<PAGE>
As Filed with the Securities and Exchange Commission on May 1, 1998
Registration No. 33-97852
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post-Effective Amendment No. 4 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 LLP
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, 1998, pursuant to paragraph (b)
----
____ 60 days after filing pursuant to paragraph (a)
____ on (date) pursuant to paragraph (a) of Rule 485
Securities Being Offered: Individual Variable Life Insurance Contracts
<PAGE>
SOUTHLAND SEPARATE ACCOUNT L1
SOUTHLAND LIFE INSURANCE COMPANY
Cross Reference to Items Required by form N-8B-2
N-8B-2 ITEM CAPTION IN PROSPECTUS
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1 Cover Page
2 Cover Page
3 Not applicable
4 Distribution of the Policies
5 The Variable Account
6 The Variable Account
7 Not applicable
8 The Variable Account
9 Legal Proceedings
10 Summary and Diagram; Facts About the Policy; Withdrawals;
Surrenders; Your Right to Transfer; Right to Convert Policy;
Premiums and Allocations; Reinstatement; Voting Privileges;
Authority to Change Policy Terms
11 The Portfolios
12 The Portfolios
13 Policy Charges and Fees
14 Facts About the Policy
15 Premiums and Allocations -- Crediting Premiums
16 The Portfolios
17 Withdrawals; Surrenders; When We Make Payments
18 The Variable Account
19 Reports to Owners
20 Authority to Change Policy Terms; Other Policy Provisions
21 Policy Loans
22 Not applicable
23 Southland's Directors and Officers
24 Not applicable
25 Facts About Southland and the Variable Account
26 Policy Charges and Fees
27 Facts About Southland and the Variable Account
28 Southland's Directors and Officers
29 Facts About Southland and the Variable Account
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 Facts About Southland and the Variable Account
<PAGE>
36 Not applicable
37 Not applicable
38 Distribution of the Policies
39 Distribution of the Policies
40 Distribution of the Policies
41 Distribution of the Policies
42 Not applicable
43 Not applicable
44 Subaccount Accumulation Value; Facts About the Policy
45 Not applicable
46 Subaccount Accumulation Value; Facts About the Policy
47 The Variable Account; The Portfolios
48 Facts About Southland and the Variable Account
49 Not applicable
50 Not applicable
51 Facts About the Policy; Distribution of the Policies
52 Changes Relating to the Variable Account
53 Federal Tax Considerations
54 Not applicable
55 Hypothetical Illustrations
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
<PAGE>
A FLEXIBLE PREMIUM ADJUSTABLE COMBINATION FIXED AND
VARIABLE LIFE INSURANCE POLICY
issued by
SOUTHLAND LIFE INSURANCE COMPANY AND
SOUTHLAND SEPARATE ACCOUNT L1
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 (20)
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
47. 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.
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
</TABLE>
DATE OF PROSPECTUS: 5/1/98
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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DEFINITIONS................................................................ -1-
SUMMARY AND DIAGRAM........................................................ -5-
HISTORICAL PERFORMANCE INFORMATION......................................... -11-
HYPOTHETICAL ILLUSTRATIONS................................................. -20-
FACTS ABOUT SOUTHLAND AND THE VARIABLE ACCOUNT............................. -28-
THE VARIABLE ACCOUNT.................................................. -28-
THE PORTFOLIOS........................................................ -29-
CHANGES RELATING TO THE VARIABLE ACCOUNT.............................. -32-
FACTS ABOUT THE POLICY..................................................... -33-
PREMIUMS AND ALLOCATIONS.............................................. -33-
YOUR ACCUMULATION VALUE............................................... -38-
YOUR RIGHT TO TRANSFER................................................ -41-
AUTOMATIC REBALANCING................................................. -43-
WITHDRAWALS........................................................... -44-
SURRENDERS............................................................ -45-
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-
ADDITIONAL POLICY INFORMATION.............................................. -64-
THE OWNER............................................................. -64-
THE BENEFICIARY....................................................... -64-
</TABLE>
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<TABLE>
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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......................................................... -74-
REPORTS TO OWNERS.................................................... -74-
DISTRIBUTION OF THE POLICIES......................................... -74-
NEW YEAR 2000........................................................ -74-
VOTING PRIVILEGES.................................................... -75-
LEGAL PROCEEDINGS.................................................... -76-
SOUTHLAND'S DIRECTORS AND OFFICERS................................... -76-
LEGAL MATTERS........................................................ -81-
FINANCIAL STATEMENTS................................................. -81-
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
<PAGE>
DEFINITIONS
ACCUMULATION VALUE: The "Accumulation Value" is the combined value of your
Policy in all of the Subaccounts of the Variable Account, the Guaranteed
Interest Account and the values held in the General Account to secure Policy
loans.
ADJUSTABLE TERM INSURANCE RIDER: The "Adjustable Term Insurance Rider" is
available to add death benefit coverage to your Policy. The amount of death
benefit coverage provided under this rider is the difference between the Base
Death Benefit and the Target Death Benefit.
AGE: The Insured's "Age" at any time is his or her age on the birthday nearest
the Policy Date increased by the number of full Policy Years elapsed since the
Policy Date.
BASE DEATH BENEFIT: The "Base Death Benefit" depends on the death benefit type
you choose. Under type A, the Base Death Benefit is the greater of Stated Death
Benefit or a multiple of the Accumulation Value on the date of the Insured's
death. Under type B, the Base Death Benefit is the greater of the Stated Death
Benefit plus the Accumulation Value, or a multiple of the Accumulation Value, on
the date of the Insured's death. See "DEATH BENEFITS AND CHANGES IN DEATH
BENEFIT TYPE," page 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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<PAGE>
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 34.
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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<PAGE>
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 NoLapse 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.
-3-
<PAGE>
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, Rev. Dr. Martin Luther
King, Jr. Holiday, 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.
-4-
<PAGE>
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 36.
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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<PAGE>
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 34. 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 37. 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 (nonvariable) 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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<PAGE>
DIAGRAM OF POLICY
----------------------------------------------------------------------
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."
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET PREMIUMS
* You direct the allocation of Net Premiums among 20 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 INVESCO VIF - Industrial Income Portfolio
VIP Fund - Overseas Portfolio INVESCO VIF - Utilities Portfolio
VIP II Fund - Contrafund 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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<PAGE>
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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>
- ---------------------------------------------------- --------------------------------------------------
CASH BENEFITS DEATH BENEFITS
<S> <C>
* 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% $50,000.
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>
- --------------------------------------------------------------------------------
ANNUAL PORTFOLIO EXPENSES
(AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS, FOR THE YEAR ENDED
DECEMBER 31, 1997)
<TABLE>
<CAPTION>
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% 0.15%1/ 1.00%
Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84%
Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89%
Variable Insurance Products Fund and Variable Insurance Products Fund II 2/
VIP Equity-Income Portfolio 0.50% 0.08% 0.58% 2/
VIP Growth Portfolio 0.60% 0.09% 0.69% 2/
VIP High Income Portfolio 0.59% 0.12% 0.71%
VIP Money Market Portfolio 0.21% 0.10% 0.31%
VIP Overseas Portfolio 0.75% 0.17% 0.92% 2/
VIP II Asset Manager Portfolio 0.55% 0.10% 0.65% 2/
VIP II Contrafund Portfolio 0.60% 0.11% 0.71% 2/
VIP II Index 500 Portfolio 0.24% 0.04% 0.28% 3/
VIP II Investment Grade Bond Portfolio 0.44% 0.14% 0.58%
Janus Aspen Series 4/
Aggressive Growth Portfolio 0.73% 0.03% 0.76%
Balanced Portfolio 0.76% 0.07% 0.83%
Growth Portfolio 0.65% 0.05% 0.70%
International Growth Portfolio 0.67% 0.29% 0.96%
Worldwide Growth Portfolio 0.66% 0.08% 0.74%
INVESCO Variable Investment Funds, Inc.
Industrial Income Portfolio 0.75% 0.16% 0.91% 5/ 6/
Utilities Portfolio 0.60% 0.39% 0.99% 5/ 6/
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
__________________________________
1/ Included in Other Expenses of Alger American Leveraged AllCap Portfolio is
0.04% of interest expense.
2/ 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 whereby credits realized, as a result of uninvested cash
balances were used to reduce custodian expenses. Including these reductions, the
total operating expenses presented in the table would have been .57% for VIP
Equity-Income Portfolio, .67% for VIP Growth Portfolio, .90% for VIP Overseas
Portfolio, .64% for VIP II Asset Manager Portfolio and .68% for VIP II
Contrafund Portfolio.
3/ The adviser has agreed to reimburse a portion of the VIP II Index 500
Portfolio's expenses. Absent reimbursement, Management Fees, Other Expenses and
Total Annual Expenses would have been .27%, .13% and .40% respectively, on an
annualized basis.
4/ Management fees for Growth, Aggressive Growth, International Growth,
Worldwide Growth and Balanced Portfolios reflect a reduced fee schedule
effective July 1, 1997. The management fee for each of these Portfolios reflects
the new rate applied to net assets as of December 31, 1997. Other 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: 0.74%, 0.04% and 0.78% for Aggressive
Growth Portfolio; 0.77%, 0.06% and 0.83% for Balanced Portfolio; 0.74%, 0.04%
and 0.78% for Growth Portfolio; 0.79%, 0.29% and 1.08% for International Growth
Portfolio; and 0.72%, 0.09% and 0.81% for Worldwide Growth Portfolio.
5/ 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.
6/ 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 0.97%
and 2.07%, 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 12/31/97: 11.39%
5 years ended 12/31/97: 12.65%
Since inception (9/21/88): 19.23%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/89 64.48% $5,266 $3,296 $250,000
12/31/90 8.71% 9,158 6,938 250,000
12/31/91 57.54% 19,509 15,359 250,000
12/31/92 3.55% 23,310 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
12/31/97 11.39% 64,316 60,166 250,000
</TABLE>
- --------------------------------------
Alger American MidCap Growth Portfolio
- --------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 15.01%
Since inception (5/3/93): 22.09%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 -1.54% $2,924 $ 954 $250,000
12/31/95 44.45% 8,964 6,744 250,000
12/31/96 11.90% 13,489 9,339 250,000
12/31/97 15.01% 19,055 14,905 250,000
</TABLE>
-12-
<PAGE>
- -------------------------------
Alger American Growth Portfolio
- -------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 25.75%
5 years ended 12/31/97: 19.28%
Since inception (9/21/88): 19.43%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/89 1.30% $3,024 $1,054 $250,000
12/31/90 1.69% 6,270 4,050 250,000
12/31/91 0.52% 9,374 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
12/31/97 25.75% 57,766 53,616 250,000
</TABLE>
- -----------------------------------------
Alger American Leveraged AllCap Portfolio
- -----------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 19.68%
Since inception (1/25/95): 33.55%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/96 12.04% $3,401 $1,431 $250,000
12/31/97 19.68% 7,910 5,690 250,000
</TABLE>
-13-
<PAGE>
- ---------------------------
VIP Fund - Growth Portfolio
- ---------------------------
Portfolio Average Annual Total Return for: 1 year ended 12/31/97: 23.48%
5 years ended 12/31/97: 18.00%
10 years ended 12/31/97: 17.19%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/88 15.58% $3,526 $1,556 250,000
12/31/89 31.51% 8,903 6,683 250,000
12/31/90 -11.73% 10,487 6,337 250,000
12/31/91 45.51% 19,901 15,751 250,000
12/31/92 9.32% 25,061 20,911 250,000
12/31/93 19.37% 33,540 29,390 250,000
12/31/94 -0.02% 36,445 32,295 250,000
12/31/95 35.36% 53,486 49,336 250,000
12/31/96 14.71% 64,855 60,705 250,000
12/31/97 23.48% 83,819 80,361 250,000
</TABLE>
- -----------------------------
VIP Fund - Overseas Portfolio
- -----------------------------
Portfolio Average Annual Total Return for: 1 year ended 12/31/97: 11.56%
5 years ended 12/31/97: 14.12%
10 years ended 12/31/97: 9.62%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/88 8.13% $3,263 $1,293 $250,000
12/31/89 26.28% 8,200 5,980 250,000
12/31/90 -1.67% 11,047 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
12/31/97 11.56% 53,219 49,761 250,000
</TABLE>
-14-
<PAGE>
- ---------------------------------
VIP Fund - Money Market Portfolio
- ---------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 5.51%
5 years ended 12/31/97: 4.85%
10 years ended 12/31/97: 5.87%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/88 7.39% $3,237 $1,267 250,000
12/31/89 9.12% 6,993 4,773 250,000
12/31/90 8.04% 10,889 6,739 250,000
12/31/91 6.09% 14,795 10,645 250,000
12/31/92 3.90% 18,517 14,367 250,000
12/31/93 3.23% 22,217 18,067 250,000
12/31/94 4.25% 26,279 22,129 250,000
12/31/95 5.87% 31,015 26,865 250,000
12/31/96 5.41% 35,992 31,842 250,000
12/31/97 5.51% 41,250 37,792 250,000
</TABLE>
- -------------------------------------
VIP II Fund - Asset Manager Portfolio
- -------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 20.65%
5 years ended 12/31/97: 12.98%
Since inception (9/6/89): 12.73%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/90 6.72% $3,214 $1,244 $250,000
12/31/91 22.56% 7,884 5,664 250,000
12/31/92 11.71% 12,265 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
12/31/97 20.65% 45,545 41,395 250,000
</TABLE>
-15-
<PAGE>
- ---------------------------------
VIP II Fund - Index 500 Portfolio
- ---------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 32.82%
5 years ended 12/31/97: 19.91%
Since inception (8/27/92): 19.87%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/93 9.74% $3,320 $1,350 $250,000
12/31/94 1.04% 6,525 4,305 250,000
12/31/95 37.19% 13,325 9,175 250,000
12/31/96 22.82% 20,183 16,033 250,000
12/31/97 32.82% 30,931 26,781 250,000
</TABLE>
- --------------------------------
VIP Fund - High Income Portfolio
- --------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 17.67%
5 years ended 12/31/97: 13.91%
10 years ended 12/31/97: 12.81%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/88 11.64% $3,387 $1,417 250,000
12/31/89 -4.17% 6,230 4,010 250,000
12/31/90 -2.23% 9,065 4,915 250,000
12/31/91 35.08% 16,525 12,375 250,000
12/31/92 23.17% 24,163 20,013 250,000
12/31/93 20.40% 32,758 28,608 250,000
12/31/94 -1.64% 35,082 30,932 250,000
12/31/95 20.72% 46,008 41,858 250,000
12/31/96 14.03% 55,984 51,834 250,000
12/31/97 17.67% 69,466 66,008 250,000
</TABLE>
-16-
<PAGE>
- ----------------------------------
VIP Fund - Equity-Income Portfolio
- ----------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 28.11%
5 years ended 12/31/97: 20.16%
10 years ended 12/31/97: 16.72%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/88 22.71% $3,778 $1,808 $250,000
12/31/89 17.34% 8,186 5,966 250,000
12/31/90 -15.29% 9,441 5,291 250,000
12/31/91 31.44% 16,557 12,407 250,000
12/31/92 16.89% 22,943 18,793 250,000
12/31/93 18.29% 30,739 26,589 250,000
12/31/94 7.07% 36,081 31,931 250,000
12/31/95 35.09% 52,889 48,739 250,000
12/31/96 14.28% 63,931 59,781 250,000
12/31/97 28.11% 85,803 82,345 250,000
</TABLE>
- ---------------------------------------------
VIP II Fund - Investment Grade Bond Portfolio
- ---------------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 9.06%
5 years ended 12/31/97: 7.11%
Since inception (12/5/88): 8.29%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/89 10.26% $3,338 $1,368 $250,000
12/31/90 6.21% 6,901 4,681 250,000
12/31/91 16.38% 11,661 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
12/31/97 9.06% 40,975 36,825 250,000
</TABLE>
-17-
<PAGE>
- ----------------------------------
VIP II Fund - Contrafund Portfolio
- ----------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 24.14%
Since inception (1/3/95): 28.16%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/96 21.22% $3,725 $1,755 $250,000
12/31/97 24.14% 8,622 6,402 250,000
</TABLE>
- -------------------------------
INVESCO VIF Utilities Portfolio
- -------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 23.41%
Since inception (1/1/95): 14.93%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/95 9.08% $3,297 $1,327 $250,000
12/31/96 12.76% 7,309 5,089 250,000
12/31/97 23.41% 12,896 8,746 250,000
</TABLE>
- ---------------------------------------
INVESCO VIF Industrial Income Portfolio
- ---------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 28.17%
Since inception (8/10/94): 23.39%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/95 29.25% $4,009 $2,039 $250,000
12/31/96 22.28% 8,832 6,612 250,000
12/31/97 28.17% 15,355 11,205 250,000
</TABLE>
-18-
<PAGE>
- ----------------------------
Janus Aspen Growth Portfolio
- ----------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 22.75%
Since inception (9/13/93): 17.71%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 2.76% $3,075 $1,105 $250,000
12/31/95 30.17% 8,223 6,003 250,000
12/31/96 18.45% 13,435 9,285 250,000
12/31/97 22.75% 20,305 16,155 250,000
</TABLE>
- ---------------------------------------
Janus Aspen Aggressive Growth Portfolio
- ---------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 12.66%
Since inception (9/13/93): 19.26%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 16.33% $3,552 $1,582 $250,000
12/31/95 27.48% 8,648 6,428 250,000
12/31/96 7.95% 12,657 8,507 250,000
12/31/97 12.66% 17,723 13,573 250,000
</TABLE>
- --------------------------------------
Janus Aspen Worldwide Growth Portfolio
- --------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 22.15%
Since inception (9/13/93): 22.96%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 1.53% $3,032 $1,062 $250,000
12/31/95 27.37% 7,981 5,761 250,000
12/31/96 29.04% 14,371 10,221 250,000
12/31/97 22.15% 21,342 17,192 250,000
</TABLE>
-19-
<PAGE>
- ------------------------------------------
Janus Aspen International Growth Portfolio
- ------------------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 18.51%
Since inception (5/2/94): 19.32%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/95 23.15% $3,793 $1,823 $250,000
12/31/96 34.71% 9,490 7,270 250,000
12/31/97 18.51% 14,935 10,785 250,000
</TABLE>
- ------------------------------
Janus Aspen Balanced Portfolio
- ------------------------------
Portfolio Average Annual Total Return for:
1 year ended 12/31/97: 22.10%
Since inception (9/13/93): 16.33%
<TABLE>
<CAPTION>
Annual Total Accumulation Cash Surrender Death
Year Ended: Return Value Value Benefit
- ----------- ------ ----- ----- -------
<S> <C> <C> <C> <C>
12/31/94 0.84% $3,008 $1,038 $250,000
12/31/95 24.79% 7,780 5,560 250,000
12/31/96 16.18% 12,655 8,505 250,000
12/31/97 22.10% 19,248 15,098 250,000
</TABLE>
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, preferred 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 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
-20-
<PAGE>
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 0.7376% 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 -1.63%,
4.32% and 10.27%, respectively for years one through ten and thereafter, -1.28%,
4.67% and 10.62%, 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.
