Prospectus
A FLEXIBLE PREMIUM ADJUSTABLE COMBINATION FIXED
AND VARIABLE UNIVERSAL LIFE INSURANCE POLICY
issued by
SOUTHLAND LIFE INSURANCE COMPANY
AND
SOUTHLAND SEPARATE ACCOUNT L1
Consider carefully the policy charges, deductions, and refunds beginning on page
47 in this prospectus.
You should read this prospectus and keep it for future reference. A prospectus
for each underlying fund portfolio must accompany and should be read together
with this prospectus.
This policy is not available in all jurisdictions. This policy is not offered in
any jurisdiction where this type of offering is not legal. Depending on the
state where it is issued, policy features may vary. You should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with information that is different.
Replacing your existing life insurance policy(ies) with this policy may not be
beneficial to you.
Your Policy
o is a flexible premium adjustable combination fixed and
variable life insurance policy;
o is issued by Southland Life Insurance Company;
o is guaranteed not to lapse during the first three policy years
if you meet certain requirements; and
o is returnable by you during the free look period if you are
not satisfied.
YOUR POLICY PREMIUM PAYMENTS
o are flexible, so the premium amount and frequency may vary;
o are allocated to variable investment subaccounts and the
guaranteed interest account, based on your instructions;
o are invested in shares of the underlying investment portfolios
under each variable subaccount; and
o can be invested in up to eighteen investment options, which
include the guaranteed interest account, over the policy's
lifetime.
YOUR ACCOUNT VALUE
o is the sum of your holdings in the variable subaccounts, the
guaranteed interest account and the loan account;
o has no guaranteed minimum cash value under the variable
subaccounts. The value varies with the value of the matching
investment portfolio;
o has a minimum guaranteed rate of return if you have allocated
amounts to the guaranteed interest account; and
o is subject to various expenses and charges, including possible
surrender charges.
DEATH PROCEEDS
o are paid if the policy is still in force when the insured
person dies;
o are equal to the death benefit minus outstanding policy loans,
accrued loan interest and unpaid charges incurred before the
insured person dies;
o are calculated under your choice of options;
* Option A- a stated death benefit
* Option B- a stated death benefit plus your account value;
and
o are generally not federally income taxed if your policy
continues to meet the federal income tax definition of life
insurance.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MAY 1, 1999
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<S> <C> <C>
ISSUED BY: ADMINISTERED BY: UNDERWRITTEN BY:
Southland Life Insurance Company Southland Customer Service Center ING America Equities, Inc.
P.O. Box 173789 P.O. Box 173789 (Envelope) P. O. Box 173789
Denver, CO 80217-3789 Denver, CO 80217-3789 Denver, CO 80217-3789
(800) 224-3035 (Tel)
THROUGH ITS: _____________________
Southland Separate Account L1
FOR OVERNIGHT DELIVERY:
1290 Broadway (Envelope)
Denver, CO 80203
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TABLE OF CONTENTS
POLICY SUMMARY.................................................................8
Your Policy...........................................................8
Free Look Period .....................................................8
Your Policy Premiums..................................................8
Allocation of Net Premiums...................................8
Variable Subaccounts..................................................8
Policy Values.........................................................9
Your Account Value in Variable Subaccounts...................9
Transfers of Account Value...........................................10
Special Policy Features..............................................10
Additional Benefits.........................................10
Dollar Cost Averaging.......................................10
Automatic Rebalancing.......................................10
Loans ...................................................10
Partial Withdrawals.........................................10
Persistency Refund..........................................10
Policy Modification, Termination and Continuation Features...........10
Right to Convert Policy.....................................10
Surrender...................................................10
Lapse ...................................................10
Reinstatement...............................................11
Continuation of Coverage....................................11
Death Benefits.......................................................11
Charges and Deductions...............................................11
Deductions from Premium.....................................11
Deductions from the Variable Subaccounts....................11
Monthly Deductions from Your Account Value..................11
Policy Transaction Fees.....................................12
Surrender Charges...........................................12
Tax Considerations...................................................12
INFORMATION ABOUT SOUTHLAND, THE VARIABLE ACCOUNT, THE INVESTMENT PORTFOLIOS
AND THE GUARANTEED INTEREST ACCOUNT..................................13
Southland Life Insurance Company.....................................13
Year 2000 Preparedness...............................................13
Southland Separate Account L1........................................14
Variable Account Structure..................................14
Order of Variable Account Liabilities.......................14
Variable Subaccounts........................................14
Investment Portfolios.......................................14
Objectives of the Investment Portfolios..............................15
The Alger American Fund.....................................15
Fidelity Variable Insurance Products Fund and Variable
Insurance Products Fund II...............................16
INVESCO Variable Investment Funds, Inc......................17
Janus Aspen Series..........................................18
The Guaranteed Interest Account......................................19
MAXIMUM NUMBER OF INVESTMENT OPTIONS................................19
DETAILED INFORMATION ABOUT THE VARIABLE UNIVERSAL LIFE POLICY.................19
Applying for a Policy................................................19
Policy Issuance.............................................20
Temporary Insurance..................................................20
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Premiums ............................................................20
Scheduled Premiums..........................................20
Unscheduled Premium Payments................................21
Minimum Annual Premium......................................21
Special Continuation Period.................................21
Allocation of Net Premiums..................................22
Premium Payments Affect Your Coverage................................22
Modified Endowment Contracts................................22
Death Benefits.......................................................23
Base Death Benefit..........................................24
Death Benefit Options.......................................24
Changes in Death Benefit Options............................25
Changes in Death Benefit Amounts............................26
Guaranteed Minimum Death Benefit............................27
Requirements to Maintain the Guarantee Period...............27
Additional Benefits..................................................28
Adjustable Term Insurance Rider.............................29
Additional Insured Rider....................................30
Exchange of Insured Rider...................................30
Waiver of Cost of Insurance Rider...........................30
Waiver of Specified Premium Rider...........................30
Accidental Death Benefit Rider..............................30
Children's Insurance Rider .................................30
Guaranteed Insurability Rider...............................30
Guaranteed Minimum Death Benefit Rider......................30
Special Features.....................................................30
Policy Maturity.............................................30
Continuation of Coverage....................................31
Right to Convert Policy.....................................31
Policy Values........................................................31
Account Value...............................................31
Net Account Value...........................................31
Cash Surrender Value........................................31
Net Cash Surrender Value....................................31
Determining the Value in the Variable Subaccounts...........32
How We Calculate Accumulation Unit Values for Each
Subaccount..............................................32
Transfers of Account Value...........................................33
Excessive Trading...........................................33
Guaranteed Interest Account Transfers.......................33
Dollar Cost Averaging................................................33
Changing Dollar Cost Averaging..............................34
Terminating Dollar Cost Averaging...........................34
Automatic Rebalancing................................................34
Changing Automatic Rebalancing..............................35
Terminating Automatic Rebalancing...........................35
Policy Loans.........................................................35
Loan Repayment..............................................36
Preferred Loans.............................................36
Loans and Your Benefits.....................................36
Partial Withdrawals..................................................37
Partial Withdrawals under Death Benefit Option A............37
Partial Withdrawals under Death Benefit Option B............37
Stated Death Benefit and Target Death Benefit Reductions....37
Partial Withdrawal Mechanics................................38
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Lapse ............................................................38
Grace Period................................................38
If You Have the Guaranteed Minimum Death Benefit in Effect..38
Reinstatement........................................................39
Surrender............................................................40
General Policy Provisions............................................40
Free Look Period ...........................................40
Your Policy.................................................41
Age ...................................................41
Ownership...................................................41
Beneficiary(ies)............................................41
Collateral Assignment.......................................42
Incontestability............................................42
Misstatements of Age or Gender..............................42
Suicide ...................................................42
Transaction Processing......................................42
Notification and Claims Procedures..........................43
Telephone Privileges........................................43
Non-participation...........................................43
Distribution of the Policies................................43
Advertising Practices and Sales Literature..................44
Settlement Provisions.......................................44
Administrative Information About the Policy..........................45
Voting Privileges...........................................45
Material Conflicts..........................................46
Right to Change Operations..................................46
Reports to Owners...........................................47
CHARGES, DEDUCTIONS AND REFUNDS...............................................47
Deductions from Premiums.............................................47
Tax Charges.................................................47
Sales Charge................................................48
Daily Deductions from the Variable Account...........................48
Mortality and Expense Risk Charge...........................48
Monthly Deductions from Your Account Value...........................48
Initial Policy Charge.......................................49
Monthly Administrative Charge...............................49
Cost of Insurance Charge....................................49
Guaranteed Minimum Death Benefit Charge.....................50
Charges for Additional Benefits.............................50
Changes in Monthly Charges..................................50
Policy Transaction Fees..............................................50
Partial Withdrawals.........................................50
Transfers...................................................50
Premium Allocation Change...................................50
Illustrations...............................................50
Persistency Refund...................................................50
Surrender Charge.....................................................51
Administrative Surrender Charge.............................51
Sales Surrender Charge......................................52
Calculation of Surrender Charge Example.....................53
Fees and Expenses of the Investment Portfolios.......................53
Group or Sponsored Arrangements or Corporate Purchasers..............55
Other Charges........................................................55
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TAX CONSIDERATIONS............................................................55
Tax Status of the Policy.............................................55
Diversification Requirements.........................................56
Tax Treatment of Policy Death Benefits...............................56
Modified Endowment Contracts.........................................56
Multiple Policies....................................................57
Distributions Other than Death Benefits from Modified Endowment
Contracts.........................................................57
Distributions Other than Death Benefits from Policies That Are Not
Modified Endowment Contracts......................................57
Investment in the Policy.............................................57
Policy Loans.........................................................57
Section 1035 Exchanges...............................................57
Tax-exempt Policy Owners.............................................57
Possible Tax Law Changes.............................................58
Changes to Comply with the Law.......................................58
Other ............................................................58
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES, AND
ACCUMULATED PREMIUMS.................................................60
ADDITIONAL INFORMATION........................................................64
Directors and Officers...............................................64
Regulation...........................................................66
Legal Matters........................................................66
Legal Proceedings....................................................66
Experts ............................................................66
Registration Statement...............................................66
FINANCIAL STATEMENTS..........................................................67
APPENDIX A...................................................................142
Death Benefit Corridor Factors......................................142
APPENDIX B...................................................................143
Performance Information.............................................143
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INDEX OF SPECIAL TERMS
The following special terms are used in this prospectus. We explain each term on
the page(s) listed in the body of this prospectus and in the summary, if
applicable:
Account value..............................................................9, 31
Accumulation unit..........................................................9, 32
Accumulation unit value....................................................9, 32
Adjustable term insurance rider...............................................29
Age.......................................................................19, 41
Base death benefit............................................................24
Beneficiary(ies)..........................................................11, 41
Cash surrender value...........................................................9
Customer service center........................................................2
Continuation of coverage......................................................31
Death proceeds................................................................24
Free look period..............................................................40
General account...............................................................14
Guarantee period..............................................................27
Guarantee period annual premium...............................................27
Guaranteed interest account...................................................19
Guaranteed minimum death benefit..............................................27
Initial premium...............................................................20
Insured.......................................................................19
Investment date...............................................................20
Investment option.............................................................19
Loan account..................................................................36
Minimum annual premium........................................................21
Monthly processing date.......................................................20
Net account value..........................................................9, 31
Net amount at risk.........................................................9, 49
Net cash surrender value.......................................................9
Net premium................................................................8, 22
Owner......................................................................8, 41
Partial withdrawal............................................................37
Policy.....................................................................8, 41
Policy date...................................................................20
Policy loan...................................................................35
Portfolios.................................................................9, 14
Rider.....................................................................10, 28
Scheduled premium.............................................................20
Segment.......................................................................26
Special continuation period...................................................21
Stated death benefit..........................................................24
Surrender charge..............................................................51
Target death benefit..........................................................24
Target premium................................................................52
Transaction date..............................................................32
Valuation date.................................................................9
Valuation period...........................................................9, 32
Variable account..............................................................14
Variable subaccounts(s).......................................................14
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POLICY SUMMARY
THIS SUMMARY HIGHLIGHTS SOME OF THE IMPORTANT POINTS ABOUT YOUR POLICY. THE
POLICY IS MORE FULLY DESCRIBED IN THE ATTACHED, COMPLETE PROSPECTUS. PLEASE READ
THE PROSPECTUS CAREFULLY. "WE," "US," "OUR," THE "COMPANY" AND "SOUTHLAND" REFER
TO SOUTHLAND LIFE INSURANCE COMPANY. "YOU" AND "YOUR" REFER TO THE POLICY OWNER.
THE OWNER IS THE INDIVIDUAL, ENTITY, PARTNERSHIP, REPRESENTATIVE OR PARTY WHO
MAY EXERCISE ALL RIGHTS OVER THE POLICY AND RECEIVE THE POLICY BENEFITS DURING
THE INSURED PERSON'S LIFETIME.
ANY STATE VARIATIONS ARE COVERED IN A SPECIAL POLICY FORM FOR USE IN THAT STATE.
THIS PROSPECTUS PROVIDES A GENERAL DESCRIPTION OF THE POLICY. YOUR ACTUAL POLICY
AND ANY RIDERS ARE THE CONTROLLING DOCUMENTS. IF YOU WOULD LIKE TO REVIEW A COPY
OF THE POLICY AND RIDERS, CONTACT OUR CUSTOMER SERVICE CENTER.
YOUR POLICY
Your policy provides life insurance protection on the insured person. The policy
includes the basic policy, applications, and any riders, amendments or
endorsements. As long as the policy remains in force, we pay a death benefit at
the death of the insured person. While your policy is in force, you may access
your policy value by taking loans or partial withdrawals. You may also surrender
your policy for its net cash surrender value. When the insured person reaches
age 100 the policy can be surrendered or continued under the continuation of
coverage option. SEE CONTINUATION OF COVERAGE, PAGE 31.
LIFE INSURANCE IS NOT A SHORT-TERM INVESTMENT. YOU SHOULD EVALUATE YOUR NEED FOR
LIFE INSURANCE COVERAGE AND THIS POLICY'S LONG-TERM INVESTMENT POTENTIAL AND
RISKS BEFORE PURCHASING A POLICY.
FREE LOOK PERIOD
You have the right to examine your policy and return it for a refund of premiums
paid or the account value, as specified by state law, if you are not satisfied
for any reason. The policy is then void. SEE FREE LOOK PERIOD, PAGE 40.
YOUR POLICY PREMIUMS
The policy is a flexible premium policy because the amount and frequency of the
premium payments you make may vary within limits. You must make premium
payments:
o for us to issue your policy;
o sufficient to keep your policy in force; and
o as necessary to continue certain benefits.
On your application, you choose how much and how often you want to pay premiums.
Depending on your choices, it may not be enough to keep your policy or certain
riders in force. The amount of premium you pay affects the length of time your
policy stays in force. SEE PREMIUMS, PAGE 20.
ALLOCATION OF NET PREMIUMS
This policy has premium-based charges which are subtracted from your payments.
We add the balance, or the net premium, to your policy based on your investment
instructions. You may allocate the net premiums among one or more variable
subaccounts, the guaranteed interest account, or both. You may not invest in
more than eighteen investment options, including the guaranteed interest
account, over the life of your policy. SEE MAXIMUM NUMBER OF INVESTMENT OPTIONS,
PAGE 19.
We apply net premium payments we have received from you to your policy after we:
o receive your initial premium;
o have the information we require;
o approve your policy application; and
o issue your policy.
You need to allocate your premiums to your investment choices in percentages
that are in whole numbers and which total to 100%. SEE ALLOCATION OF NET
PREMIUMS, PAGE 22.
VARIABLE SUBACCOUNTS
Any amount you direct into the guaranteed interest account is credited with
interest at a fixed rate set by us. If you invest in any of the following
variable subaccounts, depending on market conditions, you may make or lose
money. The variable subaccounts are described in the prospectuses for the
underlying investment portfolios.
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Each variable subaccount investment portfolio has its own investment objective.
SEE OBJECTIVES OF THE INVESTMENT PORTFOLIOS, PAGE 15.
THE ALGER AMERICAN FUND
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Capitalization Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP Equity-Income Portfolio
VIP Growth Portfolio
VIP High Income Portfolio
VIP Money Market Portfolio
VIP Overseas Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II Asset Manager Portfolio
VIP II Contrafund Portfolio
VIP II Index 500 Portfolio
VIP II Investment Grade Bond Portfolio
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF-Equity Income Fund (formerly,
INVESCO VIF - Industrial Income Portfolio)
INVESCO VIF-Utilities Fund
JANUS ASPEN SERIES
Janus Aspen Aggressive Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Growth Portfolio
Janus Aspen International Growth Portfolio
Janus Aspen Worldwide Growth Portfolio
POLICY VALUES
Your policy account value is the amount you have in the guaranteed interest
account, plus the amount you have in variable subaccounts. If you have
outstanding policy loans, your account value includes the amount in the loan
account. The loan account is part of our general account specifically designed
to hold money used as collateral for loans and loan interest. The general
account contains all of our assets other than those held in the variable
account, or our other separate accounts.
Your account value reflects:
o net premiums;
o deductions for charges;
o the investment performance of the amounts you have in the variable
subaccounts;
o interest earned on the amount you have in the guaranteed interest
account;
o interest earned on the amount you have in the loan account; and
o partial withdrawals.
We subtract charges and partial withdrawals you take from your account value.
You make a partial withdrawal when you withdraw part of your net cash surrender
value. Partial withdrawals may reduce the amount of base death benefit, which
may trigger a surrender charge.
We may deduct a surrender charge from your account value in the event of:
o surrender;
o policy lapse;
o requested reductions in the stated death benefit; or
o certain partial withdrawals.
SEE SURRENDER CHARGE, PAGE 51.
Your cash surrender value is equal to your account value minus any surrender
charge.
Your net cash surrender value is equal to the cash surrender value minus
outstanding policy loans and accrued loan interest, if any.
Your net account value is equal to the account value minus outstanding policy
loans and accrued loan interest, if any.
YOUR ACCOUNT VALUE IN VARIABLE SUBACCOUNTS
Accumulation units are the way we measure value in the variable subaccounts.
Accumulation unit value is the value of a unit of a variable subaccount on the
valuation date. Each variable subaccount has a different accumulation unit
value. SEE DETERMINING THE VALUE OF THE VARIABLE SUBACCOUNTS, PAGE 32.
On each valuation date, we determine the accumulation unit values. The
accumulation unit value for each variable subaccount reflects the investment
performance of the matching investment portfolio during the valuation period.
The valuation period is the time beginning at 4:00 p.m. Eastern time on a
valuation date and ending at 4:00 p.m. Eastern time on the next valuation date.
Each accumulation unit value reflects asset-based charges charged under the
policy, and the expenses of the investment portfolios. SEE HOW WE CALCULATE
ACCUMULATION UNIT VALUES FOR EACH SUBACCOUNT, PAGE 32.
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TRANSFERS OF ACCOUNT VALUE
You may make up to twelve free transfers among the variable subaccounts or to
the guaranteed interest account per policy year. We charge $25 for each transfer
after the first twelve in a policy year. This charge does not apply to any
automatic rebalancing or dollar cost averaging transfers--they are free. There
are restrictions on transfers to or from the guaranteed interest account. SEE
TRANSFERS OF ACCOUNT VALUE, PAGE 33.
SPECIAL POLICY FEATURES
ADDITIONAL BENEFITS
You may attach certain additional benefits to your policy by rider. A rider
changes benefits under your policy. In most cases we deduct a monthly charge
from your account value for these benefits. SEE ADDITIONAL BENEFITS, PAGE 28.
DOLLAR COST AVERAGING
You may choose dollar cost averaging on your application or on a separate
customer service form. Dollar cost averaging is a systematic plan of
transferring account values to selected investment options. It is intended to
protect your policy's value from short-term price fluctuations. However, dollar
cost averaging does not assure a profit, nor does it protect against a loss in a
declining market. Dollar cost averaging is free. SEE DOLLAR COST AVERAGING, PAGE
33.
AUTOMATIC REBALANCING
You may choose to have automatic rebalancing on your policy. Automatic
rebalancing periodically reallocates your net account value among the investment
options to maintain your specified distribution of account value among those
investment options. Automatic rebalancing is free. SEE AUTOMATIC REBALANCING,
PAGE 34.
LOANS
You may take loans against your policy's net cash surrender value. We charge a
maximum annual loan interest rate of 6%. We credit an annual interest rate of 4%
on amounts held in the loan account as collateral for your loan. SEE POLICY
LOANS, PAGE 35.
PARTIAL WITHDRAWALS
You may withdraw part of your net cash surrender value any time after your first
policy year. You may take up to twelve partial withdrawals per policy year. We
charge the lesser of $25 or 2% of the withdrawal amount for each withdrawal
after the first withdrawal in a policy year. Partial withdrawals may reduce the
death benefit and will reduce your account value. Surrender charges may apply.
SEE PARTIAL WITHDRAWALS, PAGE 37.
PERSISTENCY REFUND
After your tenth policy anniversary, where permitted by state law, we credit
your account value with a persistency refund on every monthly processing date.
SEE PERSISTENCY REFUND, PAGE 50.
POLICY MODIFICATION, TERMINATION AND CONTINUATION FEATURES
RIGHT TO CONVERT POLICY
For 24 months after the policy date you can convert your policy to a guaranteed
policy, unless state law requires differently. The right to convert your policy
is free. SEE RIGHT TO CONVERT POLICY, PAGE 31.
SURRENDER
You may surrender your policy for its net cash surrender value at any time while
the insured person is living.
We calculate your net cash surrender value on the valuation date we receive your
request and policy at our customer service center. All insurance coverage ends
on the date we receive your request. You must return your policy or a lost
policy form to us. SEE SURRENDER, PAGE 40.
LAPSE
In general, insurance coverage continues as long as your policy's net cash
surrender value is enough to pay the monthly deductions. However, your policy
and its riders are guaranteed not to lapse during the first three years of your
policy if the conditions of the special continuation period have been met. SEE
LAPSE, PAGE 38, AND SPECIAL CONTINUATION PERIOD, PAGE 21.
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REINSTATEMENT
You may reinstate your policy and its riders within five years of its lapse if
you still own the policy and the insured person is still living.
You will need to give proof that the insured person continues to be insurable.
You will need to pay required reinstatement premiums.
If the guaranteed minimum death benefit lapses and you do not correct it, this
feature terminates. Once it terminates, you cannot reinstate this feature.
We will reinstate any policy loans existing when coverage ended, with accrued
loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 39.
CONTINUATION OF COVERAGE
If the insured person is still living on the maturity date or the policy
anniversary when the insured person reaches age 100, you may either surrender
your policy or choose the continuation of coverage feature. SEE CONTINUATION OF
COVERAGE, PAGE 31.
DEATH BENEFITS
At the insured person's death, we pay death proceeds to the beneficiary(ies) if
your policy is still in force. The beneficiary(ies) is(are) the person or people
you name to receive the death proceeds. The death proceeds equal the base death
benefit plus amounts payable by rider, minus the amount of your outstanding
policy loan and accrued loan interest. Based on the death benefit you have
chosen, the base death benefit varies.
The base death benefit does not include any adjustable term insurance rider you
may have on your policy. The target death benefit includes any adjustable term
insurance rider you may have on your policy plus your base death benefit. The
total death benefit is at least equal to or greater than your target death
benefit. The death benefit at issue may vary from the stated death benefit plus
adjustable term insurance coverage for some 1035 exchanges.
The minimum stated death benefit to issue a policy is $50,000. However, we may
lower this minimum for group or sponsored arrangements, or corporate purchasers.
SEE DEATH BENEFITS, PAGE 23 .
You may change your base death benefit amount while your policy is in force,
subject to certain restrictions. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 26.
CHARGES AND DEDUCTIONS
DEDUCTIONS FROM PREMIUM
We make the following deductions from each premium payment you make:
1. Tax charges -- We currently deduct a charge of 2.5% of premiums for
state and local taxes. We currently deduct a charge of 1.5% of each
premium to cover our estimated cost of the federal income tax treatment
of deferred acquisition costs. SEE TAX CHARGES, PAGE 47.
2. Sales charge-- Currently, we deduct 4% of each premium to cover a
portion of our expenses in selling your policy, until the total sum of
your premium payments (for your stated death benefit and for any
increases) equals ten "target" premiums. We guarantee that the sales
charge percentage will never be more than 4%.
SEE DEDUCTIONS FROM PREMIUMS, PAGE 47.
DEDUCTIONS FROM THE VARIABLE SUBACCOUNTS
We assess a mortality and expense risk charge of 0.90% per year or 0.002466% per
day against the variable subaccounts. This charge compensates us for mortality
and expense risks under the policies. SEE DAILY DEDUCTIONS FROM THE VARIABLE
ACCOUNT, PAGE 48.
MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE
We deduct the following charges from your account value at the beginning of each
policy month:
1. Initial policy charge -- $20 per month for the first policy year.
2. Monthly administrative charge -- currently, $6 per month. We guarantee
that this charge will never exceed $10 per month.
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3. Cost of insurance charge -- Based on the net amount at risk on the life
of the insured person.
The amount of this charge differs for:
o the segments of the base death benefit; and
o the adjustable term insurance rider.
4. Guaranteed Minimum Death Benefit -- If you elect this provision, we
currently charge $0.005 per $1,000 of stated death benefit. We
guarantee that this charge will never exceed $0.01 per $1,000 of stated
death benefit.
5. Charges for additional benefits -- The cost of additional benefits you
choose. The adjustable term insurance rider charge is included in the
cost of insurance charge.
SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 48.
POLICY TRANSACTION FEES
We deduct policy transaction fees from your account value at the time of the
transaction.
The following are the current transaction fees.
1. Partial withdrawal fee -- The first withdrawal each policy year is
free. After that, we charge $25 or 2% of the withdrawal amount,
whichever is less.
2. Transfer fee -- We allow twelve free transfers among investment options
per policy year. For each transfer beyond that, a $25 fee applies.
3. Illustrations -- You may request one free illustration per policy year.
For each illustration beyond that, a $25 fee may apply.
4. Premium Allocation Change --You may make five free premium allocation
changes per policy year. For each premium allocation change beyond
that, a $25 fee applies.
SEE POLICY TRANSACTION FEES, PAGE 50.
SURRENDER CHARGES
During the first fourteen years of your policy or an additional segment, we
assess a surrender charge if you:
o surrender the policy;
o reduce the stated death benefit (other than by changing the death
benefit option);
o let your policy lapse; or
o take a partial withdrawal which reduces your stated death benefit.
The charge is made up of the administrative surrender charge, plus the sales
surrender charge.
The administrative surrender charge is $4 per each $1,000 of stated death
benefit. The sales surrender equals 46% of actual premiums paid, up to one
target premium, plus 44% of premiums paid between one and two target premiums.
The maximum sales surrender charge for each death benefit segment will be shown
in the schedule attached to your policy.
SEE SURRENDER CHARGE, PAGE 51.
TAX CONSIDERATIONS
Under current federal income tax law, death benefits of life insurance policies
generally are not subject to income tax. In order for this treatment to apply,
the policy must qualify as a life insurance contract. We believe it is
reasonable to conclude that the policy will qualify as a life insurance
contract. SEE TAX STATUS OF THE POLICY, PAGE 55.
Assuming the policy qualifies as a life insurance contract, under current
federal income tax law, your account value earnings are generally not subject to
income tax as long as they remain within your policy. However, depending on
circumstances, the following events may cause taxable consequences for you:
o partial withdrawals;
o surrender; or
o lapse.
In addition to the events listed above, if your policy is a modified endowment
contract, loans against or secured by the policy may cause income taxation. A
penalty tax may be imposed on a distribution from a modified endowment contract,
as well. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 56.
You should consult a qualified legal or tax adviser before you purchase your
policy.
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INFORMATION ABOUT SOUTHLAND, THE VARIABLE ACCOUNT, THE INVESTMENT PORTFOLIOS AND
THE GUARANTEED INTEREST ACCOUNT
SOUTHLAND LIFE INSURANCE COMPANY
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.
Our total assets exceeded $2.2 billion, and our shareholder's equity exceeded
$380 million on a generally accepted accounting principles basis as of December
31, 1998. (See Financial Statements.)
We have a complete line of life insurance products, including:
o annuities;
o individual life;
o group life; and
o pension products.
Southland is a wholly owned indirect subsidiary of ING Groep, N.V. ("ING"). ING
is one of the world's three largest diversified financial services
organizations. ING is headquartered in Amsterdam, The Netherlands. It has
consolidated assets over $461.8 billion on a Dutch (modified U.S.) generally
accepted accounting principles basis, as of December 31, 1998.
The principal underwriter and distributor for our policies is ING America
Equities, Inc. ING America Equities is an affiliate of Southland and is a
registered broker-dealer with the SEC and the NASD. ING America Equities is a
stock corporation organized under the laws of the State of Colorado in 1993, and
is located at 1290 Broadway, Denver, Colorado 80203-5699.
YEAR 2000 PREPAREDNESS
Southland is aware of the computer problems that may exist surrounding the Year
2000. Our senior management projects information processing and delivery systems
to complete their Year 2000 readiness preparations by December 31, 1999.
The Year 2000 problem originates from the predominant use in computer programs
of a two-digit field to capture the year, for example 99 instead of 1999. When
we reach the year 2000, many of these programs will assume the year 00 is
actually 1900 rather than 2000. This incorrect assumption can lead to erroneous
results, false calculations, or system failures. This is not only a computer
problem, but also applies to other machinery or equipment containing computer
chips that calculate dates for correct performance, the so-called "embedded
systems". That is why errors, ranging from telephone shutdown to other services
may occur as well. This potential risk is often referred to as the "Millennium
Bug" or the "Year 2000 problem".
The problem is made more complex by the many lines of code that can be affected
in a single system, the number of systems required to support business
activities, and the interdependence of both the internal and external systems
involved in exchanging data. This is particularly true for the financial
services industry, where information is at the heart of the business and which
depends heavily on the uninterrupted transfer of data world-wide, bank-to- bank
and with clearing houses, exchanges, and agencies. If the potential problems are
not addressed, this could in some cases result in business system failure. From
a financial perspective, this could, for instance, lead to incorrect interest
calculations or over/under payments.
The company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, remediation, testing, and implementation. The project plan
covers Southland Life Insurance Company and affiliated companies Life Insurance
Company of Georgia, Golden American Life Insurance Company and Security Life of
Denver Insurance Company. We have followed our normal project management
methodology including communication with senior management. The company's
project team has completed the assessment phase of the plan and remediation
efforts are underway. Testing of mission-critical systems is underway with
implementation completion by December 31, 1999.
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As part of our implemented project plan, the company has completed an inventory
and assessment of substantially all vendor products to determine the extent to
which the company may be vulnerable to such parties' failure to resolve their
own Year 2000 issues. The company is assessing and is prioritizing responses in
an attempt to mitigate risks with respect to the failure of these parties to be
Year 2000 ready. Failure of certain third parties, for example, subaccount
advisors, to complete their Year 2000 preparations could have an adverse effect
on the company's operations. There can be no assurance that failure of third
parties to complete adequate preparations in a timely manner, and any resulting
systems interruptions or other consequences, would not have an adverse effect,
directly or indirectly, on the company's operations.
The company believes the risks of Year 2000 issues are mitigated by our Year
2000 project and contingency plans. These contingency plans involve, among other
actions, manual processing, outsourcing, and adjusting staffing strategies.
The company designates each of the statements made by it herein as a Year 2000
Readiness Disclosure. Such statements are made pursuant to the Year 2000
Information and Readiness Disclosure Act (112 Stat.
2386).
SOUTHLAND SEPARATE ACCOUNT L1
VARIABLE ACCOUNT STRUCTURE
We established Southland Separate Account L1 (the "variable account") on
February 25, 1994, under Texas insurance law. It is a unit investment trust,
registered with the SEC under the Investment Company Act of 1940. The SEC does
not supervise our management of the variable account or Southland.
The variable account is a separate investment account. It is used to support our
variable life insurance policies, and for other purposes allowed by law and
regulation. We keep the variable account assets separate from our general
account and other separate accounts. We may offer other variable life insurance
contracts with different benefits and charges that invest in the variable
account. We do not discuss these contracts in this prospectus. The variable
account may invest in other securities not available for the policy described in
this prospectus. The general account contains all of our assets other than those
held in the variable account or other separate accounts. The company owns all
the assets in the variable account. We credit gains to or charge losses against
the variable account without regard to performance of other investment accounts.
ORDER OF VARIABLE ACCOUNT LIABILITIES
State law provides that we may not charge general account liabilities against
variable account assets equal to its reserves and other liabilities. This means
that in the event we were ever to become insolvent, the variable account assets
will be used first to pay variable account policy claims. Only if assets remain
in the variable account after these claims have been satisfied can these assets
be used to pay other policy owners and our creditors.
The variable account may have liabilities from assets credited to other variable
life policies offered by the variable account. If the assets of the variable
account are greater than required reserves and policy liabilities, we may
transfer the excess to our general account.
VARIABLE SUBACCOUNTS
The variable account has several subaccounts. Each subaccount invests in shares
of a matching investment portfolio. This means that the investment performance
of a policy depends on the performance of the investment portfolios you choose.
Each investment portfolio has its own investment objective. These investment
portfolios are not available directly to individual investors. They are only
available as the underlying investments for variable annuity and variable life
insurance contracts and certain pension accounts.
