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As Filed with the Securities and Exchange Commission on April 30, 1997
Registration No. 33-97852
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post-Effective Amendment No. 3 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.
Vice President & General Counsel Sutherland, Asbill & Brennan, L.L.P.
Southland Life Insurance Company 1275 Pennsylvania Avenue, N.W.
5780 Powers Ferry Road, N.W. Washington, DC 20004-2404
Atlanta, GA 30327
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1997 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.
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.
Pursuant to paragraph (b)(2) of Rule 24f-2, the Registrant elected not to file a
Rule 24f-2 Notice because it did not sell any securities in reliance on
Rule 24f-2 during the most recent fiscal year.
<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
36 Not applicable
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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
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 48. 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.
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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.
INTERESTS IN THE POLICIES AND SHARES IN THE PORTFOLIOS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED BY, A BANK, AND THE INTERESTS AND SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY.
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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ISSUED BY: DISTRIBUTED BY: CUSTOMER SERVICE CENTER:
Southland Life Insurance ING America Equities, Inc. Southland Customer Service Center
P.O. Box 173789 5780 Powers Ferry Road P.O. Box 173789
Denver, CO 80217-3789 Atlanta, GA 30327-4390 Denver, CO 80217-3789
1-800-224-3035
For Overnight Delivery:
8515 East Orchard Road - 9T2
Englewood, CO 80111
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DATE OF PROSPECTUS: 5/1/97
<PAGE>
TABLE OF CONTENTS
PAGE
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DEFINITIONS............................................................ -1-
SUMMARY AND DIAGRAM.................................................... -5-
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............................................... -41-
AUTOMATIC REBALANCING................................................ -43-
WITHDRAWALS.......................................................... -44-
SURRENDERS........................................................... -46-
POLICY LOANS......................................................... -46-
TELEPHONE PRIVILEGES................................................. -48-
DEATH BENEFIT AND CHANGES IN DEATH BENEFIT TYPE...................... -48-
MATURITY BENEFIT..................................................... -54-
PAYMENT OPTIONS...................................................... -54-
WHEN WE MAKE PAYMENTS................................................ -54-
THE GUARANTEED INTEREST ACCOUNT...................................... -55-
POLICY CHARGES AND FEES................................................ -56-
CHARGES DEDUCTED FROM PREMIUMS....................................... -56-
SURRENDER CHARGE..................................................... -57-
MONTHLY DEDUCTIONS FROM YOUR NET ACCUMULATION VALUE.................. -60-
OTHER ADMINISTRATIVE CHARGES......................................... -62-
CHARGES DEDUCTED FROM THE SUBACCOUNTS................................ -62-
PORTFOLIO EXPENSES................................................... -62-
PERSISTENCY REFUND................................................... -63-
GROUP OR SPONSORED ARRANGEMENTS...................................... -64-
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ADDITIONAL POLICY INFORMATION........................................ -64-
THE OWNER.......................................................... -64-
THE BENEFICIARY.................................................... -64-
CHANGE OF OWNER OR BENEFICIARY..................................... -65-
RIGHT TO CONVERT POLICY............................................ -65-
REINSTATEMENT...................................................... -65-
OTHER POLICY PROVISIONS............................................ -66-
AUTHORITY TO CHANGE POLICY TERMS................................... -66-
ADDITIONAL BENEFITS.................................................. -66-
ACCIDENTAL DEATH BENEFIT RIDER..................................... -67-
ADJUSTABLE TERM INSURANCE RIDER.................................... -67-
ADDITIONAL INSURED RIDER........................................... -68-
CHILDREN'S INSURANCE RIDER......................................... -68-
GUARANTEED INSURABILITY RIDER...................................... -69-
WAIVER OF THE COST OF INSURANCE RIDER.............................. -69-
WAIVER OF SPECIFIED PREMIUM RIDER.................................. -69-
GUARANTEED MINIMUM DEATH BENEFIT RIDER............................. -69-
FEDERAL TAX CONSIDERATIONS........................................... -69-
OTHER INFORMATION.................................................... -73-
REPORTS TO OWNERS.................................................. -73-
DISTRIBUTION OF THE POLICIES....................................... -74-
VOTING PRIVILEGES.................................................. -74-
LEGAL PROCEEDINGS.................................................. -75-
SOUTHLAND'S DIRECTORS AND OFFICERS................................. -75-
LEGAL MATTERS...................................................... -79-
FINANCIAL STATEMENTS............................................... -79-
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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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 48.
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 60. 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.
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 36.
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 69.
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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 50. 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 65.
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 ("Portfolios") of The
Alger American Fund ("Alger American"), Fidelity Variable Insurance Products
Fund ("VIP Fund"), Fidelity Variable Insurance Products Fund II ("VIP II
Fund"), Janus Aspen Series ("Janus Aspen"), and INVESCO Variable Investment
Funds ("INVESCO VIF"). See "The Portfolios." Portfolios available are:
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Alger American - Small Capitalization Portfolio VIP II Fund - Asset Manager Portfolio
Alger American - MidCap Growth Portfolio VIP II Fund - Index 500 Portfolio
Alger American - Growth Portfolio Janus Aspen - Growth Portfolio
Alger American - Leveraged AllCap Portfolio Janus Aspen - Aggressive Growth Portfolio
VIP Fund - High Income Portfolio Janus Aspen - Worldwide Growth Portfolio
VIP Fund - Money Market Portfolio Janus Aspen - International Growth Portfolio
VIP Fund - Equity-Income Portfolio Janus Aspen - Balanced Portfolio
VIP Fund - Growth Portfolio Janus Aspen - Short-Term Bond Portfolio
VIP Fund - Overseas Portfolio INVESCO VIF - Industrial Income Portfolio
VIP II Fund - Contrafund Portfolio INVESCO VIF - Utilities Portfolio
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 will 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.
- --------------------------------------------------------------------------------
-8-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CASH BENEFITS DEATH BENEFITS
* Loans may be taken for amounts up to 90% of * Death benefit should be excludable from the
Cash Surrender Value, at a maximum net interest- gross income of the Beneficiary. See "Tax
rate of 6%. See "Policy Loans" and "Tax Treatment of Policy Benefits."
Treatment of Policy Benefits."
* Available as lump sum or under a variety of
* Withdrawals generally can be made up to 12 payment options. See "Payment Options."
times a Policy Year provided there is sufficient
remaining Cash Surrender Value. A Withdrawal * Minimum Death Benefit available is
transaction charge equal to the lesser of $25 or 2% $100,000.
of the amount requested for Withdrawal will apply
to each Withdrawal after the first in a Policy * Death Benefit is equal to Base Death Benefit
Year. See "Withdrawals" and "Withdrawal plus any additional insurance provided by rider.
Transaction Charge" for rules and limits. If a If the Adjustable Term Insurance Rider is in
Withdrawal results in a decrease in Stated Death effect, the Death Benefit is equal to the Target
Benefit during the first 14 Policy Years or first 14 Death Benefit plus any additional life insurance
years following an increase in Stated Death proceeds provided by any other riders. See
Benefit, a portion of the sales surrender charge "Additional Benefits."
may be deducted from Net Accumulation Value.
See "Surrender Charge." * Base Death Benefit available in two death
benefit types: type A (larger of Stated Death
* Payment options are available. See "Payment Benefit or a multiple of Accumulation Value); or
Options." type B (larger of Stated Death Benefit plus
Accumulation Value or a multiple of Accumula
* The Policy can be surrendered at any time for tion Value). See "Death Benefit and Changes in
its Cash Surrender Value (Accumulation Value Death Benefit Type."
minus Policy Debt, any applicable Surrender
Charge and the next monthly deduction). * Flexibility to change Stated Death Benefit
and to change Death Benefit type. See "Death
* The surrender charge consists of an Benefit and Changes in Death Benefit Type" for
administrative surrender charge and a sales rules and limits.
surrender charge. The administrative surrender
charge is $4.00 per $1,000 of Stated Death Benefit * A surrender charge will apply if Stated Death
(or increase in Stated Death Benefit) for the first Benefit is decreased upon a requested decrease or
nine Policy Years (or first nine years following an withdrawal or on surrender of the Policy, if, in
increase in Stated Death Benefit), and decreases any case, it occurs within 14 Policy Years after
annually during the following six years to $0. The the Policy was issued or 14 years after an
sales surrender charge is equal to 46% of actual increase in Stated Death Benefit. See "Surrender
premiums paid up to one Target Premium plus Charge."
44% of premiums paid between one and two
Target Premiums for the Stated Death Benefit (or * One of two Guaranteed Minimum Death
increase) during the first nine Policy Years (or the Benefit options to protect the Stated Death
first nine years following an increase in Stated Benefit may be elected at the time of application.
Death Benefit), and decreases annually during the One option has a Guarantee Period of 10 Policy
following six years to 0%. However, during the Years or to the date the Insured reaches age 65,
first two Policy Years (or two years following an whichever is later; and the second option has a
increase in Stated Death Benefit), the sales Guarantee Period for the life of the Insured up to
surrender charge is limited to 26% of premiums the Maturity Date. See "Guaranteed Minimum
paid up to one Target Premium, plus 6% of premi Death Benefits," page 51.
ums 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.
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO EXPENSES
(AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS, FOR THE YEAR ENDED DECEMBER 31, 1996)
Management Other Total Annual
(Advisory) Expenses Expenses
Fees (after reimbursements) (after reimbursements)
<S> <C> <C> <C>
The Alger American Fund
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Leveraged AllCap Portfolio 0.85% 0.24% 1.09%
Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84%
Alger American Small Capitalization Portfolio 0.85% 0.03% 0.88%
Variable Insurance Products Fund and Variable Insurance Products Fund II
VIP Equity-Income Portfolio 0.51% 0.07% 0.58%/1/
VIP Growth Portfolio 0.61% 0.08% 0.69%/1/
VIP High Income Portfolio 0.59% 0.12% 0.71%
VIP Money Market Portfolio 0.21% 0.09% 0.30%
VIP Overseas Portfolio 0.76% 0.17% 0.93%/1/
VIP II Asset Manager Portfolio 0.64% 0.10% 0.74%/1/
VIP II Contrafund Portfolio 0.61% 0.13% 0.74%/1/
VIP II Index 500 Portfolio 0.13% 0.15% 0.28%/2/
VIP II Investment Grade Bond Portfolio 0.45% 0.13% 0.58%
Janus Aspen Series/3/
Aggressive Growth Portfolio 0.72% 0.04% 0.76%
Balanced Portfolio 0.79% 0.15% 0.94%
Growth Portfolio 0.65% 0.04% 0.69%
International Growth Portfolio 0.05% 1.21% 1.26%
Short-Term Bond Portfolio 0.47% 0.19% 0.66%
Worldwide Growth Portfolio 0.66% 0.14% 0.80%
INVESCO Variable Investment Funds, Inc.
Industrial Income Portfolio 0.75% 0.20% 0.95%/4/ /5/
Utilities Portfolio 0.60% 0.56% 1.16%/4/ /5/
</TABLE>
/1/ A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
Including these reductions, the total operating expenses presented in the table
would have been .56% for Equity-Income Portfolio, .67% for Growth Portfolio,
.92% for Overseas Portfolio, .73% for Asset Manager Portfolio and .71% for
Contrafund Portfolio.
/2/ The adviser has agreed to reimburse a portion of the Portfolio's expenses.
Absent reimbursement, Management Fees, Other Expenses and Total Annual Expenses
would have been .28%, .15% and .43% respectively, on an annualized basis.
/3/ The fees and expenses are based on gross expenses of the shares before
expense offset arrangements. The information for each Portfolio is net of fee
waivers or reductions from Janus Capital. Without such waivers or reductions,
Management Fees, Other Expenses and Total Annual Expenses respectively were:
0.79%, 0.04% and 0.83% for Aggressive Growth Portfolio; 0.92%, 0.15% and 1.07%
for Balanced Portfolio; 0.79%, 0.04% and 0.83% for Growth Portfolio; 1.00%,
1.21% and 2.21% for International Growth Portfolio; 0.65%, 0.19% and 0.84% for
Short-Term Bond Portfolio; and 0.77%, 0.14% and 0.91% for Worldwide Growth
Portfolio.
/4/ The Portfolios' actual Total Operating Expenses were lower than the figures
shown because the Portfolios' custodian fees were reduced under an expense
offset arrangement. The figures shown above do not reflect these reductions.
/5/ Certain Portfolio expenses are being absorbed by INVESCO Funds Group, Inc.
In the absence of such absorbed expenses, the Total Annual Expenses of the
Industrial Income Portfolio and the Utilities Portfolio would have been 1.19%
and 5.36%, respectively.
-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 preferred, 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 56.
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
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 4.18%
5 years ended 12/31/96: 11.02%
Since inception (9/21/88): 20.21%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
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% 23,310 19,160 250,000
12/31/93 13.28% 29,829 25,679 250,000
12/31/94 -4.38% 31,306 27,156 250,000
12/31/95 44.31% 49,622 45,472 250,000
12/31/96 4.18% 54,706 50,556 250,000
Alger American MidCap Growth Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 11.90%
Since inception (5/3/93): 24.08%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/94 -1.54% $ 2,924 $ 954 $250,000
12/31/95 44.45% 8,964 6,744 250,000
12/31/96 11.90% 13,489 9,339 250,000
-12-
<PAGE>
Alger American Growth Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 13.35%
5 years ended 12/31/96: 16.63%
Since inception (9/21/88): 18.65%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
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% 9,374 5,224 250,000
12/31/92 0.33% 12,454 8,304 250,000
12/31/93 22.47% 19,062 14,912 250,000
12/31/94 1.45% 22,376 18,226 250,000
12/31/95 36.37% 34,747 30,597 250,000
12/31/96 13.35% 42,791 38,641 250,000
Alger American Leveraged AllCap Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 12.04%
Since inception (1/25/95): 41.27%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/96 12.04% $ 3,401 $ 1,431 $250,000
VIP Fund - Growth Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 14.71%
5 years ended 12/31/96: 15.16%
Since inception (10/9/86): 15.15%
-13-
<PAGE>
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
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% 14,739 10,589 250,000
12/31/91 45.51% 26,056 21,906 250,000
12/31/92 9.32% 31,756 27,606 250,000
12/31/93 19.37% 41,490 37,340 250,000
12/31/94 -0.02% 44,393 40,243 250,000
12/31/95 35.36% 64,377 60,227 250,000
12/31/96 14.71% 77,285 73,826 250,000
VIP Fund - Overseas Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 13.15%
5 years ended 12/31/96: 9.15%
Since inception (1/28/87): 7.88%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
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% 11,047 6,897 250,000
12/31/91 8.00% 15,240 11,090 250,000
12/31/92 -10.72% 16,241 12,091 250,000
12/31/93 37.35% 26,617 22,467 250,000
12/31/94 1.72% 30,082 25,932 250,000
12/31/95 9.68% 36,299 32,149 250,000
12/31/96 13.15% 44,619 40,469 250,000
-14-
<PAGE>
VIP Fund - Money Market Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 5.41%
5 years ended 12/31/96: 4.53%
10 years ended 12/31/96: 5.96%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/87 6.44% $ 3,204 $ 1,234 250,000
12/31/88 7.39% 6,840 4,620 250,000
12/31/89 9.12% 10,835 6,685 250,000
12/31/90 8.04% 15,018 10,868 250,000
12/31/91 6.09% 19,153 15,003 250,000
12/31/92 3.90% 23,022 18,872 250,000
12/31/93 3.23% 26,844 22,694 250,000
12/31/94 4.25% 31,119 26,969 250,000
12/31/95 5.87% 36,261 32,111 250,000
12/31/96 5.41% 41,493 38,035 250,000
VIP II Fund - Asset Manager Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 14.60%
5 years ended 12/31/96: 11.26%
Since inception (9/6/89): 11.69%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
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% 12,265 8,115 250,000
12/31/93 21.23% 18,636 14,486 250,000
12/31/94 -6.09% 20,280 16,130 250,000
12/31/95 16.96% 27,289 23,139 250,000
12/31/96 14.60% 34,719 30,569 250,000
-15-
<PAGE>
VIP II Fund - Index 500 Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 22.82%
Since inception (8/27/92): 17.08%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
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% 13,325 9,175 250,000
12/31/96 22.82% 20,183 16,033 250,000
VIP Fund - High Income Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 14.03%
5 years ended 12/31/96: 14.96%
10 years ended 12/31/96: 11.12%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/87 1.22% $ 3,021 $ 1,051 250,000
12/31/88 11.64% 6,925 4,705 250,000
12/31/89 -4.17% 9,539 5,389 250,000
12/31/90 -2.23% 12,284 8,134 250,000
12/31/91 35.08% 20,851 16,701 250,000
12/31/92 23.17% 29,404 25,314 250,000
12/31/93 20.40% 39,108 34,958 250,000
12/31/94 -1.64% 41,335 37,185 250,000
12/31/95 20.72% 53,686 49,536 250,000
12/31/96 14.03% 64,694 61,236 250,000
-16-
<PAGE>
VIP Fund - Equity-Income Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 14.28%
5 years ended 12/31/96: 17.98%
10 years ended 12/31/96: 13.74%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
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% 12,528 8,378 250,000
12/31/90 -15.29% 13,101 8,951 250,000
12/31/91 31.44% 21,343 17,193 250,000
12/31/92 16.89% 28,508 24,358 250,000
12/31/93 18.29% 37,288 33,138 250,000
12/31/94 7.07% 43,099 38,949 250,000
12/31/95 35.09% 62,509 58,359 250,000
12/31/96 14.28% 74,869 71,411 250,000
VIP II Fund - Investment Grade Bond Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 3.19%
5 years ended 12/31/96: 6.64%
Since inception (12/5/88): 8.19%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
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% 11,661 7,511 250,000
12/31/92 6.65% 15,694 11,544 250,000
12/31/93 10.96% 20,801 16,651 250,000
12/31/94 -3.76% 22,868 18,718 250,000
12/31/95 17.32% 30,395 26,245 250,000
12/31/96 3.19% 34,443 30,293 250,000
-17-
<PAGE>
VIP II Fund - Contrafund Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 21.22%
Since inception (1/3/95): 30.19%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/96 21.22% $ 3,725 $ 1,755 $250,000
INVESCO VIF Utilities Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 12.76%
Since inception (1/1/95): 10.90%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/95 9.08% $ 3,297 $ 1,327 $250,000
12/31/96 12.76% 7,309 5,089 250,000
INVESCO VIF Industrial Income Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 22.28%
Since inception (8/10/94): 21.46%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/95 29.25% $ 4,009 $ 2,039 $250,000
12/31/96 22.28% 8,832 6,612 250,000
-18-
<PAGE>
Janus Aspen Growth Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 18.45%
Since inception (9/13/93): 16.22%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/94 2.76% $ 3,075 $ 1,105 $250,000
12/31/95 30.17% 8,223 6,003 250,000
12/31/96 18.45% 13,435 9,285 250,000
Janus Aspen Aggressive Growth Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 7.95%
Since inception (9/13/93): 21.33%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/94 16.33% $ 3,552 $ 1,582 $250,000
12/31/95 27.48% 8,648 6,428 250,000
12/31/96 7.95% 12,657 8,507 250,000
Janus Aspen Worldwide Growth Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 29.04%
Since inception (9/13/93): 23.20%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/94 1.53% $ 3,032 $ 1,062 $250,000
12/31/95 27.37% 7,981 5,761 250,000
12/31/96 29.04% 14,371 10,221 250,000
-19-
<PAGE>
Janus Aspen International Growth Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 34.71%
Since inception (5/2/94): 19.62%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/95 23.15% $ 3,793 $ 1,823 $250,000
12/31/96 34.71% 9,490 7,270 250,000
Janus Aspen Balanced Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 16.18%
Since inception (9/13/93): 14.63%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/94 0.84% $ 3,008 $ 1,038 $250,000
12/31/95 24.79% 7,780 5,560 250,000
12/31/96 16.18% 12,655 8,505 250,000
Janus Aspen Short-Term Bond Portfolio
Portfolio Average Annual Total Return for:
1 year ended 12/31/96: 3.98%
Since inception (9/13/93): 4.42%
Cash
Annual Total Accumulation Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
12/31/94 0.92% $ 3,010 $ 1,040 $250,000
12/31/95 9.54% 6,775 4,555 250,000
12/31/96 3.98% 10,235 6,085 250,000
-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 Portfolios 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 Portfolios are subject to an
annual expense ratio of 0.7795% 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%, and 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 -1.67%,
4.28% and 10.22%, respectively for years one through ten and thereafter, -1.32%,
4.63% and 10.57%, respectively. Net annual rates of return for the Variable
Account are not equal to net annual rates of return for the Policy because the
Variable Account rates do not reflect all charges to the Policy.