The illustrations are based on our sex distinct rates for preferred 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.
-21-
<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 $ 2,952 $ 982 $250,000
2 46 4,500 6,040 3,820 250,000
3 47 4,500 9,023 4,873 250,000
4 48 4,500 11,969 7,819 250,000
5 49 4,500 14,879 10,729 250,000
6 50 4,500 17,752 13,602 250,000
7 51 4,500 20,589 16,439 250,000
8 52 4,500 23,431 19,281 250,000
9 53 4,500 26,375 22,225 250,000
10 54 4,500 29,283 25,825 250,000
11 55 4,500 32,463 29,697 250,000
12 56 4,500 35,518 33,443 250,000
13 57 4,500 38,431 37,048 250,000
14 58 4,500 41,203 40,511 250,000
15 59 4,500 43,828 43,828 250,000
16 60 4,500 46,296 46,296 250,000
17 61 4,500 48,591 48,591 250,000
18 62 4,500 50,698 50,698 250,000
19 63 4,500 52,598 52,598 250,000
20 64 4,500 54,268 54,268 250,000
21 65 4,500 55,766 55,766 250,000
22 66 4,500 57,044 57,044 250,000
23 67 4,500 58,084 58,084 250,000
24 68 4,500 58,860 58,860 250,000
25 69 4,500 59,349 59,349 250,000
26 70 4,500 59,522 59,522 250,000
27 71 4,500 59,352 59,352 250,000
28 72 4,500 58,807 58,807 250,000
29 73 4,500 57,850 57,850 250,000
30 74 4,500 56,428 56,428 250,000
Age 65 4,500 54,268 54,268 250,000
</TABLE>
Gross Investment Rate: 0.00%
Average Fund Level Expense: 0.7376%
Net Rate of Return Years 1 - 10: -1.63%
Net Rate of Return Years 11+: -1.28%
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.
-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 $ 3,163 $ 1,193 $250,000
2 46 4,500 6,652 4,432 250,000
3 47 4,500 10,239 6,089 250,000
4 48 4,500 13,995 9,845 250,000
5 49 4,500 17,928 13,778 250,000
6 50 4,500 22,047 17,897 250,000
7 51 4,500 26,361 22,211 250,000
8 52 4,500 30,920 26,770 250,000
9 53 4,500 35,842 31,692 250,000
10 54 4,500 40,995 37,537 250,000
11 55 4,500 46,738 43,971 250,000
12 56 4,500 52,677 50,602 250,000
13 57 4,500 58,807 57,424 250,000
14 58 4,500 65,142 64,451 250,000
15 59 4,500 71,693 71,693 250,000
16 60 4,500 78,463 78,463 250,000
17 61 4,500 85,457 85,457 250,000
18 62 4,500 92,682 92,682 250,000
19 63 4,500 100,145 100,145 250,000
20 64 4,500 107,854 107,854 250,000
21 65 4,500 115,878 115,878 250,000
22 66 4,500 124,216 124,216 250,000
23 67 4,500 132,890 132,890 250,000
24 68 4,500 141,929 141,929 250,000
25 69 4,500 151,364 151,364 250,000
26 70 4,500 161,236 161,236 250,000
27 71 4,500 171,597 171,597 250,000
28 72 4,500 182,507 182,507 250,000
29 73 4,500 194,037 194,037 250,000
30 74 4,500 206,272 206,272 250,000
Age 65 4,500 107,854 107,854 250,000
</TABLE>
Gross Investment Rate: 6.00%
Average Fund Level Expense: 0.7376%
Net Rate of Return Years 1 - 10: 4.32%
Net Rate of Return Years 11+: 4.67%
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 $ 3,374 $ 1,404 $250,000
2 46 4,500 7,290 5,070 250,000
3 47 4,500 11,557 7,407 250,000
4 48 4,500 16,279 12,129 250,000
5 49 4,500 21,507 17,357 250,000
6 50 4,500 27,293 23,143 250,000
7 51 4,500 33,698 29,548 250,000
8 52 4,500 40,832 36,682 250,000
9 53 4,500 48,884 44,734 250,000
10 54 4,500 57,797 54,339 250,000
11 55 4,500 68.056 65,290 250,000
12 56 4,500 79,357 77,282 250,000
13 57 4,500 91,807 90,424 250,000
14 58 4,500 105,544 104,852 250,000
15 59 4,500 120,722 120,722 250,000
16 60 4,500 137,511 137,511 250,000
17 61 4,500 156,107 156,107 250,000
18 62 4,500 176,734 176,734 250,000
19 63 4,500 199,658 199,658 250,000
20 64 4,500 225,081 225,081 272,347
21 65 4,500 253,149 253,149 301,288
22 66 4,500 284,101 284,101 335,311
23 67 4,500 318,228 318,228 372,437
24 68 4,500 355,854 355,854 412,946
25 69 4,500 397,332 397,332 457,142
26 70 4,500 443,056 443,056 505,359
27 71 4,500 493,558 493,558 553,166
28 72 4,500 549,372 549,372 604,815
29 73 4,500 611,107 611,107 660,645
30 74 4,500 679,455 679,455 721,038
Age 65 4,500 225,081 225,081 272,347
</TABLE>
Gross Investment Rate: 12.00%
Average Fund Level Expense: 0.7376%
Net Rate of Return Years 1 - 10: 10.27%
Net Rate of Return Years 11+: 10.62%
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 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 $ 2,904 $ 934 $250,000
2 46 4,500 5,942 3,722 250,000
3 47 4,500 8,873 4,723 250,000
4 48 4,500 11,693 7,543 250,000
5 49 4,500 14,398 10,248 250,000
6 50 4,500 16,985 12,835 250,000
7 51 4,500 19,441 15,291 250,000
8 52 4,500 21,755 17,605 250,000
9 53 4,500 23,917 19,767 250,000
10 54 4,500 25,909 22,451 250,000
11 55 4,500 27,823 25,056 250,000
12 56 4,500 29,548 27,473 250,000
13 57 4,500 31,079 29,695 250,000
14 58 4,500 32,401 31,710 250,000
15 59 4,500 33,494 33,494 250,000
16 60 4,500 34,332 34,332 250,000
17 61 4,500 34,889 34,889 250,000
18 62 4,500 35,128 35,128 250,000
19 63 4,500 35,003 35,003 250,000
20 64 4,500 34,464 34,464 250,000
21 65 4,500 33,460 33,460 250,000
22 66 4,500 31,949 31,949 250,000
23 67 4,500 29,873 29,873 250,000
24 68 4,500 27,174 27,174 250,000
25 69 4,500 23,769 23,769 250,000
26 70 4,500 19,537 19,537 250,000
27 71 4,500 14,178 14,178 250,000
28 72 4,500 7,768 7,768 250,000
29 73 LAPSE LAPSE LAPSE LAPSE
30 74 LAPSE LAPSE LAPSE LAPSE
Age 65 4,500 34,464 34,464 250,000
</TABLE>
Gross Investment Rate: 0.00%
Average Fund Level Expense: 0.7376%
Net Rate of Return Years 1 - 10: -1.63%
Net Rate of Return Years 11+: -1.28%
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.
-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 $ 3,112 $ 1,142 $250,000
2 46 4,500 6,548 4,328 250,000
3 47 4,500 10,074 5,924 250,000
4 48 4,500 13,692 9,542 250,000
5 49 4,500 17,397 13,247 250,000
6 50 4,500 21,193 17,043 250,000
7 51 4,500 25,071 20,921 250,000
8 52 4,500 29,022 24,872 250,000
9 53 4,500 33,041 28,891 250,000
10 54 4,500 37,114 33,656 250,000
11 55 4,500 41,378 38,612 250,000
12 56 4,500 45,705 43,630 250,000
13 57 4,500 50,094 48,710 250,000
14 58 4,500 54,543 53,851 250,000
15 59 4,500 59,039 59,039 250,000
16 60 4,500 63,573 63,573 250,000
17 61 4,500 68,132 68,132 250,000
18 62 4,500 72,696 72,696 250,000
19 63 4,500 77,242 77,242 250,000
20 64 4,500 81,744 81,744 250,000
21 65 4,500 86,184 86,184 250,000
22 66 4,500 90,547 90,547 250,000
23 67 4,500 94,819 94,819 250,000
24 68 4,500 98,984 98,984 250,000
25 69 4,500 103,019 103,019 250,000
26 70 4,500 106,881 106,881 250,000
27 71 4,500 110,424 110,424 250,000
28 72 4,500 113,745 113,745 250,000
29 73 4,500 116,669 116,669 250,000
30 74 4,500 119,098 119,098 250,000
Age 65 4,500 81,744 81,744 250,000
</TABLE>
Gross Investment Rate: 6.00%
Average Fund Level Expense: 0.7376%
Net Rate of Return Years 1 - 10: 4.32%
Net Rate of Return Years 11+: 4.67%
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 $ 3,322 $ 1,352 $250,000
2 46 4,500 7,181 4,961 250,000
3 47 4,500 11,378 7,228 250,000
4 48 4,500 15,947 11,797 250,000
5 49 4,500 20,921 16,771 250,000
6 50 4,500 26,342 22,192 250,000
7 51 4,500 32,247 28,097 250,000
8 52 4,500 38,678 34,528 250,000
9 53 4,500 45,687 41,537 250,000
10 54 4,500 53,325 49,867 250,000
11 55 4,500 61,858 59,092 250,000
12 56 4,500 71,214 69,139 250,000
13 57 4,500 81,496 80,112 250,000
14 58 4,500 92,817 92,125 250,000
15 59 4,500 105,304 105,304 250,000
16 60 4,500 119,105 119,105 250,000
17 61 4,500 134,395 134,395 250,000
18 62 4,500 151,380 151,380 250,000
19 63 4,500 170,300 170,300 250,000
20 64 4,500 191,452 191,452 250,000
21 65 4,500 215,175 215,175 256,140
22 66 4,500 241,384 241,384 284,949
23 67 4,500 270,187 270,187 316,275
24 68 4,500 301,837 301,837 350,336
25 69 4,500 336,614 336,614 387,368
26 70 4,500 374,819 374,819 427,620
27 71 4,500 416,910 416,910 467,364
28 72 4,500 463,404 463,404 510,275
29 73 4,500 514,797 514,797 556,633
30 74 4,500 571,720 571,720 606,811
Age 65 4,500 191,452 191,452 250,000
</TABLE>
Gross Investment Rate: 12.00%
Average Fund Level Expense: 0.7376%
Net Rate of Return Years 1 - 10: 10.27%
Net Rate of Return Years 11+: 10.62%
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>
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 $2.0 billion, and our shareholder's
equity exceeded $373 million on a generally accepted accounting principles basis
as of December 31, 1997. (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 Groep, N.V. ("ING"), one
of the world's five largest diversified financial services organizations. ING is
headquartered in Amsterdam, Netherlands and has consolidated assets exceeding
$307 billion as of December 31, 1997.
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
-28-
<PAGE>
other Policy liabilities with respect to the Variable Account is not chargeable
with liabilities arising out of any other business Southland may conduct. It
may, however, be subject to liabilities arising from Subaccounts whose assets
are attributable to other variable life insurance policies offered by the
Variable Account. If the assets exceed the required reserves and other Policy
liabilities, we may transfer the excess to our General Account. The assets in
the Variable Account will at all times, equal or exceed the sum of the
Subaccount Accumulation Values of all Policies supported by the Variable
Account.
The Variable Account was established on February 25, 1994, and may invest in
mutual funds or other investment portfolios which we determine to be suitable
for the Policy's purposes. The Variable Account meets the definition of a
separate account under federal securities laws. It is registered with the SEC
under the Investment Company Act of 1940 (the "1940 Act") as a unit investment
trust. Such registration does not involve any supervision by the SEC of the
management of the Variable Account or Southland. It is governed by the laws of
Texas, our state of domicile, and may also be governed by laws of other states
in which we do business. We have established other separate accounts, of which
Southland Separate Account A1 is registered with the SEC under the 1940 Act.
The Variable Account has twenty (20) 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 may also be sold to separate accounts to serve
as the underlying investment for both variable annuity contracts and variable
life insurance policies, a practice known as "mixed funding". As a result, there
is a possibility that a material conflict may arise between the interests of
Owners of our Policies, whose Accumulation Values are allocated to the Variable
Account, and of owners of other policies whose accumulation values are allocated
to one or more other separate accounts investing in any one of the Portfolios.
Shares of some of these Portfolios may also be sold to certain qualified pension
and retirement plans. As a result, there is a possibility that a material
conflict may arise between the interests of Owners generally or certain classes
of Owners, and such retirement plans or participants in such retirement plans.
In the event of any such material conflicts, 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
-29-
<PAGE>
and with the sale of shares to qualified pension and retirement plans, as
disclosed in each Portfolio's prospectus.
Each of the Portfolios is part of a separate series of an open-end diversified
management investment company which receives investment advice from a registered
investment adviser. 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 that,
at the time of purchase of the securities, have 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.
