Effective Amendment
Number 2 Form S-6 Registration Statement being filed by Southland Life Insurance
Company ("Southland") under the Securities Act of 1933, as amended (the "Act"),
for the offering of interests ("Interests") in Southland Separate Account L1
("Separate Account L1") under the Flexible Premium Variable Universal Life
Insurance Policies ("Policies") to be issued by Southland. The securities being
registered under the Act are to be offered in the manner described in the
Registration Statement.
I have examined or supervised the examination of all such corporate
records of Securities Life and such other documents and such laws as I consider
appropriate as a basis for the opinion hereinafter expressed. On the basis of
such examination, it is my opinion that:
1. Southland is a corporation duly organized and validly existing
under the laws of the State of Texas.
2. Separate Account L1 was duly created as a separate investment account
of Southland pursuant to the laws of the State of Texas.
3. The assets of Separate Account L1 will be owned by Southland. Under
Texas law and the provisions of the Policies, the income, gains and
losses, whether or not realized, from assets allocated to Separate
Account L1 must be credited to or charged against such Account, without
regard to the other income, gains or losses of Southland.
4. The Policies provide that the assets of Separate Account L1 may not be
charged with liabilities arising out of any other business Southland
may conduct, except to the extent that assets of Separate Account L1
exceed its liabilities arising under the Policies.
5. The Policies and the Interests in Separate Account L1 to be issued
under the Policies have been duly authorized by Southland; and the
Policies, including the Interests therein, when
<PAGE>
issued and delivered, will constitute validly issued and binding
obligations of Southland in accordance with their terms.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of my name under the caption "Legal Matters" in the
Prospectus contained in the Registration Statement.
Sincerely,
/s/ Francis J. Mulcahy
Francis J. Mulcahy
Secretary, Vice President
and General Counsel
FJM/jnc
<PAGE>
[LETTERHEAD OF SOUTHLAND LIFE APPEARS HERE]
EXHIBIT 6
October 25, 1996
Board of Directors
Southland Life Insurance Company
5780 Powers Ferry Road
Atlanta, Georgia 30327-4390
RE: Statement of Opinion regarding Aspects of Southland Life Insurance
Company Filing of an Individual Flexible Premium Adjustable
Combination Fixed and Variable Life Insurance Policy (S.E.C.
Registration Number 33-97852)
To the Board of Directors:
This opinion is furnished in connection with the filing of a Post-Effective
Amendment Number 2 to the Registration Statement on Form S-6 (the "Registration
Statement") covering certain flexible premium adjustable combination fixed and
variable life insurance policies (a "Policy" or the "Policies") proposed to be
issued by Southland Life Insurance Company (the "Company").
The Prospectus included in the Registration Statement describes the Policies.
The Policy forms were reviewed under my direction and I am familiar with the
Registration Statement and the Exhibits thereto. In my opinion:
1. The illustrations of Policy values, surrender values, death benefits
and accumulated premiums in the Prospectus included in the Registration
Statement and based on the assumptions stated in the illustrations are
consistent with provisions of the Policy. The rate structure of the Policies
have not been designed so as to make the relationship between premiums and
benefits, as shown in the illustrations, appear to be more favorable to
prospective non-smoker purchasers at age 45 than to prospective purchasers of
Policies, for males or females, smokers or non-smokers, at other issues
ages.
2. The information contained in the Prospectus included in the Registration
Statement describing premiums, surrender charges and other charges described
in the Registration Statement are consistent with the provisions of the
Policy.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of my name relating to actuarial matters under the
heading "Experts" in the Prospectus.
Pamela M. Crane, F.S.A., M.A.A.A.
Senior Vice President - Finance/Actuarial
Southland Life Insurance Company
<PAGE>
EXHIBIT 7(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Financial Statements" and to the use of our report dated April 5, 1996, in
Post-Effective Amendment No. 2 to the Registration Statement (Form S-6 No.
33-97852) and the related Prospectus of Southland Separate Account L1 (dated
October 25, 1996).
/s/ Ernst & Young LLP
--------------------------
ERNST & YOUNG LLP
Atlanta, Georgia
October 24, 1996
<PAGE>
[Letterhead of Sutherland, Asbill & Brennan, L.L.P.]
Exhibit 7(b)
October 24, 1996
Southland Life Insurance Company
5780 Powers Ferry Road, N.W.
Atlanta, GA 30340
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the prospectus filed as part of the Post-Effective Amendment No. 2
to the Form S-6 registration statement for Southland Separate Account L1 (File
No. 33-97852). In giving this consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Sincerely,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
By: /s/ Susan S. Krawczyk
--------------------------
Susan S. Krawczyk, Esq.
LFB
