<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1997
Registration No. 33-78444
811-8196
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM N-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 4
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9
SECURITY LIFE SEPARATE ACCOUNT A1
(Exact Name of Registrant)
SECURITY LIFE OF DENVER INSURANCE COMPANY
(Name of Depositor)
1290 Broadway
Denver, Colorado 80203-5699
(Address of Depositor's Principal Executive Offices)
(303) 860-1290
(Depositor's Telephone Number, including Area Code)
Copy to:
GARY W. WAGGONER, ESQ. DIANE AMBLER, ESQ.
Security Life of Denver Insurance Mayer, Brown & Platt
Company 2000 Pennsylvania Avenue, N.W.
1290 Broadway Washington, D.C. 20006-1882
Denver, Colorado 80203-5699 (202) 778-0641
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practical after the
effective date.
________________
It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b) of Rule 485
X on May 1, 1997 pursuant to paragraph (b) of Rule 485
---
___ 60 days after filing pursuant to paragraph (a)(i) of Rule 485
___ on (date) pursuant to paragraph (a)(i) of Rule 485
___ 75 days after filing pursuant to paragraph (a)(ii)
___ on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
___ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24F-2
An indefinite amount of the Registrant's securities has been registered under
the Securities Act of 1933 pursuant to paragraph (b)(2) of Rule 24f-2 under the
Investment Company Act of 1940. Registrant filed its Form 24f-2 for the fiscal
year ending December 31, 1996 on March 3, 1997.
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT A1 (File No. 33-78444)
Cross-Reference Sheet
Pursuant to Rule 495(a)
Under the Securities Act of 1933
<TABLE>
<CAPTION>
Form N-4 Item No. Caption in Prospectus
- ----------------- ---------------------
<S> <C>
1. Cover Page Cover Page
2. Definitions Glossary of Terms
3. Synopsis Summary of the Exchequer
Variable Annuity
4. Condensed Financial Condensed Financial
Information Information
5. General Description of Facts about Security Life
Registrant, Depositor and the Variable Account;
and Portfolio Companies The Guaranteed Interest
Division
6. Deductions and Expenses Fee Table; Summary of the
Exchequer Variable
Annuity; Contract Charges
and Fees
7. General Description of Facts about the Contract
Variable Annuity
Contracts
8. Annuity Period Choosing an Annuity Option
9. Death Benefit Summary of the Exchequer
Variable Annuity; Values
under the Contract
10. Purchases and Contract Summary of the Exchequer
Value Variable Annuity; Facts
about the Contract;
Values under the Contract
11. Redemptions Summary of the Exchequer
Variable Annuity;
Contract Charges and
Fees; Values under the
Contract; Choosing an
Annuity Option
12. Taxes Summary of the Exchequer
Variable Annuity;
Contract Charges and
Fees; Federal Tax
Considerations
13. Legal Proceedings Regulatory Information
14. Table of Contents of Table of Contents of
Statement of Statement of Additional
Additional Information Information
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Caption in Statement of Additional
Information (or Prospectus, Where
Form N-4 Item No. Indicated)
- ----------------- ----------------------------------
<S> <C>
15. Cover Page Cover Page
16. Table Contents Table of Contents
17. General Information and Security Life; Prospectus -- Facts
History about Security Life and the
Variable Account
18. Services Security Life; The Administrator
19. Purchase of Securities Prospectus -- Facts About the
Being Offered Contract
20. Underwriters Security Life
21. Calculation of Performance Information;
Performance Data Prospectus - Appendix A,
Performance Information
22. Annuity Payouts Performance Information;
Prospectus -- Choosing an Annuity
Option
23. Financial Statements Financial Statements of Security
Life Separate Account A1 of
Security Life of Denver Insurance
Company Financial Statements of
Security Life of Denver Insurance
Company; Prospectus - Condensed
Financial Information
</TABLE>
Part C - Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
(iii)
<PAGE>
THE EXCHEQUER VARIABLE ANNUITY
A FLEXIBLE PREMIUM DEFERRED COMBINATION FIXED AND VARIABLE ANNUITY CONTRACT
issued by
SECURITY LIFE OF DENVER INSURANCE COMPANY
AND
SECURITY LIFE SEPARATE ACCOUNT A1
This prospectus describes The Exchequer Variable Annuity, a flexible premium
deferred combination fixed and variable annuity contract (the "Contract")
offered by Security Life of Denver Insurance Company ("Security Life," "we,"
"our" or "us"). The Contract is designed to aid in long-term financial planning
and generally provides automatic reinvestment and compounding of any investment
earnings on a tax-deferred basis for retirement or other long-term purposes. The
Owner ("you" or "your") purchases the Contract with an initial Purchase Payment
and is permitted to make additional Purchase Payments.
The Contract is funded by Security Life Separate Account A1 (the "Variable
Account"). Seventeen Divisions of the Variable Account are currently available
under the Contract. Each of the Divisions of the Variable Account invests in
shares of a corresponding Portfolio of a mutual fund. A Guaranteed Interest
Division, which guarantees a minimum fixed rate of interest, is also available.
Investors may utilize both the Variable Account and the Guaranteed Interest
Division simultaneously.
You may allocate your Purchase Payments among the Divisions available under the
Contract in any way you choose, subject to certain restrictions. During the
Accumulation Period, you may change the allocation of your Accumulation Value
up to 12 times per Contract Year free of charge.
You may surrender the Contract for its Cash Surrender Value at any time prior to
the Annuity Date. The Cash Surrender Value will vary daily with the investment
results of the Divisions of the Variable Account and any interest credited to
the Guaranteed Interest Division. We do not guarantee any minimum Cash Surrender
Value for amounts allocated to the Divisions of the Variable Account. You may
withdraw some of your Cash Surrender Value by making partial withdrawals,
subject to certain restrictions. Surrenders and withdrawals may be subject to a
surrender charge and a tax penalty.
We will pay a Death Benefit to the Beneficiary if the Owner dies prior to the
Annuity Date.
This prospectus describes the Contract and your principal rights and limitations
and sets forth the information concerning the Variable Account that investors
should know before investing. A prospectus for each Portfolio being considered
must accompany this prospectus and should be read in conjunction with this
prospectus. The prospectuses provide information regarding investment activities
and objectives of the Portfolios. A Statement of Additional Information, dated
May 1, 1997, about the Variable Account has been filed with the Securities and
Exchange Commission ("SEC") and is available without charge. To obtain a copy of
this document, call or write our Customer Service Center. The Table of Contents
of the Statement of Additional Information may be found on page 41 of this
prospectus. The Statement of Additional Information is incorporated herein by
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE.
IT IS NOT VALID UNLESS ACCOMPANIED BY THE CURRENT PROSPECTUS
FOR EACH OF THE PORTFOLIOS BEING CONSIDERED.
ISSUED BY: DISTRIBUTED BY: CUSTOMER SERVICE CENTER:
Security Life of Denver ING America Equities, Inc. P.O. Box 173763
Insurance Company
1290 Broadway 1290 Broadway, Attn: Denver, CO 80217-3763
Variable
Denver, CO 80203-5699 Denver, CO 80203 1-800-933-5858
1-800-525-9852
Date of Prospectus: May 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY OF TERMS................................................................. 5
FEE TABLE......................................................................... 7
SUMMARY OF THE EXCHEQUER VARIABLE ANNUITY......................................... 10
General Description............................................................... 10
Purchase Payments................................................................. 10
Enhanced Guaranteed Death Benefit................................................. 11
Partial Withdrawals............................................................... 11
Surrendering Your Contract........................................................ 11
Your Right to Cancel the Contract................................................. 11
Contract Charges and Fees......................................................... 11
Tax Considerations................................................................ 12
CONDENSED FINANCIAL INFORMATION................................................... 12
FACTS ABOUT SECURITY LIFE AND THE VARIABLE ACCOUNT................................ 14
Security Life..................................................................... 14
Customer Service Center........................................................... 14
The Variable Account.............................................................. 14
The Portfolios.................................................................... 15
Changes Within The Variable Account............................................... 18
FACTS ABOUT THE CONTRACT.......................................................... 19
Your Right to Cancel the Contract................................................. 19
Purchase Payments................................................................. 19
Initial Purchase Payment........................................................ 19
Additional Purchase Payments.................................................... 19
Where to Make Payments.......................................................... 19
Crediting and Allocation of Purchase Payments................................... 19
Dollar Cost Averaging............................................................. 20
Automatic Rebalancing............................................................. 20
Reports to Owners................................................................. 21
Group or Sponsored Arrangements................................................... 21
Offering the Contract............................................................. 22
VALUES UNDER THE CONTRACT......................................................... 22
Enhanced Guaranteed Death Benefit................................................. 22
Death Benefit Proceeds............................................................ 22
How to Claim Payouts to Beneficiary............................................. 23
Your Accumulation Value........................................................... 23
Measurement of Investment Experience for the Divisions of the Variable Account.... 23
Accumulation Unit Value......................................................... 23
How We Determine the Accumulation Experience Factor............................. 23
Net Rate of Return for a Division of the Variable Account....................... 23
Division Accumulation Value of Each Division of the Variable Account.............. 24
Division Accumulation Value of the Guaranteed Interest Division................... 24
Your Right to Transfer Among Divisions............................................ 24
Partial Withdrawals............................................................... 25
Demand Withdrawal Option........................................................ 26
</TABLE>
________________________________________________________________________________
2
Exchequer
<PAGE>
<TABLE>
<S> <C>
Systematic Income Program....................................................... 26
IRA Income Program - IRA Contracts Only....................................... 27
The Amount You May Withdraw Without a Surrender Charge.......................... 27
Tax Consequences of Partial Withdrawals......................................... 27
Surrendering to Receive the Cash Surrender Value.................................. 27
When We Make Payouts.............................................................. 28
THE GUARANTEED INTEREST DIVISION.................................................. 28
OTHER INFORMATION................................................................. 29
The Owner......................................................................... 29
The Annuitant..................................................................... 29
The Beneficiary................................................................... 29
Change of Owner, Beneficiary or Annuitant......................................... 29
Other Contract Provisions......................................................... 30
In Case of Errors on the Application or Enrollment Form......................... 30
Procedures...................................................................... 30
Telephone Privileges............................................................ 30
Assigning the Contract as Collateral............................................ 30
Non-Participating............................................................... 30
Authority to Change Contract Terms................................................ 30
Contract Changes - Applicable Tax Law........................................... 30
CONTRACT CHARGES AND FEES......................................................... 31
Deduction of Charges.............................................................. 31
Charges Deducted from the Accumulation Value...................................... 31
Surrender Charge................................................................ 31
Partial Withdrawal Transaction Charge........................................... 31
Administrative Charge........................................................... 32
Excess Transfer Charge.......................................................... 32
Taxes on Purchase Payments...................................................... 32
Charges Deducted From The Divisions............................................... 32
Mortality and Expense Risk Charge............................................... 32
Asset-based Administrative Charge............................................... 32
Portfolio Expenses................................................................ 32
CHOOSING AN ANNUITY OPTION........................................................ 33
General Provisions................................................................ 33
Supplementary Contract.......................................................... 33
Election and Changes of Annuity Date............................................ 33
Election and Changes of Annuity Option.......................................... 33
Payout Options.................................................................... 33
Variable Annuity Payout......................................................... 33
Fixed Annuity Payout............................................................ 34
Combination Annuity Payout...................................................... 35
Frequency and Amount of Annuity Payouts......................................... 35
Payout Period Options............................................................. 35
Payouts Other Than Monthly...................................................... 35
Commuting Provisions............................................................ 35
REGULATORY INFORMATION............................................................ 35
Voting Privileges................................................................. 35
State Regulation.................................................................. 36
Legal Proceedings................................................................. 36
</TABLE>
_______________________________________________________________________________
3
Exchequer
<PAGE>
<TABLE>
<S> <C>
Legal Matters..................................................................... 37
Experts........................................................................... 37
FEDERAL TAX CONSIDERATIONS........................................................ 37
Introduction...................................................................... 37
Security Life Tax Status.......................................................... 37
Taxation of Annuities............................................................. 37
1. Withdrawals Prior to the Annuity Commencement Date........................... 37
2. Annuity Payouts after the Annuity Date....................................... 38
3. Penalty Tax on Certain Withdrawals or Distributions.......................... 38
Taxation of Individual Retirement Annuities....................................... 38
Distribution-at-Death Rules....................................................... 39
Taxation of Death Benefit Proceeds................................................ 40
Contracts Owned by Non-Natural Persons............................................ 40
Section 1035 Exchanges............................................................ 40
Assignments....................................................................... 40
Multiple Contracts Rule........................................................... 40
Diversification Standards......................................................... 40
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.......................... 42
APPENDIX A........................................................................ 43
Example 1: Hypothetical Illustration of Systematic Income Program Withdrawals.. 43
Example 2: Hypothetical Illustration of a Series of Demand Withdrawals......... 43
Example 3: Hypothetical Illustration of a Full Surrender....................... 45
APPENDIX B........................................................................ 46
Performance Information........................................................... 46
Performance Chart................................................................. 48
APPENDIX C........................................................................ 49
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
________________________________________________________________________________
4
Exchequer
<PAGE>
GLOSSARY OF TERMS
AS USED IN THIS PROSPECTUS, THE FOLLOWING TERMS HAVE THE INDICATED MEANINGS.
THERE ARE OTHER CAPITALIZED TERMS WHICH ARE EXPLAINED OR DEFINED IN OTHER PARTS
OF THIS PROSPECTUS.
ACCUMULATION EXPERIENCE FACTOR - The factor which reflects the investment
experience of the Portfolio in which a Division of the Variable Account
invests as well as the asset-based charges assessed against that Division for
a Valuation Period during the Accumulation Period.
ACCUMULATION PERIOD - The period of time from the Contract Date to the Annuity
Date.
ACCUMULATION UNIT - A unit of measurement which we use to calculate the
Accumulation Value during the Accumulation Period.
ACCUMULATION UNIT VALUE - The value of the Accumulation Units of the Divisions
of the Variable Account. The Accumulation Unit Value is determined as of each
Valuation Date.
ACCUMULATION VALUE - The amount that your Contract provides which is available
for investment at any time prior to the Annuity Date. Initially, this amount
is equal to the initial Purchase Payment. Thereafter, the Accumulation Value
will reflect additional Purchase Payments made, investment experience of the
Divisions of the Variable Account you select, interest credited to the
Guaranteed Interest Division, charges deducted and partial withdrawals taken.
AGE - The Age on the birthday prior to any date for which Age is to be
determined.
ANNUITANT - The person designated by the Owner to receive the Annuity Payouts
and on whose life Annuity Payouts are based.
ANNUITY DATE - The date as of which Annuity Payouts begin.
ANNUITY EXPERIENCE FACTOR - The factor which reflects the investment experience
of the Portfolio in which a Division of the Variable Account invests as well
as the asset-based charges assessed against that Division for a Valuation
Period during the Annuity Period.
ANNUITY OPTIONS - Options the Owner elects consisting of both the Payout Option
and the Payout Period Option that determine the Annuity Payout.
ANNUITY PAYOUT - The periodic payouts an Annuitant receives. They may be either
a fixed or a variable amount, or a combination of fixed and variable, based
on the Payout Option elected.
ANNUITY PERIOD - The period of time from the Annuity Date until the last Annuity
Payout is made to the Annuitant.
ANNUITY UNIT - A unit of measurement used to calculate any periodic Annuity
Payouts during the Annuity Period.
ANNUITY UNIT VALUE - The value of the Annuity Units of the Divisions of the
Variable Account. The Annuity Unit Value is determined as of each Valuation
Date.
BENEFICIARY (OR BENEFICIARIES) - The person (or persons) designated to receive
the Death Benefit in the case of the death of the Owner during the
Accumulation Period.
BENCHMARK TOTAL RETURN - The interest rate assumed for the purposes of
calculating the Annuity Payout upon annuitization.
BUSINESS DAY - Any day which is a Valuation Date.
CASH SURRENDER VALUE - The amount the Owner receives upon surrendering the
Contract.
CODE - The Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT - The person designated by the Owner who becomes the
Annuitant upon the Annuitant's death.
CONTINGENT BENEFICIARY (OR BENEFICIARIES) - The person (or persons) designated
by the Owner who, upon the Beneficiary's death, becomes the Beneficiary.
CONTRACT - The entire Contract consisting of the basic Contract, any
applications and any Riders or Endorsements.
CONTRACT ANNIVERSARY - The anniversary of the Contract Date.
CONTRACT DATE - The date as of which we have received and accepted the initial
Purchase Payment and as of which we begin determining the Accumulation Value.
The Contract Date is used to determine Contract Processing Dates, Years and
Anniversaries.
CONTRACT PROCESSING DATE - The day the annual administrative charge is deducted
from the
Accumulation Value. The Contract Processing Date is as of each Contract
Anniversary. Any Contract Processing Date that is not a Valuation Date is
deemed to occur as of the next succeeding Valuation Date.
CONTRACT YEAR - A period of 12 months commencing with the Contract Date or any
Contract Anniversary.
________________________________________________________________________________
5
Exchequer
<PAGE>
CUSTOMER SERVICE CENTER - Where service is provided to Owners. The mailing
address and telephone number of the Customer Service Center are shown on the
cover.
DEATH BENEFIT - The amount actually payable due to the death of the Owner during
the Accumulation Period.
DIVISION - A sub-account of the Variable Account, the assets of which are
invested in a corresponding Portfolio or the Guaranteed Interest Division.
DIVISION ACCUMULATION VALUE - The value under a Contract in a particular
Division.
EARNINGS - For purposes of calculating surrender charges, an amount equal to the
Accumulation Value less Purchase Payments not previously withdrawn.
ENDORSEMENTS - An Endorsement changes or adds provisions to the Contract.
FREE LOOK PERIOD - The period of time within which an Owner may examine the
Contract and return it for a refund.
GENERAL ACCOUNT - The account which contains all of our assets other than those
held in our separate accounts.
GROSS PARTIAL WITHDRAWAL - A partial withdrawal plus any applicable partial
withdrawal transaction charges plus any applicable surrender charges.
GUARANTEED INTEREST DIVISION - Part of our General Account to which a portion of
your Accumulation Value may be allocated and which provides guarantees of
principal and interest.
INDIVIDUAL IRA CONTRACT - An Individual Retirement Annuity, an IRA Rollover or
an IRA Transfer offered to an individual for use in connection with Sections
408(a) and (b) of the Code.
IRA - An individual Retirement Annuity used as an Individual IRA Contract, a SEP
Contract or a SIMPLE Contract.
NASD - The National Association of Securities Dealers, Inc.
NET PURCHASE PAYMENTS - Total Purchase Payments made less Gross Partial
Withdrawals taken.
OWNER - The person or persons who own the Contract and are entitled to exercise
all rights under the Contract. This person's death during the Accumulation
Period usually initiates payout of the Death Benefit.
PAYOUT OPTION - Specifies the type of annuity to be paid and may be either
fixed, variable or a combination of fixed and variable.
PAYOUT PERIOD OPTION - Determines how long the annuity will be paid and the
amount of the first payout.
PORTFOLIOS - The investment options available to the Divisions of the Variable
Account. Each Portfolio has a defined investment objective.
PROCEEDS - The amount to be paid as of the Annuity Date to provide Annuity
Payouts, upon surrender of the Contract prior to the Annuity Date, or as a
Death Benefit prior to the Annuity Date.
PURCHASE PAYMENTS - The initial Purchase Payment and any future payments made
with respect to your Contract.
RIDER(S) - A Rider adds benefits to the Contract.
SARSEP - A Contract established as part of a salary reduction simplified
employee pension plan. A SARSEP is a type of SEP.
SEC - The United States Securities and Exchange Commission.
SEP CONTRACT - A Contract which is part of a simplified employer pension plan
(SEP) established by an employer for use in connection with Section 408(k) of
the Code. A SEP Contract is a type of IRA.
SIMPLE CONTRACT - A Contract which is part of a savings incentive match plan for
employees (SIMPLE) established by an employer for use in connection with
Section 408(p) of the Code. A SIMPLE Contract is a type of IRA.
SUPPLEMENTARY CONTRACT - The Election and Supplementary Agreement for a
Settlement Option amends the entire Contract when an Annuity Option becomes
effective. The Supplementary Contract describes the manner of settlement and
the rights of the Annuitant.
SUPPLEMENTARY CONTRACT EFFECTIVE DATE - The Annuity Date or the date of other
settlement, whenever the Annuity Option becomes effective.
VALUATION DATE - Each date as of which the net asset value of the shares of any
of the Portfolios and unit values of the Divisions are determined. Valuation
Dates currently occur on each day on which the New York Stock Exchange and
Security Life's Customer Service Center are open for business, except for
days on which a Division's corresponding Portfolio does not value its shares.
VALUATION PERIOD - The period that starts at 4 p.m. Eastern Time on a Valuation
Date and ends at 4 p.m. Eastern Time on the next succeeding Valuation Date.
VARIABLE ACCOUNT - Security Life Separate Account A1 established by Security
Life to segregate the assets funding the variable benefits provided by the
Contract from the assets in our General Account.
________________________________________________________________________________
6
Exchequer
<PAGE>
FEE TABLE
The purpose of the following tables is to assist you in understanding the
various costs and expenses that you may bear directly or indirectly. The tables
reflect charges under the Contracts, expenses of the Divisions and expenses of
the Portfolios. In addition to the charges and expenses described below, we may
also deduct from the Proceeds taxes incurred but not paid to cover any state or
local tax charge on Purchase Payments. See Taxes on Purchase Payments, page 32.
We may reduce certain charges under group or sponsored arrangements. See Group
or Sponsored, Arrangements, page 21.
TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchase Payments............................................................... 0%
Surrender Charge/1/
Contract Anniversaries Since Surrender Charge as a Percentage of
Purchase Payment Was Made Purchase Payment Withdrawn
0...............................................7%
1...............................................6%
2...............................................5%
3...............................................4%
4...............................................3%
5...............................................2%
6+..............................................0%
Partial Withdrawal Transaction Charge/2/.............................................................. $25
Excess Transfer Charge (does not apply to the first 12 transfers in a Contract Year)/3/............... $25
ANNUAL CONTRACT FEES
Administrative Charge (does not apply after the Annuity Date)/4/
If Net Purchase Payments made are less than $100,000.............................................. $30
If Net Purchase Payments made are $100,000 or more................................................ $0
Variable Account Annual Expenses (as a percentage of assets in each Division of the Variable Account)
Mortality and Expense Risk Charge/5/
Basic............................................................................................. 1.25%
Enhanced Death Benefit (does not apply after the Annuity Date).................................... 0.12%
Total Mortality & Expense Risk Charge ............................................................ 1.37%
Asset-based Administrative Charge .................................................................. 0.15%
Total Variable Account Annual Expenses/6/........................................................... 1.52%
</TABLE>
_________________________________
/1/ Up to certain limits, partial withdrawals may be taken without incurring a
current surrender charge. See Charges Deducted from the Accumulation Value,
page 31.
/2/ The partial withdrawal transaction charge is the lesser of $25 or 2% of the
amount withdrawn, and is assessed on each demand withdrawal after the first
in any Contract Year. See Partial Withdrawal Transaction Charge, page 31.
/3/ Any transfer under Dollar Cost Averaging or Automatic Rebalancing is not
considered a transfer for this purpose. See Dollar Cost Averaging , page 20,
Automatic Rebalancing, page 20. After the Annuity Date, transfers are
limited to four each Contract Year, and no transfer charge applies. See
Excess Transfer Charge, page 32.
/4/ The administrative charge is deducted as of each Contract Anniversary or
upon surrender. See Administrative Charge, page 32.
/5/ See Enhanced Guaranteed Death Benefit, page 22, for a description of the
Basic and Enhanced Death Benefit. See Mortality and Expense Risk Charge,
page 32.
/6/ 1.40% for a Variable Annuity during the Annuity Period. See Payout Options,
page 33.
________________________________________________________________________________
7
Exchequer
<PAGE>
PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET
ASSETS)/7/
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL PORTFOLIO
PORTFOLIO FEES EXPENSES EXPENSES
--------- ---- -------- --------
<S> <C> <C> <C>
NEUBERGER & BERMAN ADVISERS MANAGEMENT
TRUST8
Limited Maturity Bond Portfolio 0.65% 0.13% 0.78%
Growth Portfolio 0.83% 0.09% 0.92%
Partners Portfolio 0.84% 0.11% 0.95%
Government Income Portfolio 0.00% 1.02% 1.02%
THE ALGER AMERICAN FUND
Alger American Small Capitalization Portfolio 0.85% 0.03% 0.88%
Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84%
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Leveraged AllCap Portfolio 0.85% 0.24%/9/ 1.09%/9/
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP Growth Portfolio 0.61% 0.08% 0.69%/10/
VIP Overseas Portfolio 0.76% 0.17% 0.93%/10/
VIP Money Market Portfolio 0.21% 0.09% 0.30%
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II Asset Manager Portfolio 0.64% 0.10% 0.74%/10/
VIP II Index 500 Portfolio 0.13% 0.15% 0.28%/11/
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - Total Return Portfolio 0.75% 0.19% 0.94%/12 13/
INVESCO VIF - Industrial Income Portfolio 0.75% 0.20% 0.95%/12 14/
INVESCO VIF - High Yield Portfolio 0.60% 0.27% 0.87%/12 15/
INVESCO VIF - Utilities Portfolio 0.60% 0.56% 1.16%/12 16/
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund (formerly
Gold and Natural Resources Fund) 1.00% 0.24% 1.24%
Worldwide Balanced Fund (not 0.00%/17/ 0.00%/17/ 0.00%/17/
available for new investments)
</TABLE>
- -----------------------
/7/ 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 Division assets or reductions
from Contract 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 Divisions. For a more
complete description of the Portfolios' costs and expenses, see the prospectuses
for the Portfolios.
/8/ Neuberger & Berman Advisers Management Trust (the "Trust") is divided into
portfolios ("Portfolios"), each of which invests all of its net investable
assets in a corresponding series ("Series") of Advisers Managers Trust. Expenses
in the table reflect expenses of the Portfolios and include each Portfolio's pro
rata portion of the operating expenses of each Portfolio's corresponding Series.
The Portfolios pay Neuberger & Berman Management, Inc. ("NBMI"), an
administration fee based on the Portfolios' net asset value. Each Portfolio's
corresponding Series pays NBMI a management fee based on the Series' average
daily net assets. Accordingly, this table combines management fees at the
Series level and administration fees at the Portfolio level in a unified fee
rate. See "Expenses" in the Trust's Prospectus. Expenses reflect expense
reimbursement. NBMI has voluntarily undertaken to limit the Portfolios'
compensation of NBMI and excluding taxes, interest, extraordinary expense,
brokerage commissions and transaction costs, that exceed 1% of the Portfolios'
average daily net asset value. These expense reimbursement policies are subject
to termination upon 60 days written notice to the Portfolios.
/9/ The Alger American Leverage AllCap Portfolio's "Other Expenses" includes
0.03% of interest expense.
/10/ A portion of the brokerage commissions the Portfolio paid was used to
reduce its expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent expenses. Including these reductions,
the total operating expenses presented in the table would have been 0.67% for
Growth Portfolio, 0.92% for Overseas Portfolio, and 0.73% for Asset Manager
Portfolio.
/11/ FMR agreed to reimburse a portion of Index 500 Portfolio's expenses during
the period. Without this reimbursement, the funds' management fee, other
expenses and total expenses would have been 0.28%, 0.15% and 0.43% respectively
for Index 500 Portfolio on a annualized basis.
/12/ The Portfolios' custodian fees were reduced under an expense offset
arrangement. In addition, certain expenses of the Portfolio's are being
absorbed voluntarily by INVESCO Funds Group, Inc. ("IFG"). The above ratios
reflect total expenses, less expenses absorbed by IFG, prior to any expense
offset.
/13/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the
years ended December 31, 1996 and 1995 and the period December 31, 1994. If
such expenses had not been voluntarily absorbed, ratio expenses to average net
assets would have been 1.30%, 2.51% and 16.44%, respectively, and ratio of net
investment income to average net assets would have been 3.08%, 2.41% and
(11.72%), respectively.
/14/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the
years ended December 31, 1996 and 1995 and the period ended December 31, 1994.
If such expenses had not been voluntarily absorbed, ratio of expenses to average
net assets would have been 1.19%, 2.31% and 32.55%, respectively, and ratio of
net investment income to average net assets would have been 2.63%, 2.22% and
(30.07%), respectively.
/15/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the
years ended December 31, 1996 and 1995 and the period ended December 31, 1994.
If such expenses had not been voluntarily absorbed, ratio of expenses to average
net assets would have been 1.32%, 2.71% and 30.38% respectively, and ratio of
net investment income to average net assets would have been 8.74%, 7.05% and
(26.92%), respectively.
/16/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the
years ended December 31, 1996 and 1995. If such expenses had not been
voluntarily absorbed, ratio expenses to average net assets would have been
5.36%, and 57.13%, respectively, and ratio of net investment income to average
net assets would have been (1.28%), and (52.86), respectively.
/17/ The Portfolio's expenses were voluntarily reduced by the Portfolio's
investment manager. Absent such reimbursement, "Management Fees", "Other
Expenses" and "Total Portfolio Expenses" would have been 0.75%, 0.60% and 1.35%,
respectively. "Other Expenses" of 0.60% are based on a net asset estimation of
$30 million.
________________________________________________________________________________
8
Exchequer
<PAGE>
The following examples depict the dollar amount of expenses that would be
incurred under this Contract assuming a $1,000 initial Purchase Payment and 5%
annual return on assets. The expense amounts presented are derived from a
formula which allows the maximum $30 annual administrative charge to be
expressed as a percentage of the average Contract account size for existing
Contracts. Because the average Contract account size is greater than $1,000, the
expense effect of the annual administrative charge is reduced accordingly. Taxes
on Purchase Payments may also be applicable but are not reflected in the
expenses below. See Taxes on Purchase Payments, page 32. The Enhanced Death
Benefit Risk Charge and the annual administrative charge do not apply during the
Annuity Period.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE IF YOU DO NOT SURRENDER YOUR CONTRACT OR IF YOU
----------------
APPLICABLE TIME PERIOD. ANNUITIZE AT THE END OF THE APPLICABLE TIME
PERIOD.
- ------------------------------------------------------------------------------------------------------------------------------------
DIVISION INVESTING IN: 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NEUBERGER & BERMAN
ADVISERS MANAGEMENT TRUST
Limited Maturity Bond
Portfolio 94 124 156 268 24 74 126 268
Growth Portfolio 95 128 163 281 25 78 133 281
Government Income 96 131 167 291 26 81 137 291
Portfolio (not
available for
new investments)
Partners Portfolio 96 129 164 284 26 79 134 284
THE ALGER AMERICAN FUND
Alger American Small
Capitalization
Portfolio 95 127 161 277 25 77 131 277
Alger American MidCap
Growth Portfolio 95 125 159 274 25 75 129 274
Alger American Growth
Portfolio 94 124 156 269 24 74 126 269
Alger American
Leveraged AllCap
Portfolio 97 133 171 297 27 83 141 297
FIDELITY VARIABLE
INSURANCE PRODUCTS FUNDS
VIP Growth Portfolio 93 121 151 259 23 71 121 259
VIP Overseas Portfolio 95 128 163 282 25 78 133 282
VIP Money Market
Portfolio 89 110 132 221 19 60 102 221
FIDELITY VARIABLE
INSURANCE PRODUCTS FUNDS
II
VIP II Asset Manager
Portfolio 94 122 154 264 24 72 124 264
VIP II Index 500
Portfolio 89 109 131 219 19 59 101 219
INVESCO VARIABLE
INVESTMENT FUNDS, INC.
INVESCO VIF - Total
Return Portfolio 95 128 163 283 25 78 133 283
INVESCO VIF -
Industrial Income
Portfolio 96 129 164 284 26 79 134 284
INVESCO VIF - High
Yield Portfolio 95 126 160 276 25 76 130 276
INVESCO VIF - Utilities
Portfolio 98 135 174 304 28 85 144 304
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Balanced Fund (not
available for new investments) 86 101 118 190 16 51 88 190
Worldwide Hard Assets Fund
(formerly Gold and Natural
Resources Fund) 98 137 178 311 28 87 148 311
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN, SUBJECT TO THE GUARANTEES UNDER THE CONTRACT.
________________________________________________________________________________
9
Exchequer
<PAGE>
SUMMARY OF THE EXCHEQUER VARIABLE ANNUITY
GENERAL DESCRIPTION
This prospectus provides you with the necessary information to make a decision
on purchasing the Exchequer Variable Annuity offered by Security Life and funded
by the Variable Account as well as by our General Account. The description of
the Contracts in this prospectus is subject to the terms of the Contract
purchased by an Owner and any Endorsement or Rider to it. An applicant may
review a copy of the Contract and any Endorsement or Rider to it on request.
This summary provides a brief overview of the more significant aspects of the
Contract. Further detail is provided in this prospectus, the related Statement
of Additional Information, the Contract, and the prospectuses of the Portfolios
being considered. The description of the Contract in this prospectus, together
with any applications and any Riders or Endorsements, constitute the entire
agreement between you and us and should be retained. For further information
about the Contract, contact the Security Life Customer Service Center.
We can issue a Contract if the Owner and Annuitant are not older than Age 85,
and we can accept additional Purchase Payments prior to the Annuity Date until
the Owner reaches Age 86. For an IRA Contract, you generally may not make
Purchase Payments after March 31 of the year following the year in which you
reach Age 70 1/2.
The Contract may be used as an Individual Retirement Annuity, an IRA Rollover,
an IRA Transfer, a SEP Contract or a SIMPLE Contract ("IRA Contracts"). IRA
Contracts are offered to individuals for use in connection with Sections 408(a)
and (b) of the Code. See your tax adviser concerning these matters.
Purchase Payments or Accumulation Value may be allocated among one or more of
seventeen Divisions of the Variable Account, a separate account of Security
Life, or to the Guaranteed Interest Division. We do not promise that your
Accumulation Value will increase. Depending on the Contract's investment
experience for funds invested in the Divisions of the Variable Account and
interest credited to the Guaranteed Interest Division, the Accumulation Value,
Cash Surrender Value and Death Benefit may increase or decrease on any day.
Furthermore, any investment earnings under the Contract generally accumulate
free from annual taxation under current tax law until distributed.
Each Division of the Variable Account invests its assets without sales charge in
a corresponding mutual fund Portfolio. The Portfolios have their own distinct
investment objectives and are managed by experienced fund investment advisers.
You bear the investment risk for funds invested in the Divisions of the Variable
Account; you receive the benefits from favorable experience but also bear the
risk of poor investment experience. These Portfolios are available only to serve
as the underlying investment for variable annuity and variable life insurance
contracts issued through separate accounts of Security Life as well as other
life insurance companies, and to certain qualified pension and retirement plans.
They are not directly available to individual investors. For more information
regarding the Variable Account, the Divisions and the Portfolios, see The
Variable Account, page 14, and The Portfolios, page 15.
The Guaranteed Interest Division is a part of our General Account and guarantees
principal and a minimum interest rate of 3%. This interest will be paid
regardless of the actual investment experience of the General Account; we bear
the full amount of the investment risk for any amounts allocated to the
Guaranteed Interest Division. For more information about The Guaranteed Interest
Division, see THE GUARANTEED INTEREST DIVISION, page 28.
The Contract also offers a choice of Annuity Options to which you may apply the
Accumulation Value less taxes incurred but not deducted as of the Annuity Date.
These Annuity Options are also available to the Beneficiary to apply the Death
Benefit as of the Supplementary Contract Effective Date. You have the option to
change the Annuity Date within certain limits.
The ultimate effect of Federal income taxes on the amounts held under a
Contract, on Annuity Payouts and on the economic benefits to the Owner,
Annuitant or Beneficiary depends on Security Life's tax status and upon the tax
status of the parties concerned. In general, an Owner is not taxed on increases
in value under an annuity Contract until some form of distribution is made under
it. There may be tax penalties if you make a partial withdrawal or surrender the
Contract before reaching Age 59 1/2. See FEDERAL TAX CONSIDERATIONS, page 37.
PURCHASE PAYMENTS
The minimum initial Purchase Payment is $5,000 ($1,000 for an IRA Contract). The
minimum additional Purchase Payment we will accept is $500 ($250 for an IRA
Contract or $90 if you have set up your IRA on a monthly program of Purchase
Payments). We will take under consideration and may refuse to accept a Purchase
Payment if it would cause the sum of all Net Purchase
________________________________________________________________________________
10
Exchequer
<PAGE>
Payments received under the Contract to exceed $1,500,000.
The initial Purchase Payment is allocated to each Division according to your
most recent allocation instructions unless the Contract is issued in a state
that requires the return of Purchase Payments during the Free Look Period. In
those states, your initial Purchase Payment allocated to the Guaranteed Interest
Division will be allocated to that Division upon receipt; your initial Purchase
Payment allocated to the Divisions of the Variable Account will be allocated to
the Division investing in the Fidelity VIP Money Market Portfolio during the
Free Look Period and then transferred to the Divisions of the Variable Account
according to your most recent allocation instructions. See Your Right to Cancel
the Contract, page 19.