INVESTMENT PORTFOLIOS
Each of the investment portfolios is a separate series of an open-end management
investment company. The investment company receives investment advice from a
registered investment adviser who is not associated with us.
The investment portfolios sell shares to separate accounts of insurance
companies. These insurance companies may or may not be affiliated with us. This
is known as "shared funding." Investment portfolios may sell shares as the
underlying investment for both variable annuity and variable life insurance
contracts. This process is known as "mixed funding."
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The investment portfolios may sell shares to certain qualified pension and
retirement plans that qualify under Section 401 of the Internal Revenue Code
("IRC"). As a result, a material conflict of interest may arise between
insurance companies, owners of different types of contracts and retirement plans
or their participants.
If there is a material conflict, we will consider what should be done, including
removing the investment portfolio from the variable account. There are certain
risks with mixed and shared funding, and with selling shares to qualified
pension and retirement plans. See the investment portfolios' prospectuses.
OBJECTIVES OF THE INVESTMENT PORTFOLIOS
Each investment portfolio has a different investment objective that it tries to
achieve by following its own investment strategy. The objectives and policies of
each investment portfolio affect its investment results and its risks. You must
receive the current prospectus for each investment portfolio along with this
prospectus. We summarize the investment objectives for each investment portfolio
here. You should read each investment portfolio prospectus.
Certain investment portfolios offered under this policy have investment
objectives and policies similar to other funds managed by the portfolios'
investment advisers. The investment results of a portfolio may be higher or
lower than those of other funds managed by the same adviser. There is no
assurance, and no representation is made, that the investment results of any
investment portfolio will be comparable to those of another fund managed by the
same investment adviser.
Some investment portfolio advisers (or their affiliates) may pay us compensation
for servicing, administration or other expenses. Currently, Fred Alger
Management, Inc. is the only adviser compensating us. The amount of compensation
is usually based on the aggregate assets of the investment portfolio from
policies that we issue or administer. Some advisors may pay us more than others.
THE ALGER AMERICAN FUND
The Alger American Fund is a registered investment company organized on April 6,
1988. It is a multi- series Massachusetts business trust. The Fund's investment
manager is Fred Alger Management, Inc., which has provided investment advisory
services
since 1964.
Alger American Growth Portfolio -- seeks long-term capital appreciation.
The portfolio focuses on growing companies that generally have broad
product lines, markets, financial resources and depth of management. Under
normal circumstances, the portfolio invests primarily in the equity
securities of large companies. The portfolio considers a large company to
have a market capitalization of $1 billion or greater.
Alger American Leveraged AllCap Portfolio -- seeks long-term capital
appreciation.
Under normal circumstances, the portfolio invests in the equity
securities of companies of any size which demonstrate promising growth
potential.
The portfolio can leverage, that is, borrow money, to buy additional
securities. By borrowing money, the portfolio has the potential to increase
its returns if the increase in the value of the securities purchased
exceeds the cost of borrowing, including interest paid for the money
borrowed.
Alger American MidCap Growth Portfolio -- seeks long-term capital appreciation.
The portfolio focuses on midsize companies with promising growth potential.
Under normal circumstances, the portfolio invests primarily in the equity
securities of companies having a market capitalization within the range of
companies in the S&P(R)MidCap 400 Index.
Alger American Small Capitalization Portfolio -- seeks long-term capital
appreciation.
The portfolio focuses on small, fast growing companies that offer
innovative products, services or technologies to a rapidly expanding
marketplace. Under normal circumstances, the
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portfolio invests primarily in the equity securities of small
capitalization companies. A small capitalization company is one that has a
market capitalization with the range of the Russell(R)2000 Growth Index or
the S&P(R) SmallCap 600 Index.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND
II
Fidelity Variable Insurance Products Fund ("VIP" established November 13, 1981)
and Variable Insurance Products Fund II ("VIP II" established March 21, 1988)
are open-end, diversified, management investment companies. These funds are
organized as Massachusetts business trusts.
Fidelity Management & Research Company ("FMR") manages and provides investment
and other services to the funds named here. However, Bankers Trust Company also
provides subadvisory services for VIP II Index 500 Portfolio. FMR is the
management arm of Fidelity Investments(R), which was established in 1946 and is
one of America's largest mutual fund managers.
VIP Equity-Income Portfolio -- seeks reasonable income.
The portfolio will also consider the potential for capital appreciation.
The portfolio seeks a yield which exceeds the composite yield on the
securities comprising the S&P(R)500. FMR's principal investment strategies
include:
o Investing at least 65% of total assets in income-producing equity
securities, which tend to lead to investments in large cap "value"
stocks.
o Potentially investing in other types of equity securities and debt
securities, including lower-quality debt securities.
o Investing in domestic and foreign issuers.
o Using fundamental analysis of each issuer's financial condition
and industry position and market and economic conditions to select
investments.
VIP Growth Portfolio -- seeks capital appreciation.
FMR's principal investment strategies include:
o Investing primarily in common stocks.
o Investing in companies that it believes have above-average growth
potential (stocks of those companies are often called "growth"
stocks).
o Investing in domestic and foreign issuers.
o Using fundamental analysis of each issuer's financial condition
and industry position and market and economic conditions to select
investments.
VIP High Income Portfolio -- seeks a high level of current income while also
considering growth of capital.
FMR's principal investment strategies include:
o Investing at least 65% of total assets in income-producing debt
securities, preferred stocks, and convertible securities with an
emphasis on lower-quality debt securities.
o Potentially investing in non-income producing debt securities,
including defaulted securities and common stocks.
o Investing in companies in troubled or uncertain financial
condition.
o Investing in domestic and foreign issuers.
o Using fundamental analysis of each issuer's financial condition
and industry position and market and economic conditions to select
investments.
VIP Money Market Portfolio -- seeks as high a level of current income as is
consistent with the preservation of capital and liquidity.
FMR's principal investment strategies include:
o Investing in U.S. dollar-denominated money market securities,
including U.S. Government securities and repurchase agreements,
and entering into reverse repurchase agreements.
o Investing more than 25% of total assets in the financial services
industry.
o Investing in compliance with industry- standard requirements for
money market funds for the quality, maturity and diversification
of investments.
VIP Overseas Portfolio -- seeks long-term growth of capital.
FMR's principal investment strategies include:
o Investing at least 65% of total assets in foreign securities.
o Investing primarily in common stocks.
o Allocating investments across countries and regions considering
the size of the market in each country and region relative to the
size of the international market as a whole.
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o Using fundamental analysis of each issuer's financial condition
and industry position and market and economic conditions to select
investments.
VIP II Asset Manager Portfolio -- seeks high total return with reduced risk
over the long term by allocating its assets among stocks, bonds, and
short-term instruments.
FMR's principal investment strategies include:
o Allocating the portfolio's assets among stocks, bonds, and
short-term money market instruments.
o Maintaining a neutral mix over time of 50% of assets in stocks,
40% of assets in bonds, and 10% of assets in short-term money
market instruments.
o Adjusting allocation among asset classes gradually within the
following ranges: stock class (30% - 70%), bond class (20% - 60%),
and short-term/money market class (0% - 50%).
o Investing in domestic and foreign issuers.
o Analyzing an issuer using fundamental and/or quantitative factors
and evaluating each security's current price relative to estimated
long-term value in selecting investments.
VIP II Contrafund Portfolio -- seeks long-term capital appreciation.
FMR's principal investment strategies include:
o Investing primarily in common stocks.
o Investing in securities of companies whose value it believes is
not fully recognized by the public.
o Investing in domestic and foreign issuers.
o Investing in either "growth" stocks or "value" stocks or both.
o Using fundamental analysis of each issuer's financial condition
and industry position and market and economic conditions to select
investments.
VIP II Index 500 Portfolio -- seeks investment results that correspond to the
total return of the common stocks publicly traded in the United States as
represented by the S&P(R)500.
Banker's Trust's principal investment strategies include:
o Investing at least 80% of assets in common stocks included in the
S&P(R)500.
o Lending securities to earn income for the portfolio.
o VIP II Investment Grade Bond Portfolio -- seeks as high a level of
current income as is consistent with the preservation of capital.
FMR's principal investment strategies include:
o Investing in U.S. dollar-denominated investment grade bonds.
o Managing the portfolio to have similar overall interest rate risk
to Lehman Brothers Aggregate Bond Index(R).
o Allocating assets across different market sectors and maturities.
o Analyzing a security's structural features, current pricing and
trading opportunities, and the credit quality of its issuer in
selecting investments.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO Variable Investment Funds, Inc. ("VIF") is a registered, open-end
management investment company. It was organized as a Maryland corporation on
August 19, 1993. It is currently made up of ten diversified investment
portfolios. Two of the investment portfolios are described here.
INVESCO Funds Group, Inc. ("IFG") is the Funds' investment adviser. As the
adviser, it is mostly responsible for providing the portfolios with investment
management, various administrative services, and supervising the Fund's daily
business affairs.
INVESCO VIF-Equity Income Fund -- seeks high current income, with growth of
capital as a secondary objective. (Prior to May 1, 1999, the fund was known
as the INVESCO VIF Industrial Income Portfolio.)
The fund normally invests at least 65% of its assets in dividend-paying
common and preferred stocks, although in recent years that percentage has
been somewhat higher. Stocks held by the fund generally are expected to
produce a relatively high level of income and a consistent, stable return.
Although it focuses on the stocks of larger companies with a strong record
of paying dividends, the fund also may invest in companies that have not
paid regular dividends. The fund's equity investments are limited to
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stocks that can be traded easily in the United States; it may, however, invest
in foreign securities in the form of American Depository Receipts. The rest of
the fund's assets are invested in debt securities, generally corporate bonds
that are rated investment grade or better. The fund also may invest up to 15% of
its assets in lower-grade debt securities, commonly known as "junk bonds," which
generally offer higher interest rates, but are riskier investments than
investment grade securities.
INVESCO VIF-Utilities Fund --seeks capital appreciation and income.
The fund normally invests at least 80% of its assets in companies doing
business in the utilities economic sector. The remainder of the fund's
assets are not required to be invested in the sector.
The fund is aggressively managed. Although the fund can invest in debt
securities, it primarily invests in equity securities that IFG believes
will rise in price faster than other investments, as well as options and
other investments whose value is based upon the value of equity securities.
JANUS ASPEN SERIES
Janus Aspen Series is a registered, open-end management investment company. It
was organized as a Delaware business trust on May 20, 1993. It is currently made
up of eleven investment portfolios. We describe five of these investment
portfolios here.
Janus Capital is the investment adviser to each of the portfolios and is
responsible for the day-to-day management of the investment portfolios,
providing continuous advice and recommendations concerning each portfolios
investments.
Janus Aspen Aggressive Growth Portfolio -- seeks long-term growth of capital.
The portfolio pursues its objective by investing primarily in common stocks
selected for their growth potential and normally invests at least 50% of
its equity assets in medium-sized companies. Medium-sized companies are
those whose market capitalizations fall within the range of companies in
the S&P(R) MidCap 400 Index. Market capitalization is a commonly used
measure of the size and value of a company. The market capitalizations
within the Index will vary, but as of December 31, 1998, they ranged from
approximately $142 million to $73 billion.
Janus Aspen Balanced Portfolio -- seeks long-term growth of capital, consistent
with preservation of capital and balanced by current income.
The portfolio pursues its objective by normally investing 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. The portfolio invests normally at least 25% of its assets in
fixed-income securities.
Janus Aspen Growth Portfolio -- seeks long-term growth of capital in a manner
consistent with preservation of capital.
The portfolio pursues its objective by investing primarily in common stocks
selected for their growth potential. Although the portfolio can invest in
companies of any size, it generally invests in larger, more established
companies.
Janus Aspen International Growth Portfolio -- seeks long-term growth of capital.
Normally, the portfolio pursues its objective by investing at least 65% of
its total assets in securities of issuers from at least five different
countries, excluding the United States. Although the portfolio intends to
invest substantially all of its assets in issuers located outside the
United States, it may at times invest in U.S. issuers and it may at times
invest all of its assets in fewer than five countries or even a single
country.
Janus Aspen Worldwide Growth Portfolio -- seeks long-term growth of capital in a
manner consistent with preservation of capital.
The portfolio pursues its objective by investing primarily in common stocks
of companies of any size throughout the world. The portfolio normally
invests in issuers from at least five different countries, including the
United States. The portfolio may at times invest in fewer than five
countries or even in a single country.
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THE GUARANTEED INTEREST ACCOUNT
You may allocate all or a part of the net premiums and transfers of your net
account value into the guaranteed interest account. The guaranteed interest
account is part of our general account which guarantees principal. It pays
interest at a fixed rate that we declare.
The general account supports our non-variable insurance and annuity obligations.
We have not registered interests in the guaranteed interest account under the
Securities Act of 1933. Also, we have not registered the guaranteed interest
account or the general account as an investment company under the Investment
Company Act of 1940 (because of exemptive and exclusionary provisions). This
means that the general account, the guaranteed interest account and its
interests are generally not subject to regulation under these Acts.
The SEC staff has not reviewed the disclosures included in this prospectus
relating to the general account and the guaranteed interest account. These
disclosures, however, may be subject to certain requirements of the federal
securities law regarding accuracy and completeness of statements made in this
prospectus.
The amount you have in the guaranteed interest account is the sum of net
premiums you allocate to that account, plus transfers you made to the guaranteed
interest account, plus interest earned.
Amounts you transfer out of or withdraw from the guaranteed interest account
reduce this amount. It is also reduced by deductions for charges from your
account value allocated to the guaranteed interest account.
We declare the interest rate that applies to all amounts in the guaranteed
interest account. These interest rates are never less than the minimum
guaranteed interest rate of 3.5% and will be in effect for periods of at least
twelve months. Interest compounds daily at an effective annual rate that equals
the declared rate. We credit interest to the guaranteed interest account on a
daily basis. We pay interest regardless of the actual investment performance of
our account. We bear all of the investment risk for the guaranteed interest
account.
MAXIMUM NUMBER OF INVESTMENT OPTIONS
You may invest in a total of eighteen investment options over the lifetime of
your policy. Investment options consist of the variable subaccounts and the
guaranteed interest account, but not the loan account. The loan account does not
count toward the eighteen investment option maximum.
As an example, if you have had funds in seventeen variable subaccounts and the
guaranteed interest account (or eighteen variable subaccounts), these are the
only investment options to which you may later add or transfer funds. You may
want to use fewer investment options in the early years of your policy, so that
you can invest in other investment options in the future. Further, if you invest
in eighteen variable subaccounts, you will not be able to invest in the
guaranteed interest account.
DETAILED INFORMATION ABOUT THE VARIABLE UNIVERSAL LIFE POLICY
This prospectus describes our standard variable life insurance policy. There may
be differences in the policy because of state requirements where we issue your
policy. We will describe any such differences in your policy.
The illustrations beginning on page 60 are intended to show how the policy
works.
APPLYING FOR A POLICY
You purchase a policy by submitting an application to us. On the policy date,
the insured person must be no older than age 75. We may, in our sole discretion,
issue a policy covering an insured over age 75. The insured person is the person
on whose life we issue a policy and upon whose death we pay death proceeds.
"Age" is the insured person's age on the birthday nearest the policy date plus
the number of completed policy years since the policy date.
We may back-date the policy up to six months to allow the insured person to give
proof of a younger age for the purposes of your policy.
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POLICY ISSUANCE
Before we issue a policy or apply your net premium to the investment options, we
require satisfactory evidence of insurability of the insured person and payment
of your initial premium. This evidence may include a medical examination and
completion of all underwriting and issue requirements.
The investment date is the first date we apply the net premium payments we have
received from you to your policy. Your initial premium is the premium we must
receive before coverage can begin. The initial premium is the first premium we
receive and apply to your policy. It must be at least equal to the sum of the
scheduled premiums which are due from your policy date through your investment
date.
We generally require a minimum stated death benefit of $50,000. We may reduce
the minimum stated death benefit for group or sponsored arrangements or
corporate purchasers. Our underwriting and reinsurance procedures in effect at
the time you apply limit the maximum stated death benefit.
The policy date as shown on your policy schedule determines:
o monthly processing dates;
o policy months;
o policy years; and
o policy anniversaries.
It is not affected by the date you receive the policy. The policy date may be
different from the date we receive your first premium payment. If the policy
date is earlier, we charge monthly deductions from the policy date.
TEMPORARY INSURANCE
If you apply and qualify for it, we may issue temporary insurance in an amount
equal to the face amount of insurance for which you applied. The maximum amount
of temporary insurance is $1 million, which includes any in force coverage with
us. This temporary insurance is in force as long as you meet all requirements.
Coverage begins when:
1. you have completed and signed our conditional receipt or temporary
insurance agreement, as applicable;
2. we receive and accept a premium payment of at least your scheduled
premium (selected on your application); and
3. parts I and II of the application are completed.
Temporary insurance coverage ends on the earliest of:
o the date we return your premiums;
o five days after we mail notice of termination to the address on your
application;
o the date your policy coverage starts;
o the date we refuse to issue you a policy based on your application; or
o 90 days after you sign our conditional receipt or temporary insurance
agreement, as applicable.
There is no death benefit under the temporary insurance agreement if:
o there is a material misrepresentation in statements on your
application;
o the person or persons intended to be insured die by suicide or
self-inflicted injury; or
o the bank does not honor your premium check.
PREMIUMS
You may choose the amount and frequency of premium payments, within limits.
SCHEDULED PREMIUMS
Your premiums are flexible. You may select your scheduled premium (within our
limits) when you apply for your policy. The scheduled premium, shown in your
policy and schedule, is the amount you choose to pay over a stated time period.
THIS AMOUNT MAY OR MAY NOT BE ENOUGH TO KEEP YOUR POLICY IN FORCE. You may
receive premium reminder notices for the scheduled premium on a monthly,
quarterly, semiannual, or annual basis. You are not required to pay the
scheduled premium.
Alternatively, you may choose to pay your premium by electronic funds transfer
each month. This option is not available for your initial premium. The financial
institution that makes your electronic funds transfer may charge for this
service.
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You can change the amount of your scheduled premium within our minimum and
maximum limits at any time. If you fail to pay your scheduled premium or if you
change the amount of your scheduled premium, your policy performance will be
affected. During the special continuation period, your scheduled premium should
not be less than the minimum annual premium shown in your policy. If you want
one of two guaranteed minimum death benefit choices, your scheduled premium
should not be less than the guarantee period annual premium shown in your
policy. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27.
UNSCHEDULED PREMIUM PAYMENTS
Generally speaking, you may make unscheduled premium payments at any time;
however:
1. We may limit the amount of your unscheduled premium payments that would
result in an increase in the base death benefit amount required by the
federal income tax law definition of life insurance. We may require
satisfactory evidence that the insured person is insurable at the time
that you make the unscheduled premium payment if the death benefit is
increased due to your unscheduled premium payments.
2. We may require proof that the insured person is insurable if your
unscheduled premium payments will cause the net amount at risk to
increase; and
3. We will return premium payments which are greater than the "seven-pay"
limit for your policy if your payment would cause your policy to become
a modified endowment contract, unless you send us notice acknowledging
the new modified endowment contract status for your policy.
SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 56 AND CHANGES TO COMPLY WITH THE LAW,
PAGE 58.
If you have an outstanding policy loan and you make an unscheduled payment which
is received by us before the maturity date we will consider this payment a loan
repayment, unless you tell us otherwise. If your payment is a loan repayment, we
do not take out the tax and sales charges which apply to premium payments.
MINIMUM ANNUAL PREMIUM
You must pay a minimum annual premium during your first three policy years to
qualify for the special continuation period.
Your minimum annual premium is based on:
o the insured person's age, gender, premium class and any rating;
o the stated death benefit of your policy; and
o any additional benefits you select.
Your minimum annual premium is shown in the schedule pages of your policy. We
may reduce the minimum annual premium for group, or sponsored arrangements, or
for corporate purchasers.
SPECIAL CONTINUATION PERIOD
The special continuation period is during the first three policy years. Under
the special continuation period, we guarantee that your policy will not lapse,
regardless of its net cash surrender value, if on a monthly processing date:
o the sum of all premiums you have paid, minus partial withdrawals that
you have taken, minus policy loans that you have taken, including
accrued loan interest, is greater than or equal to;
o the minimum monthly premiums for each policy month, starting with the
first month of your policy through the current policy monthly
processing date.
The minimum monthly premium is one-twelfth of the minimum annual premium.
On the monthly processing date, we deduct the monthly deductions from your
account value.
During the first three years of your policy, if there is not enough net cash
surrender value to pay the monthly deductions and you have satisfied our
requirements, we do not permanently waive certain charges. Instead, we continue
to deduct these charges. This deduction may result in your policy having
negative net cash surrender value, unless you pay enough premium to prevent
this. The negative balance is your unpaid monthly deductions owing. At the end
of the special continuation period to avoid lapse of your policy, you must pay
enough premium to bring the net cash surrender value to zero plus the
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amount that covers your estimated monthly deductions for the following two
months. SEE LAPSE, PAGE 38.
ALLOCATION OF NET PREMIUMS
The net premium is the balance remaining after we take premium-based charges
from your premium payment. We add the net premium to your account value
according to your instructions.
We apply net premiums we have received from you to your policy after:
a) we receive the amount of premium required for your insurance coverage
to begin;
b) all issue requirements have been met and received by our customer
service center;
c) we approve your policy application; and d) your policy is issued.
All amounts you designated for the guaranteed interest account will be allocated
to that account. If your state requires return of your premium during the free
look period we invest amounts you have designated for the variable subaccounts
into the Fidelity VIP Money Market subaccount until 15 days after we issue your
policy (deemed delivery time, plus a typical free look period which varies by
state). If your state provides for return of account value during the free look
period, we invest amounts you designated for the variable subaccounts directly
into your selected investment portfolios. SEE FREE LOOK PERIOD , PAGE 40.
After we apply your initial net premium payment to your policy, we allocate any
additional net premiums on the valuation date of receipt. After the free look
period, we always use your most recent premium allocation instructions. Your
instructions must specify percentages that are whole numbers totaling 100%.
You may invest in a maximum of eighteen investment options over the lifetime of
your policy. The eighteen investment option maximum does not include the loan
account. SEE MAXIMUM NUMBER OF INVESTMENT OPTIONS, PAGE 19.
You may make five free premium allocation changes per year. After the five free
premium allocation changes, we charge you $25 for each additional allocation
change per policy year. The $25 fee is withdrawn from each investment option pro
rata to the amount in each investment option.
PREMIUM PAYMENTS AFFECT YOUR COVERAGE
Unless you have the guaranteed minimum death benefit feature or are in the
special continuation period, your policy continues in effect only until your net
cash surrender value no longer covers the monthly deductions for your benefits.
If this happens, your policy will enter the 61-day grace period and you must
make a premium payment to avoid lapse. SEE LAPSE, PAGE 38, AND SEE GRACE PERIOD,
PAGE 38 .
If you pay your minimum annual premium each year during the first three policy
years, we guarantee your policy and riders will not lapse during the special
continuation period, regardless of your net cash surrender value. SEE SPECIAL
CONTINUATION PERIOD, PAGE 21.
Under the guaranteed minimum death benefit, the base death benefit portion of
your policy remains effective until the end of the guarantee period. The
guaranteed minimum death benefit feature does not apply to riders which can
lapse and terminate during the guarantee period. You must meet all conditions of
the guarantee. SEE GUARANTEED MINIMUM DEATH BENEFIT , PAGE 27.
MODIFIED ENDOWMENT CONTRACTS
There are special federal income tax rules for distributions from certain life
insurance policies known as modified endowment contracts. These rules apply to
distributions such as policy loans, surrenders, and partial withdrawals.
Whether or not these rules apply depends upon whether or not the premiums you
paid are greater than the "seven-pay" limit. SEE MODIFIED ENDOWMENT CONTRACTS,
PAGE 56.
If we find that your scheduled premium causes your policy to be a modified
endowment contract on your policy date, we will require you to acknowledge that
you know the policy is a modified endowment contract. We will issue your policy
based on the scheduled premium you selected. If you do not want your policy to
be issued as a modified endowment contract, you may reduce your scheduled
premium to a level which does not cause your policy to be a modified endowment
contract. We will then issue your policy based on the revised scheduled premium.
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DEATH BENEFITS
You can decide the amount of insurance you need, now and in the future. You can
combine the long-term advantages of permanent life insurance base coverage with
the flexibility and short-term advantages of term life insurance. Both permanent
and term life insurance are available under your one policy.
When we issue your policy, we base the initial insurance coverage on the
instructions in your application. The initial death benefit is the stated death
benefit amount. You can add an adjustable term insurance rider for additional
insurance coverage.
Death benefits are valued as of the date of death of the insured person. The
stated death benefit is the permanent element of your policy. The adjustable
term insurance rider is the term insurance element of your policy.
The adjustable term insurance rider acts as a bridge. It provides term insurance
coverage which automatically adjusts to fill the gap between your total death
benefit and your base death benefit depending on which death benefit option you
choose. Generally, your stated death benefit may be no less than $50,000 to
issue your policy.
We do not guarantee coverage provided by the adjustable term insurance rider
under the guaranteed minimum death benefit.
It may be to your economic advantage to include part of your insurance coverage
under the adjustable term insurance rider. Both the cost of insurance under the
adjustable term insurance rider and the cost of insurance for the base death
benefit are deducted monthly from your account value and generally increase with
the age of the insured person. Use of the adjustable term insurance rider may
reduce sales compensation. SEE ADJUSTABLE TERM INSURANCE RIDER, PAGE 29.
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DEATH BENEFIT SUMMARY
THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES AND NO REQUESTED OR SCHEDULED
INCREASES OR DECREASES IN STATED OR TARGET DEATH BENEFIT.
<TABLE>
<CAPTION>
OPTION A OPTION B
================= ================================================= ===================================================
<S> <C> <C>
STATED DEATH The amount of policy death benefit at issue, not The amount of policy death benefit at issue, not
BENEFIT including rider coverage. This amount stays including rider coverage. This amount stays
level throughout the life of the policy. level throughout the life of the policy.
BASE DEATH The greater of the stated death benefit or the The greater of the stated death benefit plus the
BENEFIT account value multiplied by the death benefit account value or, the account value multiplied by
corridor factor. the death benefit corridor factor.
TARGET DEATH Stated death benefit plus adjustable term Stated death benefit plus adjustable term
BENEFIT insurance rider benefit. This amount remains insurance rider benefit. This amount remains
level throughout the life of the policy. level throughout the life of the policy.
TOTAL DEATH This is the total death proceeds. It is the grea This is the total death proceeds. It is the greater
BENEFIT of the target death benefit or the base death of the target death benefit plus the account value
benefit. or the base death benefit.
ADJUSTABLE TERM The adjustable term insurance rider benefit is t The adjustable term insurance rider benefit is the
INSURANCE RIDER total death benefit minus base death benefit, bu total death benefit minus the base death benefit,
BENEFIT it will not be less than zero. If the account v but it will not be less than zero. If the account
multiplied by the death benefit corridor factor value multiplied by the death benefit corridor
greater than the stated death benefit, the factor is greater than the stated death benefit plus
adjustable term insurance benefit will be the account value, the adjustable term insurance
decreased. It will be decreased so that the sum rider benefit will be decreased. It will be
the base death benefit and the adjustable term decreased so that the sum of the base death
insurance rider benefit is not greater than the benefit and the adjustable term insurance rider
target death benefit. If the base death benefit benefit is not greater than the target death benefit
becomes greater than the target death benefit, plus the account value. If the base death benefit
then the adjustable term insurance rider benefit becomes greater than the target death benefit
zero. plus the account value, then the adjustable term
insurance rider benefit is zero.
================= ================================================= ===================================================
</TABLE>
BASE DEATH BENEFIT
Your base death benefit can be different from your stated death benefit as a
result of:
o your choice of death benefit option;
o a change in your death benefit option;
o increases to satisfy the federal income tax law definition of life
insurance;
o partial withdrawals;
o increases or decreases in the stated death benefit; or
o a transaction which causes the base death benefit to change.
As long as your policy is in force, we will pay the death proceeds to your
beneficiary when the insured person dies. The beneficiary(ies) is(are) the
person (people) you name to receive the death proceeds from your policy. The
death proceeds are:
o your base death benefit; plus
o any rider benefits; minus
o your outstanding policy loan with accrued loan interest; minus
o outstanding policy charges due before the insured person's date of
death.
There could be outstanding policy charges if the insured dies while your policy
is in the grace period or, during the three-year special continuation period.
DEATH BENEFIT OPTIONS
You have a choice of two death benefit options: option A or option B (described
below). Your choice
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may result in your having a base death benefit which is greater than your stated
death benefit. You may change your death benefit option after the policy date
and before the continuation of coverage feature begins. SEE CHANGES IN DEATH
BENEFIT OPTIONS, PAGE 25.
Under death benefit option A, your base death benefit is the greater of:
1. your stated death benefit on the date of the insured person's death; or
2. your account value on the date of the insured person's death multiplied
by the appropriate "Death Benefit Corridor Factor" from the table in
Appendix A.
Under death benefit option B, your base death benefit is the greater of:
1. your stated death benefit plus your account value on the date of the
insured person's death; or
2. your account value on the date of the insured person's death multiplied
by the appropriate "Death Benefit Corridor Factor" from the table in
Appendix A.
Under option A, positive investment performance is generally reflected in a
reduced net amount at risk. This lowers your policy's total cost of insurance
charges. Option A offers insurance coverage that is a set amount with
potentially lower cost of insurance charges over time. You should choose option
B if you want to have investment performance reflected in your insurance
coverage.
Federal income tax law requires that your death benefit be at least as much as
your account value multiplied by a factor defined by law. This factor is based
on:
o the insured person's age; and
o the insured person's gender.
We will adjust your policy to continue to qualify as life insurance under the
federal income tax laws in existence at the time the policy was issued.
CHANGES IN DEATH BENEFIT OPTIONS
You may request a change in your death benefit option A or B after the policy
date and before the continuation of coverage feature begins. Your death benefit
option change is effective on your next monthly anniversary after we accept and
approve your requested change, so long as at least five days remain before your
monthly anniversary. If fewer than five days remain before your monthly
anniversary, your death benefit option change is effective on your next monthly
anniversary.
After we approve your request, we send a new policy schedule page to you. You
should attach it to your policy. We may ask you to return your policy to our
customer service center so that we can note the change in your schedule. A death
benefit option change applies to your entire stated death benefit.
For you to change from death benefit option A to option B, you must provide to
us proof that the insured person is insurable under our normal rules of
underwriting for your policy class, except in Florida. Changing your death
benefit option may reduce or increase your target death benefit, as well as your
stated death benefit.
We may not allow you to change the death benefit option if it reduces the target
or stated death benefit below the minimum we require to issue your policy.
On the effective date of your option change, your stated death benefit is
changed as follows:
Change Change Stated Death Benefit
From To Following Change:
---- -- ----------------
Option A -> Option B your stated death benefit before the
change minus your gross account value as of the
effective date of the change.
Option B -> Option A your stated death benefit before the
change plus your gross account value as of the
effective date of the change.
We increase or decrease your stated death benefit to keep the net amount at risk
the same on the date you change your death benefit option. Additionally, there
is no change to the amount of term insurance if you have an adjustable term
insurance rider. SEE COST OF INSURANCE CHARGE, PAGE 49.
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If you change your death benefit option, we adjust the stated death benefit for
each of your segments by allocating your account value to each benefit segment.
For example, if you change from death benefit option A to option B, your stated
death benefit is decreased by the amount of your account value allocation to
that segment. If you change from death benefit option B to option A, your stated
death benefit is increased by the amount allocated to that segment. We do not
impose a surrender charge for any decrease in your stated death benefit due to
your changing your death benefit option. There is no change to the target
premium. SEE SURRENDER CHARGE, PAGE 51.
CHANGES IN DEATH BENEFIT AMOUNTS
You may want to increase the target or stated death benefit under your policy.
You may do this while your policy is in force and before the policy anniversary
when the insured person turns age 76. You may request a decrease in the stated
death benefit only after your second policy anniversary.
Contact our customer service center to request an increase or decrease in your
policy death benefit. The request is effective as of the next monthly processing
date after we receive your request and approve it, unless there are underwriting
or other requirements which must be met before your request is effective. Any
requested change in your coverage must be for at least $10,000.
After we approve your request, we send you a new schedule page for your policy
which includes the:
o stated death benefit;
o benefit under applicable riders;
o guaranteed cost of insurance rates of each segment;
o guideline annual premium;
o new surrender charge; and
o target death benefit schedule.
Keep the new schedule with your policy. We may ask you to send your policy to us
so that we can note the change in your schedule.
We may not approve a requested change if it will disqualify your policy as life
insurance under the applicable federal income tax law. If we disapprove a change
for any reason, we provide you with a notice of our decision. SEE TAX
CONSIDERATIONS, PAGE 55. If you decrease your death benefit, you may not
decrease your stated death benefit below $50,000 or the minimum we require to
issue your policy.
There may be tax consequences as a result of a decrease in your death benefit,
as well as a possible surrender charge. SEE TAX STATUS OF THE POLICY, PAGE 55,
AND MODIFIED ENDOWMENT CONTRACTS, PAGE 56.
