<PAGE>
As filed with the Securities and Exchange Commission on April 23, 1996
Registration No. 33-88148
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
Post-Effective Amendment No. 1
_________________
SECURITY LIFE SEPARATE ACCOUNT L1
(Exact Name of Trust)
SECURITY LIFE OF DENVER INSURANCE COMPANY
(Name of Depositor)
1290 Broadway
Denver, Colorado 80203-5699
(Address of Depositors Principal Executive Offices)
Copy to:
EUGENE L. COPELAND, Esq. KURT W. BERNLOHR, Esq.
Security Life of Denver Insurance Security Life of Denver Insurance
Company Company
1290 Broadway 1290 Broadway
Denver, Colorado 80203-5699 Denver, Colorado 80203-5699
(Name and Address of Agent for (303) 894-4923
Service)
----------
It is proposed that this filing will become effective:
___ on (date) pursuant to paragraph (a) of Rule 485
___ 60 days after filing pursuant to paragraph (a) of Rule 485
X on May 1, 1996 pursuant to paragraph (b) of Rule 485
___ immediately upon filing pursuant to paragraph (b) of Rule 485
___ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title and amount of securities being registered: Interests under variable life
insurance policies.
Approximate Date of Proposed Public Offering: As soon as practical after the
effective date.
Registrant elects to be governed by Rule 6e-3(T)(b)(13)(i)(A) under the
Investment Company Act of 1940 with respect to the policy described in the
Prospectus.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has registered an indefinite amount of securities. Registrant filed its Form
24f-2 on February 28, 1996 for its most recent fiscal year ending December 31,
1995.
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 33-88148)
Cross-Reference Table
<TABLE>
<CAPTION>
Form N-8B-2 Item No. Caption in Prospectus
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<S> <C>
1, 2 Cover;, Security Life of Denver Insurance
Company; Security Life Separate Account L1
3 Inapplicable
4 Security Life of Denver Insurance Company
5, 6 Security Life Separate Account L1
7 Inapplicable
8 Financial Statements
9 Inapplicable
10(a), (b), (c), (d), (e) Policy Summary; Policy Values, Determining the
Value of AmountsYou Have in the Divisions of the
Variable Account; Charges, Deductions and Refunds;
Surrender; Partial Withdrawals; The Guaranteed
Interest Division; Transfers of Account Values;
Right to Exchange Policy; Lapse; Reinstatement;
Premiums
10(f) Voting Privileges; Rights to Change Operations
10(g), (h) Right to Change Operations
10(i) Tax Considerations; Detailed Information about
the Strategic Advantage Variable Universal Life
Policy; Other General Policy Provisions;
The Guaranteed Interest Division
11, 12 Security Life Separate Account L1
13 Policy Summary; Charges, Deductions and
Refunds; Corporate Purchasers and Group or
Sponsored Arrangements
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Form N-8B-2 Item No. Caption in Prospectus
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<S> <C>
14, 15 Policy Summary; Free Look; Other General
Policy Provisions; Applying for a Policy
16 Premiums; Allocation of Net Premiums; How We
Calculate Accumulation Unit Values for Each
Division
17 Payment; Surrender; Partial Withdrawal
18 Policy Summary; Tax Considerations; Detailed
Information about the Strategic Advantage Variable
Universal Life Policy; Security Life Separate
Account L1; Persistency Refund
19 Reports to Policy Owners; Notification
and Claims Procedures; Performance
Information
20 See 10(g) & 10(a)
21 Policy Loans
22 Policy Summary; Premiums; Grace Period; Security
Life Separate Account L1; Detailed Information
about the Strategic Advantage Variable Universal
Life Policy
23 Inapplicable
24 Inapplicable
25 Security Life of Denver Insurance Company
26 Inapplicable
27, 28, 29, 30 Security Life of Denver Insurance Company
31, 32, 33, 34 Inapplicable
35 Inapplicable
36 Inapplicable
</TABLE>
(iii)
<PAGE>
<TABLE>
<CAPTION>
Form N-8B-2 Item No. Caption in Prospectus
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<S> <C>
37 Inapplicable
38, 39, 40, 41(a) Other General Policy Provisions; Distribution
of the Policies; Security Life of Denver
Insurance Company
41(b), 41(c), 42, 43 Inapplicable
44 Determining the Value You have in the Divisions of
the Variable Account; How We Calculate