-21-
<PAGE>
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 $ 2,951 $ 981 $250,000
2 46 4,500 6,035 3,815 250,000
3 47 4,500 9,015 4,865 250,000
4 48 4,500 11,956 7,806 250,000
5 49 4,500 14,859 10,709 250,000
6 50 4,500 17,725 13,575 250,000
7 51 4,500 20,554 16,404 250,000
8 52 4,500 23,386 19,236 250,000
9 53 4,500 26,319 22,169 250,000
10 54 4,500 29,215 25,757 250,000
11 55 4,500 32,382 29,616 250,000
12 56 4,500 35,423 33,348 250,000
13 57 4,500 38,321 36,937 250,000
14 58 4,500 41,075 40,384 250,000
15 59 4,500 43,683 43,683 250,000
16 60 4,500 46,132 46,132 250,000
17 61 4,500 48,407 48,407 250,000
18 62 4,500 50,493 50,493 250,000
19 63 4,500 52,372 52,372 250,000
20 64 4,500 54,020 54,020 250,000
21 65 4,500 55,494 55,494 250,000
22 66 4,500 56,748 56,748 250,000
23 67 4,500 57,763 57,763 250,000
24 68 4,500 58,513 58,513 250,000
25 69 4,500 58,976 58,976 250,000
26 70 4,500 59,121 59,121 250,000
27 71 4,500 58,923 58,923 250,000
28 72 4,500 58,349 58,349 250,000
29 73 4,500 57,361 57,361 250,000
30 74 4,500 55,907 55,907 250,000
Age 65 4,500 54,020 54,020 250,000
Gross Investment Rate: 0.00%
Average Fund Level Expense: 0.7795%
Net Rate of Return Years 1 - 10: -1.67%
Net Rate of Return Years 11+: -1.32%
</TABLE>
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 $ 3,161 $ 1,191 $250,000
2 46 4,500 6,647 4,427 250,000
3 47 4,500 10,230 6,080 250,000
4 48 4,500 13,980 9,830 250,000
5 49 4,500 17,905 13,755 250,000
6 50 4,500 22,014 17,864 250,000
7 51 4,500 26,316 22,166 250,000
8 52 4,500 30,860 26,710 250,000
9 53 4,500 35,764 31,614 250,000
10 54 4,500 40,898 37,440 250,000
11 55 4,500 46,617 43,850 250,000
12 56 4,500 52,528 50,453 250,000
13 57 4,500 58,628 57,245 250,000
14 58 4,500 64,928 64,236 250,000
15 59 4,500 71,438 71,438 250,000
16 60 4,500 78,164 78,164 250,000
17 61 4,500 85,108 85,108 250,000
18 62 4,500 92,277 92,277 250,000
19 63 4,500 99,677 99,677 250,000
20 64 4,500 107,316 107,316 250,000
21 65 4,500 115,263 115,263 250,000
22 66 4,500 123,515 123,515 250,000
23 67 4,500 132,094 132,094 250,000
24 68 4,500 141,026 141,026 250,000
25 69 4,500 150,344 150,344 250,000
26 70 4,500 160,085 160,085 250,000
27 71 4,500 170,300 170,300 250,000
28 72 4,500 181,047 181,047 250,000
29 73 4,500 192,395 192,395 250,000
30 74 4,500 204,427 204,427 250,000
Age 65 4,500 107,316 107,316 250,000
Gross Investment Rate: 6.00%
Average Fund Level Expense: 0.7795%
Net Rate of Return Years 1 - 10: 4.28%
Net Rate of Return Years 11+: 4.63%
</TABLE>
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 $ 3,372 $ 1,402 $250,000
2 46 4,500 7,286 5,066 250,000
3 47 4,500 11,547 7,397 250,000
4 48 4,500 16,262 12,112 250,000
5 49 4,500 21,480 17,330 250,000
6 50 4,500 27,253 23,103 250,000
7 51 4,500 33,641 29,491 250,000
8 52 4,500 40,753 36,603 250,000
9 53 4,500 48,778 44,628 250,000
10 54 4,500 57,658 54,200 250,000
11 55 4,500 67,876 65,109 250,000
12 56 4,500 79,127 77,052 250,000
13 57 4,500 91,517 90,133 250,000
14 58 4,500 105,182 104,490 250,000
15 59 4,500 120,274 120,274 250,000
16 60 4,500 136,961 136,961 250,000
17 61 4,500 155,434 155,434 250,000
18 62 4,500 175,918 175,918 250,000
19 63 4,500 198,673 198,673 250,000
20 64 4,500 223,907 223,907 270,936
21 65 4,500 251,759 251,759 299,643
22 66 4,500 282,460 282,460 333,385
23 67 4,500 316,299 316,299 370,190
24 68 4,500 353,591 353,591 410,333
25 69 4,500 394,687 394,687 454,113
26 70 4,500 439,972 439,972 501,857
27 71 4,500 489,970 489,970 549,163
28 72 4,500 545,208 545,208 600,249
29 73 4,500 606,282 606,282 655,450
30 74 4,500 673,873 673,873 715,137
Age 65 4,500 223,907 223,907 270,936
Gross Investment Rate: 12.00%
Average Fund Level Expense: 0.7795%
Net Rate of Return Years 1 - 10: 10.22%
Net Rate of Return Years 11+: 10.57%
</TABLE>
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 $ 2,902 $ 932 $250,000
2 46 4,500 5,938 3,718 250,000
3 47 4,500 8,865 4,715 250,000
4 48 4,500 11,680 7,530 250,000
5 49 4,500 14,379 10,229 250,000
6 50 4,500 16,958 12,808 250,000
7 51 4,500 19,407 15,257 250,000
8 52 4,500 21,711 17,561 250,000
9 53 4,500 23,863 19,713 250,000
10 54 4,500 25,845 22,387 250,000
11 55 4,500 27,747 24,980 250,000
12 56 4,500 29,460 27,385 250,000
13 57 4,500 30,976 29,593 250,000
14 58 4,500 32,285 31,594 250,000
15 59 4,500 33,363 33,363 250,000
16 60 4,500 34,186 34,186 250,000
17 61 4,500 34,728 34,728 250,000
18 62 4,500 34,951 34,951 250,000
19 63 4,500 34,810 34,810 250,000
20 64 4,500 34,254 34,254 250,000
21 65 4,500 33,233 33,233 250,000
22 66 4,500 31,705 31,705 250,000
23 67 4,500 29,612 29,612 250,000
24 68 4,500 26,896 26,896 250,000
25 69 4,500 23,475 23,475 250,000
26 70 4,500 19,226 19,226 250,000
27 71 4,500 13,851 13,851 250,000
28 72 4,500 7,425 7,425 250,000
29 73 LAPSE LAPSE LAPSE LAPSE
30 74 LAPSE LAPSE LAPSE LAPSE
Age 65 4,500 34,254 34,254 250,000
Gross Investment Rate: 0.00%
Average Fund Level Expense: 0.7795%
Net Rate of Return Years 1 - 10: -1.67%
Net Rate of Return Years 11+: -1.32%
</TABLE>
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 $ 3,111 $ 1,141 $250,000
2 46 4,500 6,544 4,324 250,000
3 47 4,500 10,066 5,916 250,000
4 48 4,500 13,677 9,527 250,000
5 49 4,500 17,375 13,225 250,000
6 50 4,500 21,161 17,011 250,000
7 51 4,500 25,027 20,877 250,000
8 52 4,500 28,964 24,814 250,000
9 53 4,500 32,966 28,816 250,000
10 54 4,500 37,021 33,563 250,000
11 55 4,500 41,263 38,496 250,000
12 56 4,500 45,564 43,489 250,000
13 57 4,500 49,925 48,542 250,000
14 58 4,500 54,342 53,650 250,000
15 59 4,500 58,803 58,803 250,000
16 60 4,500 63,297 63,297 250,000
17 61 4,500 67,811 67,811 250,000
18 62 4,500 72,325 72,325 250,000
19 63 4,500 76,815 76,815 250,000
20 64 4,500 81,256 81,256 250,000
21 65 4,500 85,626 85,626 250,000
22 66 4,500 89,913 89,913 250,000
23 67 4,500 94,099 94,099 250,000
24 68 4,500 98,168 98,168 250,000
25 69 4,500 102,095 102,095 250,000
26 70 4,500 105,835 105,835 250,000
27 71 4,500 109,241 109,241 250,000
28 72 4,500 112,405 112,405 250,000
29 73 4,500 115,148 115,148 250,000
30 74 4,500 117,368 117,368 250,000
Age 65 4,500 81,256 81,256 250,000
Gross Investment Rate: 6.00%
Average Fund Level Expense: 0.7795%
Net Rate of Return Years 1 - 10: 4.28%
Net Rate of Return Years 11+: 4.63%
</TABLE>
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 --
- --------------------------------------------------------------------------------------------------------
Accumulation Cash
Duration Attained Age Premium Paid Value Surrender Value Death Benefit
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 45 $4,500 $ 3,320 $ 1,350 $250,000
2 46 4,500 7,176 4,956 250,000
3 47 4,500 11,368 7,218 250,000
4 48 4,500 15,930 11,780 250,000
5 49 4,500 20,894 16,744 250,000
6 50 4,500 26,302 22,152 250,000
7 51 4,500 32,191 28,041 250,000
8 52 4,500 38,601 34,451 250,000
9 53 4,500 45,583 41,433 250,000
10 54 4,500 53,190 49,732 250,000
11 55 4,500 61,684 58,917 250,000
12 56 4,500 70,993 68,918 250,000
13 57 4,500 81,217 79,834 250,000
14 58 4,500 92,471 91,779 250,000
15 59 4,500 104,876 104,876 250,000
16 60 4,500 118,580 118,580 250,000
17 61 4,500 133,756 133,756 250,000
18 62 4,500 150,604 150,604 250,000
19 63 4,500 169,363 169,363 250,000
20 64 4,500 190,322 190,322 250,000
21 65 4,500 213,826 213,826 254,541
22 66 4,500 239,808 239,808 283,097
23 67 4,500 268,350 268,350 314,135
24 68 4,500 299,703 299,703 347,869
25 69 4,500 334,139 334,139 384,531
26 70 4,500 371,955 371,955 424,367
27 71 4,500 413,603 413,603 463,671
28 72 4,500 459,590 459,590 506,091
29 73 4,500 510,405 510,405 551,901
30 74 4,500 566,667 566,667 601,466
Age 65 4,500 190,322 190,322 250,000
Gross Investment Rate: 12.00%
Average Fund Level Expense: 0.7795%
Net Rate of Return Years 1 - 10: 10.22%
Net Rate of Return Years 11+: 10.57%
</TABLE>
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 $1.9 billion, and our shareholder's
equity exceeded $370 million on a generally accepted accounting principles basis
as of December 31, 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 ING Group ("ING"), one of the
world's five largest diversified financial services organizations. ING is
headquartered in Amsterdam, Netherlands and has consolidated assets exceeding
$277 billion as of December 31, 1996.
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.
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
-29-
<PAGE>
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 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.
-30-
<PAGE>
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 or the S&P Small Cap 600 Index, updated quarterly.
ALGER AMERICAN GROWTH PORTFOLIO - seeks long-term capital appreciation by
investing at least 65% of its total assets in the securities 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 at least 85% of its net assets in equity securities of companies of
any size. The Portfolio may engage in leveraging (up to 33 1/3% of its assets)
and options and futures transactions.
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.
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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. The Portfolio 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.
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 normally invests at least 65% of its total assets in dividend-paying
common stocks and up to 10% in equity securities that do not pay regular
dividends. The remaining assets are invested in other income-producing
securities, such as corporate bonds. The Portfolio also has the flexibility to
invest in other types of securities.
UTILITIES PORTFOLIO - seeks capital appreciation and income through investments
primarily in equity securities of corporations principally engaged in the public
utilities business.
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JANUS ASPEN SERIES
GROWTH PORTFOLIO - a diversified Portfolio 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 - a nondiversified 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 - 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 by 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;
(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;
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(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.
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 48). You also may apply for
supplemental benefits (see "ADDITIONAL BENEFITS," page 66), dollar cost
averaging (see "DOLLAR COST AVERAGING FACILITY," page 43), and telephone
transfer privileges (see "TELEPHONE PRIVILEGES," page 48).
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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, 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 generally be at least equal to 25% of the
minimum annual premium. 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 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 69.
Lastly, no premium will be accepted after the Maturity Date.
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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 46). 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 51.
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.
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 46.
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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 50. 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.
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 51.
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 51. 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.
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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 48. 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 65.
A grace period also may begin if Policy Debt becomes excessive. See "POLICY
LOANS," page 46.
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 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."
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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.
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
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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 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
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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
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.
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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 43.) 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.
- --------------------------------------------------------------------------------
Free Transfers 12
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Total Number of Transfers Unlimited
Permitted
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Excess Transfer Charge $25 for each transfer in excess of 12
during any Policy Year
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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.
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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 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
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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 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.
In the future, Southland may offer Automatic Rebalancing transfers on a monthly,
semi-annual and annual basis, in which case the foregoing references to calendar
quarters would be changed to monthly, semi-annual or annual periods, as
applicable.
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
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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 62. 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 57. 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.
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 50 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 57.
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.
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We generally will pay a Withdrawal request within seven days following the
Valuation Day we receive the request. See "WHEN WE MAKE PAYMENTS," page 54.
Withdrawals may have adverse tax consequences. See "FEDERAL TAX
CONSIDERATIONS," page 69.
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 57. 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 69.
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. In the State of Texas, the maximum loan amount is equal to
100% of the Surrender Value in the Guaranteed Interest Account plus 90% of the
Cash Surrender Value in the Subaccounts 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 54. 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 72.
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.
Interest paid on a Policy loan is generally not tax deductible.
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
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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 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
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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 terminate. See "FEDERAL TAX
CONSIDERATIONS," page 69, 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 54) or, if a payment option is
elected, at different dates determined by the payment option elected (see
"PAYMENT OPTIONS," page 54.) See "Selecting and Changing the Beneficiary,"
page 54.
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 53. Under
certain circumstances, the amount of the Death Proceeds may be further adjusted.
See "OTHER POLICY PROVISIONS," page 66.
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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.
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.
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DEATH BENEFIT MULTIPLES
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Multiple of Multiple of Multiple of
Attained Accumulation Attained Accumulation Attained Accumulation
Age Value Age Value Age Value
- --------------------------------------------------------------------------------
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
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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 50. 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 50. In addition, no change will be permitted that
would result in your Policy not satisfying the requirements of section 7702 of
the Code. A change in the death benefit may have other tax consequences. See
"FEDERAL TAX CONSIDERATIONS," page 69. 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 58.
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 50. 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 57.
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 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.
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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 43.
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 60.
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
Insurance Charge," page 60 and "ADDITIONAL BENEFITS," page 66. Owners should
consult their sales representatives when deciding whether to add the Adjustable
Term Insurance Rider to their Policy.
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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.
Changing the Beneficiary of the Policy may have tax consequences. See "FEDERAL
TAX CONSIDERATIONS," page 69.
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.
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.
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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 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.
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POLICY CHARGES AND FEES
Southland deducts the charges described below to cover the services and benefits
provided, costs and expenses incurred and risks assumed by Southland in
connection with the Policies. Costs and expenses incurred by Southland include
those associated with underwriting applications, increases in Stated Death
Benefit, and riders; various overhead and other expenses associated with
providing the services and benefits provided by the Policy, and other costs of
doing business, such as federal, state and local premium and other taxes and
fees; and processing applications, establishing and maintaining Policy records,
collecting premiums, processing claims, and effecting Policy transactions. Risks
assumed by Southland include the risks that Insureds may live for a shorter
period of time than estimated and, therefore, the cost of insurance charges
deducted under the Policies will be insufficient to meet our actual claims, and,
that the costs of providing services and benefits under the Policies will exceed
the charges deducted. The amount of a charge may not necessarily correspond to
the costs associated with providing the services or benefits indicated by the
designation of the charge or associated with a particular Policy.
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.
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 58.
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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.
The sales charge may be reduced or waived for certain group or sponsored
arrangements or corporate purchasers or in connection with Policies that are
issued in exchange for certain policies previously issued by the Company.
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 50. 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.
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.
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.
* 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 Premium for each death
benefit segment, as reduced, as if the decreased Stated Death Benefit was
always in effect.
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* 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.
* 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:
POLICY YEAR ADMINISTRATIVE SALES SURRENDER CHARGE ACTUAL
SURRENDER CHARGE SURRENDER
CHARGE
- --------------------------------------------------------------------------------
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
13 267 840 1107
14 133 420 553
15 0 0 0
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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.
MONTHLY ADMINISTRATIVE CHARGE. The monthly administrative charge is $6 per
month and is guaranteed never to exceed $10 a month.
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 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 48), 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.
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- -- 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 66), 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.
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 66.
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OTHER ADMINISTRATIVE CHARGES
The following describes other administrative charges that may be imposed on
certain transactions or requests.
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 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.
PORTFOLIO EXPENSES
There are fees and charges deducted from the Portfolios. Please read the
prospectus for the Portfolios you are considering for complete details.
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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:
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
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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, 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
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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 69.
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,
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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 "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
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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 $10,000 and the maximum amount is the Stated
Death Benefit.
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 48.
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
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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 44.
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 60. 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 48.
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.
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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 69.
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.
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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 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. (S)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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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 total investment in the Policy the excess will generally be treated
as ordinary income subject to tax.
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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.
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
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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 LOAN INTEREST. Interest paid on a Policy loan generally is not tax
deductible. The Owner should consult a tax adviser before deducting any interest
on a Policy 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. 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.
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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.
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
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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 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.
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.
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POSITION WITH PRINCIPAL OCCUPATION DURING
NAME AND ADDRESS SOUTHLAND LIFE THE PAST FIVE YEARS
================================================================================
R. Glenn Hilliard Chairman Director, Life of Georgia
5780 Powers Ferry Road, N.W. (since 1994); President &
Atlanta, GA 30327-4390 Chief Executive Officer, ING
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).
- --------------------------------------------------------------------------------
Michael W. Cunningham Director Executive Vice President, Chief
5780 Powers Ferry Road, N.W. Financial Officer, ING North
Atlanta, GA 30327-4390 America Insurance Corporation
(since June, 1991); Executive
Vice President, Chief Financial
Officer, American Income Life
(1991); Senior Vice President,
Chief Financial Officer,
Integon Corporation (1987-
1991).
- --------------------------------------------------------------------------------
Linda B. Emory Director Executive Vice President, ING
5780 Powers Ferry Road, N.W. North America Insurance
Atlanta, GA 30327-4390 Corporation (since 1994);
Director, Life of Georgia
(since 1991); Senior Vice
President, Life of Georgia
(1990-1994).
- --------------------------------------------------------------------------------
P. Randall Lowery Director Senior Vice President &
5780 Powers Ferry Road, N.W. Corporate Actuary, ING America
Atlanta, GA 30327-4390 Life Corporation (since 1994);
Vice President & Actuary,
Southland Life Insurance
Company (1990-1994).
- --------------------------------------------------------------------------------
James D. Thompson Director President & Chief Operating
5780 Powers Ferry Road, N.W. Officer, Southland Life
Atlanta, GA 30327-4390 Insurance Company (since 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).
- --------------------------------------------------------------------------------
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POSITION WITH PRINCIPAL OCCUPATION DURING
NAME AND ADDRESS SOUTHLAND LIFE THE PAST FIVE YEARS
================================================================================
Valerie G. Brown Director Director (since 1997);
5780 Powers Ferry Road, N.W. Executive Vice President -
Atlanta, GA 30327-4390 Strategic Marketing &
Management Development, ING
North America Life Insurance
Company (1996- Present); Vice
President - Marketing, Taco
Bell Corporation (1992-1996).
- --------------------------------------------------------------------------------
B. Scott Burton Director Director & Secretary (since
5780 Powers Ferry Road, N.W. 1997); Vice President & General
Atlanta, GA 30327-4390 Counsel (since 1996); Associate
General Counsel (1994-1996);
Associate General Counsel,
Confederation Life Insurance
Company (1990-1994).
- --------------------------------------------------------------------------------
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).
POSITION WITH PRINCIPAL OCCUPATION DURING
NAME AND ADDRESS SOUTHLAND LIFE THE PAST FIVE YEARS
================================================================================
John R. Barmeyer Senior Vice Director, Life of Georgia
5780 Powers Ferry Road, N.W. President - (since 1992); General
Atlanta, GA 30327-4390 Legal Services Counsel, ING America Life
Insurance Corporation, and
Senior Vice President,
General Counsel & Secretary,
Life of Georgia (since
1992); Vice President,
General Counsel & Secretary,
Life of Georgia (1990-1992).
- --------------------------------------------------------------------------------
James J. Carey Senior Vice Senior Vice President -
5780 Powers Ferry Road, N.W. President - Marketing/Chief Marketing
Atlanta, GA 30327-4390 Chief Marketing Officer (since 1996);
Officer President, United Securities
Alliance (1994-1996);
Independent Consulting (1992-
1994); Executive Vice
President -Marketing ,
Primerica Financial Services
(1987-1992).
- --------------------------------------------------------------------------------
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POSITION WITH PRINCIPAL OCCUPATION DURING
NAME AND ADDRESS SOUTHLAND LIFE THE PAST FIVE YEARS
================================================================================
Pamela Crane Senior Vice Senior Vice President -
5780 Powers Ferry Road, N.W. President - Actuarial/Finance (since 1995);
Atlanta, GA 30327-4390 Acturial/ Vice President - BIO (1994-
Finance 1995); Consultant, Tillinghast
(1988-1994).
- --------------------------------------------------------------------------------
Michael E. Fisher Senior Vice Senior Vice President -
5780 Powers Ferry Road, N.W. President - Litigation (since 1996);
Atlanta, GA 30327-4390 Litigation Partner, Gorby & Reeves, P.C.
(1992-1996)
- --------------------------------------------------------------------------------
Larry F. Nordin Senior Vice Senior Vice President - Sales &
5780 Powers Ferry Road, N.W. President - Marketing (since 1996); Vice
Atlanta, GA 30327-4390 Sales & President - RSD Sales, Life of
Marketing Georgia (1985-Present).
- --------------------------------------------------------------------------------
Keith T. Glover Executive Vice Executive Vice President (since
5780 Powers Ferry Road, N.W. President 1996); Executive Vice
Atlanta, GA 30327-4390 President -ING FSI North
America (1995-1996); President,
Services -ING America Life
(1994 - 1995); Executive Vice
President, Operations -
Security Life of Denver (1991 -
1994).
- --------------------------------------------------------------------------------
Lyndon E. Oliver Vice President Vice President (since 1996);
5780 Powers Ferry Road, N.W. & Treasurer Treasurer (since 1994); Life of
Atlanta, GA 30327-4390 Georgia: Vice President -
Finance, & Treasurer (1996-
Present); Assistant Treasurer
(1993-1994); Treasury
Administrator (1992-1993).
- --------------------------------------------------------------------------------
Allen W. Rightmeyer Vice President Vice President - Operations
5780 Powers Ferry Road, N.W. - Operations (since 1996); Senior Vice
Atlanta, GA 30327-4390 President, Aegon USA (1988-
1996).
- --------------------------------------------------------------------------------
Samuel H. Turner Senior Vice Senior Vice President -Emerging
5780 Powers Ferry Road, N.W. President - Markets (since 1997); President
Atlanta, GA 30327-4390 Emerging & Owner - Alliance Marketing
Markets Resources (1991-1997).
- --------------------------------------------------------------------------------
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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EXPERTS
The financial statements of Southland Life Insurance Company at December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, 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 B. Scott Burton, Vice President, Secretary and General
Counsel of Southland. Sutherland, Asbill & Brennan, L.L.P. 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, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, are included beginning on the next page.
This prospectus does not contain financial statements for the Southland Separate
Account L1 because it had not yet commenced operations, had no assets or
liabilities and had received no income nor incurred any expenses as of
December 31, 1996.
-79-
<PAGE>
Financial Statements
Southland Life Insurance Company
Years ended December 31, 1996, 1995 and 1994
with Report of Independent Auditors
<PAGE>
Southland Life Insurance Company
Financial Statements
Years ended December 31, 1996, 1995 and 1994
CONTENTS
Report of Independent Auditors............................ l
Audited Financial Statements
Balance Sheets............................................ 2
Statements of Income...................................... 4
Statements of Stockholder's Equity........................ 5
Statements of Cash Flows.................................. 6
Notes to Financial Statements............................. 8
<PAGE>
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, 1996 and 1995, and the related statements of income,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southland Life Insurance
Company at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1994 the Company changed
its method of accounting for investments in debt and equity securities.
Atlanta, Georgia
April 4, 1997
<PAGE>
Southland Life Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------
<S> <C> <C>
(In Thousands)
ASSETS
Investments (Notes 1, 2, 3 and 4):
Fixed maturities:
Available-for-sale, at fair value
(amortized cost: 1996- $815,916;
1995- $793,055) $ 856,166 $ 871,637
Equity securities, at fair value (cost:
1996- $625; 1995 - $614) 816 764
Mortgage loans on real estate 351,958 300,671
Investment real estate, at cost, less
accumulated depreciation (1995 - $10) -- 190
Policy loans 82,140 80,164
Short-term investments 15,149 --
-------------------------
Total investments 1,306,229 1,253,426
Cash 7,907 1,268
Accrued investment income 17,309 15,951
Reinsurance recoverable:
Paid benefits 6,853 8,886
Unpaid benefits and IBNR 1,949 16,400
Prepaid reinsurance premiums 260,358 282,943
Deferred policy acquisition costs 171,453 145,431
Present value of future profits less
accumulated amortization (1996-
$179,657; 1995 - $163,605) 72,345 78,204
Goodwill less accumulated amortization
(1996 -$11,081; 1995 - $9,540) 49,380 50,921
Separate account assets (Note 13) 425 --
Federal taxes recoverable from related
party (Note 8) 50 --
Other assets 6,029 5,841
-------------------------
Total assets $1,900,287 $1,859,271
=========================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------
(In Thousands,
Except Share Amounts)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Life and annuity reserves $1,168,318 $1,052,649
Accident and health reserves 10,399 10,473
Guaranteed investment contracts 254,366 276,365
Policyholders' funds 2,998 2,890
Advance premiums 80 83
Accrued dividends and dividends on
deposit 771 764
Unpaid claims 17,410 30,383
---------------------------
Total future policy benefits 1,454,342 1,373,607
Accounts payable and accrued expenses 5,909 5,383
Indebtedness to related parties 9,395 5,939
Other liabilities 17,857 34,593
Separate account liabilities (Note 13) 425 --
Federal income taxes payable (Note 8):
Current -- 5,816
Deferred 42,206 55,236
---------------------------
Total liabilities 1,530,134 1,480,574
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 246,906 246,906
Net unrealized investment gains (Note 1) 19,013 37,906
Retained earnings 96,734 86,385
---------------------------
Total stockholder's equity 370,153 378,697
---------------------------
Total liabilities and stockholder's
equity $1,900,287 $1,859,271
===========================
See accompanying notes.
</TABLE>
3
<PAGE>
Southland Life Insurance Company
Statements of Income
Year ended December 31
1996 1995 1994
------------------------------
(In Thousands)
Revenues:
Traditional life insurance premiums $ 43,379 $39,182 $36,116
Health insurance premiums 71,587 60,318 18,495
Universal life and investment product
charges 76,907 67,073 56,735
Reinsurance assumed 16 201 1,740
------------------------------
191,889 166,774 113,086
Reinsurance ceded premiums (68,663) (56,059) (17,501)
------------------------------
123,226 110,715 95,585
Net investment income 100,556 103,279 93,802
Net realized gains (losses) on
investments 9,585 2,880 (1,345)
Other revenues 13,391 11,437 2,148
------------------------------
Total revenues 246,758 228,311 190,190
Benefits and expenses:
Insurance claims and benefits
incurred:
Traditional life insurance:
Death benefits 27,756 24,305 24,124
Other benefits 20,543 21,661 21,830
Universal life and investment contracts:
Interest credited to account balances 38,051 31,465 25,181
Death benefit incurred in excess of
account balances 17,573 33,902 12,690
Health benefits 49,849 28,883 8,841
Increase in policy reserves and
other funds 5,344 94 3,757
Reinsurance recoveries (41,920) (39,883) (9,489)
------------------------------
117,196 100,427 86,934
Commissions 19,195 15,229 8,178
Insurance operating expenses (Note 11) 30,910 20,924 18,945
Amortization of goodwill 1,541 1,541 1,541
Amortization of present value of
future profits, net of
accrued interest 9,148 10,155 10,414
Amortization of deferred policy
acquisition costs 17,905 13,326 10,060
------------------------------
195,895 161,602 136,072
------------------------------
Income before federal income taxes 50,863 66,709 54,118
Federal income taxes (Note 8) 19,514 23,828 18,722
------------------------------
Net income $ 31,349 $ 42,881 $ 35,396
==============================
See accompanying notes.