Requested reductions in the death benefit will first be applied to decrease the
target death benefit. We decrease your stated death benefit only after your
adjustable term insurance rider coverage is reduced to zero. If you have more
than one segment, we divide subsequent decreases in stated death benefit among
your benefit segments pro rata unless state law requires differently.
You must provide satisfactory evidence that the insured person is still
insurable in order to increase your death benefit.
Unless you tell us differently, we assume any request you make for an increase
in your target death benefit is also a request for an increase to the stated
death benefit. Thus, the amount of your adjustable term insurance rider will not
change. You may change the target death benefit only once in a policy year.
The initial, or first segment, is the stated death benefit on the effective date
of the policy. An increase in the stated death benefit (other than one caused by
an option change) will cause a new segment to be created. The segment year
begins on the segment effective date and ends one year later. The following may
apply to each new segment:
o a new minimum annual premium for the remainder of the first three years
of your policy, if applicable;
o a new sales charge;
o new surrender charges;
o new cost of insurance charges, guaranteed and current;
o a new incontestability period;
o a new suicide exclusion period; and
o a new target premium.
A requested increase in your stated death benefit creates a new segment. Once we
create a new segment, it is permanent unless state law requires differently. If
an option change causes the stated
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death benefit to increase, no new segment is created. Instead, the size of each
existing segment(s) is(are) changed. If an option causes the stated death
benefit to decrease, each segment is decreased.
To determine the applicable sales charge, premiums you pay after an increase are
applied to your policy segments in the same proportion as the guideline annual
premiums for each segment bears to the sum of the guideline annual premiums for
all segments.
For each coverage segment, your schedule shows your guideline annual premiums.
We allocate the net amount at risk among segments in the same proportion that
each segment bears to the total stated death benefit.
GUARANTEED MINIMUM DEATH BENEFIT
Usually, how long your policy remains in force depends on your policy's net cash
surrender value. Because we deduct charges monthly from your net cash surrender
value, your coverage lasts only as long as your net cash surrender value is
enough to pay these charges and your account value is more than your loan
interest due during the special continuation period. Your account value and the
length of time your policy remains in force depend on:
1. timing and amount of any premium payments;
2. the investment performance of the variable subaccounts;
3. the interest you earn in the guaranteed interest account;
4. the amount of your monthly charges;
5. partial withdrawals you take; and
6. loan activity you may have.
By adding the guaranteed minimum death benefit rider to your policy, you can put
one of two guaranteed minimum death benefit options in force. These options
extend the period that your policy's stated death benefit remains in effect even
if the variable subaccounts have poor investment performance. The two guaranteed
minimum death benefit options vary primarily by the length of time they each
cover for the guarantee period. The options provide for a guarantee period that
lasts:
1. under one guaranteed minimum death benefit option, until the later of
ten policy years or until the insured person is age 65; or
2. under the other guaranteed minimum death benefit option, the lifetime
of the insured person so long as your policy is in force, or to the
maturity date.
The guaranteed minimum death benefit coverage does not apply to any riders,
including the adjustable term insurance rider. Therefore, if your net cash
surrender value is not enough to pay the deductions as they come due on your
policy and if your policy is no longer in the special continuation period, only
the stated death benefit portion of your coverage is guaranteed to stay in
force. See your policy to determine how your benefits are affected in this
situation. SEE LAPSE, PAGE 38.
During the guarantee period, we will deduct a monthly charge from your account
value. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 48.
This guaranteed minimum death benefit rider can only be added at the issue of
your policy and is not available in some states.
REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD
To qualify for the guaranteed minimum death benefit you must pay an annual
premium higher than the minimum annual premium. This higher premium is called
the guarantee period annual premium. The guarantee period monthly premium is
equal to one-twelfth of the guarantee period annual premium. Your net account
value must also meet certain diversification requirements.
Although the required guarantee period annual premium level is different for the
two guarantee period options, the guaranteed minimum death benefit operates
similarly for either option.
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<PAGE>
Your guarantee period annual premium depends on which of the two guarantee
periods you choose, as well as:
o your policy's stated death benefit;
o the insured person's age, gender, premium class and underwriting
characteristics;
o the death benefit option you chose;
o additional rider coverage on your policy; and
o other additional benefits on your policy.
If your policy has no rider coverage, the guarantee period annual premium for
the guarantee period for life will be equal to the guideline annual premium
determined under the federal income tax law definition of life insurance. The
guarantee period annual premium for the ten year or age 65 guarantee period will
be the greater of the target premium or the minimum annual premium for each
segment. The guarantee period annual premium for the guarantee period for life
will be greater than that required for the ten year or age 65 guarantee period.
At each monthly processing date we test to see if you have paid enough premium
to keep your guarantee in place. We calculate:
o actual premiums paid; minus
o the amount of any partial withdrawals you make; minus
o policy loans you take with accrued loan interest.
This amount must equal or exceed:
o the sum of the guarantee period monthly premium payments for each
policy month starting with your first policy month through the end of
the policy month that begins on the current monthly processing date.
You must continually meet the requirements of the guarantee period for this
feature to remain in effect. We show the guarantee period annual premium on your
policy schedule. If your policy benefits increase, the guarantee period annual
premium increases. If your policy fails to meet this test on any monthly
processing date, the guarantee period ends, and thus the guaranteed minimum
death benefit lapses.
The guarantee period also ends if your net account value on any monthly
processing date is not diversified as follows:
1. you must invest your net account value in at least five investment
options; and
2. you may invest no more than 35% of your net account value in any one
investment option.
Your policy will continue to meet the diversification requirements if:
1. you have automatic rebalancing and you meet the two diversification
tests listed above; or
2. you have dollar cost averaging which results in transfers into at least
four additional investment options with no more than 35% of any
transfer directed to any one investment option.
SEE DOLLAR COST AVERAGING, PAGE 33, AND AUTOMATIC REBALANCING, PAGE 34.
If you fail to satisfy either the premium test or the diversification test and
you do not correct it, this feature terminates. If you choose to activate the
guaranteed minimum death benefit, you must make sure your policy satisfies the
premium test and diversification test. Once it terminates, you cannot reinstate
the guaranteed minimum death benefit feature. The guarantee period annual
premium then no longer applies to your policy.
ADDITIONAL BENEFITS
Your policy may include additional benefits, which we attach by rider. A rider
changes benefits under your policy and may or may not add an additional cost to
your policy. If applicable, we deduct a monthly charge from your account value
for each rider you choose. You may cancel these rider benefits at any time. If
you choose any of these benefits your policy will include the details. Not all
riders are available for all policies. You may schedule your term rider coverage
to increase or decrease at issue. If you want to increase your scheduled
benefits after issue of your rider, new guidelines may apply. Scheduled benefits
are the kind and amount of benefits you choose under your policy over a stated
period of time.
Periodically we may offer other riders than those listed here. You should
contact your registered representative for a complete list of the riders now
available.
SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 56, FOR INFORMATION ON THE POSSIBLE TAX
EFFECTS OF ADDING OR CANCELING THESE BENEFITS.
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ADJUSTABLE TERM INSURANCE RIDER
You may increase your death proceeds by adding an adjustable term insurance
rider on the insured person's life. As the name suggests, the adjustable term
insurance rider adjusts over time.
You specify a target death benefit when you apply for this rider. The target
death benefit can be level or can be scheduled to change at the beginning of any
policy year. We generally restrict your target death benefit to an amount not
more than ten times your stated death benefit at issue. In other words, if your
stated death benefit is $100,000, then the maximum amount of target death
benefit we allow you is $1,000,000.
The death benefit for the adjustable term insurance rider is the difference
between your total death benefit and your base death benefit. The death benefit
automatically adjusts daily as your base death benefit changes. Total death
benefit depends on which death benefit option is in effect:
OPTION A: If option A is in effect, the total death benefit is the
greater of:
a. the target death benefit; or
b. the account value multiplied by the appropriate factor
from the death benefit corridor factors in the policy.
OPTION B: If option B is in effect, the total death benefit is the
greater of:
a. the target death benefit plus the account value; or
b. the account value multiplied by the appropriate factor
from the death benefit corridor factors in the policy.
For example, under option A, assume your base death benefit increases as a
result of an increase in your account value. The adjustable term insurance rider
adjusts to provide death proceeds equal to your total death benefit in each
year:
Base Death Total Death Adjustable Term
Benefit Benefit Insurance Rider Amount
------- ------- ----------------------
$201,500 $250,000 $48,500
202,500 250,000 47,500
202,250 250,000 47,750
It is possible that the amount of your adjustable term insurance may be zero if
your base death benefit increases enough. Using the same example, if the base
death benefit under your policy grew to $250,000 or more, the adjustable term
insurance would be zero.
The adjustable term insurance can never be less than zero. Even when the
adjustable term insurance is reduced to zero, your rider remains in effect until
you remove it from your policy. Therefore, if later the base death benefit is
reduced below your target death benefit, the adjustable term insurance rider
amount reappears to maintain the total death benefit.
You may change the target death benefit schedule after it is issued, based on
our rules. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 26.
We may deny any future, scheduled increases to your target death benefit if you
cancel a scheduled change, or if you ask for an unscheduled decrease in your
target death benefit.
Partial withdrawals, changes from death benefit option A to death benefit option
B, and base decreases may reduce the amount of your target death benefit. SEE
PARTIAL WITHDRAWALS, PAGE 37, AND CHANGES IN DEATH BENEFIT OPTIONS, PAGE 25.
There is no defined premium for a given amount of adjustable term insurance
coverage. Instead, we deduct a monthly cost of insurance charge from your
account value. The cost of insurance for this rider is calculated as the monthly
cost of insurance rate for the rider coverage multiplied by the adjustable term
death benefit in effect that month. The cost of insurance rates will be
determined by us from time to time. They will be based on the issue age, gender,
and premium class of the person insured, as well as the length of time since
your policy date. The monthly guaranteed maximum cost of insurance rates for
this rider will be in the policy. SEE COST OF INSURANCE CHARGE, PAGE 49.
There are no sales charges or surrender charges for this coverage. This means
that an increase in your target death benefit which does not increase your
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stated death benefit does not increase the total surrender charge for your
policy. Further, a decrease in your adjustable term insurance rider coverage
does not cause a surrender charge to be assessed. If the target death benefit
schedule is increased by you after the rider is issued, we use the same rates
for the entire coverage for this rider. These rates are based on the original
premium class even though satisfactory new evidence of insurability is given to
us for the increased schedule.
ADDITIONAL INSURED RIDER
This rider provides death benefits upon the death of immediate family members
other than the insured person. You may add up to nine additional insured person
riders to your policy. We require proof of insurability for each additional
insured person. The minimum amount of coverage for each rider is $10,000. The
maximum coverage for all additional insured persons is five times your policy's
stated death benefit.
EXCHANGE OF INSURED RIDER
This rider allows you to change the insured person under your policy. You must
provide satisfactory evidence of insurability for the new insured person. A
change of the insured person may have federal income tax consequences. If you
change the insured person, the cost of your future insurance charges may change,
but your account value remains the same as of the date you make this change.
Changing the insured person also means that there will be a new contestability
period and suicide period. There is no charge for this rider.
WAIVER OF COST OF INSURANCE RIDER
If the insured person becomes totally disabled while your policy is in force,
this rider provides that we waive the monthly expense charges, cost of insurance
charges, and rider charges during the disability. This means that we do not
deduct these amounts from your account value. You must meet all of our
requirements for this rider to apply. If you add this rider to your policy, you
may not add the waiver of specified premium rider.
WAIVER OF SPECIFIED PREMIUM RIDER
If the insured person becomes disabled while your policy is in force, this rider
provides that we credit a specified premium amount monthly to your policy during
the total disability of the insured person. There is a waiting period before
this benefit applies. In your application, you select the amount of premium we
credit, subject to our limits. If you add this rider to your policy, you may not
add the waiver of cost of insurance rider.
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.
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.
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. If you add this rider to your
policy, you may not add the guaranteed minimum death benefit rider.
GUARANTEED MINIMUM DEATH BENEFIT RIDER
This rider provides that your stated death benefit will remain in force for the
selected guarantee period regardless of the amount of your net cash surrender
value, provided certain conditions are met. SEE GUARANTEED MINIMUM DEATH
BENEFIT, PAGE 27.
SPECIAL FEATURES
POLICY MATURITY
If the insured person is still living on the maturity date or the policy
anniversary when the insured person reaches age 100 and you do not want to
exercise your right to continue the policy, you may surrender the policy for the
net account value. Your policy then ends. Some part of this payment may be
taxable. You should consult your tax adviser.
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CONTINUATION OF COVERAGE
The continuation of coverage feature allows insurance coverage to continue in
force beyond when the insured person reaches age 100. To become effective, your
written request for the continuation of coverage feature must be received at our
customer service center at least one year before the maturity date. If you
choose the continuation of coverage feature to become effective, we:
o transfer your net account value (excluding the amount in the loan
account) into the guaranteed interest account;
o terminate all riders;
o convert death benefit option A to death benefit option B, if
applicable;
o convert your stated death benefit and target death benefit to zero; and
o terminate investment features such as dollar cost averaging and
automatic rebalancing.
You may make no further premium payments.
Your insurance coverage becomes the net account value and continues in force
until the insured person's death, unless the policy lapses or is surrendered.
However, we deduct no further cost of insurance charges. Your monthly deductions
also cease when continuation of coverage begins.
Your net account value may not be transferred into the variable subaccounts
after the insured person reaches age 100.
If you wish to stop coverage after the continuation of coverage feature begins,
you may surrender your policy and receive the net account value. There is no
surrender charge after the insured person reaches age 100. All normal
consequences of surrender apply. SEE SURRENDER, PAGE 40, AND SURRENDER CHARGE,
PAGE 51.
The continuation of coverage feature may not be available in all states.
The tax consequences of coverage continuing beyond when the insured person
reaches age 100 are uncertain. You should consult a tax adviser as to those
consequences.
RIGHT TO CONVERT POLICY
During the first 24 months after your policy date, you have the right to convert
your policy to a guaranteed policy, unless state law requires differently. To do
this, we transfer the amount you have in the variable subaccounts to the
guaranteed interest account. We allocate all of your future net premiums only to
the guaranteed interest account. We do not allow any future payments or
transfers to the variable subaccounts when you exercise this right.
We will not charge you for the transfer to make this exchange. SEE THE
GUARANTEED INTEREST ACCOUNT, PAGE 19.
POLICY VALUES
ACCOUNT VALUE
Your account value is the total amount you have in the guaranteed interest
account, the variable subaccounts, and the loan account. Your account value
reflects:
o net premiums;
o deductions for charges;
o partial withdrawals;
o investment performance of the variable subaccounts;
o interest earned on the amount you have in the guaranteed interest
account; and
o interest earned on the amounts you have in the loan account.
NET ACCOUNT VALUE
Your policy's net account value is your account value minus the amount of your
outstanding policy loans and accrued loan interest.
CASH SURRENDER VALUE
Your cash surrender value is your account value minus any surrender charge.
NET CASH SURRENDER VALUE
Your net cash surrender value is your cash surrender value minus the amount of
your outstanding policy loans and accrued loan interest.
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DETERMINING THE VALUE IN THE VARIABLE SUBACCOUNTS
The amounts included in the variable subaccounts are measured by accumulation
units and accumulation unit values.
The value of a variable subaccount is the accumulation unit value for that
subaccount times the number of accumulation units you own in that subaccount.
Each variable subaccount has a different accumulation unit value.
You purchase accumulation units of a subaccount whenever you allocate premium or
make transfers to that subaccount. This includes transfers from the loan
account.
We redeem accumulation units from the variable subaccounts:
o when you take a partial withdrawal;
o when amounts are transferred from a variable subaccount (including
transfers to the loan account);
o for the monthly deductions from your account value;
o for policy transaction charges;
o for surrender charges;
o on surrender; and
o to pay the death benefit when the insured person dies.
We calculate the number of variable subaccount accumulation units purchased or
redeemed by:
1. dividing the dollar amount of your transaction by:
2. the subaccount's accumulation unit value calculated at the close of
business on the valuation date of the transaction.
The accumulation unit value is the value of an accumulation unit determined as
of each valuation date. The accumulation unit value of each subaccount varies
with the investment performance of the matching portfolio. It reflects:
o investment income;
o realized and unrealized capital gains and losses;
o investment portfolio expenses; and
o daily mortality and expense risk charges we take from the variable
account.
SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH SUBACCOUNT, PAGE 32.
The transaction date is the date we receive your premium, an acceptable request
or other transaction request at our customer service center, so long as the date
of receipt is a valuation date. Each valuation date ends at 4:00 p.m. Eastern
time. We use the accumulation unit value which is next calculated after we
receive your premium or transaction request and we use the number of
accumulation units attributable to your policy on the date of receipt.
We take monthly deductions from your account value as of the monthly processing
date. If your monthly processing date is not a valuation date, the monthly
deduction is processed on the next valuation date.
The value of amounts allocated to the variable subaccounts goes up or down
depending on investment performance.
FOR AMOUNTS IN THE VARIABLE SUBACCOUNTS, THERE IS NO GUARANTEED MINIMUM CASH
VALUE.
HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH SUBACCOUNT
We determine accumulation unit values for the variable subaccounts on each
valuation date.
We generally set the accumulation unit value for a subaccount at $10 on the date
when the subaccount is first opened and begins accepting amounts. After that,
the accumulation unit value on any valuation date is:
1. the accumulation unit value for the preceding valuation date multiplied
by
2. the accumulation experience factor for that subaccount for the
valuation period.
Every valuation period begins at 4:00 p.m. Eastern time on a valuation date and
ends at 4:00 p.m. Eastern time on the next valuation date.
We calculate an accumulation experience factor for each subaccount every
valuation date as follows:
1. We take the share value of the underlying portfolio shares in the
subaccount as reported to us by the investment portfolio manager as of
the close of business on that valuation date.
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2. We add dividends or capital gain distributions declared per share and
reinvested by the investment portfolio on the date that the share value
is affected. If applicable, we subtract a charge for taxes from this
amount.
3. We divide the remaining amount by the share value of the underlying
investment portfolio for the variable subaccount at the close of
business on the previous valuation date.
4. We then subtract a charge for the mortality and expense risk which we
assume under your policy. The daily charge is .002466% of the
accumulation unit value. This is an annual rate of .90% of the
accumulation unit value. If the previous day was not a valuation date,
the charge is multiplied by the additional number of days since the
prior valuation date.
The result of these calculations is the accumulation experience factor for the
valuation period.
TRANSFERS OF ACCOUNT VALUE
You may make up to twelve free transfers among the variable subaccounts, or the
guaranteed interest account, in each policy year. You may not make transfers
until after your free look period ends if your state requires a refund of
premium during the free look period. We do not limit your number of transfers,
but we charge a $25 fee for each transfer that you make after the first twelve
in each policy year. We do not include transfers for automatic rebalancing or
dollar cost averaging toward your twelve free transfers. You may not make
transfers during the continuation of coverage period.
You may make transfer requests in writing, or by telephone if you have telephone
privileges, to our customer service center. Your transfer takes effect on the
valuation date we receive your request. The minimum amount you may transfer is
$100. This minimum does not need to come from only one investment option or be
transferred to only one investment option, as long as the total amount you
transfer is at least $100. However, if the amount remaining in a variable
subaccount is less than $100 when you make a transfer request, we transfer the
entire amount out of that subaccount.
EXCESSIVE TRADING
Excessive trading activity can disrupt investment portfolio management
strategies and increase portfolio expenses. Thus, we may limit excessive
transfer activity.
Excessive transfers may cause:
o increased trading and transaction costs;
o disruption of planned investment strategies;
o forced and unplanned portfolio turnover;
o lost opportunity costs; and
o the investment portfolios to have large asset swings that decrease
their ability to provide maximum investment return to all policyowners.
In response to excessive trading, we may place restrictions or refuse transfers
made by third-party agents acting on behalf of owners such as a market timing
service. We will refuse or place restrictions on transfers when we determine, in
our sole discretion, that transfers are harmful to the investment portfolios, or
to policyowners as a whole.
GUARANTEED INTEREST ACCOUNT TRANSFERS
You may transfer from the guaranteed interest account only in the first 30 days
of each policy year. Transfer requests received within 30 days before your
policy anniversary are deemed to occur on your policy anniversary. A request
received by us within 30 days after your policy anniversary is effective as of
the valuation date we receive it. Transfer requests made at any other time will
not be processed.
Transfers from the guaranteed interest account are limited to the largest of:
o 25% of your guaranteed interest account balance at the time of your
first transfer or withdrawal out of it in that policy year;
o the sum of the amounts you have transferred and withdrawn from the
guaranteed interest account in the prior policy year; or
o $100.
Transfers of your account value into the guaranteed interest account are not
restricted.
DOLLAR COST AVERAGING
If your account value in the Fidelity VIP Money Market subaccount is at least
$10,000, you can elect dollar cost averaging. The main goal of dollar cost
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averaging is to protect your policy values from short-term price changes.
DOLLAR COST AVERAGING DOES NOT ASSURE A PROFIT NOR DOES IT PROTECT YOU AGAINST A
LOSS IN A DECLINING MARKET.
This systematic plan of transferring account values is intended to reduce the
risk of investing too much when the price of an investment portfolio's shares is
high. It also reduces the risk of investing too little when the price of an
investment portfolio's shares is low.
Since you transfer the same dollar amount to other subaccounts each period, you
purchase more units in a subaccount if the unit value per unit is low, and you
purchase fewer units if the unit value is high.
You may add dollar cost averaging to your policy at any time. The first dollar
cost averaging date must be at least five days after we receive your dollar cost
averaging request. Dollar cost averaging cannot begin until after the end of
your free look period, if your state requires refund of all premiums paid during
the free look period.
With dollar cost averaging, you designate either a dollar amount, or a
percentage of your account value, for automatic transfer from the Fidelity VIP
Money Market subaccount for automatic transfer. Each period, we automatically
transfer the amount you select to one or more other variable subaccounts. You
may not make dollar cost averaging transfers to the guaranteed interest account
or loan account.
Each dollar cost averaging transfer you make from the Fidelity VIP Money Market
subaccount must be at least $100. The minimum percentage you may transfer to any
one subaccount is 1% of the total amount you transfer from the Fidelity VIP
Money Market subaccount.
Dollar cost averaging may occur on the same day of the month either monthly,
quarterly, semi-annually, or annually. Unless you tell us otherwise, dollar cost
averaging automatically takes place monthly, on the monthly processing date.
We do not count dollar cost averaging transfers toward your twelve free
transfers per policy year. There is no charge for this feature.
You may have both dollar cost averaging and automatic rebalancing at the same
time. If you have both programs in effect at the same time, the Fidelity VIP
Money Market subaccount cannot be included in your automatic rebalancing
program.
CHANGING DOLLAR COST AVERAGING
You may change your dollar cost averaging program one time per policy year. If
you have telephone privileges, you may make changes to the dollar cost averaging
program by telephoning our customer service center. SEE TELEPHONE PRIVILEGES,
PAGE 43.
TERMINATING DOLLAR COST AVERAGING
You may cancel dollar cost averaging by sending satisfactory notice to our
customer service center. We must receive it at least five days before the next
dollar cost averaging date.
Dollar cost averaging will terminate if:
1. you specify a termination date; or
2. your balance remaining in the Fidelity VIP Money Market subaccount
reaches a dollar amount you set; or
3. on any dollar cost averaging date, the amount in the Fidelity VIP Money
Market subaccount is equal to or less than the amount to be
transferred. We will then transfer the remaining amount and dollar cost
averaging ends.
AUTOMATIC REBALANCING
Automatic rebalancing provides you with a method for maintaining a consistent
approach to investing account values over time, and simplifying the process of
asset allocation by dividing amounts among the investment options you have
chosen.
Transfers made for automatic rebalancing do not count toward your twelve free
transfers per policy year. There is no charge for this feature.
If you choose this feature, on each rebalancing date, we transfer amounts among
the investment options to match your pre-set automatic rebalancing allocation
percentages. After the transfers, the ratio of your account value in each
investment option to your total
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account value for all investment options included in automatic rebalancing
matches the automatic rebalancing allocation percentage for that investment
option. This action rebalances the amounts in the investment options that do not
match your set allocation. This happens if an investment option outperforms
other investment options for that time period.
You may choose the automatic rebalancing feature on your application or later by
completing our customer service form. Automatic rebalancing may occur on the
same day of the month either monthly, quarterly, semi-annually, or annually. If
you do not specify, automatic rebalancing will occur quarterly.
If you choose automatic rebalancing on your policy application, the first
transfer occurs on the date you select (after your free look period if your
state requires return of all premiums paid during the free look period). If you
elect this feature after your policy date, we process the first transaction on
the date you have requested. If you request no date, processing is on the last
valuation date of the calendar quarter we receive your notice at our customer
service center.
When you choose automatic rebalancing allocations, you may choose up to eighteen
total investment options. SEE MAXIMUM NUMBER OF INVESTMENT OPTIONS, PAGE 19.
If you have both automatic rebalancing and dollar cost averaging at the same
time, the Fidelity VIP Money Market subaccount cannot be included in your
automatic rebalancing allocating program. You may not include the loan account
in your automatic rebalancing allocations.
CHANGING AUTOMATIC REBALANCING
You may change your allocation percentages for automatic rebalancing at any
time. Your allocation change is effective on the valuation date that we receive
it at our customer service center. If you reduce the amount allocated to the
guaranteed interest account, it is considered a transfer from that account. You
must meet the requirements for the maximum transfer amount and time limitations
on transfers from the guaranteed interest account. SEE TRANSFERS OF ACCOUNT
VALUE, PAGE 33.
If you have automatic rebalancing and the guaranteed minimum death benefit and
you ask for an allocation which does not meet the guaranteed minimum death
benefit diversification requirements, we will notify you that the allocation
needs to be changed and ask you for revised instructions.
TERMINATING AUTOMATIC REBALANCING
You may terminate automatic rebalancing at any time, as long as we receive your
notice of termination at least five days before the next automatic rebalancing
date. If you have the guaranteed minimum death benefit and you terminate the
automatic rebalancing feature, you still must meet the diversification
requirements of your net account value for the guarantee period to continue. SEE
GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27.
POLICY LOANS
You may borrow against your policy at any time after the first monthly
processing date by using your policy as security for a loan, or as otherwise
required by law. The amount you borrow is called a policy loan. Your policy loan
is:
1. the total amount you borrow from your policy; plus
2. any policy loan interest that is capitalized when due; minus
3. policy loan repayments you make.
Unless state law requires differently, any new policy loan you take must be at
least $100. The maximum amount you can borrow on any valuation date, unless
required differently by state law, is 90% of your net cash surrender value.
Your request for a policy loan must be directed to our customer service center.
If you have telephone privileges, you may request a policy loan for less than
$25,000 by telephoning our customer service center. SEE TELEPHONE PRIVILEGES,
PAGE 43.
Based on our administrative system, we may have other rules for policy loans.
For example, we may require that your loan request be for a dollar amount rather
than a percentage to be taken from a specific investment option.
Loan interest charges on your policy loan accrue daily at a maximum annual
interest rate of 6%. Interest is due in arrears on each policy anniversary.
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If you do not pay your interest when it is due, we add it to your policy loan on
your policy anniversary.
If you request an additional loan, we add the amount you request to your
existing outstanding policy loan. This way, there is only one loan outstanding
on your policy at any time.
You may repay all or part of your policy loan at any time while your policy is
in force. We assume that any payments you make, other than your scheduled
premiums, are policy loan repayments. You must tell us otherwise if you want us
to consider additional payments as premiums.
When you request a loan you may specify one investment option from which the
loan will be taken. If you do not specify one, the loan will be taken
proportionately from each active investment option you have.
When you take a policy loan, we transfer to the loan account an amount equal to
your policy loan amount from the variable subaccounts and the guaranteed
interest account in the same proportion they represent of your total net account
value. We follow this same process for loan interest in the amount due at your
policy anniversary. We credit the loan account with interest at an annual rate
of 4%.
The loan account is part of our general account, separate from the guaranteed
interest account. When we make transfers to the loan account, we redeem
sufficient units of the variable subaccounts to cover the amount of the loan
which you take from the variable account. Unless you tell us otherwise, we
deduct the amount transferred from each investment option in the same proportion
that your account value in that investment option has to your net account value
immediately before the loan transaction. We determine the amounts in each
investment option as of the valuation date when we receive your loan request.
Policy loans may cause your policy to lapse if your net cash surrender value is
not enough to pay all deductions each month. SEE LAPSE, PAGE 38.
Any policy loans you take may have tax consequences. SEE DISTRIBUTIONS OTHER
THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 57, AND
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS, PAGE 57.
LOAN REPAYMENT
We transfer the amount of interest credited to the loan account for a policy
year from the loan account on your policy anniversary. When you make a loan
repayment, we transfer an amount equal to your repayment from the loan account
up to the amount of your policy loan. Unless you tell us otherwise, we allocate
these transfers among the variable subaccounts and the guaranteed interest
account in the same proportion as your current premium allocation.
PREFERRED LOANS
We will consider 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,
to be preferred loan amounts, as described below. Loan interest charges on your
preferred loan amount accrue daily at a maximum annual interest rate of 4%.
During each policy year of preferred loan eligibility, the first loan you take
during that year will be considered a preferred loan amount up to a maximum of
10% of the net account value. Any amount loaned later in that policy year will
not be considered a preferred loan amount. Beginning with the 21st policy year,
we will consider all loan balances to be preferred loan amounts.
If the preferred loan amount you take during any policy year is less than the
maximum allowed, you may not carry over the balance to increase the eligible
preferred loan amount in any subsequent policy year.
LOANS AND YOUR BENEFITS
Taking a loan decreases the amount you have in the variable subaccounts.
Accruing loan interest will change your net account value as compared to what it
would have been if you did not take a loan.
Even if you repay your loan, it has a permanent effect on your account value.
This means that the benefits under your policy may be affected.
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The loan is a first lien on your policy. This means we deduct your outstanding
policy loan and accrued loan interest from the death benefit payable and the
cash surrender value payable on surrender.
Failure to repay your loan may affect the guaranteed minimum death benefit
feature and the length of time your policy remains in force. The policy lapses
(FOR EXCEPTIONS, SEE SPECIAL CONTINUATION PERIOD, PAGE 21, AND GUARANTEED
MINIMUM DEATH BENEFIT, PAGE 26) when the cash surrender value minus policy loans
and accrued loan interest is not enough to cover your monthly deductions. If
your policy lapses with a loan outstanding, you may have adverse tax
consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED
ENDOWMENT CONTRACTS, PAGE 57, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM
POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 57.
If you do not repay your policy loan, we deduct the outstanding policy loan
amount and accrued loan interest from the death benefits payable, or the cash
surrender value payable upon surrender.
PARTIAL WITHDRAWALS
You may request a partial withdrawal on any valuation date after your first
policy anniversary by contacting our customer service center. If you request
partial withdrawals by telephone, the partial withdrawal must be for an amount
less than $25,000 and may not cause a decrease in your death benefit; otherwise,
your partial withdrawal request must be in writing. SEE TELEPHONE PRIVILEGES,
PAGE 43.
You may take twelve partial withdrawals per policy year. There is a fee of $25
or 2% of the withdrawal, whichever is less, for each additional partial
withdrawal after your first partial withdrawal in a policy year. We may set
rules on partial withdrawals, based on our administrative system. For example,
we may require that you specify a dollar amount rather than a percentage to be
taken from a specific investment option.
The minimum partial withdrawal you may take is $100. The maximum partial
withdrawal you may take is the amount which leaves $500 as your net cash
surrender value. If you request a withdrawal of more than this maximum, we
require you to surrender your policy. When you take a partial withdrawal, we
deduct your withdrawal amount from your account value. We also deduct a service
fee from your account value if your partial withdrawal is not your first partial
withdrawal in that policy year. If applicable, we deduct a surrender charge from
your account value if your partial withdrawal causes a reduction in your stated
death benefit. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 47.
Partial withdrawals may have adverse tax consequences. SEE DISTRIBUTIONS OTHER
THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS, PAGE 57.
PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION A
If you selected death benefit option A, and if no more than fifteen years have
passed since your policy date and the insured person is not yet age 81, you may
take a partial withdrawal of up to 5% of your stated death benefit without
decreasing the stated death benefit. Any additional amounts you withdraw will
reduce your stated death benefit by the amount of the withdrawal and may be
subject to a surrender charge.
PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION B
If you have selected death benefit option B, a partial withdrawal does not
reduce your stated death benefit or target death benefit. However, we reduce the
total death benefit by at least the partial withdrawal amount because your
account value is reduced.
STATED DEATH BENEFIT AND TARGET DEATH BENEFIT REDUCTIONS
Generally, we reduce the stated death benefit by the amount of the partial
withdrawal. A partial withdrawal may reduce your target death benefit.
Partial withdrawals do not reduce the stated death benefit if your base death
benefit has been increased to qualify your policy as life insurance under the
federal income tax laws, if you withdraw an amount that is no greater than the
amount that reduces your account value to a level which no longer requires your
base death benefit to be increased to qualify as life insurance for federal
income tax law purposes. SEE TAX STATUS OF THE POLICY, PAGE 55.
We require a minimum stated death benefit and a minimum target death benefit to
issue your policy. You are not allowed to take a partial withdrawal if it
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reduces your stated death benefit or target death benefit below this minimum.