Accumulation Unit Values for Each Division
45 Inapplicable
46 Partial Withdrawals; Detailed Information
about the Strategic Advantage Variable Universal
Life Policy
47, 48, 49, 50 Inapplicable
51 Detailed Information about the Strategic Advantage
Variable Universal Life Policy
52 Determining the Value You Have in the Divisions of
the Variable Account; Right to Change
Operations
53(a) Tax Considerations
53(b), 54, 55 Inapplicable
56, 57, 58 Inapplicable
59 Financial Statements
</TABLE>
(iv)
<PAGE>
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
SECURITY LIFE OF DENVER INSURANCE COMPANY
AND
SECURITY LIFE SEPARATE ACCOUNT L1
This prospectus describes Strategic Advantage, an individual flexible premium
variable universal life insurance policy (the "Policy" or collectively,
"Policies") issued by Security Life of Denver Insurance Company ("Security
Life"). The Policy provides insurance coverage with flexibility in death
benefits and premium payments. The Policy is designed primarily for use on a
multiple-life basis where the Insureds share a common employment or business
relationship, and it may be owned individually or by a corporation, trust,
association or similar entity. The Policy is funded by Security Life Separate
Account L1 (the "Variable Account"). Nineteen Divisions of the Variable Account
are available under the Policy. A Guaranteed Interest Division, which guarantees
a minimum fixed rate of interest, is also available. Purchasers may utilize both
the Divisions of the Variable Account and the Guaranteed Interest Division
simultaneously. The Loan Division represents amounts we set aside as collateral
for any Policy Loans taken.
We will pay the Death Proceeds when the Insured dies if the Policy is still in
force. The Death Proceeds will equal the death benefit, reduced by any
outstanding Policy Loan, accrued loan interest, and any charges due during the
grace period. The death benefit consists of two elements: the Base Death Benefit
and any amount added by Rider. The Policy will remain in force as long as the
Net Account Value remains positive. If at all times during the first three
Policy years, the sum of premiums paid minus Partial Withdrawals taken and any
Policy Loan and accrued loan interest is greater than or equal to one twelfth of
the Minimum Annual Premium times the number of completed months this Policy has
been in effect, the Policy will not lapse regardless of the amount of the Net
Account Value. If the Guaranteed Minimum Death Benefit provision is purchased,
the Stated Death Benefit portion of the Policy will remain in force for the
Guarantee Period. To continue the Guarantee Period, the required premiums must
be paid and the Net Account Value must remain diversified.
The Policy permits the Owner to choose from three death benefit options which
may increase the Base Death Benefit above the Stated Death Benefit: Option 1, a
fixed benefit that equals the Stated Death Benefit; Option 2, a benefit that
equals the Stated Death Benefit plus the Account Value; or Option 3, a benefit
that equals the Stated Death Benefit plus the sum of premiums paid minus Partial
Withdrawals taken to date. The Base Death Benefit in force as of any Valuation
Date will not be less than the amount necessary to qualify the Policy as a life
insurance contract under the Internal Revenue Code in existence at the time the
Policy is issued.
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.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
A PROSPECTUS FOR THE PORTFOLIO OR PORTFOLIOS BEING CONSIDERED
MUST ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ IN CONJUNCTION HEREWITH.
DATE OF PROSPECTUS: MAY 1, 1996
<PAGE>
When applying for the Policy, the Owner will irrevocably choose which of two
tests for compliance with the FederalFederal income tax law definition of life
insurance we will apply to the Policy. These tests are the Cash Value
Accumulation Test and the Guideline Premium/Cash Value Corridor Test. If the
Guideline Premium/Cash Value Corridor Test is chosen, premium amounts will be
limited based on the death benefit of the Policy. See Life Insurance
Definition, page 40.
We will not allocate funds to the Policy until we receive at least one quarter
of the Minimum Annual Premium, and we have approved the Policy for issue.