4
<PAGE>
Southland Life Insurance Company
Statements of Stockholder's Equity
Year ended December 31
1996 1995 1994
--------------------------------
(In Thousands)
Common stock:
Balance at beginning and end of year $7,500 $7,500 $7,500
================================
Additional paid-in capital:
Balance at beginning of year $246,906 $366,536 $366,536
Return of capital to stockholder - (119,630) -
--------------------------------
Balance at end of year $246,906 $246,906 $366,536
================================
Net unrealized investment gains (losses)
on securities:
Balance at beginning of year $ 37,906 $ (8,874) $ (23)
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 (24,889) 65,248 (52,010)
Effect on DPAC and PVFP of
unrealized gains (losses) on
fixed maturities, net of tax 5,996 (18,468) 19,891
--------------------------------
Balance at end of year $ 19,013 $ 37,906 $ (8,874)
================================
Retained earnings:
Balance at beginning of year $ 86,385 $ 58,239 $ 51,543
Net income 31,349 42,881 35,396
Dividends to stockholder (21,000) (14,735) (28,700)
--------------------------------
Balance at end of year $ 96,734 $ 86,385 $ 58,239
================================
Total stockholder's equity $370,153 $378,697 $423,401
================================
See accompanying notes.
5
<PAGE>
Southland Life Insurance Company
Statements of Cash Flows
Year ended December 31
1996 1995 1994
---------------------------------
(In Thousands)
Operating activities
Net income $ 31,349 $ 42,881 $ (5,682)
Adjustments to reconcile to net income
to net cash provided by operating
activities: 8,586 92,996 189,867
Increase in future policy benefits
Net (decrease) increase in federal
income taxes (18,896) 8,528 (5,682)
(Decrease) increase in accounts
payable and accrued expenses and
other liabilities (12,887) (3,404) 3,967
(Increase) decrease in accrued
investment income (1,358) 777 (2,092)
Net realized investment (gains)
losses (9,585) (2,880) 1,345
Decrease (increase) in reinsurance
recoverable 16,484 (22,484) 197
Decrease (increase) in prepaid
reinsurance premiums 22,585 (42,119) (161,654)
Depreciation and amortization
expense 10,681 11,708 12,001
Policy acquisition costs deferred (37,992) (41,581) (38,423)
Amortization of deferred policy
acquisition costs 17,905 13,326 10,060
Other, net 9,385 (1,057) (7,313)
---------------------------------
Net cash provided by operating
activities 36,257 56,691 37,669
Investing activities
Securities available-for-sale:
Sales:
Fixed maturities 116,988 118,212 34,553
Equity securities 25 1,105 50,485
Maturities - fixed maturities 82,646 36,740 38,925
Purchases:
Fixed maturities (215,464) (201,698) (143,013)
Equity securities (35) (186) (43,685)
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 20,115 16,613 22,069
Investment real estate 150 450 3,068
Other long-term investments - - 250
6
<PAGE>
Southland Life Insurance Company
Statements of Cash Flows (continued)
Year ended December 31
1996 1995 1994
---------------------------------
(In Thousands)
Investing activities (continued)
Purchase or issuance of investments:
Mortgage loans on real estate (71,512) (85,580) (76,403)
Investment real estate (11) - (462)
Policy loans, net (1,976) (727) 2,812
Short-term investments, net (15,149) - 14,600
Additions to property and equipment - (62) (9)
Disposal of property and equipment - 780 206
---------------------------------
Net cash used by investing activities (84,223) (95,151) (99,490)
Financing activities
Increase (decrease) in indebtedness
to related parties 3,456 (5,261) 3,968
Receipts from interest sensitive
products credited to policyholder
account balances 97,400 101,462 81,927
Return of policyholder account
balances on interest sensitive
policies (25,251) (25,244) (16,305)
Return of capital and dividends paid
to stockholder (21,000) (42,060) (23,700)
---------------------------------
Net cash provided by financing
activities 54,605 28,897 45,890
---------------------------------
Net increase (decrease) in cash 6,639 (9,563) (15,931)
Cash at beginning of year 1,268 10,831 26,762
---------------------------------
Cash at end of year $ 7,907 $ 1,268 $ 10,831
=================================
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. The gain on securities transferred of $4,549,000
and $7,447,000 at December 31, 1996 and 1995, respectively, was deferred and is
included in other liabilities until such time as the securities are sold to an
unrelated party.
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, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Southland Life Insurance Company (the Company) is a wholly-owned subsidiary of
Internationale Nederlanden Groep America Life Corporation (America Life), an
indirect, wholly-owned subsidiary of Internationale Nederlanden Groep.
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.
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:
8
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
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 1996, the Company adopted FASB 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. Adoption of this standard had
no impact on net income or stockholder's equity.
9
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
All of the Company's securities were classified as available-for-sale at
December 31, 1996 and 1995.
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.
10
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
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 6.5% to 9%. 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.
12
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE POLICY BENEFITS (CONTINUED)
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
excess of related policy account balances. Interest crediting rates for
universal life and investment products range from 4.5% to 7.25% during 1996,
and from 4.5% to 8.18% during 1995 and 1994.
Included in life and annuity reserves is an unearned revenue reserve that
reflects the unamortized balance of excess policy fees over ultimate policy
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.
13
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 8.28% and 8.45% in 1996 and
1995, respectively, grading down to 6% over the next 13 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>
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
(In Thousands)
Balance at beginning of year $ 78,204 $100,602 $107,318
Interest accrued on unamortized balance 6,904 7,915 8,882
Amortization (16,052) (18,070) (19,296)
FAS 115 adjustment 3,289 (12,243) 3,698
-------------------------------------
Balance at end of year $ 72,345 $ 78,204 $100,602
=====================================
</TABLE>
14
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRESENT VALUE OF FUTURE PROFITS (CONTINUED)
The estimated amount to be amortized during each of the next five years is shown
below (in thousands):
<TABLE>
<CAPTION>
AMORTIZATION
OF PVFP
--------------
(In Thousands)
<S> <C>
1997 $15,090
1998 12,989
1999 11,528
2000 10,059
2001 8,520
</TABLE>
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.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been reclassified
to conform to the 1996 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, 1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Available-for-sale $856,166 $856,166 $871,637 $871,637
Equity securities 816 816 764 764
Commercial mortgages 351,740 370,343 300,445 331,584
Residential mortgages 218 223 226 226
Policy loans 82,140 73,046 80,164 69,383
Short-term investments 15,149 15,149 -- --
LIABILITIES
Supplemental contracts without
life contingencies 879 879 934 934
Other policyholder funds left
on deposit 3,849 3,849 2,992 2,992
Individual and group annuities,
net of reinsurance 19,905 19,765 22,452 22,220
</TABLE>
The following methods and assumptions were used by the Company in estimating the
fair value disclosures for financial instruments:
FIXED MATURITIES, EQUITY SECURITIES AND SHORT-TERM INVESTMENTS: 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. The fair values of short-term investments
approximate the carrying amount of such assets.
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
at 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 option 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 $88,000 at December 31, 1996 and
$1,544,000 at December 31, 1995 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, 1996:
<TABLE>
<CAPTION>
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS GAINS VALUE
-----------------------------------------------------
<S> <C> <C> <C> <C>
(In Thousands)
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 23,187 $ 4,053 $ -- $ 27,240
States, municipalities and political
subdivisions 660 17 -- 677
Public utilities securities 38,818 3,553 82 42,289
Corporate securities 457,299 27,407 1,459 483,247
Mortgage-backed securities 232,684 6,531 1,608 237,607
Other asset-backed securities 63,268 2,103 353 65,018
Derivatives hedging fixed maturities -- 573 485 88
-------------------------------------------------
Total fixed maturities 815,916 44,237 3,987 856,166
Preferred stocks 521 61 -- 582
Common stocks 104 174 44 234
-------------------------------------------------
Total $816,541 $44,472 $4,031 $856,982
=================================================
</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, 1995:
<TABLE>
<CAPTION>
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS 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 $ 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>
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, 1996 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>
COST OR ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------------------
(In Thousands)
<S> <C> <C>
Available-for-sale:
Due in one year or less $ 13,728 $ 13,834
Due after one year through five years 84,806 88,785
Due after five years through ten years 184,783 194,243
Due after ten years 236,647 256,679
-------------------------
519,964 553,541
Mortgage-backed securities 232,684 237,607
Other asset-backed securities 63,268 65,018
Equity securities 625 816
-------------------------
Total available-for-sale $816,541 $856,982
=========================
</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, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
FIXED EQUITY TOTAL
------------------------------------
(In Thousands)
<S> <C> <C> <C>
Gross unrealized gains $ 43,752 $235 $ 43,987
Gross unrealized losses 3,502 44 3,546
------------------------------------
Net unrealized gains 40,250 191 40,441
Deferred income tax expense (14,088) (67) (14,155)
------------------------------------
Net unrealized gains after taxes 26,162 124 26,286
Less:
Balance at beginning of year 51,078 97 51,175
------------------------------------
Change in net unrealized gains
(losses) $(24,916) $ 27 $(24,889)
====================================
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
====================================
</TABLE>
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
1996 1995
-----------------
(In Thousands)
Investment purchase commitments $4,278 $21,865
These commitments were settled in January 1997 and 1996, respectively.
Major categories of investment income for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities $ 66,337 $ 74,911 $69,031
Equity securities 37 73 --
Mortgage loans on real estate 28,622 23,851 19,139
Policy loans 5,025 4,775 4,735
Short-term investments 1,446 -- --
Other investments 759 1,457 2,986
-----------------------------
102,226 105,067 95,891
Investment expenses (1,670) (1,788) (2,089)
-----------------------------
Net investment income $100,556 $103,279 $93,802
=============================
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities $7,209 $2,824 $ 1,248
Equity securities -- -- (2,577)
Real estate and other (522) 56 (16)
Fixed maturities transferred to parent
company in 1995 2,898 -- --
----------------------------
Net realized gain (losses) on
investments $9,585 $2,880 $(1,345)
============================
</TABLE>
During 1996, 1995 and 1994, debt and marketable equity securities available-for-
sale were sold with a fair value at the date of sale of $117,013,000,
$119,317,000 and $85,038,000, respectively. Gross gains of $7,326,000,
$3,494,000 and $1,940,000 and gross losses of $117,000, $670,000 and $3,269,000
were realized on those sales in 1996, 1995 and 1994, respectively.
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,
1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
-------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Interest rate contracts:
Swaps $28,000 $ -- $ 573 $ 573
Swaps-affiliates 25,000 -- (485) (485)
-------------------------------------------
Total swaps $53,000 $ -- $ 88 $ 88
============================================
DECEMBER 31, 1995
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
-------------------------------------------
(In Thousands)
Interest rate contracts:
Swaps $28,000 $ -- $1,774 $1,774
Swaps-affiliates 25,000 -- (230) (230)
-------------------------------------------
Total swaps $53,000 $ -- $1,544 $1,544
============================================
</TABLE>
24
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
5. CONCENTRATIONS OF RISK
At December 31, 1996, the Company held below-investment-grade bonds classified
as available-for-sale with a carrying value of $34,792,000 and a fair value of
$36,383,000. These holdings amounted to 4.2% of the Company's investment in
bonds and less than 2% of total assets. The holdings of below-investment-grade
bonds are widely diversified and of satisfactory quality based on the Company's
investment policies and credit standards.
At December 31, 1996, the Company's commercial mortgages involved a
concentration of properties located in Florida (24%), Texas (11%) and
Pennsylvania (10%). The remaining commercial mortgages relate to properties
located in 24 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
$6,800,000.
The Company also has a concentration of direct premium income in Texas (17%) and
California (16%) at December 31, 1996.
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.
25
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
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 December 31, 1996, 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, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1996
Life insurance in force $20,482,429 $5,293,509 $ 777 $15,189,697 0.01%
================================================================================
Premiums:
Life insurance $ 43,379 $ 11,918 $ 16 $ 31,477 0.05%
Health insurance 71,587 56,745 -- 14,842 0.00%
--------------------------------------------------------------------------------
Total premiums $ 114,966 $ 68,663 $ 16 $ 46,319 0.03%
================================================================================
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 47,986 -- 12,332 0.00%
--------------------------------------------------------------------------------
Total premiums $ 99,500 $ 56,059 $ 201 $ 43,642 0.46%
================================================================================
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%
================================================================================
</TABLE>
27
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
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.
Beginning in 1995, the Company filed a consolidated federal income tax return
with Internationale Nederlanden Groep America Insurance Holdings, Inc. (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 it 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 asset of $50,000 at December 31, 1996 and current tax liability
of $5,816,000 at December 31, 1995 are due from and payable to, respectively,
the parent company, America Life, under the terms of the tax sharing agreement.
28
<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:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-----------------
(In Thousands)
<S> <C> <C>
Deferred income tax liability:
Deferred policy acquisition costs $39,494 $34,700
PVFP 15,126 7,500
Deferred investment gains -- 2,300
Unrealized investment gains and losses 15,418 24,800
Bond/mortgage loans market discount 115 700
Other reserves 2,238 2,100
------------------
Total deferred income tax liability 72,391 72,100
Deferred income tax asset:
Benefit reserves 28,863 14,100
Other assets 1,322 2,764
------------------
Total deferred income tax asset 30,185 16,864
------------------
Net deferred income tax liability $42,206 $55,236
==================
</TABLE>
29
<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
1996 1995 1994
------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-preferred investment income -- -- (.1)
Goodwill 1.1 .7 1.0
Other items, net 2.3 -- (1.3)
------------------------
Effective tax rate 38.4% 35.7% 34.6%
========================
</TABLE>
The components of federal income tax expense consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------
(In Thousands)
<S> <C> <C> <C>
Current $22,370 $22,913 $13,768
Deferred (2,856) 915 4,954
---------------------------
Federal income tax expense $19,514 $23,828 $18,722
===========================
</TABLE>
The Company made net income tax payments of $29,320,000 during 1996, $16,254,000
during 1995, and $22,585,000 during 1994 for current income taxes and
settlements of prior year returns.
9. STATUTORY ACCOUNTING INFORMATION AND PRACTICES
Statutory capital and surplus was $100,228,000 and $78,992,000 at December 31,
1996 and 1995, respectively. Statutory net income was $43,594,000, $42,182,000
and $36,539,000, for the years ended December 31, 1996, 1995, and 1994,
respectively.
30
<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, 1996. 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.
The NAIC has established certain Risk-Based Capital (RBC) requirements for
life/health insurance companies. The NAIC RBC formula attempts to measure the
risk profile of insurance companies in relation to actual capitalization levels.
The Company exceeded the NAIC RBC minimum requirements for 1996 and 1995.
At December 31, 1996 and 1995, bonds with an amortized cost of $8,790,000 and
$8,376,000, respectively, were on deposit with various state insurance
departments to meet regulatory requirements.
31
<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 1996, 1995, and 1994, the Company reimbursed Life of Georgia
$21,586,000, $24,573,000 and $28,000,000, respectively, under this agreement.
The Company has a payable to Life of Georgia of $9,363,000 and $5,894,000 at
December 31, 1996 and 1995, 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 $100,000,000 which matures
30 days from the date of advancement. This line of credit expires June 30, 1997.
Interest rates on these borrowings are tied to the Federal Funds rate plus .25%.
Outstanding borrowings under this agreement were $0 at December 31, 1996 and
1995.
13. SEPARATE ACCOUNTS
Separate account assets and liabilities represent funds segregated by the
Company for the benefit of certain policyholders who bear the investment risk.
The separate account assets and liabilities are carried at fair value. Revenues
and expenses on the separate account assets and related liabilities equal the
benefits paid to the separate account policyholders and are excluded from the
amounts reported in the Statements of Income except for fees charged for
administration services and mortality risk.
32
<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 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.
<PAGE>
(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.
(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:
-2-
<PAGE>
(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, 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.
-3-
<PAGE>
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 Southland Life Insurance Company.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectus consisting of 79 pages.
Undertaking to file reports.
Rule 484 undertaking.
Representations pursuant to Section 26(e)(2)(A).
The signatures.
Written consents of the following persons: B. Scott Burton, Esquire; Pamela
Crane, Senior Vice President, Actuarial; Ernst & Young LLP; and Sutherland,
Asbill & Brennan, L.L.P.
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-
<PAGE>
(4) Not applicable
(5) (a) Specimen Flexible Premium Adjustable Combination Fixed and
Variable Life Insurance Policy *****
(a)(1) Specimen Form of Montana Flexible Premium Adjustable
Combination Fixed and Variable Life Insurance Policy
(a)(2) Specimen Form of Texas 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 ****
(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 B. Scott Burton, Esquire
3. Not applicable
4. Not applicable
-5-
<PAGE>
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, L.L.P.
- -----------------------------
* 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.
** 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.
****** Incorporated by reference to Post-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 October 25, 1996.
-6-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Southland Separate Account L1, certifies that it meets all of the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Post-Effective Amendment
Number 3 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
----
April, 1997.
Southland Separate Account L1
(Registrant)
(SEAL) Southland Life Insurance Company
(Depositor)
Attest: /s/ B. Scott Burton By: /s/ James D. Thompson
---------------------- ------------------------------
B. Scott Burton, Vice James D. Thompson, President &
President, Secretary & Chief Operating Officer
General Counsel
Pursuant to the requirements of the Securities Act of 1933, Southland Life
Insurance Company has duly caused this Post-Effective Amendment Number 3 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 April, 1997.
----
(SEAL) Southland Life Insurance Company
Attest: /s/ B. Scott Burton By: /s/ James D. Thompson
---------------------- ------------------------------
B. Scott Burton, Vice James D. Thompson, President &
President, Secretary & Chief Operating Officer
General Counsel
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment Number 3 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the date(s) set forth below.
Signature Title Date
- --------- ----- ----
/s/ James D. Thompson President, Chief April 25, 1997
- ---------------------------- Operating Officer & --------
James D. Thompson Director
/s/ R. Glenn Hilliard Chief Executive Officer & April 25, 1997
- ---------------------------- Chairman of the Board --------
R. Glenn Hilliard
/s/ B. Scott Burton Vice President, Secretary, April 25, 1997
- ---------------------------- General Counsel & Director --------
B. Scott Burton
/s/ Michael W. Cunningham Director April 25, 1997
- ---------------------------- --------
Michael W. Cunningham
/s/ Linda B. Emory Director April 25, 1997
- ---------------------------- --------
Linda B. Emory
/s/ P. Randall Lowery Director April 25, 1997
- ---------------------------- --------
P. Randall Lowery
/s/ Valerie G. Brown Director April 25, 1997
- ---------------------------- --------
Valerie G. Brown
<PAGE>
Exhibit Index
1.A.5.(a)(1) Specimen Form of Montana Flexible Premium Adjustable Combination
Fixed and Variable Life Insurance Policy
1.A.5.(a)(2) Specimen Form of Texas Flexible Premium Adjustable Combination
Fixed and Variable Life Insurance Policy
2. Opinion and Consent of B. Scott Burton, 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.(a)(1)
Specimen form of Montana Flexible Premium Adjustable Combination
Fixed and Variable Life Insurance Policy
<PAGE>
SOUTHLAND LIFE INSURANCE COMPANY
(A TEXAS CORPORATION)
5780 POWERS FERRY ROAD, N.W., ATLANTA, GEORGIA 30327-4390
MAILING ADDRESS
P. O. BOX 105006, ATLANTA, GEORGIA 30348-5006
A STOCK COMPANY - ESTABLISHED 1908
[JOHN Q. DOE]
[12-3456789-0] [$100,000]
AGREEMENT BY SOUTHLAND LIFE INSURANCE COMPANY
Southland Life Insurance Company will pay the benefits described in this Policy
in accordance with the terms of this Policy.
CONSIDERATION FOR ISSUING THIS POLICY
This Policy is issued in consideration of:
1. The application; and
2. Payment of the first premium.
PLEASE READ YOUR POLICY CAREFULLY
This Policy is a legal contract between the Policyowner and the Company.
FREE LOOK PERIOD
YOU HAVE THE RIGHT TO EXAMINE AND RETURN THIS POLICY. THIS POLICY MAY BE
RETURNED TO THE AGENT OF THE COMPANY WITHIN 20 DAYS OF RECEIPT, 45 DAYS AFTER
YOU SIGN THE APPLICATION OR 10 DAYS AFTER WE MAIL THE NOTICE OF WITHDRAWAL
RIGHT, WHICHEVER IS LATEST. THE POLICY WILL BE DEEMED TO BE RECEIVED BY YOU 15
DAYS AFTER IT IS MAILED FROM OUR CUSTOMER SERVICE CENTER. THE POLICY MAY BE
RETURNED BY MAIL OR OTHER DELIVERY TO OUR CUSTOMER SERVICE CENTER OR TO OUR
AUTHORIZED AGENT WHO SOLD IT. IT WILL THEN BE VOID FROM THE BEGINNING. UPON
RETURN OF THE POLICY, WE WILL REFUND ALL PREMIUMS PAID.
This Policy is signed for Southland Life Insurance Company by
[SIGNATURE APPEARS HERE] [SIGNATURE APPEARS HERE]
President Secretary
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
DEATH BENEFITS AND OTHER VALUES PROVIDED BY THIS POLICY, WHEN BASED ON THE
INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY
INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS
TO A FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US TO THE
BENEFICIARY UPON THE DEATH OF THE INSURED PRIOR TO MATURITY. THE NET
ACCUMULATION VALUE, IF ANY, IS PAYABLE BY US IF THE INSURED IS LIVING UPON
MATURITY. FLEXIBLE PREMIUMS ARE PAYABLE BY THE OWNER DURING THE LIFETIME
OF THE INSURED UNTIL MATURITY.
CUSTOMER SERVICE CENTER
P. O. BOX 173789
DENVER, CO 80217-3789
(800) 224-3035
1
<PAGE>
TABLE OF CONTENTS
POLICY SCHEDULE....................................................... 4
Allocation of Initial Premium....................................... 5
Benefit and Premium Schedule........................................ 6
Target Death Benefit Schedule....................................... 7
Guaranteed Maximum Expense Charges.................................. 8
Guaranteed Maximum Surrender Charges................................ 9
DEFINITIONS........................................................... 10
OWNERSHIP AND BENEFICIARY PROVISIONS.................................. 13
Ownership........................................................... 13
Beneficiary......................................................... 13
Assignment.......................................................... 13
PAYMENT OF PREMIUMS................................................... 13
Premiums............................................................ 13
Excess Premium...................................................... 14
No-Lapse Guarantee.................................................. 14
Allocation of Net Premium........................................... 14
Continuation of Insurance........................................... 14
Grace Period........................................................ 15
Reinstatement....................................................... 15
DEATH BENEFITS........................................................ 15
Proceeds Payable at Death Prior to Age 100.......................... 15
Death Benefit Amount................................................ 16
Maturity at Age 100................................................. 16
Optional Continuance Beyond Age 100................................. 16
POLICY CHANGES........................................................ 17
Right to Make Change................................................ 17
Increase in Stated Death Benefit.................................... 17
Decrease in Stated Death Benefit.................................... 17
Change of Death Benefit Type........................................ 17
Change of Benefits Option........................................... 18
VARIABLE ACCOUNT...................................................... 18
Accumulation Unit Value............................................. 18
Accumulation Experience Factor...................................... 19
Subaccount Accumulation Value....................................... 19
Persistency Refund.................................................. 20
GUARANTEED INTEREST ACCOUNT........................................... 20
TRANSFERS............................................................. 21
Excess Transfer Charge.............................................. 21
Dollar Cost Averaging Facility...................................... 22
Automatic Rebalancing............................................... 22
2
<PAGE>
POLICY SURRENDER AND WITHDRAWALS...................................... 23
Policy Surrender.................................................... 23
Withdrawals......................................................... 23
Withdrawal Transaction Charge....................................... 24
POLICY LOANS.......................................................... 24
Making a Policy Loan................................................ 24
Interest Credited................................................... 24
Interest Charges.................................................... 24
Other Borrowing Rules............................................... 25
Repaying a Policy Debt.............................................. 25
POLICY CHARGES........................................................ 25
Taxes and Sales Loads............................................... 25
Monthly Deduction................................................... 25
Cost of Insurance Charge............................................ 26
Basis of Computations............................................... 27
Guaranteed Maximum Monthly Cost of Insurance Rates.................. 28
Mortality Expense and Risk Charge................................... 30
Portfolio Expenses.................................................. 30
Surrender Charges................................................... 30
REPORTS............................................................... 31
Annual Report....................................................... 31
Other Reports....................................................... 31
GENERAL POLICY PROVISIONS............................................. 32
Conformity with Montana Statutes.................................... 32
Policy Incontestability............................................. 32
Termination......................................................... 32
Age and Sex Misstatement............................................ 32
Suicide............................................................. 32
Modifications....................................................... 33
Delay of Payment by Law............................................. 33
CONVERSION OF POLICY.................................................. 33
HOW BENEFITS ARE PAID................................................. 34
Selecting an Optional Payment....................................... 34
Provisions Relating to Options 1, 3, and 4.......................... 34
SETTLEMENT OPTION TABLE 1............................................. 35
SETTLEMENT OPTION TABLE 2............................................. 35
3
<PAGE>
POLICY SCHEDULE
POLICY NUMBER [12-3456789-0]
INSURED PERSON [JOHN Q. DOE]
ISSUE AGE [35]
INSURED PERSON'S SEX [MALE]
RISK CLASS [STANDARD TOBACCO]
RISK FACTOR [1.00]
POLICY DATE [JUNE 1, 1996]
MINIMUM STATED DEATH BENEFIT [$100,000]
MONTHLY PROCESSING DATE [1ST]
DEATH BENEFIT TYPE [A]
BENEFICIARY NAME [MARY J. DOE]
BENEFICIARY RELATIONSHIP [SPOUSE]
FIRST PREMIUM [$1,600.00]
PLANNED PERIODIC PREMIUM [$1,600.00]
MODE AT ISSUE [ANNUAL]
NO-LAPSE MONTHLY PREMIUM [$54.00]
OWNER [JOHN Q. DOE]
4
<PAGE>
POLICY SCHEDULE (Continued)
ALLOCATION OF INITIAL PREMIUM
[Alger American Small Capitalization Subaccount 0%
[Alger American MidCap Growth Subaccount] 25%
[Alger American Leveraged AllCap Subaccount] 0%
[Alger American Growth Subaccount] 0%
[Fidelity VIP II Asset Manager Subaccount] 0%
[Fidelity VIP Growth Subaccount] 25%
[Fidelity VIP Overseas Subaccount] 0%
[Fidelity VIP Money Market Subaccount] 0%
[Fidelity VIP II Index 500 Subaccount] 0%
[Fidelity VIP Equity-Income Subaccount] 0%
[Fidelity VIP High Income Subaccount] 0%
[Fidelity VIP II Contrafund Subaccount] 0%
[Fidelity VIP II Investment Grade Bond Subaccount] 0%
[Janus Growth Subaccount] 25%
[Janus Aggressive Growth Subaccount] 0%
[Janus Worldwide Growth Subaccount] 0%
[Janus International Growth Subaccount] 0%
[Janus Balanced Subaccount] 0%
[Janus Short-Term Bond Subaccount] 0%
[INVESCO Industrial Income Subaccount] 0%
[INVESCO Utilities Subaccount] 25%
Guaranteed Interest Account 0%
If you elect to invest in a particular investment option, at least 5% of your
Premiums must be allocated to that option. All percentage allocations must be
in whole numbers.