SEE GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS, PAGE 55.
PARTIAL WITHDRAWAL MECHANICS
Unless you tell us otherwise, we will make a partial withdrawal from the
guaranteed interest account and the variable subaccounts in the same proportion
that each investment option has to your net account value immediately before
your withdrawal. The amount withdrawn from the guaranteed interest account may
not be for more than your total withdrawal multiplied by the ratio of your
account value in the guaranteed interest account to your total net account value
immediately before the partial withdrawal transaction.
We will send a new schedule page for your policy showing the effect of your
withdrawal if there is any change to your stated death benefit or your target
death benefit.
To make this change, we may ask that you return the policy to our customer
service center. Your withdrawal and any reductions in the death benefits are
effective as of the valuation date on which we receive your request. SEE
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE
57, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT
MODIFIED ENDOWMENT CONTRACTS, PAGE 57.
LAPSE
Your insurance coverage continues as long as your net cash surrender value is
enough to pay all deductions each month. Lapse does not apply if either the
guaranteed minimum death benefit or the special continuation period is in effect
and you have met all requirements. SEE SPECIAL CONTINUATION PERIOD, PAGE 21, AND
GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27.
After the insured person reaches age 100 and if the continuation of coverage
feature is active, the policy could lapse even though there are no further
monthly deductions. If there is an outstanding policy loan, your policy will
lapse if the loan plus the accrued interest owed is more than the account value.
GRACE PERIOD
Your policy enters the 61-day lapse grace period if, on a monthly processing
date:
1. your net cash surrender value is zero (or
less); and
2. the three-year special continuation period has expired, or you have not
paid the required special continuation period premium; and
3. you do not have the guaranteed minimum death benefit or it has expired
or terminated.
We notify you that the policy is in a grace period at least 30 days before the
grace period ends. We provide this notice to you, or a person to whom you have
assigned your policy, at the last address in our records. We notify you of the
required premium payment necessary to prevent your policy from lapsing. This
amount is generally the amount of past due charges, plus the amount that covers
your estimated monthly policy and rider deductions for the next two months. If
the insured person dies during the grace period, we pay death proceeds to your
beneficiary(ies) with reductions for policy loans, accrued loan interest, and
monthly deductions owed. No lapse notice will be sent to you if the guaranteed
minimum death benefit is going to lapse.
If we receive your payment of the required amount before the end of the grace
period, we apply it to your account value in the same manner as your other
premium payments, then we take the overdue deductions from your account balance.
If you do not pay the full amount we request within the 61-day grace period,
your policy and all of its riders lapse without value. We then withdraw your
remaining account balance from the variable subaccounts and the guaranteed
interest account. We deduct amounts which you owe us, including any surrender
charge and inform you that the policy has ended.
IF YOU HAVE THE GUARANTEED MINIMUM DEATH BENEFIT IN EFFECT
After the special continuation period has ended, and if the guaranteed minimum
death benefit is in effect, your policy's stated death benefit will not lapse
during the guarantee period. This is true even if your net cash surrender value
is not enough to cover all of
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the deductions from your account value on any monthly processing date. SEE
GUARANTEED MINIMUM DEATH BENEFIT , PAGE 27.
The guaranteed minimum death benefit feature does not protect benefits you may
have under riders attached to your policy. Nor does it protect any amount of the
base death benefit which is more than the stated death benefit. These benefits
lapse if on any monthly processing date, your policy net cash surrender value is
not enough to pay all monthly deductions from your account value (unless your
policy is in the three-year special continuation period and your account value
is more than the interest due on your loan). While the guaranteed minimum death
benefit applies, we reduce your account value by monthly deductions, but not
below zero. We permanently waive monthly deductions during the guarantee period
which would reduce your account value below zero.
The guaranteed minimum death benefit terminates if your policy does not meet the
monthly premium or diversification tests. If your guaranteed minimum death
benefit terminates, the normal test for lapse then resumes. SEE REQUIREMENTS TO
MAINTAIN THE GUARANTEE PERIOD, PAGE 27.
<TABLE>
<CAPTION>
LAPSE SUMMARY
SPECIAL CONTINUATION PERIOD GUARANTEED MINIMUM DEATH BENEFIT
============================================================== ===============================================================
IF YOU MEET THE IF YOU DO NOT MEET THE IF YOU MEET THE IF YOU DO NOT MEET THE
REQUIREMENTS REQUIREMENTS REQUIREMENTS REQUIREMENTS
- ----------------------------- ----------------------------- ------------------------------ -----------------------------
<S> <C> <C> <C>
Your policy does not lapse if Your policy enters the grace Your policy does not lapse if Your policy enters the grace
you do not have enough net period if your net cash you do not have enough net period if your net cash
cash surrender value to pay surrender value is not cash surrender value to pay surrender value is not
the monthly charges. The enough to pay the monthly the monthly charges. enough to pay the monthly
charges are delayed until the charges, or if your loan However, if you have any charges, or if your loan
earlier of: 1) the date you interest due is more than riders, they lapse after the interest due is more than
have enough net cash your net cash surrender grace period and only your your net cash surrender
surrender value to cover the value. If you do not pay base coverage remains in value. If you do not pay
monthly charge, or 2) until enough premium to cover force. Charges for your base enough premium to cover
the end of the special the past due monthly coverage are then deducted the past due monthly
continuation period. charges and interest due plus each month to the extent that charges and interest due,
the monthly charges and there is sufficient net plus the monthly charges
interest due through the end account value to pay these and interest due through the
of the grace period (at the charges. If there is not end of the grace period (at
end of the following two sufficient net account value the end of the following two
months), your policy lapses. to pay a charge, it is months), your policy lapses.
permanently waived.
============================================================== ===============================================================
</TABLE>
REINSTATEMENT
If you do not pay enough premium before the end of the grace period, your policy
lapses. You may still reinstate your policy and its riders (other than the
guaranteed minimum death benefit) within five years after the grace period ends.
Unless state law requires differently, we will reinstate your policy and riders
if:
1. you have not surrendered your policy for its net cash surrender value;
2. you provide satisfactory evidence to us that the insured person (and
any people insured under your riders) is still insurable according to
our normal rules of underwriting for your type of policy; and
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3. we receive enough premium from you to keep your policy and its riders
in force from the beginning to the end of the grace period and for two
months after the reinstatement date.
Reinstatement is effective as of the monthly processing date following our
approval of your reinstatement application. When we reinstate your policy, we
also reinstate the surrender charges for the amount and time remaining when your
policy lapsed. If you had a policy loan when coverage ended, we reinstate it
with accrued loan interest to the date of lapse. The cost of insurance charges
in effect at the time of reinstatement for the age of the insured person are
adjusted to reflect the time since the lapse.
We apply the net premiums received after reinstatement according to the premium
allocation instructions in effect at the start of the grace period, unless you
tell us otherwise.
SURRENDER
You may surrender your policy for its net cash surrender value any time while
the insured person is living. You do this by sending a written request and your
policy, or a lost policy form, to our customer service center.
Your policy net cash surrender value is your cash surrender value, minus policy
loans you have taken, including accrued loan interest.
We compute your net cash surrender value as of the valuation date we receive
your surrender request and policy at our customer service center. All insurance
coverage ends on the date we receive your surrender request and policy.
We do not pro-rate or add back charges and expenses deducted from your account
value which we deducted on the monthly anniversary before the date your
surrender is processed. If you surrender your policy during the first fourteen
policy years or segment years, we deduct a surrender charge from your net
account value. If you surrender your policy during the early policy years, you
may have little or no net cash surrender value. SEE SURRENDER CHARGE, PAGE 51.
A surrender of your policy may have adverse tax consequences. SEE DISTRIBUTIONS
OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 57, AND
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS, PAGE 57.
GENERAL POLICY PROVISIONS
FREE LOOK PERIOD
You have the right to examine your policy. If for any reason you do not want it,
you may return your policy to us or your registered representative within the
period shown in the policy. If you return your policy to us within your state's
specified time limit, we will consider it canceled as of your policy date. If
you cancel your policy during this free look period, you will receive a refund
as determined under state law.
Generally, there are two types of free look refunds. Some states require a
return of all premiums paid while others permit payment of the account value
plus a refund of all charges deducted. Your policy will specify what free look
refund applies in your state. The type of free look refund allowed in your state
will affect when your initial net premium and any additional net premiums we
receive from you before the end of the free look period are invested into the
variable subaccounts you selected.
Your state may require us to return the premiums you have paid if you cancel
your policy during the free look period. In this case, that portion of your
initial net premium and any net premium we receive from you during the free look
period that you have allocated to the variable subaccounts will then be held in
the Fidelity VIP Money Market subaccount for 15 days after we issue your policy
(five days deemed delivery time plus a typical free look period of 10 days),
unless state law requires otherwise, if:
o you made a premium payment before we issued your policy; and
o you have provided all information and documents we have requested.
At the end of 15 days, your account value will be allocated among your chosen
variable subaccounts, based on your most recent premium allocation instructions.
Your state may require us to return your account value plus a refund of all
charges deducted during the free look period. In this case, that portion of your
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initial net premium that you have allocated to the variable subaccounts will
then be invested according to your most recent premium allocation instructions
on the date we issue your policy if:
o you made a premium payment before we issued your policy; and
o you have provided all information and documents we have requested.
Amounts you have allocated to the guaranteed interest account will be invested
in the guaranteed interest account when we issue your policy if you have made a
premium payment and have no outstanding information or document requests from
us.
Once we have applied your net premium to your selected investment options, you
may transfer funds between investment options and activate policy investment
features such as automatic rebalancing or dollar cost averaging.
YOUR POLICY
The entire contract between you and us is the combination of:
o your policy;
o a copy of your original application and any applications for benefit
increases or decreases;
o all of your riders;
o endorsements;
o amendments;
o schedule pages; and
o reinstatement applications.
If you make a change to your coverage, we give you a copy of your changed
application and new schedules. If you send us your policy, we attach these items
to your policy and return it to you. Otherwise, you need to attach them to your
policy. Unless there is fraud, we consider all statements made in an application
to be representations and not guarantees. We use no statement to deny a claim,
unless it is in an application.
A president or an officer of our company and our secretary or assistant
secretary must sign all changes or amendments we make to your policy. No other
person may change the terms or conditions of your policy.
AGE
We issue your policy at the insured person's age stated in your policy schedule.
This is based on the insured person's age as of the nearest birthday to the
policy date. We determine the insured person's age at any given time by adding
the number of completed policy years to the age calculated at issue and shown in
the schedule.
OWNERSHIP
The original owner is the person named as the owner in the policy application.
The owner can exercise all rights and receive the benefits during the insured
person's lifetime. This includes the right to change the owner, beneficiaries,
or method to pay proceeds.
As a matter of law, all rights of ownership are limited by the rights of any
person who has been assigned rights under the policy, and any irrevocable
beneficiary(ies).
You may name a new owner by giving us written notice. The effective date of the
change to the new owner is the date the prior owner signs the notice. However,
we will not be liable for any action we take before a change is recorded at our
customer service center. A change in ownership may cause the prior owner to
recognize taxable income on gain under the policy.
BENEFICIARY(IES)
You, as owner, name the beneficiary(ies) when you apply for your policy. The
primary beneficiary(ies) who survives the insured person receives the death
proceeds. Other surviving beneficiary(ies) receive death proceeds only if there
is no surviving primary beneficiary(ies). If more than one beneficiary(ies)
survives the insured person, they share the death proceeds equally, unless you
have told us otherwise. If none of your policy beneficiaries has survived the
insured person, we pay the death proceeds to you, or to your estate as owner.
Once you tell us who the beneficiary(ies) is/are, we keep this information on
file. You may name a new beneficiary during the insured person's lifetime. We
pay the death proceeds to the most recent beneficiary (ies) whom you have most
recently named and which we have on record. We do not make multiple payments.
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COLLATERAL ASSIGNMENT
You may assign your policy as security by sending written notice to us. After we
record the assignment, your rights as owner and the beneficiary's(ies') rights
(unless the beneficiary(ies) were made an irrevocable beneficiary(ies) under an
earlier assignment) are subject to the assignment. It is your responsibility to
make sure the assignment is valid.
INCONTESTABILITY
After your policy has been in force while the insured person is alive for two
years from your policy date, we will not question the validity of the statements
in your application. After your policy has been in force while the insured
person is alive for two years from the effective date of any new segment or from
the effective date of an increase in any other benefit, we will not contest the
statements in your application for the new segment or other benefit increase.
After this policy has been in force while the insured person is alive for two
years from the effective date of any reinstatement, we will not contest the
statements in your application for reinstatement.
MISSTATEMENTS OF AGE OR GENDER
If the insured person's age or gender has been misstated, we adjust the death
benefit. We adjust death benefits to the amount which would have been purchased
for the insured person's correct age and gender. We base the adjusted death
benefit on the cost of insurance charges deducted from your account value on the
last monthly processing date before the insured person's death, or as otherwise
required by state law.
If unisex cost of insurance rates apply, we do not make any adjustments for a
misstatement of gender.
SUICIDE
If the insured person commits suicide, while that insured person is sane or
insane, within two years of your policy date unless otherwise required by state
law, we limit death benefits to:
1. the total of all premiums paid to the time of death; minus
2. the amount of outstanding policy loans and accrued loan interest; minus
3. any partial withdrawals you have taken.
If the insured person has been changed, and the new insured person dies by
suicide within two years of the change date, we then limit the death benefit to:
1. your net cash surrender value as of the change date; plus
2. the premiums you paid since the change date; minus
3. the sum of any increases in policy loans, accrued loan interest, and
partial withdrawals taken since the change date.
We make a limited payment to the beneficiary(ies) for a new segment or other
increase if the insured person commits suicide, while sane or insane within two
years of the effective date of a new segment, or within two years of an increase
in any other benefit, unless otherwise required by law. The limited payment we
make is equal to the cost of insurance and monthly expense charges which were
deducted for such increase.
TRANSACTION PROCESSING
Generally, within seven days of when we receive all information required to
process a payment, we pay:
o death proceeds;
o net cash surrender value upon surrender;
o partial withdrawals; and
o loan proceeds.
We may delay processing these transactions if:
o the NYSE is closed for trading;
o trading on the NYSE is restricted by the SEC;
o there is an emergency so that it is not reasonably possible to sell
securities in the variable subaccounts or to determine the value of an
investment option's assets; or
o a governmental body with jurisdiction over the separate account allows
suspension by its order.
Any SEC rules and regulations that apply determine whether or not these
conditions exist.
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We execute transfers among the variable subaccounts as of the valuation date
that we receive your request at our customer service center.
We determine death proceeds as of the insured person's date of death. The death
proceeds are not affected by changes in the value of the variable subaccounts
after the insured person's death. We pay interest at our stated rate (or at a
higher rate if required by law), from the insured person's date of death to the
date of payment.
Unless state law requires otherwise, we may delay payment from our guaranteed
interest account for up to six months, of:
o surrender proceeds;
o withdrawal amounts; or
o loan amounts.
We pay interest at our declared rate (or at a higher rate if required by law)
from the date we receive the request if we delay payment more than 30 days.
NOTIFICATION AND CLAIMS PROCEDURES
Except for certain authorized telephone requests, we must receive in writing any
election, designation, change, assignment or request made by the owner.
You must use a form acceptable to us. We are not liable for actions taken before
we receive and record the written notice. We may require you to return your
policy for any policy change, or at the time of surrender.
If the insured person dies while your policy is in force, please let us or your
registered representative know as soon as possible. We will immediately send you
instructions on how to make a claim. As proof of the deceased insured person's
death, we may require you to provide proof of the deceased insured person's age,
and a certified copy of the deceased insured person's death certificate.
The beneficiary(ies) and the deceased insured person's next of kin may need to
sign authorization forms. These forms allow us to get information about the
deceased insured person. This information may include medical records of doctors
and hospitals used by the deceased insured person.
TELEPHONE PRIVILEGES
If your policy was delivered on or after May 1, 1999, telephone privileges are
automatically provided to you and your agent or registered representative,
unless you tell us otherwise. If you do not wish to have this feature, decline
it on the application or contact our customer service center. If your policy was
delivered before May 1, 1999, you may choose telephone privileges by completing
our customer service form and return it to our customer service center.
Telephone privileges allow you or your agent or registered representative, if
applicable, to call our customer service center to:
o make transfers;
o change premium allocations;
o change features in your dollar cost averaging and automatic rebalancing
programs;
o request partial withdrawals; or
o request a policy loan.
Our customer service center uses reasonable procedures to make sure that
instructions received by telephone are genuine. These procedures may include:
1. requiring some form of personal identification;
2. providing written confirmation of any transactions; and
3. tape recording telephone calls.
By accepting automatic telephone privileges, you authorize us to record your
telephone calls to us. If we use reasonable procedures to confirm instructions,
we are not liable for losses due to unauthorized or fraudulent instructions. We
may discontinue this privilege at any time.
NON-PARTICIPATION
Your policy does not participate in the surplus earnings of Southland.
DISTRIBUTION OF THE POLICIES
The principal underwriter (distributor) for our policies is ING America
Equities, Inc. ING America Equities, Inc. is an affiliate of Southland. It is
registered as a broker-dealer with the SEC and the NASD. We pay ING America
Equities, Inc. for acting as the principal underwriter under a distribution
agreement.
We sell our policies through registered representatives of other broker-dealers
who have
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entered into selling agreements with us. These broker-dealers are registered
with the SEC and the NASD. Broker-dealers selling our policies include the
following affiliates of Southland:
1. VESTAX Securities Corporation;
2. Locust Street Securities, Inc.;
3. Multi-Financial Services, Inc.; and
4. IFG Network Securities, Inc.
Under these selling agreements, we pay a distribution allowance to
broker-dealers, who then pay commissions to the registered representative who
sells this policy. The distribution allowance is approximately 80% 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.
Registered representatives receive an additional 3% on premiums received in
policy years 2 through 10. They may also earn certain bonuses and managerial
compensation.
Compensation arrangements may vary among broker-dealers and depend on particular
circumstances. In addition to the above-described compensation, we may pay:
o override payments;
o expense allowances;
o bonuses;
o special marketing fees;
o wholesaler fees and marketing allowances; and
o training allowances.
Under our sales incentive programs, as permitted by law, registered
representatives may qualify to receive other compensation such as:
o expense-paid trips;
o expense-paid educational seminars; and
o merchandise.
We pay all distribution and other allowances from our own resources, which
includes sales charges deducted from premiums and surrender charges.
ADVERTISING PRACTICES AND SALES LITERATURE
We may use advertisements and sales literature to promote this product,
including:
o articles on variable life insurance and other information published in
business or financial publications;
o indices or rankings of investment securities; and
o comparisons with other investment vehicles, including tax
considerations.
We may use information regarding the past performance of the variable
subaccounts. Of course, past performance is not indicative of future performance
of the subaccounts or the policies and is not reflective of the actual
investment experience of individual policyowners.
We may feature certain investment options and their managers, as well as
describe asset levels and sales volumes for our products. We may refer to past,
current, or prospective economic trends and investment performance or other
information we believe may be of interest to our customers.
SETTLEMENT PROVISIONS
You may elect to have the beneficiary(ies) receive the death proceeds other than
in one payment. If you make this election, you must do so during the insured
person's lifetime. If you have not made this election, the beneficiary(ies) may
do so within 60 days after we receive proof of the insured person's death.
You may take your net cash surrender value in other than one payment.
The investment performance of the variable subaccounts does not affect payments
under these settlement options. Instead, interest accrues at a fixed rate based
on the option you choose. Payment options are subject to our rules at the time
you make your selection. A periodic payment must be at least $20. Currently,
these alternate payment options are available if the proceeds are $2,000 or
more.
Option I: PAYOUTS FOR A DESIGNATED PERIOD: Payout payments may be made on a
monthly, quarterly, semi-annual, or annual basis.
These payments may last for a period from five to thirty years.
The installment dollar amounts are equal except for any excess
interest. Settlement Option Table I in your policy shows the
amount of the first monthly payout for each $1,000 of account
value applied.
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Option II: LIFE INCOME WITH PAYOUTS GUARANTEED FOR A DESIGNATED PERIOD:
Payout payments may be made on a monthly, quarterly, semi-annual,
or annual basis.
We make these payments throughout the lifetime of the person
receiving the payment, or if longer for guaranteed periods of
five, ten, fifteen, or twenty years. You may choose the length of
time to receive the guaranteed payments. If you choose a longer
guaranteed period, this will decrease the amount of your periodic
payments.
The installment dollar amounts are equal except for any excess
interest. The Settlement Option Table II in your policy shows the
amount of the first monthly payout for each $1,000 of account
value applied. This option is available only for the ages shown in
this table.
Option III: HOLD AT INTEREST: Amounts may be left on deposit with us to be
paid at the death of the person you choose to receive the payment,
or at a chosen earlier date. We will pay interest at our declared
rate on any unpaid balance (or at a higher rate if required by
law). You may choose interest to be accumulated or be paid on a
monthly, quarterly, semi-annual, or annual basis.
You may not leave money on deposit for more than 30 years.
Option IV: PAYOUTS OF A DESIGNATED AMOUNT: Payouts will be made until
proceeds, including interest, are exhausted. Interest is at a rate
we declare (or at a higher rate as required by law). Payout
payment choices are on a monthly, quarterly, semi-annual, or
annual basis.
Option V: OTHER: You, as owner, may ask us to apply money under any options
we offer at the time we pay the benefit.
The beneficiary(ies) or other person (successor to the beneficiary(ies)) who has
the right to receive payments may name someone else to receive amounts that we
would otherwise pay to the beneficiary's(ies') estate if he/she/they die(s). The
person who has the right to receive payment may name another person, at any
time. Designating another person to receive payment may have income, gift or
estate tax consequences. Consult a professional tax adviser before making this
designation.
We must approve an arrangement that involves someone who is to receive payment
who is not a human being (for example, a corporation). We must approve a
situation involving a person who is to receive payment while acting on behalf of
another, called a fiduciary. We base the details of all arrangements on our
rules at the time the arrangements are effective. This includes rules on the:
o minimum amount we pay under an option;
o minimum amounts for installment payments;
o withdrawal rights;
o right to receive payments over time, which we may offer as a lump sum
payment;
o naming of people who have the right to receive payment and their
successors; and
o proof of age and survival.
ADMINISTRATIVE INFORMATION ABOUT THE POLICY
VOTING PRIVILEGES
We invest the variable subaccounts' assets in shares of investment portfolios.
We are the legal owner of the shares held in the variable account and we have
the right to vote on certain issues. Among other things, we may vote on issues
described in a fund's current prospectus, or issues requiring a vote by
shareholders under the Investment Company Act of 1940.
Even though we own the shares, we give you the opportunity to tell us how to
vote the number of shares attributable to your account value. If you have a
voting interest, we send you proxy material and a form on which to give us your
voting instructions.
Each investment portfolio's shares have the right to one vote. The votes of all
investment portfolios are cast together on a collective basis, except on issues
for which the interests of the portfolios differ. In these cases, voting is done
on a portfolio-by-portfolio basis.
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Examples of issues that require a portfolio-by- portfolio vote are:
1. changes in the fundamental investment policy of a particular investment
portfolio; or
2. approval of an investment advisory agreement.
We vote the shares in accordance with your instructions at meetings of
investment portfolio shareholders. We vote any investment portfolio shares that
are not attributable to policies, and any investment portfolio shares for which
the owner does not give us instructions, the same way we vote as if we did
receive owner instructions.
We reserve the right to vote investment portfolio shares without getting
instructions from policy owners if the federal securities laws, regulations, or
their interpretations change to allow this.
You may only instruct us on matters relating to the investment portfolios
corresponding to subaccounts in which you have invested assets as of the record
date set by the investment portfolio's Board for the portfolio's shareholders
meeting. We determine the number of investment portfolio shares in each
subaccount that we attribute to your policy by dividing your account value
allocated to that subaccount by the net asset value of one share of the matching
investment portfolio. We count fractional shares.
MATERIAL CONFLICTS
We are required to track events to identify any material conflicts arising from
using investment portfolios for both variable life and variable annuity separate
accounts. The boards of the investment portfolios, Southland, and other
insurance companies participating in the investment portfolios, have this same
duty. There may be a material conflict if:
o state insurance law or federal income tax law changes;
o investment management of an investment portfolio changes; or
o voting instructions given by owners of variable life insurance policies
and variable annuity contracts differ.
The investment portfolios may sell shares to certain qualified pension and
retirement plans qualifying under Code Section 401. These include cash or
deferred arrangements under Code Section 401(k). Therefore, there is a
possibility that a material conflict may arise between the interests of owners
in general, or between certain classes of owners, and these retirement plans or
participants in these retirement plans.
If there is a material conflict, we have the duty to determine appropriate
action, including removing the portfolios involved from our variable
subaccounts. We may take other action to protect policy owners. This could mean
delays or interruptions of the variable operations.
When state insurance regulatory authorities require us, we may ignore voting
instructions relating to changes in an investment portfolio's adviser or its
investment policies. If we do ignore voting instructions, we give you a summary
of our actions in the next semi-annual report to owners.
Under the Investment Company Act of 1940, we must get your approval for certain
actions involving our separate account. In this case, you have one vote for
every $100 of value you have in the variable subaccounts. We cast votes credited
to amounts in the variable subaccounts, but not credited to policies in the same
proportion as votes cast by owners.
RIGHT TO CHANGE OPERATIONS
Subject to state limitations, we may from time to time make any of the following
changes to our separate account:
1. Change the investment objective.
2. Offer additional subaccounts which will invest in portfolios we find
appropriate for policies we issue.
3. Eliminate variable subaccounts.
4. Combine two or more variable subaccounts.
5. Substitute a new investment portfolio for a portfolio in which the
subaccount currently invests. A substitution may become necessary if,
in our judgment:
o a portfolio no longer suits the purposes of your policy;
o there is a change in laws or regulations;
o there is a change in a portfolio's investment objectives or
restrictions;
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o the portfolio is no longer available for investment; or
o we deem a substitution is appropriate for another reason.
6. Transfer assets related to your policy class to another separate
account.
7. Withdraw the separate account from registration under the 1940 Act.
8. Operate the separate account as a management investment company under
the 1940 Act.
9. Cause one or more subaccounts to invest in a mutual fund other than, or
in addition to, the investment portfolios.
10. Stop selling these policies.
11. End any employer or plan trustee agreement with us under the
agreement's terms.
12. Limit or eliminate any voting rights for the separate account.
13. Make any changes required by the 1940 Act, or its rules or regulations.
We will not make a change until it is effective with the SEC and approved by the
appropriate state insurance departments, if necessary. We will notify you of
changes. If you then wish to transfer the amount you have in the affected
subaccount to another variable subaccount, or to the guaranteed interest
account, you may do so free of charge. Just notify us at our customer service
center.
REPORTS TO OWNERS
At the end of each policy year we send a report to you that shows:
o your total policy death benefit (your stated death benefit plus
adjustable term insurance rider death benefit, if any);
o your account value;
o your policy loans, if any, plus accrued interest;
o your net cash surrender value; and
o your account transactions during the previous year showing net
premiums, transfers, deductions, loans, or withdrawals.
We also send you semi-annual reports with financial information on the
investment portfolios, including a list of the investment holdings of each
portfolio. We send confirmation notices to you throughout the year for certain
policy transactions.
CHARGES, DEDUCTIONS AND REFUNDS
The amount of a charge may not exactly correspond to the cost incurred by us to
provide the service or benefits associated with the particular policy. Many
charges are not at "cost". For example, the sales charges may not cover all of
the sales and distribution expenses actually incurred by us. Proceeds from other
charges, including the mortality and expense risk charge or cost of insurance
charges, may be used in part to cover such expenses.
DEDUCTIONS FROM PREMIUMS
We consider any payment we receive to be a premium if the insured person is not
yet age 100, and you do not have an outstanding loan. After we deduct certain
expenses from your premium payment, we add the remaining net premium to your
account value.
TAX CHARGES
We pay state and local taxes in almost all states. These taxes vary in amount
from state to state and may vary from jurisdiction to jurisdiction within a
state. Currently, state and local taxes range from 0.5% to 5%, with some states
not imposing these types of taxes. We currently deduct an amount equal to 2.5%
of each premium payment you make to cover these taxes. The 2.5% rate
approximates the average tax rate we expect to pay in all states.
We also currently deduct an amount equal to 1.5% of each premium payment you
make to cover our estimated costs for the federal income tax treatment of
deferred acquisition costs. This cost is determined solely by the amount of life
insurance premiums we receive.
We reserve the right to increase or decrease your premium expense charge for
taxes as a result of changes in the tax law, within limits set by state law. We
also reserve the right to increase or decrease your premium expense charge for
the federal income tax treatment of deferred acquisition costs based on any
change in that cost to us.
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SALES CHARGE
We deduct a percentage from your premium payments to compensate us for the costs
we incur in selling policies. We currently charge 4% of each premium paid until
the total sum of your premium payments for your stated death benefit and any
added increases in stated death benefit equals ten target premiums for your
policy. We guarantee that the sales charge percentage will never exceed 4%.
These premium deductions are 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 52.
To determine your applicable sales charge, premiums you pay after an increase in
stated death benefit are allocated to your policy segments in the same
proportion that the guideline annual premium (defined by federal income tax law)
for each segment bears to the total guideline annual premium for your stated
death benefit.
The sales charge covers the costs of distribution, preparing our sales
literature, promotional expenses, and other direct and indirect expenses. The
amount charged is not specifically related to sales expenses in a particular
year.
We may reduce or waive the sales charge for certain group or sponsored
arrangements, for corporate purchasers or in connection with policies that are
issued in exchange for certain policies that we previously issued.
DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE
We deduct a charge each day for the mortality and expense risks we assume. The
daily charge is 0.002466% of the amount you have in the variable subaccounts.
This is an annual rate of 0.90%. The mortality risk we assume is that insured
people, as a group, may live less time than we estimated. We assume risk that
other expenses we incur in issuing and administering the policies and in
operating the variable subaccounts are greater than the amount we estimated when
we set these charges.
The mortality and expense risk charge does not apply to your account value which
is invested in the guaranteed interest account or the loan account.
MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE
We deduct charges from your account value on each monthly processing date.
On or before November 1, 1999, we will make available to you the option to
designate a single withdrawal investment option from which we will take your
monthly deductions. You may designate a withdrawal investment option at policy
application or at a later time. You may choose to have us withdraw the monthly
deduction from the guaranteed interest account or the variable subaccounts in
which you have amounts. You may not use the loan account as your designated
withdrawal investment option from which to deduct monthly deductions.
If you do not choose a withdrawal investment option from which to deduct monthly
deductions, or if the amount you have in your designated withdrawal investment
option is not enough to cover the monthly deductions, these charges are taken
from the variable subaccounts and guaranteed interest account in the same
proportion that your account value in each investment option bears to your total
net account value as of the monthly processing date.
If you change your designated withdrawal investment option from which monthly
deductions are deducted, we may consider this a premium allocation change.
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INVESTMENT OPTIONS FROM WHICH WE DEDUCT CHARGES
<TABLE>
<CAPTION>
MONTHLY CHARGES: COST OF INSURANCE CHARGES, LOANS AND
RIDER CHARGES AND ADMINISTRATION FEES TRANSACTION FEES PARTIAL WITHDRAWALS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CHOICE May choose one investment option, including Proportionally among May choose any investment
guaranteed interest account when this option is variable accounts and option or combination of
available guaranteed interest investment options subject to
account requirements
DEFAULT Proportionally among variable subaccounts and Proportionally among Proportionally among
guaranteed interest account variable subaccounts and variable subaccounts and
guaranteed interest guaranteed interest account
account
</TABLE>
INITIAL POLICY CHARGE
The initial policy charge is $20 per month for the first year of your policy.
This charge compensates us for such costs as:
o application processing;
o medical examinations ;
o establishment of policy records; and
o insurance underwriting costs.
MONTHLY ADMINISTRATIVE CHARGE
We currently charge a per month administrative charge for this policy of $6. We
guarantee that this charge will never be higher than $10 per month. The monthly
administrative change is designed to compensate us for ongoing costs such as:
o premium billing and collections;
o claim processing;
o policy transactions;
o record keeping;
o reporting and communications with policy owners; and
o other expenses and overhead.
COST OF INSURANCE CHARGE
The cost of insurance charge compensates us for the ongoing costs of providing
insurance coverage under the policy, including the expected cost of paying death
proceeds that are more than your account value at the insured person's death.
We base the cost of insurance charge rates on the insured person's age, gender,
ratings and premium class on the policy for each segment date, or on the date
you add a base coverage segment.
The cost of insurance charge is equal to our current monthly cost of insurance
rate times the net amount at risk for each portion of your death benefit. We
calculate the net amount at risk monthly, at the beginning of each policy month.
For the base death benefit, the net amount at risk is calculated using the
difference between the current base death benefit and your account value. We
determine the amount of your account value after we deduct your policy and rider
charges due on that date, other than cost of insurance charges for the base
death benefit, adjustable term insurance rider, and waiver of cost of insurance
rider.
If your base death benefit at the beginning of a month increases (due to
requirements of the federal income tax law definition of life insurance), the
net amount at risk for your base death benefit for that month also increases.
Similarly, the net amount at risk for your adjustable term insurance rider
decreases. This means that the amount of your cost of insurance charge varies
from month to month with changes in your net amount at risk, changes in the
death benefit and with the increasing age of the insured person. We allocate the
net amount at risk to any segments in the same proportion that each segment has
to the total stated death benefit for all coverage segments as of the monthly
processing date.