Thereafter, the timing and amount of premium payments may vary, within specified
limits. A higher premium level may be required to keep the Guaranteed Minimum
Death Benefit in force. After certain deductions have been made, Net Premiums
may be allocated to one or more of the Divisions of the Variable Account and to
the Guaranteed Interest Division. A Policy may be returned according to the
terms of the Right to Examine Policy Period (also called the Free-Look Period),
during which time Net Premiums allocated to the Variable Account will be held in
the Division investing in the Fidelity VIPInvestments Money Market Portfolio
Division of the Variable Account. The assets of the Divisions of the Variable
Account will be used to purchase, at net asset value, shares of designated
Portfolios of various investment companies. The Policy Account Value is the sum
of the amounts in the Divisions of the Variable Account plus the amount in the
Guaranteed Interest Division and the amount in the Loan Division. The value of
the amounts allocated to the Divisions of the Variable Account will vary with
the investment experience of the corresponding Portfolios; there is no minimum
guaranteed cash value for amounts allocated to the Divisions of the Variable
Account. The value of amounts allocated to the Guaranteed Interest Division will
depend on the interest rates we declare. The Account Value will also reflect
deductions for the cost of insurance and expenses, as well as increases for
additional Net Premiums.
Replacing existing insurance coverage with the Policy described in this
prospectus may not be advantageous.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ISSUED BY: Security Life of Denver BROKER DEALER: ING America Equities, Inc.
Insurance Company 1290 Broadway,
Security Life Center Attn: Variable
1290 Broadway Denver, CO 80203-5699
Denver, CO 80203-5699 (303) 860-2000
(800) 525-9852
THROUGH ITS: Security Life Separate Account L1
ADMINISTERED AT: Customer Service Center
P.O. Box 173763
Denver, CO 80217-3763
(800) 933-5858
</TABLE>
PROSPECTUS DATED: May 1, 1996
________________________________________________________________________________
Strategic Advantage 2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS............................................................. 7
POLICY SUMMARY.................................................................................................. 10
General Information............................................................................................. 10
Death Benefits.................................................................................................. 10
Benefits at Maturity............................................................................................ 11
Additional Benefits............................................................................................. 11
Premiums........................................................................................................ 11
Allocation of Net Premiums...................................................................................... 12
Policy Values................................................................................................... 12
Determining the Value in the Divisions of the Variable Account.................................................. 12
How We Calculate Accumulation Unit Values for Each Division..................................................... 12
Transfers of Account Values..................................................................................... 12
Dollar Cost Averaging........................................................................................... 13
Automatic Rebalancing........................................................................................... 13
Loans........................................................................................................... 13
Partial Withdrawals............................................................................................. 13
Surrender....................................................................................................... 14
Right to Exchange Policy........................................................................................ 14
Lapse........................................................................................................... 14
Reinstatement................................................................................................... 14
Charges and Deductions.......................................................................................... 14
Persistency Refund.............................................................................................. 15
Refund of Sales Charges......................................................................................... 15
Tax Considerations.............................................................................................. 15
INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT,
THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION..................................................... 16
Security Life of Denver Insurance Company....................................................................... 16
Security Life Separate Account L1............................................................................... 16
Investment Objectives of the Portfolios......................................................................... 17
The Guaranteed Interest Division................................................................................ 20
DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE
VARIABLE UNIVERSAL LIFE POLICY.................................................................................. 20
Applying for a Policy........................................................................................... 20
Premiums........................................................................................................ 21
Scheduled Premiums............................................................................................. 21
Unscheduled Premium Payments................................................................................... 21
Minimum Annual Premium......................................................................................... 21
Premium Payments Affect The Continuation of Coverage........................................................... 22
Choice of Definitional Tests................................................................................... 22
Choice of Guaranteed Minimum Death Benefit Provisions.......................................................... 22
Modified Endowment Contracts................................................................................... 22
Allocation of Net Premiums...................................................................................... 22
Death Benefits.................................................................................................. 23
Death Benefit Options.......................................................................................... 23
Changes In Death Benefit Option................................................................................ 23
Guaranteed Minimum Death Benefit Provision..................................................................... 24
Requirements to Maintain the Guarantee Period.................................................................. 25
- ---------------------------------------------------------------------------------------------------------------------
Strategic Advantage 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Changes In Death Benefit Amounts............................................................................ 25
Benefits at Maturity......................................................................................... 26
Additional Benefits.......................................................................................... 26
Accidental Death Benefit Rider.............................................................................. 26
Adjustable Term Insurance Rider............................................................................. 26
Additional Insured Rider.................................................................................... 27
Guaranteed Insurability Rider............................................................................... 27
Right to Exchange Rider..................................................................................... 27
Waiver of Cost of Insurance Rider........................................................................... 27
Waiver of Specified Premium Rider........................................................................... 27
Policy Values................................................................................................ 28
Account Value............................................................................................... 28
Cash Surrender Value........................................................................................ 28
Net Cash Surrender Value.................................................................................... 28
Net Account Value........................................................................................... 28
Determining the Value of Amounts in the Divisions of the Variable Account.................................... 28
How We Calculate Accumulation Unit Values for Each Division.................................................. 28