5
<PAGE>
POLICY SCHEDULE (Continued)
BENEFIT AND PREMIUM SCHEDULE
Benefit Premium
--------- ----------------
Amount No-Lapse Target
On Policy Monthly Annual
Date Premium Premium
Stated Death Benefit $100,000 $54.00 $800.00
TOTAL PREMIUMS ON POLICY DATE $54.00 $800.00
6
<PAGE>
POLICY SCHEDULE (Continued)
TARGET DEATH BENEFIT SCHEDULE
(1) (2) (3)
Target Base Adjustable
Death Benefit Death Benefit Term Rider
Amount Amount Amount
* (1)-(2)
Not Applicable $100,000 Not Applicable
*The Stated Death Benefit is shown in column (2). A higher amount based on your
Policy's Accumulation Value may apply (as defined on Page 16 under "Death
Benefit Amount").
7
<PAGE>
POLICY SCHEDULE (Continued)
EXPENSE CHARGES
<TABLE>
<CAPTION>
<S> <C>
GUARANTEED MAXIMUM PERCENTAGE OF PREMIUM EXPENSE CHARGES
Premium Tax 2.5% of each Premium
Federal Tax on Deferred Acquisition Costs 1.5% of each Premium
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.
Guaranteed Maximum Sales Load 4.0% of each Premium
GUARANTEED MAXIMUM MONTHLY ADMINISTRATIVE EXPENSE CHARGES
Initial Policy Charge in 1st Policy Year $20 per month for 1st 12 months
Monthly Policy Charge in all Policy Years $10 per month in every month
GUARANTEED MAXIMUM ANNUAL CHARGE TO VARIABLE ACCOUNTS
Charge for Mortality and Expense Risk .90% of Subaccount Accumulation Unit Value
(.002466% daily equivalent)
These charges do not apply to the Guaranteed Interest Account
GUARANTEED MAXIMUM POLICYHOLDER TRANSACTION CHARGES
Premium Allocation Changes
Charge for more than 5 per Policy Year $25 each after the 5th in a Policy Year
Automatic Rebalancing Changes
Charge for more than 5 per Policy Year $25 each after the 5th in a Policy Year
Withdrawal
Charge for more than 1 per Policy Year Lesser of $25 or 2% of Withdrawal Amount
each withdrawal after the 1st in a PolicyYear
Excess Transfer Between Subaccounts and/or Guaranteed Interest Account
Charge for more than 12 per Policy Year $25 each after the 12th in a Policy Year
Policy Illustrations $50 each
</TABLE>
8
<PAGE>
POLICY SCHEDULE (Continued)
EXPENSE CHARGES (Continued)
GUARANTEED MAXIMUM SURRENDER CHARGES
ADMINISTRATIVE SURRENDER CHARGE Per $1,000 of Stated Death Benefit Segment
Surrendered
Duration Amount of Charge
1-9 $4.00
10 $3.33
11 $2.67
12 $2.00
13 $1.33
14 $0.67
15 and later $0.00
PERCENTAGE OF PREMIUM SALES SURRENDER CHARGES Per Stated Death
Benefit Segment Surrendered
<TABLE>
<CAPTION>
Duration Amount of Charge
<S> <C>
1-2 .26 X Premium Paid up to 1st Target Premium
plus .06 X Premium Paid above 1st Target up to 2nd Target Premium
plus .05 X Premium Paid above 2 Target Premiums
---- ------------------------------------------
= Sales Surrender Charge in 1st or 2nd year
3-9 .46 X Premium Paid up to 1st Target Premium
plus .44 X Premium Paid above 1st Target up to 2nd Target Premium
---- ------------------------------------------------------------
= Sales Surrender Charge in 3rd through 9th years = SC9
10 SC9 X .833333
11 SC9 X .666667
12 SC9 X .500000
13 SC9 X .333333
14 SC9 X .166667
15 and later 0
</TABLE>
(No surrender charges apply after Age 98)
9
<PAGE>
DEFINITIONS
ACCUMULATION VALUE: The "Accumulation Value" is the combined value of your
Policy in all of the Subaccounts of the Variable Account, 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. This Rider is included
in your Policy if an amount is listed on page 6 and page 7. The amount of death
benefit coverage provided under this rider is the difference between the Target
Death Benefit and the Base 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 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 the 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 on the date of the Insured's
death, or a multiple of the Accumulation Value on the date of the Insured's
death.
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, Englewood, 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 BENEFIT PROCEEDS: The "Death Benefit 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 Death Benefit; minus [2] any outstanding Policy
Debt; minus [3] any monthly deductions not yet deducted.
FREE LOOK PERIOD: The "Free Look Period" is the period during which you may
return the Policy and receive a refund of all premiums paid.
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 a Withdrawal plus any applicable
Withdrawal Transaction Charge and any applicable Surrender Charge.
10
<PAGE>
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.
INSURED: The "Insured" means the person upon whose life the Policy is issued.
MONTHLY DEDUCTION: The "Monthly Deduction" is the total amount of deduction
taken from the Accumulation Value on each Monthly Processing Date and includes
the initial Policy charge (during the first 12 months), the Monthly
Administrative Charge, the cost of insurance charge and any charges for
additional benefits provided by riders.
MONTHLY PROCESSING DATE: The "Monthly Processing Date" is the date each month on
which the monthly deductions from the Accumulation Value are deducted. 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.
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 MONTHLY PREMIUM: The "No-Lapse Monthly Premium" is a benchmark monthly
premium calculated for each Policy based on the Age, sex and risk class of the
Insured, the requested Stated Death Benefit and any additional benefits provided
by riders. 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 and Policy Debt, is at least equal to the cumulative amount of No-
Lapse Monthly 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 LOAN ACCOUNT: The "Policy Loan Account" is described in the "Policy
Loans" section of this Policy.
POLICY YEAR: Each "Policy Year" starts on the same day and month as the Policy
Date.
11
<PAGE>
PORTFOLIO: A "Portfolio" refers to a division of an underlying 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 and is shown in the Policy Schedule
on page 6.
SUBACCOUNT: A "Subaccount" is a subdivision of the Variable Account, the assets
of which are invested in a corresponding Portfolio.
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 which
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 and
shown on Page 7 if applicable.
TARGET PREMIUM: A "Target Premium" refers to a premium amount we use to
calculate the sales load charge and the sales surrender charge. A Target
Premium is determined for the initial Stated Death Benefit on the Policy Date,
and an additional Target Premium is determined for each increase in Stated Death
Benefit based on the Insured's Age, sex and risk class. The Target Premium is
not based on the premium you plan to pay for your Policy. It is generally less
than planned premiums for a Policy Year. It may be more or less than the No-
Lapse Monthly 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, President's Day, Good
Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving 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 fall on a Tuesday; the Friday after New Year's Day, July Fourth or
Christmas Day, if any of these holidays fall on a Thursday; and the Friday after
Thanksgiving.
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 in a form
satisfactory to the Company which is signed by the Owner and received at the
Customer Service Center.
YOU AND YOUR: "You" and "your" refer to the Owner of this Policy.
12
<PAGE>
OWNERSHIP AND BENEFICIARY PROVISIONS
OWNERSHIP
The original Owner is the person named as the Owner in the application and shown
in the Policy Schedule. You, as Owner, can exercise all rights and receive the
benefits during the Insured's life before maturity. All rights of the Owner are
subject to the rights of any assignee and any irrevocable Beneficiary.
BENEFICIARY
The Beneficiary will receive any death benefits of this Policy, subject to any
assignment you have made. Unless otherwise provided, the interest of any
Beneficiary who dies before the Insured will be paid in equal shares to any
surviving Beneficiaries. If no Beneficiary is living at the Insured's death,
payment will be made to the Owner's estate.
The Beneficiary may be changed by Written Request. After we record receipt of
your request, the change will take effect as of the date the request is signed,
but will not affect any action already taken. The rights of the former
Beneficiary will cease at the same time. We may require return of the Policy to
record the change.
If you give up the right to change a Beneficiary, that Beneficiary's written
consent will be needed along with your Written Request to make any change in
this Policy.
ASSIGNMENT
We will not honor an assignment of this Policy unless it is in writing and filed
with the Company. You must provide the form of assignment. Conditions of the
assignment take priority over any conflicting ownership or beneficiary
provisions. It is up to you to make sure it is valid. All assignments are
subject to Policy Debt(s).
PAYMENT OF PREMIUMS
PREMIUMS
Premiums must be paid to the Company. A receipt will be furnished on request.
The first premium is due on the Policy Date. The Policy will not take effect
until it has been delivered and the first premium paid while the Insured is
alive and prior to any change in health as shown in the application.
The planned periodic premium and the mode of payment are shown on the Policy
Schedule. We will send reminder notices to you for the planned periodic premium
that you have selected. You may select to receive notices either annually,
semiannually or quarterly. You may also arrange for payment of premiums on a
monthly basis through an authorized special payment facility. All payment modes
are subject to our minimum requirements for the payment mode selected. Changes
in frequency and increases or decreases in the amount of planned premiums may be
made by you, subject to our current administrative rules and minimum limits on
premiums.
Additional unplanned premiums may be made at any time during the Insured's
lifetime subject to certain limits. The premiums must be at least $100 and must
be sent to our Customer Service Center.
We reserve the right to require evidence of insurability prior to accepting any
premium that would increase the difference between the Accumulation Value and
the Death Benefit. We reserve the right to limit total premiums paid in a
Policy Year to the planned premiums selected. No premium will be accepted after
maturity.
If you have a Policy Debt outstanding, any payment submitted will be treated as
a loan repayment unless
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<PAGE>
you indicate otherwise when submitting the payment. It no Policy Debt is
outstanding, any payment submitted by you is treated as a premium payment.
EXCESS PREMIUM
It is possible that total premiums paid may reach a level that could cause an
adverse effect on the tax status of the Policy. Under the Code, there is a
limit on aggregate premiums for the Policy to be considered a "life insurance
contract." Code section 7702 provides for that exclusion. The portion of any
premium received in excess of that limit will be refunded. This provision is
subject to interpretations of and changes in the federal income tax laws and
regulations.
NO-LAPSE GUARANTEE
We guarantee that this 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
Monthly Premium multiplied by the number of months the Policy has been in force.
The No-Lapse Monthly Premium for your Policy generally will be less than the
monthly amount of planned premiums you select to pay. The above referred test
of premiums is made on each Monthly Processing Date. As long as this test is
satisfied, if the Net Accumulation Value is less than or equal to zero, the
charges will be temporarily waived. Whenever the Net Accumulation Value becomes
positive, a portion of all of the charges waived will be deducted from the
Accumulation Value. This process will continue until the end of the No-Lapse
Guaranteed period. If there is a balance of waived charges at the end of this
period and there is not sufficient Accumulation Value to pay them, the Policy
will enter its grace period. The No-Lapse Guarantee will not prevent the
termination of the Policy if the Policy Debt equals or exceeds the Cash
Surrender Value.
ALLOCATION OF NET PREMIUM
During the Free Look Period, the portion of your Net Premium which you elected
to invest in a Subaccount of the Variable Account will be invested in the money
market Subaccount shown on the Policy Schedule on page 5. The portion of your
Net Premium which you elected to invest in the Guaranteed Interest Account will
be allocated to that Account. After the Free Look Period, the balance of your
assets in the money market Subaccount will be reallocated as you directed in the
application for this Policy.
Subject to and in accordance with the provisions of this Policy, subsequent Net
Premiums will be allocated as you directed to the Subaccounts of the Variable
Account or the Guaranteed Interest Account. You may change the allocation of
future premiums at any time by sending Written Notice.
If you change your Net Premium allocation more than five times per Policy Year,
we will deduct a charge from the Subaccounts of the Variable Account and the
Guaranteed Interest Account in the same proportion that your Accumulaton Value
of each account bears to your Net Accumulation Value. The amount of this charge
is $25.00 for each change over five.
CONTINUATION OF INSURANCE
If all premiums cease, the insurance provided under this Policy, including
additional benefits provided by any supplemental agreements attached to this
Policy, will continue in accordance with the provisions of this Policy and any
such supplemental agreements for as long as the Cash Surrender Value of this
Policy is sufficient to keep it in force.
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GRACE PERIOD
A grace period of sixty-one (61) days is allowed to pay each premium after the
first premium. If the Cash Surrender Value on a Monthly Processing Date will
not cover the monthly deduction due, a sufficient premium must be paid in the
grace period to cover past due charges plus an amount sufficient to keep the
Policy in force for two (2) months following our receipt of the required
premium. The grace period will begin on the date the notice is mailed.
Notice of the amount of premium required to be paid to keep the Policy from
lapsing will be mailed to you and to any assignee at the last known address. If
the premium is not paid, the Policy will terminate without value at the end of
the grace period.
REINSTATEMENT
If coverage ends because a sufficient premium is not paid in a grace period,
this Policy may be reinstated within five (5) years after the lapse. We would
require:
1. satisfactory proof that the Insured is insurable;
2. payment of premiums sufficient to keep the Policy (and applicable riders)
in force from the date of lapse to the date of the expired grace period and
for two months following the date of reinstatement; plus
3. repayment or the continuance of any Policy Debt which existed when coverage
ended.
At reinstatement, the Accumulation Value will be:
1. the Accumulation Value at the date of lapse; plus
2. your payments on reinstatement.
The reinstatement will be effective on the Monthly Processing Date on or next
following the date of our approval. Net premiums will be allocated to
Subaccounts of the Variable Account and the Guaranteed Interest Account
according to your instructions in effect at the beginning of the grace period
unless you direct otherwise in writing at reinstatement.
If the Policy has been surrendered, we will not reinstate this Policy.
DEATH BENEFITS
PROCEEDS PAYABLE AT DEATH PRIOR TO AGE 100
We will pay the Death Benefit Proceeds of this Policy to the Beneficiary on
receipt of proof that the Insured died while this Policy was in force. These
proceeds will equal:
1. the Base Death Benefit; plus
2. amounts payable from any additional benefits provided by any rider; minus
3. any monthly deductions due in the grace period, if applicable; minus
4. any Policy Debt.
Payment of Death Proceeds is subject to the "Age Misstatement," "Policy
Incontestability" and "Suicide" provisions of this Policy.
Payment will be in a lump sum unless you request an alternate form of payment by
Written Request (See "How Benefits Are Paid"). Interest will be paid on this
lump sum as required by applicable state law, or until another payment option is
selected. Interest will be at the rate we declare, or at any higher rate
required by law.
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DEATH BENEFIT AMOUNT
If death benefit type A is shown on the Policy Schedule, the Base Death Benefit
equals the larger of:
1. the Stated Death Benefit; or
2. a multiple of the Accumulation Value on the date of death.
If death benefit type B is shown on the Policy Schedule, the Base Death Benefit
equals the larger of:
1. the Stated Death Benefit plus the Accumulation Value on the date of death;
or
2. a multiple of the Accumulation Value on the date of death.
In both cases, the multiple in (2) depends on the Insured's Age at death. The
table of multiples in effect as of the Policy Date is shown below. If the table
becomes inconsistent with any federal income tax laws and regulations, we
reserve the right to change it.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
DEATH BENEFIT MULTIPLES
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Multiple of Attained Multiple of Attained Multiple of
Attained Accumulation Age Accumulation Age Accumulation
Age Value Value Value
- ------------------------------------------------------------------------
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>
MATURITY AT AGE 100
If the Insured is living at attained age 100 and this Policy is in force, we
will pay you the Policy's Net Accumulation Value and the Policy will terminate.
It is possible that the coverage will terminate prior to age 100 if premiums are
not paid regularly or are insufficient to cover Monthly Deductions. Coverage
may be affected also by changes in the interest rates and monthly deductions.
OPTIONAL CONTINUANCE BEYOND AGE 100
You may make a Written Request that we defer payment of proceeds and continue
the Policy in force. We must receive your Written Request at least one year
before maturity.
During continuance, the Death Benefit at any time will be the Net Accumulation
Value. The Accumulation Value will increase with interest at the guaranteed
rate or higher rate as we may determine. No further monthly deductions will
apply. No more premiums may be paid after continuance.
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POLICY CHANGES
RIGHT TO MAKE CHANGE
You may make any of the following changes by Written Request. No change will be
permitted that would result in the failure of this Policy to be a "life
insurance contract" by virtue of not satisfying the requirements of section 7702
of the Code or as set forth in any applicable successor provisions thereto. In
addition, each change is subject to the conditions stated.
INCREASE IN STATED DEATH BENEFIT
After the first Policy Year and prior to Age 76, you may request an increase in
the Stated Death Benefit. An increase in Stated Death Benefit can only be
requested during the thirty day period preceding a Policy Anniversary. Any
increase in the Stated Death Benefit must be at least $10,000 and must be
applied for on a written application. Evidence of insurability satisfactory to
us must be submitted. An increase will become effective as of the Policy
Anniversary on or following the date we approve your application for increase.
You will receive a new Schedule to show the increased Stated Death Benefit, the
effective date of the increase and the new surrender charges.
The amount of an increase in the Stated Death Benefit is referred to as a
coverage segment. Each such increase comprises a new segment.
If the increase become effective during the first three Policy Years, the No-
Lapse Guarantee will be extended for three years from the effective date of 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 new percentage of premium sales load charge.
DECREASE IN STATED DEATH BENEFIT
Your request for a decrease in the Stated Death Benefit may only be made after
the second Policy Year or two years following the effective date of an increase
in the Stated Death Benefit. A decrease in Stated Death Benefit can only be
requested during the thirty day period preceding a Policy Anniversary and in a
Written Request. Any decrease in the Stated Death Benefit must be at least
$10,000. The Stated Death Benefit may not be decreased to less than the
minimum amount shown on the Policy Schedule on page 4. Any decrease in the
Stated Death Benefit will become effective as of the Policy Anniversary on or
following our receipt of your Written Request.
If increases in the initial Stated Death Benefit are in effect, a decrease in
the Stated Death Benefit will be allocated to each segment of the Stated Death
Benefit in the same proportion as the Target Premium for each segment bears to
the total Target Premium 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 may apply.
CHANGE OF DEATH BENEFIT TYPE
After the first Policy Year, you may change the Death Benefit type by sending us
a Written Request. A change from type A to type B may require evidence of
insurability. The effective date of the change will be the Monthly Processing
Date that coincides with or follows the Valuation Day after we approve your
Written Request.
If type A is in effect, you can request that it be changed to type B. This will
decrease the Stated Death Benefit by the amount of Accumulation Value. The new
Stated Death Benefit cannot be less than the minimum Stated Death Benefit shown
on the Policy Schedule on page 4.
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<PAGE>
If type B is in effect, you can request that it be changed to type A. This will
increase the Stated Death Benefit by the amount of the Accumulation Value.
CHANGE OF BENEFITS OPTION
You may add or drop any additional benefits by sending us a Written Request.
Proof of insurability may be required by us to add a benefit. We may require
this Policy to be returned to us to make the change. The amounts and types of
benefits allowed to be added must be in accordance with our rules as of the date
of your request.
VARIABLE ACCOUNT
The Variable Account is an account established by us pursuant to the laws of the
State of Texas, to separate the assets funding the variable benefits for the
class of Policies to which this Policy belongs from the other assets of
Southland Life Insurance Company.
The Variable Account is registered with the SEC as a unit investment trust under
the Investment Company Act of 1940 (the "1940 Act"). All income, gains and
losses, whether or not realized, from assets allocated to the Variable Account
are credited to or charged against the Variable Account without regard to
income, gains or losses of the Company. The assets of the Variable Account are
our property, but are separate from our General Account and any other separate
account maintained by us. 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 we may conduct.
We reserve the right to transfer to our General Account any assets that are in
excess of such reserves and other liabilities.
The Variable Account is divided into Subaccounts, each of which invests in a
corresponding Portfolio designed to meet the objectives of the Subaccount. The
current Subaccounts are shown on the Policy Schedule on page 5. We may, from
time to time, make the following changes to the Variable Account, subject to
review by the SEC and other regulatory authorities:
(1) create new separate accounts for the Policy;
(2) combine separate accounts, including the Variable Account;
(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.
We reserve the right to limit the number of Subaccounts in which you may invest.
ACCUMULATION UNIT VALUE
Net Premiums allocated to a Subaccount or amounts transferred to a Subaccount
are converted into
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<PAGE>
Accumulation Units, a unit of measure used to calculate Subaccount Accumulation
Value. 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 was established. Thereafter, for any Subaccount, the
Accumulation Unit Value for a Valuation Period equals the Accumulation Unit
Value for the preceding Valuation Period multiplied by the Accumulation
Experience Factor (described below) for the current Valuation Period.
Decreases in Subaccount Accumulation Value under a Policy are effected by the
cancellation of an appropriate number of Accumulation Units of a Subaccount.
Accumulation units are canceled as of the end of the Valuation Period in which
the Company received notice of or instructions regarding the event.
ACCUMULATION EXPERIENCE FACTOR
For each Subaccount of the Variable Account, 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 the daily factor representing the mortality and expense risk charge
deducted from the subaccount adjusted for the number of days in the
Valuation Period.
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 follows:
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
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<PAGE>
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 Withdrawal 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.
PERSISTENCY REFUND
Each month your Policy remains in force after its tenth Policy Anniversary, we
will credit the Accumulation Value in the Subaccounts with a persistency refund
equivalent to 0.35% of the Accumulation Value in the Subaccounts on an annual
basis for that segment (0.02917% monthly). To compute the persistency refund, a
factor is applied to the Accumulation Value as of the prior Monthly Processing
Date. The persistency refund will be added to the Subaccounts in the same
proportion that your Accumulation Value in each Subaccount bears to the total of
Accumulation Value in the Subaccounts on the Monthly Processing Date.
GUARANTEED INTEREST ACCOUNT
The Guaranteed Interest Account is another account to which you may allocate Net
Premiums or make transfers. It is part of our general account assets. Interest
is credited at the guaranteed annual effective interest rate of 3.5% or may be
credited at a higher rate.
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 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.
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
2. Any additional Net Premiums allocated to the Guaranteed Interest Account
plus interest credited to those premiums during the current Valuation
Period; plus
20
<PAGE>
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.
TRANSFERS
After the Free-Look Period, you may transfer amounts among Subaccounts and the
Guaranteed Interest Account. Transfers may be made based upon instructions
given by Written Notice or by telephone. Any such transfer will take effect at
the end of the Valuation Period during which we receive such notice at our
Customer Service Center, or such later date as you may specify in your Written
Notice or telephone request.
Each transfer must be for a minimum of $100 or the balance in the Subaccount or
the Guaranteed Interest Account, if less. The minimum amount which can remain
in a Subaccount or in the Guaranteed Interest Account as a result of a transfer
is $100. Any amount below this minimum must be included in the amount
transferred.