All percentage allocations must be in whole numbers. We allocate any additional
Purchase Payments among the Divisions in accordance with your most recent
allocation instructions, or as otherwise instructed by you. You may designate a
different allocation with respect to any Purchase Payment by sending us a
written notice with the Purchase Payment or by telephone, if the proper
telephone authorization form is on file with us. See Crediting and Allocation of
Purchase Payments, page 19.
You may choose to have a specified dollar amount transferred from the Divisions
investing in the Fidelity VIP Money Market Portfolio or the Neuberger & Berman
AMT Limited Maturity Bond Portfolio to the other Divisions of the Variable
Account on a monthly basis during the Accumulation Period with the objective of
shielding your investment from short-term price fluctuations. See Dollar Cost
Averaging, page 20.
You may transfer or reallocate your Accumulation Value among the Divisions of
the Variable Account any time after the end of the Free Look Period. There is no
charge for the first 12 transfers per Contract Year during the Accumulation
Period. A $25 charge will be assessed for each transfer in excess of 12 during a
Contract Year. During the Annuity Period, you may make up to four transfers per
Contract Year and no transfer charge will be assessed.
ENHANCED GUARANTEED DEATH BENEFIT
The Contract provides an Enhanced Guaranteed Death Benefit to the Beneficiary if
the Owner dies prior to the Annuity Date. For more details, see Enhanced
Guaranteed Death Benefit, page 22, and Death Benefit Proceeds, page 22.
PARTIAL WITHDRAWALS
After the Free Look Period, prior to the Annuity Date and while the Contract is
in effect, you may take partial withdrawals under any of three options: the
Demand Withdrawal Option, the Systematic Income Program or the IRA Income
Program.
A penalty tax may be assessed upon partial withdrawals. See Taxation of
Annuities, page 22.
SURRENDERING YOUR CONTRACT
You may surrender the Contract at any time prior to the Annuity Date and receive
its Cash Surrender Value. No Annuity Options are available upon surrender. No
surrender may be made on or after the Annuity Date or with respect to any
amounts applied under an Annuity Option. See Surrendering to Receive the Cash
Surrender Value, page 27.
A penalty tax may be assessed upon surrender. See Taxation of Annuities, page
37.
YOUR RIGHT TO CANCEL THE CONTRACT
At any time during the Free Look Period, you may cancel your Contract and
receive a refund equal to your Accumulation Value plus charges deducted.
However, if required by state law, we will return the Purchase Payments made.
The Free Look Period is a ten day period of time, or such other period as
required by a state, beginning when the Contract is delivered to you. See Your
Right to Cancel the Contract, page 19.
CONTRACT CHARGES AND FEES
We deduct charges for certain transactions and make deductions from the
Divisions of the Variable Account and the Guaranteed Interest Division in the
same proportion that the Division Accumulation Value of each Division bears to
the total Accumulation Value. We may reduce certain charges for group or
sponsored arrangements. See Group or Sponsored Arrangements, page 21. A
description of the charges we deduct follows.
If a Purchase Payment is withdrawn or surrendered within five full Contract
Years since the Contract Anniversary at the end of the Contract Year in which
the Purchase Payment was made, a surrender charge is assessed. If a Purchase
Payment is made as of the first day of a Contract Year, a surrender charge will
apply against this Purchase Payment for six full years. For purposes of
determining the amount of Purchase Payments withdrawn and the surrender charge,
withdrawals will be allocated first to the Earnings, then to Purchase Payments
held for at least five full Contract Years since the Contract Anniversary at the
end of the Contract Year in which the Purchase Payment was made, then to the
amount by which 15% of the Accumulation Value as of the last Contract
Anniversary (less any Gross Partial Withdrawals already made during
________________________________________________________________________________
11
Exchequer
<PAGE>
the Contract Year which are not considered to be withdrawals of Purchase
Payments) exceeds the Earnings in the Contract, if any, and finally to Purchase
Payments to which the lowest surrender charge applies. The surrender charge is
7% of the Purchase Payment if withdrawn in the Contract Year during which the
Purchase Payment was made, reduced by 1% each year for the next five Contract
Years and is 0% in the sixth Contract Year following the Contract Year in which
the Purchase Payment was made. See Surrender Charge, page 31.
If you take more than one demand withdrawal in a Contract Year or take a demand
withdrawal in the same Contract Year while the Systematic Income Program is in
effect, we impose a partial withdrawal transaction charge equal to the lesser of
$25 or 2% of the amount withdrawn. See Partial Withdrawal Transaction Charge
page 31.
We charge each Division of the Variable Account with a daily asset-based charge
equivalent to an annual rate of 1.37% for mortality and expense risks which
includes 0.12% for the cost of the Enhanced Death Benefit guarantee. During the
Annuity Period, the charge is reduced to 1.25%. See Charges Deducted from the
Accumulation Value, 31.
We charge each Division of the Variable Account with a daily asset-based charge
equivalent to an annual rate of 0.15% to cover a portion of Contract
administration costs. See Asset-based Administrative Charge, page 32.
During the Accumulation Period, we deduct an annual administrative charge of $30
per Contract Year if Net Purchase Payments are less than $100,000. If Net
Purchase Payments equal $100,000 or more, the charge is zero. We also deduct
this charge when determining the Cash Surrender Value payable if you surrender
the Contract prior to the end of a Contract Year. See Administrative Charge,
page 32.
A $25 charge will be assessed for each transfer in excess of 12 during a
Contract Year during the Accumulation Period. See Excess Transfer Charge, page
32.
Generally, taxes on Purchase Payments, if any, are incurred as of the Annuity
Date, and a charge for taxes on Purchase Payments is deducted from the
Accumulation Value as of that date. Some jurisdictions impose a tax on Purchase
Payments at the time a Purchase Payment is paid. In these jurisdictions, our
current practice is to pay the tax on Purchase Payments for you and then deduct
the charge for these taxes from the payout of Proceeds. See Taxes on Purchase
Payments, page 32.
There are fees and expenses deducted from the Portfolios. The investment
experience of the Portfolios and deductions for fees and expenses from the
Portfolios underlying the Divisions in which you are invested will affect your
Accumulation Value. Please read the prospectus for each of the Portfolios you
are considering for details.
TAX CONSIDERATIONS
Under current Federal income tax law, the increase in value of an annuity
contract owned by an individual is generally not taxed until it is distributed.
Prior to the annuity Date, partial withdrawals, surrenders or assignments may
result in the recognition of ordinary income for tax purposes and may also
result in tax penalties if the taxpayer is under age 59 1/2. After the Annuity
Date, the taxable portion of each annuity payout will be subject to tax at
ordinary income rates.
Generally, under current Federal income tax law, proceeds of an annuity Contract
must be distriburted within five years of the death of the Owner. Death
proceeds may result in the recognition of ordinary income by the Recipient.
Section 1035 of the Code generally provides that no gain or loss shall be
recognized on the exchange of an annuity contract for another. Special rules
and procedures apply to Section 1035 transactions. See FEDERAL TAX
CONSIDERATIONS, page 37.
________________________________________________________________________________
12
Exchequer
<PAGE>
CONDENSED FINANCIAL INFORMATION
The consolidated financial statements and schedules of Security Life and its
subsidiaries at December 31, 1996 and 1995, and for each of the three years in
the period ended December 31, 1996, and the financial statements of the Separate
Account at December 31, 1996, and for the year then ended, appear in the
Statement of Additional Information.
<TABLE>
<CAPTION>
_____________________________________________________________________________________________________________________________
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE ACCUMULATION
BEGINNING OF AT END UNITS AT END CALENDAR
DIVISION INVESTING IN: PERIOD OF PERIOD OF THE PERIOD YEAR
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST:
<S> <C> <C> <C> <C>
Limited Maturity Bond Portfolio 10.00 9.98 0.000 1994*
9.98 10.35 563,487.916 1995
10.35 10.64 288,635.255 1996
Government Income Portfolio *** 10.00 10.05 0.000 1994*
10.05 10.72 13,437.293 1995
10.72 10.70 61,534.920 1996
Growth Portfolio 10.00 9.83 0.000 1994*
9.83 12.37 13,967.690 1995
12.37 13.30 144,473.402 1996
Partners Portfolio 10.00 9.82 0.000 1994*
9.82 13.17 18,425.180 1995
THE ALGER AMERICAN FUND: 13.17 16.81 194,111.730 1996
Alger American Small Capitalization Portfolio 10.00 10.18 0.000 1994*
10.18 14.53 109,121.103 1995
14.53 14.91 353,902.764 1996
Alger American MidCap Growth Portfolio 10.00 10.16 983.060 1994*
10.16 14.46 45,272.292 1995
14.46 15.94 207,341.752 1996
Alger American Growth Portfolio 10.00 11.98 60,576.492 1995**
11.98 13.37 206,009.336 1996
Alger American Leveraged AllCap Portfolio 10.00 14.74 20,636.526 1995**
14.74 16.27 99,823.309 1996
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
VIP Growth Portfolio 10.00 10.14 0.000 1994*
10.14 13.50 91,703.491 1995
13.50 15.25 386,707.380 1996
VIP Overseas Portfolio 10.00 9.57 1,358.026 1994*
9.57 10.34 91,367.590 1995
10.34 11.53 417,669.832 1996
VIP Money Market Portfolio 10.00 10.04 52,413.096 1994*
10.04 10.47 259,770.455 1995
10.47 10.87 918,154.339 1996
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
VIP II Asset Manager Portfolio 10.00 9.63 0.000 1994*
9.63 10.90 62,156.503 1995
10.90 12.31 254,932.411 1996
VIP II Index 500 Portfolio 10.00 9.85 0.000 1994*
9.85 13.11 45,041.743 1995
13.11 15.86 349,173.950 1996
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
INVESCO VIF - Total Return Portfolio 10.00 10.00 0.000 1994*
10.00 12.14 66,073.393 1995
12.14 13.41 228,925.945 1996
INVESCO VIF - Industrial Income Portfolio 10.00 10.10 0.000 1994*
10.10 12.96 81,266.429 1995
12.96 15.61 294,419.794 1996
INVESCO VIF - High Yield Portfolio 10.00 10.09 676.252 1994*
10.09 11.90 54,748.222 1995
11.90 13.67 280,339.680 1996
INVESCO VIF - Utilities Portfolio 10.00 10.00 0.000 1994*
10.00 10.82 22,313.580 1995
10.82 12.02 200,534.253 1996
</TABLE>
*Commencement of business in these Divisions was on October 14, 1994.
**Commencement of business in these Divisions was on May 1, 1995.
***No Longer available for new investments
________________________________________________________________________________
13
Exchequer
<PAGE>
<TABLE>
<CAPTION>
_____________________________________________________________________________________________________________________________
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE ACCUMULATION
BEGINNING OF AT END UNITS AT END CALENDAR
DIVISION INVESTING IN: PERIOD OF PERIOD OF THE PERIOD YEAR
<S> <C> <C> <C> <C>
VAN ECK WORLDWIDE INSURANCE TRUST:
Worldwide Balanced Fund (no longer available for new 10.00 10.00 513.000 1994*
investments) 10.00 9.85 14,721.975 1995
9.85 10.83 86,789.616 1996
Worldwide Hard Assets Fund (formerly Gold and Natural Resources 10.00 9.20 700.158 1994*
Fund) 9.20 10.06 7,301.735 1995
10.06 11.69 86,244.713 1996
_____________________________________________________________________________________________________________________________
</TABLE>
*Commencement of business in these Divisions was on October 14, 1994.
**Commencement of business in these Divisions was on May 1, 1995.
***No Longer available for new investments
FACTS ABOUT SECURITY LIFE AND THE VARIABLE ACCOUNT
SECURITY LIFE
Security Life is a stock life insurance company organized under the laws of the
State of Colorado in 1928. Our headquarters are located at 1290 Broadway,
Denver, Colorado 80203-5699. We are admitted to do business in the District of
Columbia and all states except New York. As of the end of 1996, Security Life
and its consolidated subsidiaries had over $139.9 billion of life insurance in
force. Our total assets exceeded $7.1 billion and our shareholder's equity
exceeded $778 million on a generally accepted accounting principles basis as of
December 31, 1996. We offer a complete line of life insurance and retirement
products, including annuities, individual and group life, pension products, and
market life reinsurance.
Security Life actively manages its General Account investment portfolio to meet
both long-term and short-term contractual obligations. The General Account
portfolio invests primarily in investment-grade bonds and low-risk policy loans.
Security Life is a wholly owned indirect subsidiary of ING Groep, N.V. ("ING"),
one of the world's three largest diversified financial services organizations.
ING is headquartered in Amsterdam, Netherlands, and had consolidated assets
exceeding $277.9 billion on a Dutch (modified U.S.) generally accepted
accounting principles basis as of December 31, 1996.
The principal underwriter and distributor for the Contracts is ING America
Equities, Inc. ("ING America Equities"), a wholly owned subsidiary of Security
Life. ING America Equities is registered as a broker-dealer with the SEC and is
a member of the NASD. The current address for ING America Equities is 1290
Broadway, Denver, Colorado 80203-5699.
CUSTOMER SERVICE CENTER
Financial Administrative Services Corporation provides administrative services
for Security Life at our Customer Service Center at P.O. Box 173763, Denver, CO
80217-3763. The administrative services include processing Purchase Payments,
Annuity Payouts, Death Benefits, surrenders, partial withdrawals and transfers;
preparing confirmation notices and periodic reports; calculating mortality and
expense risk charges; calculating Accumulation and Annuity Unit Values and
distributing voting materials and tax reports.
THE VARIABLE ACCOUNT
All obligations under the Contract are general obligations of Security Life. The
Variable Account is a separate investment account used to support our variable
annuity contracts and for other purposes as permitted by applicable laws and
regulations. The assets of the Variable Account are our property, but are kept
separate from our General Account and our other variable accounts. We may offer
other variable annuity Contracts investing in the Variable Account which are not
discussed in this prospectus. The Variable Account may also invest in other
portfolios which are not available to the Contract described in this prospectus.
We own all the assets in the Variable Account. Income and realized and
unrealized gains or losses from assets in the Variable Account are credited to
or charged against the Variable Account without regard to other income, gains or
losses in our other investment accounts. That portion of the assets of the
Variable Account which is equal to the reserves and other contract liabilities
with respect to the Variable Account is not chargeable with liabilities arising
out of any other business we may conduct. It may, however, be subject to
liabilities arising
________________________________________________________________________________
14
Exchequer
<PAGE>
from Divisions of the Variable Account whose assets are attributable to other
variable annuity contracts offered by the Variable Account. If the assets exceed
the required reserves and other contract liabilities, we may transfer the excess
to our General Account. The assets in the Variable Account will at all times
equal or exceed the sum of the accumulation values of all contracts funded by
this Variable Account.
The Variable Account was established on November 3, 1993, and it may invest in
mutual funds or other investment portfolios which we determine to be suitable
for the contracts' purposes. The Variable Account is treated as a unit
investment trust under Federal securities laws. It is registered with the SEC
under the Investment Company Act of 1940 (the "1940 Act") as an investment
company. Such registration does not involve any supervision by the SEC of the
management of the Variable Account or Security Life. The Variable Account is
governed by the laws of Colorado, our state of domicile, and may also be
governed by laws of other states in which we do business.
Seventeen Divisions of the Variable Account are currently available under the
Contract. Each of the Divisions invests in shares of a corresponding Portfolio
of a mutual fund. Therefore, the investment experience of your Contract depends
on the experience of the Divisions you select. These Portfolios are available
only to serve as the underlying investment for variable annuity and variable
life insurance contracts issued through separate accounts of Security Life as
well as other life insurance companies, and to certain qualified pension and
retirement plans. They are not available directly to individual investors.
THE PORTFOLIOS
Currently, each Division of the Variable Account offered pursuant to this
prospectus invests in a corresponding Portfolio. See the prospectus for each of
the Portfolios being considered for details.
Shares of these Portfolios are sold to separate accounts of insurance companies,
which may or may not be affiliated with Security Life or each other, a practice
known as "shared funding." These shares may also be sold to separate accounts
funding both variable annuity contracts and variable life insurance policies, a
practice known as "mixed funding." As a result, there is a possibility that a
material conflict may arise between the interests of Owners of Contracts in
which Division Accumulation Values are allocated to the Variable Account and of
owners of contracts in which accumulation values are allocated to one or more
other separate accounts investing in any one of the Portfolios. Shares of these
Portfolios may also be sold to certain qualified pension and retirement plans
qualifying under Section 401 of the Code that include cash or deferred
arrangements under Section 401(k) of the Code. As a result, there is a
possibility that a material conflict may arise between the interests of owners
generally or certain classes of owners, and such retirement plans or
participants in such retirement plans. In the event of a material conflict,
Security Life will consider what action may be appropriate, including removing
the Portfolio from the Variable Account. There are certain risks associated with
mixed and shared funding and with the sale of shares to qualified pension and
retirement plans, as disclosed in each Portfolio's prospectus.
Each of the Portfolios is part of a separate series of an open-end diversified
management investment company which receives investment advice from a registered
investment adviser. The Neuberger & Berman Advisers Management Trust utilizes a
master feeder structure. See the prospectus for the Neuberger & Berman Advisers
Management Trust for more details.
The Portfolios as well as their investment objectives are described below. There
is no guarantee that any Portfolio will meet its investment objectives. Meeting
objectives depends on various factors, including, in certain cases, how well the
portfolio manager anticipates changing economic and market conditions.
The Divisions of the Variable Accounts investing in the Neuberger & Berman
Advisers Management Trust Government Income Portfolio and the Van Eck Worldwide
Balanced Fund will no longer accept new investments, including through
transfers, automatic rebalancing or dollar cost averaging. Existing investments
in these Funds will not need to be moved at this time, however, Security Life
encourages investors in these Portfolios to consider making a voluntary exchange
to another Division. Transfers of account values from the Government Income
Portfolio Division or the Worldwide Balanced Fund Division to another Division
of the Variable Account or to the Guaranteed Interest Division will not count
against the 12 transfers permitted annually without charge under the Contract.
Please refer to the prospectus for each of the Portfolios you are considering
for more information. A description of each Portfolio, its objectives and
investments of each Portfolio follows.
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NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Neuberger & Berman Advisers Management Trust (the "Trust") is a registered,
open-end management investment company organized as a Delaware business trust
pursuant to a Trust Instrument dated May 23, 1994. The Trust is comprised of
separate Portfolios, each of which invests all of its net investable assets in a
corresponding series of Advisers Managers Trust ("Managers Trust"), a
diversified, open-end management investment company organized as of May 24, 1994
as a New York common law trust. This master feeder structure is different from
that of many other investment companies which directly acquire and manage their
own portfolios of securities. Neuberger & Berman Management Incorporated acts as
investment manager to Managers Trust and Neuberger & Berman, L.P. as sub-
adviser.
Limited Maturity Bond Portfolio -- seeks the highest current income consistent
with low risk to principal and liquidity. As a secondary objective, it also
seeks to enhance its total return. The Limited Maturity Bond Portfolio
pursues its investment objectives by investing in a diversified portfolio of
U.S. Government and Agency securities and investment grade debt securities
issued by financial institutions, corporations and others. The Limited
Maturity bond Portfolio may invest up to 10% of its net assets, measured at
the time of investment, in fixed income securities rated below investment
grade or in comparable unrated securities. The Limited Maturity Bond
Portfolio's dollar weighted average portfolio duration may range up to four
years.
Government Income Portfolio -- (no longer available for new investments) seeks a
high level of current income and total return, consistent with safety of
principal. The Portfolio invests at least 65% of its total assets in U.S.
Government and Agency securities with an emphasis on U.S. Government mortgage
backed securities. In addition, the Portfolio invests at least 25% of its
total assets in mortgage backed securities (including U.S. Government
mortgage backed securities) and asset backed securities. The investment
manager follows a flexible investment strategy depending on market conditions
and interest rate trends.
Growth Portfolio -- seeks capital appreciation without regard to income and
invests in small-medium and large capitalization securities believed to have
maximum potential for long-term capital appreciation. The portfolio utilizes
a "growth at a reasonable price" strategy in selecting these securities.
This investment program involves greater risks and share price volatility
than programs that invest in more conservative securities.
Partners Portfolio -- seeks capital growth through an investment approach that
is designed to increase capital with reasonable risk. Its investment program
seeks securities believed to be undervalued based on strong fundamentals such
as low price to earnings ratio, consistent cash flow, and support from asset
values. Up to 15% of the series' net assets, measured at the time of
investment, may be invested in corporate debt securities rated below
investment grade.
THE ALGER AMERICAN FUND
The Alger American Fund is a registered investment company organized on April 6,
1988 as a multi-series Massachusetts business trust. The Fund's investment
manager is Fred Alger Management, Inc., which has been in the business of
providing investment advisory services since 1964.
Alger American Small Capitalization Portfolio -- seeks to obtain long term
capital appreciation. Except during temporary defensive periods, the
Portfolio invests at least 65% of its total assets in equity securities of
companies that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the Russell 2000
Growth Index ("Russell Index") or the S&P SmallCap 600 Index ("S&P Index"),
updated quarterly. Both indexes are broad indexes of small capitalization
stocks. As of March 31, 1997, the range of market capitalization of the
companies in the Russell Index was $10 million to $1.945 billion; the range
of market capitalization of the companies in the S&P Index at that date was
$32 million to $2,579 billion. The combined range was $10 million to
$2.579 billion.
Alger American MidCap Growth Portfolio -- seeks long-term capital appreciation.
Except during temporary defensive periods, the Portfolio invests at least 65%
of its total assets in equity securities of companies that, at the time of
purchase of the securities, have total market capitalization within the range
of companies included in the S&P MidCap 400 Index, updated quarterly. The S&P
MidCap 400 Index is designed to track the performance of medium
capitalization companies. As of March 31, 1997, the range of market
capitalization of these companies was $120 million to $7.193 billion.
Alger American Growth Portfolio -- seeks to obtain long-term capital
appreciation. The Portfolio will invest
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its assets primarily in companies whose securities are traded on domestic
stock exchanges or in the over-the-counter market. Except during temporary
defensive periods, the Portfolio will invest at least 65% of its total assets
in the securities of companies that, at the time of purchase of the
securities, have a total market capitalization of $1 billion or greater.
Alger American Leveraged AllCap Portfolio -- seeks long-term capital
appreciation. The Portfolio may purchase put and call options and sell
(write) covered call and put options on securities and securities indexes to
increase gain and to hedge against the risk of unfavorable price movements,
and may enter into futures contracts on securities indexes and purchase and
sell call and put options on these futures contracts. The Portfolio may also
borrow money for the purchase of additional securities. The Portfolio may
borrow only from banks and may not borrow in excess of one third of the
market value of its assets, less liabilities other than such borrowing.
Except during temporary defensive periods, the Portfolio will invest 85% of
its net assets in equity securities of companies of any size.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS
FUND II
Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund
II are open-end, diversified, management investment companies organized as
Massachusetts business trusts on November 13, 1981 and March 21, 1988,
respectively. The funds are managed by Fidelity Management & Research Company
("FMR") which handles the Funds' business affairs. FMR is the management arm of
Fidelity Investments, which was established in 1946 and is now America's largest
mutual fund manager
VIP Growth Portfolio -- seeks capital appreciation by investing in common
stocks, although the Portfolio is not limited to any one type of security.
VIP Overseas Portfolio -- seeks long term growth of capital primarily through
investments in foreign securities. The Overseas Portfolio provides a means for
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.
VIP Money Market Portfolio -- seeks as high a level of current income as is
consistent with preserving capital and providing liquidity. The Portfolio will
invest only in high quality U.S. dollar-denominated money market securities of
domestic and foreign issuers.
VIP II Asset Manager Portfolio -- seeks high total return with reduced risk over
the long-term by allocating its assets among domestic and foreign stocks,
bonds, and short-term fixed-income instruments.
VIP II Index 500 Portfolio -- seeks to provide investment results that
correspond to the total return (i.e., the combination of capital changes and
income) of common stocks publicly traded in the United States. In seeking this
objective, the Portfolio attempts to duplicate the composition and total
return of the Standard & Poor's Composite Index of 500 Stocks while keeping
transaction costs and other expenses low. The Portfolio is designed as a long-
term investment option.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO Variable Investment Funds, Inc. is a registered, open-end management
investment company that was organized as a Maryland corporation on August 19,
1993, and is currently comprised of four diversified investment Portfolios,
described below. INVESCO Funds Group, Inc., the Fund's investment adviser, is
primarily responsible for providing the Portfolios with various administrative
services and supervising the Fund's daily business affairs. Portfolio management
is provided to each Portfolio by its sub-adviser. INVESCO Trust Company serves
as sub-adviser to the Industrial Income, High Yield and Utilities Portfolios.
INVESCO Capital Management, Inc. serves as sub-adviser to the Total Return
Portfolio.
INVESCO VIF Total Return Portfolio -- seeks a high total return on investment
through capital appreciation and current income. The Total Return Portfolio
seeks to achieve its investment objective by investing in a combination of
equity securities (consisting of common stocks and, to a lesser degree,
securities convertible into common stock) and fixed income securities.
INVESCO VIF Industrial Income Portfolio -- seeks the best possible current
income, while following sound investment practices. Capital growth potential
is an additional consideration in the selection of portfolio securities. The
Portfolio normally invests at least 65% of its total assets in dividend-
paying common stocks. Up to 10% of the Portfolio's total assets may be
invested in equity securities that do not pay regular dividends. The
remaining assets are invested in other income-producing securities, such
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as corporate bonds. The Portfolio also has the flexibility to invest in other
types of securities.
INVESCO VIF High Yield Portfolio -- seeks a high level of current income by
investing substantially all of its assets in lower rated bonds and other debt
securities and in preferred stock. Under normal circumstances, at least 65%
of the Portfolio's total assets will be invested in debt securities having
maturities at the time of issuance of at least three years. Potential capital
appreciation is a factor in the selection of investments, but is secondary to
the Portfolio's primary objective. This Portfolio may not be appropriate for
all Owners due to the higher risk of lower rated bonds commonly known as
"junk bonds." See the prospectus for the INVESCO VIF High Yield Portfolio for
more information concerning these risks.
INVESCO VIF Utilities Portfolio -- seeks capital appreciation and income through
investments primarily in equity securities of companies principally engaged
in the public utilities business.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment company
organized as a "business trust" under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as
investment adviser and manager to the Worldwide Hard Assets Fund and the
Worldwide Balanced Fund. Fiduciary International Inc. does not currently serve
as sub-investment adviser to the Worldwide Balance Fund, but it is expected to
do so when the Fund's assets reach a point at which it is appropriate to utilize
the sub-investment adviser's services. On April 30, 1997, the Van Eck Gold and
Natural Resources Fund was renamed the Worldwide Hard Assets Fund to reflect the
Fund's new investment objective and concentration policy approved by
shareholders on April 9, 1997. The Fund's new investment objective is described
below.
Van Eck Worldwide Balance Fund -- (no longer available for new investments)
seeks long term capital appreciation together with current income by
investing in stocks, bonds and money market instruments worldwide.
On April 30, 1997, the Van Eck Gold and Natural Resources Fund was renamed the
Worldwide Hard Assets Fund to reflect the Fund's new investment objective and
concentration policy approved by shareholders on April 9, 1997. the fund's new
investment objective is described below.
Van Eck Worldwide Hard Assets Fund -- seeks long-term capital appreciation by
investing globally, primarily in "Hard Assets Securities." Hard assets are
tangible, finite assets, such as real estae, energy, timber, and industrial
and preciousmetals. Income is a secondary consideration.
CHANGES WITHIN THE VARIABLE ACCOUNT
We may from time to time make the following changes to the Variable Account:
1) Make additional Divisions available. These Divisions will invest in
portfolios we find suitable for the Contract.
2) Eliminate Divisions from the Variable Account, combine two or more
Divisions, or substitute a new Portfolio for the Portfolio in which a
Division invests. A substitution may become necessary if, in our judgment,
a Portfolio no longer suits the purposes of the Contract. This may also
happen due to a change in laws or regulations, or a change in a
Portfolio's investment objectives or restrictions, or because the
Portfolio is no longer available for investment, or for some other reason,
such as a declining asset base.
3) Transfer assets of the Variable Account, which we determine to be
associated with the class of contracts to which your Contract belongs, to
another variable account.
4) Withdraw the Variable Account from registration under the 1940 Act.
5) Operate the Variable Account as a management investment company under the
1940 Act.
6) Cause one or more Divisions to invest in a mutual fund other than or in
addition to the Portfolios.
7) Discontinue the sale of Contracts and certificates.
8) Terminate any employer or plan trustee agreement with us pursuant to its
terms.
9) Restrict or eliminate any voting rights as to the Variable Account.
10) Make any changes required by the 1940 Act or the rules or regulations
thereunder.
No such changes will be made until it becomes effective with the SEC or without
any necessary approval of the
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applicable state insurance departments. Owners will be notified of any changes.
FACTS ABOUT THE CONTRACT
YOUR RIGHT TO CANCEL THE CONTRACT
You may cancel the Contract within your Free Look Period, which is ten days
after you receive your Contract. We deem this period to expire 15 days after the
Contract is mailed from our Customer Service Center. Some states laws may
require a longer Free Look Period. If you decide to cancel, you may mail or
deliver the Contract to us at our Customer Service Center. We will refund the
Accumulation Value plus any charges we deducted. If you have purchased a
Contract in a state that requires the return of Purchase Payments during the
Free Look Period and you choose to exercise your Free Look right, we will return
the greater of Purchase Payments or the Accumulation Value plus any charges we
deducted.
PURCHASE PAYMENTS
INITIAL PURCHASE PAYMENT
You purchase the Contract with an initial Purchase Payment. The minimum initial
Purchase Payment is $5,000 ($1,000 for an IRA). We may reduce the minimum
initial Purchase Payment requirements for certain group or sponsored
arrangements or with approval by us. See Group or Sponsored Arrangements, page
21. We will take under consideration and may refuse to accept an initial
Purchase Payment in excess of $1,500,000.
ADDITIONAL PURCHASE PAYMENTS
We can accept additional Purchase Payments until the Owner reaches the Age of 86
or the Annuity Date if earlier. The minimum additional Purchase Payment we will
accept is $500 ($250 for an IRA or $90 if you have set up your IRA on a monthly
program of Purchase Payments). We may reduce the minimum additional Purchase
Payment requirements for certain group or sponsored arrangements or with
approval by Security Life. We may refuse to accept a Purchase Payment if it
would cause the sum of all Net Purchase Payments to exceed $1,500,000.
Under the Code, contributions to an Individual IRA contract may not exceed
$2,000 in any year. For married individuals filing joint returns, each spouse
may establish an IRA Contract and contribute up to $2,000 per year ($4,000 total
even if one spouse doesn't work), provided that the combined contributions do
not exceed the total combined compensation of both spouses. Employer
contributions to a SEP cannot exceed the lesser of $30,000 or 15% of an
employee's compensation. Under a SARSEP established prior to January 1, 1997,
salary reduction contributions are permitted up to a maximum of $7,000, indexed
for inflation. A SARSEP may not be established after January 1, 1997. Under a
SIMPLE plan, employees may elect to make salary reduction contributions up to a
maximum of $6,000 per year, indexed for inflation, and, in addition, the
employer must make either dollar-for-dollar matching contributions up to 3% of
each contributing employeee's compensation or 2% of compensation for every
employee earning at least $5,000 per year. Special limitations apply to SEP
Contracts and SIMPLE Contracts. Consult your tax adviser for assistance in
determining the maximum contribution limits for your SEP or SIMPLE Contract.
These maximums are not applicable to any Purchase Payment which is the result of
a rollover or transfer from another qualified plan.
WHERE TO MAKE PAYMENTS
Send Purchase Payments to our Customer Service Center at the address shown on
the cover. We will send you a confirmation notice upon receipt. Make checks
payable to Exchequer Annuity/Security Life.
CREDITING AND ALLOCATION OF PURCHASE PAYMENTS
We will credit the initial Purchase Payment within two business days of receipt
at our Customer Service Center of a completed application. We may retain the
initial Purchase Payment for up to five business days while attempting to
complete an incomplete application. If the application cannot be made complete
within five business days, the applicant will be informed of the reasons for the
delay and the initial Purchase Payment will be returned immediately unless the
applicant specifically consents to our retaining the initial Purchase Payment
until the application is made complete. The initial Purchase Payment will then
be credited within two business days of the proper completion of the
application.
We will credit additional Purchase Payments that are accepted by us as of the
Valuation Period of receipt at our Customer Service Center.
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The initial Purchase Payment is allocated among the Divisions according to your
most recent allocation instructions, unless the Contract is issued in a state
that requires the return of Purchase Payments during the Free Look Period. See
Your Right to Cancel the Contract, page 19. In those states, your initial
Purchase Payment allocated to the Guaranteed Interest Division will be allocated
to that Division upon receipt; your initial Purchase Payment allocated to the
Divisions of the Variable Account will be allocated to the Division investing in
the Fidelity VIP Money Market Portfolio during the Free Look Period and then
transferred to the Divisions of the Variable Account according to your most
recent instructions.
You may allocate your Purchase Payments among any or all Divisions available.
All percentage allocations must be in whole numbers. We allocate any additional
Purchase Payments among the Divisions in accordance with your most recent
allocation instructions, or as otherwise instructed by you. You may designate a
different allocation with respect to any Purchase Payment by sending us a
written notice with the Purchase Payment or by telephone, if the proper
telephone authorization form is on file with us.
DOLLAR COST AVERAGING
The main objective of Dollar Cost Averaging is to protect your investment from
short-term price fluctuations. Because the same dollar amount is transferred to
a Division each month, more units are purchased in a Division if the value per
unit that month is low, and fewer units are purchased if the value per unit that
month is high. This plan of investing keeps you from investing too much when the
price of shares is high and too little when the price of shares is low.
During the Accumulation Period only, if you have at least $10,000 of Division
Accumulation Value in either the Division investing in the Fidelity VIP Money
Market Portfolio or the Neuberger & Berman AMT Limited Maturity Bond Portfolio,
you may choose to transfer a specified dollar amount each month from one of
these Divisions to other Divisions of the Variable Account. Dollar cost
averaging transfers may not be made to the Guaranteed Interest Division. The
minimum amount that you may elect to transfer each month under this option is
$100. The maximum amount that you may transfer under this option is equal to the
Division Accumulation Value in the Division from which the transfer is taken
when the election is made, divided by 12. Percentage allocations of the transfer
amount must be designated as whole number percentages; no specific dollar
designation may be made to the Divisions of the Variable Account. You may
specify a date for Dollar Cost Averaging to terminate. You may also specify a
dollar amount so that when the Division Accumulation Value in the Division from
which dollar cost averaging transfers are made reaches this dollar amount,
Dollar Cost Averaging will terminate.
The transfer date will be the same calendar day each month as the Contract Date.
If this calendar day is not a Valuation Date, the next Valuation Date will be
used. If, on any transfer date, the value in the chosen Division is equal to or
less than the amount you have elected to transfer, the entire amount will be
transferred, and this option will end.
You may change the transfer amount or the Divisions to which transfers are to be
made once each Contract Year, subject to the above limitations. You may cancel
this election by notifying our Customer Service Center at least seven days
before the next transfer date. Any transfer under this option will not be
included for purposes of the excess transfer charge.
Dollar Cost Averaging will end as of the Valuation Date immediately preceding
the Annuity Date.
If you elect both Dollar Cost Averaging and Automatic Rebalancing, Dollar Cost
Averaging will take place first. As of the first Valuation Date of the next
calendar quarter after Dollar Cost Averaging has terminated, Automatic
Rebalancing will begin. Dollar Cost Averaging is available without charge.
If you elect telephone privileges in an application or send written notice to
our Customer Service Center requesting this privilege, you may make changes to
your Dollar Cost Averaging options by telephoning our Customer Service Center.
See Telephone Privileges, page 30.
AUTOMATIC REBALANCING
The Automatic Rebalancing feature provides a method for maintaining a balanced
approach to investing your Accumulation Value and simplifying the process of
asset allocation over time. There is no charge for this feature. Any transfers
as a result of the operation of this feature are not counted toward the limit of
12 transfers per Contract Year without an additional transfer charge. If you
wish to transfer among the Divisions during the operation of the Automatic
Rebalancing feature, you must change your Automatic Rebalancing allocation
instructions to achieve the transfer.
When you apply for the Contract, or at any subsequent time during the
Accumulation Period, you may elect Automatic Rebalancing by electing this
feature on the
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application or notifying us in writing or by telephone, if the
proper telephone authorization form is on file with us. Automatic Rebalancing
allows you to match your Division Accumulation Value allocations over time with
the allocation percentages you have selected. As of the first Valuation Date of
each calendar quarter, we will automatically rebalance the amounts in each of
the Divisions into which you allocate Purchase Payments to match your allocation
percentages. This will rebalance any Division Accumulation Values that may be
out of line with the allocation percentages you initially indicated, which may
result, for example, from Divisions which do not perform as well as the other
Divisions in certain quarterly periods.
If you elect this feature, as of the first Valuation Date of the next calendar
quarter we will transfer amounts among the Divisions so that the ratio of your
Division Accumulation Value in each Division to your total Accumulation Value
matches your selected allocation percentage for that Division.
If you elect Automatic Rebalancing with your application, the first transfer
will occur as of the first Valuation Date of the next calendar quarter following
the end of the Free Look Period. If you elect this feature after the Contract
Date, the first transfer will be processed as of the first Valuation Date of the
next calendar quarter after we receive the notification at our Customer Service
Center and the Free Look Period has ended.