We apply unisex rates where appropriate under the law. This currently includes
the State of Montana and policies purchased by employers and employee
organizations in connection with employment-related insurance or benefit
programs.
Separate cost of insurance rates apply to:
o each segment of the base death benefit; and
o your adjustable term insurance rider.
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These rates are never more than the guaranteed maximum rates shown in your
policy; however, they may change from time to time. Current rates are greater
for policies with a stated death benefit (or target death benefit, if any) that
is less than $250,000 on the policy date. The guaranteed maximum rates are based
on the 1980 Commissioner's Standard Ordinary Sex Distinct Mortality Table.
The maximum rates for the initial and any new segment will be printed in the
schedule which we will provide to you.
There are no cost of insurance charges after the insured person reaches age 100.
GUARANTEED MINIMUM DEATH BENEFIT CHARGE
If you choose the guaranteed minimum death benefit feature, we currently charge
$0.005 per $1,000 of stated death benefit each month during the guarantee
period. This charge is guaranteed never to be more than $0.01 per $1,000 of
stated death benefit each month.
CHARGES FOR ADDITIONAL BENEFITS
On each monthly processing date, we deduct the cost of additional benefits under
your riders. SEE ADDITIONAL BENEFITS, PAGE 28.
CHANGES IN MONTHLY CHARGES
Changes we make in the cost of insurance charges, the guaranteed minimum death
benefit charge or charges for additional benefits are for a class of insured
persons. We base the new charge on changes in expectations about:
o investment earnings;
o mortality;
o the time policies remain in effect;
o expenses; and
o taxes.
New monthly charges will never be more than the guaranteed maximum rates shown
in your policy.
POLICY TRANSACTION FEES
We charge fees for certain transactions or elections you may make under your
policy. We take transaction fees from the variable subaccounts and the
guaranteed interest account in the same proportion that your account value in
each investment option has to your net account value immediately after the
transaction.
PARTIAL WITHDRAWALS
We charge a service fee against your account value for each additional partial
withdrawal after your first partial withdrawal in a policy year, to cover our
costs. This fee is $25 or 2% of the withdrawal, whichever is less. We may also
deduct a surrender charge from your account value. SEE PARTIAL WITHDRAWALS, PAGE
37.
TRANSFERS
You may make twelve free transfer per policy year. After the twelve free
transfers, we charge you $25 for each additional transfer per policy year. If
you include multiple transfers in one transfer request, it counts as one
transfer. There is no transfer fee if you are transferring your account value
into the guaranteed interest account under the right to convert feature in your
policy. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 33, AND RIGHT TO CONVERT POLICY,
PAGE 31.
PREMIUM ALLOCATION CHANGE
You may make five free premium allocation changes per policy year. After the
five free premium allocation changes, we charge you $25 for each additional
premium allocation change per policy year.
ILLUSTRATIONS
The first policy illustration you request in a policy year is free. After that,
we may charge a fee of up to $25 for each additional policy illustration you
request.
PERSISTENCY REFUND
Where state law allows us, we pay long-term policy owners a persistency refund.
Each month your policy remains in force after your tenth policy anniversary, we
credit your account value with a refund. This refund equals 0.35% of your
account value on an annual basis. On a monthly basis, this equals 0.02917%.
We add the persistency refund to the variable subaccounts in the same proportion
that your account
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value in each subaccount has to your total account value in all of the variable
subaccounts as of the monthly processing date.
Here are two examples of how the persistency refund may affect your account
value each month:
EXAMPLE 1: YOUR POLICY HAS NO LOAN:
o account value = $10,000 (all in the variable subaccounts)
o monthly persistency refund rate = .0002917
o persistency refund = 10,000 x .0002917 = $2.92
Before After
Persistency Persistency
Refund Refund
------ ------
Variable subaccounts $10,000.00 $10,002.92
EXAMPLE 2: YOUR POLICY DOES HAVE A LOAN:
o account value = $10,000
o account value in the variable subaccounts = $6,000
o account value in the loan account = $4,000
o monthly persistency refund rate = .0002917
o persistency refund = 6,000 x .0002917 = $1.75
Before After
Persistency Persistency
Refund Refund
------ ------
Variable subaccounts $6,000.00 $6,001.75
Loan $4,000.00 $4,000.00
SURRENDER CHARGE
We may deduct a surrender charge from your account value during the first
fourteen years of your policy or coverage segment if you:
o surrender your policy;
o reduce your stated death benefit;
o allow your policy to lapse; or
o take a partial withdrawal which decreases your stated death benefit.
The surrender charge compensates us for issuing and distributing policies. We
deduct surrender charges proportionately based on the account value in each
investment option in which you have amounts invested immediately following the
transaction.
The surrender charge is made up of two parts:
1. an administrative surrender charge, and
2. a sales surrender charge.
If you change your death benefit option, this may decrease your stated death
benefit. Under these circumstances, we do not deduct a surrender charge from
your account value, and we do not reduce future surrender charges.
If you change your death benefit option, this may increase the stated death
benefit. We do not increase your surrender charge in this case. However, all
other increases in your stated death benefit create a new segment which will be
subject to its own fourteen year surrender charge period.
If your surrender charge changes, we send you a new schedule showing the change.
The surrender charge remains level for the first nine years following the
effective date of your policy, and any new segment. These charges then decrease
at the beginning of each following policy year by one-sixth of the amount in
effect at the end of the ninth policy year. This continues until your surrender
charge reaches zero at the beginning of your fifteenth policy year, or the year
when the insured person reaches age 98, whichever happens first.
We may reduce or waive the surrender charge for certain group or sponsored
arrangements, for corporate purchasers or in connection with policies that are
issued in exchange for certain policies that we previously issued.
ADMINISTRATIVE SURRENDER CHARGE
The administrative surrender charge is $4 per $1,000 of the stated death benefit
for each death benefit segment.
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During the first fourteen years of your policy your administrative surrender
charge may decrease. This happens if you request a decrease in your stated death
benefit, or you take a partial withdrawal which causes your stated death benefit
to decrease. Your administrative surrender charge decreases in the same
proportion that your stated death benefit decreases. Under these circumstances
we then deduct from your account value the amount by which your administrative
surrender charge decreased.
We designed your administrative surrender charge to cover part of our
administrative expenses for your policy, such as:
o application processing;
o establishing your policy records;
o insurance underwriting; and
o costs associated with developing and operating our systems to
administer the policies.
SALES SURRENDER CHARGE
We calculate the sales surrender charge for each segment by applying the
premiums you paid to each segment in the same proportion that the guideline
annual premium for each segment (as defined by the federal income tax laws) has
to the sum of the guideline annual premiums for all segments.
The sales surrender charge is:
1. 46% of the premiums you paid up to your target premium for each segment
(this is known as the base standard target premium); plus
2. 44% of the premiums you paid between one and two target premiums for
each segment.
In the first two policy years or first two years after an increase in stated
death benefit, we cap the sales surrender charge 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 paid in excess of two target premiums.
We do not determine target premiums on your scheduled premium. We determine
target premiums actuarially, based on the age and gender of the insured person.
Your policy schedule shows the initial target premium for your policy and the
target premium for any added segments. The schedule also shows the maximum sales
surrender charge for your stated death benefit.
If your stated death benefit decreases, we reduce your target premium for each
segment in the same proportion that we reduce your stated death benefit. We do
not do this if the reduction is a result of a death benefit option change. In
that case, we will send a new schedule page to you. You should attach this new
page to your policy. In some instances, we may ask you to send your policy to us
so that we can make this change for you.
If your new target premium for each segment is greater than or equal to the
premiums you paid for that segment, then we reduce your future maximum sales
surrender charge, but we do not deduct a sales surrender charge from your
account value.
If your new target premium for each segment is less than the sum of the premiums
you paid for that segment, we reduce the future maximum sales surrender charge
and we deduct a sales surrender charge from your account value equal to the
difference between your sales surrender charge before the decrease, and your
sales surrender charge after the decrease. We recalculate your new sales
surrender charge as if your new target premium was always in effect for that
segment.
We reduce your future maximum sales surrender charge in the same proportion that
we reduce your stated death benefit if:
1. you make a decrease to your stated death benefit more than nine years
after your policy date; or
2. you make a partial withdrawal from your policy which reduces the stated
death benefit, and you make your request more than nine years after the
date you added the additional segment.
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CALCULATION OF SURRENDER CHARGE EXAMPLE
An example of the calculation of surrender charges follows:
Assume the stated death benefit on your policy is $200,000 and the insured
person is age 45 when we issued your policy. The target premium on your policy
is $2,800. Assuming that you pay a $2,500 premium at the beginning of each
policy year, the resulting actual surrender charge for each policy year is:
Administrative Sales Actual
Policy Year Surrender Charge Surrender Charge Surrender Charge
- ----------- ---------------- ---------------- ----------------
1 $ 800 $ 650 $ 1450
2 800 860 1660
3 800 2520 3320
4 800 2520 3320
5 800 2520 3320
6 800 2520 3320
7 800 2520 3320
8 800 2520 3320
9 800 2520 3320
10 667 2100 2767
11 533 1680 2213
12 400 1260 1660
13 267 840 1107
14 133 420 553
15 0 0 0
FEES AND EXPENSES OF THE INVESTMENT PORTFOLIOS
The variable account purchases shares of the investment portfolios at net asset
value. This price reflects investment management fees and other direct expenses
that are deducted from the portfolio assets. The following table describes these
investment management fees and other direct expenses of the investment
portfolios. The fees and expenses are shown both before and after the effect of
any absorption of expenses or fees by the investment portfolio advisers.
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<TABLE>
<CAPTION>
PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS, FOR THE YEAR ENDED DECEMBER 31, 1998) 1
Total Fees and Total Net
Management Other Portfolio Expenses Waived Portfolio
Portfolio Fees Expenses Expenses or Reimbursed Expenses
--------- ---- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
THE ALGER AMERICAN FUND
Alger American Growth 0.75% 0.04% 0.79% N/A 0.79%
Alger American Leveraged AllCap 0.85% 0.11%/2/ 0.96% N/A 0.96%
Alger American MidCap Growth 0.80% 0.04% 0.84% N/A 0.84%
Alger American Small Capitalization 0.85% 0.04% 0.89% N/A 0.89%
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP Equity - Income 0.49% 0.09% 0.58% N/A 0.58%/3/
VIP Growth 0.59% 0.09% 0.68% N/A 0.68%/3/
VIP High Income 0.58% 0.12% 0.70% N/A 0.70%
VIP Money Market 0.20% 0.10% 0.30% N/A 0.30%
VIP Overseas 0.74% 0.17% 0.91% N/A 0.91%/3/
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II Asset Manager 0.54% 0.10% 0.64% N/A 0.64%/3/
VIP II Contrafund 0.59% 0.11% 0.70% N/A 0.70%/3/
VIP II Index 500 0.24% 0.11% 0.35% 0.07% 0.28%/4/
VIP II Investment Grade Bond 0.43% 0.14% 0.57% N/A 0.57%
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - Equity Income 0.75% 0.42%/5/ 1.17%/5/ 0.24%/5/ 0.93%/5/
INVESCO VIF - Utilities 0.60% 1.24%/5/ 1.84%/5/ 0.76%/5/ 1.08%/5/
JANUS ASPEN SERIES
Janus Aspen Aggressive Growth 0.72% 0.03% 0.75%/6/ N/A 0.75%/6/
Janus Aspen Balanced 0.72% 0.02% 0.74%/6/ N/A 0.74%/6/
Janus Aspen Growth 0.72% 0.03% 0.75%/6/ 0.07% 0.68%/6/
Janus Aspen Worldwide Growth 0.67% 0.07% 0.74%/6/ 0.02% 0.72%/6/
Janus Aspen International Growth 0.75% 0.20% 0.95%/6/ 0.09% 0.86%/6/
</TABLE>
/1/ The preceding portfolio expense information was provided to us by the
portfolios, and we have not independently verified such information. These
portfolio expenses are not direct charges against subaccount assets or
reductions from policy values; rather these portfolio expenses are taken into
consideration in computing each underlying portfolio's net asset value, which is
the share price used to calculate the unit values of the subaccounts. For a more
complete description of the portfolios' costs and expenses, see the prospectuses
for the portfolios.
/2/ Included in "Other Expenses" of the Alger American Leveraged AllCap
Portfolio is 0.03% of interest expense.
/3/ A portion of the brokerage commissions that certain portfolios pay was used
to reduce portfolio expenses. In addition, certain funds, or FMR on behalf of
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 Net Portfolio
Expenses" presented in the table would have been 0.57% for Equity-Income
Portfolio, 0.66% for Growth Portfolio, 0.89% for Overseas Portfolio, 0.63% for
Asset Manager Portfolio and 0.66% for Contrafund Portfolio.
/4/ FMR agreed to reimburse a portion of the Index 500 Portfolio's expenses
during the period. Without this reimbursement, the "Total Net Portfolio
Expenses" would have been 0.35%.
/5/ Certain expenses of the Equity Income Fund (formerly known as Industrial
Income Portfolio) and Utilities Fund are being voluntarily absorbed by INVESCO
Funds Group, Inc. pursuant to a commitment to those Funds. After absorption, the
Equity-Income Fund's "Other Expense"s and "Total Net Portfolio Expenses" were
0.18% and 0.93% respectively and the Utilities Fund's" Other Expenses" and
"Total Net Portfolio Expenses" were 0.48% and 1.08% respectively. This
commitment can be changed at any time following consultation with the board of
directors.
/6/ All expenses are stated both with and without contractual waivers and fee
reductions by Janus Capital. Fee reductions for the Growth, Aggressive Growth,
International Growth, Worldwide Growth and Balanced Portfolios reduce the
"Management Fee" to the level of the corresponding Janus retail fund. Other
waivers, if applicable, are first applied against the" Management Fee" and then
against "Other Expenses." Janus Capital has agreed to continue the other waivers
and fee reductions until at least the next annual renewal of the advisory
agreement.
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GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS
Individuals, corporations or other institutions may purchase this policy. For
group or sponsored arrangements (including employees of Southland, its
affiliates and appointed sales agents), corporate purchasers, or special
exchange programs which we may offer from time to time, we may reduce or waive
the:
o surrender charge, including the surrender charge on partial
withdrawals;
o length of time a surrender charge applies;
o administrative charge;
o minimum stated death benefit;
o minimum target death benefit;
o minimum annual premium;
o target premium;
o sales charges;
o cost of insurance charges; or
o other charges normally assessed.
We can reduce or waive these items due to expected economies under a group or
sponsored arrangement or with a corporate purchaser. Group arrangements include
those in which there is a trustee, an employer or an association. The group
either purchases policies covering a group of individuals on a group basis or
endorses a policy to a group of individuals. Sponsored arrangements include
those in which an employer or association allows us to offer policies to its
employees or members on an individual basis.
Our sales, administration and mortality costs generally vary with the size and
stability of the group, among other factors. We take all these factors into
account when we reduce charges. A group or sponsored arrangement must meet
certain requirements to qualify for reduced charges. We make reductions to
charges based on our rules in effect when we approve a policy application form.
We may change these rules from time to time.
Sponsored arrangements or corporations may have different group premium payments
and premium requirements.
We will not be unfairly discriminatory in any variation in the surrender charge,
administrative charge, or other charges, fees and privileges. These variations
are based on differences in costs or services.
OTHER CHARGES
Under current law, we pay no tax on investment income and capital gains included
in variable life insurance policy reserves. This means that no charge is
currently made to any variable subaccount for our federal income taxes. If the
tax law changes and we have federal income tax chargeable to the variable
subaccounts, we may make such a charge in the future.
In most states, we must pay state and local taxes. If these taxes increase, we
may charge for such taxes.
TAX CONSIDERATIONS
The following summary provides a general description of the federal income tax
considerations associated with the policy and does not purport to be complete or
to cover all tax situations. This discussion is not intended as tax advice.
Counsel or other competent tax advisers should be consulted for more complete
information. This discussion is based upon our understanding of the present
federal income tax laws. No representation is made as to the likelihood of
continuation of the present federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service.
TAX STATUS OF THE POLICY
This policy is designed to qualify as a life insurance contract under the
Internal Revenue Code. All terms and provisions of the policy shall be construed
in a manner which is consistent with that design. In order to qualify as a life
insurance contract for federal income tax purposes and to receive the tax
treatment normally accorded life insurance contracts under federal tax law, a
policy must satisfy certain requirements which are set forth in Internal Revenue
Code Section 7702.
We believe that our policies issued on the basis of a standard underwriting
class satisfy the applicable requirements. While there is very little guidance
with respect to policies issued on a substandard basis, we believe it is
reasonable to conclude that those policies also satisfy the applicable
requirements. If it is subsequently determined that a policy does not satisfy
the applicable requirements, we will take appropriate and reasonable steps to
bring the policy
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into compliance with such requirements and we reserve the right to restrict
policy transactions or modify your policy in order to do so.
DIVERSIFICATION REQUIREMENTS
In addition to meeting the Code Section 7702 tests, Code Section 817(h) requires
separate account investments, such as our variable account, to be adequately
diversified. The Treasury has issued regulations which set the standards for
measuring the adequacy of any diversification. To be adequately diversified,
each variable subaccount must meet certain tests. If your variable life policy
is not adequately diversified under these regulations, it is not treated as life
insurance under Code Section 7702. You would then be subject to federal income
tax on your policy income as you earn it. Our variable subaccounts' investment
portfolios have promised they will meet the diversification standards that apply
to your policy.
In certain circumstances, you, as owner of a variable life insurance contract,
may be considered the owner for federal income tax purposes of the separate
account assets used to support your contract. Any income and gains from the
separate account assets are includable in the gross income from your policy
under these circumstances. The IRS has stated in published rulings that a
variable contract owner is considered the owner of separate account assets if
the contract owner has "indicia of ownership" in those assets. "Indicia of
ownership" includes the ability to exercise investment control over the assets.
Your ownership rights under your policy are similar to, but different in some
ways from those described by the IRS in rulings in which it determined that
policy owners are not owners of separate account assets. For example, you have
flexibility in allocating your premium payments and in your policy values. These
differences could result in the IRS treating you as the owner of a pro rata
share of the variable account assets. We do not know what standards will be set
forth in the future, if any, in Treasury regulations or rulings. We reserve the
right to modify your policy, as necessary, to try to prevent you from being
considered the owner of a pro rata share of the variable account assets, or to
otherwise qualify your policy for favorable tax treatment.
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY DEATH BENEFITS
We believe that the death benefit under a policy is generally excludable from
the gross income of the beneficiary(ies) under section 101(a)(1) of the Code.
However, there are exceptions to this general rule. Additionally, federal and
local transfer, estate inheritance, and other tax consequences of ownership or
receipt of policy proceeds depend on the circumstances of each policy owner or
beneficiary(ies). A tax adviser should be consulted about these consequences.
Generally, the policy owner will not be taxed on any of the policy cash value
until there is a distribution. When distributions from a policy occur, or when
loans are taken from or secured by a policy, the tax consequences depend on
whether or not the policy is a "modified endowment contract."
Special rules also apply if you are subject to the alternative minimum tax. You
should consult a tax adviser if you are subject to the alternative minimum tax.
MODIFIED ENDOWMENT CONTRACTS
Under the Internal Revenue Code, certain life insurance contracts are classified
as "modified endowment contracts," and are given less favorable tax treatment
than other life insurance contracts. Due to the flexibility of the policies as
to premiums and benefits, the individual circumstances of each policy will
determine whether or not it is classified as a modified endowment contract. The
rules are too complex to be summarized here, but generally depend on the amount
of premiums paid during the first seven policy years. Certain changes in a
policy after it is issued could also cause it to be classified as a modified
endowment contract. A current or prospective policy owner should consult with a
competent adviser to determine whether or not a policy transaction will cause
the policy to be classified as a modified endowment contract.
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MULTIPLE POLICIES
All modified endowment contracts that are issued by us (or our affiliates) to
the same policy owner during any calendar year are treated as one modified
endowment contract for purposes of determining the amount includable in the
policy owner's income when a taxable distribution occurs.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS
Once a policy is classified as a modified endowment contract, the following tax
rules apply both prospectively and to any distributions made in the prior two
years:
1. All distributions other than death benefits, including distributions
upon surrender and withdrawals, from a modified endowment contact will
be treated first as distributions of gain taxable as ordinary income
and as tax-free recovery of the policy owner's investment in the policy
only after all gain has been distributed.
2. Loans taken from or secured by a policy classified as a modified
endowment contract are treated as distributions and taxed first as
distributions of gain taxable as ordinary income and as tax-free
recovery of the policy owner's investment in the policy only after all
gain has been distributed.
3. A 10% additional income tax penalty may be imposed on the distribution
amount subject to income tax. Consult a tax adviser to determine
whether or not you may be subject to this penalty tax.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS
Distributions other than death benefits from a policy that is not classified as
a modified endowment contract are generally treated first as a recovery of the
policy owner's investment in the policy. Only after the recovery of all
investment in the policy, is there taxable income. However, certain
distributions which must be made in order to enable the policy to continue to
qualify as a life insurance contract for federal income tax purposes, if policy
benefits are reduced during the first fifteen policy years, may be treated in
whole or in part as ordinary income subject to tax.
Loans from or secured by a policy that is not a modified endowment contract are
generally not treated as distributions. Finally, neither distributions from, nor
loans from or secured by, a policy that is not a modified endowment contract are
subject to the 10% additional income tax.
INVESTMENT IN THE POLICY
Your investment in the policy is generally the total of your aggregate premiums.
When a distribution is taken from the policy other than a policy loan, your
investment in the policy is reduced by the amount of the distribution that is
tax free.
POLICY LOANS
In general, interest on a policy loan will not be deductible. Before taking out
a policy loan, you should consult a tax adviser as to the tax consequences.
SECTION 1035 EXCHANGES
Code Section 1035 generally provides that no gain or loss shall be recognized on
the exchange of one life insurance policy for another life insurance policy, or
for an endowment or annuity contract. We accept 1035 exchanges with outstanding
loans. Special rules and procedures apply to Section 1035 exchanges. If you wish
to take advantage of Section 1035, you should consult your tax adviser.
TAX-EXEMPT POLICY OWNERS
Special rules may apply to a policy that is owned by a tax-exempt entity.
Tax-exempt entities should consult their tax adviser regarding the consequences
of purchasing and owning a policy. These consequences could include an effect on
the
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tax-exempt status of the entity and the possibility of the unrelated business
income tax.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative action is uncertain, there is always the
possibility that the tax treatment of the policy could be changed by legislation
or otherwise. You should consult a tax adviser with respect to legislative
developments and their effect on the policy.
CHANGES TO COMPLY WITH THE LAW
So that your policy continues to qualify as life insurance under the Code, we
reserve the right to refuse to accept all or part of your premium payments, or
to change your death benefit. We may refuse to allow you to make partial
withdrawals that would cause your policy to fail to qualify as life insurance.
We also may:
o make changes to your policy or its riders; or
o take distributions from your policy to the degree that we deem
necessary to qualify your policy as life insurance for tax purposes.
If we make any change of this type, it applies the same way to all affected
policies. We will give you advance notice of this change.
The tax law limits the amount we can charge for mortality costs and other
expenses used to calculate whether your policy qualifies as life insurance for
federal income tax purposes. We must base these calculations on reasonable
mortality charges and other charges reasonably expected to be paid. The Treasury
issued proposed regulations on what it considers reasonable mortality charges.
We believe that the charges used for your policy should meet the Treasury's
current requirement for "reasonableness." We reserve the right to make changes
to the mortality charges if future regulations have standards which make changes
necessary in order to continue to qualify your policy as life insurance for
federal income tax purposes.
Additionally, assuming that you do not want your policy to be or to become a
modified endowment contract, we include a policy endorsement under which we have
the right to amend your policy, including riders. We do this to attempt to
enable your policy to continue to meet the seven-pay test for federal income tax
purposes. If the policy premium you pay is more than the seven-pay limit, we
have the right to remove any excess premium or to make any appropriate
adjustments to your policy's account value and death benefit. It is not clear,
however, whether we can take effective action pursuant to this endorsement under
all possible circumstances to prevent a policy that has exceeded the premium
limitation from being classified as a modified endowment contract.
Any increase in your death benefit will cause an increase in your cost of
insurance charges.
OTHER
Policy owners may use our policies in various arrangements, including:
o qualified plans;
o non-qualified deferred compensation or salary continuance plans;
o split dollar insurance plans;
o executive bonus plans;
o retiree medical benefit plans; and
o other plans.
The tax consequences of these plans may vary depending on the particular facts
and circumstances of each arrangement. If you want to use any of your policies
in this type of arrangement, you should consult a qualified tax adviser
regarding the tax issues of your 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 IRS requires us to withhold income taxes from any portion of the amounts
individuals receive in a taxable transaction. We do not withhold income taxes if
you elect in writing not to have withholding apply. If the amount withheld for
you is insufficient to cover income taxes, you may have to pay income taxes and
possibly penalties later.
The transfer of the policy or designation of a beneficiary may have federal,
state, and/or local transfer and inheritance tax consequences, including the
imposition of gift, estate, and generation-skipping transfer taxes. For example,
the transfer of the policy
58
<PAGE>
to, or the designation as a beneficiary of, or the payment of proceeds to, a
person who is assigned to a generation which is two or more generations below
the generation assignment of the policy owner may have generation skipping
transfer tax consequences under federal tax law. The individual situation of
each policy owner or beneficiary will determine the extent, if any, to which
federal, state, and local transfer and inheritance taxes may be imposed and how
ownership or receipt of policy proceeds will be treated for purposes of federal,
state and local estate, inheritance, generation skipping and other taxes.
YOU SHOULD CONSULT QUALIFIED LEGAL OR TAX ADVISERS FOR COMPLETE INFORMATION ON
FEDERAL, STATE, LOCAL, AND OTHER TAX CONSIDERATIONS.
59
<PAGE>
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES, AND
ACCUMULATED PREMIUMS
The following tables are intended to show how the policy works. This includes
how benefits and values can vary over a long period of time. Each table also
compares these values with total premiums paid with interest. The following
policy is illustrated:
<TABLE>
<CAPTION>
Tobacco User Death Benefit Stated Target Death
Gender Age Status Option Death Benefit Premium Benefit
------ --- ------ ------ ------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Male 45 Preferred Non- A $250,000 $4,500 $250,000
tobacco
</TABLE>
The tables show how death benefits, account values, and cash surrender values of
a hypothetical policy could vary over an extended period of time, assuming the
variable subaccounts had constant hypothetical gross annual investment returns
of 0%, 6%, or 12% over the periods indicated in each table. Values would differ
from those shown in the tables if the annual investment returns were not
constant. The amounts shown would differ if we had used female or unisex rates.
These illustrations assume there are no policy loans.
We illustrate premium payments as if they were made at the beginning of the
year. Each table shows what would happen if an amount equal to the assumed
premiums earned interest, after taxes, of 5% compounded annually.
The difference between the account value and the cash surrender value in the
first fourteen years of the policy show the effect of the surrender charge.
The net investment return on your policy is lower than the gross investment
return on the variable subaccounts. This is due to the mortality and expense
risk charge, and the portfolio charge for management fees and portfolio
expenses. We show the effect of the net investment return in the in the amounts
for death benefits, account values and cash surrender values.
The tables reflect annual investment management fees of 0.6290% of the
portfolios' aggregate average daily net assets. This hypothetical rate is a
simple average of the investment advisory fees applying to the investment
portfolios for the year ending December 31, 1998. We assume other portfolio
expenses at the rate of 0.1010% of the portfolios' average daily net assets.
This is an average of all the portfolios' other expenses for the year ending
December 31, 1998 after any absorption by investment portfolio managers has been
made. The average of all portfolios' total expenses is 0.7300%.
Actual fees vary by portfolio. The portfolio fees and expenses used in the
illustrations are the net amounts shown after absorption of fees and expenses by
the portfolio's investment manager. Absent such absorption, the average
investment management fees, average other portfolio expenses and the average of
all portfolios' total expenses used in the illustrations would have been higher
(0.6290%, 0.1635% and 0.7925%, respectively). The tables assume that the current
expense reimbursement arrangements will continue. However, they may not continue
through 1999.
The effect of these portfolio charges and expenses, and mortality and expense
risk charges results in a net rate of return of :
o (1.62)% on a 0% gross rate of return;
o 4.33% on a 6% gross rate of return; and
o 10.27% on a 12% gross rate of return.
The tables assume that charges have been deducted, including deductions for
premiums, cost of insurance rider charges, monthly deductions and administrative
and sales charges. The tables show charges at our current rates which includes a
persistency refund. The tables also show charges at the maximum rates we
guarantee in our
60
<PAGE>
policies. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 48. The tables
reflect that we do not currently charge against the variable account for state
or federal taxes. If we charge for the taxes in the future, it will take a
higher gross rate of return than the rates shown to produce the same death
benefits, account values, and cash surrender values.
If we are asked to do so, we will give you a comparable personalized
illustration based on:
o the insured person's age and gender;
o standard premium class assumptions;
o initial stated death benefit;
o the chosen death benefit option;
o scheduled premiums consistent with your policy form; and
o special features elected on your policy.
At issue, we deliver an individualized illustration showing the scheduled
premium you chose and the insured person's actual risk class. After we issue the
policy, if you ask us to, we will give you an illustration of future policy
benefits. We base these hypothetical future benefits on both guaranteed and
current cost factor assumptions and actual account value.
61
<PAGE>
SOUTHLAND LIFE FUTURE DIMENSIONS VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $250,000 ANNUAL PREMIUM: $4,500.00
MALE 45 PREFERRED NON-TOBACCO DEATH BENEFIT OPTION A
- --------------------------------------------------------------------------------
SUMMARY PAGE
ASSUMING CURRENT CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
-------------0.00%------------ -------------12.00%------------- --------------6.00%-------------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $4,500 $ 4,725 $ 2,953 $ 983 $250,000 $ 3,374 $ 1,404 $250,000 $ 3,163 $ 1,193 $250,000
2 4,500 9,686 6,040 3,820 250,000 7,291 5,071 250,000 6,653 4,433 250,000
3 4,500 14,896 9,025 4,875 250,000 11,559 7,409 250,000 10,240 6,090 250,000
4 4,500 20,365 11,972 7,822 250,000 16,282 12,132 250,000 13,997 9,847 250,000
5 4,500 26,109 14,882 10,732 250,000 21,512 17,362 250,000 17,932 13,782 250,000
6 4,500 32,139 17,757 13,607 250,000 27,300 23,150 250,000 22,053 17,903 250,000
7 4,500 38,471 20,596 16,446 250,000 33,709 29,559 250,000 26,369 22,219 250,000
8 4,500 45,120 23,439 19,289 250,000 40,847 36,697 250,000 30,931 26,781 250,000
9 4,500 52,101 26,385 22,235 250,000 48,904 44,754 250,000 35,856 31,706 250,000
10 4,500 59,431 29,295 25,837 250,000 57,823 54,364 250,000 41,013 37,555 250,000
15 4,500 101,959 43,850 43,850 250,000 120,965 120,965 250,000 71,782 71,782 250,000
20 4,500 156,237 54,305 54,305 250,000 225,888 225,888 275,583 108,080 108,080 250,000
25 4,500 225,511 59,406 59,406 250,000 399,358 399,358 463,255 151,830 151,830 250,000
30 4,500 313,924 56,510 56,510 250,000 684,006 684,006 731,886 207,156 207,156 250,000
AGE 65 4,500 168,773 55,806 55,806 250,000 254,132 254,132 304,958 116,142 116,142 250,000
</TABLE>
The current cost of insurance rates are subject to change. Account values will
vary from those illustrated if actual rates differ from those assumed. Current
mortality charge rates are based on current mortality experience and are not
dependent upon future improvements in underlying mortality.
The hypothetical gross rates of return shown are illustrative only and should
not be deemed as a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocations made to the subaccounts
of the variable account and the guaranteed interest account and their investment
experience. No representation can be made that these hypothetical gross
investment returns can be achieved for any one year or sustained over any period
of time.
The death benefit, account value and cash surrender value for a policy would be
different from those shown if the actual gross annual rates of return averaged
0.00%, 12.00% And 6.00% Over a period of years but varied above or below that
average during the period. They would also be different if premiums were paid in
a different frequency than shown.