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VARIABLE INSURANCE PRODUCTS FUND ("VIP") AND
VARIABLE INSURANCE PRODUCTS FUND II ("VIP II")
VIP MONEY MARKET PORTFOLIO - seeks as high a level of current income as is
consistent with preserving capital and providing liquidity. The Portfolio will
invest only in high quality U.S. dollar-denominated money market securities of
domestic and foreign issuers.
VIP HIGH INCOME PORTFOLIO - seeks high income by investing primarily in high
yielding, lower-rated, fixed-income securities. Growth of capital is also
considered in security selection.
VIP EQUITY-INCOME PORTFOLIO - seeks reasonable income by investing primarily in
income-producing equity securities. In selecting investments, the Portfolio also
considers potential for capital appreciation.
VIP GROWTH PORTFOLIO - seeks capital appreciation by investing primarily in
common stocks, although the Portfolio is not limited to any one type of
security.
VIP OVERSEAS PORTFOLIO - seeks long-term growth of capital, primarily through
investments in foreign securities. 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 money market 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 whose value the manager believes is not fully
recognized by the public.
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
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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.
JANUS ASPEN SERIES
GROWTH PORTFOLIO - a diversified Portfolio that seeks long-term growth of
capital, in a manner consistent with the preservation 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, in a manner consistent with the preservation 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, consistent with the preservation of capital and 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.
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;
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(5) add new Portfolios or remove existing Portfolios;
(6) if shares of a Portfolio are no longer available for investment or if we
determine that investment in a Portfolio is no longer appropriate in light
of the purposes of the Variable Account, substitute a different Portfolio
for any existing Portfolio;
(7) deregister the Variable Account under the 1940 Act if such registration is
no longer required;
(8) operate the Variable Account as a management investment company under the
1940 Act or as any other form permitted by law; and
(9) make any changes to the Variable Account or its operations as may be
required by the 1940 Act or other applicable law or regulations.
Owners will be notified of any changes.
FACTS ABOUT THE POLICY
PREMIUMS AND ALLOCATIONS
APPLYING FOR A POLICY
If you want to purchase a Policy, you must complete an application and submit it
to one of our authorized agents. You also must pay an initial premium at least
equal to the minimum required. See "Premiums," below. Your initial premium can
be submitted with the application or at a later date, but Policy coverage will
not become effective until the Policy is delivered to you and the initial
premium in good order is received at our Customer Service Center while the
Insured is alive and prior to any change in health as shown in the application.
We require satisfactory evidence of the Insured's insurability, which may
include a medical examination of the Insured. Generally, we will issue a Policy
covering an Insured up to Age 75 if evidence of insurability satisfies our
underwriting rules. We may, in our sole discretion, issue a Policy covering an
Insured over Age 75. Acceptance of an application depends on our underwriting
rules, and we reserve the right to reject an application for any reason.
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When you complete an application, you select a premium payment plan (see
"Planned Premiums," below), designate Net Premium allocation percentages (see
"Net Premium Allocations," below), and select the initial Stated Death Benefit
(subject to a minimum of $50,000) 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 42), and telephone transfer privileges
(see "TELEPHONE PRIVILEGES," page 48).
FREE LOOK PERIOD
You may cancel your Policy during your Free Look Period. This period expires 20
days after you receive your Policy. The Policy will be deemed to be received by
you 15 days after it is mailed from the Customer Service Center. Some states may
require a longer Free Look Period. 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. If you cancel an increase, we
will refund to your Accumulation Value plus 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 1/12th of
the minimum annual premium where you propose to pay monthly premiums. If the
premiums are to be paid less often than monthly, the initial premium is equal to
the minimum annual premium divided by the frequency of the planned premiums you
propose to make (e.g., if quarterly premiums are proposed, the initial premium
is equal to 1/4th of the minimum annual premium). The initial premium for a
backdated Policy may be substantially greater. See "Planned Premiums" and
"Premiums to Prevent Lapse," below.
Premiums other than planned premiums may be paid in any amount and at any time
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.
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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.
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.
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THREE-YEAR GUARANTEE
We guarantee that a Policy will remain in force during the first three Policy
Years, regardless of the sufficiency of the Cash Surrender Value, if the total
premiums paid less any Withdrawals and Policy Debt are greater than the No-Lapse
Premium multiplied by the number of months the Policy has been in force. The No-
Lapse Premium for your Policy generally will be less than the monthly amount of
planned premiums you select to pay. The above is tested on each Monthly
Processing Date. If the Net Accumulation Value is less than or equal to zero,
the charges will be temporarily deferred until the Net Accumulation Value is
positive. Whenever the Net Accumulation Value becomes positive, a portion or all
of the charges deferred will be deducted from the Accumulation Value. This
process will continue until the end of the Three-Year Guarantee period. If there
is a balance of deferred charges at the end of this period and there is not
sufficient Accumulation Value to pay such charges, a grace period will begin.
The Three-Year Guarantee will not prevent the termination of the Policy if the
Cash Surrender Value becomes insufficient because of excessive Policy Debt. See
"POLICY LOANS," page 46.
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.
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If the Guaranteed Minimum Death Benefit provision is in effect, the Stated Death
Benefit of the Policy will not lapse during the Guarantee Period even if the
Cash Surrender Value is insufficient to cover all of the monthly deductions on
any Monthly Processing Date. Any coverage provided by riders or any amount by
which the Base Death Benefit exceeds the Stated Death Benefit are not protected
by this provision. Therefore, these portions of the Policy benefits will lapse
if the Cash Surrender Value is insufficient to cover all of the monthly
deductions on any Monthly Processing Date. See "Guaranteed Minimum Death
Benefits," page 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.
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
The initial Net Premiums received that are directed to the Guaranteed Interest
Account will be allocated to that Account upon receipt. However, your initial
Net Premiums allocated to the Subaccounts will be allocated to the VIP Money
Market Subaccount ("Money Market Subaccount") until the Free Look Period
expires. This period expires 20 days after you receive your policy. The Policy
will be deemed to be received by you 15 days after it is mailed from the
Customer Service Center. At the expiration of this period, such portion of the
Net Premium, as adjusted to reflect the investment performance of the Money
Market Subaccount during this period, is then allocated to the Subaccounts as
specified by you in the application. If your Policy has a Free Look Period of 20
or 30 days, the allocation to the Subaccounts is made at the expiration of a
period of 35 or 45 days (as applicable) from the date that the Policy is mailed
from the Customer Service Center. See "Free Look Period," page 34.
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You may allocate initial and subsequent Net Premiums among up to 18 Subaccounts
available as well as to the Guaranteed Interest Account, provided that at no
time may your Variable Accumulation Value be allocated among more than 18
Subaccounts.The sum of your allocations must equal 100%, and each allocation
percentage must be a whole number. 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, by sending a
Written Notice specifying the new allocation percentage to our Customer Service
Center. The change will apply to all premiums received with or after our receipt
of your Written Notice. If you change your Net Premium allocation percentages
more than five times during a Policy Year, we have the right to deduct a $25
charge proportionally from your Subaccount Accumulation Values and Guaranteed
Interest Account Accumulation Value as of the Valuation Day the allocation
change is effective. See "OTHER ADMINISTRATIVE CHARGES."
CREDITING PREMIUMS
The initial Net Premium will be credited to the Policy as of the Policy Date or
the date it is received at our Customer Service Center, if later. Planned
premiums and unplanned premiums not requiring additional underwriting will be
credited to the Policy and the resulting Net Premiums will be allocated on the
Valuation Day the premium is received by our Customer Service Center in
accordance with the Net Premium allocation percentages then in effect. However,
any premium requiring additional underwriting will be allocated to the Money
Market Subaccount until underwriting has been completed and the premium has been
accepted. When accepted, the Accumulation Value in the Money Market Subaccount
attributable to the resulting Net Premium will be credited to the Policy and
allocated to the Subaccounts and Guaranteed Interest Account in accordance with
the Net Premium allocation percentages then in effect. If an additional premium
is rejected, we will return the premium, without any adjustment for investment
experience.
YOUR ACCUMULATION VALUE
The Accumulation Value of your Policy is the sum of Variable Accumulation Value
and the Guaranteed Interest Account Accumulation Value and any values held in
the General Account to secure policy loans. The Variable Accumulation Value is
the sum of all the Subaccount Accumulation Values.
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SUBACCOUNT ACCUMULATION VALUE
The Subaccount Accumulation Value for any Subaccount as of the Policy Date is
equal to the amount of the initial Net Premium allocated to that Subaccount.
On subsequent Valuation Days, the amount of the Subaccount Accumulation Value is
calculated as:
1. The number of Accumulation Units in that Subaccount as of the beginning of
the current Valuation Period multiplied by that Subaccount's Accumulation
Unit value for the current Valuation Period; plus
2. Any additional Net Premiums allocated to that Subaccount during the current
Valuation Period; plus
3. Any Accumulation Value transferred to the Subaccount during the current
Valuation Period (including any amounts released from the Policy Loan
Account and allocated to that Subaccount during the current Valuation
Period); minus
4. Any Accumulation Value transferred from the Subaccount during the current
Valuation Period (including any amounts transferred to the Policy Loan
Account and the portion of any Excess Transfer Charge allocated to the
Subaccount during the current Valuation Period); minus
5. The portion of any Gross Withdrawals allocated to that Subaccount during
the current Valuation Period (including the portion of the Surrender Charge
resulting from a decrease in Stated Death Benefit allocated to the
Subaccount during the current Valuation Period); minus
6. The portion of the monthly deduction allocated to such Subaccount, if a
Monthly Processing Date occurs during the current Valuation Period.
Accumulation Unit Value. Net Premiums allocated to a Subaccount or amounts
transferred to a Subaccount are converted into Accumulation Units. For any
Subaccount, the number of Accumulation Units credited is determined by dividing
the dollar amount directed to the Subaccount by the value of the Accumulation
Unit for that Subaccount for the Valuation Period on which the Net Premium is
received or the transfer is effective. In this manner, an increase in Subaccount
Accumulation Value under a Policy occurs by the addition of Accumulation Units
of that Subaccount.
The Accumulation Unit Value for each Subaccount was arbitrarily set initially at
$10 when the Subaccount began investing in the underlying Portfolio. Thereafter,
for any Subaccount, the Accumulation Unit Value for a Valuation Period equals
the Accumulation Unit Value for the
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preceding Valuation Period multiplied by the Accumulation Experience Factor
(described below) for the Valuation Period.
Decreases in Subaccount Accumulation Value under a Policy are effected by the
cancellation of Accumulation Units of a Subaccount. Therefore, Surrenders,
Withdrawals, loans, transfers out of a Subaccount, payment of a Death Benefit,
and the monthly deduction all result in the cancellation of an appropriate
number of Accumulation Units of one or more Subaccounts. Accumulation Units
generally are canceled as of the end of the Valuation Period in which the
Company received notice of or instructions regarding the event or the deduction
is made.
The Accumulation Experience Factor. For each Subaccount, the Accumulation
Experience Factor reflects the investment experience of the Portfolio in which
that Subaccount invests and the charges assessed against that Subaccount for a
Valuation Period. The Accumulation Experience Factor is calculated by dividing
(1) by (2) and subtracting (3) from the result, where:
(1) is the result of:
a. the net asset value per share of the Portfolio held in the Subaccount,
determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gains distributions made by
the Portfolio held in the Subaccount, if the "ex-dividend" date occurs
during the current Valuation Period; plus or minus
c. a per share charge or credit for any taxes reserved for, which is
determined by the Company to have resulted from the operations of the
Subaccount.
(2) is the net asset value per share of the Portfolio held in the Subaccount,
determined at the end of the last prior Valuation Period.
(3) is a daily factor representing the mortality and expense risk charge
deducted from the Subaccount, adjusted for the number of days in the
Valuation Period.
GUARANTEED INTEREST ACCOUNT ACCUMULATION VALUE
The Guaranteed Interest Account Accumulation Value as of the Policy Date is
equal to the amount of the initial Net Premium allocated to the Guaranteed
Interest Account. On subsequent Valuation Days, the Guaranteed Interest Account
Accumulation Value is calculated as follows:
1. The Guaranteed Interest Account Accumulation Value as of the end of the
preceding Valuation Period plus any interest earned during the Valuation
Period; plus
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2. Any additional Net Premiums allocated to the Guaranteed Interest Account
plus interest credited to those premiums during the current Valuation
Period; plus
3. Any Accumulation Value transferred to the Guaranteed Interest Account
during the current Valuation Period (including any amounts released from
the Policy Loan Account and allocated to the Guaranteed Interest Account
during the current Valuation Period); minus
4. Any Accumulation Value transferred from the Guaranteed Interest Account
during the current Valuation Period (including any amounts transferred to
the Policy Loan Account and the portion of any Excess Transfer Charge
allocated to the Guaranteed Interest Account during the current Valuation
Period); minus
5. The portion of any Gross Withdrawals allocated to the Guaranteed Interest
Account during the current Valuation Period (including the portion of any
Surrender Charges resulting from a decrease in Stated Death Benefit
allocated to the Guaranteed Interest Account during the current Valuation
Period); minus
6. The portion of the monthly deduction allocated to the Guaranteed Interest
Account, if a Monthly Processing Date occurs during the current Valuation
Period.
YOUR RIGHT TO TRANSFER
After the initial Free Look Period, you may transfer your Net Accumulation Value
among the Subaccounts and, subject to the special rules described below, to and
from the Guaranteed Interest Account. The minimum amount that may be transferred
from each Subaccount or the Guaranteed Interest Account is $100 or the balance
in the Subaccount or the Guaranteed Interest Account, if less. The minimum
amount that can remain in a Subaccount or the Guaranteed Interest Account
following a transfer is $100. Percentages must be in whole numbers. Transfer
requests that do not comply with these requirements will not be effected.
Transfers due to the operation of Dollar Cost Averaging or Automatic Rebalancing
are not included in determining the limit on the number of transfers allowed
without a charge. (See "DOLLAR COST AVERAGING FACILITY," and "AUTOMATIC
REBALANCING," page 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.
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<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Free Transfers 12
- --------------------------------------------------------------------------------
Total Number of Transfers Unlimited
Permitted
- --------------------------------------------------------------------------------
Excess Transfer Charge $25 for each transfer in excess of 12 during
any Policy Year
- --------------------------------------------------------------------------------
</TABLE>
Transfers may be made based upon instructions given by Written Notice or by
telephone.
Right to Restrict Transfers. The Company reserves the right to modify, restrict,
suspend or eliminate the transfer privileges (including the telephone transfer
facility) at any time, for any class of Policies, for any reason. In particular,
the Company reserves the right to not honor transfers requested by a third party
holding a power of attorney from an Owner where that third party requests
simultaneous transfers on behalf of the Owners of two or more Policies.
Special Rules for the Guaranteed Interest Account. Once during the first 30 days
of each Policy Year, you may transfer amounts from the Guaranteed Interest
Account. Transfer requests received within 30 days prior to the Policy
Anniversary will be considered requests to transfer on the Policy Anniversary. A
request to transfer from the Guaranteed Interest Account that is received on the
Policy Anniversary or within the following 30 days will be processed if it is
the first such transfer request received during the 30 day period. REQUESTS FOR
TRANSFERS FROM THE GUARANTEED INTEREST ACCOUNT RECEIVED AT ANY OTHER TIME WILL
NOT BE PROCESSED. Transfers to the Guaranteed Interest Account are not so
limited.
The maximum transfer amount from the Guaranteed Interest Account to the
Subaccounts of the Variable Account in any Policy Year is the greatest of:
(a) 25% of the Guaranteed Interest Account Accumulation Value immediately prior
to the first transfer or Withdrawal in that Policy Year from the Guaranteed
Interest Account;
(b) $100; or
(c) the sum of the amounts that were transferred out of and withdrawn from the
Guaranteed Interest Account in the prior Policy Year.