Transfers of Account Values.................................................................................. 29
Dollar Cost Averaging........................................................................................ 29
Automatic Rebalancing........................................................................................ 30
Policy Loans................................................................................................. 31
Partial Withdrawals.......................................................................................... 32
Surrender.................................................................................................... 33
Right to Exchange Policy..................................................................................... 33
Lapse........................................................................................................ 33
If Guaranteed Minimum Death Benefit Provision Is Not in Effect.............................................. 33
If the Guaranteed Minimum Death Benefit Provision Is in Effect.............................................. 33
Grace Period................................................................................................. 34
Reinstatement................................................................................................ 34
CHARGES, DEDUCTIONS AND REFUNDS.............................................................................. 34
Deductions from Premiums..................................................................................... 34
Tax Charges................................................................................................. 34
Sales Charges............................................................................................... 34
Daily Deductions from the Variable Account................................................................... 35
Mortality and Expense Risk Charge........................................................................... 35
Monthly Deductions from the Account Value.................................................................... 35
Initial Policy Charge....................................................................................... 35
Monthly Administrative Charge............................................................................... 35
Cost Of Insurance Charges................................................................................... 36
Charges For Additional Benefits............................................................................. 36
Guaranteed Minimum Death Benefit Charge..................................................................... 36
Changes In Monthly Charges.................................................................................. 36
Policy Transaction Fees...................................................................................... 37
Partial Withdrawal.......................................................................................... 37
Transfers................................................................................................... 37
Premium Allocation Charges.................................................................................. 37
Illustrations............................................................................................... 37
Persistency Refund........................................................................................... 37
Refund of Sales Charges...................................................................................... 38
Charges from Portfolios...................................................................................... 38
Group or Sponsored Arrangements.............................................................................. 40
Other Charges................................................................................................ 40
- ------------------------------------------------------------------------------------------------------------------
Strategic Advantage 4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TAX CONSIDERATIONS........................................................................................... 40
Life Insurance Definition.................................................................................... 40
Diversification Requirements................................................................................. 41
Modified Endowment Contracts................................................................................. 41
Tax Treatment of Premiums.................................................................................... 42
Loans, Surrenders and Withdrawals............................................................................ 42
If the Policy is Not a Modified Endowment Contract.......................................................... 42
If the Policy is a Modified Endowment Contract.............................................................. 42
Alternative Minimum Tax...................................................................................... 43
Tax-exempt Policy Owners..................................................................................... 43
Changes to Comply with Law................................................................................... 43
Other........................................................................................................ 43
ADDITIONAL INFORMATION ABOUT THE POLICY...................................................................... 44
Voting Privileges............................................................................................ 44
Right to Change Operations................................................................................... 45
Reports to Owners............................................................................................ 45
OTHER GENERAL POLICY PROVISIONS.............................................................................. 45
Free Look Period............................................................................................. 45
The Policy................................................................................................... 46
Age.......................................................................................................... 46
Ownership.................................................................................................... 46
Beneficiary.................................................................................................. 46
Collateral Assignment........................................................................................ 46
Incontestability............................................................................................. 46
Misstatements of Age or Sex.................................................................................. 46
Suicide...................................................................................................... 46
Payment...................................................................................................... 47
Notification and Claims Procedures........................................................................... 47
Telephone Privileges......................................................................................... 47
Non-Participating............................................................................................ 48
Distribution of the Policies................................................................................. 48
Settlement Provisions........................................................................................ 48
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND
ACCUMULATED PREMIUMS......................................................................................... 50
ADDITIONAL INFORMATION....................................................................................... 58
Directors and Officers....................................................................................... 58
State Regulation............................................................................................. 61
Legal Matters................................................................................................ 61
Legal Proceedings............................................................................................ 61
Experts...................................................................................................... 61
Registration Statement....................................................................................... 62
FINANCIAL STATEMENTS......................................................................................... 62
APPENDIX A................................................................................................... 120
APPENDIX B................................................................................................... 128
APPENDIX C................................................................................................... 129
Performance Information...................................................................................... 129
- ------------------------------------------------------------------------------------------------------------------
Strategic Advantage 5
</TABLE>
<PAGE>
IN THIS PROSPECTUS "WE," "US" AND "OUR" REFER TO
SECURITY LIFE OF DENVER INSURANCE COMPANY.