You may change the allocation percentages for Automatic Rebalancing at any time
and your Accumulation Value will be reallocated as of the Valuation Date that we
receive your allocation instructions at our Customer Service Center. Any
reduction in your allocation to the Guaranteed Interest Division, however, will
be considered a transfer from that Division and, therefore, must comply with the
maximum transfer amount and time limitations on transfers from the Guaranteed
Interest Division, as described in Your Right to Transfer Among Divisions, page
24. We will not process a request which is in conflict with these requirements.
Automatic Rebalancing may be terminated at any time, so long as we receive
notice of the termination at least seven days prior to the first Valuation Date
of the next calendar quarter.
If you elect both Automatic Rebalancing and Dollar Cost Averaging, Dollar Cost
Averaging will take place first. As of the first Valuation Date of the next
calendar quarter after Dollar Cost Averaging has terminated, Automatic
Rebalancing will begin.
If you elect telephone privileges in an application or send written notice to
our Customer Service Center requesting this privilege, you may make changes to
your Automatic Rebalancing options by telephoning our Customer Service Center.
See Telephone Privileges, page 30.
REPORTS TO OWNERS
During the Accumulation Period, we will send you a report within 31 days after
the end of each calendar quarter. This report will show the current Division
Accumulation Value in each Division, the total Accumulation Value, the Cash
Surrender Value and the Death Benefit, as of the end of the calendar quarter, as
well as activity under the Contract since the last report.
During the Annuity Period, we will send you a report within 31 days after the
end of each calendar year showing any information required by law. The reports
will include any information that may be required by the SEC or the insurance
supervisory official of the jurisdiction in which the Contract is delivered.
We will also send you copies of any shareholder reports of the Portfolios in
which the Divisions invest, as well as any other reports, notices or documents
required by law to be furnished to Owners.
GROUP OR SPONSORED ARRANGEMENTS
For certain group or sponsored arrangements, we may reduce or eliminate the
surrender charge, the length of time a surrender charge applies, the
administrative charge, the minimum initial Purchase Payment and the minimum
additional Purchase Payment requirements, as well as other fees or charges. See
CONTRACT CHARGES AND FEES, page 31. We may also increase the amount of partial
withdrawals which may be withdrawn without surrender charge. For example, group
arrangements include those in which a trustee, an employer or an association
purchase Contracts covering a group of individuals on a group basis or special
exchange programs Security Life may offer, including programs to officers,
directors and employees (and their families) of Security Life or its affiliates.
Sponsored arrangements include those in which an employer or association allows
us to offer Contracts to its employees or members on an individual basis.
Our costs for sales, administration, and mortality generally vary with the size
and stability of the group, among other factors. We take all these factors into
account when reducing charges. To qualify for reduced charges, a group or
sponsored arrangement must meet certain requirements. We will make any
reductions
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according to our rules in effect when an application form for a Contract is
approved. We may change these rules from time to time. Any variation in the
surrender charge, administrative charge or other charges, fees and privileges
will reflect differences in costs or services and will not be unfairly
discriminatory.
OFFERING THE CONTRACT
ING America Equities is principal underwriter and distributor of the Contract as
well as of other contracts issued through the Variable Account and other
variable accounts of Security Life and its affiliates. ING America Equities is a
wholly owned subsidiary of Security Life. It is registered with the SEC as a
broker-dealer and is a member of the NASD. Security Life pays ING America
Equities for acting as principal underwriter under a distribution agreement. The
offering of the Contract will be continuous.
ING America Equities will enter into sales agreements with broker-dealers to
solicit for the sale of the Contract through registered representatives who are
licensed to sell securities and variable insurance products including variable
annuities. The broker-dealer involved will generally receive commissions based
on a percent of Purchase Payments made (up to a maximum of 6.0%), a percent of
Accumulation Value (up to a maximum of 0.20%), or a combination of these two.
Compensation arrangements may vary among broker-dealers. In addition, we may
also pay override payments, expense allowances, bonuses, wholesaler fees, and
training allowances. Certain registered representatives who meet specified
production levels may qualify, under our sales incentive programs, to receive
non-cash compensation such as expense-paid trips, educational seminars and
merchandise. The writing registered representative will receive a percentage of
these commissions from the respective broker-dealer, depending on the practice
of that broker-dealer. These commissions will be paid to the broker-dealer by
ING America Equities and will not be charged to the Owner.
VALUES UNDER THE CONTRACT
ENHANCED GUARANTEED DEATH BENEFIT
The Death Benefit payable under the Contract provides for an Enhanced Guaranteed
Death Benefit amount which is greater than the traditional basic death benefit
payable under annuity contracts. The Enhanced Guaranteed Death Benefit is the
greatest of the following amounts as of the Valuation Date Enhanced Guaranteed
Death Benefit Proceeds are determined:
1) Net Purchase Payments accumulated at 4% per year (0% after attained Age 75
and for Contracts issued in certain states) up to a maximum of two times
the sum of all Net Purchase Payments. Net Purchase Payments are Purchase
Payments made less Gross Partial Withdrawals taken; or
2) The Accumulation Value; or
3) The Step-Up Benefit, plus Net Purchase Payments since the last step-up
anniversary. The Step-Up Benefit at issue is the initial Purchase Payment.
As of each step-up
anniversary, the current Accumulation Value is compared to the prior
determination of the Step-Up Benefit increased by Net Purchase Payments
since the last step-up anniversary. The greater of these becomes the new
Step-Up Benefit. The step-up anniversaries are every 6th Contract
Anniversary for the duration of the Contract. (i.e., the 6th, 12th, 18th,
etc.)
The Death Benefit payable to the Beneficiary is the Enhanced Guaranteed Death
Benefit as calculated above minus taxes incurred but not deducted.
DEATH BENEFIT PROCEEDS
Proceeds payable to the Beneficiary upon the death of the Owner before the
Annuity Date will be the Death Benefit and will be paid according to the
provisions in Distribution-at-Death Rules, page 39. If the Owner is not an
individual, Proceeds are payable upon the death of the Annuitant.
The Death Benefit will be determined as of the Valuation Date we receive both
due proof of death and all information needed to process the claim, including
designation of a Beneficiary and the election of a one sum payout or election
under an Annuity Option.
We will pay the Proceeds in one lump sum unless the Beneficiary elects an
Annuity Option within 60 days of our receipt of due proof of death but prior to
the date on which we pay the Proceeds. See CHOOSING AN ANNUITY OPTION, page 33.
If a one sum payout is elected, the Proceeds will be paid within 7 days of
determination of the amount of the Death Benefit described above. Interest will
be paid on the Proceeds from the date of determination of the Death Benefit to
the date of payout. Interest is at the rate we declare, or any higher rate
required by law, but not less than 3% per year. If the Proceeds are paid under
an Annuity Option, the
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Beneficiary becomes the Annuitant, and the Contingent Beneficiary becomes the
Contingent Annuitant. Contact our Customer Service Center or your agent for more
information.
HOW TO CLAIM PAYOUTS TO BENEFICIARY
Before we will make any payouts to the Beneficiary, we must receive due proof of
the death of the Owner in the form of a certified death certificate and all
information necessary to process the claim including designation of a
Beneficiary and the election of a one sum payout or election under an Annuity
Option. The Beneficiary should contact our Customer Service Center for
instructions. For information on tax matters relating to death benefit Proceeds,
see FEDERAL TAX CONSIDERATIONS, page 37.
YOUR ACCUMULATION VALUE
The Accumulation Value of your Contract is the sum of the Division Accumulation
Values of all the Divisions of the Variable Account in which your Contract is
invested, plus any Division Accumulation Value of the Guaranteed Interest
Division. Your Division Accumulation Value in a Division of the Variable
Account as of any day is determined by multiplying the number of your
Accumulation Units in that Division by the Accumulation Unit Value as of that
day for that Division. We adjust your Accumulation Value as of each Valuation
Date to reflect Purchase Payments and transfers made, partial withdrawals taken,
deduction of certain charges, earned interest of the Guaranteed Interest
Division, and the investment experience of the Divisions of the Variable
Account. The Accumulation Value, less applicable taxes, is applied under the
elected Annuity Option as of the Annuity Date. See CHOOSING AN ANNUITY OPTION,
page 33.
You may allocate your Accumulation Value among all the Divisions available,
subject to the restrictions on the percentages and amounts allocated from a
Purchase Payment or a transfer to or from any Division.
MEASUREMENT OF INVESTMENT EXPERIENCE FOR THE DIVISIONS OF THE VARIABLE ACCOUNT
ACCUMULATION UNIT VALUE
The investment experience of a Division of the Variable Account is determined as
of each Valuation Date. We use an Accumulation Unit Value to measure the
experience of each of the Variable Account Divisions during a Valuation Period.
The Accumulation Unit Value for a Valuation Period equals the Accumulation Unit
Value for the preceding Valuation Period multiplied by the Accumulation
Experience Factor for the Valuation Period.
We determine the number of Accumulation Units related to a given transaction in
a Division of the Variable Account as of a Valuation Date by dividing the dollar
value of that transaction in that Division by that Division's Accumulation Unit
Value for that date.
For a description of the method of calculating the Accumulation Unit Value, see
the Statement of Additional Information.
HOW WE DETERMINE THE ACCUMULATION EXPERIENCE FACTOR
For each Division of the Variable Account, the Accumulation Experience Factor
reflects the investment experience of the Portfolio in which that Division
invests and the charges assessed against that Division for a Valuation Period.
The Accumulation Experience Factor is calculated as follows:
1) The net asset value of the Portfolio in which that Division invests as of
the end of the current Valuation Period; plus
2) The amount of any dividend or capital gains distribution declared and
reinvested in that Portfolio during the current Valuation Period; minus
3) A charge for taxes, if any.
4) The result of 1), 2), and 3) divided by the net asset value of that
Portfolio as of the end of the preceding Valuation Period; minus
5) The daily mortality and expense risk charge for that Division for each day
in the Valuation Period; minus
6) The daily asset-based administrative charge for that Division for each day
in the Valuation Period.
NET RATE OF RETURN FOR A DIVISION OF THE VARIABLE ACCOUNT
The Net Rate of Return for a Division of the Variable Account during a Valuation
Period is the Accumulation Experience Factor for that Valuation Period minus
one.
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DIVISION ACCUMULATION VALUE OF EACH DIVISION OF THE VARIABLE ACCOUNT
The Division Accumulation Value of each Division of the Variable Account as of
the Contract Date is equal to the amount of the initial Purchase Payment
allocated to that Division.
On subsequent Valuation Dates, the amount of Division Accumulation Value of each
Division of the Variable Account is calculated as follows:
1) The number of Accumulation Units in that Division of the Variable Account
as of the end of the preceding Valuation Period multiplied by that
Division's Accumulation Unit Value for the current Valuation Period; plus
2) Any additional Purchase Payments allocated to that Division during the
current Valuation Period; plus
3) Any Division Accumulation Value transferred to such Division during the
current Valuation Period; minus
4) Any Division Accumulation Value transferred from such Division during the
current Valuation Period; minus
5) Any excess transfer charge allocated to such Division during the current
Valuation Period; minus
6) Any Gross Partial Withdrawals allocated to that Division during the current
Valuation Period; minus
7) The portion of the annual administrative charge applicable to that Division
if a Contract Anniversary occurs during the Valuation Period.
DIVISION ACCUMULATION VALUE OF THE GUARANTEED INTEREST DIVISION
The Division Accumulation Value of the Guaranteed Interest Division as of the
Contract Date is equal to the amount of the initial Purchase Payment allocated
to that Division.
On subsequent Valuation Dates, the Division Accumulation Value of the Guaranteed
Interest Division is calculated as follows:
1) The Division Accumulation Value of the Guaranteed Interest Division as of
the end of the preceding Valuation Period plus earned interest during the
Valuation Period; plus
2) Any additional Purchase Payments allocated to the Guaranteed Interest
Division during the current Valuation Period; plus
3) Any Division Accumulation Value transferred to the Guaranteed Interest
Division during the current Valuation Period; minus
4) Any Division Accumulation Value transferred from the Guaranteed Interest
Division during the current Valuation Period; minus
5) Any excess transfer charge allocated to the Guaranteed Interest Division
during the current Valuation Period; minus;
6) Any Gross Partial Withdrawals allocated to the Guaranteed Interest Division
during the current Valuation Period; minus
7) The portion of the annual administrative charge applicable to the
Guaranteed Interest Division if a Contract Anniversary occurs during the
current Valuation Period.
YOUR RIGHT TO TRANSFER AMONG DIVISIONS
Prior to the Annuity Date, while the Contract is in effect and after the Free
Look Period, you may transfer your Accumulation Value among the Divisions of the
Variable Account and the Guaranteed Interest Division. The minimum amount that
may be transferred from each Division is the lesser of $100 or the balance of a
Division. Percentages must be in whole numbers. Transfers due to the operation
of Dollar Cost Averaging or Automatic Rebalancing are not included in
determining the limit on transfers without a charge. Each request to transfer
for your Contract is considered one transfer regardless of how many Divisions
are affected by the transfer. The table below summarizes the number of transfers
available and any associated charges during any Contract Year.
<TABLE>
<CAPTION>
Accumulation Accumulation
Period Period
------ ------
<S> <C> <C>
Free Transfer 12 4
Total Number of Transfers Permitted Unlimited 4
Excess Transfer Charge $25 for each Not
Transfer in Applicable
excess of 12
</TABLE>
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Except for Contracts issued in certain states, we reserve the right to limit the
number of transfers per Contract Year to 12 and to limit excessive trading
activity, which can disrupt Portfolio management strategy and increase Portfolio
expenses. For example, we may refuse to accept or to place certain restrictions
on transfers made by third-party agents acting on behalf of multiple Owners or
made pursuant to market timing services when we determine, at our sole
discretion, that such transfers will be detrimental to the Portfolios and the
Owners as a whole. Such transfers may cause increased trading and transaction
costs, disruption of planned investment strategies, forced and unplanned
portfolio turnover, and lost opportunity costs, and may subject the Portfolios
to large asset swings that diminish the Portfolios' ability to provide maximum
investment return to all Owners.
Once during the first 30 days of each Contract Year, you may transfer amounts
from the Guaranteed Interest Division. Transfer requests received within 30 days
prior to the Contract Anniversary will be deemed to occur as of the Contract
Anniversary. Transfer requests received on the Contract Anniversary or within
the following 30 days will be processed; transfer requests received at any other
time will not be processed. Transfers of your Accumulation Value to the
Guaranteed Interest Division are not limited to this 30-day period.
The maximum transfer amount from the Guaranteed Interest Division to the
Divisions of the Variable Account in any Contract Year is the greatest of:
1) 25% of the balance in the Guaranteed Interest Division immediately prior to
the transfer;
2) $100; or
3) the sum of the amounts that were transferred or withdrawn from the
Guaranteed Interest Division in the prior Contract Year. For purposes of
calculating the maximum transfer amount from the Guaranteed Interest
Division, all partial withdrawals (including Systematic Income Program
partial withdrawals) and transfers from the Guaranteed Interest Division in
a Contract Year are summed.
When a transfer involving the Divisions of the Variable Account is made, we
redeem Accumulation Units in the Divisions you are transferring from, and
purchase Accumulation Units in the Divisions you are transferring to, at their
values next computed after receipt of your request at our Customer Service
Center.
If you elect telephone privileges in an application or send written notice to
our Customer Service Center requesting this privilege, you may make transfers by
telephoning our Customer Service Center. See Telephone Privileges, page 30.
PARTIAL WITHDRAWALS
Prior to the Annuity Date, while the Contract is in effect and after the Free
Look Period, you may withdraw in cash all or a part of the Cash Surrender Value
of your Contract. Partial withdrawals may be subject to a 10% tax penalty. See
Tax Consequences of Partial Withdrawals, page 27.
Partial withdrawals from the Divisions of the Variable Account will be made by
redeeming Accumulation Units in the affected Divisions at their values as next
computed after we receive your request at our Customer Service Center. A partial
withdrawal will result in a decrease in the Accumulation Value of this Contract.
The decrease is equal to the amount of the Gross Partial Withdrawal. A surrender
charge and a partial withdrawal transaction charge could be incurred for
withdrawals in excess of certain amounts. See Charges Deducted from the
Accumulation Value, page 31, and The Amount You May Withdraw Without a Surrender
Charge, page 27.
Certain plans or programs sold on a group or sponsored basis to employee or
professional groups may have different withdrawal privileges. See Group or
Sponsored Arrangements, page 21.
Withholding of Federal income taxes on all distributions may be required unless
you elect not to have any such amounts withheld and properly notify Security
Life of that election. Even if you elect no withholding, special "back-up
withholding" rules may require Security Life to disregard your election if you
fail to supply Security Life with a taxpayer identification number ("TIN") or
social security number for individuals, or if the Internal Revenue Service
notifies Security Life that the TIN provided by you is incorrect. In addition,
withholding is required for all payees with addresses outside the United States.
Some states also impose withholding requirements.
If you elect telephone privileges in an application or send written notice to
our Customer Service Center requesting this privilege, you may make demand
withdrawals by telephoning our Customer Service Center. Any telephone request
for a demand withdrawal must be for an amount less than $25,000. See Telephone
Privileges, page 30.
There are three options available for selecting partial withdrawals: the Demand
Withdrawal Option, the Systematic Income Program and the IRA Income Program. All
three options are described below.
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Partial withdrawals may be subject to a 10% tax penalty. See Tax Consequences of
Partial Withdrawals, page 27.
DEMAND WITHDRAWAL OPTION
The minimum amount you may withdraw under this option is $100, and the maximum
demand withdrawal amount is the Cash Surrender Value minus $500. If the amount
of the demand withdrawal you specify exceeds the maximum level, the amount of
the demand withdrawal will automatically be adjusted to leave $500 remaining as
Cash Surrender Value. See Surrendering to Receive the Cash Surrender Value, page
27.
Unless you specify otherwise, the amount of the partial withdrawal will be taken
from each Division in the same proportion that the amount of Division
Accumulation Value in that Division bears to the Accumulation Value in all of
the Divisions immediately before the withdrawal.
We impose a partial withdrawal transaction charge for each demand withdrawal
after the first in any Contract Year. See Partial Withdrawal Transaction Charge,
page 31. In addition, a surrender charge could be incurred for demand
withdrawals in excess of certain amounts. See Charges Deducted from the
Accumulation Value, page 31, The Amount You May Withdraw Without a Surrender
Charge, page 27, and APPENDIX A, page 43.
You may not withdraw from the Guaranteed Interest Division an amount that is
greater than the total demand withdrawal multiplied by the ratio of the Division
Accumulation Value in the Guaranteed Interest Division to the total Accumulation
Value immediately before the withdrawal.
SYSTEMATIC INCOME PROGRAM
You may choose to receive Systematic Income Program partial withdrawals on a
monthly or quarterly basis from the Accumulation Value. Withdrawals will be
taken from each Division of the Variable Account and the Guaranteed Interest
Division in the same proportion that the Division Accumulation Value of that
Division bears to the total Accumulation Value. The payouts under this option
may not start sooner than one month after the Contract Date.
You may select the day of the month when the withdrawals will be made. If no day
is selected, the withdrawals will be made on the same calendar day of the month
as the Contract Date. If this calendar day is not a Valuation Date, the next
Valuation Date will be used. You may select a dollar amount or a percentage
amount for your withdrawal subject to the following maximums:
Frequency Maximum Income Payment Percentage
- --------- ---------------------------------
Monthly 1.25% of Accumulation Value
Quarterly 3.75% of Accumulation Value
Except as described in the following sections, in no event will a payout be less
than $100.
If a dollar amount is selected and the amount to be systematically withdrawn
would exceed the applicable maximum percentage as of the withdrawal date, the
amount withdrawn will be reduced to equal such percentage. If the amount to be
withdrawn is then less than $100, the withdrawal will be made, the Systematic
Income Program will be canceled. See APPENDIX A, page 43.
If a percentage is selected and the amount to be systematically withdrawn based
on that percentage would be less than $100, the amount withdrawn will be
increased to the lesser of $100 or the maximum percentage. If this amount to be
withdrawn is then less than $100, the withdrawal will be made, the Systematic
Income Program will be canceled.
During any Contract Year, if a demand withdrawal is made while the Systematic
Income Program is in effect, the remaining payouts to be made under the
Systematic Income Program for that Contract Year will be considered demand
withdrawals for purposes of calculating partial withdrawal transaction charges
and any applicable surrender charges. If a demand withdrawal is not made in the
same Contract Year, Systematic Income Program partial withdrawals will not be
assessed a surrender charge. IRA Income Program withdrawals will not be assessed
a surrender charge. However, the amount available for Systematic Income Program
partial withdrawals and IRA Income Program partial withdrawals is never greater
than the Cash Surrender Value.
You may change the amount or percentage of your Systematic Income Program
partial withdrawal once each Contract Year. You may cancel your election at any
time by sending notice to our Customer Service Center at least seven days prior
to the next scheduled withdrawal date.
In no event will you be allowed to withdraw more than the Cash Surrender Value.
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IRA INCOME PROGRAM -- IRA CONTRACTS ONLY
If you have an IRA Contract, we will provide payout of amounts required to be
distributed by the Internal Revenue Service unless the minimum distributions are
otherwise satisfied. See Taxation of Individual Retirement Annuities, page 38.
Amounts taken pursuant to the IRA Income Program are not subject to a surrender
charge.
You may either provide us with the minimum required distribution amount or we
will determine the amount that is required to be distributed from your Contract
each year based on the information you give us and various choices you make. For
information regarding the calculation and choices you must make, see the
Statement of Additional Information. The minimum dollar amount of each
distribution is $100. At any time while minimum distributions are being made, if
your Cash Surrender Value falls below $2,000, we will cancel the Contract and
send you the amount of your Cash Surrender Value. See Taxation of Individual
Retirement Annuities, page 38.
In no event will you be allowed to withdraw more than the Cash Surrender Value.
THE AMOUNT YOU MAY WITHDRAW WITHOUT A SURRENDER CHARGE
Each Contract Year after the first, you may withdraw without a surrender charge
the greater of Earnings (as of the date of receipt of the written request) or
15% of the Accumulation Value as of the last Contract Anniversary (less any
Gross Partial Withdrawals already made during the Contract Year which are not
considered to be withdrawals of Purchase Payments) as well as Purchase Payments
held beyond the surrender charge period. Any unused portion of a partial
withdrawal amount not subject to a surrender charge is non-cumulative and does
not apply to a partial withdrawal made in subsequent Contract Years.
Demand withdrawals and any Systematic Income Program partial withdrawals which
occur in the same Contract Year as a demand withdrawal are deemed to be made in
the following order:
1) Any Earnings in the Contract;
2) Purchase Payments held for at least five full Contract Years since the
Contract Anniversary at the end of the Contract Year in which the Purchase
Payment was made;
3) The amount by which 15% of the Accumulation Value as of the last Contract
Anniversary (less any Gross Partial Withdrawals already made during the
Contract Year which are not considered to be withdrawals of Purchase
Payments) exceeds the Earnings in the Contract, if any;
4) Any Purchase Payments remaining on a first-in, first-out basis.
A surrender charge applies only to the withdrawal of Purchase Payments held less
than five full Contract Years since the Contract Anniversary at the end of the
Contract Year in which the Purchase Payment was made. If a Purchase Payment is
made as of the first day of a Contract Year, a surrender charge will apply
against this Purchase Payment for six full years. See Surrender Charge, page
31.
Certain plans or programs sold on a group or sponsored basis to employee or
professional groups may have different withdrawal privileges. See Group or
Sponsored Arrangements, page 21.
For an example illustrating how we would determine the surrender charge (and the
amounts that may be withdrawn without a surrender charge) for a hypothetical
series of demand withdrawals, see APPENDIX A, page 43.
TAX CONSEQUENCES OF PARTIAL WITHDRAWALS
CONSULT YOUR TAX ADVISER REGARDING THE TAX CONSEQUENCES ASSOCIATED WITH TAKING
PARTIAL WITHDRAWALS. A partial withdrawal made before the taxpayer reaches Age
59 1/2 may result in imposition of a tax penalty of 10% of the taxable portion
withdrawn. Please refer to FEDERAL TAX CONSIDERATIONS, page 37, for more
details.
SURRENDERING TO RECEIVE THE CASH SURRENDER VALUE
You may surrender the Contract for its Cash Surrender Value at any time prior to
the Annuity Date.
Your Contract's Cash Surrender Value fluctuates daily with the investment
experience of the Divisions of the Variable Account in which you are invested.
We do not guarantee any minimum Cash Surrender Value for amounts invested in the
Divisions of the Variable
Account. The amount allocated to the Guaranteed Interest Division and a minimum
interest rate are guaranteed for amounts allocated to the Guaranteed Interest
Division; the amount allocated to the Guaranteed Interest Division will vary
depending on any partial withdrawals, transfers, surrenders, and charges
deducted. As of any Valuation Date while the Contract is in effect, the Cash
Surrender Value is calculated as follows:
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1) We take the Contract's Accumulation Value as of that date less any
taxes incurred but not deducted (see Taxes on Purchase Payments, page
32);
2) We deduct any surrender charge (see Surrender Charge, page 31);
3) We deduct the $30 annual administrative charge, if any, due at the end
of the Contract Year (see Administrative Charge, page 32).
For an example illustrating how we determine Cash Surrender Value in certain
hypothetical situations, see APPENDIX A, page 43.
When a Contract is surrendered, we redeem Accumulation Units in the Divisions of
the Variable Account at their value next computed after we receive at our
Customer Service Center your written request along with the Contract. All
benefits under the Contract are then terminated. We will normally pay the Cash
Surrender Value within seven days but we may delay payout as described in When
We Make Payouts on this page.
Withholding of Federal income taxes on all distributions may be required unless
you elect not to have any such amounts withheld and properly notify Security
Life of that election. Even if you elect no withholding, special "back-up
withholding" rules may require Security Life to disregard your election if you
fail to supply Security Life with a taxpayer identification number ("TIN") or
social security number for individuals, or if the Internal Revenue Service
notifies Security Life that the TIN provided by you is incorrect. In addition,
withholding is required for all payees with addresses outside the United States.
Some states also impose withholding requirements.
If you do not wish to receive your Cash Surrender Value in a one sum payout and
you are also the Annuitant, you may avoid a surrender charge by applying the
Accumulation Value, less any taxes incurred but not deducted, to Payout Period
Options II or III by accelerating the Annuity Date under the Contract. See
CHOOSING AN ANNUITY OPTION, page 33.
WHEN WE MAKE PAYOUTS
Partial withdrawals or payout of Proceeds from the Divisions of the Variable
Account will usually be processed within seven days of receipt of the request in
proper form at our Customer Service Center. However, we may postpone the
processing of any such transactions for any of the following reasons:
1) When the New York Stock Exchange ("NYSE") is closed for trading;
2) When trading on the NYSE is restricted by the SEC;
3) When an emergency exists such that it is not reasonably practical to
dispose of securities in the applicable Division of the Variable Account or
to determine the value of its assets; or
4) When a governmental body having jurisdiction over the Variable Account
permits such suspension by order.
Rules and regulations of the SEC are applicable and will govern as to whether
conditions described in 2), 3), or 4) exist.
We may defer for up to six months the payout of any partial withdrawal or
Proceeds from the Guaranteed Interest Division.
THE GUARANTEED INTEREST DIVISION
You may allocate all or a portion of your Purchase Payments and transfer your
Accumulation Value subject to certain restrictions to or from the Guaranteed
Interest Division, which is part of our General Account and which pays interest
at a declared rate. See Your Right to Transfer Among Divisions, page 24. The
General Account supports our non-variable insurance and annuity obligations.
Because of exemptive and exclusionary provisions, interests in the Guaranteed
Interest Division have not been registered under the Securities Act of 1933, and
neither the Guaranteed Interest Division nor the General Account has been
registered as an investment company under the Investment Company Act of 1940.
Accordingly, neither the General Account, the Guaranteed Interest Division nor
any interest therein are generally subject to regulation under these Acts. As a
result, the staff of the SEC has not reviewed the disclosures which are included
in this prospectus which relate to the General Account and the Guaranteed
Interest Division. These disclosures, however, may be subject to certain
provisions of the Federal securities laws relating to the accuracy and
completeness of statements made in this prospectus. For more details regarding
the General Account, see your Contract.
You may accumulate amounts in the Guaranteed Interest Division by (i) allocating
Purchase Payments, (ii) transferring amounts from the Divisions of the Variable
Account, and (iii) earning interest on amounts you already have in the
Guaranteed Interest Division.
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The amount you have in the Guaranteed Interest Division at any time is the sum
of all Purchase Payments allocated to this Division, all transfers, and earned
interest. This amount is reduced by amounts transferred out of or withdrawn from
the Guaranteed Interest Division and deductions allocated to the Guaranteed
Interest Division.
We pay a declared interest rate on all amounts that you have in the Guaranteed
Interest Division. These interest rates will never be less than the minimum
guaranteed interest rate of 3%. We may declare rates higher than the guaranteed
minimum that will apply to amounts in the Guaranteed Interest Division. Any
higher rate is guaranteed to be in effect for at least 12 months. Interest is
compounded daily at an effective annual rate that equals this declared rate. The
interest is credited as of each Valuation Date to the amount you have in the
Guaranteed Interest Division. This interest will be paid regardless of the
actual investment experience of the General Account; we bear the full amount of
the investment risk for the amount allocated to the Guaranteed Interest
Division.
OTHER INFORMATION
THE OWNER
You are the Owner. You are also the Annuitant unless another Annuitant is named
in the application. You have the rights and options described in the Contract.
You and your spouse may be joint Owners; no other joint ownership is allowed.
You (and your spouse, in the case of joint ownership) must be younger than Age
86 as of the Contract Date.
Subject to the applicable provisions of Distribution-at-Death Rules, page 39,
if the Owner (or a Deemed Owner as defined in Distribution-at-Death Rules,
Page 39) dies prior to the Annuity Date, and:
1) If the Owner's spouse is the Joint Owner, then the spouse becomes the
new Owner and no Death Benefit is payable; or
2) If the Owner's spouse is the Beneficiary, then the spouse may elect to
become the Owner (in which case there is no Death Benefit payable) by so
electing within 60 days of the death; if there is no such election, the
Death Benefit is payable to the Beneficiary; or
3) If the Owner's spouse is not the Joint Owner or the Beneficiary, then
the Death Benefit is payable to the Beneficiary.
See Enhanced Guaranteed Death Benefit, page 22.
THE ANNUITANT
The Annuitant will receive the annuity benefits of the Contract as of the
Annuity Date if the Annuitant is living and the Contract is then in force. If
the Annuitant dies before the Annuity Date and a Contingent Annuitant is named,
the Contingent Annuitant becomes the Annuitant (unless the Owner is not an
individual, in which case the Proceeds become payable). If no Contingent
Annuitant has been named, the Owner must designate a new Annuitant. If no
designation is made within 30 days of the Annuitant's death, the Owner will
become the Annuitant.
Upon the death of the Annuitant after the Annuity Date, any remaining designated
period payouts will be continued to any Contingent Annuitant. Upon the death of
both the Annuitant and all Contingent Annuitants, any remaining designated
period payouts will be paid to the estate of the last to die of the Annuitant
and Contingent Annuitants. Amounts may be released in one sum if the Owner's
election allows. See CHOOSING AN ANNUITY OPTION, page 33.
THE BENEFICIARY
The Beneficiary is the person to whom we pay Proceeds upon the death of the
Owner (or of the Annuitant, if the Owner is not an individual) prior to the
Annuity Date.
The original Beneficiary and any Contingent Beneficiaries are named in the
application. Surviving Contingent Beneficiaries are paid death benefit Proceeds
only if no Beneficiary survives. If more than one Beneficiary in a class
survives, they will share the Proceeds equally, unless the Owner's designation
provides otherwise. If there is no designated Beneficiary or Contingent
Beneficiary surviving, we will pay the Proceeds to the Owner's estate. The
Beneficiary designation will be on file with us. We will pay Proceeds according
to the most recent Beneficiary designation on file.
CHANGE OF OWNER, BENEFICIARY OR ANNUITANT
Prior to the Annuity Date and while the Contract is in effect after the Free
Look Period, you may transfer Ownership of the Contract (unless the Contract is
an IRA Contract) subject to our published rules at the time of the change. A new
Owner must be younger than Age 86.
You may name a new Annuitant prior to the Annuity Date. Any Annuitant or
Contingent Annuitant must be younger than Age 86 when named. An Annuitant or
Contingent Annuitant that is not an individual may not be
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named without our consent. If the Owner is not an individual, the Annuitant may
not be changed without our consent.
The Owner may name a new Beneficiary unless an irrevocable Beneficiary has been
named. When an irrevocable Beneficiary has been designated, the Owner and the
irrevocable Beneficiary must act together to make any Beneficiary changes. If
the Contract is an IRA Contract and a Beneficiary change is being made, the
Owner's spouse must sign a statement agreeing to this designation.
To make any of these changes, you must send us written notice of the change to
our Customer Service Center. The change will take effect as of the day the
notice is signed and dated provided that the request was received at our
Customer Service Center prior to any payout. The change will not affect any
payout made or action taken by us before recording the change at our Customer
Service Center. There may be tax consequences, see FEDERAL TAX CONSIDERATIONS,
page 37.
OTHER CONTRACT PROVISIONS
IN CASE OF ERRORS ON THE APPLICATION OR ENROLLMENT FORM
If the Age or sex given in the application is misstated, the amounts payable or
benefits provided by the Contract shall be those that the Purchase Payment would
have bought at the correct Age or sex.
PROCEDURES
We must receive any election, designation, change, assignment, or any other
change request you make in writing, except those you have chosen to request by
telephone. We may require a return of your Contract for any Contract change or
for paying Proceeds. We may require proof of Age, death, or survival of an
Annuitant or Beneficiary when such proof is relevant to the payout of a benefit,
claim, or settlement under the Contract. If your Contract has been lost, we will
require that you complete and return a Contract Replacement Form. The effective
date of any change in provisions of the Contract will be the date the request
was signed. Any change will not affect payouts made or action taken by us before
the change is recorded at our Customer Service Center.
In the event of the Owner's death prior to the Annuity Date, we should be
informed as soon as possible. Claim procedure instructions will be sent to your
Beneficiary immediately. We require a certified copy of the death certificate
and may require proof of the Owner's Age. We may require the Beneficiary and the
Owner's next of kin to sign all authorizations as part of due proof.
TELEPHONE PRIVILEGES
If you have elected this privilege in a form required by us, you may make
transfers, changes in your Dollar Cost Averaging and Automatic Rebalancing
options, or request partial withdrawals by telephoning our Customer Service
Center.
Our Customer Service Center will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may include,
among others, requiring some form of personal identification prior to acting
upon instructions received by telephone, providing written confirmation of such
transactions, and/or tape recording telephone instructions. Your request for
telephone privileges authorizes us to record telephone calls. If reasonable
procedures are not used in confirming instructions, we may be liable for any
losses due to unauthorized or fraudulent instructions. We reserve the right to
discontinue this privilege at any time.
ASSIGNING THE CONTRACT AS COLLATERAL
You may assign this Contract as collateral security upon written notice to us.
Once it is recorded with us, the rights of the Owner and Beneficiary are subject
to the assignment. It is your responsibility to make sure the assignment is
valid. There may be tax consequences for an assignment. IRA Contracts may not
be assigned. See Assignments, page 40.
NON-PARTICIPATING
The Contract does not participate in Security Life's surplus earnings.
AUTHORITY TO CHANGE CONTRACT TERMS
All agreements made by us must be signed by our president or an officer and by
our secretary or assistant secretary. No other person, including an insurance
agent or broker, can change any of the Contract's terms or make any agreements
binding on us.
CONTRACT CHANGES - APPLICABLE TAX LAW
This Contract is intended to qualify as an annuity contract under the Code. To
that end, all terms and provisions of the Contract shall be interpreted to
ensure or maintain such qualification, notwithstanding any other provisions
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to the contrary. Payouts and distributions under this Contract shall be made in
the time and manner necessary to maintain such qualification under the
applicable provisions of the Code in existence at the time this Contract is
issued.
We reserve the right to amend this Contract, to reflect any clarifications or
changes that may be needed or are appropriate, or to conform it to any
applicable changes in the tax requirements to qualify the Contract as an
annuity. Any such changes will apply uniformly to all Contracts that are
affected. We will send you written notice of such changes.
CONTRACT CHARGES AND FEES
DEDUCTION OF CHARGES
We invest the entire amount of the initial and any additional Purchase Payments
in the Divisions of the Variable Account and the Guaranteed Interest Division.
We then periodically deduct certain amounts from your Accumulation Value
invested in the Divisions of the Variable Account and the Guaranteed Interest
Division. We may reduce certain charges under group or sponsored arrangements.
See Group or Sponsored Arrangements, page 21. A description of the charges we
deduct follows.
CHARGES DEDUCTED FROM THE ACCUMULATION VALUE
SURRENDER CHARGE
The withdrawal of Purchase Payments held less than five full Contract Years
since the Contract Anniversary at the end of the Contract Year in which the
Purchase Payment was made, either by surrender or partial withdrawal, is subject
to a surrender charge. The surrender charge will not apply to partial
withdrawals made pursuant to the Systematic Income and IRA Income Programs
unless a demand withdrawal occurs while the Systematic Income Program is in
effect. If a Purchase Payment is made as of the first day of a Contract Year, a
surrender charge will apply against this Purchase Payment for six full years.