DOLLAR COST AVERAGING FACILITY
If elected at the time of the application or at any time thereafter by Written
Notice, an Owner may systematically transfer on a monthly basis, specified
dollar amounts from the Money Market Subaccount to up to seventeen (17) 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
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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 Accumulation Value in the
Money Market Subaccount is at least $10,000 at the time of the election. The
minimum transfer amount out of the Money Market Subaccount for Dollar Cost
Averaging is $100 per month. The maximum transfer amount out of the Money Market
Subaccount for Dollar Cost Averaging is the Accumulation Value in the Money
Market 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 Money Market Subaccount Accumulation Value is depleted, the Maturity Date
occurs or until the Owner cancels the election by Written Notice received at
least seven days in advance of the next transfer date. There is no additional
charge for using Dollar Cost Averaging. The Company reserves the right to
discontinue offering the Dollar Cost Averaging facility at any time and for any
reason.
You may change the transfer amount or the Subaccounts to which transfers are to
be made once each Policy Year, subject to the above limitations. Any transfer
under this facility will not be included for the purposes of computing the
excess transfer charge.
AUTOMATIC REBALANCING
You may implement an automatic rebalancing program for your Variable
Accumulation Value. Accumulation Value allocated to the Subaccounts can be
expected to increase or decrease at different rates. An automatic rebalancing
program automatically reallocates your Accumulation Value among the Subaccounts
each quarter to return the allocation to the most recent Net Premium allocation
percentages you specify for the Subaccounts. Automatic Rebalancing is intended
to transfer Accumulation Value from those Subaccounts that have increased in
value to those that have declined, or not increased as much, in value. Over
time, this method of investing may help an Owner "buy low and sell high,"
although there can be no assurance that this objective will be achieved.
Automatic Rebalancing does not guarantee profits, nor does it assure that an
Owner will not have losses.
You may select an automatic rebalancing program when you apply for the Policy or
at a later date by completing the Automatic Rebalancing form and returning it to
our Customer Service Center. We require that you allocate no more than 35% of
your Premiums to any one 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
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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 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.
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When you request a Withdrawal, you can direct how the Gross Withdrawal will be
deducted from your Accumulation Value in the Subaccounts and the Guaranteed
Interest Account. If you provide no directions, the Gross Withdrawal will be
deducted from your Accumulation Value in the Subaccounts and the Guaranteed
Interest Account on a pro rata basis. See "THE GUARANTEED INTEREST ACCOUNT,"
page 40.
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 Stated Death Benefit, then the Withdrawal will not reduce the Stated Death
Benefit. If the first three of the above conditions are met and the amount of
the Withdrawal exceeds 5% of the Stated Death Benefit, the Stated Death Benefit
will be reduced by no more than the amount by which the Withdrawal exceeds 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
dollar for dollar by the amount the Gross Withdrawal exceeds the threshold as
described above. 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.
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
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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 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
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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 Policy
Loan Account equal to any preferred loan amount on the Policy will be credited
with interest at the rate of 4%.
A Policy loan, whether or not repaid, will have a permanent effect on the Death
Benefit and Accumulation Values because the investment results of the
Subaccounts of the Variable Account and current interest rates credited on
Accumulation Value in the Guaranteed Interest Account will apply only to the
non-loaned portion of the Accumulation Value. The longer the loan is
outstanding, the greater the effect is likely to be. Depending on the investment
results of the Subaccounts or credited interest rates for the Guaranteed
Interest Account while the Policy loan is outstanding, the effect could be
favorable or unfavorable. Policy loans may increase the potential for lapse if
investment results of the Subaccounts are less than anticipated. Also, Policy
loans could, particularly if not repaid, make it more likely than otherwise for
a Policy to terminate. See "FEDERAL TAX CONSIDERATIONS," page 69, for a
discussion of adverse tax consequences if a Policy lapses with Policy loans
outstanding.
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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 37. 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. 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
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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 20.
In both cases, the multiple of the Accumulation Value depends on the Insured's
attained Age at death. The table of multiples in effect as of the issue date is
shown below. If the table becomes inconsistent with any federal income tax laws
and/or regulations, we reserve the right to change it.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
DEATH BENEFIT MULTIPLES
- ---------------------------------------------------------------------------------------------------------------------------
Multiple of Multiple of Multiple of
Attained Accumulation Attained Accumulation Attained Accumulation
Age Value Age Value Age Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0 - 40 2.50 54 1.57 68 1.17
41 2.43 55 1.50 69 1.16
42 2.36 56 1.46 70 1.15
43 2.29 57 1.42 71 1.13
44 2.22 58 1.38 72 1.11
45 2.15 59 1.34 73 1.09
46 2.09 60 1.30 74 1.07
47 2.03 61 1.28 75 - 90 1.05
48 1.97 62 1.26 91 1.04
49 1.91 63 1.24 92 1.03
50 1.85 64 1.22 93 1.02
51 1.78 65 1.20 94 1.01
52 1.71 66 1.19 95 - 100 1.00
53 1.64 67 1.18
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 $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.
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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 49. 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 49. 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.
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 not increase the
Stated Death Benefit so that the difference between the Target Death Benefit and
the Base Death Benefit will be larger before versus after the increase. In such
event, a change in planned premiums may be advisable. See "Premiums Upon
Increase in Stated Death Benefit," page 36. 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
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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 49. 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 both these charges and potential
charges assessed upon Surrender. 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.
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
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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 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 and including any other riders. For Policies with 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 plus the Target Premiums for any riders. 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. Note that while we will not waive
fees against any riders as part of the Guaranteed Minimum Death Benefit
provisions, such provisions do require that the above mentioned Target Premiums
are paid into those riders so that the non-rider Policy funds are not
subsidizing the other riders.
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.
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).
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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 42, 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 33.)
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 40.)
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 in addition to any surrender charge that may be assessed upon Surrender,
Withdrawal or reduction in the Stated Death Benefit 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 34. 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:
<TABLE>
<CAPTION>
POLICY YEAR ADMINISTRATIVE SALES SURRENDER CHARGE ACTUAL SURRENDER
SURRENDER CHARGE CHARGE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 800 650 1450
2 800 860 1660
3 800 2520 3320
4 800 2520 3320
5 800 2520 3320
6 800 2520 3320
7 800 2520 3320
8 800 2520 3320
9 800 2520 3320
10 667 2100 2767
11 533 1680 2213
12 400 1260 1660
13 267 840 1107
14 133 420 553
15 0 0 0
</TABLE>
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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.
- -- 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
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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. We may profit from this charge.
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. ss.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.
In recent years, Congress has adopted new rules relating to life insurance owned
by businesses. Any business contemplating the purchase of a new Policy or a
change in an existing Policy should consult a tax adviser.
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,
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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.
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
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investment in the Policy (described below) and then, only after the return of
all such investment in the Policy, as distributing taxable income. An exception
to this general rule occurs in the case of a decrease in the Policy's Death
Benefit or any other change that reduces benefits under the Policy in the first
fifteen years after the Policy is issued and that results in a cash distribution
to the Owner in order for the Policy to continue complying with the section 7702
definitional limits. Such a cash distribution will be taxed in whole or in part
as ordinary income (to the extent of any gain in the Policy) under rules
prescribed in section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment Contract
are generally not treated as distributions. Instead, such loans generally are
treated as indebtedness of the Owner. However, the tax treatment of Preferred
Loans from a Policy that is not a Modified Endowment Contract is uncertain. The
Owner should consult a tax adviser with respect to Preferred Loans.
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).
POSSIBLE CHANGES IN TAX LAW. Although the likelihood of legislative change is
uncertain, there is always the possibility that the tax treatment of the
Policies could change by legislation or other means. For instance, the
President's 1999 Budget Proposal recommended legislation that, if enacted, would
adversely modify the federal taxation of the Policies. It is also possible that
any change could be retroactive (that is, effective prior to the date of the
change). A tax adviser should be consulted with respect to legislative
developments and their effect on the Policy.
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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.
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.
YEAR 2000
Like all financial services providers, Southland and its affiliates (including
the Customer Service Center) utilize data processing systems that may be
affected by Year 2000 transition issues and
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Southland relies on service providers, including banks, administrators and
investment managers that also may be affected by transition issues. Southland
and its affiliates have developed, and are in the process of implementing, a
Year 2000 transition plan, and are confirming that their service providers are
also so engaged. The resources that are being devoted to this effort are
substantial. It is difficult to predict with precision whether the amount of
resources ultimately devoted, or the outcome of these efforts, will have any
negative impact on Southland and its affiliates. However, as of the date of this
prospectus, Southland does not anticipate that Owners will experience negative
effects on their investment or on the services provided in connection therewith,
as a result of Year 2000 transition implementation. Southland and its affiliates
currently anticipate that their systems will be Year 2000 compliant on or about
December 31, 1998, but there can be no assurance that they will be successful,
or that interaction with other service providers will not impair Southland's or
its affiliates' services at that time.
VOTING PRIVILEGES
In accordance with its view of current applicable law, Southland 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 Southland 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 Owner's Subaccount Accumulation Value by the net
asset value per share of the Portfolio in which that Subaccount invests.
The number of votes available to an Owner will be determined as of the date
coincident with the date established by the Portfolio for determining
shareholders eligible to vote at the relevant meeting of the Portfolio's
shareholders. Voting instructions will be solicited by written communication
prior to such meeting in accordance with procedures established for the
Portfolio. Each Owner having a voting interest in a Subaccount will receive
proxy materials and reports relating to any meeting of shareholders of the
Portfolio in which that Subaccount invests.
Portfolio shares as to which no timely instructions are received and shares held
by Southland 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
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VARIABLE ACCOUNT," page 32) may require Contract 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 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 lawsuits, including class action lawsuits. In
some class action or other lawsuits involving insurance companies, substantial
damages have been sought and/or material settlement payments have been made.
Although the outcome of any litigation can not be predicted with certainty, we
do not believe that any current litigation 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.
SOUTHLAND'S DIRECTORS AND OFFICERS
Southland Life Insurance Company is managed by a board of directors. The
following table sets forth the name, address and principal occupations during
the past five years of each of Southland's directors.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PRINCIPAL OCCUPATION DURING THE PAST
SOUTHLAND LIFE FIVE YEARS
================================================================================
<S> <C> <C>
Fred S. Hubbell Chairman Chairman, Southland Life Insurance
Equitable of Iowa Company (since 1998); President and Chief
909 Locust Street Executive Officer, ING US & Life Annuity
Des Moines, IA 50309 Operations (since 1997); President, Chief
Executive Officer and Chairman of
Equitable of Iowa Companies (1987-1997)
- --------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PRINCIPAL OCCUPATION DURING THE PAST
SOUTHLAND LIFE FIVE YEARS
=================================================================================================
<S> <C> <C>
James D. Thompson Director and President, Southland Life Insurance
5780 Powers Ferry Road, N.W. President Company, (since 1995); Chief Operating
Atlanta, GA 30327-4390 Officer, Southland Life Insurance Company
(1995-1998); President, Life Insurance
Company of Georgia (since 1998);
Executive Vice President & Chief Financial
Officer, ING America Life Corporation and
Security Life (1993-1995); Vice President,
ITT Corporation (1992-1993); Executive
Vice President, ITT Corporation (1990-
1993).
- -------------------------------------------------------------------------------------------------
Michael W. Cunningham Director Executive Vice President, Chief Financial
5780 Powers Ferry Road, N.W. Officer & Treasurer, ING North America
Atlanta, GA 30327-4390 Insurance Corporation (since 1995);
Executive Vice President, Chief
Financial Officer (1994-1995); Senior Vice
President, Chief Financial Officer (1991-1994).
- -------------------------------------------------------------------------------------------------
Linda B. Emory Director Executive Vice President, Corporate
5780 Powers Ferry Road, N.W. Actuary & Secretary, ING North America
Atlanta, GA 30327-4390 Insurance Corporation (since 1995);
Executive Vice President, ING North
America Insurance Corporation (since
1994); Director, Life of Georgia (1991-
1994); Senior Vice President, Life of
Georgia (1990-1994).
- -------------------------------------------------------------------------------------------------
Valerie G. Brown Director Director (since 1997); President, Medical
5780 Powers Ferry Road, N.W. Risk Solutions (since 1998); Executive Vice
Atlanta, GA 30327-4390 President - Strategic Marketing &
Management Development, ING North
America Life Insurance Company (1996-
1998); Vice President - Marketing, Taco
Bell Corporation (1992-1996).
- -------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PRINCIPAL OCCUPATION DURING THE PAST
SOUTHLAND LIFE FIVE YEARS
=================================================================================================
<S> <C> <C>
B. Scott Burton Director, Director & Secretary (since 1997); Vice
5780 Powers Ferry Road, N.W. Vice President President & General Counsel (since 1996);
Atlanta, GA 30327-4390 and Secretary Associate General Counsel (1994-1996) ,
Southland Life Insurance Company; Vice
President, General Counsel & Sectary, Life
Insurance Company of Georgia (since
1998); Associate General Counsel,
Confederation Life Insurance Company
(1990-1994).
- -------------------------------------------------------------------------------------------------
W. Kenneth Hunt, III Director and Chief Operating Officer, Life Insurance
Chief Operating Company of Georgia and Southland Life
Officer Insurance Company (since 1998); Chief Financial
Officer, Southland Life Insurance Company and
Life Insurance Company of Georgia (since June 1997);
Senior Vice President, ING North America Insurance
Corporation (since 1998); President, Liberty Life
Insurance Company (1994-1996); President
Liberty Pre-Need Group (1993-1994); President,
Liberty Life Insurance Company (1991-1993).
- -------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the names, addresses and principal occupations
during the last five years of the senior officers of Southland (other than
officers who are members of Southland's board of directors).
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PRINCIPAL OCCUPATION DURING THE
SOUTHLAND LIFE PAST FIVE YEARS
=================================================================================================
<S> <C> <C>
John R. Barmeyer Senior Vice President - Senior Vice President - Legal
5780 Powers Ferry Road, N.W. Legal Services Services U.S.A.and Chief Legal
Atlanta, GA 30327-4390 Officer - ING America Insurance
Holdings (since 1997); Director,
Life of Georgia and Southland Life
Insurance Company (1992-1998);
General Counsel, ING America
Life Insurance Corporation, and
Senior Vice President, General
Counsel & Secretary, Life of
Georgia (1992-98).
- -------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PRINCIPAL OCCUPATION DURING THE
SOUTHLAND LIFE PAST FIVE YEARS
=============================================================================================================
<S> <C> <C>
James J. Carey Senior Vice President - Senior Vice President -
5780 Powers Ferry Road, N.W. Chief Marketing Marketing/Chief Marketing Officer
Atlanta, GA 30327-4390 Officer (since 1996); President, United
Securities Alliance (1994-1996);
Independent Consulting (1992-
1994).
- -------------------------------------------------------------------------------------------------------------
Pamela M. Crane Senior Vice President - Senior Vice President -
5780 Powers Ferry Road, N.W. Actuarial/Finance Actuarial/Finance (since 1995);
Atlanta, GA 30327-4390 Vice President - BIO (1994-1995);
Consultant, Tillinghast (1988-
1994).
- -------------------------------------------------------------------------------------------------------------
Michael E. Fisher Senior Vice President - Senior Vice President-Litigation -
5780 Powers Ferry Road, N.W. Litigation ING North America Insurance
Atlanta, GA 30327-4390 Company (since 1996); Partner,
Gorby & Reeves, P.C. (1992-
1996).
- -------------------------------------------------------------------------------------------------------------
Larry F. Nordin Senior Vice President - Senior Vice President-Medical
5780 Powers Ferry Road, N.W. Medical Risk Solutions Risk Solutions (since 1996); Vice
Atlanta, GA 30327-4390 President - Group Sales (1988-
1996).
- -------------------------------------------------------------------------------------------------------------
Allen W. Rightmeyer Vice President - Vice President-Underwriting and
5780 Powers Ferry Road, N.W. Underwriting and Insurance Services (since 1998);
Atlanta, GA 30327-4390 Insurance Services Vice President-Operations (1996-
1998); Senior Vice President,
Aegon USA (1988-1996).
- -------------------------------------------------------------------------------------------------------------
Samuel H. Turner Senior Vice President - Senior Vice President-Emerging
5780 Powers Ferry Road, N.W. Emerging Markets Markets (since 1997); President &
Atlanta, GA 30327-4390 Owner - Alliance Marketing
Resources (1991-1997).