62
<PAGE>
SOUTHLAND LIFE FUTURE DIMENSIONS VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $250,000 ANNUAL PREMIUM: $4,500.00
MALE 45 PREFERRED NON-TOBACCO DEATH BENEFIT OPTION A
- --------------------------------------------------------------------------------
SUMMARY PAGE
ASSUMING GUARANTEED CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
-------------0.00%------------ -------------12.00%----------- --------------6.00%-------------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $4,500 $ 4,725 $ 2,904 $ 934 $250,000 $ 3,322 $ 1,352 $250,000 $ 3,113 $ 1,143 $250,000
2 4,500 9,686 5,943 3,723 250,000 7,181 4,961 250,000 6,549 4,329 250,000
3 4,500 14,896 8,874 4,724 250,000 11,379 7,229 250,000 10,076 5,926 250,000
4 4,500 20,365 11,696 7,546 250,000 15,950 11,800 250,000 13,694 9,544 250,000
5 4,500 26,109 14,401 10,251 250,000 20,925 16,775 250,000 17,401 13,251 250,000
6 4,500 32,139 16,990 12,840 250,000 26,349 22,199 250,000 21,199 17,049 250,000
7 4,500 38,471 19,448 15,298 250,000 32,257 28,107 250,000 25,079 20,929 250,000
8 4,500 45,120 21,763 17,613 250,000 38,692 34,542 250,000 29,033 24,883 250,000
9 4,500 52,101 23,926 19,776 250,000 45,705 41,555 250,000 33,054 28,904 250,000
10 4,500 59,431 25,921 22,463 250,000 53,349 49,891 250,000 37,131 33,673 250,000
15 4,500 101,959 33,514 33,514 250,000 105,530 105,530 250,000 59,121 59,121 250,000
20 4,500 156,237 34,498 34,498 250,000 192,208 192,208 250,000 81,947 81,947 250,000
25 4,500 225,511 23,822 23,822 250,000 338,453 338,453 392,606 103,435 103,435 250,000
30 4,500 313,924 LAPSE LAPSE LAPSE 575,736 575,736 616,037 119,913 119,913 250,000
AGE 65 4,500 168,773 33,498 33,498 250,000 216,100 216,100 259,320 86,420 86,420 250,000
</TABLE>
The expense charges and cost of insurance rates will never be greater than those
which were used to calculate the above values.
The hypothetical gross rates of return shown are illustrative only and should
not be deemed as a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocations made to the subaccounts
of the variable account and the guaranteed interest account and their investment
experience. No representation can be made that these hypothetical gross
investment returns can be achieved for any one year or sustained over any period
of time.
The death benefit, account value and cash surrender value for a policy would be
different from those shown if the actual gross annual rates of return averaged
0.00%, 12.00% And 6.00% Over a period of years but varied above or below that
average during the period. They would also be different if premiums were paid in
a different frequency than shown.
63
<PAGE>
ADDITIONAL INFORMATION
DIRECTORS AND OFFICERS
Southland Life Insurance Company is managed by a board of directors. The
following table sets forth the name, address and principal occupations during
the past five years of each of Southland's directors.
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS SOUTHLAND LIFE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
<S> <C> <C>
Stephen M. Christopher Chairman Chairman, Southland Life Insurance Company (since 1999); President
1290 Broadway & CEO, Security Life of Denver Insurance Company (1995 - present);
Denver, CO 80203-5699 Director & President, Southland Life Insurance Company (1993 - 1995)
James D. Thompson Director and President President, Southland Life Insurance Company, (1995 - present); Chief
5780 Powers Ferry Road, NW Operating Officer, Southland Life Insurance Company (1995-1998);
Atlanta, GA 30327-4390 President, Life Insurance Company of Georgia (since 1998); Executive
Vice President & Chief Financial Officer, ING America Life
Corporation and Security Life of Denver Insurance Company
(1993-1995)
Michael W. Cunningham Director Executive Vice President, Chief Financial Officer & Treasurer, ING
5780 Powers Ferry Road, NW North America Insurance Corporation (1994 - present); Executive Vice
Atlanta, GA 30327-4390 President & Chief Financial Officer, ING America Insurance Holdings,
Inc. (1994 - present); Senior Vice President & Chief Financial Officer,
ING North America Insurance Corporation (1991-1994).
P. Randall Lowery Director Executive Vice President, Actuarial & Risk Management, ING America
5780 Powers Ferry Road, NW Insurance Holdings, Inc. (1998 - present); Senior Vice President &
Atlanta, GA 30327-4390 Actuary, ING America Insurance Holdings, Inc. (1997 - 1998); Senior
Vice President & Corporate Actuary, ING America Life Corporation
(1995 - 1996); Vice President & Actuary, Southland Life Insurance
Company (1990 - 1995).
Valerie G. Brown Director President, Medical Risk Solutions, a division of Southland Life
5780 Powers Ferry Road, NW Insurance Company (1998 - present); Executive Vice President -
Atlanta, GA 30327-4390 Strategic Marketing & Management Development, ING North America
Insurance Holdings, Inc. (1996-1998); Vice President - Marketing,
Taco Bell Corporation (1992-1996).
B. Scott Burton Director, Vice Senior Vice President, General Counsel & Secretary, Southland Life
5780 Powers Ferry Road, NW President and Insurance Company and Life Insurance Company of Georgia (1998 to
Atlanta, GA 30327-4390 Secretary present); Secretary, Southland Life Insurance Company (since 1997),
Vice President & General Counsel, Southland Life Insurance Company
(1996 - 1998), Associate General Counsel, Southland Life Insurance
Company (1994-1996); Associate General Counsel, Confederation Life
Insurance Company (1990-1994).
Jerome J. Cwiok Director and Chief Director, Executive Vice President & Chief Operating Officer, Life
5780 Powers Ferry Road, NW Operating Officer Insurance Company of Georgia and Southland Life Insurance Company
Atlanta, GA 30327-4390 (1998 - present);Chief Marketing Officer, Life Insurance Company of
Georgia (1997 to
present);
President & Agency
SBU, Federal
Kemper Life
(1993-1997).
</TABLE>
64
<PAGE>
The following table sets forth the names, addresses and principal occupations
during the last five years of the senior officers of Southland (other than
officers who are members of Southland's board of directors).
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
SOUTHLAND LIFE
<S> <C> <C>
John R. Barmeyer Senior Vice President Senior Vice President and Chief Legal Officer, Southland Life
5780 Powers Ferry Road, NW Insurance Company and Life Insurance Company of Georgia (1996 to
Atlanta, GA 30327-4390 present); Director, Southland Life Insurance Company and Life
Insurance Company of Georgia (1992-1998); and Vice President,
General Counsel & Secretary, Southland Life Insurance Company and
Life Insurance Company of Georgia (1990-1996).
James J. Carey Senior Vice President - Senior Vice President - Marketing/Chief Marketing Officer (1996 to
5780 Powers Ferry Road, NW Marketing and present); President, United Securities Alliance (1994-1996);
Atlanta, GA 30327-4390 Chief Marketing Independent Consulting (1992-1994).
Officer
Daniel B. Settle Vice President and Vice President & Chief Actuary (since 1999); Vice President -
5780 Powers Ferry Road, NW Chief Actuary Valuation and Modeling, Southland Life Insurance Company and Life
Atlanta, GA 30327-4390 Insurance Company of Georgia (1998 - 1999); Vice President -
Valuation, Southland Life Insurance Company (1997 - 1998); Vice
President and Life Actuary, Life Insurance Company of Georgia
(1994 - 1997).
Michael E. Fisher Senior Vice President - Senior Vice President-Litigation, Southland Life Insurance Company
5780 Powers Ferry Road, NW Litigation and Life Insurance Company of Georgia (1996 - present); Partner,
Atlanta, GA 30327-4390 Gorby & Reeves, P.C. (1992-1996).
Larry F. Nordin Senior Vice President - Senior Vice President-Medical Risk Solutions (1996 - present); Vice
5780 Powers Ferry Road, NW Medical Risk Solutions President - Group Sales (1988-1996).
Atlanta, GA 30327-4390
Samuel H. Turner Senior Vice President - Senior Vice President-Emerging Markets (1997 - present); President
5780 Powers Ferry Road, NW Emerging Markets & Owner - Alliance Marketing Resources (1991-1997).
Atlanta, GA 30327-4390
Douglas L. Donivan Vice President - Vice President-Customer Services (since 1998); Senior Vice President
5780 Powers Ferry Road, NW Customer Services Operations, Liberty Insurance Services (1991-1998).
Atlanta, GA 30327-4390
Charles D. Lewis, Jr. Vice President - Vice - President - Management & Organization Development (1998 -
5780 Powers Ferry Road, NW Management & present); Senior Vice President, Development Corporate Services
Atlanta, GA 30327-4390 Organization (1997-1998); Vice President, Human Resources (1996 - 1997); Vice
President, Corporate Education & Development - Security Life of
Denver (1993 - 1996).
David S. Pendergrass Treasurer Treasurer, Southland Life Insurance Company and Life Insurance
5780 Powers Ferry Road, NW Company of Georgia (1997 - present); Vice President & Treasurer,
Atlanta, GA 30327-4390 ING North America Insurance Corporation (1995 - present); Treasury
Manager, - Scientific Atlanta International (1989-1995).
</TABLE>
65
<PAGE>
REGULATION
We are regulated and supervised by the Department of Insurance of the State of
Texas which periodically examines our financial condition and operations. In
addition, we are subject to the insurance laws and regulations in every
jurisdiction in which we do business. As a result, the provisions of this policy
may vary somewhat from jurisdiction to jurisdiction.
We are required to submit annual statements, including financial statements, of
our operations and finances to the insurance departments of the various
jurisdictions in which we do business to determine solvency and compliance with
state insurance laws and regulations.
We are also subject to various federal securities laws and regulations.
LEGAL MATTERS
The legal matters in connection with the policy described in this prospectus
have been passed on by the General Counsel of Southland. Sutherland Asbill &
Brennan LLP of Washington, D.C. has provided advice on certain matters
relating to the federal securities laws.
LEGAL PROCEEDINGS
Southland, as an insurance company, is ordinarily involved in litigation. 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, and we do not
expect to incur significant losses from such actions. ING America Equities,
Inc., the principal underwriter and distributor of the policy, is not engaged in
any litigation of any material nature.
EXPERTS
The financial statements of Southland Life Insurance Company at December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998, and the financial statements of the Southland Separate Account L1 at
December 31, 1998, and for each of the two years in the period ended December
31, 1998, 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 on the authority of such firm as experts in accounting and
auditing.
Actuarial matters in this prospectus have been examined by Daniel B. Settle, who
is Vice President and Chief Actuary of Southland. His opinion on actuarial
matters is filed as an exhibit to the Registration Statement we filed with the
SEC.
REGISTRATION STATEMENT
We have filed a Registration Statement relating to the variable account and the
variable life insurance policy described in this prospectus with the SEC. The
Registration Statement, which is required by the Securities Act of 1933,
includes additional information that is not required in this prospectus under
the rules and regulations of the SEC. The additional information may be obtained
from the SEC's principal office in Washington, DC. There is a charge for this
material.
66
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements of Southland Separate Account L1 at December
31, 1998, and for each of the two years in the period ended December 31, 1998,
are included beginning on the next page. Immediately following are the audited
financial statements of Southland Life Insurance Company at December 31, 1998
and 1997, and for each of the three years in the period ended December 31, 1998.
67
<PAGE>
[This page intentionally left blank]
68
<PAGE>
Financial Statements
Southland Separate Account L1
of Southland Life Insurance
Company
Years ended December 31, 1998 and 1997
with Report of Independent Auditors
69
<PAGE>
Southland Separate Account L1
Financial Statements
Years ended December 31, 1998 and 1997
CONTENTS
Report of Independent Auditors................................................71
Audited Financial Statements
Statement of Net Assets.......................................................72
Statements of Operations......................................................77
Statements of Changes in Net Assets...........................................87
Notes to Financial Statements ................................................97
70
<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 Sub-Accounts) ("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 Sub-Accounts) ("VIP and VIP II"),
the INVESCO Variable Investment Funds, Inc. (comprising the Industrial Income
and Utilities Sub-Accounts) ("INVESCO") and the Janus Aspen Series (comprising
the Growth, Aggressive Growth, Worldwide Growth, International Growth, Balanced,
and Short-Term Bond Sub-Accounts) ("Janus")) as of December 31, 1998, and the
related statements of operations and changes in net assets for each of the two
years in the period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1998, 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 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 Separate Account L1
at December 31, 1998, and the results of its operations and the changes in its
net assets for each of the two years in the period then ended, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
April 5, 1999
71
<PAGE>
Southland Separate Account L1
Statement of Net Assets
December 31, 1998
<TABLE>
<CAPTION>
Total Total
All Total VIP & Total Total
Sub-Accounts Alger VIP II INVESCO Janus
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at market value (Note C) $25,202,304 $4,358,386 $12,117,134 $898,727 $7,828,057
------------- ----------- ------------ --------- ------------
Total assets 25,202,304 4,358,386 12,117,134 898,727 7,828,057
------------- ----------- ------------ --------- ------------
LIABILITIES
Due to (from) Southland Life Insurance Company (441,196) (13,742) (416,444) (170) (10,840)
Due to (from) other sub-accounts (including the
guaranteed interest account in the general account) 191,850 902 190,578 32 338
------------- ----------- ------------ --------- ------------
Total liabilities (249,346) (12,840) (225,866) ( 138) (10,502)
------------- ----------- ------------ --------- ------------
Net assets $25,451,650 $4,371,226 $12,343,000 $898,865 $7,838,559
============= =========== ============ ========= ============
POLICYHOLDER RESERVES
Reserve for policyholders (Note B) $25,451,650 $4,371,226 $12,343,000 $898,865 $7,838,559
------------- ----------- ------------ --------- ------------
Total policyholder reserves $25,451,650 $4,371,226 $12,343,000 $898,865 $7,838,559
============= =========== ============ ========= ============
</TABLE>
See accompanying notes.
72
<PAGE>
Southland Separate Account L1
Statement of Net Assets (continued)
December 31, 1998
<TABLE>
<CAPTION>
ALGER
American American American
Total Small MidCap American Leveraged
Alger Capitalization Growth Growth AllCap
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at market value (Note C) $ 4,358,386 $ 881,194 $923,985 $ 1,820,952 $732,255
----------- --------- -------- ----------- --------
Total assets 4,358,386 881,194 923,985 1,820,952 732,255
----------- --------- -------- ----------- --------
LIABILITIES
Due to (from) Southland Life Insurance Company (13,742) (2,806) 604 (12,031) 491
Due to (from) other sub-accounts (including the
guaranteed interest account in the general account) 902 522 6 365 9
----------- --------- -------- ----------- --------
Total liabilities (12,840) (2,284) 610 (11,666) 500
----------- --------- -------- ----------- --------
Net assets $ 4,371,226 $ 883,478 $923,375 $ 1,832,618 $731,755
=========== ========= ======== =========== ========
POLICYHOLDER RESERVES
Reserves for policyholders (Note B) $ 4,371,226 $ 883,478 $923,375 $ 1,832,618 $731,755
----------- --------- -------- ----------- --------
Total policyholder reserves $ 4,371,226 $ 883,478 $923,375 $ 1,832,618 $731,755
=========== ========= ======== =========== ========
Number of sub-account units outstanding (Note G) 71,702.588 61,552.437 96,519.612 39,281.333
========== ========== =========== ==========
Net value per sub-account unit $12.32 $15.00 $18.99 $18.63
========== ========== =========== ==========
</TABLE>
See accompanying notes.
73
<PAGE>
Southland Separate Account L1
Statement of Net Assets (continued)
December 31, 1998
<TABLE>
<CAPTION>
Total Asset Money
VIP & VIP Manager Growth Overseas Market Index 500
II
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at market value $ 12,117,134 $ 504,072 $ 1,158,714 $ 197,318 $ 2,150,215 $ 2,877,794
(Note C) ------------ --------- ----------- --------- ----------- -----------
Total assets 12,117,134 504,072 1,158,714 197,318 2,150,215 2,877,794
------------ --------- ----------- --------- ----------- -----------
LIABILITIES
Due to (from) Southland Life Insurance Company (416,444) 92 (1,456) (133) (401,500) (7,582)
Due to (from) other sub-accounts (including the
guaranteed interest account in the general
account) 190,578 (7) 5 -- 188,142 1,074
------------ --------- ----------- --------- ----------- -----------
Total liabilities (225,866) 85 (1,451) (133) (213,358) (6,508)
------------ --------- ----------- --------- ----------- -----------
Net assets $ 12,343,000 $ 503,987 $ 1,160,165 $ 197,451 $ 2,363,573 $ 2,884,302
============ ========= =========== ========= =========== ===========
POLICYHOLDER RESERVES
Reserves for policyholders (Note B) $ 12,343,000 $ 503,987 $ 1,160,165 $ 197,451 $ 2,363,573 $ 2,884,302
------------ --------- ----------- --------- ----------- -----------
Total policyholder reserves $ 12,343,000 $ 503,987 $ 1,160,165 $ 197,451 $ 2,363,573 $ 2,884,302
============ ========= =========== ========= =========== ===========
Number of sub-account units outstanding (Note G) 35,040.789 67,213.256 15,284.198 194,464.915 159,598.401
========= =========== ========== ============ ============
Net value per sub-account unit $14.38 $17.26 $12.92 $12.15 $18.07
========= =========== ========== ============ ============
<CAPTION>
Equity- High Investment
Income Income Contrafund Grade Bond
-------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at market value (Note C) $ 1,492,604 $ 629,412 $ 2,696,802 $ 410,203
Total assets ----------- ----------- ----------- ---------
1,492,604 629,412 2,696,802 410,203
----------- ----------- ----------- ---------
LIABILITIES
Due to (from) Southland Life Insurance Company
(1,402) (387) (3,892) (184)
Due to (from) other sub-accounts (including the
guaranteed interest account in the general account) (343) 237 953 517
----------- ----------- ----------- ---------
Total liabilities (1,745) (150) (2,939) 333
----------- ----------- ----------- ---------
Net assets $ 1,494,349 $ 629,562 $ 2,699,741 $ 409,870
=========== =========== =========== =========
POLICYHOLDER RESERVES
Reserves for policyholders (Note B) $ 1,494,349 $ 629,562 $ 2,699,741 $ 409,870
----------- ----------- ----------- ---------
Total policyholder reserves $ 1,494,349 $ 629,562 $ 2,699,741 $ 409,870
=========== =========== =========== =========
Number of sub-account units outstanding (Note G) 100,106.288 55,875.183 157,136.563 34,341.076
=========== =========== =========== =========
$ 14.93 $ 11.27 $ 17.18 $ 11.94
=========== =========== =========== =========
Net value per sub-account unit
</TABLE>
See accompanying notes.
74
<PAGE>
Southland Separate Account L1
Statement of Net Assets (continued)
December 31, 1998
<TABLE>
<CAPTION>
INVESCO
Total Industrial
INVESCO Income Utilities
--------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in mutual funds at market value (Note C ) $ 898,727 $ 710,999 $ 187,728
--------- --------- ---------
Total assets 898,727 710,999 187,728
--------- --------- ---------
LIABILITIES
Due to (from) Southland Life Insurance Company (170) 297 (467)
Due to (from) other sub-accounts (including the
guaranteed interest account in the general account) 32 (294) 326
--------- --------- ---------
Total liabilities (138) 3 (141)
--------- --------- ---------
Net assets $ 898,865 $ 710,996 $ 187,869
========= ========= =========
POLICYHOLDER RESERVES
Reserves for policyholders (Note B) $ 898,865 $ 710,996 $ 187,869
--------- --------- ---------
Total policyholder reserves $ 898,865 $ 710,996 $ 187,869
========= ========= =========
Number of sub-account units outstanding (Note G) 49,352.422 11,674.130
========= =========
Net value per sub-account unit $14.41 $16.09
========= =========
</TABLE>
See accompanying notes.
75
<PAGE>
Southland Separate Account L1
Statement of Net Assets (continued)
December 31, 1998
JANUS
<TABLE>
<CAPTION>
TOTAL AGGRESSIVE WORLDWIDE
JANUS GROWTH GROWTH GROWTH
-------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at market value (Note C) $ 7,828,057 $ 1,297,960 $1,130,974 $ 2,156,893
----------- ----------- ---------- -----------
Total assets 7,828,057 1,297,960 1,130,974 2,156,893
----------- ----------- ---------- -----------
LIABILITIES
Due to (from) Southland Life Insurance Company (10,840) (2,664) 179 (1,614)
Due to (from) other sub-accounts (including the
guaranteed interest account in the general
account) 338 293 26 1,335
----------- ----------- ---------- -----------
Total liabilities (10,502) (2,371) 205 (279)
----------- ----------- ---------- -----------
Net assets $ 7,838,559 $ 1,300,331 $1,130,769 $ 2,157,172
=========== =========== ========== ===========
POLICYHOLDER RESERVES
Reserves for policyholders (Note B) $ 7,838,559 $ 1,300,331 $1,130,769 $ 2,157,172
----------- ----------- ---------- -----------
Total policyholder reserves $ 7,838,559 $ 1,300,331 $1,130,769 $ 2,157,172
=========== =========== ========== ===========
Number of sub-account units outstanding (Note G) 77,638.452 78,750.742 133,217.360
=========== ========== ============
Net value per sub-account unit $16.75 $14.36 $16.19
=========== ========== ============
<CAPTION>
INTERNATIONAL SHORT-TERM
GROWTH BALANCED BOND
--------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in mutual funds at market value (Note C) $ 1,067,102 $ 2,175,128 $ --
----------- ----------- --------
Total assets 1,067,102 2,175,128 --
----------- ----------- --------
LIABILITIES
Due to (from) Southland Life Insurance Company 330 (7,071) --
Due to (from) other sub-accounts (including the
guaranteed interest account in the general
account) (7) (1,309) --
----------- ----------- --------
Total liabilities 323 (8,380) --
----------- ----------- --------
Net assets $ 1,066,779 $ 2,183,508 $ --
=========== =========== ========
POLICYHOLDER RESERVES
Reserves for policyholders (Note B) $ 1,066,779 $ 2,183,508 $ --
----------- ----------- --------
Total policyholder reserves $ 1,066,779 $ 2,183,508 $ --
=========== =========== ========
Number of sub-account units outstanding (Note G) 73,359.684 131,276.187 --
=========== =========== ========
Net value per sub-account unit $ 14.54 $ 16.63 $ --
=========== =========== ========
</TABLE>
See accompanying notes.
76
<PAGE>
Southland Separate Account L1
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Total Total
All Total VIP & Total Total
Sub-Accounts Alger VIP II INVESCO Janus
------------ --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 626,404 $179,195 $ 252,170 $37,292 $ 157,747
Less valuation period deductions (Note B) 119,686 17,962 61,507 4,011 36,206
---------- -------- ---------- ------- ----------
Net investment income (loss) 506,718 161,233 190,663 33,281 121,541
---------- -------- ---------- ------- ----------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) on investments 127,820 25,905 31,103 5,430 65,382
Net unrealized gains (losses) on investments 2,657,680 642,532 1,033,851 41,691 939,606
---------- -------- ---------- ------- ----------
Net realized and unrealized gains (losses)
on investments 2,785,500 668,437 1,064,954 47,121 1,004,988
---------- -------- ---------- ------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $3,292,218 $829,670 $1,255,617 $80,402 $1,126,529
========== ======== ========== ======= ==========
</TABLE>
See accompanying notes.
77
<PAGE>
Southland Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
ALGER
American American American
Total Small MidCap American Leveraged
Alger Capitalization Growth Growth AllCap
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $179,195 $50,067 $ 30,380 $ 87,268 $ 11,480
Less valuation period deductions (Note B) 17,962 4,045 4,033 6,878 3,006
-------- ------- -------- -------- --------
Net investment income (loss) 161,233 46,022 26,347 80,390 8,474
-------- ------- -------- -------- --------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) on investment 25,905 2,686 9,274 6,653 7,292
Net unrealized gains (losses) on investments 642,532 49,565 120,660 303,561 168,746
-------- ------- -------- -------- --------
Net realized and unrealized gains (losses)
on investments 668,437 52,251 129,934 310,214 176,038
-------- ------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $829,670 $98,273 $156,281 $390,604 $184,512
======== ======= ======== ======== ========
</TABLE>
See accompanying notes.
78
<PAGE>
Southland Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
VIP & VIP II
Total Asset Money
VIP & Manager Growth Overseas Market Index 500
VIP II
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 252,170 $ 15,561 $ 37,137 $ 3,617 $104,324 $ 17,011
Less valuation period deductions (Note B) 61,507 2,798 5,164 924 17,651 11,910
---------- -------- -------- -------- -------- --------
Net investment income (loss) 190,663 12,763 31,973 2,693 86,673 5,101
---------- -------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) on investments 31,103 (2,166) 3,265 (1,636) -- 12,724
Net unrealized gains (losses) on investments 1,033,851 28,383 189,989 11,290 -- 332,201
---------- -------- -------- -------- -------- --------
Net realized and unrealized gains (losses)
on investments 1,064,954 26,217 193,254 9,654 -- 344,925
---------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $1,255,617 $ 38,980 $225,227 $ 12,347 $ 86,673 $350,026
========== ======== ======== ======== ======== ========
<CAPTION>
Equity- High Investment
Income Income Contrafund Grade Bond
-------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 23,486 $ 16,684 $ 30,389 $ 3,961
Less valuation period deductions (Note B) 6,837 2,983 11,312 1,928
-------- -------- -------- -------
Net investment income (loss) 16,649 13,701 19,077 2,033
-------- -------- -------- -------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) on investments 2,172 (2,338) 8,424 10,658
Net unrealized gains (losses) on investments 82,881 (39,195) 420,570 7,732
-------- -------- -------- -------
Net realized and unrealized gains (losses)
on investments 85,053 (41,533) 428,994 18,390
-------- -------- -------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $101,702 $(27,832) $448,071 $20,423
======== ======== ======== =======
</TABLE>
See accompanying notes.
79
<PAGE>
Southland Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
INVESCO
Total Industrial
INVESCO Income Utilities
---------------------------
INVESTMENT INCOME
Dividends from mutual funds $37,292 $34,407 $ 2,885
Less valuation period deductions (Note B) 4,011 3,474 537
------- ------- -------
Net investment income (loss) 33,281 30,933 2,348
------- ------- -------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) on investments 5,430 4,916 514
Net unrealized gains (losses) on investments 41,691 23,002 18,689
------- ------- -------
Net realized and unrealized gains (losses)
on investments 47,121 27,918 19,203
------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $80,402 $58,851 $21,551
======= ======= =======
See accompanying notes.
80
<PAGE>
Southland Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
JANUS
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 funds $ 157,747 $ 36,308 $ -- $ 52,078 $16,024 $ 49,352 $ 3,985
Less valuation period deductions (Note B) 36,206 5,483 4,426 11,466 6,089 8,447 295
---------- -------- --------- -------- ------- -------- -------
Net investment income (loss) 121,541 30,825 (4,426) 40,612 9,935 40,905 3,690
---------- -------- --------- -------- ------- -------- -------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) on investments 65,382 30,199 4,969 21,777 2,697 9,053 (3,313)
Net unrealized gains (losses) on investments 939,606 189,068 227,403 208,893 41,449 271,281 1,512
Net realized and unrealized gains (losses)
---------- -------- --------- -------- ------- -------- -------
on investments 1,004,988 219,267 232,372 230,670 44,146 280,334 (1,801)
---------- -------- --------- -------- ------- -------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $1,126,529 $250,092 $ 227,946 $271,282 $54,081 $321,239 $ 1,889
========== ======== ========= ======== ======= ======== =======
</TABLE>
See accompanying notes.
81
<PAGE>
Southland Separate Account L1
Statement of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Total Total
All Total VIP & Total Total
Sub-Accounts Alger VIP II INVESCO Janus
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 47,219 $ 829 $29,532 $ 9,839 $ 7,019
Less valuation period deductions (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.
82
<PAGE>
Southland Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
ALGER
American American American
Total Small MidCap American Leveraged
Alger Capitalization Growth Growth AllCap
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 829 $ 319 $ 18 $ 492 $ --
Less valuation period deductions (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.
83
<PAGE>
Southland Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
VIP & VIP II
<TABLE>
<CAPTION>
Total
VIP & VIP Asset Money Index Equity-
II Manager Growth Overseas Market 500 Income
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $29,532 $ -- $ -- $-- $29,532 $ -- $ --
Less valuation period deductions (Note B) 8,582 142 322 65 4,934 710 431
------- ------- ------- ----- ------- -------- -------
Net investment income (loss) 20,950 (142) (322) (65) 24,598 (710) (431)
------- ------- ------- ----- ------- -------- -------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
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
------- ------- ------- ----- ------- -------- -------
Net realized and unrealized gains (losses)
on investments 76,410 2,334 3,120 (621) -- 19,403 9,883
------- ------- ------- ----- ------- -------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $97,360 $ 2,192 $ 2,798 $(686) $24,598 $ 18,693 $ 9,452
======= ======= ======= ===== ======= ======== =======
<CAPTION>
Investment
High Grade
Income Contrafund Bond
-------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ -- $ -- $ --
Less valuation period deductions (Note B) 398 1,381 199
------- -------- -------
Net investment income (loss) (398) (1,381) (199)
------- -------- -------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Net realized gains (losses) on investments 817 2,545 181
Net unrealized gains (losses) on investments 7,284 28,977 2,487
------- -------- -------
Net realized and unrealized gains (losses)
on investments 8,101 31,522 2,668
------- -------- -------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 7,703 $ 30,141 $ 2,469
======= ======== =======
</TABLE>
See accompanying notes.
84
<PAGE>
Southland Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
INVESCO
Total Industrial
INVESCO Income Utilities
---------------------------------
INVESTMENT INCOME
Dividends from mutual funds $ 9,839 $ 9,766 $ 73
Less valuation period deductions (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
======= ======= ====
See accompanying notes.
85
<PAGE>
Southland Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
JANUS
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 funds $ 7,019 $ 2,261 $ -- $ 2,031 $ 226 $ 825 $ 1,676
Less valuation period deductions (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.
86
<PAGE>
Southland Separate Account L1
Statement of Changes in Net Assets
Year ended December 31, 1998
<TABLE>
<CAPTION>
Total Total
All Total VIP & Total Total
Sub-Accounts Alger VIP II INVESCO Janus
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 506,718 $ 161,233 $ 190,663 $ 33,281 $ 121,541
Net realized gains (losses) on investments 127,820 25,905 31,103 5,430 65,382
Net unrealized gains (losses) on investments 2,657,680 642,532 1,033,851 41,691 939,606
------------ ----------- ------------ --------- -----------
Increase (decrease) in net assets from operations 3,292,218 829,670 1,255,617 80,402 1,126,529
------------ ----------- ------------ --------- -----------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 20,624,321 1,162,046 17,385,636 261,529 1,815,110
Cost of insurance and administrative expenses (2,903,575) (419,601) (1,693,394) (78,336) (712,244)
Benefit payments (615) -- (309) -- (306)
Surrenders and withdrawals (307,094) (53,131) (142,218) (4,788) (106,957)
Net transfers among sub-accounts (including the
guaranteed interest account in the general account) (121,358) 2,273,667 (7,539,680) 497,977 4,646,678
Other (99,262) (19,523) (59,568) (2,149) (18,022)
------------ ----------- ------------ --------- -----------
Increase (decrease) from principal transactions 17,192,417 2,943,458 7,950,467 674,233 5,624,259
------------ ----------- ------------ --------- -----------
Total increase (decrease) in net assets 20,484,635 3,773,128 9,206,084 754,635 6,750,788
Net assets at beginning of year 4,967,015 598,098 3,136,916 144,230 1,087,771
------------ ----------- ------------ --------- -----------
Net assets at end of year $ 25,451,650 $ 4,371,226 $ 12,343,000 $ 898,865 $ 7,838,559
============ =========== ============ ========= ===========
</TABLE>
See accompanying notes.
87
<PAGE>
Southland Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
ALGER
American American American
Total Small MidCap American Leveraged
Alger Capitalization Growth Growth AllCap
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 161,233 $ 46,022 $ 26,347 $ 80,390 $ 8,474
Net realized gains (losses) on investments 25,905 2,686 9,274 6,653 7,292
Net unrealized gains (losses) on investments 642,532 49,565 120,660 303,561 168,746
----------- --------- --------- ----------- ---------
Increase (decrease) in net assets from operations 829,670 98,273 156,281 390,604 184,512
----------- --------- --------- ----------- ---------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 1,162,046 285,818 203,624 475,150 197,454
Cost of insurance and administrative expenses (419,601) (97,991) (86,531) (160,700) (74,379)
Benefit payments -- -- -- -- --
Surrenders and withdrawals (53,131) (15,643) (12,779) (17,013) (7,696)
Net transfers among sub-accounts (including the guaranteed
interest account in the general account) 2,273,667 446,424 502,094 987,565 337,584
Other (19,523) (774) (889) (15,121) (2,739)
----------- --------- --------- ----------- ---------
Increase (decrease) from principal transactions 2,943,458 617,834 605,519 1,269,881 450,224
----------- --------- --------- ----------- ---------
Total increase (decrease) in net assets 3,773,128 716,107 761,800 1,660,485 634,736
Net assets at beginning of year 598,098 167,371 161,575 172,133 97,019
----------- --------- --------- ----------- ---------
Net assets at end of year $ 4,371,226 $ 883,478 $ 923,375 $ 1,832,618 $ 731,755
=========== ========= ========= =========== =========
</TABLE>
See accompanying notes.