The surrender charge that applies is calculated as follows.
<TABLE>
<CAPTION>
Contract
Anniversaries Since Surrender Charge as a
Purchase Payment Percentage of Purchase
was Made Payment Withdrawal
- -------- ------------------
<S> <C>
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6+ 0%
</TABLE>
Up to certain limits, partial withdrawals may be taken without a surrender
charge. See The Amount You May Withdraw Without a Surrender Charge, page 27.
Any applicable surrender charges will reduce the Division Accumulation Value of
each Division in the same proportion that the Division Accumulation Value in
each Division bears to the total Accumulation Value immediately after the
withdrawal.
Proceeds from the surrender charge may not cover the expected costs of
distributing the Contracts. Any shortfall will be recovered from Security Life's
general assets, which may include revenues from the mortality and expense risk
charge deducted from the Variable Account.
PARTIAL WITHDRAWAL TRANSACTION CHARGE
Prior to the Annuity Date and while the Contract is in effect after the Free
Look Period, you may take one demand withdrawal each Contract Year without a
partial withdrawal transaction charge. We impose a partial withdrawal
transaction charge to each additional demand withdrawal in that Contract Year,
equal to the lesser of $25 or 2% of the amount withdrawn. The partial withdrawal
transaction charge will reduce the Division Accumulation Value of each Division
in the same proportion that the Division Accumulation Value in each Division
bears to the total Accumulation Value immediately after the withdrawal. The
partial withdrawal transaction charge will not apply to withdrawals made
pursuant to the Systematic Income and IRA Income Programs unless a demand
withdrawal occurs while the
Systematic Income Program is in effect. Then, the remaining payouts to be made
under the Systematic Income Program for that year will be considered demand
withdrawals for purposes of calculating partial withdrawal transaction charges
and surrender charges.
We do not expect that the total revenue from the partial withdrawal transaction
charge will be greater than the total expected cost of administering demand
withdrawals, on average, over the period that the Contracts are in force.
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ADMINISTRATIVE CHARGE
The administrative charge is deducted each year during the Accumulation Period
as of the Contract Processing Date. We deduct this charge when determining the
Cash Surrender Value payable if you surrender the Contract prior to the end of a
Contract Year. The amount deducted is $30 per Contract Year if Net Purchase
Payments are less than $100,000. If Net Purchase Payments equal $100,000 or
more, the charge is zero. This charge covers a portion of our administrative
expenses. See Asset-Based Administrative Charge, page 32.
The administrative charge is allocated to a Division in the same proportion that
the amount of Division Accumulation Value in that Division bears to the total
Accumulation Value immediately after the withdrawal. For Contracts issued in
certain states, the administrative charge is allocated only among the Divisions
of the Variable Account.
EXCESS TRANSFER CHARGE
We allow you 12 free transfers among Divisions per Contract Year during the
Accumulation Period. For each additional transfer, we will charge you $25 at the
time the transfer is processed. The charge will be deducted from each of the
Divisions in which you are invested in the same proportion that the amount of
Division Accumulation Value in that Division bears to the total Accumulation
Value of all the Divisions immediately after the transfer. We do not expect that
the total revenues from the excess transfer charge will be greater than the
total expected cost of administering transfers, on average, over the period that
the Contracts are in force. Any transfer(s) due to the election of Dollar Cost
Averaging, Automatic Rebalancing and/or pursuant to Changes Within The Variable
Account, page 18, will not be included in determining if the excess transfer
charge should apply.
After the Annuity Date, only four transfers each Contract Year are allowed, and
no transfer charge will be deducted.
TAXES ON PURCHASE PAYMENTS
We make a charge for state and local taxes on Purchase Payments in certain
states, which can range from 0% to 3.5% of the Purchase Payment (5% for the
Virgin Islands). The charge depends on the Annuitant's state of residence.
Taxes on Purchase Payments, if any, are generally incurred as of the Annuity
Date, and we deduct the charge for taxes on Purchase Payments from your
Accumulation Value as of the Annuity Date. Some jurisdictions impose a tax on
Purchase Payments at the time the Purchase Payments are paid, regardless of the
Annuity Date. In those states, our current practice is to advance the payment of
your taxes on Purchase Payments and charge it against your Accumulation Value
either upon surrender of the Contract, payout of death benefit Proceeds, or upon
the Annuity Date. We reserve the right to deduct any state and local taxes on
Purchase Payments from your Accumulation Value at the time such tax is due.
CHARGES DEDUCTED FROM THE DIVISIONS
MORTALITY AND EXPENSE RISK CHARGE
We will deduct a daily charge from the assets in the Divisions of the Variable
Account to compensate Security Life for mortality and expense risks we assume
under the Contract. The daily charge during the Accumulation Period is at the
rate of 0.003753% (equivalent to an annual rate of 1.37%) on the assets in the
Divisions of the Variable Account. The daily charge during the Annuity Period is
at the rate of 0.003425% (equivalent to an annual rate of 1.25%) on the assets
in the Divisions of the Variable Account. This charge is not deducted from the
Guaranteed Interest Division. We will realize a gain from this charge to the
extent it is not needed to provide for benefits and expenses under the Contract.
ASSET-BASED ADMINISTRATIVE CHARGE
We will deduct a daily charge from the assets in each Division of the Variable
Account to compensate Security Life for a portion of the administrative expenses
under the Contract. The daily charge is at a rate of 0.000411% (equivalent to an
annual rate of 0.15%) on the assets in each Division of the Variable Account.
This charge is not deducted from the Guaranteed Interest Division.
We do not expect that the total revenues from the administrative charges will be
greater than the total expected cost of administering the Contracts, on average,
excluding costs that are properly categorized as distribution expenses, over the
period that the Contracts are in force.
PORTFOLIO EXPENSES
There are fees and charges deducted from the Portfolios as described in the FEE
TABLE on page 7. Please read the prospectus for the Portfolios you are
considering for complete details.
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CHOOSING AN ANNUITY OPTION
GENERAL PROVISIONS
SUPPLEMENTARY CONTRACT
When an Annuity Option becomes effective, your Contract will be amended to
include a Supplementary Contract which will put the Annuity Option elected into
effect. The Supplementary Contract Effective Date will be the date the Annuity
Option becomes effective. The computation of the first payout will be made as of
the Supplementary Contract Effective Date. The first payout will be paid within
10 days of this date.
ELECTION AND CHANGES OF ANNUITY DATE
The Annuity Date is the date as of which Annuity Payouts begin. It may be
elected on your application. Your Annuity Date election must follow the second
Contract Anniversary but may not be later than the Annuitant's 85th birthday or
the tenth Contract Anniversary, whichever is later. In certain states, the
latest Annuity Date may be limited to an earlier date. If no Annuity Date is
elected in the application, the Annuity Date will be the first day of the month
following the Annuitant's 85th birthday or the first day of the month following
the tenth Contract Anniversary, whichever is later. However, the Annuity Date
limitations may vary according to state regulation. Please refer to your
Contract for a description of these limitations. For an IRA Contract,
distribution generally must commence no later than April 1st of the calendar
year following the calendar year in which you attain Age 70 1/2 unless the
minimum distributions are otherwise satisfied. Consult your tax adviser. You may
change the Annuity Date by sending a written request to our Customer Service
Center at least 60 days prior to the currently elected Annuity Date of the
Contract.
ELECTION AND CHANGES OF ANNUITY OPTION
The Annuity Option is composed of both the Payout Option which specifies the
type of annuity to be paid and the Payout Period Option which determines how
long the annuity will be paid, the frequency, and the amount of the first
payout. The Owner elects the Annuity Option that applies upon annuitization. The
Owner may change that Annuity Option at any time prior to the Annuity Date. The
Beneficiary may select an Annuity Option for any payouts to be made pursuant to
Death Benefit Proceeds. Any Death Benefit Proceeds to be applied under a Payout
Option will be allocated to each of the Divisions of the Variable Account or the
Guaranteed Interest Division as instructed by the Beneficiary. The available
options are described in the Annuity Option provisions of the Contract.
The various methods of settlement are shown below.
PAYOUT OPTIONS
Proceeds applied as of the Annuity Date to provide an annuity under an Annuity
Option will be the Accumulation Value minus taxes incurred but not deducted. The
taxes will be taken from each of the Divisions in the same proportion that the
Division Accumulation Value in each Division bears to the Division Accumulation
Value in all Divisions immediately prior to the Annuity Date.
If no Annuity Option has been chosen upon annuitization, we will apply Proceeds
to Payout Period Option Table I, using a Benchmark Total Return of 3%, with a
designated period of 30 years. The Annuity Option will be allocated among the
Guaranteed Interest Division and the Divisions of the Variable Account in the
same proportion that the Accumulation Value was allocated prior to the Annuity
Date. For example, if all of the Accumulation Value is allocated to the
Guaranteed Interest Division, the Annuity Payout will be a Fixed Annuity Payout.
VARIABLE ANNUITY PAYOUT
A Variable Annuity Payout is an annuity with payouts which: 1) are not pre-
determined or guaranteed as to dollar amount; and 2) vary in amount with the
investment experience of the Divisions of the Variable Account in which you
invest.
As of the Annuity Date, any Division Accumulation Value invested in the
Guaranteed Interest Division will be allocated among the Divisions of the
Variable Account in the same proportion that the Division Accumulation Value of
each Division bears to the total Division Accumulation Value of all the
Divisions of the Variable Account.
The first Variable Annuity Payout for each Division of the Variable Account will
be the amount that the Proceeds will provide as of the close of business on the
Valuation Date immediately preceding the Supplementary Contract Effective Date
at the Benchmark Total Return elected. If you have elected to receive payouts
less frequently than monthly, the payout amount is then adjusted according to
the factors in Payouts Other Than Monthly, page 35.
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After the first payout, Variable Annuity Payouts vary in amount with the
investment experience of the Divisions of the Variable Account. The dollar
amount of each Variable Annuity Payout after the first payout is calculated by
adding the amount due for each Division of the Variable Account.
The Owner may transfer, up to four times each Contract Year, all or a portion of
the Annuity Units in a Division of the Variable Account to another Division of
the Variable Account.
For a description of the method for determining the amount of Annuity Payouts,
the Annuity Unit Value and transfer provisions during the Annuity Period, see
the Statement of Additional Information.
FIXED ANNUITY PAYOUT
A Fixed Annuity Payout is an annuity with payouts which remain fixed as to
dollar amount throughout the Payout Period. As of the Annuity Date, any Division
Accumulation Value invested in the Divisions of the Variable Account will be
allocated to the Guaranteed Interest Division. The Fixed Annuity Payouts will be
that amount that the Proceeds will provide as of the Supplementary Contract
Effective Date at the Benchmark Total Return of 3%. If the Fixed Annuity Payout
is credited at an interest rate above the guaranteed minimum, the installment
dollar amount will be greater than the determined installment dollar amount for
the time period that the higher rate is declared. If you have elected to receive
payouts less frequently than monthly, the payout amount is adjusted according to
the factors in Payouts Other Than Monthly, page 35.
For Fixed Annuity Payouts, Security Life guarantees that, after the
Supplementary Contract Effective Date, monies held under an Annuity Option will
be credited with interest at a minimum guaranteed effective rate of 3%. We may
declare that Fixed Annuity Payouts are to be credited at an interest rate above
the guaranteed minimum. We guarantee that any higher rate will be in effect for
at least 12 months.
COMBINATION ANNUITY PAYOUT
A Combination Annuity Payout is an annuity where a portion of the payout is
variable and a portion of the payout is fixed as to dollar amount throughout the
Payout Period. You can split the Proceeds among Fixed and Variable Annuity
Payouts in any proportion you choose, with the exception that a minimum of 25%
must be allocated to either option you elect as of the Supplementary Contract
Effective Date. As of the Supplementary Contract Effective Date, we will
allocate Accumulation Value between the Guaranteed Interest Division and the
Divisions of the Variable Account to meet the proportions selected.
The potential benefit of splitting the Proceeds between a Fixed and a Variable
Annuity Payout is that you will have a portion of your Annuity Payout fixed and
guaranteed and a portion which may increase over time, helping to offset
inflation. Of course, the payouts attributable to the Variable Annuity Payout
could decrease and are not guaranteed, since their value is determined by the
investment experience of the Divisions of the Variable Account you select. Once
you elect your Combination Annuity Payout, you may subsequently increase your
allocation to a Fixed Annuity Payout, but you may not increase your allocation
to the Variable Annuity Payout.
FREQUENCY AND AMOUNT OF ANNUITY PAYOUTS
Annuity Payouts will be made to the Annuitant based on the Annuity Option and
frequency elected. They may be made monthly, quarterly, semiannually or
annually. If we do not receive written notice from you, the Annuity Payouts will
be made monthly. There may be certain restrictions on minimum payouts that we
will allow. We may require that a one sum payout be made if the Proceeds to be
applied are less than $2,000 or, if the payouts to the Annuitant are ever less
than $20, we may change the frequency of payouts to result in payouts of at
least that amount or require a one sum payout.
PAYOUT PERIOD OPTIONS
Under each Payout Option, the Payout Period is elected from one of the following
options:
OPTION I. PAYOUTS FOR A DESIGNATED PERIOD. Payouts will be made in 1, 2, 4,
or 12 installments per year as elected for a designated period, which may
be 5 to 30 years. If a Fixed Annuity Payout is elected, the installment
dollar amounts will be equal except for any excess interest as described in
Fixed Annuity Payout, page 41. If a Variable Annuity Payout is elected, the
number of Annuity Units of each installment will be equal, but the dollar
amounts of each installment will vary based on the Annuity Unit Values of
the Divisions chosen. If the Annuitant dies before the end of the
designated period, payouts will be continued to the Contingent Annuitant,
if one has been named, until the end of the designated period. The amount
of each payout will depend upon the designated period elected and, if a
Variable Annuity Payout is elected, the investment experience
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of the Divisions of the Variable Account selected. The amount of the first
monthly payout for each $1,000 of Accumulation Value applied is shown in
Payout Option Table I in the Contract.
OPTION II. LIFE INCOME WITH PAYOUTS FOR A DESIGNATED PERIOD. Payouts will
be made in 1, 2, 4, or 12 installments per year throughout the Annuitant's
lifetime or, if longer, for a period of 5, 10, 15, or 20 years as elected.
If a Fixed Annuity Payout is elected, the installment dollar amounts will
be equal except for any excess interest as described in Fixed Annuity
Payout, page 34. If a Variable Annuity Payout is elected, the number of
Annuity Units of each installment will be equal, but the dollar amounts of
each installment will vary based on the Annuity Unit Values of the
Divisions chosen. If the Annuitant dies before the end of the designated
period, payouts will be continued to the Contingent Annuitant, if one has
been named, until the end of the designated period. The amount of each
payout will depend upon the Annuitant's sex (unless otherwise prohibited by
state law), Age at the time the first payout is due, the designated period
elected and, if a Variable Annuity Payout is elected, the investment
experience of the Divisions of the Variable Account selected. The amount of
the first monthly payout for each $1,000 of Accumulation Value applied is
shown in Payout Option Table II in the Contract. This option is not
available for Ages not shown in these Tables.
OPTION III. JOINT AND LAST SURVIVOR. Payouts will be made in 1, 2, 4, or 12
installments per year while both Annuitants are living. Upon the death of
one Annuitant, the Survivor's Annuity Payout will be paid throughout the
lifetime of the Surviving Annuitant.
If a Fixed Annuity Payout is elected, the installment dollar amount will be
equal while both Annuitants are living and, upon the death of one
Annuitant, will be reduced to 2/3 of the installment dollar amount while
both Annuitants were living, excluding any excess interest as described in
Fixed Annuity Payout, page 34.
If a Variable Annuity Payout is elected, the number of Annuity Units
applied to each installment will be level while both Annuitants are living
and, upon the death of one Annuitant, will be reduced to 2/3 of the number
of Annuity Units applied to each installment while both Annuitants were
living. The dollar amounts of each installment will vary based on the
Annuity Unit Values of the Divisions chosen.
The amount of each payout will depend upon the Age and sex (unless
otherwise prohibited by state law) of each Annuitant at the time the first
payout is due and, if a Variable Annuity Payout is elected, the investment
experience of the Divisions of the Variable Account selected.
A description of how the first monthly installment for Payout Period Option
III is calculated is provided in your Contract.
OPTION IV. OTHER. Payouts will be made in any other manner as agreed upon
in writing between you or the Beneficiary and us.
PAYOUTS OTHER THAN MONTHLY
The Payout Option Tables in your Contract show the first monthly installments
for Payout Period Options I and II. To arrive at the first annual, semiannual or
quarterly payouts, multiply the appropriate figures by 11.839, 5.963 or 2.993 if
the Benchmark Total Return is 3% and by 11.736, 5.939 or 2.988 if the Benchmark
Total Return is 5%, respectively. Factors for other designated periods or for
other options that may be provided by mutual agreement will be provided upon
reasonable request.
COMMUTING PROVISIONS
The Annuitant may commute remaining designated period installments under Payout
Period Option I. The Contingent Annuitant may commute remaining designated
period installments after the death of the Annuitant under Payout Period Options
I or II. If no Contingent Annuitant is named, any remaining designated period
installments may be commuted by the estate. Any computation shall be at the
appropriate Benchmark Total Return rate.
REGULATORY INFORMATION
VOTING PRIVILEGES
We invest the assets in the Divisions of the Variable Account in shares of the
corresponding Portfolios. See The Portfolios, page 15. Security Life is the
legal owner of the shares held in the Variable Account and, as such, has the
right to vote on certain matters. Among other things, we may vote on any matters
described in the Fund's current prospectus or requiring a vote by shareholders
under the 1940 Act.
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Even though we own the shares, to the extent required by the interpretations of
the SEC, we give you the opportunity to tell us how to vote the number of shares
that are attributable to your Contract. We will vote those shares at meetings of
Portfolio shareholders according to your instructions. We will also vote any
Portfolio shares that are not attributable to the Contracts and shares for which
instructions from Owners were not received in the same proportion that Owners
vote. If the Federal securities laws or regulations or interpretations of them
change so that we are permitted to vote shares of a Portfolio in our own right
or to restrict Owner voting, we reserve the right to do so.
You may participate in voting only on matters affecting the Portfolios in which
your assets have been invested. We determine the number of Portfolio shares in
each Division that are attributable to your Contract by dividing the amount of
your Division Accumulation Value allocated to that Division by the net asset
value of one share of the corresponding Portfolio. The number of shares as to
which you may give instructions will be determined as of the record date set by
the Portfolio's Board for the Portfolio's shareholders meeting. We count
fractional shares. If you have a voting interest, we will send you proxy
material and a form for giving us voting instructions.
All Portfolio shares are entitled to one vote. The votes of all Portfolios are
cast together on an aggregate basis, except on matters where the interests of
the Portfolios differ. In such cases, voting is on a portfolio-by-portfolio
basis. In these cases, the approval of the shareholders in one Portfolio is not
needed in order to make a decision in another Portfolio. Examples of matters
that would require a portfolio-by-portfolio vote are changes in the fundamental
investment policy of a particular Portfolio or approval of an investment
advisory agreement. Shareholders in a Portfolio not affected by a particular
matter generally would not be entitled to vote on it.
The Boards of the Portfolios and Security Life and any other insurance companies
participating in the Portfolios are required to monitor events to identify any
material conflicts that may arise from the use of the Portfolios for variable
life and variable annuity separate accounts. Conflict might arise as a result of
changes in state insurance law or Federal income tax law, changes in investment
management of any Portfolio, or differences in voting instructions given by
owners of variable life insurance policies and variable annuity contracts.
Shares of these Portfolios may also be sold to certain pension and retirement
plans qualifying under Section 401 of the Code and plans that include cash or
deferred arrangements under Section 401(k) of the Code. As a result, there is a
possibility that a material conflict may arise between the interests of owners
generally, or certain classes of owners, and such retirement plans or
participants in such retirement plans. If there is a material conflict, Security
Life will have an obligation to determine what action should be taken, probably
including the removal of the affected Portfolios from eligibility for investment
by the Variable Account. Security Life will consider taking other action to
protect Owners. However, there could be unavoidable delays or interruptions of
operations of the Variable Account that Security Life may be unable to remedy.
In certain cases, when required by state insurance regulatory authorities, we
may disregard instructions relating to changes in the Portfolio's adviser or the
investment policies of the Portfolios. In the event we do disregard voting
instructions, we will include a summary of our actions and give our reasons in
the next semiannual report to Owners.
Under the 1940 Act, certain actions affecting the Variable Account (such as some
of those described under Changes Within The Variable Account, page 18) may
require Owner approval. In that case, you will be entitled to one vote for every
$100 of Division Accumulation Value you have in the Divisions of the Variable
Account. We will cast votes attributable to amounts in the Divisions of the
Variable Account not attributable to Contracts in the same proportion as votes
cast by Owners.
STATE REGULATION
We are regulated and supervised by the Division of Insurance of the Department
of Regulatory Agencies of the State of Colorado, which periodically examines our
financial condition and operations. We are also subject to the insurance laws
and regulations of all jurisdictions in which we do business. The Contract has
been approved by the Division of Insurance of the Department of Regulatory
Agencies of the State of Colorado and by the Insurance Departments of other
jurisdictions. We are required to submit annual statements of our operations,
including financial statements, to the Insurance Departments of the various
jurisdictions in which we do business to determine solvency and compliance with
state insurance laws and regulations.
LEGAL PROCEEDINGS
Security Life, as an insurance company, is ordinarily involved in litigation. We
do not believe that any current litigation is material to Security Life's
ability to meet its obligations under the Contract or to the Variable Account,
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and we do not expect to incur significant losses from such actions. ING America
Equities, the principal underwriter and distributor of the Contact, is not
engaged in any litigation of any material nature.
LEGAL MATTERS
The legality of the Contract described in this prospectus has been passed upon
by the General Counsel and Secretary of Security Life.
EXPERTS
The consolidated financial statements and schedules of Security Life of Denver
Insurance Company and Subsidiaries at December 31, 1996 and 1995, and for each
of the three years in the period ended December 31, 1996, and the financial
statements of the Separate Account at December 31, 1996, and for each of the two
years in the period ended December 31, 1996, appearing in the Statement of
Additional Information have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing in the Statement of
Additional Information and in the Registration Statement, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
FEDERAL TAX CONSIDERATIONS
INTRODUCTION
The ultimate effect of Federal income taxes on the amounts paid for the
Contract, on the investment return on assets held under a Contract, on Annuity
Payouts and on the economic benefits to the Owner, Annuitant or Beneficiary
depends upon the terms of the Contract, upon Security Life's tax status and upon
the tax status of the parties concerned.
The following discussion is general in nature and is not intended as tax advice.
Each party concerned should consult a competent tax adviser. The discussion
below is based upon Security Life's understanding of the Federal income tax laws
as they are currently interpreted and does not include state or local tax
issues. No representation is made regarding the likelihood of continuation of
the Federal income tax laws, the Treasury Regulations, or the current
interpretations by the Internal Revenue Service. For a discussion of Federal
income taxes as they relate to the Portfolios, please see the accompanying
prospectuses for the Portfolios that you are considering.
SECURITY LIFE TAX STATUS
Security Life is taxed as a life insurance company under Part I of Subchapter L
of the Code. Since the Variable Account is not a separate entity from Security
Life and its operations form a part of Security Life, it will not be taxed
separately as a "regulated investment company" under Subchapter M of the Code.
Investment income and realized capital gains on the assets of the Variable
Account are reinvested and taken into account in determining the Contract's
Accumulation Value. Under existing Federal income tax laws, the Variable
Account's investment income, including realized net capital gains, is not taxed
to Security Life. Security Life reserves the right to make a deduction for taxes
should they be imposed with respect to such items in the future.
TAXATION OF ANNUITIES
Section 72 of the Code governs taxation of annuities. In general, the Owner
(holder) of an annuity Contract will not be taxed on increases in value under
the Contract until some form of distribution occurs. (For purposes of this rule,
the amount of any indebtedness that is secured by a pledge or assignment of a
Contract is treated as a payout received on account of a partial withdrawal from
the Contract.) Under certain circumstances, however, the amount of any increase
in the value of a Contract may be subject to current Federal income tax. See
Contracts Owned by Non-Natural Persons, page 40, and Diversification
Standards, page 40.
1. WITHDRAWALS PRIOR TO THE ANNUITY COMMENCEMENT DATE.
Section 72 of the Code provides, in effect, that the Proceeds from a surrender
of the Contract or a partial withdrawal from the Contract prior to the Annuity
Date will be treated as taxable income to the extent that the amount held under
the Contract immediately prior to the distribution exceeds the "investment in
the Contract." The "investment in the Contract" is defined in the Code as that
portion, if any, of Purchase Payments by or on behalf of a taxpayer under the
Contract which was not excluded from the taxpayer's gross income at the time of
such payout less any amounts previously received under the Contract which were
excluded from the taxpayer's gross income at the time of their receipt. For
these purposes, "investment in the Contract" is not affected by the Owner's or
Annuitant's death. That is, the investment in the Contract
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remains the amount of any Purchase Payments made which were not excluded from
gross income. The taxable portion of any distribution received prior to the
Annuity Date will be subject to tax at ordinary income tax rates. For purposes
of this rule, a pledge or assignment of a Contract is treated as a payout
received on account of a partial withdrawal of a Contract.
2. ANNUITY PAYOUTS AFTER THE ANNUITY DATE.
Upon receipt of the Proceeds of a surrender of the Contract after the Annuity
Date, the recipient is taxed to the extent the Proceeds exceed the investment in
the Contract. Upon receipt of an Annuity Payout under the Contract, the
recipient will be taxed on a portion of each payout received if the value of the
Contract exceeds the investment in the Contract. The taxable portion of a payout
received after the Annuity Date will be subject to tax at ordinary income tax
rates.
For Fixed Annuity Payouts, the taxable portion of each payout is determined by
using a formula known as the "exclusion ratio," which establishes the ratio that
the investment in the Contract bears to the total expected amount of Annuity
Payouts for the term of the Contract. That ratio is then applied to each payout
to determine the non-taxable portion of the payout. The remaining portion of
each payout is taxed at ordinary income rates. For Variable Annuity Payouts, in
general, the taxable portion is determined by a formula which establishes a
specific dollar amount of each payout that is not taxed. The dollar amount is
determined by dividing the investment in the Contract by the total number of
expected periodic payouts. The remaining portion of each payout is taxed at
ordinary income rates. For Contracts with Annuity Dates after December 31, 1986,
once the excludable portion of Annuity Payouts to date equals the investment in
the Contract, the balance of the Annuity Payouts will be fully taxable.
Withholding of Federal income taxes on all distributions may be required unless
the recipient elects not to have any amounts withheld and properly notifies
Security Life of that election.
3. PENALTY TAX ON CERTAIN WITHDRAWALS OR DISTRIBUTIONS.
With respect to amounts withdrawn or distributed before the taxpayer reaches Age
59 1/2, a penalty tax is imposed equal to 10% of the taxable portion of amounts
withdrawn or distributed. This penalty is 25% for withdrawals from SIMPLE
Contracts within the first two years of participation. However, the penalty tax
will not apply to withdrawals:
1) made on or after the death of the Owner or, where the Owner is not an
individual, the death of the "primary Annuitant." The primary
Annuitant is defined as the individual the events in whose life are of
primary importance in affecting the timing and amount of the payout
under the Contract;
2) attributable to the taxpayer's becoming totally disabled within the
meaning of Code Section 72(m)(7);
3) which are part of a series of substantially equal periodic payouts
made at least annually for the life (or life expectancy) of the
taxpayer, or the joint lives (or joint life expectancies) of the
taxpayer and his Beneficiary;
4) allocable to investment in the Contract prior to August 14, 1982;
5) under a qualified funding asset (as defined in Code Section
130(d));
6) under an immediate annuity Contract, or
7) on Contracts which are purchased by an employer on termination of
certain types of qualified plans and which are held by the employer
until the employee separates from service.
Other tax penalties may apply to certain distributions as well as to certain
contributions and other transactions under a qualified plan.
If the penalty tax does not apply to a withdrawal as a result of the application
of item 3) above, and the series of payouts are subsequently modified (other
than by reason of death or disability), the tax for the year when the
modification occurs will be increased by an amount (as determined by the
regulations) equal to the tax that would have been imposed but for item 3)
above, plus interest for the deferral period, if the modification takes place
(a) before the close of the period which is five years from the date of the
first payout and after the taxpayer attains Age 59 1/2, or (b) before the
taxpayer reaches Age 59 1/2.
TAXATION OF INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408 permits individuals or their employers to contribute to an
individual retirement program known as an IRA. In addition, distributions from
certain other types of qualified plans may be placed into an IRA on a tax
deferred basis. IRAs are subject to limitations on the amount which may be
contributed and the time when
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<PAGE>
distributions may commence. Tax penalties may apply to contributions in excess
of specified limits, loans or assignments, distributions in excess of a
specified amount annually or that do not meet specified requirements, and in
certain other circumstances.
Under the Code, contributions to an Individual IRA contract may not exceed
$2,000 in any year. For married individuals filing joint returns, each spouse
may establish an IRA Contract and contribute up to $2,000 per year ($4,000 total
even if one spouse doesn't work), provided that the combined contributions do
not exceed the total combined compensation of both spouses. Employer
contributions to a SEP cannot exceed the lesser of $30,000 or 15% of an
employee's compensation. Under a SARSEP established prior to January 1, 1997,
salary reduction contributions are permitted up to a maximum of $7,000, indexed
for inflation. A SARSEP may not be established after January 1, 1997. Under a
SIMPLE plan, employees may elect to make salary reduction contributions up to a
maximum of $6,000 per year, indexed for inflation, and, in addition, the
employer must make either dollar-for-dollar matching contributions up to 3% of
each contributing employee's compensation or 2% of compensation for every
employee earning at least $5,000 per year.
Under the Code, distributions from IRAs generally must begin no later than April
1st of the calendar year following the calendar year in which the Owner attains
Age 70 1/2. If the required minimum distribution is not withdrawn, there may be
a penalty tax in an amount equal to 50% of the difference between the amount
required to be withdrawn and the amount actually withdrawn. See the Statement of
Additional Information for a discussion of the various special rules concerning
the minimum distribution requirements.
Under amendments to the Code which became effective in 1993, distributions from
a qualified plan (other than non-taxable distributions representing a return of
capital, distributions meeting the minimum distribution requirement,
distributions for the life or life expectancy of the recipient(s) or
distributions that are made over a period of more than 10 years) are eligible
for tax-free rollover within 60 days of the date of distribution, but are also
subject to Federal income tax withholding at a 20% rate unless paid directly to
another qualified plan. If the recipient is unable to take full advantage of the
tax-free rollover provisions, there may be taxable income, and the imposition of
a 10% penalty tax (25% in the case of distributions from SIMPLE plans) if the
recipient is under Age 59 1/2.
Security Life provides the Owner with the IRA Disclosure Statement attached to
the Prospectus as Appendix C. It is important that you consult your tax adviser
before purchasing any type of IRA.
DISTRIBUTION-AT-DEATH RULES
The following required distribution rules shall apply if and to the extent
required under Section 72(s) of the Internal Revenue Code:
1) Subject to the alternative election or spouse beneficiary provisions
in subsection (2) or (3) below,
a) If any Owner dies on or after the annuity starting date and
before the entire interest in this Contract has been distributed,
the remaining portion of such interest shall be distributed at
least as rapidly as under the
method of distribution being used as of the date of such death;
b) If any Owner dies before the annuity starting date, the entire
interest in this Contract will be distributed within 5 years
after such death; and
c) If any Owner is not an individual, then for purposes of this
subsection (1), the primary Annuitant under this Contract shall
be treated as the Owner (the "Deemed Owner"), and any change in
the primary Annuitant shall be treated as the death of the Owner.
The primary Annuitant is the individual, the events in the life
of whom are of primary importance in affecting the timing or
amount of the payout under the Contract.
2) If any portion of the interest of an Owner (or a Deemed Owner) in
subsection (1) is payable to or for the benefit of a designated
beneficiary, and such beneficiary elects within 60 days of receipt of
due proof of death to have such portion distributed in an Annuity
Option over a period that: A) does not extend beyond such
beneficiary's life or life expectancy and B) starts within 1 year
after such death (a "Qualifying Distribution Period"); then for
purposes of satisfying the requirements of subsection (1), such
portion shall be treated as distributed entirely on the date such
periodic distributions begin. Such beneficiary may elect any Payout
Period Option for a Qualifying Distribution Period, subject to any
restrictions imposed by any regulations under Section 72(s) of the
Internal Revenue Code.
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<PAGE>
3) If any portion of the interest of an Owner (or a Deemed Owner)
described in subsection (1) is payable to or for the benefit of such
Owner's spouse, or is co-owned by such spouse, then such spouse shall
be treated as the Owner of such portion for purposes of the
requirements of subsection (1).
Our Contract complies with these rules. See the Required Distribution section of
your Contract.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a non-qualified Contract because of the death of
the Owner. Generally, such amounts are includible in the income of the recipient
as follows: (a) if distributed in a lump sum, they are taxed in the same manner
as a full surrender of the Contract, as described above, or (b) if distributed
under an Annuity Option, they are taxed in the same manner as Annuity Payouts,
as described above.
CONTRACTS OWNED BY NON-NATURAL PERSONS
For contributions to Contracts where the Contract is held by a non-natural
person (for example, a corporation) the income on that Contract (generally the
increase in the Cash Surrender Value less the Purchase Payments) is includible
in taxable income each year. The rule does not apply where the non-natural
person is the nominal Owner of a Contract and the Beneficiary is a natural
person. The rule also does not apply where the Contract is acquired by the
estate of a decedent, where the Contract is an IRA Contract, where the Contract
is a qualified funding asset for structured settlements or where the Contract is
purchased on behalf of an employee upon termination of a qualified plan.
If the Contract is held by a trust, contact your tax adviser for the tax
effects.
SECTION 1035 EXCHANGES
Section 1035 of the Code generally provides that no gain or loss shall be
recognized on the exchange of an annuity Contract for another. If the exchanged
contract was issued prior to August 14, 1982, the new Contract retains some of
the exchanged contract's tax attributes. The pre-August 14, 1982, cost recovery
rules will continue to apply to distributions characterized as amounts not
received as an annuity with respect to such distributions allocable to
investments made before August 14, 1982. Under the cost recovery rule, such
amounts are received tax-free until the taxpayer has received amounts equal to
the pre-August 14, 1982 investments. Amounts allocable to post-August 13, 1982,
investments are subject to the interest first rule. In contrast, a new Contract
issued in exchange for a contract issued before January 18, 1985, does not
retain the exchanged contract's grandfathering for purposes of the penalty and
distribution at death rules. Special rules and procedures apply to Section 1035
transactions. Prospective Owners wishing to take advantage of Section 1035
should consult their tax advisers.
ASSIGNMENTS
A transfer of Ownership, a collateral assignment or the designation of an
Annuitant or other Beneficiary who is not also the Owner may result in tax
consequences to the Owner, Annuitant or Beneficiary that are not discussed
herein. An Owner contemplating such a transfer or assignment of a Contract
should contact a competent tax adviser with respect to the potential tax effects
of such a transaction.
IRA Contracts may not be transferred or assigned.
MULTIPLE CONTRACTS RULE
The Technical and Miscellaneous Revenue Act of 1988 (the "1988 Act") provides
that, for Contracts entered into on or after October 21, 1988, for purposes of
determining the amount of any distribution under Section 72(e) (amounts not
received as annuities) that is includible in gross income, all non-qualified
deferred annuity contracts issued by the same (or an affiliated) insurer to the
same Owner during any calendar year are to be aggregated and treated as one
contract. Thus, any amount received under any such contract prior to the
contract's annuity starting date, such as a partial withdrawal, dividend, or
loan, will be taxable (and possibly subject to the 10% penalty tax) to the
extent of the combined income in all such contracts. The Treasury Department has
specific authority to issue regulations that prevent the avoidance of Section
72(e) income through the serial purchase of annuity contracts or otherwise. In
addition, there may be other situations in which the Treasury Department may
conclude that it would be appropriate to aggregate two or more contracts
purchased by the same Owner. Accordingly, an Owner should consult a competent
tax adviser before purchasing more than one annuity contract.
DIVERSIFICATION STANDARDS
To comply with the diversification regulations ("Regulations") issued under Code
Section 817(h), the
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<PAGE>
Divisions will be required to diversify their investments. The Regulations
generally require that on the last day of each quarter of a calendar year
1) no more than 55% of the value of each Division is represented by any one
investment;
2) no more than 70% is represented by any two investments;
3) no more than 80% is represented by any three investments; and
4) no more than 90% is represented by any four investments.
With respect to each Division, a "look-through" rule applies which suggests that
each Division of the Variable Account will be tested for compliance with the
percentage limitations by looking through to the assets of the Portfolio in
which that Division invests. All securities of the same issuer are treated as
one investment. As a result of the 1988 Act, each government agency or
instrumentality will be treated as a separate issuer for the purposes of these
limitations.