Once during the first 30 days of each Policy Year, you may transfer amounts to
or 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 to or 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 transfer to or from the
Guaranteed Interest Account received at any other times will not be processed.
The maximum transfer amount from the Guaranteed Interest Account to the
Subaccounts of the Variable Account in any Policy Year is the greater 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.
EXCESS TRANSFER CHARGE
The first 12 transfers per Policy Year will be allowed free of charge.
Thereafter, a $25 transfer charge may be deducted from the amount transferred.
All transfers effected during a single Valuation Period will be counted as one
transfer for purposes of the transfer charge. 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. 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.
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<PAGE>
DOLLAR COST AVERAGING FACILITY
If you have at least $10,000 of Accumulation Value in the Money Market
Subaccount shown on the Policy Schedule on page 5, you may choose to transfer a
specified dollar amount each month from this Subaccount and have a percentage of
that amount transferred to other Subaccounts of the Variable Account. Dollar
Cost Averaging transfers may not be made to the Guaranteed Interest Account.
You may elect the Dollar Cost Averaging transfer option at any time prior to
maturity by Written Notice.
The minimum amount that you may elect to transfer each month is $100. The
maximum amount that you may transfer is equal to the Subaccount Accumulation
Value (when the election is made) of the Subaccount from which the transfer is
taken divided by twelve.
The percentage to be transferred to the other Subaccounts must be designated in
whole number percentages. No specific dollar designation may be made to the
Subaccounts. If you elect to transfer to a particular Subaccount, the minimum
percentage that may be transferred to that Subaccount is 5% of the total amount
transferred. Transfers for Dollar Cost Averaging will be effected on the
Monthly Processing Dates. If, on any transfer date, the Accumulation Value in
the selected Subaccount is equal to or less than the amount you elected to have
transferred, the entire amount will be transferred, and this option will end.
If still in effect, Dollar Cost Averaging will end as of the Valuation Day
immediately preceding maturity.
You may change the transfer amount or the Subaccounts to which transfers are to
be made once each Policy Year. You may cancel this election by Written Notice
at least seven days before the next transfer date. Any transfer under this
option will not be included for purposes of computing the transfer charge.
AUTOMATIC REBALANCING
Automatic Rebalancing allows you to match your Accumulation Value in each
Subaccount to your allocation percentage for new premiums. Automatic
Rebalancing can be elected in your application or by completing the Automatic
Rebalancing form and returning it to our Customer Service Center. As of the
first Valuation Date of each calendar quarter thereafter we will reallocate your
Net Accumulation Value so that the amount in each Subaccount matches your most
recent premium allocation. Automatic Rebalancing may not begin until the
Monthly Processing Date following the end of the Free Look Period. Automatic
Rebalancing will continue until we receive Written Notice or a telephone request
at our Customer Service Center to terminate.
While this feature is in effect, we require that you allocate no more than 35%
of your premiums to any one Subaccount, and you must allocate your premiums to
at least five Subaccounts. If at any time during the operation of the Automatic
Rebalancing feature you request a change in premium allocation which does not
meet these requirements, we will notify you that your allocation 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 Net Accumulation Value will be reallocated as of the Valuation Date that we
receive your Written allocation instructions. Amounts will be transferred among
the Subaccounts to match the allocation for new Premiums.
During the operation of Automatic Rebalancing, you may not change your
allocation percentage to the Guaranteed Interest Account by more than 25% of the
percentage previously allocated to the Guaranteed Interest Account.
If you change your Automatic Rebalancing allocation more than 5 times per Policy
Year, there will be a $25 charge taken from your Accumulation Value. The charge
will be deducted from each of the Subaccounts of the Variable Account and the
Guaranteed Interest Account in the same proportion that
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<PAGE>
your Accumulation Value in each account bears to your Net Accumulation Value as
of the Valuation Day the allocation change is effective.
You may elect either Dollar Cost Averaging or Automatic Rebalancing, but not
both. Other transfers may not be made during Automatic Rebalancing.
POLICY SURRENDER AND WITHDRAWALS
POLICY SURRENDER
You may surrender this Policy for its Cash Surrender Value by Written Notice.
We must receive the Policy and your request during the Insured's lifetime. We
will pay the Cash Surrender Value within seven days following receipt of the
Written Notice. The Policy will be canceled on the date of receipt of the
Written Notice.
The Cash Surrender Value under the Policy is at least equal to that required by
law. A detailed statement of the method of computation has been filed with the
insurance department of the state where the policy was issued.
WITHDRAWALS
You may withdraw part of the Cash Surrender Value after the first Policy Year by
Written Notice or request by telephone. We must receive the request during the
Insured's lifetime.
The maximum Withdrawal amount is the Cash Surrender Value minus $500. 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. It cannot cause the Stated Death Benefit to reduce below the
Minimum Stated Death Benefit shown in the Schedule. The minimum Withdrawal
amount, the maximum number of Withdrawals per Policy Year and the Withdrawal
Transaction Charge are shown below:
Minimum Withdrawal amount $500
Maximum number of Withdrawals per Policy Year 12
Withdrawal Transaction Charge: the lesser of $25 or 2%
of the amount requested
If death benefit type A is in effect, a Withdrawal will reduce the Accumulation
Value and 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, and the Withdrawal occurs less than 16 years
following the date of issue, then the Withdrawal will not reduce the Stated
Death Benefit if the amount of the Withdrawal is less than 5% of the Stated
Death Benefit. If the above conditions are met and the amount of the Withdrawal
exceeds 5% of the Stated Death Benefit, the Stated Death Benefit will only be
reduced by the amount of such excess. The Stated Death Benefit will be reduced
in proportion to the reduction in Accumulation Value caused by the Gross
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. If the Withdrawal occurs during the
first 14 Policy Years or first 14 years following an increase in Stated Death
Benefit, a Surrender Charge will be assessed.
If death benefit type B is in effect, a Withdrawal will reduce the Accumulation
Value but the Stated Death Benefit will not be reduced as the Accumulation Value
reflects the decrease.
23
<PAGE>
You may tell us how to allocate the Gross Withdrawal among the Subaccounts and
the Guaranteed Interest Account. If you do not, the Withdrawal will be
allocated among the Subaccounts and the Guaranteed Interest Account on a pro
rata basis.
We will pay a withdrawal request within seven days following our receipt of the
request.
WITHDRAWAL TRANSACTION CHARGE
A Withdrawal Transaction Charge of the lesser of $25 or 2% of the amount
requested will be deducted from the requested Withdrawal amount on any
Withdrawal made during a Policy Year after the first Withdrawal. The Withdrawal
Transaction Charge will be deducted from your Net Accumulation Value on the same
basis as the Withdrawal is taken.
POLICY LOANS
This Policy has loan privileges that are described below. Any outstanding
Policy Debt will be deducted from proceeds payable at the Insured's death, on
maturity or on Surrender.
MAKING A POLICY LOAN
After the first Policy Anniversary, you may obtain a policy loan from us by
submitting a Written Request or telephone request to our Customer Service
Center. This Policy is the only security required. The available loan amount
at any time is the maximum loan amount less any outstanding Policy Debt. The
maximum loan amount is equal to 90% of the Policy's Cash Surrender Value at the
time of the loan. The minimum amount you may borrow is $100.
Certain loan amounts taken after the earlier of:
1. the tenth Policy Anniversary, or
2. the fifth Policy Anniversary if the Insured's attained Age is 60 or
greater,
will be considered preferred loan amounts as described below.
During each Policy Year of preferred loan eligibility amounts, 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.
INTEREST CREDITED
Accumulation Value in the Policy Loan Account of the General Account will be
credited with 4% interest annually. The interest earned will be allocated to
the Subaccounts and the Guaranteed Interest Account in the same proportion that
Net Premiums are being allocated and will be transferred on each Policy
Anniversary.
INTEREST CHARGES
Interest charges on Policy loans is due and payable on each Policy Anniversary.
If interest is not paid when due, it will be added to the Policy Debt and will
be charged interest at the rate than being charged on the loan.
24
<PAGE>
The maximum annual Policy Loan interest rate is 4.0% for preferred loans and
6.0% for other loans. We have the option of charging lower rates.
OTHER BORROWING RULES
When a policy loan is made, or when interest is not paid when due, an amount of
Accumulation Value sufficient to secure the Policy Debt is transferred out of
the Variable Account and the Guaranteed Interest Account and into the Policy
Loan Account of our General Account. You may tell us how to allocate the
remaining Accumulation Value among the Subaccounts and the Guaranteed Interest
Account provided that the amount remaining in the Subaccount or the Guaranteed
Interest Account as a result of the allocation is at least $100. Otherwise, the
Accumulation Value will be allocated among the Subaccounts and the Guaranteed
Interest Account in the same proportion that the Policy's Accumulation Value in
each Subaccount and the Guaranteed Interest Account bears to the total
Accumulation Value in all Subaccounts and the Guaranteed Interest Account on the
date we make the loan.
If the outstanding Policy Debt exceeds the Accumulation Value less any Surrender
Charge and the Monthly Deduction, the Policy will be in default. We will send
you a notice of the amount you must pay. If you do not pay this amount within
61 days after we send notice, the Policy will terminate without value. We will
send the notice to you and to any assignee of record at our Customer Service
Center.
Any loan transaction will permanently affect the values of this Policy.
REPAYING A POLICY DEBT
You can repay a Policy Debt in part or in full anytime during the Insured's life
prior to maturity while this Policy is in force. If there is an outstanding
Policy loan, any payment which is not a scheduled premium received before
maturity is considered loan repayment unless otherwise indicated. When a loan
repayment is made, Accumulation Value in the General Account related to that
payment will be transferred into the Subaccounts and the Guaranteed Interest
Account in the same proportion that Net Premiums are then being allocated unless
you provide other instructions.
POLICY CHARGES
Charges against your Policy consist of expenses for taxes and sales loads,
administrative expenses, cost of insurance charges, certain policyholder
transactions which exceed a maximum, and surrender charges on Withdrawals.
Mortality and Expense Risk charges apply to the Subaccounts. They do not apply
to the Guaranteed Interest Account.
TAXES AND SALES LOADS
These charges are deducted as a percentage of your premium payments to define
the Net Premiums. These charges will not exceed the amounts shown on the Policy
Schedule on page 8.
MONTHLY DEDUCTION
Administrative expenses and cost of insurance charges are taken from the
Accumulation Values monthly as a Monthly Deduction. Maximum monthly
administrative expenses are shown on the Policy Schedule on page 8. The Cost of
Insurance charges are given below.
The monthly deduction is taken from the Accumulation Value on each Monthly
Processing Date. The monthly deduction includes the Initial Policy Charge
(during the first 12 months), the Monthly Policy Charge, the cost of insurance
charge for the Policy and for any additional benefits provided by riders.
25
<PAGE>
The monthly deduction is allocated to the Subaccounts of the Variable Account
and Guaranteed Interest Account in the same proportion that your Accumulation
Value in the Account bears to the total Accumulation Value as of the Monthly
Processing Date.
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
vary from month to month.
The charge is equal to our current monthly cost of insurance rate multiplied by
the net amount at risk under the Policy for Death Benefit. 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 any Adjustable Term Insurance Rider on
the 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 at the beginning of the month is increased, for
example, due to the requirements of Federal income tax law definition of life
insurance, net amount at risk for the Base Death Benefit than month will also
increase, but the net amount at risk for any Adjustable Term Insurance Rider may
be reduced. Therefore, the amount of the cost of insurance charges will vary
from month to month with changes in the net amount at risk, changes in the
relative makeup of the death benefit, and with increasing Age of the Insured.
If the Death Benefit of your Policy consists of more than one segment because
there has been an increase in Stated Death Benefit, the charge is calculated
separately for each segment. The cost of insurance charge for each segment is
equal to our current monthly cost of insurance rate for each segment times the
net amount at risk for that segment of the Death Benefit. Net Amount at Risk
for each segment of the Death Benefit is calculated on the Monthly Processing
Date. Net amount at risk is allocated to each Stated Death Benefit segment in
the same proportion that the Stated Death Benefit of each segment bears to the
sum of the Stated Death Benefit for all coverage segments as of the Monthly
Processing Date.
The cost of insurance rates for Base Death Benefit segments are based on the
risk class of the Insured, the Insured's Age on the date a segment is created
and duration since segment creation. The cost of insurance rates for any
Adjustable Term Insurance Rider are based on the Age and risk class of the
Insured on the Policy Date and duration since issue.
A risk class of tobacco or non-tobacco or a risk class involving a higher
mortality risk (a "substandard" risk) is determined 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 when
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.
26
<PAGE>
Our current cost of insurance rates may be less than the guaranteed rates. In
addition, current rates are greater for Policies with Stated Death Benefit (or
Target Death Benefit, if any) that is less than $250,000 on the Policy Date.
Our current cost of insurance rates will be determined based on our expectations
as to future experience. The rates may change from time to time, but they will
never be more than the guaranteed maximum rates set for in your Policy.
Cost of insurance rates (whether guaranteed or current) of an Insured in a non-
tobacco class are lower than guaranteed rates for an Insured of the same age and
sex in a tobacco class.
The tables on pages 27 and 28 give non-tobacco and tobacco risk class Guaranteed
Maximum Cost of Insurance rates. The rates in the Table are guaranteed not to
increase. To determine the guaranteed maximum rates for your Policy, use the
column appropriate for your risk class. Multiply the rates shown by your risk
class factor. Column 1 applies if your risk class includes the word "Non-
tobacco". Otherwise, column 1 applies. See the Policy Schedule on page 4 for
your risk class.
BASIS OF COMPUTATIONS
The guaranteed maximum cost of insurance rates for Insureds ages 15 and older
are computed using the 1980 Commissioners' Standard Ordinary Mortality Tables,
Smoker or Nonsmoker, Age Nearest Birthday ("1980 CSO Tables") at 3.5% interest.
For juvenile Insureds ages 0-14, the 1980 Commissioners' Standard Ordinary
Mortality Table, Nonsmoker, Age Nearest Birthday will be used. The guaranteed
rates for substandard classes are based on multiples or additives of the 1980
CSO Tables.
27
<PAGE>
- ----------------------------------------------------------
GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE
RATES PER $1,000
AGES 0 - 50
- ----------------------------------------------------------
Attained Age NON-TOBACCO TOBACCO
- ----------------------------------------------------------
0 0.34900
1 0.08921
2 0.08254
3 0.08170
4 0.07920
5 0.07503
6 0.07169
7 0.06669
8 0.06336
9 0.06169
10 0.06085
11 0.06419
12 0.07086
13 0.08254
14 0.09588
15 0.10756 0.13760
16 0.11924 0.15597
17 0.12842 0.17099
18 0.13343 0.18018
19 0.13844 0.18853
20 0.14011 0.19270
21 0.13927 0.19437
22 0.13677 0.19187
23 0.13427 0.18853
24 0.13093 0.18435
25 0.12675 0.17851
26 0.12342 0.17350
27 0.12175 0.17183
28 0.12008 0.17016
29 0.12008 0.17183
30 0.12008 0.17517
31 0.12258 0.18101
32 0.12509 0.18686
33 0.12926 0.19604
34 0.13427 0.20690
35 0.14094 0.21943
36 0.14762 0.23447
37 0.15680 0.25369
38 0.16682 0.27542
39 0.17851 0.30050
40 0.19103 0.32893
41 0.20607 0.36239
42 0.22110 0.39670
43 0.23865 0.43604
44 0.25619 0.47708
45 0.27709 0.52401
46 0.29966 0.57096
47 0.32391 0.62212
48 0.34984 0.67584
49 0.37912 0.73631
50 0.41009 0.80018
28
<PAGE>
- ----------------------------------------------------------
GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE
RATES PER $1,000
AGES 51 - 99
- ----------------------------------------------------------
Attained Age NON-TOBACCO TOBACCO
- ----------------------------------------------------------
51 0.44693 0.87419
52 0.48965 0.95668
53 0.53742 1.05105
54 0.59276 1.15734
55 0.65401 1.27051
56 0.72203 1.39312
57 0.79429 1.52015
58 0.87251 1.65583
59 0.96090 1.79682
60 1.05949 1.95335
61 1.16916 2.12977
62 1.29417 2.32876
63 1.43714 2.55476
64 1.59899 2.80452
65 1.77812 3.07567
66 1.97123 3.35886
67 2.18097 3.65683
68 2.40660 3.96448
69 2.65338 4.29327
70 2.93268 4.65747
71 3.30181 5.06279
72 3.61779 5.52571
73 4.04199 6.04980
74 4.52073 6.62444
75 5.03724 7.26414
76 5.59039 7.92842
77 6.17549 8.60587
78 6.78686 9.28569
79 7.44038 9.98835
80 8.16249 10.74534
81 8.97320 11.57692
82 9.89814 12.50906
83 10.95204 13.55162
84 12.11846 14.66820
85 13.37460 15.82369
86 14.69860 16.98122
87 16.08129 18.12337
88 17.49682 19.38671
89 18.96601 20.65144
90 20.51212 21.93652
91 22.16549 23.26852
92 23.98724 24.70635
93 26.06643 26.58833
94 28.78427 29.07200
95 32.81758 32.81758
96 39.64294 39.64294
97 53.06605 53.06605
98 83.33333 83.33333
99 83.33333 83.33333
- ----------------------------------------------------------
29
<PAGE>
MORTALITY AND EXPENSE RISK CHARGE
We will 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.
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.
SURRENDER CHARGES
We assess a surrender charge against your Accumulation Value upon a surrender,
reduction in Stated Death Benefit or lapse of your Policy in the first fourteen
Policy years, or the fourteen Policy Years following an increase in Stated Death
Benefit (herein referred to as an addition of a new coverage segment of Stated
Death Benefit). The surrender charge consists of two charges: an
administrative surrender charge and a sales surrender charge.
During the first fourteen years of the Policy or within 14 years of an increase
in the Stated Death Benefit, if you request a decrease to the Stated Death
Benefit of your Policy or take a Withdrawal which decreases the Stated Death
Benefit, we will deduct a portion of the surrender charge from your Net
Accumulation Value. The amount of the surrender charge which will be deducted
from your Net Accumulation Value on the decrease will equal the surrender charge
in effect before the reduction minus the surrender charge in effect after the
reduction.
Decreases as a result of a change to your death benefit option do not result in
a surrender charge deduction from your Net Accumulation Value and future
surrender charges will not be reduced.
Increases in the Stated Death Benefit as a result of changes in death benefit
option do not result in an increase in the maximum sales surrender charge. All
other increases in Stated Death Benefit will increase the maximum surrender
charges.
ADMINISTRATIVE SURRENDER CHARGE
The administrative surrender charge in the first nine years is equal to four
dollars ($4.00) per $1,000 of Stated Death Benefit. After the first nine years
following issuance of the Policy or the effective date of a coverage segment,
the administrative surrender charge decreases by one-sixth of the amount in
effect at the end of the 9th Policy year until it reaches zero at the beginning
of the fifteenth year, or the year in which the Insured reaches Age 98,
whichever is earlier.
During the first 14 Policy years or within 14 years of an increase in the Stated
Death Benefit, if you request a decrease to the Stated Death Benefit or take a
Withdrawal which causes the Stated Death Benefit to decrease, your
administrative surrender charge will decrease in the same proportion that the
Stated Death Benefit decreases.
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<PAGE>
SALES SURRENDER CHARGE
The sales surrender charge is a percentage of actual premiums paid up to a
maximum based on Target Premiums. In the first two Policy Years or the first
two years following 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 all other
premiums. The Target Premium for your Policy and any Stated Death Benefit
coverage segments added since the Policy Date will be listed in the Schedule of
your Policy. Upon a decrease in the Stated Death Benefit the Target Premium for
each segment will be reduced in the same proportion that the Stated Death
Benefit is reduced.
The maximum sales surrender charge for a Stated Death Benefit segment is shown
in the Policy Schedule. This charge remains level for the first nine Policy
Years or for the first nine years following an increase in a Stated Death
Benefit segment, then decreases by one-sixth of the amount in effect at the end
of the 9th year each Policy year until it reaches zero at the beginning of the
fifteenth year, or the year in which the Insured reaches Age 98, whichever is
earlier.
Upon a decrease in the Stated Death Benefit other than due to a change in death
benefit option, the Target Premium for each segment will be reduced in the same
proportion that the Stated Death Benefit is reduced. The following rules
explain when a sales surrender charge is deducted on a decrease in Stated Death
Benefit, and how future sales surrender charges are adjusted. If the new target
Premium for each Stated Death Benefit segment is greater than or equal to the
sum of your paid Premiums which are allocated to the segment, the maximum sales
surrender charge you may pay in the future will be reduced, but a sales
surrender charge will not be deducted from your Accumulation Value. If the new
Target Premium for each Stated Death Benefit segment is less than the sum of
your paid Premiums which are allocated to the segment, your maximum sales
surrender charge you may pay in the future will be reduced and a sales surrender
charge will be deducted from your Accumulation Value. The new sales surrender
charge will be recalculated as if the new Target Premium was always in effect
for the segment. A deduction equal to the difference between the sales
surrender charge as calculated before and after the decrease will be taken from
your Accumulation Value.
If you request a decrease to the Stated Death Benefit or take a Withdrawal which
causes the Stated Death Benefit to be reduced, more than nine years following
the Policy date or the date of an increase to the Stated Death Benefit,
whichever is applicable, the maximum sales surrender charge you could pay in the
future will be reduced in the same proportion that the Stated Death Benefit is
reduced.
REPORTS
ANNUAL REPORTS
Each year you will be mailed an annual report that shows the progress of the
Policy. This report will show for the last Policy Year the current Accumulation
Value, Cash Surrender Value and premiums paid since the last report. 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.
OTHER REPORTS
You may request a report illustrating future values of the Policy under both
guaranteed and current assumptions. A reasonable fee not to exceed $50 may be
charged for this report.
31
<PAGE>
GENERAL POLICY PROVISIONS
This Policy, the attached application, any additional riders or endorsements,
and any supplemental applications make up the entire contract between you and
us. In the absence of fraud, statements in the application will be considered
representations and not warranties. No statement will void this Policy or be
used in defense of a claim unless contained in the application.
CONFORMITY WITH MONTANA STATUTES
The provisions of this Policy conform to the minimum requirements of Montana law
and control over any conflicting statutes of any state in which an Insured
resides on or after the effective date of such Insured's coverage.
POLICY INCONTESTABILITY
We cannot contest this Policy after it 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
two years from the effective date of such benefit, during the Insured's lifetime
except for non-payment of premium.
TERMINATION
All coverage under this Policy will terminate on the first to occur of one of
these events:
1. you request that coverage terminate; or
2. the Insured dies; or
3. this Policy matures; or
4. the grace period ends; or
5. this Policy is surrendered.
On termination of this Policy, we will make any payment that may be applicable.
AGE MISSTATEMENT
The amount of insurance under this Policy is based on the Insured person's Age
nearest birthday on the Policy Date. If the Age shown in the Policy Schedule is
wrong, the Stated Death Benefit will be adjusted. The adjusted Death Benefit
will be that which would be purchased by the most recent cost of insurance
charge at the correct Age.
SUICIDE
If the Insured commits suicide during the first two years from the Policy Date,
instead of paying the Policy proceeds, we will make a limited payment of:
1. all premiums paid; less
2. any Policy Debt; less
3. any Withdrawals.
If the Insured commits suicide within two years from the effective date of any
increase in Stated Death Benefit or benefits provided by any rider, we will pay:
1. proceeds from this Policy and any benefits that have been in force at least
two years from their respective effective dates; plus
2. the cost of insurance for any increase or additional benefits that have
been in effect less than two years from their respective effective dates;
less
3. any Policy Debt; less
4. any Withdrawals.
The payment will be made to the Beneficiary.
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<PAGE>
MODIFICATIONS
No agent is allowed to make any changes in this Policy. Changes can only be
made by our President, a Vice President, or the Secretary.
DELAY OF PAYMENT BY LAW
Payments of Withdrawals, Surrenders or Death Benefit Proceeds from the
Subaccounts will usually be made within seven days after receipt of your request
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 Policy owners.
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.
CONVERSION OF POLICY
At any time within the first 24 Policy months after issuance of the Policy or
after an increase in Stated Death Benefit while this Policy is in force during
the life of the Insured, you may convert this Policy without evidence of
insurability for 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 amount 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 exchange will be
subject to the following conditions:
(1) The new Policy will be on the flexible premium adjustable life insurance
plan that was being issued by Southland on the date of issue of this
Policy.
(2) The new Policy will provide the same amount of death benefit or the same
net amount at risk to Southland as this Policy and will have the same
Policy Date and issue Age as this Policy.
(3) The cost of insurance rates for the new Policy will be those applicable to
flexible premium adjustable life policies in the same risk classification
as this Policy and issued on the same date as this Policy.
(4) All Policy Debt under this Policy must be paid.