- -------------------------------------------------------------------------------------------------------------
Douglas L. Donivan Vice President - Vice President-Customer Services
5780 Powers Ferry Road, N.W. Customer Services (since 1998); Senior Vice President
Atlanta, GA 30327-4390 Operations, Liberty Insurance
Services (1991-1998).
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-79-
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PRINCIPAL OCCUPATION DURING THE
SOUTHLAND LIFE PAST FIVE YEARS
====================================================================================================================
<S> <C> <C>
Charles D. Lewis, Jr. Vice President - Vice President-Management &
5780 Powers Ferry Road, N.W. Management & Organization Development (since
Atlanta, GA 30327-4390 Organization 1998); Senior Vice President,
Development Corporate Services (1997-1998);
Vice President, Human Resources
(1996-1997);Vice President,
Corporate Education &
Development-Security Life of
Denver (1993-1996).
- --------------------------------------------------------------------------------------------------------------------
David S. Pendergrass Treasurer Treasurer, Life Insurance Company
5780 Powers Ferry Road, N.W. of Georgia and Southland Life
Atlanta, GA 30327-4390 Insurance Company (since 1997);
Vice President & Treasurer, ING
North America Insurance Corporation (since 1995);
Treasury Manager, Scientific- Atlanta
International (1989-1995).
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
A fidelity bond in the amount of $6 million in Guilders covering Southland's
officers and employees has been issued by NN Reinsurance Company, N.V.
EXPERTS
The financial statements of Southland Life Insurance Company at December 31,
1997 and 1996, and for each of the three years in the period ended December 31,
1997, as well as the financial statements of Southland Separate Account L1 at
December 31, 1997, and for the period from January 31, 1997 through December 31,
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein, and are included in reliance upon such
reports 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.
-80-
<PAGE>
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 LLP of Washington, D.C. has
provided advice on certain matters relating to the federal securities laws.
FINANCIAL STATEMENTS
The audited financial statements of Southland Separate Account L1 at December
31, 1997, and for the period from January 31, 1997 through December 31, 1997,
are included beginning on the next page. Immediately following are the audited
financial statements of Southland Life Insurance Company at December 31, 1997
and 1996, and for each of the three years in the period ended December 31, 1997.
-81-
<PAGE>
Southland Separate Account L1
Financial Statements
Period ended December 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.................................... 2
Audited Financial Statements
Statement of Net Assets...................................... 3
Statement of Operations...................................... 8
Statement of Changes in Net Assets........................... 13
Notes to Financial Statements................................ 18
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
Southland Life Insurance Company
We have audited the accompanying statement of net assets of Southland Separate
Account L1 (comprising, respectively, the Alger American Fund (comprising the
American Small Capitalization, American MidCap Growth, American Growth and
American Leveraged AllCap Portfolios) ("Alger"), the Fidelity Variable Insurance
Products Fund and Variable Insurance Products Fund II (comprising the Asset
Manager, Growth, Overseas, Money Market, Index 500, Equity-Income, High Income,
Contrafund, and Investment Grade Bond Portfolios) ("VIP and VIP II"), the
INVESCO Variable Investment Funds, Inc. (comprising the Industrial Income and
Utilities Portfolios) ("INVESCO") and the Janus Aspen Series (comprising the
Growth, Aggressive Growth, Worldwide Growth, International Growth, Balanced, and
Short-Term Bond Portfolios) ("Janus") Sub-Accounts) as of December 31, 1997, and
the related statements of operations and changes in net assets for the period
from January 31, 1997 to December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of December 31, 1997, by
correspondence with the transfer agents. 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
audit provides 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 each of the respective sub-
accounts constituting the Southland Separate Account L1 at December 31, 1997,
and the results of their operations and the changes in their net assets for the
period from January 31, 1997 to December 31, 1997, in conformity with generally
accepted accounting principles.
Atlanta, Georgia
April 10, 1998
2
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS
DECEMBER 31, 1997 TOTAL
ALL TOTAL TOTAL TOTAL TOTAL
DIVISIONS ALGER VIP & VIP II INVESCO JANUS
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual Portfolios at
market value (See Note C for
cost values) $4,783,209 $598,592 $2,951,658 $144,349 $1,088,610
-------------------------------------------------------------
Total Assets 4,783,209 598,592 2,951,658 144,349 1,088,610
-------------------------------------------------------------
LIABILITIES
Due to (from) Southland Life
Insurance Company (183,806) 516 (185,302) 119 861
Due to (from) other divisions - (22) 44 - (22)
-------------------------------------------------------------
Total Liabilities (183,806) 494 (185,258) 119 839
-------------------------------------------------------------
Net Assets 4,967,015 598,098 3,136,916 144,230 1,087,771
=============================================================
POLICYHOLDER RESERVES
Reserves for Policyholders
(See Note B) 4,967,015 598,098 3,136,916 144,230 1,087,771
-------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $4,967,015 $598,098 $3,136,916 $144,230 $1,087,771
=============================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (CONTINUED) ALGER
DECEMBER 31, 1997
AMERICAN AMERICAN AMERICAN
TOTAL SMALL MIDCAP AMERICAN LEVERAGED
ALGER CAPITALIZATION GROWTH GROWTH ALLCAP
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual Portfolios at
market value (See note C for
cost values) $598,592 $ 167,494 $ 161,708 $ 172,270 $ 97,120
---------------------------------------------------------------
Total Assets 598,592 167,494 161,708 172,270 97,120
---------------------------------------------------------------
LIABILITIES
Due to (from) Southland Life
Insurance Company 516 145 133 137 101
Due to (from) other divisions (22) (22) - - -
---------------------------------------------------------------
Total Liabilities 494 123 133 137 101
---------------------------------------------------------------
Net Assets 598,098 167,371 161,575 172,133 97,019
===============================================================
POLICYHOLDER RESERVES
Reserves for Policyholders
(See Note B) 598,098 167,371 161,575 172,133 97,019
---------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $598,098 $ 167,371 $ 161,575 $ 172,133 $ 97,019
===============================================================
Number of sub-account units outstanding
(See Note G) 15,602.47 13,909.25 13,399.38 8,148.77
==================================================
Net value per sub-account unit $ 10.73 $ 11.62 $ 12.85 $ 11.91
==================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (CONTINUED) VIP & VIP II
DECEMBER 31, 1997
TOTAL ASSET MONEY EQUITY-
VIP & VIP II MANAGER GROWTH OVERSEAS MARKET INDEX 500 INCOME
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual Portfolios at
market value (See Note C for
cost values) $2,951,658 $ 81,790 $ 247,785 $ 40,370 $ 1,223,183 $ 398,429 $ 343,375
---------------------------------------------------------------------------------------
Total Assets 2,951,658 81,790 247,785 40,370 1,223,183 398,429 343,375
---------------------------------------------------------------------------------------
LIABILITIES
Due to (from) Southland Life
Insurance Company (185,302) 64 204 26 (186,652) 270 277
Due to (from) other divisions 44 - - - 88 - (22)
---------------------------------------------------------------------------------------
Total Liabilities (185,258) 64 204 26 (186,564) 270 255
---------------------------------------------------------------------------------------
Net Assets 3,136,916 81,726 247,581 40,344 1,409,747 398,159 343,120
=======================================================================================
POLICYHOLDER RESERVES
Reserves for Policyholders
(See Note B) 3,136,916 81,726 247,581 40,344 1,409,747 398,159 343,120
---------------------------------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $3,136,916 $ 81,726 $ 247,581 $ 40,344 $ 1,409,747 $ 398,159 $ 343,120
=======================================================================================
Number of sub-account units outstanding
(See Note G) 6,482.68 19,868.31 3,494.45 115,644.20 28,102.34 25,474.83
Net value per sub-account unit $ 12.61 $ 12.46 $ 11.55 $ 12.19 $ 14.17 $ 13.47
=======================================================================
<CAPTION>
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1997
HIGH INVESTMENT
INCOME CONTRAFUND GRADE BOND
------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in mutual Portfolios at
market value (See Note C for
cost values) $ 139,193 $ 423,272 $54,261
------------------------------------
Total Assets 139,193 423,272 54,261
------------------------------------
LIABILITIES
Due to (from) Southland Life
Insurance Company 116 351 42
Due to (from) other divisions - (22) -
------------------------------------
Total Liabilities 116 329 42
------------------------------------
Net Assets 139,077 422,943 54,219
====================================
POLICYHOLDER RESERVES
Reserves for Policyholders
(See Note B) 139,077 422,943 54,219
------------------------------------
TOTAL POLICYHOLDER RESERVES $ 139,077 $ 422,943 $54,219
====================================
Number of sub-account units outstanding
(See Note G) 11,714.00 31,768.10 4,900.06
Net value per sub-account unit $ 11.87 $ 13.31 $11.06
====================================
</TABLE>
See accompanying notes.
5
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (CONTINUED) INVESCO
DECEMBER 31, 1997
TOTAL INDUSTRIAL
INVESCO INCOME UTILITIES
---------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in mutual Portfolios at
market value (See Note C for
cost values) $144,349 $ 141,117 $ 3,232
---------------------------------------------------------------
Total Assets 144,349 141,117 3,232
---------------------------------------------------------------
LIABILITIES
Due to (from) Southland Life
Insurance Company 119 116 3
Due to (from) other divisions - - -
---------------------------------------------------------------
Total Liabilities 119 116 3
---------------------------------------------------------------
Net Assets 144,230 141,001 3,229
===============================================================
POLICYHOLDER RESERVES
Reserves for Policyholders
(See Note B) 144,230 141,001 3,229
---------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $144,230 $ 141,001 $ 3,229
===============================================================
Number of sub-account units outstanding
(See Note G) 11,223.70 250.46
=====================================
Net value per sub-account unit $ 12.56 $ 12.89
=====================================
</TABLE>
See accompanying notes.
6
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1997 JANUS
TOTAL AGGRESSIVE WORLDWIDE INTERNATIONAL SHORT-TERM
JANUS GROWTH GROWTH GROWTH GROWTH BALANCED BOND
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual Portfolios at
market value (See Note C for
cost values) $1,088,610 $ 249,138 $ 95,804 $ 482,941 $ 155,061 $ 94,523 $ 11,143
----------------------------------------------------------------------------------------
Total Assets 1,088,610 249,138 95,804 482,941 155,061 94,523 11,143
----------------------------------------------------------------------------------------
LIABILITIES
Due to (from) Southland Life
Insurance Company 861 198 75 396 123 63 6
Due to (from) other divisions (22) - - - - (22) -
----------------------------------------------------------------------------------------
Total Liabilities 839 198 75 396 123 41 6
----------------------------------------------------------------------------------------
Net Assets 1,087,771 248,940 95,729 482,545 154,938 94,482 11,137
========================================================================================
POLICYHOLDER RESERVES
Reserves for Policyholders
(See Note B) 1,087,771 248,940 95,729 482,545 154,938 94,482 11,137
----------------------------------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $1,087,771 $ 248,940 $ 95,729 $ 482,545 $ 154,938 $ 94,482 $ 11,137
========================================================================================
Number of sub-account units outstanding
(See Note G) 20,034.70 8,875.28 38,107.83 12,384.22 7,592.84 1,034.55
Net value per sub-account unit $ 12.43 $ 10.79 $ 12.66 $ 12.51 $ 12.44 $ 10.77
=========================================================================
</TABLE>
See accompanying notes.
7
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 31, 1997
TO DECEMBER 31, 1997 TOTAL
ALL TOTAL TOTAL TOTAL TOTAL
DIVISIONS ALGER VIP & VIP II INVESCO JANUS
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual Portfolios $ 47,219 $ 829 $29,532 $ 9,839 $ 7,019
Less: Valuation period deductions
(See Note B) 13,332 2,047 8,582 305 2,398
------------------------------------------------------
Net Investment Income (Loss) 33,887 (1,218) 20,950 9,534 4,621
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 18,964 4,877 6,680 604 6,803
Net unrealized gains (losses) on
investments 118,688 26,112 69,730 (1,884) 24,730
------------------------------------------------------
Net Realized and Unrealized Gains
(Losses) on Investments 137,652 30,989 76,410 (1,280) 31,533
------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $171,539 $29,771 $97,360 $ 8,254 $36,154
======================================================
</TABLE>
See accompanying notes.
8
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (CONTINUED) ALGER
FOR THE PERIOD FROM JANUARY 31, 1997 TO
DECEMBER 31, 1997
AMERICAN AMERICAN AMERICAN
TOTAL SMALL MIDCAP AMERICAN LEVERAGED
ALGER CAPITALIZATION GROWTH GROWTH ALLCAP
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual Portfolios $ 829 $ 319 $ 18 $ 492 $
Less: Valuation period deductions
(See Note B) 2,047 550 511 543 443
------------------------------------------------------------
Net Investment Income (Loss) (1,218) (231) (493) (51) (443)
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 4,877 988 1,017 1,571 1,301
Net unrealized gains (losses) on
investments 26,112 7,706 1,036 9,623 7,747
------------------------------------------------------------
Net Realized and Unrealized Gains
(Losses) on Investments 30,989 8,694 2,053 11,194 9,048
------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $29,771 $8,463 $1,560 $11,143 $8,605
============================================================
</TABLE>
See accompanying notes.
9
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (CONTINUED) VIP & VIP II
FOR THE PERIOD FROM JANUARY 31, 1997 TO
DECEMBER 31, 1997
TOTAL ASSET MONEY EQUITY- HIGH
VIP & VIP II MANAGER GROWTH OVERSEAS MARKET INDEX 500 INCOME INCOME
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual Portfolios $29,532 $ - $ - $ - $29,532 $ - $ - $ -
Less: Valuation period deductions
(See Note B) 8,582 142 322 65 4,934 710 431 398
------------------------------------------------------------------------------------------
Net Investment Income (Loss) 20,950 (142) (322) (65) 24,598 (710) (431) (398)
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) on
investments 6,680 238 199 (3) - 2,043 660 817
Net unrealized gains (losses) on
investments 69,730 2,096 2,921 (618) - 17,360 9,223 7,284
------------------------------------------------------------------------------------------
Net Realized and Unrealized Gains
(Losses) on Investments 76,410 2,334 3,120 (621) - 19,403 9,883 8,101
------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS
$97,360 $2,192 $2,798 $(686) $24,598 $18,693 $9,452 $7,703
==========================================================================================
<CAPTION>
INVESTMENT
CONTRAFUND GRADE BOND
-----------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends from mutual Portfolios $ - $ -
Less: Valuation period deductions
(See Note B) 1,381 199
---------------------
Net Investment Income (Loss) (1,381) (199)
REALIZED AND UNREALIZED GAINS (LOSSES
ON INVESTMENTS
Net realized gains (losses) on
investments 2,545 181
Net unrealized gains (losses) on
investments 28,977 2,487
---------------------
Net Realized and Unrealized Gains
(Losses) on Investments 31,522 2,668
---------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS
$ 30,141 $2,469
=====================
</TABLE>
See accompanying notes.
10
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (CONTINUED)
FOR THE PERIOD FROM JANUARY 31, INVESCO
1997 TO DECEMBER 31, 1997
TOTAL INDUSTRIAL
INVESCO INCOME UTILITIES
----------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual Portfolios $ 9,839 $ 9,766 $ 73
Less: Valuation period deductions
(See Note B) 305 300 5
----------------------------------------------------------
Net Investment Income (Loss) 9,534 9,466 68
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 604 592 12
Net unrealized gains (losses) on
investments (1,884) (2,062) 178
----------------------------------------------------------
Net Realized and Unrealized Gains
(Losses) on Investments (1,280) (1,470) 190
----------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 8,254 $ 7,996 $258
==========================================================
</TABLE>
See accompanying notes.