In connection with the issuance of the temporary diversification regulations in
1986, the Treasury Department announced that such regulations did not provide
guidance concerning the extent to which owners may direct their investments to
particular divisions of a separate account without being considered the owners
of the assets of the account. It is possible that regulations or revenue rulings
may be issued in this area at some time in the future. It is not clear at this
time what these regulations or rulings would provide. It is possible that if
such regulations or rulings are issued, the Contract may need to be modified in
order to remain in compliance. For these reasons, Security Life reserves the
right to modify the Contract, as necessary, to prevent the Owner from being
considered the Owner of the assets of the Variable Account.
The Portfolios in which the Variable Account invests have provided certain
assurances that they will meet the applicable diversification standards.
However, in the case of a master feeder arrangement, we note that the Internal
Revenue Service had not previously ruled that the "look-through" rule referenced
above may be applied to both the feeder fund and the master fund in order to
meet the diversification requirements of Code Section 817(h). Thus, in
connection with the conversion of the Neuberger & Berman Advisers Management
Trust into a master feeder structure effective May 1, 1995 (see "Facts about
Security Life and the Variable Account -- The Portfolios"), Neuberger & Berman
Management Incorporated advised Security Life that it applied for a private
letter ruling from the Internal Revenue Service authorizing such a multiple
look-through. On June 29, 1995, the Internal Revenue Service issued a favorable
private letter ruling regarding the applicability of the "look-through"
provisions of Internal Revenue Code Section 817(h) to the master feeder
structure.
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<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<S> <C>
SECURITY LIFE 2
THE ADMINISTRATOR 2
PERFORMANCE INFORMATION 2
SEC Yield for the Division Investing in the Fidelity VIP Money Market Portfolio 2
SEC Standard Average Annual Total Return for Non-money Market Divisions 3
Accumulation Unit Value 3
Determination of Annuity Payouts 4
IRA INCOME PROGRAM 6
OTHER INFORMATION 6
FINANCIAL STATEMENTS 7
</TABLE>
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<PAGE>
APPENDIX A
EXAMPLE 1: HYPOTHETICAL ILLUSTRATION OF SYSTEMATIC INCOME PROGRAM WITHDRAWALS
The following example illustrates how Systematic Income Program partial
withdrawals would work if you elected a monthly withdrawal program with the
maximum monthly income payment percentage of 1.25% of Accumulation Value, based
on hypothetical Accumulation Values as shown:
<TABLE>
<CAPTION>
Accumulation Value Systematic Income
Month At Time of Withdrawal Program Withdrawal Amount
----- --------------------- -------------------------
<S> <C> <C>
1 $8,500.00 $106.25
2 $8,425.00 $105.31
3 $8,700.00 $108.75
4 $8,150.00 $101.87
5 $7,900.00 $ 98.75
</TABLE>
Because the fifth monthly Systematic Income Program withdrawal amount would be
less than $100 (and is based on the maximum monthly percentage of 1.25%), the
Systematic Income Program would be canceled after this withdrawal, and no
withdrawal would be made for the sixth and subsequent months.
For additional information about the Systematic Income Program, see Systematic
Income Program, page 26.
EXAMPLE 2: HYPOTHETICAL ILLUSTRATION OF A SERIES OF DEMAND WITHDRAWALS
The following example illustrates how we would determine the surrender charge
(and the amounts that could be withdrawn without a surrender charge) and the
partial withdrawal transaction charge for a hypothetical series of three demand
withdrawals made in the third Contract Year.
For example, assume that:
1) An Owner has made an initial Purchase Payment of $30,000 to a Contract;
2) The Owner has not subsequently made any additional Purchase Payments to
the Contract;
3) The Owner has not taken any partial withdrawals during the first two
Contract Years; and
4) The Accumulation Value of the Contract as of the second Contract
Anniversary is $34,000.
The surrender and partial withdrawal transaction charges associated with each of
the following three hypothetical demand withdrawals would therefore be as
follows:
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<PAGE>
<TABLE>
<CAPTION>
First Gross Second Gross Third Gross
Demand Withdrawal Demand Withdrawal Demand Withdrawal
----------------- ----------------- -----------------
<S> <C> <C> <C>
1) Hypothetical Accumulation Value $34,200 $33,000/1/ $29,400/2/
Before Demand Withdrawal
2) 15% Of The Accumulation Value As Of $ 5,100 $ 3,100/3/ $ 0/4/
The Last Contract Anniversary (Less
Any Gross Partial Withdrawals Already
Made During The Contract Year That Are
Not Considered To Be Withdrawals Of
Purchase Payments)
3) Amount Of Accumulation Value $ 4,200/5/ $ 3,000/6/ $ 400/7/
Attributable To Earnings
4) Gross Demand Withdrawal Requested/8/ $ 2,000 $ 4,000 $ 3,000
5) Amount Withdrawn Attributable To Any $ 2,000 $ 3,000 $ 400
Earnings In The Contract
6) Amount Withdrawn Attributable To $ 0 $ 0 $ 0
Purchase Payments Held For At Least
Five Full Contract Years Since The
Contract Anniversary At The End Of The
Contract Year In Which The Purchase
Payment Was Made
7) Amount Withdrawn Attributable To The $ 0 $ 100 $ 0
Amount By Which 2) Exceeds 3)
8) Amount Withdrawn Attributable To Any $ 0 $ 900 $ 0
Purchase Payments Remaining On A
First-In, First-Out Basis
9) Surrender Charge $ 0 $ 45 $ 130
[8) Multiplied By 5%, The
Applicable Surrender Charge
Percentage For Surrenders Of
Purchase Payments Made During The
Contract Year.]
10) Partial Withdrawal Transaction $ 0 $ 25 $ 25
Charge
11) Amount Of Net Demand Withdrawal [4) $ 2,000 $ 3,930 $ 2,845
Minus 9) Minus 10)]
</TABLE>
For more information, see Demand Withdrawal Option, page 26, and The Amount You
May Withdraw Without a Surrender Charge, page 27.
____________________
/1/ Accumulation Value after the first Net Demand Withdrawal ($32,200) plus any
Earnings since that time, assumed to be $800.
/2/ Accumulation Value after the second Net Demand Withdrawal ($29,000) plus any
Earnings since that time, assumed to be $400.
/3/ $5,100 minus $2,000, the amount of Gross Partial Withdrawals already made
during the Contract Year that are not considered to be withdrawals of
Purchase Payments.
/4/ $5,100 minus $2,000 minus $3,100, the amount of Gross Partial Withdrawals
already made during the Contract Year that are not considered to be
withdrawals of Purchase Payments.
/5/ Current Accumulation Value ($34,200) minus amount of initial Purchase
Payment ($30,000).
/6/ Cumulative Earnings remaining after the first Demand Withdrawal ($2,200)
plus the Earnings since that time, assumed to be $800.
/7/ Cumulative Earnings remaining after the first and second Demand Withdrawals
($0) plus the Earnings since that time, assumed to be $400.
/8/ We would deem the Gross Demand Withdrawal to be made in the following
order --5), 6), 7) and 8) -- for purposes of determining the amount of any
surrender charge. Withdrawals deemed to be taken from 5), 6) or 7) are not
subject to a surrender charge.
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<PAGE>
EXAMPLE 3: HYPOTHETICAL ILLUSTRATION OF A FULL SURRENDER
The following example illustrates how we impose the surrender charge and
administrative charge on full surrenders to arrive at the Cash Surrender Value.
For example, assuming that:
1) An Owner has made an initial Purchase Payment of $30,000 to a Contract; and
2) The Owner has not made any additional Purchase Payments to the Contract;
The Owner's Cash Surrender Value would be as follows, based on hypothetical
Accumulation Values, if the Contract were surrendered at the end of the
applicable time periods:
<TABLE>
<CAPTION>
If You
Surrender Your Hypothetical Purchase Surrender Cash
Contract in Accumulation Earnings Payment Charge Surrender Administrative Surrender
Contract Year Value Withdrawal Withdrawn Percentage Charge Charge Value
- ------------- ----- ---------- --------- ---------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
1 $31,000 $ 1,000 $30,000 7% $2,100 $30 $28,870
3 $40,000 $10,000 $30,000 5% $1,500 $30 $38,470
6 $60,000 $30,000 $30,000 2% $ 600 $30 $59,370
8 $70,000 $40,000 $30,000 0% $ 0 $30 $69,970
</TABLE>
For more information, see Surrender Charge, page 31, and Administrative Charge,
page 32.
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<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
We may advertise certain performance related information for the Divisions of
the Variable Account, including yields and average annual total return. Certain
Portfolios have been in existence prior to the commencement of the offering of
the Contract described in this prospectus. We may advertise the performance of
the Divisions that invest in these Portfolios for these prior periods. The
performance information of any period prior to the commencement of the offering
of the Contract is calculated as if the Contract had been offered during those
periods using current charges and expenses.
Performance information for a Division of the Variable Account may be compared,
in reports and promotional literature, to: (i) the Standard & Poor's 500 Index
("S & P 500"), the Dow Jones Industrial Average ("DJIA"), the Shearson/Lehman
Intermediate Government/Corporate Bond Index, the Shearson/Lehman Long-Term
Government/Corporate Bond Index; the Donoghue Money Fund Average, the U.S.
Treasury Note Index, or other indices measuring performance of a pertinent group
of securities so that investors may compare that Division's results with those
of a group of securities widely regarded by investors as representative of the
securities markets in general; (ii) other variable annuity separate accounts or
other investment products tracked by Lipper Analytical Services, Variable
Annuity Research Data Service ("VARDS') or Morningstar, Inc. -- three widely
used independent research firms which rank mutual funds and other investment
companies by overall performance, investment objectives, and assets -- or
tracked by other ratings services, companies, publications, or persons who rank
separate accounts or other investment products on overall performance or other
criteria; and (iii) the Consumer Price Index (as a measure for inflation) to
assess the real rate of return from an investment in the Contract. Unmanaged
indices may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
Normally these rankings and ratings are published by independent tracking
services and publications of general interest including, but not limited to:
Lipper, VARDS, Morningstar, Donoghue, magazines such as Money, Forbes,
Kiplinger's Personal Finance Magazine, Financial World, Consumer Reports,
Business Week, Time, Newsweek, National Underwriter, U.S. News and World Report,
On Wall Street, Smart Money, Investment Adviser, Securities Industry Management,
Life Insurance Selling, Financial Planning; rating services such as LIMRA,
Value, Best's Agent Guide, Western Annuity Guide, Comparative Annuity Reports,
and other publications such as The Wall Street Journal, Barron's, Investor's
Daily, and Standard & Poor's Outlook.
Performance information for any Division of the Variable Account reflects only
the performance of a hypothetical Contract under which the Division Accumulation
Value is allocated to that Division during the particular time period on which
the calculations are based. The performance information is based on historical
results and is not intended to indicate past or future performance under an
actual Contract.
Below are tables of total return for each Division of the Variable Account for
the most recent one, five and ten years (or since inception of the underlying
Portfolio if less than ten years). Below also are the 7-day yield and effective
yield for the Division investing in the Fidelity VIP Money Market Portfolio.
The yield of the Division investing in the Fidelity VIP Money Market Portfolio
refers to the income generated by an investment in the Division over a 7-day
period (which period will be specified in the advertisement). This income is
then "annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The effective yield calculation is similar, but when
annualized, the income earned by an investment in the Division is assumed to be
reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment. The yield and
effective yield of this Division reflects the deduction of all charges, expenses
and fees applicable to that Division but not the surrender charge, partial
withdrawal transaction charge, excess transfer charge, or taxes on Purchase
Payments. Yield and effective yield are calculated as shown in the Statement of
Additional Information.
Quotations of the average annual total returns are based on the average
percentage change in value of a hypothetical investment in the specific Division
over a given period of one, five or ten years (or, if less, up to the life of
the Portfolio.) They reflect the deduction of the surrender charge that would
apply if an Owner terminated the Contract at the end of the period indicated,
the
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<PAGE>
administrative charge, the mortality and expense risk charge and the asset-
based administrative charge as well as fees and charges of the respective
Portfolio. In addition, average annual total return quotations may also be
accompanied by total return quotations, computed on the same basis as described
above, except deductions will not include the surrender charge. Average annual
total return is calculated as shown in the Statement of Additional Information.
The performance results shown in the following tables are not an estimate or
guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Owner.
Performance information should be considered in light of the investment
objectives, characteristics and quality of the Portfolios in which that Division
invests, and the market conditions during the given time period, and should not
be considered as a representation of what may be achieved in the future. For a
description of the methods used to determine yield and total return for the
Divisions of the Variable Account, see the Statement of Additional Information.
Reports and promotional literature may also contain other information, including
the ranking of any Division derived from rankings of variable annuity separate
accounts or other investment products tracked by Lipper Analytical Services,
Morningstar, Inc., or by ratings services, companies, publications, or other
persons who rank separate accounts or other investment products on overall
performance or other criteria.
The Variable Account may also report other information, including the effect of
tax-deferred compounding on a Division's investment returns, or returns in
general, which may be illustrated by tables, graphs, or charts. All income and
capital gains derived from Division investments are reinvested and can lead to
substantial long-term accumulation of assets, provided that the Division
investment experience exceeds 1.52% on an annual basis over many years.
Security Life is also ranked and rated by independent financial rating services,
among which may include A. M. Best, Duff & Phelps, Moody's, Standard & Poor's
and Weiss Research, Inc. The purpose of these ratings is to reflect the
financial strength or claims-paying ability of Security Life. The ratings are
not intended to reflect the investment experience or financial strength of the
Variable Account.
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<PAGE>
PERFORMANCE CHART
The information below shows how the actual charges of a hypothetical contract
held for specified time periods ending December 31, 1996, would affect the
investment experience of the various Divisions available under the Contract.
The rates of return assume a $1,000 single purchase payment allocated to each
individual Division and no taxes deducted from the Purchase Payment. The
returns for a Contract that is not surrendered and for the 7-day yield for the
Division investing in the Fidelity VIP Money Market Portfolio include all
deductions for contract charges except the surrender charge. The returns for a
Contract that is surrendered reflect all Contract costs -- including the
surrender charge -- that would apply if the Contract were terminated at the end
of the period indicated. (The maximum sales surrender charge on each payment is
7% the first year, decreasing 1% each year thereafter and equaling 0% after six
years.) The maximum $30 annual administrative charge is reflected using a
formula which allows this charge to be expressed as a percentage of the average
Contract size for existing Contracts. Because the average Contact account size
is greater than $1,000, the expense effect of the annual administrative charge
is reduced accordingly.
<TABLE>
<CAPTION>
Total Average Annual Returns Total Average Annual Returns
Assuming Contract Not Surrendered Assuming Contract Surrendered
- ------------------------------------------------------------------------------------------------------------------------------------
Shorter of Shorter of
Portfolio 10 Years or 10 Years or
Division Inception 1 Year 5 Years Inception 1 Year 5 Years Inception
- -------- --------- ----- ------- ----------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Neuberger & Berman Advisers Management Trust
Limited Maturity Bond Portfolio 09-10-84 2.63% 3.64% 4.99% -4.37% 3.11% 4.99%
Government Income Portfolio 03-22-94 -0.31% N/A 3.45% -7.31% N/A 1.73%
Growth Portfolio 09-10-94 7.40% 8.08% 9.68% 0.40% 7.64% 9.68%
Partners Portfolio 03-22-94 27.53% N/A 19.83% 20.53% N/A 18.51%
The Alger American Fund
Alger American Small Capitalization Portfolio 09-21-88 2.51% 9.25% 18.35% -4.49% 8.82% 18.35%
Alger American MidCap Growth Portfolio 05-03-93 10.12% N/A 22.18% 3.12% N/A 21.53%
Alger American Growth Portfolio 01-09-89 11.54% 14.80% 16.87% 4.54% 14.45% 16.87%
Alger American Leveraged AllCap Portfolio 01-25-95 10.27% N/A 39.15% 3.27% N/A 36.86%
Fidelity Variable Insurance Products Fund
VIP Growth Portfolio 10-09-86 12.87% 13.35% 13.35% 5.87% 12.98% 13.35%
VIP Overseas Portfolio 01-28-87 11.41% 7.41% 6.18% 4.41% 6.95% 6.18%
VIP Money Market Portfolio* 04-01-82 3.71% 2.86% 4.28% -3.29% 2.32% 4.28%
Fidelity Variable Insurance Products Fund II
VIP II Asset Manager Portfolio 09-06-89 12.78% 9.48% 9.93% 5.78% 9.06% 9.93%
VIP II Index 500 Portfolio 08-27-92 20.88% N/A 15.25% 13.88% N/A 14.82%
INVESCO Variable Investment Funds, Inc.
INVESCO VIF - Total Return Portfolio 06-02-94 10.39% N/A 12.16% 3.39% N/A 10.52%
INVESCO VIF - Industrial Income Portfolio 08-10-94 20.34% N/A 19.52% 13.34% N/A 17.87%
INVESCO VIF - High Yield Portfolio 05-27-94 14.75% N/A 12.16% 7.75% N/A 10.54%
INVESCO VIF - Utilities Portfolio 01-01-95 10.96% N/A 9.15% 3.96% N/A 6.37%
Van Eck Worldwide Insurance Trust
Worldwide Balanced Fund 12-23-94 9.87% N/A 3.82% 2.87% N/A 1.41%
Worldwide Hard Assets 09-01-89 16.15% 12.74% 6.52% 9.15% 12.36% 6.52%
</TABLE>
*The yield and effective yield for the Division investing in the Fidelity VIP
Money Market Portfolio was 3.62% and 3.68%, respectively, as of December 31,
1996.
The above performance figures reflect past performance only. They neither
guarantee nor predict future investment results under a Contract. Actual rates
of return and values will fluctuate, and you may have a gain or loss when money
is withdrawn from the Contract. The Accumulation Values of the Contract will
depend upon a number of factors, including what investment allocations you
choose and the experience of the Divisions in which you invest.
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APPENDIX C
DISCLOSURE STATEMENT
SECURITY LIFE OF DENVER INSURANCE COMPANY
EXCHEQUER ANNUITY
PROTOTYPE VARIABLE INDIVIDUAL RETIREMENT ANNUITY ACCOUNT
1. What is an IRA?
An IRA is intended to enable you to plan for your retirement by creating a
personal "retirement plan" subject to certain federal income tax
advantages, including, in some cases, a tax deduction for contributions. In
addition, any earnings on your IRA will not be subject to federal income
tax until you actually begin to receive a distribution from your account.
The state income tax treatment of your account may differ, and details
should be available from your state taxing authority or your own tax
adviser. As with most other laws that provide special tax treatment, there
are certain restrictions and limitations involved with respect to your
IRA.
2. What if I establish an Individual Retirement Annuity (IRA) Account and then
change my mind?
You may revoke your IRA account at anytime and are entitled to a full
refund of any amount you have contributed to this account if you revoke the
account before the end of the 10th day following the day you execute the
account. The period of time during which you may revoke the account is
called the "Free Look" period. You may revoke the account in writing by
mailing or delivering a written notice of your intent to revoke on or
before the 10th day after the day you execute the account. Your notice must
be postmarked on or before the 10th day after the day you executed the
account. To revoke the account, mail or deliver the revocation to:
Security Life of Denver
Customer Service Center
P.O. Box 173763
Denver, Colorado 80217-3763
800-933-5858
3. How may I make contributions to my IRA?
You may make annual contributions to your IRA from your own earnings, or
those of your spouse if you are not employed, or you may make special
rollover contributions of distributions from other qualified retirement
plans, including other IRAs. In addition, your employer may establish for
you an IRA known as a "Simplified Employee Pension" (SEP) plan.
4. How much may I contribute annually?
You may contribute annually up to 100% of your compensation or earnings
from self-employment, up to a maximum of $2,000. If your spouse is not
employed, he or she may open a separate IRA. The combined total that may be
contributed to both IRAs is the lesser of 100% of your compensation or
earnings from self-employment, or $4,000. You may divide your contribution
between the IRAs in any way, provided that no more than $2,000 is
contributed to either IRA for any year. (You and your spouse must file a
joint return in order to establish a spousal IRA.) In the case of a SEP,
your employer may contribute annually up to 15% of your compensation, to a
maximum of $30,000. If you participate in a SEP, you may also establish
your own IRA. Rollover contributions are not subject to the annual
limits.
5. How much of my annual contribution may I deduct?
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<PAGE>
The amount of your deduction depends on whether you or your spouse are
covered by a retirement plan at work including a SEP, and on your level of
income. Whether you are covered by a retirement plan at work will be
reported on your Form W-2. For any year before you turn 70-1/2, if you are
not covered by a retirement plan at work, you may deduct the entire amount
of your IRA (and spousal IRA) contributions (up to the maximum contribution
limits). However, if you are covered by a retirement plan at work, the
amount of your IRA contribution that you may deduct depends upon your
income for federal tax purposes. If your "modified adjusted gross income"
shown on your tax return exceeds certain levels ($25,000 if single, $40,000
if married filing jointly), your deduction may be limited or eliminated
(above $35,000 if single, $50,000 if married filing jointly). These rules
are quite complicated. Refer to IRS Publication 590, or 560 regarding SEPs,
or consult your tax advisor for further detail. Even if your deduction is
limited, you may still contribute to your IRA, up to your maximum
contribution limit, on a nondeductible basis.
6. When may I contribute?
You may make your regular IRA contribution for any year not later than the
due date for filing your tax return for the year (not including
extensions). However, rollover IRA contributions are subject to special
limitations on timing discussed below.
7. What if I contribute too much?
There is a 6% penalty tax on any amount you contribute to your IRAs in
excess of your annual contribution limit (except in the case of a rollover
contribution). This may happen, for example, if you contribute to more than
one IRA or contribute during or after the year in which you turn 70-1/2.
The 6% penalty for any "excess contribution" applies for each year until
the excess amount is withdrawn or used up. If the excess contribution is
withdrawn before you are required to file your tax return for the year in
which it was made, there will be no penalty, although you will have
additional tax on any earnings on the excess amount. Excess contributions
for one year may be carried forward and deducted in the next year but the
6% penalty will apply.
8. Who may establish a Security Life of Denver Insurance Company (Security
Life) Individual Retirement Annuity Account?
A Security Life Individual Retirement Annuity Account may be established by
any individual over age 18.
9. What is a rollover contribution?
A rollover contribution is a special contribution method that allows you to
avoid immediate taxation on a qualifying distribution from a retirement
plan or an IRA. However, the rollover contribution must satisfy the
definition of "Eligible Rollover Distribution." See paragraph 10, below,
for requirements.
Generally, any distribution that you receive from a qualified plan will
qualify as an Eligible Rollover Contribution unless the distribution
represents (1) a required minimum distribution or (2) one of a series of
equal payments to you for life (or over your life expectancy or the
combined life expectancies of you and your beneficiary). You cannot roll
over a distribution of contributions you made to your employer's plan,
except for voluntary deductible contributions or pre-tax contributions made
by you to a 401(k) plan. (Voluntary deductible contributions were special
contributions available before 1987.) You may request that your employer
transfer all or any part of your Eligible Rollover Distribution directly to
your IRA under a "Direct Rollover Option."
If you have attained age 70-1/2, you may not roll over a distribution made
if the distribution was required under Code Section 401(a)(9).
If you inherit an individual retirement account, it is not eligible for
rollover into another IRA.
Within 60 days from the date the distribution is received, all or part of
the distribution, except any nondeductible contributions you have made to a
qualified plan, may be put into an IRA.
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<PAGE>
Assets of one IRA may be rolled over tax free into another IRA. However,
once an IRA has been rolled over, it may not be rolled over again into
another IRA for one year.
10. What is a "Direct Rollover Option"?
If you elect to have your Eligible Rollover Distribution paid directly to
you before you make a rollover contribution to your IRA, your employer will
be required to withhold 20% of the Eligible Rollover Distribution to be
applied as a credit toward your income taxes for the year (you may later be
entitled to a tax refund with respect to some or all of the withheld
amount). Accordingly, the amount available to be rolled over to your IRA
will be reduced by 20%, unless you choose to make it up from other
available funds. If you do not make up the difference, the amount withheld
will be treated as a taxable distribution to you. In order to avoid this
dilemma, you may instead request that your employer transfer all or any
part of your Eligible Rollover Distribution directly to your IRA as a
"Direct Rollover Option." The 20% withholding tax does not apply to any
amount that is transferred to your IRA under the Direct Rollover Option.
Your employer will provide you with information as to how to elect the
Direct Rollover Option, sometimes called a trustee-to-trustee transfer. Any
part of your Eligible Rollover Distribution not transferred by you or your
employer as a rollover must be reported by you as ordinary income in the
taxable year in which it is received. However, certain special tax
treatments like lump sum averaging may apply.
11. How do the rollover rules apply to a spouse in the event of death or
divorce?
If you receive an Eligible Rollover Distribution as a death benefit from a
qualified retirement plan in which your spouse participated, you may make a
rollover contribution of all or any portion of the distribution in the same
manner that your spouse may have elected. However, your IRA may not be
treated as a "conduit IRA" (see below) which you may later roll over into
another qualified plan. If you receive an Eligible Rollover Distribution
from your spouse's qualified retirement plan under a "qualified domestic
relations order" in connection with a divorce, you will be eligible to use
the rollover rules in the same manner as your ex-spouse.
12. What is a "conduit" IRA?
If you receive an Eligible Rollover Distribution from your employer's
qualified retirement plan and want to roll it over into another qualified
retirement plan of your new employer, but are not yet eligible to
participate in the new plan, you may roll over the distribution into an IRA
(subject to all of the rollover rules summarized above) and, when you are
finally eligible to participate in your new employer's plan, you may roll
over the amount from your IRA. In order to qualify your IRA as a conduit
IRA, you may not make regular annual contributions to the IRA or make any
other rollover contribution that will not later be eligible for rollover
into your new employer's plan. Instead, you should establish separate
IRAs.
13. What will happen to my contribution?
Your contribution will be used to purchase a deferred variable annuity
Contract from Security Life Insurance Company. Your interest in the
Contract is nonforfeitable and nontransferable.
14. What happens if I borrow on the Contract or invest part of my IRA in
collectibles?
If you borrow on the Contract or pledge the Contract or your benefits under
the Contract as security for a loan, your IRA will cease to be qualified
and the value of your Contract will have to be included in your income for
that year for tax purposes. If you are under age 59-1/2, your federal
income tax also will be increased by a penalty equal to 10% of the value of
the Contract that is included in your income. If you invest any part of an
IRA in collectibles, it will be considered a distribution in the amount of
the cost of the collectible.
15. Is there any other way I can endanger the qualification of my IRA?
If you or your beneficiaries commit a prohibited transaction with respect
to your IRA assets under the plan, your IRA will be disqualified with the
same result and penalty described in Question 14. Borrowing money on your
annuities is an example of a prohibited transaction.
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<PAGE>
16. How are distributions made from an IRA?
Distributions are made in a single lump sum payment, in annuity payments
for your life, in annuity payments for the joint lives of you and your
beneficiary, or in annuity payments for a period certain.
17. When do distributions begin?
Distributions must begin not later than the first day of April following
the calendar year in which you reach age 70-1/2. Distributions should not
begin before you reach age 59-1/2 unless you die, are disabled, or ask
Security Life for a distribution so you can transfer the value of your
Contracts to another plan.
18. What happens if I take a distribution before I reach age 59-1/2?
Unless you are disabled or die or unless the distribution is an eligible
rollover and is rolled over into another plan within 60 days, the
distribution will be included in your income for the year you received it
and you will be subject to a penalty tax equal to 10% of the value of the
distribution.
19. What constitutes disability under the Contract?
Under the Contract, disability means an inability to engage in any
substantial gainful activity because of a physical or mental impairment
that can be expected to result in death or to be of long and indefinite
duration. Your disability for purposes of the Contract must be determined
by a competent physician and proof must be furnished to Security Life.
20. Are there any other tax penalties to which my IRA can be subjected?
A penalty tax of 50% is attached if distribution is not commenced by the
required date under the law and under the distribution provisions of the
plan. The recipient of the distribution must pay this penalty tax. A
penalty tax of 50% also is imposed if a certain minimum level of
distributions is not maintained. Once you reach age 70-1/2, the minimum
amount that is required to be distributed each year is equal to the
remaining balance of your account divided by the remaining number of years
of your life expectancy or the life expectancies of you and your
beneficiary. If Security Life is unable to make distribution because it
cannot locate you or your beneficiary, Security Life may automatically
treat your IRA as if a distribution had been made and issue a W-2.
You may also be subject to a penalty tax of 15% if you receive total
distributions in any year from all of your IRAs and all other qualified
retirement plans in which you participate in excess of certain limitations
(currently $150,000 for annual annuity payments, $750,000 for lump sums,
but these amounts may be increased for future inflation).
21. What if I die?
If you die after distribution has begun, the remaining interest, if any,
will be distributed at least as rapidly as the distribution method used
prior to your death.
If you die before distribution begins, your entire interest will be
distributed as follows:
a. Within five years after the date of your death.
b. If payable to your beneficiary and you have not elected payment in a
single lump sum, your interest will be paid over the life of your
beneficiary or a period certain not longer than the life expectancy of
your beneficiary beginning no later than one year after the date of
your death.
c. If your beneficiary is your surviving spouse, your spouse may elect to
receive payments for life or over a period certain not exceeding the
life expectancy of your surviving spouse. The payment may begin on any
date prior to the date you would have reached age 70-1/2. The
surviving spouse may accelerate these payments at any time.
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<PAGE>
d. If your beneficiary is your surviving spouse, your spouse may treat
the account as his own individual retirement arrangement.
22. What are the federal income tax aspects of my distribution?
Retirement funds accumulated in an IRA are taxable to you when distributed
as described below. The special qualifying lump sum distribution treatment
afforded to distributions from certain types of retirement plans is not
available for an IRA distribution. This rule applies even if the original
contribution to the IRA was a rollover contribution that would have
qualified for special treatment if you had not rolled the lump sum
distribution over into an IRA.
Because nondeductible IRA contributions are made using income that has
already been taxed, the portion of an IRA distribution consisting of
nondeductible contributions will not be taxed again when received by you.
If you make any nondeductible IRA contributions, each distribution from
your IRA will consist of a nontaxable portion (return of nondeductible
contributions) and a taxable portion (return of deductible contributions,
if any, and account earnings).
You must maintain your own records of your nondeductible contributions in
order to avoid double taxation upon distribution.
Thus, you may not take a distribution that is entirely tax-free. The
following formula is used to determine the taxable portion of your
distributions for a taxable year:
<TABLE>
<S> <C> <C> <C>
Remaining
Nondeductible Total Nontaxable
Contributions X Distributions = Distributions
Year-end Total IRA (for the year) (for the year)
Account Balances
</TABLE>
To figure the year-end total IRA account balance, you treat all of your
IRAs as a single IRA. This includes all regular IRAs, as well as Simplified
Employee Pension (SEP) IRAs, and Rollover IRAs. You also add back the
distributions taken during the year.
Example: An individual makes the following contributions to his or her
IRAs:
<TABLE>
<CAPTION>
Year Deductible Nondeductible
<S> <C> <C>
1991 $2,000
1992 1,800
1993 1,000 $1,000
1994 600 1,400
$5,400 $2,400
Deductible Contributions: $5,400
Nondeductible Contributions: $2,400
Earnings on IRAs: $1,200
Total Account Balance of IRAs as of 12/31/94
(including distributions in 1995) $9,000
</TABLE>
In 1995 the individual takes a distribution of $3,000. The total account
balance in the IRAs on 12/31/95 including 1995 distributions is $9,000. The
nontaxable portion of the distributions for 1995 is figured as
follows:
Total nondeductible contributions $2,400
Total account balance in the IRAs $9,000 x $3,000 = $800
times distributions
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<PAGE>
Thus $800 of the $3,000 distribution in 1995 will not be included in the
individual's taxable income. The remaining $2,200 will be taxable for
1995.
23. Can I terminate my IRA?
You may terminate your IRA at any time by notifying Security Life of Denver
Insurance Company in writing that the Contract is to be terminated.
24. Has the Security Life Individual Retirement Annuity been approved by the
Internal Revenue Service?
The Security Life Individual Retirement Annuity has been approved as to
form by the Internal Revenue Service. Approval as to form by the IRS of an
IRA does not represent a determination of the merits of investing in the
IRA.
25. Must I file anything with the IRS?
If you make nondeductible IRA contributions in any year, you must report
the amount of such contributions on Form 8606 filed with your tax return
for the year. In addition, you must file Form 5329 for any year in which
you have made an excess contribution, received a premature distribution
subject to the 10% excise tax, or received an insufficient or excess
distribution.
26. Where can I get additional information?
Additional information can be obtained from any District Office of the
Internal Revenue Service.
27. If I make contributions to my IRA, how will it be determined how much I
will have accumulated by the time I retire or if I decide to withdraw my
funds during the first five years?
The amount of your Accumulation Value is determined by the contributions
you have made, withdrawals taken, administrative charges, the investment
performance of the Divisions in which your funds are invested, mortality
and expense risk charges, and transaction charges which may be incurred as
a result of a requested transaction. Due to the variable nature of the
Contract, the amount of your Accumulation Value may increase or decrease on
any day, and the growth in value of the account is neither guaranteed nor
projected.
For this variable annuity, assuming you make (1) level annual contributions
in the amount of $1,000 on the first day of each Contract year, (2) a
rollover contribution of $1,000 on the first day of the year and no other
contributions, or (3) a rollover contribution of $1,000 on the first day of
each year, an annual administrative charge in the amount of $30 will be
deducted from your Accumulation Value at the end of each Contract year. The
amount of each annual contribution is added to your Accumulation Value and
invested in the options which you have selected.
Each investment Division of the Variable Account will experience a unique
rate of return based upon the underlying mutual funds in which it is
invested. A daily charge is deducted from the amount of your Accumulation
Value which is invested in the Variable Account to compensate Security Life
for mortality and expense risks we assume under the Contract as well as to
cover administrative costs associated with this Contract. This daily charge
during the Accumulation Period is at the rate of 0.004164% (equivalent to
an annual rate of 1.52%) on the assets in the Divisions of the Variable
Account. The daily charge during the Annuity Period is at the rate of
0.003836% (equivalent to an annual rate of 1.40%) on the assets in the
Divisions of the Variable Account.
The Cash Surrender Value is the amount of money which is available to you
at any time upon a surrender of the Contract. The amount of your Cash
Surrender Value is your Accumulation Value less surrender charges, taxes
and the administrative charge of $30. An explanation of each of these
charges follows.
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<PAGE>
SURRENDER CHARGE
This charge is calculated as a percentage of the Purchase Payments
withdrawn. The percentage is based on the number of anniversaries since
the Contract year in which each payment was made.
<TABLE>
<CAPTION>
Anniversaries Since Surrender Charge as a
Purchase Payment Percentage of Purchase
Was Made Payment Withdrawn
<S> <C>
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6+ 0%
</TABLE>
TAXES ON PURCHASE PAYMENTS
Some states and localities charge a tax on Purchase Payments. This tax
can range from 0% to 3.5% of the Purchase Payment (5% for the Virgin
Islands). The charge depends on the Annuitant's state of residence.
Taxes on Purchase Payments are generally incurred as of the Annuity Date,
and we deduct the charge for taxes on Purchase Payments from your
Accumulation Value as of the Annuity Date. Some jurisdictions impose a
tax on Purchase Payments at the time the Purchase Payments are paid,
regardless of the Annuity Date. In those states, our current practice is
to advance the payment of your taxes on Purchase Payments and charge it
against your Accumulation Value either upon surrender of the Contract,
payment of Death Proceeds, or upon the Annuity Date. We reserve the right
to deduct any state and local taxes on Purchase Payments from your
Accumulation Value at the time such tax is due.
Transaction charges may be deducted from your Accumulation Value in the event
you request a particular transaction. These are outlined below:
PARTIAL WITHDRAWAL TRANSACTION CHARGE
Prior to the Annuity Date and while the Contract is in effect after the
Free Look period, you may take one withdrawal each Contract Year without a
partial withdrawal transaction charge. We impose a partial withdrawal
transaction charge to each additional Demand Withdrawal in that Contract
Year equal to the lesser of $25 or 2% of the amount withdrawn.
EXCESS TRANSFER CHARGE
We allow you 12 free transfers among Divisions per Contract Year during
the Accumulation Period. For each additional transfer, we will charge you
$25 at the time each transfer is processed.
After the Annuity Date, only four transfers each Contract Year are
allowed, and no transfer charge will be deducted.
The above represents a brief summary of the tax consequences of maintaining an
IRA. For more information, consult your personal tax advisor or refer to
Publication 590, or 560 regarding SEPs, which is available on request from the
Internal Revenue Service.
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE EXCHEQUER VARIABLE ANNUITY
A FLEXIBLE PREMIUM DEFERRED COMBINATION
FIXED AND VARIABLE ANNUITY CONTRACT
ISSUED BY
SECURITY LIFE OF DENVER INSURANCE COMPANY
AND
SECURITY LIFE SEPARATE ACCOUNT A1
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THE INFORMATION
CONTAINED HEREIN SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE
SECURITY LIFE OF DENVER INSURANCE COMPANY EXCHEQUER DEFERRED COMBINATION FIXED
AND VARIABLE ANNUITY CONTRACT WHICH IS REFERRED TO HEREIN.