88
<PAGE>
Southland Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
VIP & VIP II
TOTAL
VIP & VIP ASSET MONEY
II MANAGER GROWTH OVERSEAS MARKET
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 190,663 $ 12,763 $ 31,973 $ 2,693 $ 86,673
Net realized gains (losses) on investments 31,103 (2,166) 3,265 (1,636) --
Net unrealized gains (losses) on investments 1,033,851 28,383 189,989 11,290 --
------------ --------- ----------- --------- ------------
Increase (decrease) in net assets from operations 1,255,617 38,980 225,227 12,347 86,673
------------ --------- ----------- --------- ------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 17,385,636 150,080 324,965 91,305 14,635,587
Cost of insurance and administrative expenses (1,693,394) (54,468) (113,665) (25,461) (700,063)
Benefit payments (309) -- -- -- --
Surrenders and withdrawals (142,218) (6,929) (28,566) (3,338) (12,212)
Net transfers among sub-accounts (including the guaranteed
interest account in the general account) (7,539,680) 295,904 509,516 83,279 (13,025,086)
Other (59,568) (1,306) (4,893) (1,025) (31,073)
------------ --------- ----------- --------- ------------
Increase (decrease) from principal transactions 7,950,467 383,281 687,357 144,760 867,153
------------ --------- ----------- --------- ------------
Total increase (decrease) in net assets 9,206,084 422,261 912,584 157,107 953,826
Net assets at beginning of year 3,136,916 81,726 247,581 40,344 1,409,747
------------ --------- ----------- --------- ------------
Net assets at end of year $ 12,343,000 $ 503,987 $ 1,160,165 $ 197,451 $ 2,363,573
============ ========= =========== ========= ============
<CAPTION>
INVESTMENT
EQUITY- HIGH GRADE
INDEX 500 INCOME INCOME CONTRAFUND BOND
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 5,101 $ 16,649 $ 13,701 $ 19,077 $ 2,033
Net realized gains (losses) on investments 12,724 2,172 (2,338) 8,424 10,658
Net unrealized gains (losses) on investments 332,201 82,881 (39,195) 420,570 7,732
----------- ----------- --------- ----------- ---------
Increase (decrease) in net assets from operations 350,026 101,702 (27,832) 448,071 20,423
----------- ----------- --------- ----------- ---------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 822,531 353,365 150,989 765,529 91,285
Cost of insurance and administrative expenses (304,160) (127,836) (45,807) (294,427) (27,507)
Benefit payments -- -- -- (309) --
Surrenders and withdrawals (54,104) (8,634) (229) (28,154) (52)
Net transfers among sub-accounts (including the guaranteed
interest account in the general account) 1,690,539 832,698 404,606 1,396,236 272,628
Other (18,689) (66) 8,758 (10,148) (1,126)
----------- ----------- --------- ----------- ---------
Increase (decrease) from principal transactions 2,136,117 1,049,527 518,317 1,828,727 335,228
----------- ----------- --------- ----------- ---------
Total increase (decrease) in net assets 2,486,143 1,151,229 490,485 2,276,798 355,651
Net assets at beginning of year 398,159 343,120 139,077 422,943 54,219
----------- ----------- --------- ----------- ---------
Net assets at end of year $ 2,884,302 $ 1,494,349 $ 629,562 $ 2,699,741 $ 409,870
=========== =========== ========= =========== =========
</TABLE>
See accompanying notes.
89
<PAGE>
Southland Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
INVESCO
Total Industrial
INVESCO Income Utilities
-----------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 33,281 $ 30,933 $ 2,348
Net realized gains (losses) on investments 5,430 4,916 514
Net unrealized gains (losses) on investments 41,691 23,002 18,689
--------- --------- ---------
Increase (decrease) in net assets from operations 80,402 58,851 21,551
--------- --------- ---------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 261,529 200,531 60,998
Cost of insurance and administrative expenses (78,336) (61,807) (16,529)
Benefit payments -- -- --
Surrenders and withdrawals (4,788) (4,417) (371)
Net transfers among sub-accounts (including the guaranteed 497,977 377,109 120,868
interest account in the general account)
Other (2,149) (272) (1,877)
--------- --------- ---------
Increase (decrease) from principal transactions 674,233 511,144 163,089
--------- --------- ---------
Total increase (decrease) in net assets 754,635 569,995 184,640
Net assets at beginning of year 144,230 141,001 3,229
--------- --------- ---------
Net assets at end of year $ 898,865 $ 710,996 $ 187,869
========= ========= =========
</TABLE>
See accompanying notes.
90
<PAGE>
Southland Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
JANUS
Total Aggressive Worldwide
Janus Growth Growth Growth
---------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 121,541 $ 30,825 $ (4,426) $ 40,612
Net realized gains (losses) on investments 65,382 30,199 4,969 21,777
Net unrealized gains (losses) on investments 939,606 189,068 227,403 208,893
----------- ----------- ----------- -----------
Increase (decrease) in net assets from operations 1,126,529 250,092 227,946 271,282
----------- ----------- ----------- -----------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 1,815,110 426,022 322,364 490,342
Cost of insurance and administrative expenses (712,244) (167,261) (104,466) (187,471)
Benefit payments (306) (306) -- --
Surrenders and withdrawals (106,957) (34,731) (6,451) (63,558)
Net transfers among sub-accounts (including the guaranteed 4,646,678 581,280 602,530 1,168,578
interest account in the general account)
Other (18,022) (3,705) (6,883) (4,546)
----------- ----------- ----------- -----------
Increase (decrease) from principal transactions 5,624,259 801,299 807,094 1,403,345
----------- ----------- ----------- -----------
Total increase (decrease) in net assets 6,750,788 1,051,391 1,035,040 1,674,627
Net assets at beginning of year 1,087,771 248,940 95,729 482,545
----------- ----------- ----------- -----------
Net assets at end of year $ 7,838,559 $ 1,300,331 $ 1,130,769 $ 2,157,172
=========== =========== =========== ===========
<CAPTION>
International Short-Term
Growth Balanced Bond
----------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 9,935 $ 40,905 $ 3,690
Net realized gains (losses) on investments 2,697 9,053 (3,313)
Net unrealized gains (losses) on investments 41,449 271,281 1,512
----------- ----------- --------
Increase (decrease) in net assets from operations 54,081 321,239 1,889
----------- ----------- --------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 200,143 367,935 8,304
Cost of insurance and administrative expenses (98,915) (151,467) (2,664)
Benefit payments -- -- --
Surrenders and withdrawals (1,162) (1,055) --
Net transfers among sub-accounts (including the guaranteed 755,641 1,556,845 (18,196)
interest account in the general account)
Other 2,053 (4,471) (470)
----------- ----------- --------
Increase (decrease) from principal transactions 857,760 1,767,787 (13,026)
----------- ----------- --------
Total increase (decrease) in net assets 911,841 2,089,026 (11,137)
Net assets at beginning of year 154,938 94,482 11,137
----------- ----------- --------
Net assets at end of year $ 1,066,779 $ 2,183,508 $ --
=========== =========== ========
</TABLE>
See accompanying notes.
91
<PAGE>
Southland Separate Account L1
Statement of Changes in Net Assets
Year ended December 31, 1997
<TABLE>
<CAPTION>
Total Total
All Total VIP & Total Total
Sub-Accounts Alger VIP II INVESCO Janus
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE 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 and withdrawals (1,357) (346) (677) (8) (326)
Net transfers among sub-accounts (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.
92
<PAGE>
Southland Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
ALGER
American American American
Total Small MidCap American Leveraged
Alger Capitalization Growth Growth AllCap
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
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 and withdrawals (346) (127) (23) (180) (16)
Net transfers among sub-accounts (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.
93
<PAGE>
Southland Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
VIP & VIP II
Total
VIP & VIP Asset Money
II Manager Growth Overseas Market
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 20,950 $ (142) $ (322) $ (65) $ 24,598
Net realized gains (losses) on investments 6,680 238 199 (3) --
Net unrealized gains (losses) on investments 69,730 2,096 2,921 (618) --
----------- -------- --------- -------- -----------
Increase (decrease) in net assets from operations 97,360 2,192 2,798 (686) 24,598
----------- -------- --------- -------- -----------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 4,858,995 28,701 13,829 8,799 4,552,361
Cost of insurance and administrative expenses (304,785) (3,199) (8,783) (2,955) (215,522)
Surrenders and withdrawals (677) (16) (16) -- --
Net transfers among sub-accounts (including the guaranteed
interest account in the gaccount) (1,513,977) 54,048 239,753 35,186 (2,951,690)
----------- -------- --------- -------- -----------
Increase from principal transactions 3,039,556 79,534 244,783 41,030 1,385,149
----------- -------- --------- -------- -----------
Total increase in net assets 3,136,916 81,726 247,581 40,344 1,409,747
Net assets at beginning of year -- -- -- -- --
----------- -------- --------- -------- -----------
Net assets at end of year $ 3,136,916 $ 81,726 $ 247,581 $ 40,344 $ 1,409,747
=========== ======== ========= ======== ===========
<CAPTION>
Equity- High Investment
Index 500 Income Income Contrafund Grade Bond
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (710) $ (431) $ (398) $ (1,381) $ (199)
Net realized gains (losses) on investments 2,043 660 817 2,545 181
Net unrealized gains (losses) on investments 17,360 9,223 7,284 28,977 2,487
--------- --------- --------- --------- --------
Increase (decrease) in net assets from operations 18,693 9,452 7,703 30,141 2,469
--------- --------- --------- --------- --------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 80,172 26,271 49,548 80,795 18,519
Cost of insurance and administrative expenses (16,744) (7,481) (9,095) (35,811) (5,195)
Surrenders and withdrawals (58) (8) -- (579) --
Net transfers among sub-accounts (including the guaranteed
interest account in the gaccount) 316,096 314,886 90,921 348,397 38,426
--------- --------- --------- --------- --------
Increase from principal transactions 379,466 333,668 131,374 392,802 51,750
--------- --------- --------- --------- --------
Total increase in net assets 398,159 343,120 139,077 422,943 54,219
Net assets at beginning of year -- -- -- -- --
--------- --------- --------- --------- --------
Net assets at end of year $ 398,159 $ 343,120 $ 139,077 $ 422,943 $ 54,219
========= ========= ========= ========= ========
</TABLE>
See accompanying notes.
94
<PAGE>
Southland Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
INVESCO
Total Industrial
INVESCO Income Utilities
--------------------------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
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 and withdrawals (8) -- (8)
Net transfers among sub-accounts (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.
95
<PAGE>
Southland Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
JANUS
Total Aggressive Worldwide International
Janus Growth Growth Growth Growth
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 4,621 $ 1,600 $ (240) $ 1,036 $ (71)
Net realized gains (losses) on investments 6,803 2,977 1,170 1,592 983
Net unrealized gains (losses) on investments 24,730 6,871 6,573 11,707 (1,597)
----------- --------- -------- --------- ---------
Increase (decrease) in net assets from operations 36,154 11,448 7,503 14,335 (685)
----------- --------- -------- --------- ---------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 253,062 70,041 28,978 98,303 36,942
Cost of insurance and administrative expenses (68,891) (21,920) (10,113) (25,436) (7,255)
Surrenders and withdrawals (326) (246) (16) (64) --
Net transfers among sub-accounts (including the guaranteed
interest account in the general account) 67,772 189,617 69,377 395,407 125,936
----------- --------- -------- --------- ---------
Increase from principal transactions 1,051,617 237,492 88,226 468,210 155,623
----------- --------- -------- --------- ---------
Total increase in net assets 1,087,771 248,940 95,729 482,545 154,938
Net assets at beginning of year -- -- -- -- --
----------- --------- -------- --------- ---------
Net assets at end of year $ 1,087,771 $ 248,940 $ 95,729 $ 482,545 $ 154,938
=========== ========= ======== ========= =========
<CAPTION>
Short-Term
Balanced Bond
---------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 641 $ 1,655
Net realized gains (losses) on investments 75 6
Net unrealized gains (losses) on investments 2,688 (1,512)
-------- --------
Increase (decrease) in net assets from operations 3,404 149
-------- --------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 18,703 95
Cost of insurance and administrative expenses (3,564) (603)
Surrenders and withdrawals -- --
Net transfers among sub-accounts (including the guaranteed
interest account in the general account) 75,939 11,496
-------- --------
Increase from principal transactions 91,078 10,988
-------- --------
Total increase in net assets 94,482 11,137
Net assets at beginning of year -- --
-------- --------
Net assets at end of year $ 94,482 $ 11,137
======== ========
</TABLE>
See accompanying notes.
96
<PAGE>
Southland Separate Account L1
Notes to Financial Statements
December 31, 1998
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) policies offered by the Company. The Separate
Account may be used to support other variable life policies 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 policies will not be used to satisfy liabilities arising out of any other
operations of the Company.
As of December 31, 1998, the Separate Account consisted of twenty investment
sub-accounts available to the policyholders, each of which invests in an
independently managed mutual fund portfolio ("fund"). The funds are as follows:
PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS)
The Alger American Fund (Alger):
American Small Capitalization
American MidCap Growth
American Growth
American Leveraged AllCap
Fidelity Variable Insurance Products (VIP & VIP II) Funds:
VIP II Asset Manager
VIP Growth
VIP Overseas
VIP Money Market
VIP II Index 500
VIP Equity-Income
VIP High Income
VIP II Contrafund
VIP II Investment Grade Bond
97
<PAGE>
Southland Separate Account L1
Notes to Financial Statements (continued)
NOTE A. ORGANIZATION (CONTINUED)
INVESCO Variable Investment Funds, Inc. (INVESCO):
Industrial Income
Utilities
Janus Aspen Series Funds (Janus):
Growth
Aggressive Growth
Worldwide Growth
International Growth
Balanced
The Future Dimensions policies allow the policyholders to specify the allocation
of their net premiums to the various funds. They can also transfer their account
values among the funds. The Future Dimensions product also provides the
policyholders the option to allocate their net premiums, or to transfer their
account values, to a Guaranteed Interest Account ("GIA") in the Company's
General Account. 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 Fund no longer accepted any new investments.
The Securities and Exchange Commission issued a substitution order and on
September 28, 1998, shares of the Fidelity VIP Money Market Fund were exchanged
for Janus Aspen Series Short-Term Bond Fund shares.
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.
98
<PAGE>
Southland Separate Account L1
Notes to Financial Statements (continued)
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:
INVESTMENT VALUATION--The investments in shares of the funds are valued at the
closing net asset value (market value) per share as determined by the funds on
the day of measurement.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--The investments in shares
of the funds 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 investment 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 policies, 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 years ended December 31, 1998 and 1997
were $119,686 and $13,332, respectively.
POLICYHOLDER RESERVES--Policyholder reserves are presented 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.
99
<PAGE>
Southland Separate Account L1
Notes to Financial Statements (continued)
NOTE C. INVESTMENTS
Fund 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. Fund 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 for the years ended December 31,
1998 and 1997 were $2,903,575 and $437,265, respectively. Dividends made by the
funds are reinvested in the funds.
The following is a summary of Fund shares owned as of December 31, 1998:
<TABLE>
<CAPTION>
Number Net Asset Value
of Value of Shares Cost of
Fund Shares at Market at Market Shares
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Alger American Fund:
American Small Capitalization 20,040.800 $43.97 $ 881,194 $ 823,924
American MidCap Growth 32,005.000 $28.87 923,985 802,289
American Growth 34,215.550 $53.22 1,820,952 1,507,768
American Leveraged AllCap 20,981.500 $34.90 732,255 555,761
Fidelity Variable Insurance Products (VIP & VIP II)
Funds:
VIP II Asset Manager 27,757.250 $18.16 504,072 473,592
VIP Growth 25,823.750 $44.87 1,158,714 965,803
VIP Overseas 9,841.400 $20.05 197,318 186,648
VIP Money Market 2,150,214.000 $1.00 2,150,215 2,150,214
VIP II Index 500 20,373.750 $141.25 2,877,794 2,528,232
VIP Equity-Income 58,717.700 $25.42 1,492,604 1,400,500
VIP High Income 54,589.000 $11.53 629,412 661,323
VIP II Contrafund 110,343.820 $24.44 2,696,802 2,247,256
VIP II Investment Grade Bond 31,651.500 $12.96 410,203 399,984
INVESCO Variable Investment Funds, Inc.:
Industrial Income 38,205.180 $18.61 710,999 690,059
Utilities 10,558.400 $17.78 187,728 168,860
Janus Aspen Series Funds:
Growth 55,138.500 $23.54 1,297,960 1,102,020
Aggressive Growth 40,992.200 $27.59 1,130,974 896,998
Worldwide Growth 74,145.500 $29.09 2,156,893 1,936,293
International Growth 50,169.500 $21.27 1,067,102 1,027,251
Balanced 96,672.500 $22.50 2,175,128 1,901,160
Short-Term Bond 0.000 $ 0.00 -- --
----------- -----------
Total $25,202,304 $22,425,935
=========== ===========
</TABLE>
100
<PAGE>
Southland Separate Account L1
Notes to Financial Statements (continued)
NOTE C. INVESTMENTS (CONTINUED)
For the year ended December 31, 1998, the cost of purchases (plus reinvested
dividends) and sales of investments are as follows:
<TABLE>
<CAPTION>
Beginning End
Fund of Year Purchases Sales of Year
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Alger American Fund:
American Small Capitalization $ 159,788 $ 793,898 $ (129,762) $ 823,924
American MidCap Growth 160,671 808,135 (166,517) 802,289
American Growth 162,645 1,567,659 (222,536) 1,507,768
American Leveraged AllCap 89,374 558,712 (92,325) 555,761
Fidelity Variable Insurance Products (VIP & VIP II) Funds:
VIP II Asset Manager 79,694 484,109 (90,211) 473,592
VIP Growth 244,864 881,785 (160,846) 965,803
VIP Overseas 40,989 182,452 (36,793) 186,648
VIP Money Market 1,223,183 14,685,116 (13,758,085) 2,150,214
VIP II Index 500 381,069 2,552,251 (405,088) 2,528,232
VIP Equity-Income 334,152 1,296,260 (229,912) 1,400,500
VIP High Income 131,909 620,022 (90,608) 661,323
VIP II Contrafund 394,295 2,237,710 (384,749) 2,247,256
VIP II Investment Grade Bond 51,774 574,990 (226,780) 399,984
INVESCO Variable Investment
Funds, Inc.:
Industrial Income 143,178 629,430 (82,549) 690,059
Utilities 3,054 187,031 (21,225) 168,860
Janus Aspen Series Funds:
Growth 242,267 1,048,291 (188,538) 1,102,020
Aggressive Growth 89,231 935,858 (128,091) 896,998
Worldwide Growth 471,234 1,814,789 (349,730) 1,936,293
International Growth 156,658 982,449 (111,856) 1,027,251
Balanced 91,837 1,977,281 (167,958) 1,901,160
Short-Term Bond 12,655 65,561 (78,216) --
---------- ----------- ------------ -----------
Total $4,664,521 $34,883,789 $(17,122,375) $22,425,935
========== =========== ============ ===========
</TABLE>
Aggregate proceeds from sales of investments for the year ended December 31,
1998 were $17,250,195.
101
<PAGE>
Southland Separate Account L1
Notes to Financial Statements (continued)
NOTE D. OTHER POLICY DEDUCTIONS
The Future Dimensions policies 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 of borrowing
against the policies, an amount equal to the loan amount is transferred from the
Separate Account sub-accounts to a loan Guaranteed Interest Account in the
Company's General Account to secure the loan. As payments are made on the policy
loan, amounts are transferred back from the Loan Guaranteed Interest Account to
the Separate Account sub-accounts. Interest is credited to the balance in the
loan Guaranteed Interest Account at a fixed rate. The loan Guaranteed Interest
Account 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. The Separate
Account is not taxed as a "Regulated Investment Company" under subchapter "M" of
the Internal Revenue Code.
102
<PAGE>
Southland Separate Account L1
Notes to Financial Statements (continued)
NOTE G. SUMMARY OF CHANGES IN UNITS
The following schedule summarizes the changes in sub-account units for the year
ended December 31, 1998:
<TABLE>
<CAPTION>
(Decrease)
Increase for
Outstanding for Withdrawals Outstanding
at Beginning Payments and Other at End
Sub-Account of Year Received Deductions of Year
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Alger American Fund:
American Small Capitalization 15,602.470 66,203.578 (10,103.460) 71,702.588
American MidCap Growth 13,909.250 55,156.739 (7,513.552) 61,552.437
American Growth 13,399.380 94,364.654 (11,244.422) 96,519.612
American Leveraged AllCap 8,148.770 36,679.921 (5,547.358) 39,281.333
Fidelity Variable Insurance Products (VIP
& VIP II) Funds:
VIP II Asset Manager 6,482.680 33,107.305 (4,549.196) 35,040.789
VIP Growth 19,868.310 56,789.233 (9,444.287) 67,213.256
VIP Overseas 3,494.450 14,053.495 (2,263.747) 15,284.198
VIP Money Market 115,644.200 1,334,612.678 (1,255,791.963) 194,464.915
VIP II Index 500 28,102.340 153,812.513 (22,316.452) 159,598.401
VIP Equity-Income 25,474.830 84,172.610 (9,541.152) 100,106.288
VIP High Income 11,714.000 48,130.308 (3,969.125) 55,875.183
VIP II Contrafund 31,768.100 146,734.981 (21,366.518) 157,136.563
VIP II Investment Grade Bond 4,900.060 31,738.917 (2,297.901) 34,341.076
INVESCO Variable Investment Funds, Inc.:
Industrial Income 11,223.700 43,201.975 (5,073.253) 49,352.422
Utilities 250.460 12,714.459 (1,290.789) 11,674.130
Janus Aspen Series Funds:
Growth 20,034.700 71,997.593 (14,393.841) 77,638.452
Aggressive Growth 8,875.280 79,190.451 (9,314.989) 78,750.742
Worldwide Growth 38,107.830 111,570.199 (16,460.669) 133,217.360
International Growth 12,384.220 68,300.451 (7,324.987) 73,359.684
Balanced 7,592.840 134,182.102 (10,498.755) 131,276.187
Short-Term Bond 1,034.550 739.743 (1,774.293) 0.000
</TABLE>
103
<PAGE>
Southland Separate Account L1
Notes to Financial Statements (continued)
NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED)
The following schedule summarizes the changes in sub-account units for the year
ended December 31, 1997:
<TABLE>
<CAPTION>
(Decrease)
Increase for
Outstanding for Withdrawals Outstanding
at Beginning Payments and Other at End
Sub-Account of Year Received Deductions of Year
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Alger American Fund:
American Small Capitalization -- 15,614.280 (11.810) 15,602.470
American MidCap Growth -- 13,911.240 (1.990) 13,909.250
American Growth -- 13,413.360 (13.980) 13,399.380
American Leveraged AllCap -- 8,150.060 (1.290) 8,148.770
Fidelity Variable Insurance Products (VIP & VIP II) Funds:
VIP II Asset Manager -- 6,483.960 (1.280) 6,482.680
VIP Growth -- 19,869.540 (1.230) 19,868.310
VIP Overseas -- 3,494.450 -- 3,494.450
VIP Money Market -- 418,912.020 (303,267.820) 115,644.200
VIP II Index 500 -- 28,106.580 (4.240) 28,102.340
VIP Equity-Income -- 25,475.490 (.660) 25,474.830
VIP High Income -- 11,714.000 -- 11,714.000
VIP II Contrafund -- 31,812.080 (43.980) 31,768.100
VIP II Investment Grade Bond -- 4,900.060 -- 4,900.060
INVESCO Variable Investment Funds, Inc.:
Industrial Income -- 11,223.710 (.010) 11,223.700
Utilities -- 251.170 (.710) 250.460
Janus Aspen Series Funds:
Growth -- 20,054.580 (19.880) 20,034.700
Aggressive Growth -- 8,876.800 (1.520) 8,875.280
Worldwide Growth -- 38,113.040 (5.210) 38,107.830
International Growth -- 12,384.220 -- 12,384.220
Balanced -- 7,592.840 -- 7,592.840
Short-Term Bond -- 1,034.550 -- 1,034.550
</TABLE>
104
<PAGE>
Southland Separate Account L1
Notes to Financial Statements (continued)
NOTE H. NET ASSETS
Net assets at December 31, 1998 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
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Alger American Fund:
American Small Capitalization $ 776,742 $ 45,791 $ 3,674 $ 57,271 $ 883,478
American MidCap Growth 765,535 25,853 10,291 121,696 923,375
American Growth 1,430,872 80,339 8,224 313,183 1,832,618
American Leveraged AllCap 538,638 8,030 8,593 176,494 731,755
Fidelity Variable Insurance Products (VIP
& VIP II) Funds:
VIP II Asset Manager 462,815 12,621 (1,928) 30,479 503,987
VIP Growth 932,139 31,652 3,464 192,910 1,160,165
VIP Overseas 185,789 2,629 (1,639) 10,672 197,451
VIP Money Market 2,252,301 111,272 -- -- 2,363,573
VIP II Index 500 2,515,583 4,391 14,767 349,561 2,884,302
VIP Equity-Income 1,383,195 16,218 2,832 92,104 1,494,349
VIP High Income 649,692 13,302 (1,521) (31,911) 629,562
VIP II Contrafund 2,221,529 17,697 10,969 449,546 2,699,741
VIP II Investment Grade Bond 386,977 1,835 10,839 10,219 409,870
INVESCO Variable Investment Funds, Inc.:
Industrial Income 644,149 40,399 5,508 20,940 710,996
Utilities 166,060 2,416 526 18,867 187,869
Janus Aspen Series Funds:
Growth 1,038,791 32,424 33,176 195,940 1,300,331
Aggressive Growth 895,320 (4,666) 6,139 233,976 1,130,769
Worldwide Growth 1,871,556 41,647 23,369 220,600 2,157,172
International Growth 1,013,384 9,863 3,680 39,852 1,066,779
Balanced 1,858,866 41,546 9,128 273,968 2,183,508
Short-Term Bond (2,038) 5,345 (3,307) -- --
------------ --------- --------- ----------- -----------
Total $ 21,987,895 $ 540,604 $ 146,784 $ 2,776,367 $25,451,650
============ ========= ========= =========== ===========
</TABLE>
105
<PAGE>
Southland Separate Account L1
Notes to Financial Statements (continued)
NOTE I. YEAR 2000 (UNAUDITED)
Southland Life Insurance Company is aware of the computer problems that may
exist surrounding the Year 2000. Our senior management projects information
processing and delivery systems to complete their Year 2000 readiness
preparations by December 31, 1999.
As a financial services enterprise, the Company is dependent on computer systems
and applications to conduct its business. The Company's plan to resolve the Year
2000 issue involves the following four phases: assessment, remediation, testing,
and implementation. The project plan covers Southland Life Insurance Company and
its affiliated companies, Life Insurance Company of Georgia, Golden American
Life Insurance Company and Security Life of Denver Insurance Company. We have
followed our normal project management methodology including communication with
senior management. The Company's project team has completed the assessment and
remediation phases of its plan. Testing of mission-critical systems is underway
with implementation completion by December 31, 1999. The costs of these efforts
will not affect the Separate Account.
As part of our project plan, the Company has completed an inventory and
assessment of substantially all vendor products to determine the extent to which
the Company may be vulnerable to such parties' failure to resolve their own Year
2000 issues. The Company has assessed and is prioritizing responses in an
attempt to mitigate risks with respect to the failure of these parties to be
Year 2000 ready. Failure of certain third parties, for example, sub-account
advisors, to complete their Year 2000 preparations could have an adverse effect
on the Company's operations. There can be no assurance that failure of third
parties to complete adequate preparations in a timely manner, and any resulting
systems interruptions or other consequences, would not have an adverse effect,
directly or indirectly, on the Separate Account, including, without limitation,
its operation or the valuation of its assets and units.
The Company believes the risks of Year 2000 issues are mitigated with its Year
2000 project and contingency plans. These contingency plans involve, among other
actions, manual processing, outsourcing, and adjusting staffing strategies.
The Company designates each of the statements made by it herein as a Year 2000
Readiness Disclosure. Such statements are made pursuant to the Year 2000
Information and Readiness Disclosure Act.
106
<PAGE>
Financial Statements
Southland Life Insurance Company
Years ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
107
<PAGE>
Southland Life Insurance Company
Financial Statements
Years ended December 31, 1998, 1997 and 1996
CONTENTS
Report of Independent Auditors...............................................109
Audited Financial Statements
Balance Sheets...............................................................110
Statements of Income.........................................................112
Statements of Stockholder's Equity...........................................113
Statements of Cash Flows.....................................................114
Notes to Financial Statements................................................116
108
<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, 1998 and 1997, and the related statements of income,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
April 5, 1999
109
<PAGE>
Southland Life Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Investments (Notes 1, 2, 3 and 4):
Fixed maturities:
Available-for-sale, at fair value (amortized cost:
1998 - $1,140,483; 1997- $981,672) $1,186,813 $1,031,283
Equity securities, at fair value (cost: 1998 - $5,941;
1997 - $3,072) 6,503 3,200
Mortgage loans on real estate 341,673 334,447
Policy loans 87,904 86,156
Short-term investments -- 3,311
---------- ----------
Total investments 1,622,893 1,458,397
Cash 4,742 6,818
Accrued investment income 18,336 17,961
Reinsurance recoverable:
Paid benefits 3,539 7,337
Unpaid benefits and IBNR 5,201 1,491
Prepaid reinsurance premiums 190,035 275,154
Deferred policy acquisition costs 223,949 193,196
Present value of future profits less accumulated
amortization (1998 - $205,258; 1997 - $195,275) 59,628 64,363
Goodwill less accumulated amortization (1998 -$14,163;
1997 - $12,622) 46,298 47,839
Separate account assets (Note 13) 54,009 18,877
Federal taxes recoverable from related party (Note 8) 6,598 --
Other assets 16,626 6,363
---------- ----------
Total assets $2,251,854 $2,097,796
========== ==========
</TABLE>
110
<PAGE>
Southland Life Insurance Company
Balance Sheets
DECEMBER 31
1998 1997
-------------------------
(In Thousands,
Except Share Amounts)
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Life and annuity reserves $1,549,782 $1,325,442
Accident and health reserves 9,647 9,989
Guaranteed investment contracts 137,714 256,645
Policyholders' funds 2,632 2,539
Advance premiums 97 78
Accrued dividends and dividends on deposit 742 758
Unpaid claims 30,442 18,147
---------- ----------
Total future policy benefits 1,731,056 1,613,598
Accounts payable and accrued expenses 12,204 8,491
Indebtedness to related parties 6,355 18,118
Other liabilities 36,437 15,959
Separate account liabilities (Note 13) 54,009 18,877
Federal income taxes payable (Note 8):
Current -- 2,267
Deferred 31,425 46,868
--------- ---------
Total liabilities 1,871,486 1,724,178
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 271,906 246,906
Accumulated other comprehensive income 20,637 24,320
Retained earnings 80,325 94,892
---------- ----------
Total stockholder's equity 380,368 373,618
---------- ----------
Total liabilities and stockholder's equity $2,251,854 $2,097,796
========== ==========
See accompanying notes.
111
<PAGE>
Southland Life Insurance Company
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------
(In Thousands)
<S> <C> <C> <C>
Revenues:
Traditional life insurance premiums $ 36,383 $ 32,304 $ 34,591
Health insurance premiums 68,947 69,997 71,587
Universal life and investment product charges 107,634 92,660 76,907
Reinsurance assumed 397 570 16
--------- --------- ---------
213,360 195,531 183,101
Reinsurance ceded premiums (52,378) (61,103) (68,663)
--------- --------- ---------
160,983 134,428 114,438
Net investment income 111,408 107,563 100,556
Net realized gains on investments 19,296 25,294 9,585
Other revenues 7,712 11,293 13,391
--------- --------- ---------
Total revenues 299,399 278,578 237,970
Benefits and expenses:
Insurance claims and benefits incurred:
Traditional life insurance:
Death benefits 29,201 27,569 27,756
Other benefits 16,524 19,452 20,543
Universal life and investment contracts:
Interest credited to account balances 57,581 46,182 38,051
Death benefit incurred in excess of account balances 27,753 21,102 17,573
Health benefits 62,470 53,613 49,849
Increase (decrease) in policy reserves and other funds 960 (2,579) (3,444)
Reinsurance recoveries (48,478) (43,814) (41,920)
--------- --------- ---------
146,011 121,525 108,408
Commissions 16,676 17,186 19,195
Insurance operating expenses (Note 11) 60,422 38,644 30,910
Amortization of goodwill 1,541 1,541 1,541
Amortization of present value of future profits, net of
accrued interest 4,694 9,473 9,148
Amortization of deferred policy acquisition costs 30,925 27,572 17,905
--------- --------- ---------
260,269 215,941 187,107
--------- --------- ---------
Income before federal income taxes 39,130 62,637 50,863
Federal income taxes (Note 8) 14,297 22,479 19,514
--------- --------- ---------
Net income $ 24,833 $ 40,158 $ 31,349
========= ========= =========
</TABLE>
See accompanying notes.