THIS POLICY IS NOT AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATION REGARDING THE
OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR ANY ATTACHED SUPPLEMENT HERETO.
- -------------------------------------------------------------------------------
Strategic Advantage 6
<PAGE>
DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS
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.
ACCOUNT VALUE -- THE SUM OF THE AMOUNTS ALLOCATED TO THE DIVISIONS OF THE
VARIABLE ACCOUNT AND TO THE GUARANTEED INTEREST DIVISION, AS WELL AS ANY
AMOUNT SET ASIDE IN THE LOAN DIVISION TO SECURE A POLICY LOAN.
ACCUMULATION UNIT -- A UNIT OF MEASUREMENT WHICH WE USE TO CALCULATE THE ACCOUNT
VALUE IN EACH DIVISION OF THE VARIABLE ACCOUNT.
ACCUMULATION UNIT VALUE -- THE VALUE OF THE ACCUMULATION UNITS OF EACH
DIVISION OF THE VARIABLE ACCOUNT. THE ACCUMULATION UNIT VALUE IS DETERMINED
AS OF EACH VALUATION DATE.
ADJUSTABLE TERM INSURANCE RIDER -- THE ADJUSTABLE TERM INSURANCE RIDER IS
AVAILABLE TO ADD DEATH BENEFIT COVERAGE TO THE POLICY. THE ADJUSTABLE TERM
INSURANCE RIDER ALLOWS THE OWNER TO SCHEDULE THE PATTERN OF DEATH BENEFITS
APPROPRIATE FOR FUTURE NEEDS. THE ADJUSTABLE TERM INSURANCE RIDER IS NOT
GUARANTEED UNDER THE GUARANTEED MINIMUM DEATH BENEFIT PROVISION.
AGE -- THE INSUREDS AGE AT ANY TIME IS HIS OR HER AGE ON THE BIRTHDAY NEAREST
THE POLICY DATE INCREASED BY THE NUMBER OF FULL POLICY YEARS ELAPSED SINCE
THE POLICY DATE.
BASE DEATH BENEFIT -- THE BASE DEATH BENEFIT WILL VARY ACCORDING TO WHICH DEATH
BENEFIT OPTION IS CHOSEN: UNDER OPTION 1, THE BASE DEATH BENEFIT EQUALS THE
STATED DEATH BENEFIT OF THE POLICY. UNDER OPTION 2, THE BASE DEATH BENEFIT
EQUALS THE STATED DEATH BENEFIT OF THE POLICY PLUS THE ACCOUNT VALUE. UNDER
OPTION 2, THE BASE DEATH BENEFIT FLUCTUATES WITH THE AMOUNT OF THE ACCOUNT
VALUE, BUT WILL NEVER BE LESS THAN THE STATED DEATH BENEF IT. UNDER OPTION 3,
THE BASE DEATH BENEFIT EQUALS THE STATED DEATH BENEFIT OF THE POLICY PLUS THE
SUM OF ALL PREMIUMS PAID MINUS PARTIAL WITHDRAWALS TAKEN UNDER THE POLICY.