11
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (CONTINUED)
FOR THE PERIOD FROM JANUARY 31, JANUS
1997 TO DECEMBER 31, 1997
TOTAL AGGRESSIVE WORLDWIDE INTERNATIONAL SHORT-TERM
JANUS GROWTH GROWTH GROWTH GROWTH BALANCED BOND
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual portfolios $ 7,019 $ 2,261 $ - $ 2,031 $ 226 $ 825 $ 1,676
Less: Valuation period deductions
(See Note B) 2,398 661 240 995 297 184 21
-------------------------------------------------------------------------------------------
Net Investment Income (Loss) 4,621 1,600 (240) 1,036 (71) 641 1,655
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 6,803 2,977 1,170 1,592 983 75 6
Net unrealized gains (losses) on
investments 24,730 6,871 6,573 11,707 (1,597) 2,688 (1,512)
-------------------------------------------------------------------------------------------
Net Realized and Unrealized Gains
(Losses) on Investments 31,533 9,848 7,743 13,299 (614) 2,763 (1,506)
-------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $36,154 $11,448 $7,503 $14,335 $ (685) $3,404 $ 149
===========================================================================================
</TABLE>
See accompanying notes.
12
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM JANUARY 31, TOTAL
1997 TO DECEMBER 31, 1997 ALL TOTAL TOTAL TOTAL TOTAL
DIVISIONS ALGER VIP & VIP II INVESCO JANUS
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 33,887 $ (1,218) $ 20,950 $ 9,534 $ 4,621
Net realized gains (losses) on
investments 18,964 4,877 6,680 604 6,803
Net unrealized gains (losses) on
investments 118,688 26,112 69,730 (1,884) 24,730
-----------------------------------------------------------------------
Increase (Decrease) in Net Assets
from Operations 171,539 29,771 97,360 8,254 36,154
-----------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 5,248,437 102,293 4,858,995 34,087 253,062
Cost of insurance and administrative
expenses (437,265) (55,276) (304,785) (8,313) (68,891)
Surrenders (1,357) (346) (677) (8) (326)
Net transfers among divisions
(including the guaranteed interest
account in the general account) (14,339) 521,656 (1,513,977) 110,210 867,772
-----------------------------------------------------------------------
Increase from Principal Transactions 4,795,476 568,327 3,039,556 135,976 1,051,617
-----------------------------------------------------------------------
Total Increase in Net Assets 4,967,015 598,098 3,136,916 144,230 1,087,771
Net Assets at Beginning of Year - - - - -
-----------------------------------------------------------------------
Net Assets at End of Year $4,967,015 $598,098 $ 3,136,916 $144,230 $1,087,771
=======================================================================
</TABLE>
See accompanying notes.
13
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED) ALGER
FOR THE PERIOD FROM JANUARY 31,
1997 TO DECEMBER 31, 1997 AMERICAN AMERICAN AMERICAN
TOTAL SMALL MIDCAP AMERICAN LEVERAGED
ALGER CAPITALIZATION GROWTH GROWTH ALLCAP
-------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
<S> <C> <C> <C> <C> <C>
Net investment income (loss) $ (1,218) $ (231) $ (493) $ (51) $ (443)
Net realized gains (losses) on
investments 4,877 988 1,017 1,571 1,301
Net unrealized gains (losses) on
investments 26,112 7,706 1,036 9,623 7,747
-------------------------------------------------------------
Increase (Decrease) in Net Assets
from Operations 29,771 8,463 1,560 11,143 8,605
-------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 102,293 19,354 41,846 21,286 19,807
Cost of insurance and administrative
expenses (55,276) (14,992) (12,080) (17,070) (11,134)
Surrenders (346) (127) (23) (180) (16)
Net transfers among divisions
(including the guaranteed interest
account in the general account) 521,656 154,673 130,272 156,954 79,757
Increase from Principal Transactions 568,327 158,908 160,015 160,990 88,414
-------------------------------------------------------------
Total Increase in Net Assets 598,098 167,371 161,575 172,133 97,019
Net Assets at Beginning of Year - - - - -
-------------------------------------------------------------
Net Assets at End of Year $598,098 $167,371 $161,575 $172,133 $ 97,019
=============================================================
</TABLE>
See accompanying notes.
14
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIOD FROM JANUARY 31, VIP & VIP II
1997 TO DECEMBER 31, 1997
TOTAL ASSET MONEY EQUITY-
VIP & VIP II MANAGER GROWTH OVERSEAS MARKET INDEX 500 INCOME
--------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 20,950 $ (142) $ (322) $ (65) $ 24,598 $ (710) $ (431)
Net realized gains (losses) on
investments 6,680 238 199 (3) - 2,043 660
Net unrealized gains (losses) on
investments 69,730 2,096 2,921 (618) - 17,360 9,223
--------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
from Operations 97,360 2,192 2,798 (686) 24,598 18,693 9,452
--------------------------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 4,858,995 28,701 13,829 8,799 4,552,361 80,172 26,271
Cost of insurance and administrative
expenses (304,785) (3,199) (8,783) (2,955) (215,522) (16,744) (7,481)
Surrenders (677) (16) (16) - - (58) (8)
Net transfers among divisions
(including the guaranteed interest
account in the general account) (1,513,977) 54,048 239,753 35,186 (2,951,690) 316,096 314,886
--------------------------------------------------------------------------------------
Increase from Principal Transactions 3,039,556 79,534 244,783 41,030 1,385,149 379,466 333,668
--------------------------------------------------------------------------------------
Total Increase in Net Assets 3,136,916 81,726 247,581 40,344 1,409,747 398,159 343,120
Net Assets at Beginning of Year - - - - - - -
--------------------------------------------------------------------------------------
Net Assets at End of Year $ 3,136,916 $81,726 $247,581 $40,344 $ 1,409,747 $398,159 $343,120
======================================================================================
<CAPTION>
HIGH INVESTMENT
INCOME CONTRAFUND GRADE BOND
--------------------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ (398) $ (1,381) $ (199)
Net realized gains (losses) on
investments 817 2,545 181
Net unrealized gains (losses) on
investments 7,284 28,977 2,487
--------------------------------------
Increase (Decrease) in Net Assets
from Operations 7,703 30,141 2,469
--------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 49,548 80,795 18,519
Cost of insurance and administrative
expenses (9,095) (35,811) (5,195)
Surrenders - (579) -
Net transfers among divisions
(including the guaranteed interest
account in the general account) 90,921 348,397
--------------------------------------
Increase from Principal Transactions 131,374 392,802 51,750
--------------------------------------
Total Increase in Net Assets 139,077 422,943 54,219
Net Assets at Beginning of Year - - -
--------------------------------------
Net Assets at End of Year $139,077 $422,943 $54,219
======================================
</TABLE>
See accompanying notes.
15
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED) INVESCO
FOR THE PERIOD FROM JANUARY 31,
1997 TO DECEMBER 31, 1997 TOTAL INDUSTRIAL
INVESCO INCOME UTILITIES
------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
<S> <C> <C> <C>
Net investment income (loss) $ 9,534 $ 9,466 $ 68
Net realized gains (losses) on
investments 604 592 12
Net unrealized gains (losses) on
investments (1,884) (2,062) 178
------------------------------------------------
Increase (Decrease) in Net Assets
from Operations 8,254 7,996 258
------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 34,087 32,647 1,440
Cost of insurance and administrative
expenses (8,313) (7,681) (632)
Surrenders (8) - (8)
Net transfers among divisions
(including the guaranteed interest
account in the general account) 110,210 108,039 2,171
Increase from Principal Transactions 135,976 133,005 2,971
------------------------------------------------
Total Increase in Net Assets 144,230 141,001 3,229
Net Assets at Beginning of Year - - -
------------------------------------------------
Net Assets at End of Year $144,230 $141,001 $3,229
================================================
</TABLE>
See accompanying notes.
16
<PAGE>
Southland Separate Account L1
<TABLE>
<CAPTION>
STATEMENT OF CHANGES NET ASSETS (CONTINUED)
FOR THE PERIOD FROM JANUARY 31, JANUS
DECEMBER 31, 1997
TOTAL AGGRESSIVE WORLDWIDE INTERNATIONAL SHORT-TERM
JANUS GROWTH GROWTH GROWTH GROWTH BALANCED BOND
----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 4,621 $ 1,600 $ (240) $ 1,036 $ (71) $ 641 $ 1,655
Net realized gains (losses) on
investments 6,803 2,977 1,170 1,592 983 75 6
Net unrealized gains (losses) on
investments 24,730 6,871 6,573 11,707 (1,597) 2,688 (1,512)
----------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
from Operations 36,154 11,448 7,503 14,335 (685) 3,404 149
----------------------------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 253,062 70,041 28,978 98,303 36,942 18,703 95
Cost of insurance and administrative
expenses (68,891) (21,920) (10,113) (25,436) (7,255) (3,564) (603)
Surrenders (326) (246) (16) (64) - - -
Net transfers among divisions
(including the guaranteed interest
account in the general account) 867,772 189,617 69,377 395,407 125,936 75,939 11,496
----------------------------------------------------------------------------------------
Increase from Principal Transactions 1,051,617 237,492 88,226 468,210 155,623 91,078 10,988
----------------------------------------------------------------------------------------
Total Increase in Net Assets 1,087,771 248,940 95,729 482,545 154,938 94,482 11,137
Net Assets at Beginning of Year - - - - - - -
----------------------------------------------------------------------------------------
Net Assets at End of Year $1,087,771 $248,940 $ 95,729 $482,545 $154,938 $94,482 $11,137
========================================================================================
</TABLE>
See accompanying notes.
17
<PAGE>
Southland Separate Account L1
Notes to Financial Statements
December 31, 1997
NOTE A. ORGANIZATION
The Southland Separate Account L1 (the Separate Account) was established by
resolution of the Board of Directors of Southland Life Insurance Company (the
Company) on February 25, 1994. The Separate Account was inactive prior to
January 31, 1997, except for matters relating to its organization as a unit
investment trust registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended.
The Separate Account supports the operations of the Future Dimensions Variable
Universal Life (Future Dimensions) contracts offered by the Company. The
Separate Account may be used to support other variable life contracts as they
are offered by the Company. The assets of the Separate Account are the property
of the Company. However, the portion of the Separate Account's assets
attributable to the contracts will not be chargeable with liabilities arising
out of any other operations of the Company.
The assets of the Separate Account are invested either in the Alger American
Fund, in the Fidelity Variable Insurance Products and Variable Insurance
Products II Funds, in the INVESCO Variable Investment Funds, Inc., or in the
Janus Aspen Series, all of which are open-end, diversified management investment
companies.
The Future Dimensions contracts allow the policyholders to specify the
allocation of their purchase payments to the various Portfolios. They can also
transfer their account values among the Portfolios. The Future Dimensions
product also provides the policyholders the option to allocate their purchase
payments, or to transfer their account values, to a Guaranteed Interest Account
(GIA). The GIA guarantees a rate of interest to the policyholder, and it is not
variable in nature. Therefore, it is not included in the Separate Account
financial statements.
Effective May 1, 1998 the sub-account of the Separate Account investing in Janus
Aspen Series Short-Term Bond Portfolio will no longer be accepting new
investments.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of the Separate Account have been prepared
on the basis of generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and to disclose contingent assets and liabilities at the date of
financial statements along with the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
18
<PAGE>
Southland Separate Account L1
Notes to Financial Statements
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The accounting principles followed by the Separate Account and the methods of
applying those principles are presented below or in the footnotes which follow:
SECURITY VALUATION - The investment in shares of the Portfolios are valued at
the closing net asset value (market value) per share as determined by the
Portfolios on the day of measurement.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - The investments in shares
of the Portfolios are accounted for on the date the order to buy or sell is
executed (trade date). Dividend income and distributions of capital gains are
recorded on the ex-dividend date. Realized gains and losses from security
transactions are reported using the first-in-first-out (FIFO) method of
accounting for cost. The difference between cost and current market value of
investments owned on the day of measurement is recorded as unrealized gain or
loss on investments.
VALUATION PERIOD DEDUCTIONS - Charges are made directly against the assets of
the Separate Account sub-accounts and are reflected daily in the computation of
the unit values of the sub-accounts.
For Future Dimensions contracts, a daily deduction, at an annual rate of .90% of
the daily asset value of the Separate Account sub-accounts is charged to the
Separate Account for mortality and expense risks assumed by the Company. Total
mortality and expense charges for the period from January 31, 1997 to December
31, 1997 were $13,332.
POLICYHOLDER RESERVES - Policyholder reserves are recorded in the financial
statements at the aggregate account values of the policyholders invested in the
Separate Account sub-accounts. To the extent that benefits to be paid to the
policyholders exceed their account values, the Company will contribute
additional funds to the benefit proceeds.
19
<PAGE>
Southland Separate Account L1
Notes to Financial Statements
NOTE C. INVESTMENTS
Portfolio shares are purchased at net asset value with net premiums (premium
payments, less sales and tax loads charged by the Company) and sub-account
transfers. Portfolio shares are redeemed at net asset value for the payment of
benefits, for surrenders, for transfers to other sub-accounts, and for charges
by the Company for certain cost of insurance and administrative charges. The
cost of insurance and administrative charges were $437,265 for the year ended
December 31, 1997. Distributions made by the Portfolios are reinvested in the
Portfolios.
The following is a summary of Portfolio shares owned as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER NET ASSET VALUE
OF VALUE OF SHARES COST OF
PORTFOLIO SHARES AT MARKET AT MARKET SHARES
-------------------------------------------------
<S> <C> <C> <C> <C>
The Alger American Fund:
American Small Capitalization 3,828.43 $ 43.75 $ 167,494 $ 159,788
American MidCap Growth 6,687.68 24.18 161,708 160,671
American Growth 4,028.77 42.76 172,270 162,645
American Leveraged AllCap 4,191.63 23.17 97,120 89,374
Fidelity Variable Insurance Products (VIP &
VIP II) Funds:
VIP Growth 6,678.84 37.10 247,785 244,864
VIP Overseas 2,102.60 19.20 40,370 40,989
VIP Money Market 1,223,183.00 1.00 1,223,183 1,223,183
VIP Equity-Income 14,142.30 24.28 343,375 334,152
VIP High Income 10,249.85 13.58 139,193 131,909
VIP II Asset Manager 4,541.37 18.01 81,790 79,694
VIP II Index 500 3,483.08 114.39 398,429 381,069
VIP II Contrafund 21,227.28 19.94 423,272 394,295
VIP II Investment Grade Bond 4,320.14 12.56 54,261 51,774
INVESCO Variable Investment Funds, Inc.:
Industrial Income 8,281.51 17.04 141,117 143,178
Utilities 224.44 14.40 3,232 3,054
Janus Aspen Series:
Growth 13,481.49 18.48 249,138 242,267
Aggressive Growth 4,662.00 20.55 95,804 89,231
Worldwide Growth 20,647.33 23.39 482,941 471,234
International Growth 8,390.75 18.48 155,061 156,658
Balanced 5,410.59 17.47 94,523 91,837
Short-Term Bond 1,256.26 8.87 11,143 12,655
------------------------
Total $4,783,209 $4,664,521
========================
</TABLE>
20
<PAGE>
Southland Separate Account L1
Notes to Financial Statements
NOTE C. INVESTMENTS (CONTINUED)
For the period from January 31, 1997 to December 31, 1997, the cost of purchases
(plus reinvested dividends) and the proceeds from sales of investments are as
follows:
<TABLE>
<CAPTION>
BEGINNING END
PORTFOLIO OF PERIOD PURCHASES SALES OF PERIOD
--------------------------------------------------
<S> <C> <C> <C> <C>
The Alger American Fund:
American Small Capitalization $ - $ 174,655 $ (14,867) $ 159,788
American MidCap Growth - 172,636 (11,965) 160,671
American Growth - 179,373 (16,728) 162,645
American Leveraged AllCap - 100,744 (11,370) 89,374
Fidelity Variable Insurance Products (VIP &
VIP II) Funds:
VIP Growth - 251,728 (6,864) 244,864
VIP Overseas - 44,050 (3,061) 40,989
VIP Money Market - 4,394,146 (3,170,963) 1,223,183
VIP Equity-Income - 358,860 (24,708) 334,152
VIP High Income - 140,001 (8,092) 131,909
VIP II Asset Manager - 83,231 (3,537) 79,694
VIP II Index 500 - 397,441 (16,372) 381,069
VIP II Contrafund - 437,680 (43,385) 394,295
VIP II Investment Grade Bond - 56,940 (5,166) 51,774
INVESCO Variable Investment Funds, Inc.:
Industrial Income - 150,626 (7,448) 143,178
Utilities - 3,685 (631) 3,054
Janus Aspen Series:
Growth - 262,929 (20,662) 242,267
Aggressive Growth - 99,839 (10,608) 89,231
Worldwide Growth - 496,797 (25,563) 471,234
International Growth - 172,564 (15,907) 156,658
Balanced - 95,474 (3,638) 91,837
Short-Term Bond - 13,257 (603) 12,655
--------------------------------------------------
Total $ - $8,086,656 $(3,422,129) $4,664,521
==================================================
</TABLE>
21
<PAGE>
Southland Separate Account L1
Notes to Financial Statements
NOTE D. OTHER POLICY DEDUCTIONS
The Future Dimensions contracts provide for certain deductions for sales and tax
loads from premium payments received from the policyholders and for surrender
charges and taxes from amounts paid to policyholders. Such deductions are taken
after the redemption of sub-account units in the Separate Account and are not
included in the Separate Account financial statements.