The contestable period, suicide period, and surrender charge period of the new
Policy will be measured from the Policy Date. The Accumulation Value of this
Policy will be transferred to the new Policy as of the effective date of the
conversion. The effective date of the conversion will be the date Southland
received Written Request for conversion 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 Portfolios of the Variable Account.
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<PAGE>
HOW BENEFITS ARE PAID
Any payment of proceeds of this Policy will be made in a lump sum payment unless
you request an alternate method. You may request any of the alternate payment
options listed below if you prefer.
SELECTING AN OPTIONAL PAYMENT
To select an option, send Written Notice to our Customer Service Center.
Payment under any option must be at least $20. Payment under these options to
any assignee, executor, administrator, trustee, corporation or association
cannot be made without our consent.
If you die while receiving payments, any remaining payments will be paid as a
lump sum to your estate. If payments are being made to the beneficiary and he
or she dies, any remaining payments will be paid as a lump sum to the
beneficiary's estate.
- --Option 1: Fixed Period - Equal payments for a fixed period of up to 30 years.
The longer the period, the lower the payments. Monthly payments per $1,000 are
shown in Table 1.
- --Option 2: Life Income - Equal payments for life. The longer the certain
period, if any, the lower the payments. Monthly payments per $1,000 are shown
in Table 2.
- --Option 3: Interest Only - Equal payments of 4% interest on the amount left
with us. That amount must be at least $1,000.
- --Option 4: Fixed Installments - Equal payments totaling at least $60 per year
for each $1,000. The larger the amount, the shorter the period of payments.
Additional and more favorable forms of payment may be available at the time an
option is selected.
PROVISIONS RELATING TO OPTIONS 1, 3, AND 4
Payments made under this option are based on guaranteed compound interest at a
rate of 4% per year. They will be increased during any certain or guaranteed
periods by any excess interest earnings we declare. If death occurs during a
certain or guaranteed period, the lump sum payable to the deceased's estate will
be equal to the value of the remaining guaranteed payments reduced by compound
interest at 4% per year.
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<PAGE>
SETTLEMENT OPTION TABLES
(Per $1,000 of Net Proceeds)
<TABLE>
<CAPTION>
Table 1 - Fixed Table 2 - Lifetime Payments
Period
- -------------------- ---------------------------
Number Monthly Male Without 10 Year
of Years Payment Age Refund Certain
- -------------------- ---------------------------
<S> <C> <C> <C> <C>
1 $85.12 25 $3.80 $3.80
2 43.39 26 3.82 3.82
3 29.49 27 3.85 3.84
4 22.55 28 3.87 3.87
5 18.38 29 3.90 3.89
6 15.61 30 3.92 3.92
7 13.64 31 3.95 3.95
8 12.16 32 3.98 3.97
9 11.01 33 4.01 4.01
10 10.09 34 4.05 4.04
11 9.34 35 4.08 4.07
12 8.72 36 4.12 4.11
13 8.20 37 4.16 4.15
14 7.75 38 4.20 4.18
15 7.36 39 4.24 4.23
16 7.02 40 4.29 4.27
17 6.73 41 4.33 4.31
18 6.47 42 4.38 4.36
19 6.23 43 4.44 4.41
20 6.02 44 4.49 4.46
21 5.83 45 4.55 4.52
22 5.66 46 4.61 4.57
23 5.51 47 4.67 4.63
24 5.37 48 4.74 4.70
25 5.24 49 4.81 4.76
50 4.88 4.83
51 4.96 4.90
52 5.04 4.97
53 5.13 5.05
54 5.22 5.13
55 5.31 5.22
56 5.42 5.31
57 5.52 5.41
58 5.64 5.51
59 5.76 5.62
60 5.90 5.73
61 6.04 5.85
62 6.19 5.98
63 6.36 6.11
64 6.53 6.25
65 6.72 6.39
66 6.92 6.54
67 7.14 6.69
68 7.37 6.85
69 7.61 7.01
70 7.88 7.18
- --------------------------------------------------------
</TABLE>
We will furnish payments for ages not shown on request.
35
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
DEATH BENEFITS AND OTHER VALUES PROVIDED BY THIS POLICY, WHEN BASED ON THE
INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY
INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS
TO A FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US TO THE
BENEFICIARY UPON THE DEATH OF THE INSURED PRIOR TO MATURITY. THE NET
ACCUMULATION VALUE, IF ANY, IS PAYABLE BY US IF THE INSURED IS LIVING UPON
MATURITY. FLEXIBLE PREMIUMS ARE PAYABLE BY THE OWNER DURING THE LIFETIME
OF THE INSURED UNTIL MATURITY.
CUSTOMER SERVICE CENTER
P. O. BOX 173789
DENVER, CO 80217-3789
(800) 224-3035
36
<PAGE>
EXHIBIT 1.A.5.(a)(2)
Specimen form of Texas Flexible Premium Adjustable Combination
Fixed and Variable Life Insurance Policy
<PAGE>
SOUTHLAND LIFE INSURANCE COMPANY
(A TEXAS CORPORATION)
5780 POWERS FERRY ROAD, N.W., ATLANTA, GEORGIA 30327-4390
MAILING ADDRESS
P. O. BOX 105006, ATLANTA, GEORGIA 30348-5006
A STOCK COMPANY - ESTABLISHED 1908
[JOHN Q. DOE]
[12-3456789-0] [$100,000]
AGREEMENT BY SOUTHLAND LIFE INSURANCE COMPANY
Southland Life Insurance Company will pay the benefits described in this Policy
in accordance with the terms of this Policy.
CONSIDERATION FOR ISSUING THIS POLICY
This Policy is issued in consideration of:
1. The application; and
2. Payment of the first premium.
PLEASE READ YOUR POLICY CAREFULLY
This Policy is a legal contract between the Policyowner and the Company.
FREE LOOK PERIOD
YOU HAVE THE RIGHT TO EXAMINE AND RETURN THIS POLICY. THIS POLICY MAY BE
RETURNED TO THE AGENT OF THE COMPANY WITHIN 20 DAYS OF RECEIPT, 45 DAYS AFTER
YOU SIGN THE APPLICATION OR 10 DAYS AFTER WE MAIL THE NOTICE OF WITHDRAWAL
RIGHT, WHICHEVER IS LATEST. THE POLICY WILL BE DEEMED TO BE RECEIVED BY YOU 15
DAYS AFTER IT IS MAILED FROM OUR CUSTOMER SERVICE CENTER. THE POLICY MAY BE
RETURNED BY MAIL OR OTHER DELIVERY TO OUR CUSTOMER SERVICE CENTER OR TO OUR
AUTHORIZED AGENT WHO SOLD IT. IT WILL THEN BE VOID FROM THE BEGINNING. UPON
RETURN OF THE POLICY, WE WILL REFUND ALL PREMIUMS PAID.
This Policy is signed for Southland Life Insurance Company by
[SIGNATURE APPEARS HERE] [SIGNATURE APPEARS HERE]
President Secretary
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY DEATH BENEFITS
AND OTHER VALUES PROVIDED BY THIS POLICY, WHEN BASED ON THE INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY INCREASE OR
DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS TO A FIXED
DOLLAR AMOUNT.
Death benefits are payable by us to the Beneficiary upon the death of the
Insured prior to maturity. The Net Accumulation Value, if any, is payable by us
if the Insured is living upon maturity. Flexible premiums are payable by the
Owner during the lifetime of the Insured until maturity.
CUSTOMER SERVICE CENTER
P. O. BOX 173789
DENVER, CO 80217-3789
(800) 224-3035
1
<PAGE>
TABLE OF CONTENTS
POLICY SCHEDULE..................................................... 4
Allocation of Initial Premium..................................... 5
Benefit and Premium Schedule...................................... 6
Target Death Benefit Schedule..................................... 7
Guaranteed Maximum Expense Charges................................ 8
Guaranteed Maximum Surrender Charges.............................. 9
Table of Annual Target Premiums................................... 9A
DEFINITIONS......................................................... 10
OWNERSHIP AND BENEFICIARY PROVISIONS................................ 13
Ownership......................................................... 13
Beneficiary....................................................... 13
Assignment........................................................ 13
PAYMENT OF PREMIUMS................................................. 13
Premiums.......................................................... 13
Excess Premium.................................................... 14
No-Lapse Guarantee................................................ 14
Allocation of Net Premium......................................... 14
Continuation of Insurance......................................... 14
Grace Period...................................................... 15
Reinstatement..................................................... 15
DEATH BENEFITS...................................................... 15
Proceeds Payable at Death Prior to Age 100........................ 15
Death Benefit Amount.............................................. 16
Maturity at Age 100............................................... 16
Optional Continuance Beyond Age 100............................... 16
POLICY CHANGES...................................................... 17
Right to Make Change.............................................. 17
Increase in Stated Death Benefit.................................. 17
Decrease in Stated Death Benefit.................................. 17
Change of Death Benefit Type...................................... 17
Change of Benefits Option......................................... 18
VARIABLE ACCOUNT.................................................... 18
Accumulation Unit Value........................................... 18
Accumulation Experience Factor.................................... 19
Subaccount Accumulation Value..................................... 19
Persistency Refund................................................ 20
GUARANTEED INTEREST ACCOUNT......................................... 20
TRANSFERS........................................................... 21
Excess Transfer Charge............................................ 21
Dollar Cost Averaging Facility.................................... 22
Automatic Rebalancing............................................. 22
2
<PAGE>
POLICY SURRENDER AND WITHDRAWALS.................................... 23
Policy Surrender.................................................. 23
Withdrawals....................................................... 23
Withdrawal Transaction Charge..................................... 24
POLICY LOANS........................................................ 24
Making a Policy Loan.............................................. 24
Interest Charges.................................................. 24
Other Borrowing Rules............................................. 25
Repaying a Policy Debt............................................ 25
POLICY CHARGES...................................................... 25
Taxes and Sales Loads............................................. 25
Monthly Deduction................................................. 25
Cost of Insurance Charges......................................... 26
Basis of Computations............................................. 27
Guaranteed Maximum Monthly Cost of Insurance Rates................ 28
Mortality Expense and Risk Charge................................. 30
Portfolio Expenses................................................ 30
Surrender Charges................................................. 30
REPORTS............................................................. 31
Annual Report..................................................... 31
Other Reports..................................................... 32
GENERAL POLICY PROVISIONS........................................... 32
Policy Incontestability........................................... 32
Termination....................................................... 32
Age and Sex Misstatement.......................................... 32
Suicide........................................................... 32
Modifications..................................................... 33
Delay of Payment by Law........................................... 33
CONVERSION OF POLICY................................................ 33
HOW BENEFITS ARE PAID............................................... 34
Selecting an Optional Payment..................................... 34
Provisions Relating to Options 1, 3, and 4........................ 34
SETTLEMENT OPTION TABLE 1........................................... 35
SETTLEMENT OPTION TABLE 2........................................... 35
3
<PAGE>
POLICY SCHEDULE
POLICY NUMBER [12-3456789-0]
INSURED PERSON [JOHN Q. DOE]
ISSUE AGE [35]
INSURED PERSON'S SEX [MALE]
RISK CLASS [STANDARD TOBACCO]
RISK FACTOR [1.00]
POLICY DATE [JUNE 1, 1996]
MINIMUM STATED DEATH BENEFIT [$100,000]
MONTHLY PROCESSING DATE [1ST]
DEATH BENEFIT TYPE [A]
BENEFICIARY NAME [MARY J. DOE]
BENEFICIARY RELATIONSHIP [SPOUSE]
FIRST PREMIUM [$1,910.15]
PLANNED PERIODIC PREMIUM [$1,910.15]
MODE AT ISSUE [ANNUAL]
NO-LAPSE MONTHLY PREMIUM [$54.00]
OWNER [JOHN Q. DOE]
IT IS POSSIBLE THE COVERAGE WILL TERMINATE PRIOR TO AGE 100 IF PREMIUMS ARE
INSUFFICIENT TO CONTINUE COVERAGE AND THE NO-LAPSE GUARANTEE PERIOD HAS ENDED.
COVERAGE WILL ALSO BE AFFECTED BY WITHDRAWALS, POLICY LOANS, CHANGES IN THE
CURRENT COST OF INSURANCE RATES, THE ACTUAL CREDITED INTEREST RATE FOR THE
GUARANTEED INTEREST ACCOUNT AND THE INVESTMENT EXPERIENCE OF THE VARIABLE
ACCOUNT.
4
<PAGE>
POLICY SCHEDULE (Continued)
ALLOCATION OF INITIAL PREMIUM
[Alger American Small Capitalization Subaccount 0%
[Alger American MidCap Growth Subaccount] 25%
[Alger American Leveraged AllCap Subaccount] 0%
[Alger American Growth Subaccount] 0%
[Fidelity VIP II Asset Manager Subaccount] 0%
[Fidelity VIP Growth Subaccount] 25%
[Fidelity VIP Overseas Subaccount] 0%
[Fidelity VIP Money Market Subaccount] 0%
[Fidelity VIP II Index 500 Subaccount] 0%
[Fidelity VIP Equity-Income Subaccount] 0%
[Fidelity VIP High Income Subaccount] 0%
[Fidelity VIP II Contrafund Subaccount] 0%
[Fidelity VIP II Investment Grade Bond Subaccount] 0%
[Janus Growth Subaccount] 25%
[Janus Aggressive Growth Subaccount] 0%
[Janus Worldwide Growth Subaccount] 0%
[Janus International Growth Subaccount] 0%
[Janus Balanced Subaccount] 0%
[Janus Short-Term Bond Subaccount] 0%
[INVESCO Industrial Income Subaccount] 0%
[INVESCO Utilities Subaccount] 25%
Guaranteed Interest Account 0%
If you elect to invest in a particular investment option, at least 5% of your
Premiums must be allocated to that option. All percentage allocations must be
in whole numbers.
5
<PAGE>
POLICY SCHEDULE (Continued)
BENEFIT AND PREMIUM SCHEDULE
Benefit Premium
-------- --------------
Amount Target
On Policy Annual
Date Premium
Stated Death Benefit $100,000 $800.00
TOTAL PREMIUMS ON POLICY DATE $800.00
6
<PAGE>
POLICY SCHEDULE (Continued)
TARGET DEATH BENEFIT SCHEDULE
(1) (2) (3)
Target Base Adjustable
Death Benefit Death Benefit Term Rider
Amount Amount Amount
* (1) - (2)
Not Applicable $100,000 Not Applicable
*The Stated Death Benefit is shown in column (2). A higher amount based on your
Policy's Accumulation Value may apply (as defined on Page 16 under "Death
Benefit Amount").
7
<PAGE>
POLICY SCHEDULE (Continued)
EXPENSE CHARGES
<TABLE>
<CAPTION>
<S> <C>
GUARANTEED MAXIMUM PERCENTAGE OF PREMIUM EXPENSE CHARGES
Premium Tax 2.5% of each Premium
Federal Tax on Deferred Acquisition Costs 1.5% of each Premium
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.
Guaranteed Maximum Sales Load 4.0% of each Premium
GUARANTEED MAXIMUM MONTHLY ADMINISTRATIVE EXPENSE CHARGES
Initial Policy Charge in 1st Policy Year $20 per month for 1st 12 months
Monthly Policy Charge in all Policy Years $10 per month in every month
GUARANTEED MAXIMUM ANNUAL CHARGE TO VARIABLE ACCOUNTS
Charge for Mortality and Expense Risk .90% of Subaccount Accumulation Unit Value
(.002466% daily equivalent)
These charges do not apply to the Guaranteed Interest Account
GUARANTEED MAXIMUM POLICYHOLDER TRANSACTION CHARGES
Premium Allocation Changes
Charge for more than 5 per Policy Year $25 each after the 5th in a Policy Year
Automatic Rebalancing Changes
Charge for more than 5 per Policy Year $25 each after the 5th in a Policy Year
Withdrawal
Charge for more than 1 per Policy Year Lesser of $25 or 2% of Withdrawal Amount
each withdrawal after the 1st in a Policy Year
Excess Transfer Between Subaccounts and/or Guaranteed Interest Account
Charge for more than 12 per Policy Year $25 each after the 12th in a Policy Year
Policy Illustrations $50 each after the 1st in a Policy Year
</TABLE>
8
<PAGE>
POLICY SCHEDULE (Continued)
EXPENSE CHARGES (Continued)
GUARANTEED MAXIMUM SURRENDER CHARGES
ADMINISTRATIVE SURRENDER CHARGE Per $1,000 of Stated Death Benefit Segment
Surrendered
Duration Amount of Charge
1-9 $4.00
10 $3.33
11 $2.67
12 $2.00
13 $1.33
14 $0.67
15 and later $0.00
PERCENTAGE OF PREMIUM SALES SURRENDER CHARGES Per Stated Death
Benefit Segment Surrendered
<TABLE>
<CAPTION>
Duration Amount of Charge
<S> <C>
1-2 .26 X Premium Paid up to 1st Target Premium
plus .06 X Premium Paid above 1st Target up to 2nd Target Premium
plus .05 X Premium Paid above 2 Target Premiums
---- ------------------------------------------
= Sales Surrender Charge in 1st or 2nd year
3-9 .46 X Premium Paid up to 1st Target Premium
plus .44 X Premium Paid above 1st Target up to 2nd Target Premium
---- ------------------------------------------------------------
= Sales Surrender Charge in 3rd through 9th years = SC9
10 SC9 X .833333
11 SC9 X .666667
12 SC9 X .500000
13 SC9 X .333333
14 SC9 X .166667
15 and later 0
</TABLE>
(No surrender charges apply after Age 98)
9
<PAGE>
<TABLE>
<CAPTION>
ANNUAL TARGET PREMIUMS PER $1,000
OF STATED DEATH BENEFIT
- -------------------------------------------------
TARGET PREMIUM TARGET PREMIUM
- -------------------------------------------------
Age Male Female Age Male Female
- -------------------------------------------------
<S> <C> <C> <C> <C> <C>
0 2.50 2.00 41 12.01 9.31
1 2.50 2.00 42 12.51 9.73
2 2.50 2.00 43 13.00 10.16
3 2.50 2.00 44 13.50 10.58
4 2.50 2.00 45 14.00 11.00
5 2.50 2.00 46 15.21 12.00
6 2.50 2.00 47 16.42 12.99
7 2.50 2.50 48 17.63 13.99
8 2.50 2.50 49 18.84 14.98
9 2.50 2.50 50 20.05 15.98
10 2.50 2.50 51 21.24 17.18
11 3.50 3.00 52 22.43 18.39
12 3.50 3.10 53 23.62 19.59
13 3.55 3.25 54 24.81 20.80
14 3.69 3.25 55 26.00 22.00
15 3.84 3.25 56 27.39 22.80
16 3.99 3.25 57 28.78 23.77
17 4.12 3.25 58 30.17 24.65
18 4.26 3.25 59 31.56 25.54
19 4.41 3.35 60 32.95 26.42
20 4.56 3.44 61 33.26 27.74
21 4.72 3.55 62 33.57 29.05
22 4.90 3.65 63 33.88 30.37
23 5.08 3.76 64 34.19 31.68
24 5.29 3.88 65 34.31 33.00
25 5.50 4.00 66 34.31 33.00
26 5.83 4.25 67 34.31 33.00
27 6.14 4.49 68 34.31 33.00
28 6.44 4.72 69 34.31 33.00
29 6.71 4.94 70 34.31 33.00
30 6.97 5.15 71 34.31 33.00
31 7.21 5.35 72 34.31 33.00
32 7.44 5.52 73 34.31 33.00
33 7.64 5.69 74 34.31 33.00
34 7.83 5.85 75 34.31 33.00
35 8.00 6.00 76 34.31 33.00
36 8.70 6.56 77 34.31 33.00
37 9.41 7.13 78 34.31 33.00
38 10.11 7.71 79 34.31 33.00
39 10.81 8.30 80 34.31 33.00
40 11.51 8.89
- -------------------------------------------------
</TABLE>
9A
<PAGE>
DEFINITIONS
ACCUMULATION VALUE: The "Accumulation Value" is the combined value of your
Policy in all of the Subaccounts of the Variable Account, 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. This Rider is included
in your Policy if an amount is listed on page 6 and page 7. The amount of death
benefit coverage provided under this rider is the difference between the Target
Death Benefit and the Base 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 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 the 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 on the date of the Insured's
death, or a multiple of the Accumulation Value on the date of the Insured's
death.
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, Englewood, 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 BENEFIT PROCEEDS: The "Death Benefit 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 Death Benefit; minus [2] any outstanding Policy
Debt; minus [3] any monthly deductions not yet deducted.
FREE LOOK PERIOD: The "Free Look Period" is the period during which you may
return the Policy and receive a refund of all premiums paid.
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 a Withdrawal plus any applicable
Withdrawal Transaction Charge and any applicable Surrender Charge.
10
<PAGE>
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.
INSURED: The "Insured" means the person upon whose life the Policy is issued.
MONTHLY DEDUCTION: The "Monthly Deduction" is the total amount of deduction
taken from the Accumulation Value on each Monthly Processing Date and includes
the initial Policy charge (during the first 12 months), the Monthly
Administrative Charge, the cost of insurance charge and any charges for
additional benefits provided by riders.
MONTHLY PROCESSING DATE: The "Monthly Processing Date" is the date each month on
which the monthly deductions from the Accumulation Value are deducted. 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.
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 MONTHLY PREMIUM: The "No-Lapse Monthly Premium" is a benchmark monthly
premium calculated for each Policy based on the Age, sex and risk class of the
Insured, the requested Stated Death Benefit and any additional benefits provided
by riders. 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 and Policy Debt, is at least equal to the cumulative amount of No-
Lapse Monthly 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 LOAN ACCOUNT: The "Policy Loan Account" is described in the "Policy
Loans" section of this Policy.
POLICY YEAR: Each "Policy Year" starts on the same day and month as the Policy
Date.
11
<PAGE>
PORTFOLIO: A "Portfolio" refers to a division of an underlying 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 and is shown in the Policy Schedule
on page 6.
SUBACCOUNT: A "Subaccount" is a subdivision of the Variable Account, the assets
of which are invested in a corresponding Portfolio.
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 which
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 and
shown on Page 7 if applicable.
TARGET PREMIUM: A "Target Premium" refers to a premium amount we use to
calculate the sales load charge and the sales surrender charge. A Target
Premium is determined for the initial Stated Death Benefit on the Policy Date,
and an additional Target Premium is determined for each increase in Stated Death
Benefit based on the Insured's Age, sex and risk class. The Target Premium is
not based on the premium you plan to pay for your Policy. It is generally less
than planned premiums for a Policy Year. It may be more or less than the No-
Lapse Monthly 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, President's Day, Good
Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving 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 fall on a Tuesday; the Friday after New Year's Day, July Fourth or
Christmas Day, if any of these holidays fall on a Thursday; and the Friday after
Thanksgiving.
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 in a form
satisfactory to the Company which is signed by the Owner and received at the
Customer Service Center.
YOU AND YOUR: "You" and "your" refer to the Owner of this Policy.
12
<PAGE>
OWNERSHIP AND BENEFICIARY PROVISIONS
OWNERSHIP
The original Owner is the person named as the Owner in the application and shown
in the Policy Schedule. You, as Owner, can exercise all rights and receive the
benefits during the Insured's life before maturity. All rights of the Owner are
subject to the rights of any assignee and any irrevocable Beneficiary.
BENEFICIARY
The Beneficiary will receive any death benefits of this Policy, subject to any
assignment you have made. Unless otherwise provided, the interest of any
Beneficiary who dies before the Insured will be paid in equal shares to any
surviving Beneficiaries. If no Beneficiary is living at the Insured's death,
payment will be made to the Owner's estate.
The Beneficiary may be changed by Written Request. After we record receipt of
your request, the change will take effect as of the date the request is signed,
but will not affect any action already taken. The rights of the former
Beneficiary will cease at the same time. We may require return of the Policy to
record the change.
If you give up the right to change a Beneficiary, that Beneficiary's written
consent will be needed along with your Written Request to make any change in
this Policy.
ASSIGNMENT
We will not honor an assignment of this Policy unless it is in writing and filed
with the Company. You must provide the form of assignment. Conditions of the
assignment take priority over any conflicting ownership or beneficiary
provisions. It is up to you to make sure it is valid. All assignments are
subject to Policy Debt(s).
PAYMENT OF PREMIUMS
PREMIUMS
Premiums must be paid to the Company. A receipt will be furnished on request.
The first premium is due on the Policy Date. The Policy will not take effect
until it has been delivered and the first premium paid while the Insured is
alive and prior to any change in health as shown in the application.
The planned periodic premium and the mode of payment are shown on the Policy
Schedule. We will send reminder notices to you for the planned periodic premium
that you have selected. You may select to receive notices either annually,
semiannually or quarterly. You may also arrange for payment of premiums on a
monthly basis through an authorized special payment facility. All payment modes
are subject to our minimum requirements for the payment mode selected. Changes
in frequency and increases or decreases in the amount of planned premiums may be
made by you, subject to our current administrative rules and minimum limits on
premiums.