UNDER OPTION 3, THE BASE DEATH BENEFIT GENERALLY WILL INCREASE AS PREMIUMS
ARE PAID AND DECREASE AS PARTIAL WITHDRAWALS ARE TAKEN. IN NO EVENT WILL THE
BASE DEATH BENEFIT BE LESS THAN THE STATED DEATH BENEFIT. THE BASE DEATH
BENEFIT MAY BE INCREASED FROM THE AMOUNT DESCRIBED TO COMPLY WITH THE FEDERAL
INCOME TAX LAW DEFINITION OF LIFE INSURANCE, REGARDLESS OF DEATH BENEFIT
OPTION SELECTED.
BENEFICIARY(IES) -- THE PERSON OR PERSONS DESIGNATED TO RECEIVE THE DEATH
PROCEEDS IN THE CASE OF THE DEATH OF THE INSURED.
CASH SURRENDER VALUE -- THE AMOUNT OF THE ACCOUNT VALUE PLUS ANY REFUND OF SALES
CHARGES DUE.
CUSTOMER SERVICE CENTER -- OUR ADMINISTRATIVE OFFICE AT P.O. BOX 173763,
DENVER, CO 80217-3763.
DEATH PROCEEDS -- THE AMOUNT PAYABLE ON THE DEATH OF THE INSURED. IT EQUALS THE
BASE DEATH BENEFIT PLUS THE ADJUSTABLE TERM INSURANCE RIDER, IF
APPLICABLEANY, REDUCED BY ANY OUTSTANDING POLICY LOAN AND ACCRUED LOAN
INTEREST. IF DEATH OCCURS AFTER THE POLICY HAS ENTERED THE GRACE PERIOD,
DEATH PROCEEDS WILL BE FURTHER REDUCED BY ANY POLICY CHARGES INCURRED BUT NOT
YET DEDUCTED.
DIVISION(S) -- THE INVESTMENT OPTIONS AVAILABLE: THE DIVISIONS OF THE VARIABLE
ACCOUNT, EACH OF WHICH INVESTS IN SHARES OF ONE OF THE PORTFOLIOS; THE
GUARANTEED INTEREST DIVISION; AND THE LOAN DIVISION.
FREE LOOK PERIOD -- THE PERIOD OF TIME WITHIN WHICH THE OWNER MAY EXAMINE
THE POLICY AND RETURN IT FOR A REFUND. THIS IS ALSO CALLED THE RIGHT TO
EXAMINE POLICY PERIOD.
GENERAL ACCOUNT -- THE ACCOUNT WHICH CONTAINS ALL OF OUR ASSETS OTHER THAN THOSE
HELD IN THE VARIABLE ACCOUNT OR OUR OTHER SEPARATE ACCOUNTS.
GUARANTEED INTEREST DIVISION -- PART OF OUR GENERAL ACCOUNT TO WHICH A PORTION
OF THE ACCOUNT VALUE MAY BE ALLOCATED AND WHICH PROVIDES GUARANTEES OF
PRINCIPAL AND INTEREST. SEE THE GUARANTEED INTEREST DIVISION, PAGE 20.
GUARANTEED MINIMUM DEATH BENEFIT -- THE PROVISION IN THE POLICY WHICH GUARANTEES
THAT THE STATED DEATH BENEFIT WILL REMAIN IN FORCE FOR THE GUARANTEE PERIOD
REGARDLESS OF THE AMOUNT OF THE NET ACCOUNT VALUE, PROVIDED CERTAIN
CONDITIONS ARE MET. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 24.
GUARANTEE PERIOD -- THE PERIOD DURING WHICH THE STATED DEATH BENEFIT IS
GUARANTEED UNDER THE GUARANTEED
- -------------------------------------------------------------------------------
Strategic Advantage 7
<PAGE>
MINIMUM DEATH BENEFIT PROVISION. THE TWO AVAILABLE GUARANTEE PERIODS ARE (I)
TO THE INSUREDS AGE 65 OR 10 YEARS FROM THE POLICY DATE, WHICHEVER IS LATER,
OR (II) THE LIFETIME OF THE INSURED. THE GUARANTEE PERIOD WILL END PRIOR TO
THE SELECTED DATE ANY TIME THE REQUIRED PREMIUMS HAVE NOT BEEN PAID OR ON ANY
MONTHLY PROCESSING DATE THAT THE NET ACCOUNT VALUE IS NOT DIVERSIFIED
ACCORDING TO OUR REQUIREMENTS. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE
24.