NOTE E. POLICY LOANS
The Future Dimensions policies allow the policyholders to borrow against their
policies by using them as collateral for a loan. At the time they borrow
against their policies, an amount equal to the loan amount is transferred from
the Separate Account sub-accounts to a Loan Division to secure the loan. As
payments are made on the policy loan, amounts are transferred back from the Loan
Division to the Separate Account sub-accounts. Interest is credited to the
balance in the Loan Division at a fixed rate. The Loan Division is not variable
in nature and is not included in these Separate Account statements.
NOTE F. FEDERAL INCOME TAXES
The Separate Account is not taxed separately because the operations of the
Separate Account are part of the total operations of the Company. The Company
is taxed as a life insurance company under the Internal Revenue Code.
22
<PAGE>
Southland Separate Account L1
Notes to Financial Statements
NOTE G. SUMMARY OF CHANGES IN UNITS
The following schedule summarizes the change in sub-account units for the
period from January 31, 1997 to December 31, 1997:
<TABLE>
<CAPTION>
(DECREASE)
INCREASE FOR
OUTSTANDING INCREASE (DECREASE) SURRENDERS OUTSTANDING
AT BEGINNING FOR PAYMENTS FOR DIVISIONAL AND AT END
SUB-ACCOUNT OF PERIOD RECEIVED TRANSFERS WITHDRAWALS OF PERIOD
------------------------------------------------------------------------
The Alger American Fund:
<S> <C> <C> <C> <C> <C>
American Small Capitalization - 1,812.32 13,801.96 (11.81) 15,602.47
American MidCap Growth - 3,498.77 10,412.47 (1.99) 13,909.25
American Growth - 1,647.95 11,765.41 (13.98) 13,399.38
American Leveraged AllCap - 1,682.77 6,467.29 (1.29) 8,148.77
Fidelity Variable Insurance Products (VIP &
VIP II) Funds:
VIP Growth - 1,125.24 18,744.30 (1.23) 19,868.31
VIP Overseas - 745.30 2,749.15 - 3,494.45
VIP Money Market - 418,912.02 (303,267.82) - 115,644.20
VIP Equity-Income - 2,031.22 23,444.27 (.66) 25,474.83
VIP High Income - 4,220.46 7,493.54 - 11,714.00
VIP II Asset Manager - 2,328.85 4,155.11 (1.28) 6,482.68
VIP II Index 500 - 5,885.76 22,220.82 (4.24) 28,102.34
VIP II Contrafund - 6,214.88 25,597.20 (43.98) 31,768.10
VIP II Investment Grade Bond - 1,719.86 3,180.20 - 4,900.06
INVESCO Variable Investment Funds, Inc.:
Industrial Income - 2,685.23 8,538.48 (.01) 11,223.70
Utilities - 122.70 128.47 (.71) 250.46
Janus Aspen Series:
Growth - 5,687.32 14,367.26 (19.88) 20,034.70
Aggressive Growth - 2,816.21 6,060.59 (1.52) 8,875.28
Worldwide Growth - 7,906.09 30,206.95 (5.21) 38,107.83
International Growth - 2,929.68 9,454.54 - 12,384.22
Balanced - 1,542.54 6,050.30 - 7,592.84
Short-Term Bond - 8.93 1,025.62 - 1,034.55
</TABLE>
23
<PAGE>
Southland Separate Account L1
Notes to Financial Statements
NOTE H. NET ASSETS
Net assets at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
ACCUMULATED NET
NET REALIZED UNREALIZED
ACCUMULATED GAINS GAINS
PRINCIPAL INVESTMENT (LOSSES) ON (LOSSES) ON
SUB-ACCOUNT TRANSACTIONS INCOME INVESTMENTS INVESTMENTS NET ASSETS
---------------------------------------------------------------------
The Alger American Fund:
<S> <C> <C> <C> <C> <C>
American Small Capitalization $ 158,908 $ (231) $ 988 $ 7,706 $ 167,371
American MidCap Growth 160,015 (493) 1,017 1,036 161,575
American Growth 160,990 (51) 1,571 9,623 172,133
American Leveraged AllCap 88,414 (443) 1,301 7,747 97,019
Fidelity Variable Insurance Products
(VIP & VIP II) Funds:
VIP Growth 244,783 (322) 199 2,921 247,581
VIP Overseas 41,030 (65) (3) (618) 40,344
VIP Money Market 1,385,149 24,598 - - 1,409,747
VIP Equity-Income 333,668 (431) 660 9,223 343,120
VIP High Income 131,374 (398) 817 7,284 139,077
VIP II Asset Manager 79,534 (142) 238 2,096 81,726
VIP II Index 500 379,466 (710) 2,043 17,360 398,159
VIP II Contrafund 392,802 (1,381) 2,545 28,977 422,943
VIP II Investment Grade Bond 51,750 (199) 181 2,487 54,219
INVESCO Variable Investment Funds, Inc.:
Industrial Income 133,005 9,466 592 (2,062) 141,001
Utilities 2,971 68 12 178 3,229
Janus Aspen Series:
Growth 237,492 1,600 2,977 6,871 248,940
Aggressive Growth 88,226 (240) 1,170 6,573 95,729
Worldwide Growth 468,210 1,036 1,592 11,707 482,545
International Growth 155,623 (71) 983 (1,597) 154,938
Balanced 91,078 641 75 2,688 94,482
Short-Term Bond 10,988 1,655 6 (1,512) 11,137
---------------------------------------------------------------------
Total $4,795,476 $33,887 $18,964 $118,688 $4,967,015
=====================================================================
</TABLE>
24
<PAGE>
Financial Statements
Southland Life Insurance Company
Years ended December 31, 1997, 1996 and 1995
with Report of Independent Auditors
<PAGE>
Southland Life Insurance Company
Financial Statements
Years ended December 31, 1997, 1996 and 1995
CONTENTS
<TABLE>
<S> <C>
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
</TABLE>
<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, 1997 and 1996, and the related statements of income,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Atlanta, Georgia
April 6, 1998
1
<PAGE>
Southland Life Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Investments (Notes 1, 2, 3 and 4):
Fixed maturities:
Available-for-sale, at fair value (amortized cost:
1997 - $981,672; 1996 - $815,916) $1,031,283 $ 856,166
Equity securities, at fair value (cost: 1997 -
$3,072; 1996 - $625) 3,200 816
Mortgage loans on real estate 334,447 351,958
Policy loans 86,156 82,140
Short-term investments 3,311 15,149
--------------------------------------
Total investments 1,458,397 1,306,229
Cash 6,818 7,907
Accrued investment income 17,961 17,309
Reinsurance recoverable:
Paid benefits 7,337 6,853
Unpaid benefits and IBNR 1,491 1,949
Prepaid reinsurance premiums 275,154 260,358
Deferred policy acquisition costs 193,196 171,453
Present value of future profits less accumulated
amortization (1997 - $195,275; 1996 - $179,657)
64,363 72,345
Goodwill less accumulated amortization (1997
-$12,622; 1996 - $11,081) 47,839 49,380
Separate account assets (Note 13) 18,877 425
Federal taxes recoverable from related party (Note 8) - 50
Other assets 6,363 6,029
--------------------------------------
Total assets $2,097,796 $1,900,287
======================================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------------------
(In Thousands,
Except Share Amounts)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Life and annuity reserves $1,325,442 $1,168,318
Accident and health reserves 9,989 10,399
Guaranteed investment contracts 256,645 254,366
Policyholders' funds 2,539 2,998
Advance premiums 78 80
Accrued dividends and dividends on deposit 758 771
Unpaid claims 18,147 17,410
------------------------------
Total future policy benefits 1,613,598 1,454,342
Accounts payable and accrued expenses 8,491 5,909
Indebtedness to related parties 18,118 9,395
Other liabilities 15,959 17,857
Separate account liabilities (Note 13) 18,877 425
Federal income taxes payable (Note 8):
Current 2,267 -
Deferred 46,868 42,206
------------------------------
Total liabilities 1,724,178 1,530,134
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) 24,320 19,013
Retained earnings 94,892 96,734
------------------------------
Total stockholder's equity 373,618 370,153
------------------------------
Total liabilities and stockholder's equity $2,097,796 $1,900,287
==============================
</TABLE>
See accompanying notes.
3
<PAGE>
Southland Life Insurance Company
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Revenues:
Traditional life insurance premiums $ 32,304 $ 34,591 $ 33,003
Health insurance premiums 69,997 71,587 60,318
Universal life and investment product charges 92,660 76,907 67,073
Reinsurance assumed 570 16 201
-----------------------------------------------------------
195,531 183,101 160,595
Reinsurance ceded premiums (61,103) (68,663) (56,059)
-----------------------------------------------------------
Net investment income 134,428 114,438 104,536
Net realized gains on investments 107,563 100,556 103,279
Other revenues 25,294 9,585 2,880
11,293 13,391 11,437
-----------------------------------------------------------
Total revenues 278,578 237,970 222,132
Benefits and expenses:
Insurance claims and benefits incurred:
Traditional life insurance:
Death benefits 27,569 27,756 24,305
Other benefits 19,452 20,543 21,661
Universal life and investment contracts:
Interest credited to account balances 46,182 38,051 31,465
Death benefit incurred in excess of account balances 21,102 17,573 33,902
Health benefits 53,613 49,849 28,883
(Decrease) increase in policy reserves and other funds (2,579) (3,444) (6,085)
Reinsurance recoveries (43,814) (41,920) (39,883)
-----------------------------------------------------------
121,525 108,408 94,248
Commissions 17,186 19,195 15,229
Insurance operating expenses (Note 11) 38,644 30,910 20,924
Amortization of goodwill 1,541 1,541 1,541
Amortization of present value of future profits, net of
accrued interest 9,473 9,148 10,155
Amortization of deferred policy acquisition costs 27,572 17,905 13,326
-----------------------------------------------------------
215,941 187,107 155,423
-----------------------------------------------------------
Income before federal income taxes 62,637 50,863 66,709
Federal income taxes (Note 8) 22,479 19,514 23,828
-----------------------------------------------------------
Net income $ 40,158 $ 31,349 $ 42,881
===========================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Southland Life Insurance Company
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
(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 $ 246,906 $ 366,536
Return of capital to stockholder - - (119,630)
--------------------------------------------------
Balance at end of year $ 246,906 $ 246,906 $ 246,906
==================================================
Net unrealized investment gains (losses) on
securities:
Balance at beginning of year $ 19,013 $ 37,906 $ (8,874)
Change in net unrealized investment gains
(losses), net of tax 6,044 (24,889) 65,248
Effect on DPAC and PVFP of unrealized gains
(losses) on fixed maturities, net of tax (737) 5,996 (18,468)
--------------------------------------------------
Balance at end of year $ 24,320 $ 19,013 $ 37,906
==================================================
Retained earnings:
Balance at beginning of year $ 96,734 $ 86,385 $ 58,239
Net income 40,158 31,349 42,881
Dividends to stockholder (42,000) (21,000) (14,735)
--------------------------------------------------
Balance at end of year $ 94,892 $ 96,734 $ 86,385
==================================================
Total stockholder's equity $ 373,618 $ 370,153 $ 378,697
==================================================
</TABLE>
5
See accompanying notes.
<PAGE>
Southland Life Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
(In Thousands)
OPERATING ACTIVITIES
Net income $ 40,158 $ 31,349 $ 42,881
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase (decrease) in future policy benefits 29,507 (202) 86,817
Net increase (decrease) in federal income taxes 4,121 (8,722) 8,528
Increase (decrease) in accounts payable and
accrued expenses and other liabilities 4,839 (13,312) (3,404)
(Increase) decrease in accrued investment income (652) (1,358) 777
Net realized investment gains (25,294) (9,585) (2,880)
(Increase) decrease in reinsurance recoverable (26) 16,484 (22,484)
(Increase) decrease in prepaid reinsurance
premiums (14,796) 22,585 (42,119)
Depreciation and amortization expense 11,125 10,681 11,708
Policy acquisition costs deferred (51,940) (37,992) (41,581)
Amortization of deferred policy acquisition costs 27,572 17,905 13,326
Other, net (1,124) (364) (1,057)
-------------------------------------------
Net cash provided by operating activities 23,379 27,469 50,512
INVESTING ACTIVITIES
Securities available-for-sale:
Sales:
Fixed maturities 608,076 116,988 118,212
Equity securities 335 25 1,105
Maturities - fixed maturities 79,378 82,646 36,740
Purchases:
Fixed maturities (831,839) (215,464) (201,698)
Equity securities (2,699) (35) (186)
Securities held-to-maturity:
Maturities - fixed maturities - - 19,202
Sale, maturity or repayment of investments:
Mortgage loans on real estate 40,060 20,115 16,613
Investment real estate - 150 450
</TABLE>
6
<PAGE>
Southland Life Insurance Company
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
INVESTING ACTIVITIES (CONTINUED)
Purchase or issuance of investments:
Mortgage loans on real estate (22,073) (71,512) (85,580)
Investment real estate - (11) -
Policy loans, net (4,016) (1,976) (727)
Short-term investments, net 11,838 (15,149) -
Additions to property and equipment - - (62)
Disposal of property and equipment - - 780
-----------------------------------------------------
Net cash used by investing activities (120,940) (84,223) (95,151)
FINANCING ACTIVITIES
(Decrease) increase in indebtedness to related parties (5,277) 3,456 (5,261)
Receipts from interest sensitive products credited
to policyholder account balances 162,826 106,188 107,641
Return of policyholder account balances on interest
sensitive policies (33,077) (25,251) (25,244)
Return of capital and dividends paid to stockholder (28,000) (21,000) (42,060)
-----------------------------------------------------
Net cash provided by financing activities 96,472 63,393 35,076
-----------------------------------------------------
Net (decrease) increase in cash (1,089) 6,639 (9,563)
Cash at beginning of year 7,907 1,268 10,831
-----------------------------------------------------
Cash at end of year $ 6,818 $ 7,907 $ 1,268
=====================================================
</TABLE>
The Company paid interest of $1,549,000, $0, and $13,000 during 1997, 1996 and
1995, respectively.
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 $394,000
and $4,549,000 at December 31, 1997 and 1996, 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 $14,000,000 dividend to its parent company during 1997
which was unpaid as of December 31, 1997 and was presented as indebtedness to
related parties in the accompanying balance sheet. The dividend was paid in cash
by the Company in January 1998.
See accompanying notes.
7
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements
December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Southland Life Insurance Company (the Company) is a wholly-owned subsidiary of
ING America Life Corporation (America Life), an indirect, wholly-owned
subsidiary of ING Groep, N.V.
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:
ACCOUNTING CHANGES
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
8
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES (CONTINUED)
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income.
Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. Management of the Company is presently assessing the
effect that Statement No. 130 will have on the Company's current financial
statements and footnote disclosures; however, the application of the new rules
will not have an impact on the Company's financial position or results from
operations.
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.
9
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
All of the Company's securities were classified as available-for-sale at
December 31, 1997 and 1996.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income from investments. Interest and dividends are included in net investment
income as earned.
Equity securities are reported at fair value. Mortgage loans are carried at the
unpaid balances. 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.