THE PROSPECTUS SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR OUGHT TO KNOW
BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS, SEND A WRITTEN REQUEST TO
SECURITY LIFE OF DENVER INSURANCE COMPANY, CUSTOMER SERVICE CENTER, OR TELEPHONE
1-800-933-5858.
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECURITY LIFE 2
THE ADMINISTRATOR 2
PERFORMANCE INFORMATION 2
SEC Yield for the Division Investing In the Fidelity VIP Money Market Portfolio 2
SEC Standard Average Annual Total Return for Non-money Market Divisions 3
Accumulation Unit Value 3
Determination of Annuity Payouts 4
IRA INCOME PROGRAM 6
OTHER INFORMATION 6
FINANCIAL STATEMENTS 7
</TABLE>
DATE OF PROSPECTUS: MAY 1, 1997
DATE OF STATEMENT OF ADDITIONAL INFORMATION: MAY 1, 1997
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<PAGE>
SECURITY LIFE
Security Life's immediate parent, ING America Insurance Holdings, Inc., is a
Delaware corporation whose principal business is to act as the holding company
for ING Groep, N.V.'s U.S. insurance companies.
Security Life's indirect intermediate parents, ING Insurance International B.V.
and ING N.V., are Dutch insurance and financial corporations.
Security Life's ultimate parent, ING Groep, N.V., is a Dutch insurance and
financial corporation primarily engaged in banking and insurance services which
include life and non-life insurance, life reinsurance, funds transfer services,
savings plans, investments in securities and other capital market instruments,
lending, mortgages, leasing, investment banking, debtor finance, debt conversion
and international project management, property development, finance and
management.
Security Life acts as its own custodian for the Variable Account, and its
affiliate, ING America Equities, Inc., is the principal underwriter of the
Contracts in a continuous offering. The aggregate amount of underwriting
commissions paid to the principal underwriter for Contract sales during the
fiscal years ended December 31, 1996, December 31, 1995 and December 31, 1994
were $2,971,177, $1,167,779, and $39,550, respectively.
THE ADMINISTRATOR
Financial Administrative Services Corporation and its affiliate Great-West Life
& Annuity Insurance Company have an Administrative Services Agreement with
Security Life. Financial Administrative Services Corporation or its affiliate
Great-West Life & Annuity Insurance Company provide administrative services for
all of Security Life's variable annuity Contracts, such as Contract underwriting
and issue, Owner service and the administration of the Variable Account.
PERFORMANCE INFORMATION
Performance information for the Divisions of the Variable Account, including the
yield of the Divisions and the total return of the Divisions, may appear in
reports or promotional literature to current or prospective Owners. Negative
values are denoted by parentheses. Performance information for measures other
than total return do not reflect surrender charges which can have a maximum
level of 7.0% of Purchase Payments, and any applicable tax on Purchase Payments,
currently ranging from 0% to 3.5% (5.0% in the Virgin Islands).
See Appendix B, Performance Information, in the Prospectus for a discussion of
the types of performance information that may be published for the Divisions.
SEC YIELD FOR THE DIVISION INVESTING IN THE FIDELITY VIP MONEY MARKET PORTFOLIO
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the Securities and Exchange Commission. Under those
methods, the yield quotation is computed by determining the net change
(exclusive of capital changes) in the value of a hypothetical pre-existing
account having a balance of one Accumulation Unit of the Division at the
beginning of the period, subtracting a charge reflecting deductions from the
account, and dividing the difference by the value of the account at the
beginning of the same period to obtain the base period return, and then
multiplying the return for a seven-day period by (365/7), with the resulting
yield carried to the nearest hundredth of one percent. Effective yield is
computed by compounding the unannualized base period return by using the
formula:
Effective Yield = [base period return + 1]/(365/7)/ - 1
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<PAGE>
SEC STANDARD AVERAGE ANNUAL TOTAL RETURN FOR NON-MONEY MARKET DIVISIONS
Quotations of average annual total return for the Divisions of the Variable
Account are expressed in terms of the average annual compounded rate of return
of a hypothetical investment in a Contract over a period of 1, 5 and 10 years,
calculated pursuant to the following formula:
P (1 + T)n = ERV
Where:
[P] equals a hypothetical initial Purchase Payment of $1,000
[T] equals the average annual total return
[n] equals the number of years
[ERV] equals the ending redeemable value of a hypothetical $1,000 Purchase
Payment made at the beginning of the period (or fractional portion
thereof).
Fees that vary with the size of the account are included assuming an account
size equal to the Division's mean (or median) account size. The SEC requires
that an assumption be made that the Owner surrenders the entire Contract at the
end of the 1, 5 and 10 year periods (or, if less, up to the life of the
Division) for which performance is required to be calculated. This assumption
may not be consistent with the typical Owner's intentions in purchasing a
Contract and may adversely affect advertised or quoted returns.
ACCUMULATION UNIT VALUE
The calculation of the Accumulation Unit Value ("AUV") is discussed in the
Prospectus under Division Accumulation Value in each Division of the Variable
Account. The following illustrations show a calculation of a new AUV and the
purchase of Accumulation Units (using hypothetical examples):
ILLUSTRATION OF CALCULATION OF ACCUMULATION UNIT VALUE
<TABLE>
<S> <C> <C>
1) AUV for the Division at the end of the preceding Valuation Period $5.00000000
2) Net asset value per share of the Portfolio at the end of the preceding Valuation Period $25.00
3) Net asset value per share of the Portfolio at the end of the current Valuation Period $25.50
4) Dividends and capital gains declared and reinvested in the Portfolio during the
current Valuation Period $ 0.55
5) Charge for taxes per share in the Portfolio during the current Valuation Period $ 0.05
6) Gross investment return factor [3) plus 4) minus 5)] divided by 2) 1.04000000
7) Less daily mortality and expense risk charge .00003753
8) Less daily asset-based administrative charge .00000411
9) Accumulation Experience Factor for the current Valuation Period
[6) minus 7) minus 8)] 1.03995836
10) AUV for the Division at the end of the current Valuation Period
[1) times 9)] $5.19979178
11) Net Rate of Return for the Division during the current Valuation Period 3.995836%
</TABLE>
________________________________________________________________________________
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<PAGE>
ILLUSTRATION OF PURCHASE OF UNITS (ASSUMING NO STATE TAX ON PURCHASE PAYMENTS)
<TABLE>
<S> <C> <C>
1) Purchase Payment $100.00
2) AUV for the Division on the effective date of purchase (see above example) $5.00000000
3) Number of Accumulation Units purchased [1) divided by 2)] 20.000000
4) AUV for the Division on the Valuation Date following purchase
(see above example) $5.19979178
5) Value of the Division on the Valuation Date following purchase
[3) multiplied by 4)] $104.00
</TABLE>
DETERMINATION OF ANNUITY PAYOUTS
For Variable Annuity Payouts, you have the option of electing either a 3% or 5%
Benchmark Total Return. The rate is elected at the same time the Variable
Annuity Payout is elected and may not be changed after the Annuity Date.
Electing the 5% Benchmark Total Return would mean a higher initial payment but
more slowly rising or more rapidly falling subsequent payouts if actual
investment experience varied from 5%. The 3% Benchmark Total Return assumption
would have the opposite effect. If the actual investment rate is at the annual
rate of 3% or 5%, the Annuity Payouts will be level if you elected either 3% or
5%, respectively.
As of the Annuity Date, any Division Accumulation Value invested in the
Guaranteed Interest Division will be allocated among the Divisions of the
Variable Account in the same proportion that the Division Accumulation Value of
each Division of the Variable Account bears to the total Division Accumulation
Value of all the Divisions of the Variable Account.
The first Variable Annuity Payout for each Division of the Variable Account will
be the amount that the Proceeds will provide as of the close of business on the
Valuation Date immediately preceding the Supplementary Contract Effective Date
at the Benchmark Total Return chosen. If you have elected to receive payouts
less frequently than monthly, the payout amount is then adjusted according to
the factors in Payouts Other Than Monthly section in the prospectus.
The initial number of Annuity Units for a Division of the Variable Account is
calculated by dividing the payout amount of that Division by the Annuity Unit
Value of that Division as of the Supplementary Contract Effective Date. The
number of Annuity Units for a Division of the Variable Account does not change
throughout the Annuity Period unless a transfer is made between Divisions of the
Variable Account or, if a Combination Annuity Payout is selected, an increase in
allocation from the Variable Annuity Payout to the Fixed Annuity Payout is made.
The total Variable Annuity Payout is the sum of the Variable Annuity Payouts
from all Divisions of the Variable Account.
Variable Annuity Payouts, after the first payout, vary in amount with the
investment experience of the Divisions of the Variable Account. The dollar
amount of each Variable Annuity Payout after the first payout is calculated by
adding the amount due for each Division of the Variable Account. The amount due
for each Division equals:
1) The number of Annuity Units for that Division; multiplied by,
2) The Annuity Unit Value for that Division as of the Valuation Date for which
each payout is due.
The dollar amount of each Annuity Payout after the first payout will not be
affected by variations in our expenses or mortality experience.
The Annuitant or Beneficiary may transfer all or a portion of the Annuity Units
in a Division of the Variable Account to another Division of the Variable
Account. After the transfer, the number of Annuity Units in the Division of the
Variable Account from which you are transferring will be reduced by the number
of Annuity Units transferred. The number of Annuity Units in the Division of the
Variable Account to which the transfer is made will be increased by the number
of Annuity Units transferred multiplied by:
1) The value of an Annuity Unit in the Division of the Variable Account from
which the transfer is made; divided by
2) The value of an Annuity Unit in the Division of the Variable Account to
which the transfer is made.
________________________________________________________________________________
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<PAGE>
ANNUITY UNIT VALUE
We use an Annuity Unit Value to calculate the Variable Annuity Payouts. We set
the Annuity Unit Value at $10 on the Valuation Date when the first Annuity
Period investments in a Division of the Variable Account are made. The Annuity
Unit Value for any later Valuation Period is:
1) The Annuity Unit Value for each Division as of the last prior Valuation
Period multiplied by the Annuity Experience Factor for that Division for
the Valuation Period for which the Annuity Unit Value is being calculated;
divided by
2) An interest factor based on the Benchmark Total Return selected. (This is
done to neutralize the Benchmark Total Return.)
ANNUITY EXPERIENCE FACTOR
For each Division of the Variable Account, the Annuity Experience Factor
reflects the investment experience of the Portfolio in which that Division
invests and the charges assessed against that Division for a Valuation Period.
The Annuity Experience Factor is calculated as follows:
1) The net asset value of the Portfolio in which that Division invests as of
the end of the current Valuation Period; plus
2) The amount of any dividend or capital gains distribution declared and
reinvested in such Portfolio during the current Valuation Period; minus
3) A charge for taxes, if any.
4) The result of 1), 2) and 3) divided by the net asset value of such
Portfolio in which that Division invests as of the end of the preceding
Valuation Period; minus
5) The daily equivalent of the Variable Account Annual Expenses shown in the
Schedule of the Contract for each day in the current Valuation Period.
HYPOTHETICAL EXAMPLES
The following illustrations show, by use of hypothetical examples, the method of
determining the Annuity Unit Value and the amount of several variable Annuity
Payments based on one Division.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
<TABLE>
<S> <C> <C>
1) Annuity Unit Value for the Division at 10.00000000
the end of the preceding Valuation
Period
2) Net asset value per share of the $25.00
Portfolio at the end of the preceding
Valuation Period
3) Net asset value per share of the $25.50
Portfolio at the end of the current
Valuation Period
4) Dividends and capital gains declared $ 0.55
and reinvested in the Portfolio during
the current Valuation Period
5) Charge for taxes per share in the $ 0.05
Portfolio during the current Valuation
Period
6) Gross investment return factor [3) plus 1.04000000
4) minus 5)] divided by 2)
7) Less daily mortality and expense risk 0.00003425
charge
8) Less daily asset based administrative 0.00000411
charge
9) Annuity Experience Factor for the 1.03996164
current Valuation Period
[6) minus 7) minus 8)]
10) Daily factor to compensate for 1.00008099
Benchmark Total Return of 3%
</TABLE>
________________________________________________________________________________
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<PAGE>
<TABLE>
<S> <C> <C>
11) Adjusted Annuity Experience Factor for 1.03987743
the current Valuation Period
[9) divided by 10)]
12) Annuity Unit Value at the end of the 10.39877428
current Valuation Period
[1) times 11)]
</TABLE>
ILLUSTRATION OF VARIABLE ANNUITY PAYMENTS
(ASSUMING NO PREMIUM TAX IS APPLICABLE)
<TABLE>
<S> <C> <C>
1) Number of Accumulation Units at Annuity 1,000.00
Date
2) Accumulation Unit Value 12.55548000
3) Adjusted contract value [1) x 2)] $12,555.48
4) First monthly annuity payment per $ 9.63
$1,000 of adjusted contract value
5) First monthly annuity payment [3 x $ 120.91
4)/1,000]
6) Annuity Unit Value 10.39877428
7) Number of Annuity Units [5/6)] 11.62726194
8) Assume Annuity Unit Value for second 10.50000000
month equal to
9) Second monthly annuity payment [7 x 8)] $ 122.09
10) Assume Annuity Unit Value for third 10.60000000
month equal to
11) Third monthly annuity payment [7 x 10)] $ 123.25
</TABLE>
IRA INCOME PROGRAM
If the Owner has an IRA Contract, we will provide payout of amounts required to
be distributed by the Internal Revenue Service unless the minimum distributions
are otherwise satisfied.
You may either provide us with the minimum required distribution amount or we
will determine the amount that is required to be distributed from your Contract
each year based on the information you give us and various choices you make. The
minimum dollar amount of each distribution is $100. For purposes of calculating
the minimum distribution amount, all demand withdrawals, Systematic Income
Program partial withdrawals, and Annuity Payouts must be summed between IRA
required distribution payment dates to determine if the minimum distribution
amount has been met through these other distributions. If there have been
sufficient distributions made from the Contract during the calendar year, no
further distributions will be made for that year. If there have not been
sufficient distributions made from the Contract during the calendar year, the
remaining minimum distribution amount will be paid to the Owner. At any time
while minimum distributions are being made, if your Cash Surrender Value falls
below $2,000, we will cancel the Contract and send you the amount of the Cash
Surrender Value.
Security Life provides the Owner with the IRA Disclosure Statement attached to
the Prospectus as Appendix C. The Owner specifies whether the withdrawal amount
will be based on a life expectancy calculated on a single life basis (Owner's
life only) or, if the Owner is married, on a joint life basis (Owner's and
spouse's life combined).
Security Life calculates a required distribution amount each year based on the
Code's minimum distribution rules. We do this by dividing the Accumulation Value
as of December 31 of the prior year by the life expectancy. The life expectancy
is recalculated each year unless elected otherwise. Special minimum distribution
rules govern payouts if the Beneficiary is other than the Owner's spouse and the
Beneficiary is more than ten years younger than the Owner.
________________________________________________________________________________
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<PAGE>
OTHER INFORMATION
Registration statements have been filed with the Securities and Exchange
Commission, with respect to the Contracts discussed in this Statement of
Additional Information. Not all of the information set forth in the registration
statements, amendments and exhibits thereto has been included in this Statement
of Additional Information. Statements contained in this Statement of Additional
Information concerning the content of the Contracts and other legal instruments
are intended to be summaries. For a complete statement of the terms of these
documents, reference should be made to the instruments filed with the Securities
and Exchange Commission.
FINANCIAL STATEMENTS
Ernst & Young LLP, independent auditors, 370 17th Street, Suite 4300, Denver, CO
80202, performs annual audits of the consolidated financial statements of
Security Life and the financial statements of Security Life Separate Account
A1.
The consolidated financial statements of Security Life, which are included in
this Statement of Additional Information, should be considered only as bearing
on the ability of Security Life to meet its obligations under the Contract.
________________________________________________________________________________
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<PAGE>
Consolidated Financial Statements
Security Life of Denver
Insurance Company
and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
with Report of Independent Auditors
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors................... 10
Audited Consolidated Financial Statements
Consolidated Balance Sheets...................... 11
Consolidated Statements of Income................ 13
Consolidated Statements of Stockholder's Equity.. 14
Consolidated Statements of Cash Flows............ 15
Notes to Consolidated Financial Statements....... 17
</TABLE>
________________________________________________________________________________
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<PAGE>
Report of Independent Auditors
Board of Directors and Stockholder
Security Life of Denver Insurance Company
We have audited the accompanying consolidated balance sheets of Security Life of
Denver Insurance Company (a wholly-owned subsidiary of ING America Insurance
Holdings, Inc.) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Security Life of
Denver Insurance Company and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
April 11, 1997
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed maturities, at fair value (amortized cost:
1996--$2,765,488; 1995--$2,318,038) $2,875,084 $2,470,944
Equity securities, at fair value (cost: 1996--$4,899;
1995--$8,593) 5,345 8,369
Mortgage loans on real estate 452,795 285,544
Investment real estate, at cost, less accumulated
depreciation (1996--$628; 1995--$640) 1,769 2,908
Policy loans 795,311 754,240
Other long-term investments 11,063 11,870
Short-term investments 7,019 10,946
------------------------
Total investments 4,148,386 3,544,821
Cash 13,821 32,044
Accrued investment income 45,426 38,132
Reinsurance recoverable:
Paid benefits 10,188 11,096
Unpaid benefits 19,703 13,581
Prepaid reinsurance premiums (Note 9) 1,951,012 1,614,959
Deferred policy acquisition costs (DPAC) 673,560 595,232
Property and equipment, at cost, less accumulated
depreciation (1996--$21,407; 1995--$19,556) 38,848 40,418
Federal income tax recoverable (Note 10) - 62,990
Indebtedness of related parties 5,383 33,418
Other assets 99,683 64,314
Separate account assets (Note 7) 124,986 31,825
------------------------
Total assets $7,130,996 $6,082,830
========================
</TABLE>
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits (Note 9):
Life and annuity reserves $3,834,140 $3,328,405
Guaranteed investment contracts 1,911,201 1,520,926
Policyholders' funds 81,273 75,809
Advance premiums 236 231
Accrued dividends and dividends on deposit 20,338 19,886
Unpaid claims 88,074 79,821
Funds held under reinsurance treaties 18,967 32,793
---------------------------
Total future policy benefits 5,954,229 5,057,871
Accounts payable and accrued expenses 75,790 75,019
Indebtedness to related parties 5,427 16,224
Long-term debt to related parties (Note 11) 75,000 50,032
Accrued interest on long-term debt to
related parties (Note 11) 3,700 24
Other liabilities 53,311 60,443
Federal income taxes payable (Note 10) 11,883 -
Deferred federal income taxes (Note 10) 48,541 44,746
Separate account liabilities (Note 7) 124,986 31,825
---------------------------
Total liabilities 6,352,867 5,336,184
Commitments and contingent liabilities
(Notes 8, 9 and 14)
Stockholder's equity (Note 12):
Common stock, $20,000 par value:
Authorized 149 shares
Issued and outstanding 144 shares 2,880 2,880
Additional paid-in capital 302,722 297,422
Net unrealized gains on investments 58,718 72,973
Retained earnings 413,809 373,371
---------------------------
Total stockholder's equity 778,129 746,646
---------------------------
Total liabilities and stockholder's equity $7,130,996 $6,082,830
===========================
</TABLE>
See accompanying notes.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Income
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
Revenues:
Traditional life insurance premiums $ 118,200 $ 124,619 $ 140,633
Universal life and investment product charges 202,081 202,908 164,526
Reinsurance premiums assumed 333,851 321,731 299,632
------------------------------------------------
654,132 649,258 604,791
Reinsurance premiums ceded (117,880) (117,061) (101,459)
------------------------------------------------
536,252 532,197 503,332
Net investment income 312,121 256,065 209,605
Net realized gains (losses) on investments 4,770 6,564 (7,245)
Miscellaneous income 526 1,941 6,313
------------------------------------------------
853,669 796,767 712,005
Benefits and expenses:
Benefits:
Traditional life insurance:
Death benefits 235,828 217,136 231,018
Other benefits 71,939 88,326 72,298
Universal life and investment contracts:
Interest credited to account balances 186,908 164,536 139,942
Death benefits incurred in excess of account
balances 54,004 63,672 73,869
Increase in policy reserves and other 121,946 23,895 97,723
funds
Reinsurance recoveries (80,276) (74,305) (73,379)
Product conversions 16,379 74,291
------------------------------------------------
606,728 557,551 541,471
Expenses:
Commissions 20,362 46,605 12,359
Insurance operating expenses 69,580 52,414 50,309
Amortization of deferred policy acquisition costs 94,685 71,450 65,393
------------------------------------------------
791,355 728,020 669,532
------------------------------------------------
Income before federal income taxes 62,314 68,747 42,473
Federal income taxes (Note 10) 21,876 24,296 14,921
------------------------------------------------
Net income before cumulative effect of accounting
changes 40,438 44,451 27,552
Cumulative effect of change in accounting for
postemployment benefits (net of tax) (Note 6) - - (1,381)
------------------------------------------------
Net income $ 40,438 $ 44,451 $ 26,171
================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year $ 2,880 $ 2,880 $ 2,880
==========================================
Additional paid-in capital:
Balance at beginning of year $297,422 $150,792 $ 150,792
Capital contributions 5,300 146,630 -
------------------------------------------
Balance at end of year $302,722 $297,422 $ 150,792
==========================================
Net unrealized gains on investments:
Balance at beginning of year $ 72,973 $ 6,862 $ (131)
Adjustment to beginning balance for
change in accounting method, net of
income taxes of $46,916 (Note 1) - - 87,630
Effect on DPAC of change in accounting
method, net of income taxes of $10,117 - - (18,790)
Net change in unrealized gains (losses),
net of tax (27,716) 118,654 (106,911)
Effect on DPAC of unrealized gains and
losses on fixed maturities, net of tax 13,461 (52,543) 45,064
------------------------------------------
Balance at end of year $ 58,718 $ 72,973 $ 6,862
==========================================
Retained earnings:
Balance at beginning of year $373,371 $329,640 $ 306,349
Net income 40,438 44,451 26,171
Dividends paid to stockholder - (720) (2,880)
------------------------------------------
Balance at end of year $413,809 $373,371 $ 329,640
==========================================
Total stockholder's equity $778,129 $746,646 $ 490,174
==========================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 40,438 $ 44,451 $ 26,171
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefits 585,581 471,331 621,578
Net decrease (increase) in federal income taxes 78,668 33,232 (25,506)
Increase (decrease) in accounts payable and
accrued expenses (6,845) 26,751 3,771
Increase in accrued interest on long-term debt 3,676 24 -
Increase in accrued investment income (7,294) (5,739) (5,651)
Increase in reinsurance recoverable (5,214) (24) (1,767)
Increase in prepaid reinsurance premiums (336,053) (253,968) (397,463)
Net realized investment (gains) losses (4,770) (6,564) 7,245
Depreciation and amortization expense 3,857 4,036 3,500
Policy acquisition costs deferred (152,299) (127,069) (127,305)
Amortization of deferred policy acquisition
costs 94,685 71,450 65,393
Cumulative effect of accounting changes - 1,381
Increase in accrual for postretirement benefits 484 623 851
Other, net (10,055) (9,784) (4,894)
------------------------------------------
Net cash provided by operating activities 284,859 248,750 167,304
INVESTING ACTIVITIES
Securities available-for-sale:
Sales:
Fixed maturities 334,482 357,059 731,460
Equity securities 4,198 4,730 148,176
Maturities--fixed maturities 727,937 280,581 237,586
Purchases:
Fixed maturities (1,522,369) (935,210) (1,202,024)
Equity securities (428) (1,300) (130,856)
Securities held-to-maturity:
Maturities--fixed maturities - 14,156 1,665
Purchases--fixed maturities - (42,454)
Sale, maturity or repayment of investments:
Mortgage loans on real estate 18,102 16,061 17,570
Investment real estate 1,354 215 1,534
Other long-term investments - 1,064 -
</TABLE>
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Purchase or issuance of investments:
Mortgage loans on real estate $(186,228) $(136,218) $ (91,410)
Investment real estate - 14 (156)
Policy loans, net (41,071) (63,746) (72,017)
Other long-term investments 809 (2,169) (399)
Short-term investments, net 3,942 (9,154) 4,099
Additions to property and equipment (4,482) (1,812) (2,280)
Disposals of property and equipment 2,389 79 (177)
------------------------------------
Net cash used by investing activities (661,365) (475,650) (399,683)
FINANCING ACTIVITIES
Increase (decrease) in indebtedness to 42,206 (17,011) 52,231
related parties
Cash contributions from parent 5,300 - 15,000
Receipts from interest sensitive
products
credited to policyholder account 434,726 387,904 250,396
balances
Return of policyholder account balances
on
interest sensitive policies (123,949) (128,948) (89,532)
Dividends paid to stockholder - (720) (2,880)
------------------------------------
Net cash provided by financing 358,283 241,225 225,215
activities
------------------------------------
Net (decrease) increase in cash (18,223) 14,325 (7,164)
Cash at beginning of year 32,044 17,719 24,883
------------------------------------
Cash at end of year $ 13,821 $ 32,044 $ 17,719
====================================
</TABLE>
Noncash transaction:
In 1995, the Company received a capital contribution of $124,630,000 in
fixed maturities and equity securities. The Company's parent also
contributed $22,000,000 in cash to additional paid-in capital. As of
December 31, 1995, the cash representing the capital contribution had
not been received, and the amount is presented as indebtedness of
related parties in the accompanying consolidated balance sheet. The
cash was received by the Company in January 1996.
See accompanying notes.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts and
operations, after intercompany eliminations, of Security Life of Denver
Insurance Company (Security Life) and its wholly-owned subsidiaries: Midwestern
United Life Insurance Company (Midwestern United); First ING Life Insurance
Company of New York, formerly the Urbaine Life Reinsurance Company (First ING);
First Secured Mortgage Deposit Corporation; and ING America Equities, Inc.,
formerly SLD Equities, Inc.
NATURE OF OPERATIONS
Security Life of Denver Insurance Company and its subsidiaries (the Company) is
a wholly-owned subsidiary of ING America Insurance Holdings, Inc. (ING America).
The Company focuses on two markets, the advanced market and reinsurance to other
insurers. The life insurance products offered for the advanced market include
wealth transfer and estate planning, executive benefits, charitable giving and
corporate owned life insurance. These products include traditional life,
interest sensitive life, universal life, variable annuity and variable life.
Operations are conducted almost entirely on the general agency basis and the
Company is presently licensed in all states (approved for reinsurance only in
New York), the District of Columbia and the Virgin Islands. In the reinsurance
market, the Company focuses on automatic reinsurance coverages provided to other
insurance companies.
The significant accounting policies followed by the Company that materially
affect the financial statements are summarized below:
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) which, as to the
insurance companies included in the consolidation, differ from statutory
accounting practices prescribed or permitted by state insurance regulatory
authorities.
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.
________________________________________________________________________________
17
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
Effective January 1, 1994, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 112, Employers' Accounting for Postemployment
Benefits, in accounting for disability benefits. The cumulative effect as of
January 1, 1994 of this change in accounting was to decrease net income by
$1,381,000 (net of tax of $743,000). The effect of the change on 1994 income
before the cumulative effect of the change was not material. Prior to January
1, 1994, the Company recognized the cost of providing these benefits on a cash
basis. Under the new method of accounting, the Company accrues the benefits
when it becomes probable that such benefits will be paid and when sufficient
information exists to make reasonable estimates of the amounts to be paid.
In May 1993, the Financial Accounting Standards Board issued FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities (FASB
115). The Company adopted the provisions of the new standard for investments
held as of or acquired after January 1, 1994. The cumulative effect as of
January 1, 1994 of adopting FASB 115 had no impact on income. The opening
balance of stockholder's equity was increased by $68,840,000 (net of tax of
$36,799,000) to reflect the net unrealized holding gains on securities
classified as available-for-sale previously carried at amortized cost less an
adjustment to deferred policy acquisition costs for the change in expected
future gross margins.
Because of the numerous questions that arose during the implementation of FASB
115, the Financial Accounting Standards Board issued A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities in November 1995. This Special Report provided interpretive guidance
to the implementation of FASB 115 and provided companies with a one-time period
until December 31, 1995 to reassess the appropriateness of the classifications
of all securities held at the time and account for any resulting
reclassifications at fair value. Reclassifications from the held-to-maturity
category that result from this one-time reassessment do not call into question
the intent of an enterprise to hold other debt securities to maturity in the
future. As a result of this reassessment, the Company reclassified all held-to-
maturity securities to the available-for-sale category effective December 26,
1995. The book value of these securities at the date of transfer was
$98,818,000. At transfer, an unrealized gain of $4,082,000 (net of tax of
$2,198,000) was recognized as a direct increase to stockholder's equity.
________________________________________________________________________________
18
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Beginning in 1995, the Company adopted FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan, and Statement No. 118, which amends
Statement 114. Under the amended statement, the 1996 and 1995 allowances for
credit losses related to loans that are identified for evaluation in accordance
with Statement 114 are based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. Adoption of this standard resulted in an
insignificant impact to net income and stockholder's equity.
Effective January 1, 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 amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. Adoption of this standard
resulted in an insignificant impact to net income and stockholder's equity.
INVESTMENTS
Investments are presented 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 not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax and
deferred acquisition cost adjustments, reported in a separate component of
stockholder's equity.
The Company does not hold any securities classified as held-to-maturity or
trading securities.
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.
________________________________________________________________________________
19
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans are carried at the unpaid balances. Investment real estate is
carried at cost, less accumulated depreciation. 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
Premiums for traditional life insurance products, which include those products
with fixed and guaranteed premiums and benefits and consist principally of whole
life insurance policies, are recognized as revenue when due. Revenues for
universal life insurance policies and for investment products consist of policy
charges for the cost of insurance, policy administration charges, and surrender
charges assessed against policyholder account balances during the year.
DEFERRED POLICY ACQUISITION COSTS
Commissions, reinsurance allowances, and other costs of acquiring traditional
life insurance including reinsurance assumed, 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 margins from surrender charges, investments, mortality, and
expenses. This amortization is adjusted retrospectively when estimates of
current or future gross margins 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.
________________________________________________________________________________
20
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE POLICY BENEFITS
Benefit reserves for traditional life insurance products (other than reinsurance
assumed) are computed using a net level premium method including assumptions as
to investment yields, mortality, withdrawals and other assumptions based on the
Company's and industry experience, modified as necessary to reflect anticipated
trends to include provisions for possible unfavorable deviations. Reserve
interest assumptions are those deemed appropriate at the time of policy issue,
and range from 2% to 10%. Policy benefit claims are charged to expense in the
year that the claims are incurred.
Benefit reserves for reinsurance assumed are computed using pricing assumptions
with provisions for adverse deviation. Benefits for level-term reinsurance
assumed are computed to recognize profits in proportion with premiums. Benefit
reserves for all other reinsurance assumed are computed to recognize profits in
proportion to the coverage provided.
Benefit reserves for universal life-type policies (including interest sensitive
products) 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
4.60% to 7.45% during 1996, 4.60% to 8.10% during 1995, and 6.15% to 8.10%
during 1994.
Included in life and annuity reserves is an unearned revenue reserve that
reflects the unamortized balance of excess first year policy service fees over
renewal period policy service fees on universal life and investment products.
These excess fees have been deferred and are being recognized in income over the
periods benefited, using the same assumptions and factors used to amortize
deferred policy acquisition costs.
UNPAID CLAIMS
The liabilities for unpaid claims include estimates of amounts due on reported
claims and claims that have been incurred but were not reported as of December
31. Such estimates are based on actuarial projections applied to historical
claim payment data and are considered reasonable and adequate to discharge the
Company's obligations for claims incurred but unpaid as of December 31.
________________________________________________________________________________
21
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HOME OFFICE PROPERTY AND EQUIPMENT
Home office property and equipment are carried at cost less accumulated
depreciation. Depreciation for major classes of assets is calculated on a
straight-line basis.
PARTICIPATING INSURANCE
The Company accrues a liability for earnings on participating policies that
cannot inure to the benefit of the Company's stockholder. The liability is
determined based on earnings on participating policies in excess of 10% of
profits on participating business before payment of policyholder dividends. The
liability for these undistributed earnings was $6,211,000 and $6,218,000 at
December 31, 1996 and 1995, respectively. Participating business approximates
.4% of the Company's ordinary life insurance in force and 1.4% of premium
income. Earnings for participating insurance are based on the actual earnings
of the participation block of policies. Expenses and taxes are allocated based
on the amount of participating insurance in force. Investment income is
allocated based on the yield of the participating investment portfolio. The
amount of dividends to be paid is determined annually by the Board of Directors.
Amounts allocable to participating policyholders are based on published dividend
projections or expected dividend scales. Dividends of $3,307,000, $2,964,000,
and $3,683,000 were incurred in 1996, 1995, and 1994, respectively.
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. Included as a component of
operating activities is interest paid of $1,016,000, $4,861,000, and $538,000
for 1996, 1995, and 1994, respectively.
________________________________________________________________________________
22
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GUARANTY FUND ASSESSMENTS
Insurance companies are assessed the costs of funding the insolvencies of other
insurance companies by the various state guaranty associations generally based
on the amount of premium companies collect in that state. The Company accrues
the cost of future guaranty fund assessments based on estimates of insurance
company insolvencies provided by the National Organization of Life and Health
Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in
each state. The Company reduces the accrual by credits allowed in some states
to reduce future premium taxes by a portion of assessments in that state.
PENDING ACCOUNTING STANDARD
During 1996, the FASB issued Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which requires
an entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when control has
been surrendered in accordance with the criteria provided in the Statement. The
Company will apply the new rules prospectively to transactions beginning in the
first quarter of 1997. Based on current circumstances, the Company believes the
application of the new rules will not have a material impact on the financial
statements.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been reclassified
to conform to the 1996 presentation.
2. ACQUISITION
During 1994, Security Life contributed capital of $317,000 in creation of ING
America Equities, Inc., a wholesale broker/dealer incorporated September 27,
1993 and approved for membership in the National Association of Securities
Dealers on August 18, 1994. The business of ING America Equities, Inc. consists
only of distribution of variable life and annuity contracts. ING America
Equities, Inc. does not hold customer funds or securities.
________________________________________________________________________________
23
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS
The amortized cost and fair value of investments in fixed maturities and equity
securities are as follows at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations
of U.S. government corporations and
agencies $ 88,526 $ 1,035 $ 858 $ 88,703
States, municipalities and political
subdivisions 71,857 984 1,058 71,783
Public utilities securities 105,110 1,130 748 105,492
Debt securities issued by foreign
governments 3,272 - - 3,272
Corporate securities 921,565 20,095 5,646 936,014
Mortgage-backed securities 1,273,251 108,367 18,924 1,362,694
Other asset-backed securities 299,809 8,186 1,286 306,709
Derivatives hedging fixed maturities
(Note 4) 2,098 292 1,973 417
----------------------------------------------
Total fixed maturities 2,765,488 140,089 30,493 2,875,084
Preferred stocks (nonredeemable) 2,112 66 301 1,877
Common stocks 2,787 756 75 3,468
------------------------------------------------
Total $2,770,387 $140,911 $30,869 $2,880,429
================================================
</TABLE>
________________________________________________________________________________
24
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations
of U.S. government corporations and
agencies $ 99,780 $ 3,503 $ 154 $ 103,129
States, municipalities and political
subdivisions 74,126 1,760 234 75,652
Public utilities securities 76,470 2,841 50 79,261
Debt securities issued by foreign
governments 3,272 - - 3,272
Corporate securities 659,902 34,246 911 693,237
Mortgage-backed securities 1,230,943 123,306 18,690 1,335,559
Other asset-backed securities 169,847 10,946 2,174 178,619
Derivatives hedging fixed maturities
(Note 4) 3,698 909 2,392 2,215
------------------------------------------------
Total fixed maturities 2,318,038 177,511 24,605 2,470,944
Preferred stocks (nonredeemable) 6,196 275 443 6,028
Common stocks 2,397 13 69 2,341
------------------------------------------------
Total $2,326,631 $177,799 $25,117 $2,479,313
================================================
</TABLE>
________________________________________________________________________________
25
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and fair value of investments in fixed maturities at December
31, 1996, by contractual maturity, are shown in the following table (in
thousands). Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
---------------------------
<S> <C> <C>
Available for sale:
Due in one year or less $ 25,893 $ 26,250
Due after one year through five years 349,962 354,031
Due after five years through ten years 466,457 472,014
Due after ten years 350,116 353,386
---------------------------
1,192,428 1,205,681
Mortgage-backed securities 1,273,251 1,362,694
Other asset-backed securities 299,809 306,709
---------------------------
Total available-for-sale $2,765,488 $2,875,084
===========================
</TABLE>
Changes in unrealized gains (losses) on investments in available-for-sale
securities for the years ended December 31, 1996, 1995 and 1994 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------
FIXED EQUITY TOTAL
--------------------------------
<S> <C> <C> <C>
Gross unrealized gains $140,089 $ 822 $140,911
Gross unrealized losses 30,493 376 30,869
--------------------------------
Net unrealized gains (losses) 109,596 446 110,042
Deferred income tax (expense)
benefit (38,359) (157) (38,516)
--------------------------------
Net unrealized gains (losses) after
taxes 71,237 289 71,526
Less:
Balance at beginning of year 99,389 (147) 99,242
--------------------------------
Change in net unrealized gains
(losses) $(28,152) $ 436 $(27,716)
================================
</TABLE>
________________________________________________________________________________
26
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------
FIXED EQUITY TOTAL
--------------------------------
<S> <C> <C> <C>
Gross unrealized gains $ 177,511 $ 288 $ 177,799
Gross unrealized losses 24,605 512 25,117
--------------------------------
Net unrealized gains (losses) 152,906 (224) 152,682
Deferred income tax (expense)
benefit (53,517) 77 (53,440)
--------------------------------
Net unrealized gains (losses) after
taxes 99,389 (147) 99,242
Less:
Balance at beginning of year (18,854) (558) (19,412)
--------------------------------
Change in net unrealized gains
(losses) $ 118,243 $ 411 $ 118,654
================================
DECEMBER 31, 1994
--------------------------------
FIXED EQUITY TOTAL
--------------------------------
Gross unrealized gains $ 94,846 $ 262 $ 95,108
Gross unrealized losses 123,843 1,120 124,963
--------------------------------
Net unrealized gains (losses) (28,997) (858) (29,855)
Deferred income tax (expense)
benefit 10,143 300 10,443
--------------------------------
Net unrealized gains (losses) after
taxes (18,854) (558) (19,412)
Less:
Balance at beginning of year - (131) (131)
Adjustment for change in accounting
method (net of tax of $46,916) 87,630 - 87,630
--------------------------------
Change in net unrealized gains
(losses) $(106,484) $ (427) $(106,911)
================================
</TABLE>
As part of its overall investment management strategy, the Company has entered
into agreements to purchase $21,538,000 in mortgage loans as of December 31,
1996. These agreements were settled during 1997. The Company had no agreements
to sell securities at December 31, 1996.