112
<PAGE>
Southland Life Insurance Company
Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Comprehensive Retained
(In Thousands) Stock Capital Income Earnings Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $7,500 $246,906 $ 37,906 $ 86,385 $ 378,697
Dividends to stockholder -- -- -- (21,000) (21,000)
Comprehensive income:
Change in net unrealized investment losses
net of deferred taxes of ($13,402) -- -- (24,889) -- --
Effect on DPAC and PVFP of unrealized losses
on fixed maturities, net of deferred taxes of $3,228 -- -- 5,996 -- --
Net income -- -- -- 31,349 --
Total comprehensive income -- -- -- -- 12,456
------ -------- -------- -------- ---------
Balance at December 31, 1996 7,500 246,906 19,013 96,734 370,153
Dividends to stockholder -- -- -- (42,000) (42,000)
Comprehensive income:
Change in net unrealized investment gains
net of deferred taxes of $3,255 -- -- 6,044 -- --
Effect on DPAC and PVFP of unrealized gains
on fixed maturities, net of deferred taxes of ($397) -- -- (737) -- --
Net income -- -- -- 40,158 --
Total comprehensive income -- -- -- -- 45,465
------ -------- -------- -------- ---------
Balance at December 31, 1997 7,500 246,906 24,320 94,892 373,618
Dividends to stockholder -- -- -- (39,400) (39,400)
Contributed surplus -- 25,000 -- -- 25,000
Comprehensive income:
Change in net unrealized investment losses
net of deferred taxes of ($996) -- -- (1,851) -- --
Effect on DPAC and PVFP of unrealized losses
on fixed maturities, net of deferred taxes of ($987) -- -- (1,832) -- --
Net income -- -- -- 24,833 --
Total comprehensive income -- -- -- -- 21,150
------ -------- -------- -------- ---------
Balance at December 31, 1998 $7,500 $271,906 $ 20,637 $ 80,325 $ 380,368
====== ======== ======== ======== =========
</TABLE>
113
<PAGE>
Southland Life Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 24,833 $ 40,158 $ 31,349
Adjustments to reconcile net income to net cash
provided by operating activities:
(Decrease) increase in future policy benefits (78,110) 29,507 (202)
Net (decrease) increase in federal income taxes (22,325) 4,121 (8,722)
Increase (decrease) in accounts payable and
accrued expenses and other liabilities 24,191 4,839 (13,312)
Increase in accrued investment income (375) (652) (1,358)
Net realized investment gains (19,296) (25,294) (9,585)
Decrease (increase) in reinsurance recoverable 88 (26) 16,484
Decrease (increase) in prepaid reinsurance
premiums 85,119 (14,796) 22,585
Amortization expense 6,235 11,125 10,681
Policy acquisition costs deferred (64,456) (51,940) (37,992)
Amortization of deferred policy acquisition costs 30,925 27,572 17,905
Other, net (10,280) (1,124) (364)
------ ------ ------
Net cash (used in) provided by operating activities (23,451) 23,379 27,469
INVESTING ACTIVITIES Securities available-for-sale:
Sales:
Fixed maturities 1,936,423 608,076 116,988
Equity securities 883 335 25
Maturities - fixed maturities 71,935 79,378 82,646
Purchases:
Fixed maturities (2,150,706) (831,839) (215,464)
Equity securities (3,442) (2,699) (35)
Sale, maturity or repayment of investments:
Mortgage loans on real estate 42,185 40,060 20,115
Investment real estate -- -- 150
</TABLE>
114
<PAGE>
Southland Life Insurance Company
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------
(In Thousands)
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Purchase or issuance of investments:
Mortgage loans on real estate (46,886) (22,073) (71,512)
Investment real estate -- -- (11)
Policy loans, net (1,748) (4,016) (1,976)
Short-term investments, net 3,311 11,838 (15,149)
------- ------- ------
Net cash used by investing activities (148,045) (120,940) (84,223)
FINANCING ACTIVITIES
(Decrease) increase in indebtedness to related parties, net
13,252 (5,277) 3,456
Receipts from interest sensitive products credited to
policyholder account balances 238,468 162,826 106,188
Return of policyholder account balances on interest
sensitive policies (42,900) (33,077) (25,251)
Return of capital and dividends paid to stockholder (39,400) (28,000) (21,000)
------- ------ ------
Net cash provided by financing activities 169,420 96,472 63,393
------- ------ ------
Net (decrease) increase in cash (2,076) (1,089) 6,639
Cash at beginning of year 6,818 7,907 1,268
------- ------ ------
Cash at end of year $ 4,742 $ 6,818 $ 7,907
========= ========= =========
</TABLE>
The Company paid interest of $887,000, $1,549,000 and $-0- during 1998, 1997
and 1996, respectively.
See accompanying notes.
115
<PAGE>
Southland Life Insurance Company
Notes to Financial Statements
December 31, 1998
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.
116
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
In 1998, the Company adopted FASB 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. The adoption of this FASB has no impact on the Company's
financial position or results from operations.
In 1996, the Company adopted FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Adoption of this standard had no
impact on net income or stockholder's equity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for fiscal years
beginning after June 15, 1999. Management of the Company is presently assessing
the effect that Statement No. 133 will have on the Company's current financial
statements and footnote disclosures.
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.
117
<PAGE>
Southland Life Insurance Company
Notes to the 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, 1998 and 1997.
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.
118
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF PREMIUM REVENUES AND COSTS (CONTINUED)
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.
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.
119
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE POLICY BENEFITS (CONTINUED)
Benefit reserves for interest sensitive products (including universal life-type
policies) and investment products are computed under a retrospective deposit
method and represent policy account balances before applicable surrender
charges. Policy benefits and claims that are charged to expense include benefit
claims incurred during the year in excess of related policy account balances.
Interest crediting rates for universal life and investment products range from
4.5% to 6% during 1998, from 4.75% to 6% during 1997, and from 4.5% to 7.25%
during 1996.
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 benefitted, 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.
120
<PAGE>
Southland Life Insurance Company
Notes to the 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 7.93% and 8.10% in 1998 and
1997, 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:
1998 1997 1996
------------------------------------
(In Thousands)
Balance at beginning of year $ 64,363 $ 72,345 $ 78,204
Interest accrued on unamortized balance 5,289 6,145 6,904
Amortization (9,983) (15,618) (16,052)
FAS 115 adjustment (41) 1,491 3,289
-------- -------- --------
Balance at end of year $ 59,628 $ 64,363 $ 72,345
======== ======== ========
121
<PAGE>
Southland Life Insurance Company
Notes to the 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:
AMORTIZATION
OF PVFP
----------------------
(In Thousands)
1999 $11,517
2000 9,722
2001 8,317
2002 7,526
2003 6,712
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 1996 and 1997 financial statements have been reclassified
to conform to the 1998 presentation.
122
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities: Available-for-sale $1,186,813 1,186,813 $1,031,283 $1,031,283
Equity securities 6,503 6,503 3,200 3,200
Mortgage loans on real estate 341,673 370,736 334,447 368,813
Policy loans 87,904 83,855 86,156 78,086
Short-term investments -- -- 3,311 3,311
LIABILITIES
Supplemental contracts without life 1,079 1,079 933 933
contingencies
Other policyholder funds left on deposit 3,471 3,471 3,375 3,375
Individual annuities, net of reinsurance 15,447 15,286 18,304 18,219
</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.
123
<PAGE>
Southland Life Insurance Company
Notes to the 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
$1,219,000 at December 31, 1998 and $584,000 at December 31, 1997
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.
124
<PAGE>
Southland Life Insurance Company
Notes to the 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, 1998:
<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 obligation of
U.S. Government corporations and agencies $ 48,127 $ 1,944 $ 113 $ 49,958
States, municipalities and political
subdivisions 7,589 943 -- 8,532
Public utilities securities 39,712 1,572 444 40,840
Corporate securities 516,585 32,408 7,060 541,933
Mortgage-backed securities 308,710 10,582 1,895 317,397
Other asset-backed securities 219,760 7,760 586 226,934
Derivatives hedging fixed maturities -- 1,232 13 1,219
---------- ------- ------- ----------
Total fixed maturities 1,140,483 56,441 10,111 1,186,813
Equity securities 5,941 767 205 6,503
---------- ------- ------- ----------
Total $1,146,424 $57,208 $10,316 $1,193,316
========== ======= ======= ==========
</TABLE>
125
<PAGE>
Southland Life Insurance Company
Notes to the 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, 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 obligation 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>
126
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of debt securities by contractual
maturity and marketable equity securities at December 31, 1998 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.
COST OF ESTIMATED
AMORTIZED FAIR
COST VALUE
----------------------------
(In Thousands)
Available-for-sale:
Due in one year or less $ 461 $ 466
Due after one year through five years 53,164 57,680
Due after five years through ten
years 258,275 265,093
Due after ten years 300,113 319,243
---------- ----------
612,013 642,482
Mortgage-backed securities 308,710 317,397
Other asset-backed securities 219,760 226,934
Equity securities 5,941 6,503
---------- ----------
Total available-for-sale $1,146,424 $1,193,316
========== ==========
127
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Changes in unrealized gains (losses) on investments in available-for-sale
securities for the years ended December 31, 1998 and 1997 are summarized as
follows:
DECEMBER 31, 1998
FIXED EQUITY TOTAL
-------------------------------------
(In Thousands)
Gross unrealized gains $ 56,441 $ 767 $ 57,208
Gross unrealized losses 10,111 205 10,316
-------- ----- --------
Net unrealized gains 46,330 562 46,892
Deferred income tax expense (16,216) (197) (16,413)
-------- ----- --------
Net unrealized gains after taxes 30,114 365 30,479
Less:
Balance at beginning of year 32,247 83 32,330
-------- ----- --------
Change in net unrealized gains $ (2,133) $ 282 $ (1,851)
======== ===== ========
DECEMBER 31, 1997
FIXED EQUITY TOTAL
-------------------------------------
(In Thousands)
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 $ 6,085 $ (41) $ 6,044
======== ===== ========
128
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
As part of its overall investment management strategy, the Company has entered
into agreements to purchase mortgage loans of $28,521,000 and $17,682,000 in
1998 and 1997, respectively. These commitments were settled in January 1999 and
1998, respectively.
Major categories of investment income for the years ended December 31 are
summarized as follows:
1998 1997 1996
-----------------------------------------
(In Thousands)
Fixed maturities $ 81,350 $ 75,326 $ 66,337
Equity securities 236 29 37
Mortgage loans on real estate 29,000 30,454 28,622
Policy loans 5,200 5,232 5,025
Short-term investments 165 615 1,446
Other investments 358 (970) 759
--------- --------- ---------
116,309 110,686 102,226
Investment expenses (4,901) (3,123) (1,670)
--------- --------- ---------
Net investment income $ 111,408 $ 107,563 $ 100,556
========= ========= =========
Net realized gains on investments for the years ended December 31 are summarized
as follows:
1998 1997 1996
-----------------------------------
(In Thousands)
Fixed maturities $16,235 $19,881 $ 7,209
Equity securities 310 81 --
Mortgage loans and other 2,357 1,177 (522)
Fixed maturities transferred to
parent company in 1995 394 4,155 2,898
------- ------- -------
Net realized gains on investment $19,296 $25,294 $ 9,585
======= ======= =======
129
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The above realized gains for fixed maturities and equity securities are shown
net of related tax expense of $5,929,000; $8,441,000 and $3,537,000 for 1998,
1997 and 1996, respectively. As these gains were realized, they were
reclassified from "Accumulated other comprehensive income" included in
stockholder's equity to "Net realized gains on investments" in the Statements of
Income.
During 1998, 1997 and 1996, debt and marketable equity securities
available-for-sale were sold with a fair value at the date of sale of
$1,937,306,000; $608,411,000; and $117,013,000, respectively. Gross gains of
$26,416,000; $23,870,000; and $7,326,000 and gross losses of $9,871,000;
$3,908,000; and $117,000 were realized on those sales in 1998, 1997 and 1996,
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.
130
<PAGE>
Southland Life Insurance Company
Notes to the 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 counter party 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, 1998 and 1997:
DECEMBER 31, 1998
---------------------------------------------
NOTIONAL AMORTIZED FAIR BOOK
AMOUNT COST VALUE VALUE
---------------------------------------------
(In Thousands)
Interest rate contracts:
Swaps $28,000 $ -- $ 1,232 $ 1,232
Swaps-affiliates 2,000 -- (13) (13)
------- ------ ------- -------
Total swaps $30,000 $ -- $ 1,219 $ 1,219
======= ====== ======= =======
DECEMBER 31, 1997
----------------------------------------------
NOTIONAL AMORTIZED FAIR BOOK
AMOUNT COST VALUE VALUE
----------------------------------------------
(In Thousands)
Interest rate contracts:
Swaps $28,000 $ -- $ 805 $ 805
Swaps-affiliates 25,000 -- (221) (221)
------- ------ ----- -----
Total swaps $53,000 $ -- $ 584 $ 584
======= ====== ===== =====
131
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
5. CONCENTRATIONS OF RISK
At December 31, 1998, the Company held $114,567,000 in below-investment-grade
bonds classified as available-for-sale. These holdings amounted to 9.7% of the
Company's investment in bonds and 5% 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, 1998, the Company's commercial mortgages involved a
concentration of properties located in Florida (17%), Texas (11%) and Georgia
(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 $6,600,000.
The Company also has a concentration of direct premium income in North Carolina
(15%) and California (11%) for the year ended December 31, 1998.
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.
132
<PAGE>
Southland Life Insurance Company
Notes to the 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, 1998, 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 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.
133
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
7. REINSURANCE (CONTINUED)
Additional information regarding the Company's reinsurance activity for the
years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1998
Life insurance in force $28,581,594 $8,681,450 $507 $19,900,651 NIL
=========== ========== ==== =========== =======
Premiums:
Life insurance $ 36,383 $ 13,779 $ 13 $ 22,616 0.06%
Health Insurance 68,947 38,599 384 30,732 1.25%
----------- ---------- ---- ----------- -------
Total premiums $ 105,330 $ 52,378 $397 $ 53,348 0.74%
=========== ========== ==== =========== =======
1997
Life insurance in force $22,777,781 $6,764,447 $529 $16,013,863 nil
=========== ========== ==== =========== =======
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 nil
----------- ---------- ---- ----------- -------
Total premiums $ 106,178 $ 68,663 $ 16 $ 37,531 0.04%
=========== ========== ==== =========== =======
</TABLE>
134
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
8. INCOME TAXES
The Company files a consolidated federal income tax return with America Life's
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 asset of $6,598,000 at December 31, 1998 and current tax
liability of $2,267,000 at December 31, 1997 are due from and payable to,
respectively, America Life under the terms of the tax sharing agreement.
135
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31
1998 1997
--------------------
(In Thousands)
Deferred income tax liability:
Deferred policy acquisition costs $ 48,056 $ 42,730
PVFP 20,869 22,042
Unrealized investment gains and losses 17,352 18,770
Bond/mortgage loans market discount 132 1,595
Other reserves (202) (424)
-------- --------
Total deferred income tax liability 86,207 84,713
Deferred income tax asset:
Benefit reserves 44,539 35,619
Other assets 10,243 2,226
-------- --------
Total deferred income tax asset 54,872 37,845
-------- --------
Net deferred income tax liability $ 31,425 $ 46,868
======== ========
136
<PAGE>
Southland Life Insurance Company
Notes to the 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:
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Goodwill 1.4 .6 1.1
Other items, net .1 .3 2.3
---- ---- ----
Effective tax rate 36.5% 35.9% 38.4%
==== ==== ====
The components of federal income tax expense consist of the following:
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------
(In Thousands)
Current $ 27,757 $20,675 $ 22,370
Deferred (13,460) 1,804 (2,856)
-------- ------- --------
Federal income tax expense $ 14,297 $22,479 $ 19,514
======== ======= ========
The Company made net income tax payments of $36,621,000 during 1998, $18,359,000
during 1997, $28,237,000 during 1996 for current income taxes and settlements of
prior year returns.
9. STATUTORY ACCOUNTING INFORMATION AND PRACTICES
Statutory capital and surplus was $82,946,000 and $95,453,000 at December 31,
1998 and 1997, respectively. Statutory net income was $18,073,000; $38,211,000;
and $43,594,000 for the years ended December 31, 1998, 1997, and 1996,
respectively.
137
<PAGE>
Southland Life Insurance Company
Notes to the Financial Statements (continued)
9. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED)
The Company exceeded its minimum statutory capital and surplus requirements at
December 31, 1998. 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 state insurance laws and regulations, the NAIC's
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.
In 1998, the NAIC adopted codified statutory accounting principles
("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 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, the state of 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 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 1998 and 1997.
At December 31, 1998 and 1997, bonds with an amortized cost of $9,468,000 and
$9,056,000, respectively, were on deposit with various state insurance
departments to meet regulatory requirements.
138
<PAGE>
Southland Life Insurance Company
Notes to the 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.
In 1998, the Company established an accrued liability of $12,000,000 related to
certain potential litigation. The Company will vigorously defend its position in
these cases. No such litigation reserve was established in 1997.
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 1998, 1997, and 1996, the Company reimbursed Life of Georgia
$32,353,000; $26,627,000; and $21,586,000 respectively, under this agreement.
The Company has a payable to Life of Georgia of $15,510,000 and $3,990,000 at
December 31, 1998 and 1997, 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, 1999.
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,
1998 and 1997.
139
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Southland Life Insurance Company
Notes to the Financial Statements (continued)
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.
14. IMPACT OF YEAR 2000 (UNAUDITED)
Southland Life Insurance Company is aware of the computer problems that may
exist surrounding the Year 2000. Our senior management projects information
processing and delivery systems to complete their Year 2000 readiness
preparations by December 31, 1999.
The Year 2000 problem originates from the predominant use in computer programs
of a two- digit field to capture the year, for example 99 instead of 1999. When
we reach the year 2000, many of these programs will assume the year 00 is
actually 1900 rather than 2000. This incorrect assumption can lead to erroneous
results, false calculations, or system failures. This is not only a computer
problem, but also applies to other machinery or equipment containing computer
chips that calculate dates for correct performance, the so-called "embedded
systems." That is why errors, ranging from telephone shutdown to other services
may occur as well. This potential risk is often referred to as the "Millennium
Bug" or the "Year 2000 problem."
The problem is made more complex by the many lines of code that can be affected
in a single system, the number of systems required to support business
activities, and the interdependence of both the internal and external systems
involved in exchanging data. This is particularly true for the financial
services industry, where information is at the heart of the business and which
depends heavily on the uninterrupted transfer of data world-wide, bank-to-bank
and with clearing houses, exchanges, and agencies. If the potential problems are
not addressed, this could in some cases result in business system failure. From
a financial perspective, this could, for instance, lead to incorrect interest
calculations or over/under payments.
140
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Southland Life Insurance Company
Notes to the Financial Statements (continued)
14. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
The Company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, remediation, testing, and implementation. The project plan
covers Southland Life Insurance Company and Life Insurance Company of Georgia,
an affiliated company. We have followed our normal project management
methodology including communication with senior management. The Company's
project team has completed the assessment and remediation phases of its plan.
Testing of mission-critical systems is underway with implementation completion
by December 31, 1999.
As part of our project plan, the Company has completed an inventory and
assessment of substantially all vendor products to determine the extent to which
the Company may be vulnerable to such parties' failure to resolve their own Year
2000 issues. The Company has assessed and is prioritizing responses in an
attempt to mitigate risks with respect to the failure of these parties to be
Year 2000 ready. There can be no assurance that failure of third parties to
complete adequate preparations in a timely manner, and any resulting systems
interruptions or other consequences, would not have an adverse effect, directly
or indirectly, on the Company's operations.
The Company expects to incur most of the costs of the Year 2000 effort primarily
from the testing and remediation of the administrative systems. These systems
support the administration of the Company and its affiliates. Therefore, the
combined costs would represent substantially all of the Year 2000 costs, which
will be shared by the Company and its affiliates. Combined costs were
approximately $8.1 million in 1998 and are anticipated to be $9.0 million in
1999. The Company has estimated costs based on its current knowledge and
testing.
The Company believes the risks of Year 2000 issues are mitigated by our Year
2000 project and contingency plans. These contingency plans involve, among other
actions, manual processing, outsourcing, and adjusting staffing strategies.
The Company designates each of the statements made by it herein as a Year 2000
Readiness Disclosure. Such statements are made pursuant to the Year 2000
Information and Readiness Disclosure Act.
141
<PAGE>
APPENDIX A
DEATH BENEFIT CORRIDOR FACTORS
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
--- ------ --- ------ --- ------ --- ------
0 2.50 25 2.50 50 1.85 75 1.05
1 2.50 26 2.50 51 1.78 76 1.05
2 2.50 27 2.50 52 1.71 77 1.05
3 2.50 28 2.50 53 1.64 78 1.05
4 2.50 29 2.50 54 1.57 79 1.05
5 2.50 30 2.50 55 1.50 80 1.05
6 2.50 31 2.50 56 1.46 81 1.05
7 2.50 32 2.50 57 1.42 82 1.05
8 2.50 33 2.50 58 1.38 83 1.05
9 2.50 34 2.50 59 1.34 84 1.05
10 2.50 35 2.50 60 1.30 85 1.05
11 2.50 36 2.50 61 1.28 86 1.05
12 2.50 37 2.50 62 1.26 87 1.05
13 2.50 38 2.50 63 1.24 88 1.05
14 2.50 39 2.50 64 1.22 89 1.05
15 2.50 40 2.50 65 1.20 90 1.05
16 2.50 41 2.43 66 1.19 91 1.04
17 2.50 42 2.36 67 1.18 92 1.03
18 2.50 43 2.29 68 1.17 93 1.02
19 2.50 44 2.22 69 1.16 94 1.01
20 2.50 45 2.15 70 1.15 95 1.00
21 2.50 46 2.09 71 1.13 96 1.00
22 2.50 47 2.03 72 1.11 97 1.00
23 2.50 48 1.97 73 1.09 98 1.00
24 2.50 49 1.91 74 1.07 99 1.00
100+ 1.00
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
142
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APPENDIX B
PERFORMANCE INFORMATION
The following hypothetical illustrations demonstrate how the actual investment
experience of each subaccount of the variable account affects the cash surrender
value, account value and death benefit of a policy. These hypothetical
illustrations are based on the actual historical return of each portfolio as if
a policy had been issued on the date indicated. Each portfolio's annual total
return is based on the total return calculated for each fiscal year. These
annual total return figures reflect the portfolio's management fees and other
operating expenses but do not reflect the policy level or variable account asset
based charges and deductions, which if reflected, would result in lower total
return figures than those shown.
The 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 face
amount, death benefit option A, issued to a preferred, nonsmoker male, age 45.
In each case, it is assumed that all premiums are allocated to the subaccount
illustrated for the period shown. The benefits are calculated for a specific
date. The amount and timing of premium payments and the use of other policy
features, such as policy loans, would affect individual policy benefits.
The amounts shown for the cash surrender values, account values and death
benefits take into account the charges against premiums, current cost of
insurance and monthly deductions, the daily charge against the variable account
for mortality and expense risks, and each portfolio's charges and expenses. SEE
CHARGES, DEDUCTIONS AND REFUNDS, PAGE 47. This prospectus also contains
illustrations based on assumed rates of return. SEE ILLUSTRATIONS OF DEATH
BENEFITS, ACCOUNT VALUES, SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE 60.
HYPOTHETICAL ILLUSTRATIONS
Preferred Non-tobacco Male Age 45 Death Benefit Option A
Stated Death Benefit $250,000 Annual Premium $4,500
- --------------------------------------------------------------------------------
ALGER AMERICAN GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
12/31/90 4.14% $ 1,070 $ 3,040 $250,000
12/31/91 40.38% 6,435 8,655 250,000
12/31/92 12.38% 9,506 13,656 250,000
12/31/93 22.46% 16,202 20,352 250,000
12/31/94 1.45% 19,580 23,730 250,000
12/31/95 36.37% 32,316 36,466 250,000
12/31/96 13.35% 41,702 45,852 250,000
12/31/97 25.75% 53,616 57,766 250,000
12/31/98 48.07% 89,098 93,248 250,000
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or variable account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
143
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
Preferred Non-tobacco Male Age 45 Death Benefit Option A
Stated Death Benefit $250,000 Annual Premium $4,500
- --------------------------------------------------------------------------------
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
12/31/96 12.04% $ 1,487 $ 3,457 $250,000
12/31/97 19.68% 5,284 7,504 250,000
12/31/98 57.83% 13,615 17,765 250,000
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO
12/31/94 (1.54)% $ 880 $ 2,850 $250,000
12/31/95 44.45% 6,642 8,862 250,000
12/31/96 11.90% 9,398 13,548 250,000
12/31/97 15.01% 14,045 18,195 250,000
12/31/98 30.30% 23,901 28,051 250,000
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
12/31/89 64.48% $ 3,313 $ 5,283 $250,000
12/31/90 8.71% 6,989 9,209 250,000
12/31/91 57.54% 14,819 18,969 250,000
12/31/92 3.55% 18,557 22,707 250,000
12/31/93 13.28% 26,256 30,406 250,000
12/31/94 (4.38)% 27,122 31,272 250,000
12/31/95 44.31% 45,633 49,783 250,000
12/31/96 4.18% 51,024 55,174 250,000
12/31/97 11.39% 57,984 62,134 250,000
12/31/98 15.53% 73,017 76,476 250,000
The assumptions underlying these values are described in Performance
Information, page 142.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or variable account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
144
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
Preferred Non-tobacco Male Age 45 Death Benefit Option A
Stated Death Benefit $250,000 Annual Premium $4,500
- --------------------------------------------------------------------------------
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
12/31/89 17.34% $ 1,661 $ 3,631 $250,000
12/31/90 (15.29)% 3,432 5,652 250,000
12/31/91 31.44% 7,269 11,419 250,000
12/31/92 16.89% 13,115 17,265 250,000
12/31/93 18.29% 20,151 24,301 250,000
12/31/94 7.07% 25,019 29,169 250,000
12/31/95 35.09% 39,059 43,209 250,000
12/31/96 14.28% 49,518 53,668 250,000
12/31/97 28.11% 65,278 69,428 250,000
12/31/98 11.63% 79,210 82,669 250,000
FIDELITY VIP GROWTH PORTFOLIO
12/31/89 31.51% $ 2,119 $ 4,089 $250,000
12/31/90 (11.73)% 4,114 6,334 250,000
12/31/91 45.51% 9,411 13,561 250,000
12/31/92 9.32% 14,347 18,497 250,000
12/31/93 19.37% 21,722 25,872 250,000
12/31/94 (0.02)% 24,691 28,841 250,000
12/31/95 35.36% 38,991 43,141 250,000
12/31/96 14.71% 49,765 53,915 250,000
12/31/97 23.48% 62,499 66,649 250,000
12/31/98 39.49% 96,661 100,119 250,000
The assumptions underlying these values are described in Performance
Information, page 142.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or variable account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
145
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
Preferred Non-tobacco Male Age 45 Death Benefit Option A
Stated Death Benefit $250,000 Annual Premium $4,500
- --------------------------------------------------------------------------------
FIDELITY VIP HIGH INCOME
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
12/31/89 (4.17)% $ 910 $ 2,880 $250,000
12/31/90 (2.23)% 3,604 5,824 250,000
12/31/91 35.08% 7,990 12,140 250,000
12/31/92 23.17% 14,738 18,888 250,000
12/31/93 20.40% 22,357 26,057 250,000
12/31/94 (1.64)% 24,844 28,994 250,000
12/31/95 20.72% 34,518 38,668 250,000
12/31/96 14.03% 43,204 47,354 250,000
12/31/97 17.67% 55,320 59,470 250,000
12/31/98 (4.33)% 56,083 59,542 250,000
FIDELITY VIP MONEY MARKET PORTFOLIO
12/31/89 9.12% $ 1,300 $ 3,270 $250,000
12/31/90 8.04% 4,740 6,960 250,000
12/31/91 6.09% 6,525 10,675 250,000
12/31/92 3.90% 10,131 14,281 250,000
12/31/93 3.23% 13,759 17,909 250,000
12/31/94 4.25% 17,666 21,816 250,000
12/31/95 5.87% 22,127 26,277 250,000
12/31/96 5.41% 26,711 30,861 250,000
12/31/97 5.51% 31,709 35,859 250,000
12/31/98 5.46% 37,648 41,106 250,000
The assumptions underlying these values are described in Performance
Information, page 142.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or variable account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
146
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
Preferred Non-tobacco Male Age 45 Death Benefit Option A
Stated Death Benefit $250,000 Annual Premium $4,500
- --------------------------------------------------------------------------------
FIDELITY VIP OVERSEAS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
12/31/89 26.28% $ 1,889 $ 3,859 $250,000
12/31/90 (1.67)% 4,681 6,901 250,000
12/31/91 8.00% 6,494 10,644 250,000
12/31/92 (10.72)% 8,187 12,337 250,000
12/31/93 37.35% 17,191 21,341 250,000
12/31/94 1.72% 20,641 24,791 250,000
12/31/95 9.74% 26,238 30,388 250,000
12/31/96 13.15% 33,400 37,550 250,000
12/31/97 11.56% 40,799 44,949 250,000
12/31/98 12.81% 51,561 55,019 250,000
FIDELITY VIP II ASSET MANAGER PORTFOLIO
12/31/90 6.72% $ 1,201 $ 3,171 $250,000
12/31/91 22.56% 5,589 7,809 250,000
12/31/92 11.71% 8,138 12,288 250,000
12/31/93 21.23% 14,540 18,690 250,000
12/31/94 (6.09)% 16,150 20,300 250,000
12/31/95 16.96% 23,106 27,256 250,000
12/31/96 14.60% 31,048 35,198 250,000
12/31/97 20.65% 40,382 44,532 250,000
12/31/98 15.05% 51,413 55,563 250,000
The assumptions underlying these values are described in Performance
Information, page 142.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or variable account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
147
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
Preferred Non-tobacco Male Age 45 Death Benefit Option A
Stated Death Benefit $250,000 Annual Premium $4,500
- --------------------------------------------------------------------------------
FIDELITY VIP II CONTRAFUND PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
12/31/96 21.22% $ 1,763 $ 3,733 $250,000
12/31/97 24.14% 6,008 8,228 250,000
12/31/98 29.98% 10,978 15,128 250,000
FIDELITY VIP II INDEX 500 PORTFOLIO
12/31/93 9.74% $ 1,383 $ 3,353 $250,000
12/31/94 1.04% 4,287 6,507 250,000
12/31/95 37.19% 9,081 13,231 250,000
12/31/96 22.71% 16,368 20,518 250,000
12/31/97 32.83% 25,485 29,635 250,000
12/31/98 28.31% 39,149 43,299 250,000
FIDELITY VIP II INVESTMENT GRADE BOND PORTFOLIO
12/31/89 10.26% $ 1,371 $ 3,341 $250,000
12/31/90 6.21% 4,673 6,893 250,000
12/31/91 16.38% 7,433 11,583 250,000
12/31/92 6.65% 11,518 15,668 250,000
12/31/93 10.96% 16,730 20,880 250,000
12/31/94 (3.76)% 18,745 22,895 250,000
12/31/95 17.32% 26,178 30,328 250,000
12/31/96 3.19% 30,431 34,581 250,000
12/31/97 9.06% 36,758 40,908 250,000
12/31/98 8.85% 44,175 47,633 250,000
The assumptions underlying these values are described in Performance
Information, page 142.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or variable account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
148
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
Preferred Non-tobacco Male Age 45 Death Benefit Option A
Stated Death Benefit $250,000 Annual Premium $4,500
- --------------------------------------------------------------------------------
INVESCO VIF - EQUITY INCOME FUND (formerly known as INVESCO VIF - Industrial
Income Portfolio)
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
12/31/95 29.25% $ 2,022 $ 3,992 $250,000
12/31/96 22.28% 6,800 9,020 250,000
12/31/97 28.17% 10,624 14,774 250,000
12/31/98 15.30% 16,843 20,993 250,000
INVESCO VIF - UTILITIES FUND
12/31/95 9.08% $ 1,273 $ 3,243 $250,000
12/31/96 12.76% 5,173 7,393 250,000
12/31/97 23.41% 8,315 12,465 250,000
12/31/98 25.48% 15,605 19,755 250,000
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
12/31/94 16.33% $ 1,471 $ 3,441 $250,000
12/31/95 27.48% 6,220 8,440 250,000
12/31/96 7.95% 8,335 12,485 250,000
12/31/97 12.66% 12,634 16,784 250,000
12/31/98 34.26% 22,693 26,843 250,000
JANUS ASPEN BALANCED PORTFOLIO
12/31/94 0.84% $ 1,062 $ 3,032 $250,000
12/31/95 24.79% 5,521 7,741 250,000
12/31/96 16.18% 8,533 12,683 250,000
12/31/97 22.10% 14,600 18,750 250,000
12/31/98 34.28% 25,715 29,865 250,000
The assumptions underlying these values are described in Performance
Information, page 142.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or variable account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
149
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
Preferred Non-tobacco Male Age 45 Death Benefit Option A
Stated Death Benefit $250,000 Annual Premium $4,500
- --------------------------------------------------------------------------------
JANUS ASPEN GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
12/31/94 2.76% $ 1,116 $ 3,086 $250,000
12/31/95 30.17% 5,972 8,192 250,000
12/31/96 18.45% 9,437 13,587 250,000
12/31/97 22.75% 15,260 19,410 250,000
12/31/98 35.66% 27,416 31,566 250,000
JANUS ASPEN INTERNATIONAL GROWTH PORTFOLIO
12/31/95 23.15% $ 1,740 $ 3,710 $250,000
12/31/96 34.71% 7,158 9,378 250,000
12/31/97 18.51% 10,541 14,691 250,000
12/31/98 17.23% 17,021 21,171 250,000
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
12/31/94 1.53% $ 1,061 $ 3,031 $250,000
12/31/95 27.37% 5,737 7,957 250,000
12/31/96 29.04% 10,161 14,311 250,000
12/31/97 22.15% 16,748 20,898 250,000
12/31/98 28.92% 27,473 31,623 250,000
The assumptions underlying these values are described in Performance
Information, page 142.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or variable account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
150