10
<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% 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.
11
<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
4.75% to 6.0% during 1997, from 4.5% to 7.25% during 1996, and from 4.5% to
8.18% during 1995.
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.
12
<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 8.10% and 8.28% in 1997 and
1996, respectively, grading down to 6% over the next 12 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>
1997 1996 1995
--------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 72,345 $ 78,204 $100,602
Interest accrued on unamortized balance 6,145 6,904 7,915
Amortization (15,618) (16,052) (18,070)
FAS 115 adjustment 1,491 3,289 (12,243)
--------------------------------------------------
Balance at end of year $ 64,363 $ 72,345 $ 78,204
==================================================
</TABLE>
13
<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:
<TABLE>
<CAPTION>
AMORTIZATION
OF PVFP
--------------
(In Thousands)
<S> <C>
1998 $13,932
1999 11,711
2000 10,221
2001 8,875
2002 7,795
</TABLE>
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 1995 and 1996 financial statements have been reclassified
to conform to the 1997 presentation.
14
<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, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Available-for-sale $1,031,283 $1,031,283 $856,166 $856,166
Equity securities 3,200 3,200 816 816
Mortgages 334,447 368,813 351,958 370,566
Policy loans 86,156 78,086 82,140 73,046
Short-term investments 3,311 3,311 15,149 15,149
LIABILITIES
Supplemental contracts without life
contingencies 933 933 879 879
Other policyholder funds left on
deposit 3,375 3,375 3,849 3,849
Individual and group annuities, net
of reinsurance 18,304 18,219 19,905 19,765
</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.
15
<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 $584,000 at
December 31, 1997 and $88,000 at+December+31, 1996 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.
16
<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, 1997:
<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 $ 32,412 $ 3,171 $ 23 $ 35,560
States, municipalities and political
subdivisions 4,951 1 121 4,831
Public utilities securities 42,919 3,149 595 45,473
Corporate securities 518,141 32,923 1,506 549,558
Mortgage-backed securities 249,507 7,315 208 256,614
Other asset-backed securities 133,742 5,096 175 138,663
Derivatives hedging fixed maturities - 805 221 584
------------------------------------------------------
Total fixed maturities 981,672 52,460 2,849 1,031,283
Equity securities 3,072 273 145 3,200
------------------------------------------------------
Total $984,744 $52,733 $2,994 $1,034,483
======================================================
</TABLE>
17
<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, 1996:
<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 $ 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
Equity securities 625 235 44 816
------------------------------------------------------
Total $816,541 $44,472 $4,031 $856,982
======================================================
</TABLE>
18
<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, 1997 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 FAIR
AMORTIZED COST VALUE
-------------------------------
(In Thousands)
<S> <C> <C>
Available-for-sale:
Due in one year or less $ 14,311 $ 14,429
Due after one year through five years 75,919 78,557
Due after five years through ten years 221,052 230,452
Due after ten years 287,141 311,984
-----------------------------
598,423 635,422
Mortgage-backed securities 249,507 257,198
Other asset-backed securities 133,742 138,663
Equity securities 3,072 3,200
-----------------------------
Total available-for-sale $984,744 $1,034,483
=============================
</TABLE>
19
<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, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
FIXED EQUITY TOTAL
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Gross unrealized gains $ 52,460 $273 $ 52,733
Gross unrealized losses 2,849 145 2,994
------------------------------------------
Net unrealized gains 49,611 128 49,739
Deferred income tax expense (17,364) (45) (17,409)
------------------------------------------
Net unrealized gains after taxes 32,247 83 32,330
Less:
Balance at beginning of year 26,162 124 26,286
------------------------------------------
Change in net unrealized gains
(losses) $ 6,085 $(41) $ 6,044
==========================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
FIXED EQUITY TOTAL
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Gross unrealized gains $ 44,237 $235 $ 44,472
Gross unrealized losses 3,987 44 4,031
------------------------------------------
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)
==========================================
</TABLE>
20
<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 and mortgage loans as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------------
(In Thousands)
<S> <C> <C>
Investment purchase commitments $17,682 $4,278
</TABLE>
These commitments were settled in January 1998 and 1997, respectively.
Major categories of investment income for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities $ 75,326 $ 66,337 $ 74,911
Equity securities 29 37 73
Mortgage loans on real
estate 30,454 28,622 23,851
Policy loans 5,232 5,025 4,775
Short-term investments 615 1,446 -
Other investments (970) 759 1,457
----------------------------------------------
110,686 102,226 105,067
Investment expenses (3,123) (1,670) (1,788)
----------------------------------------------
Net investment income $107,563 $100,556 $103,279
===============================================
</TABLE>
21
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Net realized gains on investments for the years ended December 31 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities $19,881 $7,209 $2,824
Equity securities 81 - -
Mortgage loans and other 1,177 (522) 56
Fixed maturities transferred to parent
company in 1995 4,155 2,898 -
----------------------------------
Net realized gains on investments $25,294 $9,585 $2,880
==================================
</TABLE>
During 1997, 1996 and 1995, debt and marketable equity securities available-for-
sale were sold with a fair value at the date of sale of $986,857,000,
$117,013,000 and $119,317,000, respectively. Gross gains of $23,870,000,
$7,326,000 and $3,494,000 and gross losses of $3,908,000, $117,000 and $670,000
were realized on those sales in 1997, 1996 and 1995, 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.
22
<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,
1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Interest rate
contracts:
Swaps $28,000 $ - $ 805 $ 805
Swaps-affiliates 25,000 - (221) (221)
-----------------------------------------------------
Total swaps $53,000 $ - $ 584 $ 584
=====================================================
</TABLE>
<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
=====================================================
</TABLE>
23
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
5. CONCENTRATIONS OF RISK
At December 31, 1997, the Company held $70,694,000 in below-investment-grade
bonds classified as available-for-sale. These holdings amounted to 6.8% of the
Company's investment in bonds and less than 4% 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, 1997, the Company's commercial mortgages involved a
concentration of properties located in Florida (21%), Pennsylvania (10%) and
Texas (9%). 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
$6,700,000.
The Company also has a concentration of direct premium income in Texas (12%) and
California (12%) at December 31, 1997.
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.
24
<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, 1997, 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.
25
<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, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-----------------------------------------------------------------
(In Thousands)
1997
<S> <C> <C> <C> <C> <C>
Life insurance in
force 22,777,781 6,764,447 529 16,013,863 0.00%
=================================================================
Premiums:
Life insurance $ 32,304 $ 11,715 $ 18 $ 20,607 0.09%
Health insurance 69,997 49,388 552 21,161 2.61%
-----------------------------------------------------------------
Total premiums $ 102,301 $ 61,103 $570 $ 41,768 1.36%
=================================================================
1996
Life insurance in
force 20,482,429 5,293,509 777 15,189,697 0.01%
=================================================================
Premiums:
Life insurance $ 34,591 $ 11,918 $ 16 $ 22,689 0.07%
Health insurance 71,587 56,745 - 14,842 0.00%
-----------------------------------------------------------------
Total premiums $ 106,178 $ 68,663 $ 16 $ 37,531 0.04%
=================================================================
1995
Life insurance in
force 18,048,076 4,138,717 809 13,910,168 0.01%
=================================================================
Premiums:
Life insurance $ 33,003 $ 8,073 $201 $ 25,131 0.80%
Health insurance 60,318 47,986 - 12,332 0.00%
-----------------------------------------------------------------
Total premiums $ 93,321 $ 56,059 $201 $ 37,463 0.54%
=================================================================
</TABLE>
26
<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.
On January 1, 1995, the Company agreed to join in filing a consolidated federal
income tax return with its parent, ING America Insurance Holdings, Inc., a
Delaware Corporation, and other US affiliates and subsidiaries. The Company's
federal income tax return is consolidated with the following entities: ING
America Insurance Holdings Inc., ING North America Insurance Corporation, ING US
P & C Holdings, Inc. and its subsidiaries, Columbine Life Insurance Company,
Security Life of Denver Insurance Company and its subsidiaries, ING Investment
Management, Inc. and ING America Life Corporation and its subsidiaries.
The method of tax allocation is governed by a written tax sharing agreement
which was revised effective January 1, 1996. The tax sharing agreement provides
that each member of the consolidated return shall reimburse ING America
Insurance Holdings, Inc. for its respective share of the consolidated federal
income tax liability for each taxable year subject to the tax sharing agreement.
The current tax liability of $2,267,000 at December 31, 1997 and current tax
asset of $50,000 at December 31, 1996 are payable to and due from, respectively,
the parent company, America Life, under the terms of the tax sharing agreement.
27
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------
(In Thousands)
<S> <C> <C>
Deferred income tax liability:
Deferred policy acquisition costs $42,730 $39,494
PVFP 22,042 15,126
Unrealized investment gains and losses 18,770 15,418
Bond/mortgage loans market discount 1,595 115
Other reserves (424) 2,238
----------------------------
Total deferred income tax liability 84,713 72,391
Deferred income tax asset:
Benefit reserves 35,619 28,863
Other assets 2,226 1,322
----------------------------
Total deferred income tax asset 37,845 30,185
----------------------------
Net deferred income tax liability $46,868 $42,206
============================
</TABLE>
28
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
A reconciliation of the income tax attributable to continuing operations
computed at U.S. federal statutory tax rates to the income tax expense included
in the accompanying statements of income follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Goodwill .6 1.1 .7
Other items, net .3 2.3 -
-------------------------------------
Effective tax rate 35.9% 38.4% 35.7%
=====================================
</TABLE>
The components of federal income tax expense consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current $20,675 $22,370 $22,913
Deferred 1,804 (2,856) 915
--------------------------------------
Federal income tax expense $22,479 $19,514 $23,828
======================================
</TABLE>
The Company made net income tax payments of $18,359,000 during 1997, $28,237,000
during 1996, and $16,254,000 during 1995 for current income taxes and
settlements of prior year returns.
9. STATUTORY ACCOUNTING INFORMATION AND PRACTICES
Statutory capital and surplus was $95,453,000 and $100,228,000 at December 31,
1997 and 1996, respectively. Statutory net income was $38,211,000, $43,594,000
and $42,182,000, for the years ended December 31, 1997, 1996, and 1995,
respectively.
29
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
9. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED)
The Company exceeded its minimum statutory capital and surplus requirements at
December 31, 1997. 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 capital and
surplus or the statutory net gain from operations.
The Company's statutory-basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Texas Insurance
Department. Currently, "prescribed" statutory accounting practices are
interspersed throughout the state insurance law and regulations, the National
Association of Insurance Commissioners' ("NAIC") Accounting Practices and
Procedures Manual and a variety of other NAIC publications. "Permitted"
statutory accounting practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future.
The NAIC is in the process of codifying statutory accounting practices
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company uses to prepare its statutory-basis financial
statements. Codification, which is expected to be approved by the NAIC in 1998,
will require adoption by the various states before it becomes the prescribed
statutory basis of accounting for insurance companies domesticated within those
states. Accordingly, before Codification becomes effective for the Company,
Texas must adopt Codification as the prescribed basis of accounting on which
domestic insurers must report their statutory-basis results to the Insurance
Department. At this time it is unclear whether Texas will adopt Codification.
However, based on current draft guidance, management believes that the impact of
Codification will not be material to the Company's statutory-basis financial
statements.
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 1997 and 1996.
At December 31, 1997 and 1996, bonds with an amortized cost of $9,056,000 and
$8,790,000, respectively, were on deposit with various state insurance
departments to meet regulatory requirements.
30
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
10. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is assessed amounts 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 those assessments
net of anticipated 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 1997, 1996, and 1995, the Company reimbursed Life of Georgia
$26,627,000, $21,586,000 and $24,573,000, respectively, under this agreement.
The Company has a payable to Life of Georgia of $3,990,000 and $9,363,000 at
December 31, 1997 and 1996, 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 July 31, 1998.
Interest rates on these borrowings are tied to the bank's cost of funds rate
plus .25%. Outstanding borrowings under this agreement were $0 at December 31,
1997 and 1996.
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 accompanying statements of income except for fees
charged for administration services and mortality risk.
31
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
14. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required to
modify or replace significant portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. The Company's total Year 2000 project cost and
estimates to complete include the estimated costs and time associated with the
impact of third party Year 2000 Issues based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems. The Company has determined it has no
exposure to contingencies related to the Year 2000 Issue for the products it has
sold.
The Company will utilize both internal and external resources to reprogram, or
replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project within one year but not later than
December 31, 1998, which is prior to any anticipated impact on its operating
systems. The total cost of the Year 2000 project is estimated at $8.7 million
and is being funded through operating cash flows. This amount, which will be
expensed as incurred, is not expected to have a material
32
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements (continued)
14. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
effect on the solvency of the Company. To date, the Company has incurred
approximately $5.0 million related to the assessment of, and preliminary efforts
on, its Year 2000 project and the development of a modification plan, purchase
of new systems and systems modifications.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
33
<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 80 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 LLP.
The following exhibits, corresponding to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
1.
A.
(1) Resolution of the Board of Directors of Southland
Life Insurance Company establishing Southland
Separate Account L1 *
(2) Not Applicable
(3) (a) Form of Underwriting Agreement between
Southland Life
Insurance Company and ING America Equities,
Inc. **
(b) Form of Distribution Agreement ***
(c) Schedule of Sales Commissions ****
-4-
<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. Not applicable
-5-
<PAGE>
6. Opinion and consent of Pamela Crane, Senior Vice President,
Actuarial, of Southland Life Insurance Company, as to
actuarial matters pertaining to the securities being
registered
7. (a) Consent of Ernst & Young LLP
(b) Consent of Sutherland, Asbill & Brennan LLP
____________________
* Incorporated by reference to the Registration Statement on Form S-6
for Southland Separate Account L1 (File No. 33-97852) filed with the
Commission on October 6, 1995.
** 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.
******* Incorporated by reference to Post-Effective Amendment No. 3 to the
Registration Statement on Form S-6 for Southland Separate Account L1
(File No. 33-97852) filed with the Commission on April 30, 1997.
-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 4 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 28th day of
April, 1998.
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 President, ----------------------------
Secretary & General Counsel James D. Thompson, President
Pursuant to the requirements of the Securities Act of 1933, Southland Life
Insurance Company has duly caused this Post-Effective Amendment Number 4 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 28th day April, 1998.
(SEAL) Southland Life Insurance Company
Attest: /s/ B. Scott Burton By: /s/ James D. Thompson
------------------------------- ----------------------------
B. Scott Burton, Vice President, James D. Thompson, President
Secretary & General Counsel
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment Number 4 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 & Director April 28, 1998
James D. Thompson
/s/ Fred S. Hubbell
- --------------------------- Chairman April 28, 1998
Fred S. Hubbell
/s/ B. Scott Burton
- --------------------------- Vice President, Secretary, April 28, 1998
B. Scott Burton General Counsel & Director
/s/ Michael W. Cunningham
- --------------------------- Director April 28, 1998
Michael W. Cunningham
/s/ Linda B. Emory
- --------------------------- Director April 28, 1998
Linda B. Emory
/s/ Valerie G. Brown
- --------------------------- Director April 28, 1998
Valerie G. Brown
/s/ Walter K. Hunt, III
- --------------------------- Director April 28, 1998
Walter K. Hunt, III Chief Operating Officer &
Chief Financial Officer
<PAGE>
Exhibit Index
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 LLP
<PAGE>
EXHIBIT 2
[Letterhead of Southland Life Insurance Company]
April 27, 1998
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 4
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
B. Scott Burton
Vice President & General Counsel
<PAGE>
EXHIBIT 6
[Letterhead of Southland Life Insurance Company]
April 27, 1998
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 4 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
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 reports dated April 6, 1998 and April 10, 1998, in Post-Effective
Amendment No. 4 to the Registration Statement (Form S-6 No. 33-97852) and
related Prospectus of Southland Separate Account L1 (dated May 1, 1998).
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
April 27, 1998
<PAGE>
EXHIBIT 7.(b)
[Letterhead of Sutherland, Asbill & Brennan LLP]
April 28, 1998
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 4 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 1993.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