________________________________________________________________________________
27
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Major categories of investment income for the years ended December 31 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Fixed maturities $240,931 $190,327 $153,777
Mortgage loans on real estate 29,143 16,601 12,221
Policy loans 52,205 55,438 42,456
Other investments 2,197 4,360 5,654
--------------------------------
324,476 266,726 214,108
--------------------------------
Investment expenses (12,355) (10,661) (4,503)
Net investment income $312,121 $256,065 $209,605
================================
</TABLE>
Net realized gains (losses) on investments for the years ended December 31 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Fixed maturities $ 4,540 $ 6,538 $ (3,847)
Equity securities 79 5 (1,761)
Real estate and other 151 21 (1,637)
-----------------------------------
Net realized gains (losses) on
investments $ 4,770 $ 6,564 $ (7,245)
===================================
</TABLE>
During 1996, 1995 and 1994, debt and marketable equity securities available-for-
sale were sold with fair values at the date of sale of $334,482,000,
$306,219,000 and $292,483,000, respectively. Gross gains of $7,248,000,
$9,691,000, and $6,125,000 and gross losses of $2,629,000, $3,148,000 and
$11,733,000 were realized on those sales in 1996, 1995, and 1994,
respectively.
At December 31, 1996 and 1995, bonds with an amortized cost of $26,140,000 and
$26,730,000, respectively, were on deposit with various state insurance
departments to meet regulatory requirements.
________________________________________________________________________________
28
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company enters into interest rate contracts, including swaps, caps, floors,
and options, to reduce and manage risks which include the risk of a change in
the value, yield, price, cash flows, or quantity of, or a degree of exposure
with respect to assets, liabilities, or future cash flows which the Company has
acquired or incurred. Hedge accounting practices are supported by cash flow
matching, scenario testing and duration matching.
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. Interest rate cap and interest rate floor
agreements owned entitle the Company to receive payments to the extent reference
interest rates exceed or fall below strike levels in the contracts based on the
notional amounts.
Premiums paid for the purchase of interest rate contracts are included in other
assets and are being amortized to interest expense over the remaining terms of
the contracts or in a manner consistent with the financial instruments being
hedged. Amounts paid or received, if any, from such contracts are included in
interest expense or income. Accrued amounts payable to or receivable from
counterparties are included in other liabilities or assets.
Gains and losses as a result of early terminations of interest rate contracts
are amortized to investment income over the remaining term of the items being
hedged to the extent the hedge is considered to be effective; otherwise, they
are recognized upon termination.
Interest rate contracts that are matched or otherwise designated to be
associated with other financial instruments are recorded at fair value if the
related financial instruments mature, are sold, or are otherwise terminated or
if the interest rate contracts cease to be effective hedges.
The Company manages the potential credit exposure from interest rate contracts
through careful evaluation of the counterparties' credit standing, collateral
agreements, 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 contacts.
________________________________________________________________________________
29
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
(CONTINUED)
The table below summarizes the Company's interest rate contracts at December 31,
1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
-------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts:
Swaps $ 794,520 $ - $(1,452) $(1,452)
Swaps-affiliates 774,520 - 1,272 1,272
-------------------------------------------
Total swaps 1,569,040 - (180) (180)
Caps owned 400,000 2,073 592 592
Caps owned-affiliates - - - -
Total caps owned 400,000 2,073 592 592
-------------------------------------------
Floors owned 100,000 25 5 5
Floors owned-affiliates - - - -
-------------------------------------------
Total floors owned 100,000 25 5 5
Options owned 212,000 3,330 3,772 3,772
Options owned-affiliates 212,000 (3,330) (3,772) (3,772)
-------------------------------------------
Total options owned 424,000 - - -
-------------------------------------------
Total derivatives $2,493,040 $ 2,098 $ 417 $ 417
===========================================
</TABLE>
________________________________________________________________________________
30
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts:
Swaps $ 884,632 $ 448 $ 4,034 $ 4,034
Swaps-affiliates 864,632 (448) (3,453) (3,453)
------------------------------------------------------
Total swaps 1,749,264 - 581 581
Caps owned 400,000 3,580 1,308 1,308
Caps owned-affiliates 40,000 61 - -
------------------------------------------------------
Total caps owned 440,000 3,641 1,308 1,308
Floors owned 100,000 57 326 326
Floors owned-affiliates
------------------------------------------------------
Total floors owned 100,000 57 326 326
Options owned 152,000 2,848 2,255 2,255
Options owned-affiliates 152,000 (2,848) (2,255) (2,255)
------------------------------------------------------
Total options owned 304,000 - - -
------------------------------------------------------
Total derivatives $2,593,264 $ 3,698 $ 2,215 $ 2,215
======================================================
</TABLE>
5. CONCENTRATIONS OF CREDIT RISK
At December 31, 1996, the Company held less-than-investment-grade bonds
classified as available-for-sale with a carrying value and market value of
$74,964,000. These holdings amounted to 3% of the Company's investments in fixed
maturity securities and 1% of total assets. The holdings of less-than-
investment-grade bonds are widely diversified and of satisfactory quality based
on the Company's investment policies and credit standards.
At December 31, 1996, the Company's commercial mortgages involved a
concentration of properties located in Florida (18%), Texas (13%), and Georgia
(10%). The remaining commercial mortgages relate to properties located in 23
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 $13,517,000.
________________________________________________________________________________
31
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a qualified noncontributory defined benefit retirement plan as
well as a non-qualified unfunded Supplemental Employees Retirement Plan (SERP)
covering substantially all employees. The benefits are based on final average
earnings from the time of eligibility for the plan, subject to minimum benefits
based on career earnings. The Company's funding policy for the qualified plan is
to contribute amounts annually to the plan sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Income Security Act of
1974, plus additional amounts as may be determined to be appropriate.
The funded status and the amounts recognized in the balance sheets for the
defined benefit plan are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------------------------
QUALIFIED QUALIFIED
PLAN SERP PLAN SERP
-------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated
benefit obligation:
Vested $(26,058) $(6,725) $(21,032) $(5,637)
Nonvested (733) (132) (1,656) -
-------------------------------------------
(26,791) (6,857) (22,688) (5,637)
Effect of projected future compensation (5,479) (951) (5,355) (1,297)
-------------------------------------------
Projected benefit obligation (32,270) (7,808) (28,043) (6,934)
Less plan assets at fair value 33,682 - 31,074 -
-------------------------------------------
Plan assets in excess of projected
benefit obligation 1,412 (7,808) 3,031 (6,934)
Unrecognized net asset (1,316) -- (1,601) --
Unrecognized prior service benefit cost (97) 236 (109) 267
Unrecognized net loss (gain) 1,930 4,622 998 4,507
-------------------------------------------
Net pension asset (liability) $ 1,929 $(2,950) $ 2,319 $(2,160)
===========================================
</TABLE>
As of December 31, 1996 and 1995, the Company recognized an additional liability
on the SERP of $3,671,000 and $3,210,000, respectively, as this plan is unfunded
and the actuarial present value of accumulated benefit obligation exceeds the
net pension liability.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The net periodic pension cost for the defined benefit plans includes the
following components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------
QUALIFIED QUALIFIED QUALIFIED
PLAN SERP PLAN SERP PLAN SERP
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1,320 $ 388 $ 1,147 $ 285 $ 1,369 $ 248
Interest cost 2,262 463 1,856 517 1,521 219
Return on plan assets (4,075) 258 (3,497) - (1,900) -
Net amortization and
deferral 883 553 239 (659) 200
-----------------------------------------------------------
Net periodic pension
expense $ 390 $1,109 $ 59 $1,041 $ 331 $ 667
===========================================================
</TABLE>
Assumptions used in accounting for the defined benefit plans as of December 31,
1996, 1995, and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.50% 7.25% 8.00%
Rate of increase in compensation level 4.50% 4.25% 6.00%
Expected long-term rate of return on assets 9.50% 9.50% 8.50%
</TABLE>
Plan assets of the defined benefit plans at December 31, 1996 are invest ed
primarily in U.S. government securities, corporate bonds, mutual funds, mortgage
loans and money market funds.
401(K) PLAN
The Security Life of Denver Insurance Company Savings Incentive Plan (the
Savings Plan) is a defined contribution-individual account plan which is
available to substantially all full-time home office employees to provide a
savings program for additional retirement benefits, qualifying as a 401(k) plan.
As a 401(k) plan, participants may make contributions to the plan through salary
reductions up to a maximum of $9,500 in 1996 and $9,240 in 1995 and 1994. Such
contributions are not currently taxable to the participants. The Company matches
100% of the first 3% of participants' contributions, plus 50% of contributions
which exceed 3% of participants' compensation, subject to
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
a maximum matching percentage of 4 1/2% of the individual's salary. Company
matching contributions were $1,143,000 for 1996, $1,071,000 for 1995, and
$1,042,000 for 1994.
Plan assets of the Savings Plan at December 31, 1996 are invested in a group
deposit administration contract (the Contract) with the Company, various mutual
funds maintained by the Principal Financial Group, and loans to participants.
The Contract is a policyholder liability of the Company and had a balance of
$25.5 million and $23.9 million at December 31, 1996 and 1995,
respectively.
POSTRETIREMENT BENEFITS
In addition to providing pension and profit sharing plans, the Company provides
certain health care and life insurance benefits for retired employees. Under
the current plans, all employees become eligible for these benefits if they
achieve a minimum of 120 months of service prior to retirement. The plans are
contributory, with retiree contributions adjusted annually, and contain other
cost-sharing features such as deductible amounts and coinsurance.
The following table presents the amounts recognized in the Company's balance
sheets (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------------------------------------------------
LIFE LIFE
MEDICAL INSURANCE MEDICAL INSURANCE
PLAN PLAN TOTAL PLAN PLAN TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees $(1,315) $(1,226) $ (2,541) $(1,234) $(1,140) $ (2,374)
Fully eligible active plan
participants (409) (392) (801) (383) (364) (747)
Other active plan participants (2,038) (1,220) (3,258) (1,913) (1,134) (3,047)
-------------------------------------------------------------------
(3,762) (2,838) (6,600) (3,530) (2,638) (6,168)
Plan assets at fair value - - - - - -
-------------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets (3,762) (2,838) (6,600) (3,530) (2,638) (6,168)
Unrecognized prior service cost 355 32 387 463 42 505
Unrecognized net gains (losses) (5,870) 1,271 (4,599) (6,114) 1,449 (4,665)
-------------------------------------------------------------------
Accrued postretirement benefit cost $(9,277) $(1,535) $(10,812) $(9,181) $(1,147) $(10,328)
===================================================================
</TABLE>
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic postretirement benefit cost for 1996, 1995, and 1994 includes the
following components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------------------
LIFE LIFE LIFE
MEDICAL INSURANCE MEDICAL INSURANCE MEDICAL INSURANCE
PLAN PLAN TOTAL PLAN PLAN TOTAL PLAN PLAN TOTAL
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost $ 236 $151 $ 387 $ 359 $175 $ 534 $436 $30 $ 466
Interest cost 268 200 468 291 112 403 448 39 487
Net amortization and deferral (275) 89 (186) (209) 65 (144) (93) (8) (101)
------------------------------------------------------------------------------------------------
Net periodic
postretirement benefit cost $ 229 $440 $ 669 $ 441 $352 $ 793 $791 $61 $ 852
================================================================================================
</TABLE>
The annual assumed rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) for the medical plan is 11.25% graded to 5%
over 12.5 years. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the assumed health care
cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation for the medical plan as of
December 31, 1996 by $656,000 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1996 by $81,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.50% at December 31, 1996 and 7.25% at
December 31, 1995.
7. 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 Consolidated Statements of Income except for fees
charged for administration services and mortality risk.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. LEASES
The Company is committed under various noncancellable long-term operating leases
relating to electronic data processing equipment that provide for annual rentals
as follows (in thousands):
<TABLE>
<S> <C>
1997 $2,985
1998 2,278
1999 35
2000 -
2001 -
--------
$5,298
========
</TABLE>
These leases expire between 1997 and 2000. Rental expense for all equipment
leases was approximately $6,151,000, $4,344,000, and $5,620,000 for the years
ended December 31, 1996, 1995, and 1994, respectively.
9. 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. As of December 31, 1996, the Company's retention limit for acceptance of
risk on life insurance policies had been set at various levels up to $1,500,000.
Reinsurance premiums, commissions, and expense reimbursements 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
contracts. Reserves are based on the terms of the reinsurance contracts, and
are consistent with the risks assumed.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. REINSURANCE (CONTINUED)
To the extent that the assuming companies become unable to meet their
obligations under these treaties, the Company remains contingently liable to its
policyholders for the portion reinsured. Consequently, allowances are
established for amounts deemed uncollectible. To minimize its exposure to
significant losses from reinsurer insolvencies, the Company evaluates the
financial condition of the reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic characteristics
of the reinsurers.
The Company assumes and cedes, on a coinsurance basis, guaranteed investment
contracts (GICs) to and from affiliates under common ownership. In 1995, the
Company ceded a block of GIC business issued in prior years to an affiliate. No
gain or loss was recognized on the transaction. The Company does not hold any
collateral under these agreements.
These transactions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------
PREMIUMS RESERVES PREMIUMS RESERVES
---------------------------------------------------
<S> <C> <C> <C> <C>
Direct (nonaffiliated) $ 767,312 $ 1,785,689 $ 556,571 $ 1,380,951
Assumed from Life Insurance Company of Georgia 50,000 125,512 25,000 128,137
Assumed from Southland Life Insurance Company - - 8,000 11,838
Ceded to Columbine Life Insurance Company (484,512) (1,425,545) (530,291) (1,328,950)
Ceded to Life Insurance Company of Georgia (282,800) (435,586) (78,200) (191,976)
---------------------------------------------------
Net $ 50,000 $ 50,070 $ (18,920) $ -
===================================================
</TABLE>
Ceded GIC reserves totaling $1,861 and $1,521 million as of December 31, 1996
and 1995, respectively, are classified as part of prepaid reinsurance premiums.
GIC reserves are reflected at their gross value of $1,911 and $1,521 million as
of December 31, 1996 and 1995.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. REINSURANCE (CONTINUED)
As of December 31, 1996 and 1995, the Company has ceded blocks of insurance
under reinsurance treaties to provide funds for financial and other purposes.
These reinsurance transactions, generally known as "surplus relief reinsurance,"
represent financial arrangements and, in accordance with generally accepted
accounting principles, are not reflected in the accompanying financial
statements except for the risk fees paid to or received from reinsurers.
Surplus relief reinsurance has the effect of increasing current statutory
surplus while reducing future statutory surplus as amounts are recaptured from
reinsurers. During 1995, most of the agreements were recaptured as part of an
overall capital restructuring plan. This capital restructuring also resulted in
a capital contribution from the Company's parent of $146,630,000 to replace the
reduction in statutory surplus that resulted from the recapture.
10. INCOME TAXES
The Company files a consolidated federal income tax return with its parent and
other U.S. affiliates and subsidiaries, with the exception of First ING. The
affiliated companies that join in the filing of the consolidated federal income
tax return have an agreement for the allocation of taxes between members that
join in the consolidated return. The agreement specifies that the separate
return payable or the separate return receivable of each member will be the
federal income tax liability or receivable that the member would have had for
the period had it filed a separate return.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. 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 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-----------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $(236,445) $(197,355)
Unrealized gains/losses (38,516) (53,440)
-----------------------
Total deferred tax liabilities (274,961) (250,795)
Deferred tax assets:
Benefit reserves and surplus relief 123,410 120,439
Tax-basis deferred acquisition costs 60,727 48,945
Investment income 11,037 12,060
Unearned investment income 8,705 9,383
Nonqualified deferred compensation 10,649 8,785
Postretirement employee benefits 3,784 3,615
Other, net 8,108 2,822
-----------------------
Net deferred tax assets 226,420 206,049
-----------------------
Net deferred tax (liabilities) assets $ (48,541) $ (44,746)
=======================
</TABLE>
The components of federal income tax expense consist of the following (in
thousands):
<TABLE>
DECEMBER 31
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Current $10,340 $ (48,136) $ 44,121
Deferred 11,536 72,870 (29,200)
Current year change in valuation
allowance - (438) -
--------------------------------
Federal income tax expense $21,876 $ 24,296 $ 14,921
================================
</TABLE>
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<PAGE>
<TABLE>
--------------------------------
<S> <C> <C> <C>
Federal income tax expense $ 21,876 $ 24,296 $ 14,921
================================
</TABLE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The Company's effective income tax rate did not vary significantly from the
statutory federal income tax rate.
Prior to 1995 a valuation allowance had been established by the Company to
account for the fact that the full benefit of the deferred tax asset established
by First ING for tax-basis deferred acquisition costs more than likely would not
be fully realized. In 1995, a change in judgment about the realization of the
deferred tax asset occurred and the valuation allowance was removed.
The Company had net income tax payments (receipts) of $(61,467,000) during 1996,
$25,875,000 during 1995, and $41,278,000 during 1994 for current income tax
payments and settlements of prior year returns.
The Policyholder's Surplus Account is an accumulation of certain special
deductions for income tax purposes and a portion of the "gains from operations"
which were not subject to current taxation under the Life Insurance Tax Act of
1959. At December 31, 1984, the balance in this account for tax return purposes
was approximately $70,800,000. The Tax Reform Act of 1984 provides that no
further accumulations will be made in this account. If amounts accumulated in
the Policyholder's Surplus Account exceed certain limits, or if distributions to
the shareholder exceed amounts in the Shareholder's Surplus Account, to the
extent of such excess amount or excess distributions, as determined for income
tax purposes, amounts in the Policyholder's Surplus Account would become subject
to income tax at rates in effect at that time. Should this occur, the maximum
tax which would be paid at the current tax rate is $24,780,000. The Company
does not anticipate any such action or foresee any events which would result in
such tax; accordingly, a deferred tax liability has not been established.
11. LONG-TERM DEBT
Long-term indebtedness to related parties for $75,000,000 represents the
cumulative cash draws on a $100,000,000 commitment from ING America Insurance
Holdings, Inc. through December 31, 1996. Additional draws may be made by the
Company at its option through December 1, 2004. This subordinated note bears
interest at a variable rate equal to the prevailing rate for 10 year U.S.
Treasury Bonds plus 1/4% adjusted annually.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. LONG-TERM DEBT (CONTINUED)
The repayment of this note requires approval of the Commissioner of Insurance of
the State of Colorado and is payable only out of surplus funds of the Company
and only at such time as the surplus of the Company, after payment is made, does
not fall below the prescribed level.
The principal and interest is scheduled to be repaid in five annual installments
beginning December 31, 1999 and continuing through December 31, 2003, with the
option of prepaying any outstanding principal and accrued interest. As of
December 31, 1996, the Company accrued interest of $3,700,000. No payments of
principal or interest were made in 1996.
Future minimum payments, assuming a current effective interest rate of 6.55%,
are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL
YEAR PAYMENTS
--------------------------------------------
<S> <C>
1999 $ 21,518
2000 21,518
Subsequent years 64,552
-----------
Total 107,588
Less imputed interest (32,588)
-----------
Present value of payments $ 75,000
===========
</TABLE>
12. STATUTORY ACCOUNTING INFORMATION AND PRACTICES
Security Life and its insurance subsidiaries prepare their statutory basis
financial statements in accordance with accounting practices prescribed or
permitted by their state of domicile. "Prescribed" statutory accounting
practices include state laws, regulations and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, from company to company within the state, and may change in the
future. The NAIC is currently in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1998, will likely change, to some extent, prescribed
statutory accounting practices, and may result in changes to the accounting
________________________________________________________________________________
41
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED)
practices that insurance companies use to prepare their statutory financial
statements.
Prescribed statutory reserve methodology does not fully encompass universal
life-type products. The NAIC, however, has promulgated a Model Regulation
regarding Universal Life Reserves. The Colorado Division of Insurance has not
adopted the regulation, but requires that reserves be held which are at least as
great as those required by Colorado Statutes. The NAIC UL Model Regulation is
used by the Company to provide reserves consistent with the principles of this
article. Because the reserves satisfy the requirements prescribed by the State
of Colorado for the valuation of universal life insurance, the Company is
permitted to compute reserves in accordance with this model regulation.
The NAIC prescribes Risk-Based Capital (RBC) requirements for life/health
insurance companies. At December 31, 1996, the Company exceeded all minimum RBC
requirements.
Combined capital and surplus, determined in accordance with statutory accounting
practices (SAP), was $366,451,000 and $333,686,000 at December 31, 1996 and
1995, respectively. Combined net income, determined in accordance with SAP, was
$9,141,000, $11,771,000, and $9,383,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
Security Life is required to maintain a minimum total statutory capital and
surplus in the state of domicile of $1,500,000. Midwestern United is required to
maintain minimum statutory capital of $200,000 and surplus of $250,000 in the
state of domicile. First ING is required to maintain minimum statutory capital
of $1,000,000 and paid-in surplus of at least 50% of paid-in capital in the
state of domicile. Each Company exceeded its respective minimum statutory
capital and surplus requirements at December 31, 1996. Additionally, the amount
of dividends which can be paid by each company to its stockholder without prior
approval of the various state insurance departments is generally limited to the
greater of 10% of statutory surplus or the statutory net gain from
operations.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instruments. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. Life insurance liabilities that
contain mortality risk and all nonfinancial instruments are excluded from
disclosure requirements. However, the fair values of liabilities under all
insurance contracts are taken into consideration in the Company's overall
management of interest rate risk, such that the Company's exposure to changing
interest rates is minimized through the matching of investment maturities with
amounts due under insurance contracts.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1996 and 1995 are summarized below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities (Note 3) $2,875,084 $2,875,084 $2,470,944 $2,470,944
Equity securities (Note 3) 5,345 5,345 8,369 8,369
Commercial mortgages 445,073 461,777 276,552 304,442
Residential mortgages 7,722 7,589 8,992 9,172
Policy loans 795,311 795,311 754,240 754,240
Short-term investments 7,019 7,019 10,946 10,946
LIABILITIES
Guaranteed investment
contracts, net of reinsurance $ 50,070 $ 50,070 $ - $ -
Supplemental contracts
without life contingencies 3,023 3,023 3,033 3,033
Other policyholder funds left
on deposit 98,824 98,824 92,893 92,893
Individual and group
annuities, net of reinsurance 45,576 45,228 49,020 48,457
</TABLE>
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values of all other financial instruments approximate their fair
value.
The following methods and assumptions were used by the Company in estimating the
"fair value" disclosures for financial instruments:
FIXED MATURITIES AND EQUITY SECURITIES: The fair values for fixed maturities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturities not actively traded, fair values are
estimated using values obtained from independent pricing services or, in the
case of private placements and collateralized mortgage obligations and other
mortgage derivative investments, are estimated by discounting expected future
cash flows. The discount rates used vary as a function of factors such as
yield, credit quality and maturity which fall within a range between 2% 12%
over the total portfolio. The fair values of equity securities are based on
quoted market prices.
MORTGAGE LOANS: Estimated market values for commercial real estate loans are
generated using a discounted cash flow approach. Loans in good standing are
discounted using interest rates determined by U.S. Treasury yields on December
31 and spreads implied by independent published surveys. The same is applied
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.
All residential loans are valued at their outstanding principal balances,
which approximate their fair values.
POLICY LOANS: The carrying amounts reported in the balance sheets for these
financial instruments approximate their fair values.
DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet derivative
financial instruments (caps and floors) and off-balance-sheet derivative
financial instruments (swaps) 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.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
GUARANTEED INVESTMENT CONTRACTS: The fair values of the Company's guaranteed
investment contracts are estimated using discounted cash flow calculations,
based on interest rates currently being offered for similar contracts with
maturities consistent with those remaining for the contracts being
valued.
OTHER INVESTMENT-TYPE INSURANCE CONTRACTS: The fair values of the Company's
deferred annuity contracts are estimated based on the cash surrender value.
The carrying values of other liabilities, including immediate annuities,
dividend accumulations, supplementary contracts without life contingencies
and premium deposits, approximate their fair values.
OFF-BALANCE-SHEET INSTRUMENTS: The Company had synthetic guaranteed
investment contract sales in the amounts of $55,780,000 and $10,358,000 in
1996 and 1995, respectively, to trustees of 401(k) plans. Pursuant to the
terms of these contracts, the trustees own and retain the assets related to
these contracts. Such assets had a value of $637,151,000 and $695,288,000 at
December 31, 1996 and 1995, respectively. Under synthetic guaranteed
investment contracts, the synthetic issuer may assume interest rate risk on
individual plan participant initiated withdrawals from stable value options
of 401(k) plans. Approximately 85% of the synthetic guaranteed investment
contract book values are on a participating basis and have a credited
interest rate reset mechanism which passes such interest rate risk to plan
participants.
LETTERS OF CREDIT
The Company is the beneficiary of letters of credit totaling $93,252,000
which have a market value to the Company of $0 and two lines of credit
totaling $205,274,000 which have a market value to the Company of $0 (see
Note 15).
14. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to pending or threatened lawsuits arising from the normal
conduct of its business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include substantial additional
claims, consequential damages, punitive damages and other similar types of
relief. While it is not possible to forecast the outcome of such litigation, it
is the opinion of management that the disposition of such lawsuits will not have
a material adverse effect on the Company's financial position or interfere with
its operations.
________________________________________________________________________________
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. FINANCING ARRANGEMENTS
The Company has a $105,274,000 line of credit issued by the Company's parent to
provide short-term liquidity. The Company has an additional non-affiliated line
of credit of $100,000,000 also to provide short-term liquidity which expires
June 30, 1997. The amount of funds available under this line is reduced by
borrowings of certain affiliates also party to the agreement. There were no
outstanding borrowings under either of these agreements at December 31, 1996 or
1995. The average balance of short-term debt was $23.4 million during 1996.
The weighted average interest rate paid on this debt during 1996 was 5.46%.
The Company is the beneficiary of letters of credit totaling $93,252,000 that
were established in accordance with the terms of reinsurance agreements. The
terms of the letters of credit provide for automatic renewal for the following
year at December 31, unless otherwise cancelled or terminated by either party to
the financing. The letters were unused during both 1996 and 1995.
________________________________________________________________________________
46
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder
Security Life of Denver Insurance Company
We have audited the consolidated financial statements of Security Life of Denver
Insurance Company (a wholly-owned subsidiary of ING America Insurance Holdings,
Inc.) and subsidiaries as of December 31, 1996 and 1995, and for each of the
three years in the period ended December 31, 1996, and have issued our report
thereon dated April 11, 1997 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedules listed
in Item 23 of this Registration Statement. These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Denver, Colorado
April 11, 1997
________________________________________________________________________________
47
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<PAGE>
SCHEDULE IV
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
For the Years Ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Ceded Assumed Percentage of
Gross To Other From Other Net Amount
Description Amount Companies Companies Amount Assumed to Net
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Life insurance in force (A) $37,914,846 $48,740,400 $101,956,967 $91,131,413 112%
Premium income and other
considerations:
Individual Life 280,761 94,351 332,372 518,782 64%
Group and other 39,520 23,529 1,479 17,470 8%
----------- ----------- ----------- ----------- -----------
Total 320,281 117,880 333,851 536,252 62%
Year ended December 31, 1995:
Life insurance in force (A) $35,147,167 $31,359,870 $74,763,208 $78,550,505 95%
Premium income and other
considerations:
Individual Life 290,114 101,364 321,262 532,197 63%
Group and other 37,413 15,697 469 22,185 2%
----------- ----------- ----------- ----------- -----------
Total 327,527 117,061 321,731 554,382 60%
Year ended December 31, 1994:
Life insurance in force (A) $30,704,660 $14,566,271 $ 61,146,122 $77,284,511 79%
Premium income and other
considerations:
Individual Life 273,301 88,613 299,602 484,290 62%
Group and other 31,858 12,846 30 19,042 0%
----------- ----------- ----------- ----------- -----------
Total 305,159 101,459 299,632 503,332 60%
</TABLE>
(A) Excludes face amount of life insurance in force assumed from or ceded to
other unaffiliated companies under financial reinsurance agreements with
unaffiliated insures generally in return for fees, as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Assumed from other companies $ -0- $ -0- $ -0-
Ceded to other companies 2,536,047 19,071,586 26,293,453
</TABLE>
These agreements will terminate during the next few years.
________________________________________________________________________________
48
Exchequer
<PAGE>
SCHEDULE V
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
VALIDATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions
-------------------------
Charged to Charged to
Beginning Costs Other Balance at
Description of Period and Expenses Accounts Deductions End of Period
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for mortgage
Loans Losses $ 2,726 $1,842 $ - $ - $ 4,568
Allowance for losses on
real estate - - - - -
Allowance for doubtful
accounts 3,222 - - 2,525 697
Accumulated depreciation on
property and equipment 19,556 3,807 - (1,956) 21,407
Accumulated depreciation on
real estate 641 50 - 63 628
Year Ended December 31, 1995:
Allowance for mortgage
Loans Losses $ 670 $2,726 $ - $ 670 $ 2,726
Allowance for losses on
real estate
Allowance for doubtful.