Additional unplanned premiums may be made at any time during the Insured's
lifetime subject to certain limits. The premiums must be at least $100 and must
be sent to our Customer Service Center.
We reserve the right to require evidence of insurability prior to accepting any
premium that would increase the difference between the Accumulation Value and
the Death Benefit. We reserve the right to limit total premiums paid in a
Policy Year to the planned premiums selected. No premium will be accepted after
maturity.
If you have a Policy Debt outstanding, any payment submitted will be treated as
a loan repayment unless
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<PAGE>
you indicate otherwise when submitting the payment. It no Policy Debt is
outstanding, any payment submitted by you is treated as a premium payment.
EXCESS PREMIUM
It is possible that total premiums paid may reach a level that could cause an
adverse effect on the tax status of the Policy. Under the Code, there is a
limit on aggregate premiums for the Policy to be considered a "life insurance
contract." Code section 7702 provides for that exclusion. The portion of any
premium received in excess of that limit will be refunded. This provision is
subject to interpretations of and changes in the federal income tax laws and
regulations.
NO-LAPSE GUARANTEE
We guarantee that this 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
Monthly Premium multiplied by the number of months the Policy has been in force.
The No-Lapse Monthly Premium for your Policy generally will be less than the
monthly amount of planned premiums you select to pay. The above referred test
of premiums is made on each Monthly Processing Date. As long as this test is
satisfied, if the Net Accumulation Value is less than or equal to zero, the
charges will be temporarily waived. Whenever the Net Accumulation Value becomes
positive, a portion of all of the charges waived will be deducted from the
Accumulation Value. This process will continue until the end of the No-Lapse
Guaranteed period. If there is a balance of waived charges at the end of this
period and there is not sufficient Accumulation Value to pay them, the Policy
will enter its grace period. The No-Lapse Guarantee will not prevent the
termination of the Policy if the Policy Debt equals or exceeds the Accumulation
Value minus any surrender charge.
ALLOCATION OF NET PREMIUM
During the Free Look Period, the portion of your Net Premium which you elected
to invest in a Subaccount of the Variable Account will be invested in the money
market Subaccount shown on the Policy Schedule on page 5. The portion of your
Net Premium which you elected to invest in the Guaranteed Interest Account will
be allocated to that Account. After the Free Look Period, the balance of your
assets in the money market Subaccount will be reallocated as you directed in the
application for this Policy.
Subject to and in accordance with the provisions of this Policy, subsequent Net
Premiums will be allocated as you directed to the Subaccounts of the Variable
Account or the Guaranteed Interest Account. You may change the allocation of
future premiums at any time by sending Written Notice.
If you change your Net Premium allocation more than five times per Policy Year,
we will deduct a charge from the Subaccounts of the Variable Account and the
Guaranteed Interest Account in the same proportion that your Accumulaton Value
of each account bears to your Net Accumulation Value. The amount of this charge
is $25.00 for each change over five.
CONTINUATION OF INSURANCE
If all premiums cease, the insurance provided under this Policy, including
additional benefits provided by any supplemental agreements attached to this
Policy, will continue in accordance with the provisions of this Policy and any
such supplemental agreements for as long as the Cash Surrender Value of this
Policy is sufficient to keep it in force.
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GRACE PERIOD
A grace period of sixty-one (61) days is allowed to pay each premium after the
first premium. If the Cash Surrender Value on a Monthly Processing Date will
not cover the monthly deduction due, a sufficient premium must be paid in the
grace period to cover past due charges plus an amount sufficient to keep the
Policy in force for two (2) months following our receipt of the required
premium. The grace period will begin on the date the notice is mailed.
Notice of the amount of premium required to be paid to keep the Policy from
lapsing will be mailed to you and to any assignee at the last known address. If
the premium is not paid, the Policy will terminate without value at the end of
the grace period.
REINSTATEMENT
If coverage ends because a sufficient premium is not paid in a grace period,
this Policy may be reinstated within five (5) years after the lapse. We would
require:
1. satisfactory proof that the Insured is insurable;
2. payment of premiums sufficient to keep the Policy (and applicable riders)
in force from the date of lapse to the date of the expired grace period and
for two months following the date of reinstatement; plus
3. repayment or the continuance of any Policy Debt which existed when coverage
ended.
At reinstatement, the Accumulation Value will be:
1. the Accumulation Value at the date of lapse; plus
2. your payments on reinstatement.
The reinstatement will be effective on the Monthly Processing Date on or next
following the date of our approval. Net premiums will be allocated to
Subaccounts of the Variable Account and the Guaranteed Interest Account
according to your instructions in effect at the beginning of the grace period
unless you direct otherwise in writing at reinstatement.
If the Policy has been surrendered, we will not reinstate this Policy.
DEATH BENEFITS
PROCEEDS PAYABLE AT DEATH PRIOR TO AGE 100
We will pay the Death Benefit Proceeds of this Policy to the Beneficiary on
receipt of proof that the Insured died while this Policy was in force. These
proceeds will equal:
1. the Base Death Benefit; plus
2. amounts payable from any additional benefits provided by any rider; minus
3. any monthly deductions due in the grace period, if applicable; minus
4. any Policy Debt.
Payment of Death Proceeds is subject to the "Age and Sex Misstatement," "Policy
Incontestability" and "Suicide" provisions of this Policy.
Payment will be in a lump sum unless you request an alternate form of payment by
Written Request (See "How Benefits Are Paid"). Interest will be paid on this
lump sum as required by applicable state law, or until another payment option is
selected. Interest will be at the rate we declare, or at any higher rate
required by law.
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DEATH BENEFIT AMOUNT
If death benefit type A is shown on the Policy Schedule, the Base Death Benefit
equals the larger of:
1. the Stated Death Benefit; or
2. a multiple of the Accumulation Value on the date of death.
If death benefit type B is shown on the Policy Schedule, the Base Death Benefit
equals the larger of:
1. the Stated Death Benefit plus the Accumulation Value on the date of death;
or
2. a multiple of the Accumulation Value on the date of death.
In both cases, the multiple in (2) depends on the Insured's Age at death. The
table of multiples in effect as of the Policy Date is shown below. If the table
becomes inconsistent with any federal income tax laws and regulations, we
reserve the right to change it.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
DEATH BENEFIT MULTIPLES
- ------------------------------------------------------------------------
Multiple of Attained Multiple of Attained Multiple of
Attained Accumulation Age Accumulation Age Accumulation
Age Value Value 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>
MATURITY AT AGE 100
If the Insured is living at attained age 100 and this Policy is in force, we
will pay you the Policy's Net Accumulation Value and the Policy will terminate.
It is possible that the coverage will terminate prior to age 100 if premiums are
not paid regularly or are insufficient to cover Monthly Deductions. Coverage
may be affected also by changes in the interest rates and monthly deductions.
OPTIONAL CONTINUANCE BEYOND AGE 100
You may make a Written Request that we defer payment of proceeds and continue
the Policy in force. We must receive your Written Request at least one year
before maturity.
During continuance, the Death Benefit at any time will be the Net Accumulation
Value. The Accumulation Value will increase with interest at the guaranteed
rate or higher rate as we may determine. No further monthly deductions will
apply. No more premiums may be paid after continuance.
THE TAX CONSEQUENCES OF CONTINUANCE BEYOND AGE 100 IS UNCERTAIN. QUALIFICATION
OF THE POLICY AS LIFE INSURANCE COULD BE ADVERSELY AFFECTED. PLEASE CONSULT
YOUR PERSONAL TAX ADVISOR PRIOR TO REQUESTING CONTINUANCE.
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POLICY CHANGES
RIGHT TO MAKE CHANGE
You may make any of the following changes by Written Request. No change will be
permitted that would result in the failure of this Policy to be a "life
insurance contract" by virtue of not satisfying the requirements of section 7702
of the Code or as set forth in any applicable successor provisions thereto. In
addition, each change is subject to the conditions stated.
INCREASE IN STATED DEATH BENEFIT
After the first Policy Year and prior to Age 76, you may request an increase in
the Stated Death Benefit. An increase in Stated Death Benefit can only be
requested during the thirty day period preceding a Policy Anniversary. Any
increase in the Stated Death Benefit must be at least $10,000 and must be
applied for on a written application. Evidence of insurability satisfactory to
us must be submitted. An increase will become effective as of the Policy
Anniversary on or following the date we approve your application for increase.
You will receive a new Schedule to show the increased Stated Death Benefit and
the effective date of the increase. Surrender charges will apply to the
increase in Stated Death Benefit. The surrender charge will be based on the
paid premiums and the target premiums applicable to the increased Stated Death
Benefit. The Administrative Surrender Charge factors and the Percentage of
Premium Sales Surrender Charge factors are as shown on page 9. A table of
Target Premiums per $1,000 of Stated Death Benefit for all ages is found on page
9A.
The amount of an increase in the Stated Death Benefit is referred to as a
coverage segment. Each such increase comprises a new segment.
If the increase become effective during the first three Policy Years, the No-
Lapse Guarantee will be extended for three years from the effective date of 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 new percentage of premium sales load charge.
DECREASE IN STATED DEATH BENEFIT
Your request for a decrease in the Stated Death Benefit may only be made after
the second Policy Year or two years following the effective date of an increase
in the Stated Death Benefit. A decrease in Stated Death Benefit can only be
requested during the thirty day period preceding a Policy Anniversary and in a
Written Request. Any decrease in the Stated Death Benefit must be at least
$10,000. The Stated Death Benefit may not be decreased to less than the
minimum amount shown on the Policy Schedule on page 4. Any decrease in the
Stated Death Benefit will become effective as of the Policy Anniversary on or
following our receipt of your Written Request.
If increases in the initial Stated Death Benefit are in effect, a decrease in
the Stated Death Benefit will reduce coverage segments in the following order:
(i) against insurance provided by the most recent increase; (ii) against the
next most recent increase successively; (iii) against insurance provided under
the original application.
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 may apply.
CHANGE OF DEATH BENEFIT TYPE
After the first Policy Year, you may change the Death Benefit type by sending us
a Written Request. A change from type A to type B may require evidence of
insurability. The effective date of the change will be the Monthly Processing
Date that coincides with or follows the Valuation Day after we approve your
Written Request.
If type A is in effect, you can request that it be changed to type B. This will
decrease the Stated Death
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<PAGE>
Benefit by the amount of Accumulation Value. The new Stated Death Benefit cannot
be less than the minimum Stated Death Benefit shown on the Policy Schedule on
page 4.
If type B is in effect, you can request that it be changed to type A. This will
increase the Stated Death Benefit by the amount of the Accumulation Value.
CHANGE OF BENEFITS OPTION
You may add or drop any additional benefits by sending us a Written Request.
Proof of insurability may be required by us to add a benefit. We may require
this Policy to be returned to us to make the change. The amounts and types of
benefits allowed to be added must be in accordance with our rules as of the date
of your request.
VARIABLE ACCOUNT
The Variable Account is an account established by us pursuant to the laws of the
State of Texas, to separate the assets funding the variable benefits for the
class of Policies to which this Policy belongs from the other assets of
Southland Life Insurance Company.
The Variable Account is registered with the SEC as a unit investment trust under
the Investment Company Act of 1940 (the "1940 Act"). All income, gains and
losses, whether or not realized, from assets allocated to the Variable Account
are credited to or charged against the Variable Account without regard to
income, gains or losses of the Company. The assets of the Variable Account are
our property, but are separate from our General Account and any other separate
account maintained by us. 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 we may conduct.
We reserve the right to transfer to our General Account any assets that are in
excess of such reserves and other liabilities.
The Variable Account is divided into Subaccounts, each of which invests in a
corresponding Portfolio designed to meet the objectives of the Subaccount. The
current Subaccounts are shown on the Policy Schedule on page 5. We may, from
time to time, make the following changes to the Variable Account, subject to
review by the SEC and other regulatory authorities:
(1) create new separate accounts for the Policy;
(2) combine separate accounts, including the Variable Account;
(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.
ACCUMULATION UNIT VALUE
Net Premiums allocated to a Subaccount or amounts transferred to a Subaccount
are converted into
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<PAGE>
Accumulation Units, a unit of measure used to calculate Subaccount Accumulation
Value. 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 was established. Thereafter, for any Subaccount, the
Accumulation Unit Value for a Valuation Period equals the Accumulation Unit
Value for the preceding Valuation Period multiplied by the Accumulation
Experience Factor (described below) for the current Valuation Period.
Decreases in Subaccount Accumulation Value under a Policy are effected by the
cancellation of an appropriate number of Accumulation Units of a Subaccount.
Accumulation units are canceled as of the end of the Valuation Period in which
the Company received notice of or instructions regarding the event.
ACCUMULATION EXPERIENCE FACTOR
For each Subaccount of the Variable Account, 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 the daily factor representing the mortality and expense risk charge
deducted from the subaccount adjusted for the number of days in the
Valuation Period.
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 follows:
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
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<PAGE>
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 Withdrawal 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.
PERSISTENCY REFUND
Each month your Policy remains in force after its tenth Policy Anniversary, we
will credit the Accumulation Value in the Subaccounts with a persistency refund
equivalent to 0.35% of the Accumulation Value in the Subaccounts on an annual
basis for that segment (0.02917% monthly). To compute the persistency refund, a
factor is applied to the Accumulation Value as of the prior Monthly Processing
Date. The persistency refund will be added to the Subaccounts in the same
proportion that your Accumulation Value in each Subaccount bears to the total of
Accumulation Value in the Subaccounts on the Monthly Processing Date.
GUARANTEED INTEREST ACCOUNT
The Guaranteed Interest Account is another account to which you may allocate Net
Premiums or make transfers. It is part of our general account assets. Interest
is credited at the guaranteed annual effective interest rate of 3.5% or may be
credited at a higher rate.
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 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.
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
2. Any additional Net Premiums allocated to the Guaranteed Interest Account
plus interest credited to those premiums during the current Valuation
Period; plus
20
<PAGE>
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.
TRANSFERS
After the Free-Look Period, you may transfer amounts among Subaccounts and the
Guaranteed Interest Account. Transfers may be made based upon instructions
given by Written Notice or by telephone. Any such transfer will take effect at
the end of the Valuation Period during which we receive such notice at our
Customer Service Center, or such later date as you may specify in your Written
Notice or telephone request.
Each transfer must be for a minimum of $100 or the balance in the Subaccount or
the Guaranteed Interest Account, if less. The minimum amount which can remain
in a Subaccount or in the Guaranteed Interest Account as a result of a transfer
is $100. Any amount below this minimum must be included in the amount
transferred.
Once during the first 30 days of each Policy Year, you may transfer amounts to
or 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 to or 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 transfer to or from the
Guaranteed Interest Account received at any other times will not be processed.
The maximum transfer amount from the Guaranteed Interest Account to the
Subaccounts of the Variable Account in any Policy Year is the greater 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.
EXCESS TRANSFER CHARGE
The first 12 transfers per Policy Year will be allowed free of charge.
Thereafter, a $25 transfer charge may be deducted from the amount transferred.
All transfers effected during a single Valuation Period will be counted as one
transfer for purposes of the transfer charge. 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. 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.
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<PAGE>
DOLLAR COST AVERAGING FACILITY
If you have at least $10,000 of Accumulation Value in the Money Market
Subaccount or the Janus Short-Term Bond Subaccount shown on the Policy Schedule
on page 5, you may choose to transfer a specified dollar amount each month from
the appropriate Subaccount and have a percentage of that amount transferred to
other Subaccounts of the Variable Account. Dollar Cost Averaging transfers may
not be made to the Guaranteed Interest Account. You may elect the Dollar Cost
Averaging transfer option at any time prior to maturity by Written Notice.
The minimum amount that you may elect to transfer each month is $100. The
maximum amount that you may transfer is equal to the Subaccount Accumulation
Value (when the election is made) of the Subaccount from which the transfer is
taken divided by twelve.
The percentage to be transferred to the other Subaccounts must be designated in
whole number percentages. No specific dollar designation may be made to the
Subaccounts. If you elect to transfer to a particular Subaccount, the minimum
percentage that may be transferred to that Subaccount is 1% of the total amount
transferred. Transfers for Dollar Cost Averaging will be effected on the
Monthly Processing Dates. If, on any transfer date, the Accumulation Value in
the selected Subaccount is equal to or less than the amount you elected to have
transferred, the entire amount will be transferred, and this option will end.
If still in effect, Dollar Cost Averaging will end as of the Valuation Day
immediately preceding maturity.
You may change the transfer amount or the Subaccounts to which transfers are to
be made once each Policy Year. You may cancel this election by Written Notice
at least seven days before the next transfer date. Any transfer under this
option will not be included for purposes of computing the transfer charge.
AUTOMATIC REBALANCING
Automatic Rebalancing allows you to match your Accumulation Value in each
Subaccount to your allocation percentage for new premiums. Automatic
Rebalancing can be elected in your application or by completing the Automatic
Rebalancing form and returning it to our Customer Service Center. As of the
first Valuation Date of each calendar quarter thereafter we will reallocate your
Net Accumulation Value so that the amount in each Subaccount matches your most
recent premium allocation. Automatic Rebalancing may not begin until the
Monthly Processing Date following the end of the Free Look Period. Automatic
Rebalancing will continue until we receive Written Notice or a telephone request
at our Customer Service Center to terminate.
While this feature is in effect, we require that you allocate no more than 35%
of your premiums to any one Subaccount, and you must allocate your premiums to
at least five Subaccounts. If at any time during the operation of the Automatic
Rebalancing feature you request a change in premium allocation which does not
meet these requirements, we will notify you that your allocation 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 Net Accumulation Value will be reallocated as of the Valuation Date that we
receive your Written allocation instructions. Amounts will be transferred among
the Subaccounts to match the allocation for new Premiums.
During the operation of Automatic Rebalancing, you may not change your
allocation percentage to the Guaranteed Interest Account by more than 25% of the
percentage previously allocated to the Guaranteed Interest Account.
If you change your Automatic Rebalancing allocation more than 5 times per Policy
Year, there will be a $25 charge taken from your Accumulation Value. The charge
will be deducted from each of the
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<PAGE>
Subaccounts of the Variable Account and the Guaranteed Interest Account in the
same proportion that your Accumulation Value in each account bears to your Net
Accumulation Value as of the Valuation Day the allocation change is effective.
You may elect either Dollar Cost Averaging or Automatic Rebalancing, but not
both. Other transfers may not be made during Automatic Rebalancing.
POLICY SURRENDER AND WITHDRAWALS
POLICY SURRENDER
You may surrender this Policy for its Cash Surrender Value by Written Notice.
We must receive the Policy and your request during the Insured's lifetime. We
will pay the Cash Surrender Value within seven days following receipt of the
Written Notice. The Policy will be canceled on the date of receipt of the
Written Notice.
If your request for surrender is within 31 days after the start of a Policy
Year, the Cash Surrender Value of any Accumulation Value in the Guaranteed
Interest Account will not be less than that account's value at the start of that
Policy Year less any loans or withdrawals from that account up to the date of
surrender.
The Cash Surrender Value under the Policy is at least equal to that required by
law. A detailed statement of the method of computation has been filed with the
insurance department of the state where the Policy was issued.
WITHDRAWALS
You may withdraw part of the Cash Surrender Value after the first Policy Year by
Written Notice or request by telephone. We must receive the request during the
Insured's lifetime.
The maximum Withdrawal amount is the Cash Surrender Value minus $500. 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. It cannot cause the Stated Death Benefit to reduce below the
Minimum Stated Death Benefit shown in the Schedule. The minimum Withdrawal
amount, the maximum number of Withdrawals per Policy Year and the Withdrawal
Transaction Charge are shown below:
Minimum Withdrawal amount $500
Maximum number of Withdrawals per Policy Year 12
Withdrawal Transaction Charge: the lesser of $25 or 2% of
the amount requested
If death benefit type A is in effect, a Withdrawal will reduce the Accumulation
Value and 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, and the Withdrawal occurs less than 16 years
following the date of issue, then the Withdrawal will not reduce the Stated
Death Benefit if the amount of the Withdrawal is less than 5% of the Stated
Death Benefit. If the above conditions are met and the amount of the Withdrawal
exceeds 5% of the Stated Death Benefit, the Stated Death Benefit will only be
reduced by the amount of such excess. The Stated Death Benefit will be reduced
in proportion to the reduction in Accumulation Value caused by the Gross
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. If the Withdrawal occurs during the
first 14 Policy Years or first 14 years following an increase in Stated Death
Benefit, a Surrender Charge will be assessed.
If death benefit type B is in effect, a Withdrawal will reduce the Accumulation
Value but the Stated Death Benefit will not be reduced as the Accumulation Value
reflects the decrease.
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You may tell us how to allocate the Gross Withdrawal among the Subaccounts and
the Guaranteed Interest Account. If you do not, the Withdrawal will be
allocated among the Subaccounts and the Guaranteed Interest Account on a pro
rata basis.
We will pay a withdrawal request within seven days following our receipt of the
request.
WITHDRAWAL TRANSACTION CHARGE
A Withdrawal Transaction Charge of the lesser of $25 or 2% of the amount
requested will be deducted from the requested Withdrawal amount on any
Withdrawal made during a Policy Year after the first Withdrawal. The Withdrawal
Transaction Charge will be deducted from your Net Accumulation Value on the same
basis as the Withdrawal is taken.
POLICY LOANS
This Policy has loan privileges that are described below. Any outstanding
Policy Debt will be deducted from proceeds payable at the Insured's death, on
maturity or on Surrender.
MAKING A POLICY LOAN
After the first Policy Anniversary, you may obtain a policy loan from us by
submitting a Written Request or telephone request to our Customer Service
Center. This Policy is the only security required. The available loan amount
at any time is the maximum loan amount less any outstanding Policy Debt. The
maximum loan amount at the time of the loan is equal to 100% of the Guaranteed
Interest Account Cash Surrender Value plus 90% of the Subaccounts Cash Surrender
Value. The minimum amount you may borrow is $100.
Certain loan amounts taken after the earlier of:
1. the tenth Policy Anniversary, or
2. the fifth Policy Anniversary if the Insured's attained Age is 60 or
greater,
will be considered preferred loan amounts as described below.
During each Policy Year of preferred loan eligibility amounts, 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.
INTEREST CREDITED
Accumulation Value in the Policy Loan Account of the General Account will be
credited with 4% interest annually. The interest earned will be allocated to
the Subaccounts and the Guaranteed Interest Account in the same proportion that
Net Premiums are being allocated and will be transferred on each Policy
Anniversary.
INTEREST CHARGES
Interest charges on Policy loans is due and payable on each Policy Anniversary.
If interest is not paid when due, it will be added to the Policy Debt and will
be charged interest at the rate than being charged on the loan.
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<PAGE>
The maximum annual Policy Loan interest rate is 4.0% for preferred loans and
6.0% for other loans. We have the option of charging lower rates.
OTHER BORROWING RULES
When a policy loan is made, or when interest is not paid when due, an amount of
Accumulation Value sufficient to secure the Policy Debt is transferred out of
the Variable Account and the Guaranteed Interest Account and into the Policy
Loan Account of our General Account. You may tell us how to allocate the
remaining Accumulation Value among the Subaccounts and the Guaranteed Interest
Account provided that the amount remaining in the Subaccount or the Guaranteed
Interest Account as a result of the allocation is at least $100. Otherwise, the
Accumulation Value will be allocated among the Subaccounts and the Guaranteed
Interest Account in the same proportion that the Policy's Accumulation Value in
each Subaccount and the Guaranteed Interest Account bears to the total
Accumulation Value in all Subaccounts and the Guaranteed Interest Account on the
date we make the loan.
If the outstanding Policy Debt exceeds the Accumulation Value less any Surrender
Charge and the Monthly Deduction, the Policy will be in default. We will send
you a notice of the amount you must pay. If you do not pay this amount within
61 days after we send notice, the Policy will terminate without value. We will
send the notice to you and to any assignee of record at our Customer Service
Center.
Any loan transaction will permanently affect the values of this Policy.
REPAYING A POLICY DEBT
You can repay a Policy Debt in part or in full anytime during the Insured's life
prior to maturity while this Policy is in force. If there is an outstanding
Policy loan, any payment which is not a scheduled premium received before
maturity is considered loan repayment unless otherwise indicated. When a loan
repayment is made, Accumulation Value in the General Account related to that
payment will be transferred into the Subaccounts and the Guaranteed Interest
Account in the same proportion that Net Premiums are then being allocated unless
you provide other instructions.
POLICY CHARGES
Charges against your Policy consist of expenses for taxes and sales loads,
administrative expenses, cost of insurance charges, certain policyholder
transactions which exceed a maximum, and surrender charges on Withdrawals.
Mortality and Expense Risk charges apply to the Subaccounts. They do not apply
to the Guaranteed Interest Account.
TAXES AND SALES LOADS
These charges are deducted as a percentage of your premium payments to define
the Net Premiums. These charges will not exceed the amounts shown on the Policy
Schedule on page 8.
MONTHLY DEDUCTION
Administrative expenses and cost of insurance charges are taken from the
Accumulation Values monthly as a Monthly Deduction. Maximum monthly
administrative expenses are shown on the Policy Schedule on page 8. The Cost of
Insurance charges are given below.
The monthly deduction is taken from the Accumulation Value on each Monthly
Processing Date. The monthly deduction includes the Initial Policy Charge
(during the first 12 months), the Monthly Policy Charge, the cost of insurance
charge for the Policy and for any additional benefits provided by riders.
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<PAGE>
The monthly deduction is allocated to the Subaccounts of the Variable Account
and Guaranteed Interest Account in the same proportion that your Accumulation
Value in the Account bears to the total Accumulation Value as of the Monthly
Processing Date.
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
vary from month to month.
The charge is equal to our current monthly cost of insurance rate multiplied by
the number of $1,000's of net amount at risk under the Policy for Death Benefit.
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 any Adjustable Term
Insurance Rider on the 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 at the beginning of the month is increased, for
example, due to the requirements of Federal income tax law definition of life
insurance, net amount at risk for the Base Death Benefit than month will also
increase, but the net amount at risk for any Adjustable Term Insurance Rider may
be reduced. Therefore, the amount of the cost of insurance charges will vary
from month to month with changes in the net amount at risk, changes in the
relative makeup of the death benefit, and with increasing Age of the Insured.
If the Death Benefit of your Policy consists of more than one segment because
there has been an increase in Stated Death Benefit, the charge is calculated
separately for each segment. The cost of insurance charge for each segment is
equal to our current monthly cost of insurance rate for each segment times the
net amount at risk for that segment of the Death Benefit. Net Amount at Risk
for each segment of the Death Benefit is calculated on the Monthly Processing
Date. Net amount at risk is allocated to each Stated Death Benefit segment in
the same proportion that the Stated Death Benefit of each segment bears to the
sum of the Stated Death Benefit for all coverage segments as of the Monthly
Processing Date.
The cost of insurance rates for Base Death Benefit segments are based on the sex
and risk class of the Insured, the Insured's Age on the date a segment is
created and duration since segment creation. The cost of insurance rates for
any Adjustable Term Insurance Rider are based on the Age, sex and risk class of
the Insured on the Policy Date and duration since issue.
A risk class of tobacco or non-tobacco or a risk class involving a higher
mortality risk (a "substandard" risk) is determined 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 when
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.
Our current cost of insurance rates may be less than the guaranteed rates. In
addition, current rates are greater for Policies with Stated Death Benefit (or
Target Death Benefit, if any) that is less than $250,000
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on the Policy Date. Our current cost of insurance rates will be determined based
on our expectations as to future experience. The rates may change from time to
time, but they will never be more than the guaranteed maximum rates set for in
your Policy.
Cost of insurance rates (whether guaranteed or current) of an Insured in a non-
tobacco class are lower than guaranteed rates for an Insured of the same age and
sex in a tobacco class.
The tables on pages 28 and 29 give non-tobacco and tobacco risk class Guaranteed
Maximum Cost of Insurance rates. The rates in the Table are guaranteed not to
increase. To determine the guaranteed maximum rates for your Policy, use the
column appropriate for your risk class. Multiply the rates shown by your risk
class factor. Column 1 applies if your risk class includes the word "Non-
tobacco". Otherwise, column 2 applies. See the Policy Schedule on page 4 for
your risk class.
BASIS OF COMPUTATIONS
The guaranteed maximum cost of insurance rates for Insureds ages 15 and older
are computed using the 1980 Commissioners' Standard Ordinary Mortality Tables,
Male or Female, Smoker or Nonsmoker, Age Nearest Birthday ("1980 CSO Tables") at
3.5% interest. For juvenile Insureds ages 0-14, the 1980 Commissioners'
Standard Ordinary Mortality Table, Male or Female, Nonsmoker, Age Nearest
Birthday will be used. The guaranteed rates for substandard classes are based
on multiples or additives of the 1980 CSO Tables.
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<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE RATES PER $1,000 AGES 0 - 50
- ---------------------------------------------------------------------------------------
MALE FEMALE
ATTAINED AGE
- ---------------------------------------------------------------------------------------
NON-TOBACCO TOBACCO NON-TOBACCO TOBACCO
Column 1 Column 2 Column 1 Column 2
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0 0.34900 0.24115
1 0.08921 0.07253
2 0.08254 0.06753
3 0.08170 0.06586
4 0.07920 0.06419
5 0.07503 0.06336
6 0.07169 0.06085
7 0.06669 0.06002
8 0.06336 0.05835
9 0.06169 0.05752
10 0.06085 0.05668
11 0.06419 0.05752
12 0.07086 0.06002
13 0.08254 0.06252
14 0.09588 0.06669
15 0.10756 0.13760 0.07003 0.07837
16 0.11924 0.15597 0.07336 0.08254
17 0.12842 0.17099 0.07670 0.08671
18 0.13343 0.18018 0.07920 0.09088
19 0.13844 0.18853 0.08170 0.09422
20 0.14011 0.19270 0.08421 0.09672
21 0.13927 0.19437 0.08504 0.09839
22 0.13677 0.19187 0.08671 0.10089
23 0.13427 0.18853 0.08754 0.10256
24 0.13093 0.18435 0.09004 0.10589
25 0.12675 0.17851 0.09088 0.10756
26 0.12342 0.17350 0.09338 0.11174
27 0.12175 0.17183 0.09505 0.11507
28 0.12008 0.17016 0.09755 0.11841
29 0.12008 0.17183 0.10006 0.12342
30 0.12008 0.17517 0.10339 0.12926
31 0.12258 0.18101 0.10589 0.13427
32 0.12509 0.18686 0.10923 0.14011
33 0.12926 0.19604 0.11257 0.14595
34 0.13427 0.20690 0.11841 0.15513
35 0.14094 0.21943 0.12258 0.16181
36 0.14762 0.23447 0.13309 0.17433
37 0.15680 0.25369 0.13927 0.19020
38 0.16682 0.27542 0.14929 0.20774
39 0.17851 0.30050 0.16098 0.22779
40 0.19103 0.32893 0.17350 0.25034
41 0.20607 0.36239 0.18853 0.27792
42 0.22110 0.39670 0.20356 0.30384
43 0.23865 0.43604 0.21860 0.33060
44 0.25619 0.47708 0.23363 0.35737
45 0.27709 0.52401 0.24951 0.38498
46 0.29966 0.57096 0.26622 0.41344
47 0.32391 0.62212 0.28461 0.44358
48 0.34984 0.67584 0.30468 0.47457
49 0.37912 0.73631 0.32558 0.50808
50 0.41009 0.80018 0.34984 0.54664
- ---------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
GUARANTEED MAXIMUM MONTHLY COST OF INSURANCE RATES PER $1,000 AGES 51 - 99
- ----------------------------------------------------------------------------------------
MALE FEMALE
ATTAINED AGE
- ----------------------------------------------------------------------------------------
NON-TOBACCO TOBACCO NON-TOBACCO TOBACCO
Column 1 Column 2 Column 1 Column 2
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
51 0.44693 0.87419 0.37578 0.58521
52 0.48965 0.95668 0.40507 0.62884
53 0.53742 1.05105 0.43939 0.68004
54 0.59276 1.15734 0.47457 0.73211
55 0.65401 1.27051 0.51227 0.78673
56 0.72203 1.39312 0.55083 0.84138
57 0.79429 1.52015 0.58941 0.89354
58 0.87251 1.65583 0.62632 0.94237
59 0.96090 1.79682 0.66577 0.99290
60 1.05949 1.95335 0.71195 1.04853
61 1.16916 2.12977 0.76656 1.12021
62 1.29417 2.32876 0.83550 1.20715
63 1.43714 2.55476 0.92216 1.32461
64 1.59899 2.80452 1.02492 1.45577
65 1.77812 3.07567 1.13624 1.60323
66 1.97123 3.35886 1.25614 1.74923
67 2.18097 3.65683 1.37789 1.90143
68 2.40660 3.96448 1.50066 2.03939
69 2.65338 4.29327 1.63207 2.19463
70 2.93268 4.65747 1.78407 2.35955
71 3.30181 5.06279 1.96612 2.57362
72 3.61779 5.52571 2.19207 2.83977
73 4.04199 6.04980 2.46823 3.16536
74 4.52073 6.62444 2.79421 3.54671
75 5.03724 7.26414 3.16450 3.97231
76 5.59039 7.92842 3.57271 4.43318
77 6.17549 8.60587 4.01324 4.91927
78 6.78686 9.28569 4.48657 5.42834
79 7.44038 9.98835 5.00641 5.97677
80 8.16249 10.74534 5.59571 6.58859
81 8.97320 11.57692 6.27546 7.28491
82 9.89814 12.50906 7.06752 8.08683
83 10.95204 13.55162 7.98847 9.00541
84 12.11846 14.66820 9.02014 10.09637
85 13.37460 15.82369 10.16441 11.19977
86 14.69860 16.98122 11.40375 12.46983
87 16.08129 18.12337 12.74961 13.71056
88 17.49682 19.38671 14.19103 15.13413
89 18.96601 20.65144 15.75519 16.50860
90 20.51212 21.93652 17.44624 18.11827
91 22.16549 23.26852 19.30510 19.86655
92 23.98724 24.70635 21.39679 21.81429
93 26.06643 26.58833 23.84043 24.07436
94 28.78427 29.07200 26.92636 26.92636
95 32.81758 32.81758 31.31011 31.31011
96 39.64294 39.64294 38.50479 38.50479
97 53.06605 53.06605 52.27571 52.27571
98 83.33333 83.33333 83.33333 83.33333
99 83.33333 83.33333 83.33333 83.33333
- ----------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
MORTALITY AND EXPENSE RISK CHARGE
We will 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.
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.
SURRENDER CHARGES
We assess a surrender charge against your Accumulation Value upon a surrender,
reduction in Stated Death Benefit or lapse of your Policy in the first fourteen
Policy years, or the fourteen Policy Years following an increase in Stated Death
Benefit (herein referred to as an addition of a new coverage segment of Stated
Death Benefit). The surrender charge consists of two charges: an
administrative surrender charge and a sales surrender charge.
During the first fourteen years of the Policy or within 14 years of an increase
in the Stated Death Benefit, if you request a decrease to the Stated Death
Benefit of your Policy or take a Withdrawal which decreases the Stated Death
Benefit, we will deduct a portion of the surrender charge from your Net
Accumulation Value. The amount of the surrender charge which will be deducted
from your Net Accumulation Value on the decrease will equal the surrender charge
in effect before the reduction minus the surrender charge in effect after the
reduction.
During the first fourteen year of the Policy or within 14 years of an increase,
an increase in Stated Death Benefit will increase Surrender Charges. An
Administrative Surrender Charge as shown on page 9 will apply to each Stated
Death Benefit segment according to the year the segment was added. A Sales
Surrender Charge will apply to each segment of the Stated Death Benefit
according to the target premium applicable to the segment and the year the
segment was added. The Percentage of Premium Sales Surrender Charge factors
applicable to the premiums for the increase are shown on page 9. Premiums
received after a new segment of Stated Death Benefit has been added will be
allocated to each segment in proportion to the total Stated Death Benefit.
Decreases as a result of a change to your death benefit option do not result in
a surrender charge deduction from your Net Accumulation Value and future
surrender charges will not be reduced.
Increases in the Stated Death Benefit as a result of changes in death benefit
option do not result in an increase in the maximum sales surrender charge. All
other increases in Stated Death Benefit will increase the maximum surrender
charges.
ADMINISTRATIVE SURRENDER CHARGE
The administrative surrender charge in the first nine years is equal to four
dollars ($4.00) per $1,000 of
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Stated Death Benefit. After the first nine years following issuance of the
Policy or the effective date of a coverage segment, the administrative surrender
charge decreases by one-sixth of the amount in effect at the end of the 9th
Policy year until it reaches zero at the beginning of the fifteenth year, or the
year in which the Insured reaches Age 98, whichever is earlier.
During the first 14 Policy years or within 14 years of an increase in the Stated
Death Benefit, if you request a decrease to the Stated Death Benefit or take a
Withdrawal which causes the Stated Death Benefit to decrease, your
administrative surrender charge will decrease in the same proportion that the
Stated Death Benefit decreases.
SALES SURRENDER CHARGE
The sales surrender charge is a percentage of actual premiums paid up to a
maximum based on Target Premiums. In the first two Policy Years or the first
two years following 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 all other
premiums. The Target Premium for your Policy and any Stated Death Benefit
coverage segments added since the Policy Date will be listed in the Schedule of
your Policy. Upon a decrease in the Stated Death Benefit the Target Premium for
each segment will be reduced in the same proportion that the Stated Death
Benefit is reduced.
The maximum sales surrender charge for a Stated Death Benefit segment is shown
in the Policy Schedule. This charge remains level for the first nine Policy
Years or for the first nine years following an increase in a Stated Death
Benefit segment, then decreases by one-sixth of the amount in effect at the end
of the 9th year each Policy year until it reaches zero at the beginning of the
fifteenth year, or the year in which the Insured reaches Age 98, whichever is
earlier.
Upon a decrease in the Stated Death Benefit other than due to a change in death
benefit option, the Target Premium for each segment will be reduced in the same
proportion that the Stated Death Benefit is reduced. The following rules
explain when a sales surrender charge is deducted on a decrease in Stated Death
Benefit, and how future sales surrender charges are adjusted. If the new target
Premium for each Stated Death Benefit segment is greater than or equal to the
sum of your paid Premiums which are allocated to the segment, the maximum sales
surrender charge you may pay in the future will be reduced, but a sales
surrender charge will not be deducted from your Accumulation Value. If the new
Target Premium for each Stated Death Benefit segment is less than the sum of
your paid Premiums which are allocated to the segment, your maximum sales
surrender charge you may pay in the future will be reduced and a sales surrender
charge will be deducted from your Accumulation Value. The new sales surrender
charge will be recalculated as if the new Target Premium was always in effect
for the segment. A deduction equal to the difference between the sales
surrender charge as calculated before and after the decrease will be taken from
your Accumulation Value.
If you request a decrease to the Stated Death Benefit or take a Withdrawal which
causes the Stated Death Benefit to be reduced, more than nine years following
the Policy date or the date of an increase to the Stated Death Benefit,
whichever is applicable, the maximum sales surrender charge you could pay in the
future will be reduced in the same proportion that the Stated Death Benefit is
reduced.
REPORTS
ANNUAL REPORTS
Each year you will be mailed an annual report that shows the progress of the
Policy. This report will show for the last Policy Year the current Accumulation
Value, Cash Surrender Value and premiums paid since the last report. 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
31
<PAGE>
information that may be currently required by the insurance supervisory official
of the jurisdiction in which the Policy is delivered.
OTHER REPORTS
You may request a report illustrating future values of the Policy under both
guaranteed and current assumptions. A reasonable fee not to exceed $50 may be
charged for this report after the first in a Policy Year.
GENERAL POLICY PROVISIONS
This Policy, the attached application, any additional riders or endorsements,
and any supplemental applications make up the entire contract between you and
us. In the absence of fraud, statements in the application will be considered
representations and not warranties. No statement will void this Policy or be
used in defense of a claim unless contained in the application.
POLICY INCONTESTABILITY
We cannot contest this Policy after it 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
two years from the effective date of such benefit, during the Insured's lifetime
except for non-payment of premium.
TERMINATION
All coverage under this Policy will terminate on the first to occur of one of
these events:
1. you request that coverage terminate; or
2. the Insured dies; or
3. this Policy matures; or
4. the grace period ends; or
5. this Policy is surrendered.
On termination of this Policy, we will make any payment that may be applicable.
AGE AND SEX MISSTATEMENT
The amount of insurance under this Policy is based on the Insured person's sex
and Age nearest birthday on the Policy Date. If either the sex or Age shown in
the Policy Schedule is wrong, the Stated Death Benefit will be adjusted. The
adjusted Death Benefit will be that which would be purchased by the most recent
cost of insurance charge at the correct Age and sex.
SUICIDE
If the Insured commits suicide during the first two years from the Policy Date,
instead of paying the Policy proceeds, we will make a limited payment of:
1. all premiums paid; less
2. any Policy Debt; less
3. any Withdrawals.
If the Insured commits suicide within two years from the effective date of any
increase in Stated Death Benefit or benefits provided by any rider, we will pay:
1. proceeds from this Policy and any benefits that have been in force at least
two years from their respective effective dates; plus
2. the cost of insurance for any increase or additional benefits that have
been in effect less than two years from their respective effective dates;
less
3. any Policy Debt; less
4. any Withdrawals.
The payment will be made to the Beneficiary.
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<PAGE>
MODIFICATIONS
No agent is allowed to make any changes in this Policy. Changes can only be
made by our President, a Vice President, or the Secretary.
DELAY OF PAYMENT BY LAW
Payments of Withdrawals, Surrenders or Death Benefit Proceeds from the
Subaccounts will usually be made within seven days after receipt of your request
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 Policy owners.
We may defer up to six months the payment of any Withdrawal, policy loan 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.
CONVERSION OF POLICY
At any time within the first 24 Policy months after issuance of the Policy or
after an increase in Stated Death Benefit while this Policy is in force during
the life of the Insured, you may convert this Policy without evidence of
insurability for 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 amount 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 exchange will be
subject to the following conditions:
(1) The new Policy will be on the flexible premium adjustable life insurance
plan that was being issued by Southland on the date of issue of this
Policy.
(2) The new Policy will provide the same amount of death benefit or the same
net amount at risk to Southland as this Policy and will have the same
Policy Date and issue Age as this Policy.
(3) The cost of insurance rates for the new Policy will be those applicable to
flexible premium adjustable life policies in the same risk classification
as this Policy and issued on the same date as this Policy.
(4) All Policy Debt under this Policy must be paid.
The contestable period, suicide period, and surrender charge period of the new
Policy will be measured from the Policy Date. The Accumulation Value of this
Policy will be transferred to the new Policy as of the effective date of the
conversion. The effective date of the conversion will be the date Southland
received Written Request for conversion 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 Portfolios of the Variable Account.
HOW BENEFITS ARE PAID
Any payment of proceeds of this Policy will be made in a lump sum payment unless
you request an alternate method. You may request any of the alternate payment
options listed below if you prefer.
33
<PAGE>
SELECTING AN OPTIONAL PAYMENT
To select an option, send Written Notice to our Customer Service Center.
Payment under any option must be at least $20. Payment under these options to
any assignee, executor, administrator, trustee, corporation or association
cannot be made without our consent.
If you die while receiving payments, any remaining payments will be paid as a
lump sum to your estate. If payments are being made to the beneficiary and he
or she dies, any remaining payments will be paid as a lump sum to the
beneficiary's estate.
- --Option 1: Fixed Period - Equal payments for a fixed period of up to 30 years.
The longer the period, the lower the payments. Monthly payments per $1,000 are
shown in Table 1.
- --Option 2: Life Income - Equal payments for life. The longer the certain
period, if any, the lower the payments. Monthly payments per $1,000 are shown
in Table 2.
- --Option 3: Interest Only - Equal payments of 4% interest on the amount left
with us. That amount must be at least $1,000.
- --Option 4: Fixed Installments - Equal payments totaling at least $60 per year
for each $1,000. The larger the amount, the shorter the period of payments.
Additional and more favorable forms of payment may be available at the time an
option is selected.
PROVISIONS RELATING TO OPTIONS 1, 3, AND 4
Payments made under this option are based on guaranteed compound interest at a
rate of 4% per year. They will be increased during any certain or guaranteed
periods by any excess interest earnings we declare. If death occurs during a
certain or guaranteed period, the lump sum payable to the deceased's estate will
be equal to the value of the remaining guaranteed payments reduced by compound
interest at 4% per year.
34
<PAGE>
SETTLEMENT OPTION TABLES
(Per $1,000 of Net Proceeds)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Table 1 - Fixed Period Table 2 - Lifetime Payments
- ---------------------- --------------------------------------------------
Number Monthly Male Without 10 Year Female Without 10 Year
of Years Payment Age Refund Certain Age Refund Certain
- ---------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $85.12 25 $3.80 $3.80 25 $3.68 $3.68
2 43.39 26 3.82 3.82 26 3.70 3.70
3 29.49 27 3.85 3.84 27 3.72 3.72
4 22.55 28 3.87 3.87 28 3.74 3.74
5 18.38 29 3.90 3.89 29 3.76 3.76
6 15.61 30 3.92 3.92 30 3.78 3.78
7 13.64 31 3.95 3.95 31 3.80 3.80
8 12.16 32 3.98 3.97 32 3.82 3.82
9 11.01 33 4.01 4.01 33 3.85 3.84
10 10.09 34 4.05 4.04 34 3.87 3.87
11 9.34 35 4.08 4.07 35 3.90 3.90
12 8.72 36 4.12 4.11 36 3.93 3.92
13 8.20 37 4.16 4.15 37 3.96 3.95
14 7.75 38 4.20 4.18 38 3.99 3.98
15 7.36 39 4.24 4.23 39 4.02 4.01
16 7.02 40 4.29 4.27 40 4.06 4.05
17 6.73 41 4.33 4.31 41 4.09 4.08
18 6.47 42 4.38 4.36 42 4.13 4.12
19 6.23 43 4.44 4.41 43 4.17 4.16
20 6.02 44 4.49 4.46 44 4.21 4.20
21 5.83 45 4.55 4.52 45 4.26 4.24
22 5.66 46 4.61 4.57 46 4.30 4.29
23 5.51 47 4.67 4.63 47 4.35 4.34
24 5.37 48 4.74 4.70 48 4.40 4.39
25 5.24 49 4.81 4.76 49 4.46 4.44
26 5.12 50 4.88 4.83 50 4.52 4.49
27 5.01 51 4.96 4.90 51 4.58 4.55
28 4.91 52 5.04 4.97 52 4.64 4.61
29 4.82 53 5.13 5.05 53 4.71 4.68
30 4.73 54 5.22 5.13 54 4.78 4.75
55 5.31 5.22 55 4.86 4.82
56 5.42 5.31 56 4.94 4.89
57 5.52 5.41 57 5.03 4.97
58 5.64 5.51 58 5.12 5.06
59 5.76 5.62 59 5.22 5.15
60 5.90 5.73 60 5.32 5.24
61 6.04 5.85 61 5.43 5.34
62 6.19 5.98 62 5.55 5.45
63 6.36 6.11 63 5.68 5.56
64 6.53 6.25 64 5.81 5.68
65 6.72 6.39 65 5.96 5.80
66 6.92 6.54 66 6.11 5.94
67 7.14 6.69 67 6.28 6.08
68 7.37 6.85 68 6.46 6.22
69 7.61 7.01 69 6.65 6.38
70 7.88 7.18 70 6.86 6.54
- ---------------------- --------------------------------------------------
</TABLE>
We will furnish payments for ages not shown on request.
35
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
DEATH BENEFITS AND OTHER VALUES PROVIDED BY THIS POLICY, WHEN BASED ON THE
INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY
INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED
AS TO A FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US TO THE
BENEFICIARY UPON THE DEATH OF THE INSURED PRIOR TO MATURITY. THE NET
ACCUMULATION VALUE, IF ANY, IS PAYABLE BY US IF THE INSURED IS LIVING UPON
MATURITY. FLEXIBLE PREMIUMS ARE PAYABLE BY THE OWNER DURING THE LIFETIME
OF THE INSURED UNTIL MATURITY.
CUSTOMER SERVICE CENTER
P. O. BOX 173789
DENVER, CO 80217-3789
(800) 224-3035
36
<PAGE>
EXHIBIT 2
[Letterhead of Southland Life Insurance Company]
April 25, 1997
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 3
to the 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
Southland 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 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/ B. Scott Burton
Vice President & General Counsel
<PAGE>
EXHIBIT 6
[Letterhead of Southland Life Insurance Company]
April 25, 1997
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 3 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.
/s/ 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 caption "Experts" and to the
use of our report dated April 4, 1997, in Post-Effective Amendment No. 3 to the
Registration Statement (Form S-6 No. 33-97852) and related Prospectus of
Southland Separate Account L1 (dated May 1, 1997).
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
April 23, 1997
<PAGE>
EXHIBIT 7.(b)
[Letterhead of Sutherland, Asbill & Brennan, L.L.P.]
April 27, 1997
Board of Directors
Southland Life Insurance Company
5780 Powers Ferry Road, N.W.
Atlanta, Georgia 30327-4390
Directors:
We hereby consent to the reference to our name under the caption "Legal Matters"
in the prospectus filed as part of post-effective amendment number 3 to the
Registration Statement on Form S-6 (File No. 33-97852) filed by Southland Life
Insurance Company and Southland Separate Account L1 with the Securities and
Exchange Commission. In giving this consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
By: /s/ Susan S. Krawczyk
_________________________________
Susan S. Krawczyk