accounts 3,080 142 - - 3,222
Accumulated depreciation on
property and equipment 15,938 3,763 - 145 19,556
Accumulated depreciation on
real estate 378 263 - - 641
Year Ended December 31, 1994:
Allowance for mortgage
Loans Losses $ 494 $ - $ 176 $ - $ 670
Allowance for losses on
real estate 860 - - 860 -
Allowance for doubtful
accounts. 3,484 - - 404 3,080
Accumulated depreciation on
property and equipment 12,806 3,521 - 389 15,938
Accumulated depreciation on
real estate 641 56 - 319 378
</TABLE>
________________________________________________________________________________
49
Exchequer
<PAGE>
Report of Independent Auditors
Contractholders
Security Life Separate Account A1 of
Security Life of Denver Insurance Company
We have audited the accompanying statement of net assets of Security Life
Separate Account A1 (comprising, respectively, the Neuberger & Berman Advisers
Management Trust (comprising the Limited Maturity Bond, Growth, Government
Income and Partners Portfolios) ("N&B"), the Alger American Fund (comprising the
American Small Capitalization, American MidCap Growth, American Growth and
American Leveraged AllCap Portfolios) ("Alger"), the Fidelity Variable Insurance
Products Fund and Variable Insurance Products Fund II (comprising the Asset
Manager, Growth, Overseas, Money Market and Index 500 Portfolios) ("Fidelity"),
the INVESCO Variable Investment Funds, Inc. (comprising the Total Return,
Industrial Income, High Yield and Utilities Portfolios) ("INVESCO") and Van Eck
Worldwide Trust (comprising the Worldwide Balanced and Gold and Natural
Resources Portfolios) ("Van Eck") Divisions) as of December 31, 1996, and the
related statements of operations for the year then ended and changes in net
assets for each of the two years in the period then ended. These financial
statements are the responsibility of the Separate Account'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, 1996, by
correspondence with the transfer agent. 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 Security Life Separate Account
A1 at December 31, 1996, and the results of its operations for the year then
ended and changes in its net assets for each of the two years in the period then
ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
April 9, 1997
________________________________________________________________________________
50
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Net Assets
December 31, 1996
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value; combined cost
$64,631,847 (see Note C) $67,175,361 $8,905,554 $12,953,377 $29,438,514 $13,923,391 $1,954,525
Total assets 67,175,361 8,905,554 12,953,377 29,438,514 13,923,391 1,954,525
-------------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver 76,321 (3,407) 4,783 51,205 17,630 6,110
Due to (from) other divisions 3 (4,124) (12,378) 18,568 (2,063) -
Total liabilities 76,324 (7,531) (7,595) 69,773 15,567 6,110
-------------------------------------------------------------------------------
Net assets $67,099,037 $8,913,085 $12,960,972 $29,368,741 $13,907,824 $1,948,415
===============================================================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $67,099,037 $8,913,085 $12,960,972 $29,368,741 $13,907,824 $1,948,415
-------------------------------------------------------------------------------
TOTAL CONTRACT OWNER RESERVES $67,099,037 $8,913,085 $12,960,972 $29,368,741 $13,907,824 $1,948,415
===============================================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
51
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Net Assets (continued)
December 31, 1996
<TABLE>
<CAPTION>
N&B
----------------------------------------------------------------------
TOTAL LIMITED GOVERNMENT
N&B MATURITY BOND GROWTH INCOME PARTNERS
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $8,905,554 $ 3,075,318 $ 1,914,076 $ 660,279 $ 3,255,881
----------------------------------------------------------------------
Total assets 8,905,554 3,075,318 1,914,076 660,279 3,255,881
----------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (3,407) 5,110 (7,513) 2,043 (3,047)
Due to (from) other divisions (4,124) - 2 - (4,126)
----------------------------------------------------------------------
Total liabilities (7,531) 5,110 (7,511) 2,043 (7,173)
----------------------------------------------------------------------
Net assets $8,913,085 $ 3,070,208 $ 1,921,587 $ 658,236 $ 3,263,054
======================================================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $8,913,085 $ 3,070,208 $ 1,921,587 $ 658,236 $ 3,263,054
----------------------------------------------------------------------
TOTAL CONTRACT OWNER RESERVES $8,913,085 $ 3,070,208 $ 1,921,587 $ 658,236 $ 3,263,054
======================================================================
Number of division units outstanding
(See Note F) 288,635.255 144,473.402 61,534.920 194,111.730
==========================================================
Value per divisional unit $ 10.64 $ 13.30 $ 10.70 $ 16.81
==========================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
52
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Net Assets (continued)
December 31, 1996
<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 $12,953,377 $ 5,285,357 $ 3,304,715 $ 2,761,757 $ 1,601,548
------------------------------------------------------------------------
Total assets 12,953,377 5,285,357 3,304,715 2,761,757 1,601,548
------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver 4,783 7,931 8,340 6,565 (18,053)
Due to (from) other divisions (12,378) - (8,252) - (4,126)
Total liabilities (7,595) 7,931 88 6,565 (22,179)
------------------------------------------------------------------------
Net assets $12,960,972 $ 5,277,426 $ 3,304,627 $ 2,755,192 $ 1,623,727
========================================================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $12,960,972 $ 5,277,426 $ 3,304,627 $ 2,755,192 $ 1,623,727
------------------------------------------------------------------------
TOTAL CONTRACT OWNER RESERVES $12,960,972 $ 5,277,426 $ 3,304,627 $ 2,755,192 $ 1,623,727
========================================================================
Number of division units outstanding
(See Note F) 353,902.764 207,341.752 206,009.336 99,823.309
===========================================================
Value per divisional unit $ 14.91 $ 15.94 $ 13.37 $ 16.27
===========================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
53
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Net Assets (continued)
December 31, 1996
<TABLE>
<CAPTION>
FIDELITY
-------------------------------------------------------------------------------------
TOTAL ASSET MONEY
FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $29,438,514 $ 3,138,719 $ 5,869,825 $ 4,810,464 $ 10,144,663 $ 5,474,843
-------------------------------------------------------------------------------------
Total assets 29,438,514 3,138,719 5,869,825 4,810,464 10,144,663 5,474,843
-------------------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver 51,205 1,519 (27,178) 3,753 119,988 (46,877)
Due to (from) other divisions 18,568 - - (8,252) 41,261 (14,441)
-------------------------------------------------------------------------------------
Total liabilities 69,773 1,519 (27,178) (4,499) 161,249 (61,318)
-------------------------------------------------------------------------------------
Net assets $29,368,741 $ 3,137,200 $ 5,897,003 $ 4,814,963 $ 9,983,414 $ 5,536,161
=====================================================================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $29,368,741 $ 3,137,200 $ 5,897,003 $ 4,814,963 $ 9,983,414 $ 5,536,161
-------------------------------------------------------------------------------------
TOTAL CONTRACT OWNER RESERVES $29,368,741 $ 3,137,200 $ 5,897,003 $ 4,814,963 $ 9,983,414 $ 5,536,161
=====================================================================================
Number of division units outstanding
(See Note F) 254,932.411 386,707.380 417,669.832 918,154.339 349,173.950
========================================================================
Value per divisional unit $ 12.31 $ 15.25 $ 11.53 $ 10.87 $ 15.86
========================================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
54
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Net Assets (continued)
December 31, 1996
<TABLE>
<CAPTION>
INVESCO
-----------------------------------------------------------------------
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $13,923,391 $ 3,075,331 $ 4,600,986 $ 3,834,954 $ 2,412,120
-----------------------------------------------------------------------
Total assets 13,923,391 3,075,331 4,600,986 3,834,954 2,412,120
-----------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver 17,630 5,252 7,042 3,896 1,440
Due to (from) other divisions (2,063) - (2,063) - -
Total liabilities 15,567 5,252 4,979 3,896 1,440
-----------------------------------------------------------------------
Net assets $13,907,824 $ 3,070,079 $ 4,596,007 $ 3,831,058 $ 2,410,680
=======================================================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $13,907,824 $ 3,070,079 $ 4,596,007 $ 3,831,058 $ 2,410,680
-----------------------------------------------------------------------
TOTAL CONTRACT OWNER RESERVES $13,907,824 $ 3,070,079 $ 4,596,007 $ 3,831,058 $ 2,410,680
=======================================================================
Number of division units outstanding
(See Note F) 228,925.945 294,419.794 280,339.680 200,534.253
==========================================================
Value per divisional unit $ 13.41 $ 15.61 $ 13.67 $ 12.02
==========================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
55
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Net Assets (continued)
December 31, 1996
<TABLE>
<CAPTION>
VAN ECK
---------------------------------------------
GOLD AND
TOTAL WORLDWIDE NATURAL
VAN ECK BALANCED RESOURCES
---------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $1,954,525 $ 943,024 $1,011,501
---------------------------------------------
Total assets 1,954,525 943,024 1,011,501
---------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver 6,110 2,831 3,279
Due to (from) other divisions - - -
---------------------------------------------
Total liabilities 6,110 2,831 3,279
---------------------------------------------
Net assets
$1,948,415 $ 940,193 $1,008,222
=============================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $1,948,415 $ 940,193 $1,008,222
---------------------------------------------
TOTAL CONTRACT OWNER RESERVES $1,948,415 $ 940,193 $1,008,222
=============================================
Number of division units outstanding
(See Note F) 86,789.616 86,244.713
================================
Value per divisional unit $10.83 $11.69
================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
56
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Operations
Year Ended December 31, 1996
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $1,984,228 $ 514,343 $ 120,851 $ 553,729 $ 786,372 $ 8,933
Less: Valuation period deductions
(See Note B) 637,444 104,594 145,399 256,359 113,111 17,981
------------------------------------------------------------------------
Net investment income (loss) 1,346,784 409,749 (24,548) 297,370 673,261 (9,048)
------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 249,385 (282,697) 241,717 129,386 132,183 28,796
Net unrealized gains (losses) on
investments 2,280,056 386,576 188,595 1,247,734 365,750 91,401
Net realized and unrealized gains
------------------------------------------------------------------------
(losses) on investments 2,529,441 103,879 430,312 1,377,120 497,933 120,197
------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $3,876,225 $ 513,628 $405,764 $1,674,490 $1,171,194 $111,149
========================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
57
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
N&B
------------------------------------------------------------------
TOTAL LIMITED GOVERNMENT
N&B MATURITY BOND GROWTH INCOME PARTNERS
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $514,343 $ 437,331 $ 43,020 $ 10,366 $ 23,626
Less: Valuation period deductions
(See Note B) 104,594 55,878 16,513 7,973 24,230
------------------------------------------------------------------
Net investment income (loss) 409,749 381,453 26,507 2,393 (604)
------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments (282,697) (273,831) (47,382) (4,839) 43,355
Net unrealized gains (losses) on
investments 386,576 (53,506) 75,841 19,442 344,799
------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 103,879 (327,337) 28,459 14,603 388,154
------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $513,628 $ 54,116 $ 54,966 $ 16,996 $387,550
==================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
58
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Operations (continued)
Year Ended December 31, 1996
<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 $120,851 $ 11,927 $ 41,721 $ 61,267 $ 5,936
Less: Valuation period deductions
(See Note B) 145,399 60,038 36,105 34,882 14,374
--------------------------------------------------------------------------
Net investment income (loss) (24,548) (48,111) 5,616 26,385 (8,438)
--------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 241,717 89,528 55,044 57,743 39,402
Net unrealized gains (losses) on
investments 188,595 (39,219) 71,238 131,641 24,935
--------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 430,312 50,309 126,282 189,384 64,337
--------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $405,764 $ 2,198 $131,898 $215,769 $55,899
==========================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
59
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
FIDELITY
----------------------------------------------------------------------------
TOTAL ASSET MONEY
FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 553,729 $ 60,136 $103,140 $ 26,834 $324,727 $ 38,892
Less: Valuation period deductions
(See Note B) 256,359 28,120 55,226 41,782 93,647 37,584
----------------------------------------------------------------------------
Net investment income (loss) 297,370 32,016 47,914 (14,948) 231,080 1,308
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 129,386 40,989 1,066 38,567 - 48,764
Net unrealized gains (losses) on
investments 1,247,734 184,003 308,218 304,189 - 451,324
----------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 1,377,120 224,992 309,284 342,756 - 500,088
----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $1,674,490 $257,008 $357,198 $327,808 $231,080 $501,396
============================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
60
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
INVESCO
--------------------------------------------------------------------
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 786,372 $ 92,388 $ 314,784 $ 325,346 $ 53,854
Less: Valuation period deductions
(See Note B) 113,111 29,358 41,973 28,968 12,812
--------------------------------------------------------------------
Net investment income (loss) 673,261 63,030 272,811 296,378 41,042
--------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 132,183 16,548 76,264 26,819 12,552
Net unrealized gains (losses) on
investments 365,750 133,324 185,477 (14,895) 61,844
--------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 497,933 149,872 261,741 11,924 74,396
--------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $1,171,194 $ 212,902 534,552 $ 308,302 $ 115,438
====================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
61
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
VAN ECK
-----------------------------------------
GOLD AND
TOTAL WORLDWIDE NATURAL
VAN ECK BALANCED RESOURCES
-----------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 8,933 $ 495 $ 8,438
Less: Valuation period deductions
(See Note B) 17,981 10,309 7,672
-----------------------------------------
Net investment income (loss) (9,048) (9,814) 766
-----------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 28,796 20,242 8,554
Net unrealized gains (losses) on
investments 91,401 63,266 28,135
-----------------------------------------
Net realized and unrealized gains
(losses) on investments 120,197 83,508 36,689
-----------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $111,149 $73,694 $37,455
=========================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
62
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets
Year Ended December 31, 1996
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 1,346,784 $ 409,749 $ (24,548) $ 297,370 $ 673,261 $ (9,048)
Net realized gains (losses) on
investments 249,385 (282,697) 241,717 129,386 132,183 28,796
Net unrealized gains (losses) on
investments 2,280,056 386,576 188,595 1,247,734 365,750 91,401
-------------------------------------------------------------------------------------
Increase in net assets from
operations 3,876,225 513,628 405,764 1,674,490 1,171,194 111,149
-------------------------------------------------------------------------------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract purchase payments 45,593,592 3,103,422 5,705,739 32,867,221 3,482,261 434,949
Administrative expenses (4,805) (668) (1,121) (2,284) (579) (153)
Benefit payments (73,051) (32,701) (10,631) (16,286) (5,472) (7,961)
Surrenders and withdrawals (1,070,304) (234,213) (223,811) (441,253) (155,835) (15,192)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 491 (818,074) 3,820,402 (10,875,570) 6,667,323 1,206,410
Other (25,821) (12,712) (5,565) (8,533) 316 673
-------------------------------------------------------------------------------------
Increase (decrease) from principal
transactions 44,420,102 2,005,054 9,285,013 21,523,295 9,988,014 1,618,726
-------------------------------------------------------------------------------------
Total increase (decrease) in net
assets 48,296,327 2,518,682 9,690,777 23,197,785 11,159,208 1,729,875
Net assets at beginning of year 18,802,710 6,394,403 3,270,195 6,170,956 2,748,616 218,540
-------------------------------------------------------------------------------------
Net assets at end of year $67,099,037 $8,913,085 $12,960,972 $ 29,368,741 $ 13,907,824 $1,948,415
=====================================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
63
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
N&B
----------------------------------------------------------------------
TOTAL LIMITED GOVERNMENT
N&B MATURITY BOND GROWTH INCOME PARTNERS
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 409,749 $ 381,453 $ 26,507 $ 2,393 $ (604)
Net realized gains (losses) on
investments (282,697) (273,831) (47,382) (4,839) 43,355
Net unrealized gains (losses) on
investments 386,576 (53,506) 75,841 19,442 344,799
----------------------------------------------------------------------
Increase in net assets from
operations 513,628 54,116 54,966 16,996 387,550
----------------------------------------------------------------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract purchase payments 3,103,422 775,080 852,082 284,980 1,191,280
Administrative expenses (668) (200) (244) (24) (200)
Benefit payments (32,701) (9,654) - (9,423) (13,624)
Surrenders and withdrawals (234,213) (125,774) (32,841) (7,552) (68,046)
Net transfers among divisions
(including the guaranteed interest
division in the general account) (818,074) (3,444,983) 875,871 228,842 1,522,196
Other (12,712) (13,266) (962) 303 1,213
----------------------------------------------------------------------
Increase (decrease) from principal
transactions 2,005,054 (2,818,797) 1,693,906 497,126 2,632,819
----------------------------------------------------------------------
Total increase (decrease) in net
assets 2,518,682 (2,764,681) 1,748,872 514,122 3,020,369
Net assets at beginning of year 6,394,403 5,834,889 172,715 144,114 242,685
----------------------------------------------------------------------
Net assets at end of year $8,913,085 $ 3,070,208 $ 1,921,587 $ 658,236 $3,263,054
======================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
64
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<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) $ (24,548) $ (48,111) $ 5,616 $ 26,385 $ (8,438)
Net realized gains (losses) on
investments 241,717 89,528 55,044 57,743 39,402
Net unrealized gains (losses) on
investments 188,595 (39,219) 71,238 131,641 24,935
---------------------------------------------------------------------
Increase in net assets from
operations 405,764 2,198 131,898 215,769 55,899
---------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Contract purchase payments 5,705,739 2,214,204 1,400,655 1,552,491 538,389
Administrative expenses (1,121) (364) (307) (269) (181)
Benefit payments (10,631) - - (10,631) -
Surrenders and withdrawals (223,811) (61,804) (23,510) (30,802) (107,695)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 3,820,402 1,538,980 1,142,942 303,666 834,814
Other (5,565) (1,125) (1,914) (858) (1,668)
---------------------------------------------------------------------
Increase (decrease) from principal
transactions 9,285,013 3,689,891 2,517,866 1,813,597 1,263,659
---------------------------------------------------------------------
Total increase (decrease) in net
assets 9,690,777 3,692,089 2,649,764 2,029,366 1,319,558
Net assets at beginning of year 3,270,195 1,585,337 654,863 725,826 304,169
---------------------------------------------------------------------
Net assets at end of year $12,960,972 $5,277,426 $3,304,627 $2,755,192 $1,623,727
=====================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
65
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
FIDELITY
---------------------------------------------------------------------------------
TOTAL ASSET MONEY
FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 297,370 $ 32,016 $ 47,914 $ (14,948) $ 231,080 $ 1,308
Net realized gains (losses) on
investments 129,386 40,989 1,066 38,567 - 48,764
Net unrealized gains (losses) on
investments 1,247,734 184,003 308,218 304,189 - 451,324
---------------------------------------------------------------------------------
Increase in net assets from
operations 1,674,490 257,008 357,198 327,808 231,080 501,396
---------------------------------------------------------------------------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract purchase payments 32,867,221 1,610,002 2,297,607 1,319,754 25,791,063 1,848,795
Administrative expenses (2,284) (227) (698) (238) (656) (465)
Benefit payments (16,286) (16,286) - - - -
Surrenders and withdrawals (441,253) (52,166) (47,221) (50,070) (239,360) (52,436)
Net transfers among divisions
(including the guaranteed interest
division in the general account) (10,875,570) 661,458 2,055,158 2,273,553 (18,514,364) 2,648,625
Other (8,533) 136 (2,580) (249) (5,444) (396)
---------------------------------------------------------------------------------
Increase (decrease) from principal
transactions 21,523,295 2,202,917 4,302,266 3,542,750 7,031,239 4,444,123
---------------------------------------------------------------------------------
Total increase (decrease) in net
assets 23,197,785 2,459,925 4,659,464 3,870,558 7,262,319 4,945,519
Net assets at beginning of year 6,170,956 677,275 1,237,539 944,405 2,721,095 590,642
---------------------------------------------------------------------------------
Net assets at end of year $ 29,368,741 $3,137,200 $5,897,003 $4,814,963 $ 9,983,414 $5,536,161
=================================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
66
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
INVESCO
-----------------------------------------------------------------
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 673,261 $ 63,030 $ 272,811 $ 296,378 $ 41,042
Net realized gains (losses) on
investments 132,183 16,548 76,264 26,819 12,552
Net unrealized gains (losses) on
investments 365,750 133,324 185,477 (14,895) 61,844
-----------------------------------------------------------------
Increase in net assets from
operations 1,171,194 212,902 534,552 308,302 115,438
-----------------------------------------------------------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract purchase payments 3,482,261 882,507 1,030,329 934,353 635,072
Administrative expenses (579) (161) (259) (87) (72)
Benefit payments (5,472) - - (5,472) -
Surrenders and withdrawals (155,835) (22,554) (70,552) (55,987) (6,742)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 6,667,323 1,195,393 2,048,163 1,998,119 1,425,648
Other 316 24 155 345 (208)
-----------------------------------------------------------------
Increase (decrease) from principal
transactions 9,988,014 2,055,209 3,007,836 2,871,271 2,053,698
-----------------------------------------------------------------
Total increase (decrease) in net
assets 11,159,208 2,268,111 3,542,388 3,179,573 2,169,136
Net assets at beginning of year 2,748,616 801,968 1,053,619 651,485 241,544
-----------------------------------------------------------------
Net assets at end of year $13,907,824 $3,070,079 $4,596,007 $3,831,058 $2,410,680
=================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
67
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
VAN ECK
-------------------------------------
GOLD AND
TOTAL WORLDWIDE NATURAL
VAN ECK BALANCED RESOURCES
-------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (9,048) $ (9,814) $ 766
Net realized gains (losses) on
investments 28,796 20,242 8,554
Net unrealized gains (losses) on
investments 91,401 63,266 28,135
-------------------------------------
Increase in net assets from
operations 111,149 73,694 37,455
-------------------------------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract purchase payments 434,949 366,629 68,320
Administrative expenses (153) (61) (92)
Benefit payments (7,961) (7,961) -
Surrenders and withdrawals (15,192) (7,693) (7,499)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 1,206,410 370,673 835,737
Other 673 (173) 846
-------------------------------------
Increase (decrease) from principal
transactions 1,618,726 721,414 897,312
-------------------------------------
Total increase (decrease) in net
assets 1,729,875 795,108 934,767
Net assets at beginning of year 218,540 145,085 73,455
-------------------------------------
Net assets at end of year $1,948,415 $940,193 $1,008,222
=====================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
68
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets
Year Ended December 31, 1995
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 87,012 $ (39,812) $ (11,210) $ 38,737 $ 99,502 $ (205)
Net realized gains (losses) on
investments 123,291 90,519 23,167 5,036 4,250 319
Net unrealized gains (losses) on
investments 263,099 161,919 39,125 59,840 111 2,104
------------------------------------------------------------------------------
Increase (decrease) in net assets
from operations 473,402 212,626 51,082 103,613 103,863 2,218
------------------------------------------------------------------------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract purchase payments 18,285,858 502,213 864,146 16,117,291 760,940 41,268
Surrenders and withdrawals (407,860) (10,012) (11,668) (383,192) (2,988) -
Net transfers among divisions
(including the guaranteed interest
division in the general account) (132,700) 5,678,431 2,355,152 (10,208,699) 1,878,933 163,483
Other 16,409 11,145 1,492 2,724 1,046 2
------------------------------------------------------------------------------
Increase from principal
transactions 17,761,707 6,181,777 3,209,122 5,528,124 2,637,931 204,753
------------------------------------------------------------------------------
Total increase in net assets 18,235,109 6,394,403 3,260,204 5,631,737 2,741,794 206,971
Net assets at beginning of year 567,601 - 9,991 539,219 6,822 11,569
------------------------------------------------------------------------------
Net assets at end of year $18,802,710 $6,394,403 $3,270,195 $ 6,170,956 $2,748,616 $218,540
==============================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
69
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
N&B
---------------------------------------------------------------
TOTAL LIMITED GOVERNMENT
N&B MATURITY BOND GROWTH INCOME PARTNERS
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (39,812) $ (37,543) $ (1,246) $ (640) $ (383)
Net realized gains (losses) on
investments 90,519 75,180 15,163 176 -
Net unrealized gains (losses) on
investments 161,919 152,085 (1,712) 4,895 6,651
---------------------------------------------------------------
Increase (decrease) in net assets
from operations 212,626 189,722 12,205 4,431 6,268
---------------------------------------------------------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract purchase payments 502,213 282,985 76,980 48,315 93,933
Surrenders and withdrawals (10,012) (9,363) (295) - (354)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 5,678,431 5,360,568 83,797 91,234 142,832
Other 11,145 10,977 28 134 6
---------------------------------------------------------------
Increase from principal
transactions 6,181,777 5,645,167 160,510 139,683 236,417
---------------------------------------------------------------
Total increase in net assets 6,394,403 5,834,889 172,715 144,114 242,685
Net assets at beginning of year - - - - -
---------------------------------------------------------------
Net assets at end of year $6,394,403 $5,834,889 $172,715 $144,114 $242,685
===============================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
70
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<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) $ (11,210) $ (6,428) $ (2,496) $ (1,355) $ (931)
Net realized gains (losses) on
investments 23,167 9,561 12,642 239 725
Net unrealized gains (losses) on
investments 39,125 9,654 15,141 1,282 13,048
---------------------------------------------------------------
Increase (decrease) in net assets
from operations 51,082 12,787 25,287 166 12,842
---------------------------------------------------------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract purchase payments 864,146 494,517 91,761 234,037 43,831
Surrenders and withdrawals (11,668) (3,626) (1,500) (3,259) (3,283)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 2,355,152 1,082,085 528,066 494,224 250,777
Other 1,492 (426) 1,258 658 2
---------------------------------------------------------------
Increase from principal
transactions 3,209,122 1,572,550 619,585 725,660 291,327
---------------------------------------------------------------
Total increase in net assets 3,260,204 1,585,337 644,872 725,826 304,169
Net assets at beginning of year 9,991 - 9,991 - -
---------------------------------------------------------------
Net assets at end of year $3,270,195 $1,585,337 $654,863 $725,826 $304,169
===============================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
71
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
FIDELITY
----------------------------------------------------------------------------
TOTAL ASSET MONEY
FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 38,737 $ (1,988) $ (2,885) $ (4,047) $ 49,254 $ (1,597)
Net realized gains (losses) on
investments 5,036 940 116 2,192 - 1,788
Net unrealized gains (losses) on
investments 59,840 25,091 (21,002) 30,743 - 25,008
----------------------------------------------------------------------------
Increase (decrease) in net assets
from operations 103,613 24,043 (23,771) 28,888 49,254 25,199
----------------------------------------------------------------------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Contract purchase payments 16,117,291 308,361 512,787 240,374 14,895,090 160,679
Surrenders and withdrawals (383,192) (364) (4,474) (1,757) (374,426) (2,171)
Net transfers among divisions
(including the guaranteed interest
division in the general account) (10,208,699) 345,548 754,085 663,819 (12,379,338) 407,187
Other 2,724 (313) (1,088) 85 4,292 (252)
----------------------------------------------------------------------------
Increase from principal
transactions 5,528,124 653,232 1,261,310 902,521 2,145,618 565,443
----------------------------------------------------------------------------
Total increase in net assets 5,631,737 677,275 1,237,539 931,409 2,194,872 590,642
Net assets at beginning of year 539,219 - - 12,996 526,223 -
----------------------------------------------------------------------------
Net assets at end of year $ 6,170,956 $677,275 $1,237,539 $944,405 $ 2,721,095 $590,642
============================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
72
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
INVESCO
-------------------------------------------------------------
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 99,502 $ 14,713 $ 34,910 $ 49,090 $ 789
Net realized gains (losses) on
investments 4,250 557 625 3,010 58
Net unrealized gains (losses) on
investments 111 7,878 7,596 (26,829) 11,466
-------------------------------------------------------------
Increase (decrease) in net assets
from operations 103,863 23,148 43,131 25,271 12,313
-------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Contract purchase payments 760,940 278,714 348,200 31,610 102,416
Surrenders and withdrawals (2,988) (797) (1,106) (994) (91)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 1,878,933 500,886 662,659 588,487 126,901
Other 1,046 17 735 289 5
-------------------------------------------------------------
Increase from principal
transactions 2,637,931 778,820 1,010,488 619,392 229,231
-------------------------------------------------------------
Total increase in net assets 2,741,794 801,968 1,053,619 644,663 241,544
Net assets at beginning of year 6,822 - - 6,822 -
-------------------------------------------------------------
Net assets at end of year $2,748,616 $801,968 $1,053,619 $651,485 $241,544
=============================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
73
Exchequer
<PAGE>
Security Life Separate Account A1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
VAN ECK
----------------------------------
GOLD AND
TOTAL WORLDWIDE NATURAL
VAN ECK BALANCED RESOURCES
----------------------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (205) $ (202) $ (3)
Net realized gains (losses) on
investments 319 - 319
Net unrealized gains (losses) on
investments 2,104 7 2,097
----------------------------------
Increase (decrease) in net assets
from operations 2,218 (195) 2,413
----------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Contract purchase payments 41,268 26,630 14,638
Surrenders and withdrawals - - -
Net transfers among divisions
(including the guaranteed interest
division in the general account) 163,483 113,547 49,936
Other 2 (26) 28
----------------------------------
Increase from principal
transactions 204,753 140,151 64,602
----------------------------------
Total increase in net assets 206,971 139,956 67,015
Net assets at beginning of year 11,569 5,129 6,440
----------------------------------
Net assets at end of year $218,540 $145,085 $73,455
==================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
74
Exchequer
<PAGE>
Security Life Separate Account A1
Notes to Financial Statements
December 31, 1996
NOTE A. ORGANIZATION
Security Life Separate Account A1 (the "Separate Account") was established by
resolution of the Board of Directors of Security Life of Denver Insurance
Company (the "Company") on November 3, 1993. The Separate Account is organized
as a unit investment trust registered with the Securities and Exchange
Commission under the Investment Company Act of 1940.
The Separate Account supports the operations of the Exchequer Variable Annuity
("Exchequer") contracts offered by the Company. The Separate Account may be
used to support other variable annuity contracts as they are offered by the
Company. The assets of the Separate Account are the property of the Company.
However, the portion of the Separate Account's assets attributable to the
contracts will not be chargeable with liabilities arising out of any other
operations of the Company.
The Separate Account currently consists of nineteen investment divisions
available to the contractholders, each of which invests in an independently
managed mutual fund portfolio ("Fund"). The Funds are as follows:
PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS)
Neuberger & Berman (N&B)
Neuberger & Berman Limited Maturity Bond Portfolio
Neuberger & Berman Growth Portfolio
Neuberger & Berman Government Income Portfolio
Neuberger & Berman Partners Portfolio
Fred Alger Management, Inc. (Alger)
Alger American Small Capitalization Portfolio
Alger American MidCap Growth Portfolio
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
________________________________________________________________________________
75
Exchequer
<PAGE>
Security Life Separate Account A1
Notes to Financial Statements (continued)
NOTE A. ORGANIZATION (CONTINUED)
Fidelity Management & Research Company (Fidelity)
Fidelity Investments VIP II Asset Manager Portfolio
Fidelity Investments VIP Growth Portfolio
Fidelity Investments VIP Overseas Portfolio
Fidelity Investments VIP Money Market Portfolio
Fidelity Investments VIP II Index 500 Portfolio
INVESCO Funds Group, Inc. (INVESCO)
INVESCO VIF Total Return Portfolio
INVESCO VIF Industrial Income Portfolio
INVESCO VIF High Yield Portfolio
INVESCO VIF Utilities Portfolio
Van Eck Investment Trust (Van Eck)
Van Eck Worldwide Balanced Portfolio
Van Eck Gold and Natural Resources Portfolio
The Exchequer contracts allow the contractholders to specify the allocation of
their purchase payments to the various Funds. They can also transfer their
account values among the Funds. The Exchequer product also provides the
contractholders the option to allocate their purchase payments, or to transfer
their account values, to a Guaranteed Interest Division ("GID") in the Company's
general account. The GID guarantees a rate of interest to the contractholder,
and it is not variable in nature. Therefore, it is not included in the Separate
Account statements.
Effective May 1, 1997, the Divisions of the Separate Account investing in the
Neuberger & Berman Government Income Portfolio and the Van Eck Worldwide
Balanced Portfolio will no longer be accepting new investments.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of the Separate Account have been prepared
on the basis of generally accepted accounting principles. The preparation of
financial
________________________________________________________________________________
76
Exchequer
<PAGE>
Security Life Separate Account A1
Notes to Financial Statements (continued)
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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
confirmed. Dividend income and distributions of capital gains are recorded on
the ex-dividend date. Realized gains and losses from security transactions are
reported using the first-in-first-out (FIFO) method of accounting for cost. The
difference between cost and current market value of investments owned on the day
of measurement is recorded as unrealized gain or loss on investment.
VALUATION PERIOD DEDUCTIONS--Charges are made directly against the assets of the
Separate Account divisions and are reflected daily in the computation of the
unit values of the divisions.
For Exchequer contracts, a daily deduction, at an annual rate of 1.37% of the
daily asset value of the Separate Account divisions, is charged to the Separate
Account for mortality and expense risks assumed by the Company. Total mortality
and expense charges for the year ended December 31, 1996 were $574,811.
Exchequer contracts are subject to a daily deduction, at an annual rate of .15%
of the daily asset value of the Separate Account divisions, for an asset based
administrative charge to compensate the Company for a portion of the
administrative expenses under
________________________________________________________________________________
77
Exchequer
<PAGE>
Security Life Separate Account A1
Notes to Financial Statements (continued)
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the contract. Total asset based administrative charges for the year ended
December 31, 1996 were $62,633.
ANNUITY RESERVES--None of the Exchequer contracts in the Separate Account have
annuitized (reached the annuity date) and are redeemable for the net cash
surrender value of the contracts. The annuity reserves are recorded in the
Separate Account at the aggregate account values of the contractholders invested
in the Separate Account divisions.
NOTE C. INVESTMENTS
Fund shares are purchased at net asset value with contract payments and
divisional transfers from other Funds. Fund shares are redeemed at net asset
value for the payment of benefits, for surrenders, for transfers to other
divisions, and for certain administrative charges by the Company which were
$4,805 for the year ended December 31, 1996. Distributions made by the Funds are
reinvested in the Funds.
________________________________________________________________________________
78
Exchequer
<PAGE>
Security Life Separate Account A1
Notes to Financial Statements (continued)
NOTE C. INVESTMENTS (CONTINUED)
The following is a summary of fund shares owned as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER NET VALUE
OF ASSET OF SHARES COST OF
FUND SHARES VALUE AT MARKET SHARES
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Neuberger & Berman:
Limited Maturity Bond 218,883.83 $14.05 $ 3,075,318 $ 2,976,739
Growth 74,246.55 25.78 1,914,076 1,839,945
Government Income 62,114.71 10.63 660,279 635,943
Partners 197,565.57 16.48 3,255,881 2,904,431
Fred Alger Management, Inc.:
American Small Capitalization 129,194.76 40.91 5,285,357 5,314,923
American MidCap Growth 154,787.60 21.35 3,304,715 3,218,231
American Growth 80,447.33 34.33 2,761,757 2,628,833
American Leveraged AllCap 82,724.57 19.36 1,601,548 1,563,564
Fidelity Management & Research Co.:
Asset Manager 185,393.90 16.93 3,138,719 2,929,625
Growth 188,497.91 31.14 5,869,825 5,582,609
Overseas 255,332.48 18.84 4,810,464 4,475,432
Money Market 10,144,663.23 1.00 10,144,663 10,144,663
Index 500 61,425.37 89.13 5,474,843 4,998,511
INVESCO Funds Group, Inc.:
Total Return 232,803.27 13.21 3,075,331 2,934,129
Industrial Income 321,073.75 14.33 4,600,986 4,407,915
High Yield 325,547.87 11.78 3,834,954 3,876,697
Utilities 201,851.00 11.95 2,412,120 2,338,810
Van Eck Investment Trust:
Worldwide Balanced 84,652.06 11.14 943,024 879,750
Gold and Natural Resources 60,496.45 16.72 1,011,501 981,097
---------------------------
Total $67,175,361 $64,631,847
===========================
</TABLE>
For the year ended December 31, 1996, the aggregate cost of purchases (plus
reinvested dividends) and the proceeds from sales of investments were
$69,310,673 and $23,437,433, respectively.
________________________________________________________________________________
79
Exchequer
<PAGE>
Security Life Separate Account A1
Notes to Financial Statements (continued)
NOTE D. OTHER CONTRACT DEDUCTIONS
The Exchequer contracts provide for certain deductions for surrender charges and
taxes from amounts paid to contractholders. Such deductions are taken after the
redemption of divisional units in the Separate Account and are not included in
the Separate Account financial statements.
NOTE E. 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.
________________________________________________________________________________
80
Exchequer
<PAGE>
Security Life Separate Account A1
Notes to Financial Statements (continued)
NOTE F. SUMMARY OF CHANGES IN UNITS
The following schedule summarizes the changes in divisional units for the year
ended December 31, 1996:
<TABLE>
<CAPTION>
INCREASE (DECREASE) FOR
OUTSTANDING INCREASE (DECREASE) SURRENDERS OUTSTANDING
AT BEGINNING FOR PAYMENTS FOR DIVISIONAL AND AT END
DIVISION OF YEAR RECEIVED TRANSFERS WITHDRAWALS OF YEAR
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Neuberger & Berman:
Limited Maturity Bond 563,487.916 73,470.349 (335,429.660) (12,893.350) 288,635.255
Growth 13,967.690 66,509.482 66,351.310 (2,355.080) 144,473.402
Government Income 13,437.293 27,299.157 22,412.120 (1,613.650) 61,534.920
Partners 18,425.180 80,281.690 100,414.600 (5,009.740) 194,111.730
Fred Alger Management, Inc.:
American Small Capitalization 109,121.103 148,656.971 100,166.800 (4,042.110) 353,902.764
American MidCap Growth 45,272.292 90,989.150 72,614.690 (1,534.380) 207,341.752
American Growth 60,576.492 123,545.054 25,083.120 (3,195.330) 206,009.336
American Leveraged AllCap 20,636.526 33,328.073 52,201.830 (6,343.120) 99,823.309
Fidelity Management & Research Co:
Asset Manager 62,156.503 138,540.658 59,501.670 (5,266.420) 254,932.411
Growth 91,703.491 158,267.199 139,957.160 (3,220.470) 386,707.380
Overseas 91,367.590 120,909.502 209,730.760 (4,338.020) 417,669.832
Money Market 259,770.455 2,415,085.474 (1,734,351.930) (22,349.660) 918,154.339
Index 500 45,041.743 127,466.237 179,821.810 (3,155.840) 349,173.950
INVESCO Funds Group, Inc.:
Total Return 66,073.393 69,951.652 94,649.130 (1,748.230) 228,925.945
Industrial Income 81,266.429 72,944.905 144,818.800 (4,610.340) 294,419.794
High Yield 54,748.222 73,701.468 156,331.870 (4,441.880) 280,339.680
Utilities 22,313.580 56,388.943 122,408.710 (576.980) 200,534.253
Van Eck Investment Trust:
Worldwide Balanced 14,721.975 36,117.781 37,449.230 (1,499.370) 86,789.616
Gold and Natural Resources 7,301.735 6,062.738 73,541.780 (661.540) 86,244.713
</TABLE>
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81
Exchequer
<PAGE>
Security Life Separate Account A1
Notes to Financial Statements (continued)
NOTE F. SUMMARY OF CHANGES IN UNITS (CONTINUED)
The following schedule summarizes the changes in divisional units for the year
ended December 31, 1995:
<TABLE>
<CAPTION>
INCREASE (DECREASE) FOR
OUTSTANDING INCREASE (DECREASE) SURRENDERS OUTSTANDING
AT BEGINNING FOR PAYMENTS FOR DIVISIONAL AND AT END
DIVISION OF YEAR RECEIVED TRANSFERS WITHDRAWALS OF YEAR
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Neuberger & Berman:
Limited Maturity Bond 0.000 28,550.417 535,423.290 (485.791) 563,487.916
Growth 0.000 6,759.201 7,231.576 (23.087) 13,967.690
Government Income 0.000 4,707.897 8,729.396 0.000 13,437.293
Partners 0.000 7,342.324 11,109.961 (27.105) 18,425.180
Fred Alger Management, Inc.:
American Small Capitalization 0.000 34,490.795 74,884.162 (253.854) 109,121.103
American MidCap Growth 983.060 6,379.230 38,016.700 (106.698) 45,272.292
American Growth 0.000 19,515.027 41,340.688 (279.223) 60,576.492
American Leveraged AllCap 0.000 3,111.285 17,756.660 (231.419) 20,636.526
Fidelity Management & Research Co.:
Asset Manager 0.000 29,351.671 32,839.606 (34.774) 62,156.503
Growth 0.000 37,542.280 54,491.189 (329.978) 91,703.491
Overseas 1,358.026 23,914.698 66,269.711 (174.845) 91,367.590
Money Market 52,413.096 1,440,901.131 (1,196,570.183) (36,973.589) 259,770.455
Index 500 0.000 12,914.586 32,293.190 (166.033) 45,041.743
INVESCO Funds Group, Inc:
Total Return 0.000 23,583.529 42,555.885 (66.021) 66,073.393
Industrial Income 0.000 27,723.972 53,628.382 (85.925) 81,266.429
High Yield 676.252 2,806.893 51,352.369 (87.292) 54,748.222
Utilities 0.000 9,926.645 12,395.666 (8.731) 22,313.580
Van Eck Investment Trust:
Worldwide Balanced 513.000 2,705.801 11,503.174 0.000 14,721.975
Gold and Natural Resources 700.158 1,441.696 5,159.881 0.000 7,301.735
</TABLE>
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82
Exchequer
<PAGE>
Security Life Separate Account A1
Notes to Financial Statements (continued)
NOTE G. NET ASSETS
Net assets at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
ACCUMULATED NET
ACCUMULATED NET REALIZED UNREALIZED
INVESTMENT GAINS GAINS
PRINCIPAL INCOME (LOSSES) ON (LOSSES) ON
DIVISION TRANSACTIONS (LOSS) INVESTMENTS INVESTMENTS NET ASSETS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Neuberger & Berman:
Limited Maturity Bond $ 2,826,370 $ 343,910 $(198,651) $ 98,579 $ 3,070,208
Growth 1,854,416 25,261 (32,219) 74,129 1,921,587
Government Income 636,809 1,753 (4,663) 24,337 658,236
Partners 2,869,236 (987) 43,355 351,450 3,263,054
Fred Alger Management, Inc.:
American Small Capitalization 5,262,441 (54,539) 99,089 (29,565) 5,277,426
American MidCap Growth 3,147,341 3,117 67,686 86,483 3,304,627
American Growth 2,539,257 25,030 57,982 132,923 2,755,192
American Leveraged AllCap 1,554,986 (9,369) 40,127 37,983 1,623,727
Fidelity Management & Research Co:
Asset Manager 2,856,149 30,028 41,929 209,094 3,137,200
Growth 5,563,576 45,029 1,182 287,216 5,897,003
Overseas 4,458,171 (18,999) 40,759 335,032 4,814,963
Money Market 9,700,857 282,557 - - 9,983,414
Index 500 5,009,566 (289) 50,552 476,332 5,536,161
INVESCO Funds Group, Inc.:
Total Return 2,834,029 77,743 17,105 141,202 3,070,079
Industrial Income 4,018,324 307,721 76,889 193,073 4,596,007
High Yield 3,497,473 345,500 29,829 (41,744) 3,831,058
Utilities 2,282,929 41,831 12,610 73,310 2,410,680
Van Eck Investment Trust:
Worldwide Balanced 866,695 (10,017) 20,242 63,273 940,193
Gold and Natural Resources 968,184 761 8,873 30,404 1,008,222
--------------------------------------------------------------------------
Total $62,746,809 $1,436,041 $ 372,676 $2,543,511 $67,099,037
==========================================================================
</TABLE>
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83
Exchequer