INSURED -- THE PERSON ON WHOSE LIFE THIS POLICY IS ISSUED AND UPON WHOSE DEATH
THE DEATH PROCEEDS ARE PAYABLE.
INVESTMENT DATE -- THE DATE ON WHICH THE INITIAL NET PREMIUM WE RECEIVE WILL BE
ALLOCATED TO THE POLICY. WE WILL NOT ALLOCATE FUNDS TO THE POLICY UNTIL WE
RECEIVE AT LEAST ONE QUARTER OF THE MINIMUM ANNUAL PREMIUM AS SHOWN IN THE
SCHEDULE ATTACHED TO THE POLICY AND WE HAVE APPROVED THE POLICY FOR ISSUE.
LOAN DIVISION -- PART OF OUR GENERAL ACCOUNT IN WHICH FUNDS ARE SET ASIDE TO
SECURE ANY OUTSTANDING POLICY LOAN AND ACCRUED LOAN INTEREST WHEN DUE.
MATURITY DATE -- THE DATE THE POLICY MATURES. THIS IS THE POLICY ANNIVERSARY ON
WHICH THE INSURED'S AGE IS NEAREST 100.
MINIMUM ANNUAL PREMIUM -- TWENTY-FIVE PERCENT OF THIS PREMIUM MUST BE PAID
BEFORE WE WILL ISSUE THE POLICY. IF ON EACH MONTHLY PROCESSING DATE DURING
THE FIRST THREE POLICY YEARS, THE SUM OF PREMIUMS PAID, LESS THE SUM OF
PARTIAL WITHDRAWALS AND POLICY LOAN TAKEN AND ACCRUED LOAN INTEREST, IS
GREATER THAN OR EQUAL TO ONE TWELFTH OF THE MINIMUM ANNUAL PREMIUM TIMES THE
NUMBER OF COMPLETED POLICY MONTHS, THE POLICY IS GUARANTEED NOT TO LAPSE,
REGARDLESS OF ITS NET ACCOUNT VALUE. SEE MINIMUM ANNUAL PREMIUM, PAGE 21.
MONTHLY PROCESSING DATE -- THE DATE EACH MONTH ON WHICH THE MONTHLY DEDUCTIONS
FROM THE ACCOUNT VALUE ARE DUE. THE FIRST MONTHLY PROCESSING DATE WILL BE THE
POLICY DATE OR THE INVESTMENT DATE, IF LATER. SUBSEQUENT MONTHLY PROCESSING
DATES WILL BE THE SAME DATE AS THE POLICY DATE EACH MONTH THEREAFTER UNLESS
THIS IS NOT A VALUATION DATE, IN WHICH CASE THE MONTHLY PROCESSING DATE
OCCURS ON THE NEXT VALUATION DATE.
NASD -- THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
NET ACCOUNT VALUE -- THE AMOUNT OF THE ACCOUNT VALUE MINUS ANY POLICY LOAN AND
ACCRUED LOAN INTEREST.
NET AMOUNT AT RISK -- THE DIFFERENCE BETWEEN THE CURRENT BASE DEATH BENEFIT AND
THE AMOUNT OF THE ACCOUNT VALUE.
NET CASH SURRENDER VALUE -- THE AMOUNT AVAILABLE IF THE POLICY IS SURRENDERED,
WHICH IS EQUAL TO THE CASH SURRENDER VALUE MINUS ANY POLICY LOAN AND ACCRUED
LOAN INTEREST.
NET PREMIUM -- PREMIUM AMOUNTS PAID LESS THE SALES AND TAX CHARGES. THESE
CHARGES ARE DEDUCTED FROM THE PREMIUMS BEFORE THE PREMIUM IS APPLIED TO THE
ACCOUNT VALUE.
OWNER -- THE INDIVIDUAL, ENTITY, PARTNERSHIP, REPRESENTATIVE OR PARTY WHO CAN
EXERCISE ALL RIGHTS OVER AND RECEIVE THE BENEFITS OF THE POLICY DURING THE
INSURED'S LIFETIME.
PARTIAL WITHDRAWAL -- THE WITHDRAWAL OF A PORTION OF THE NET CASH SURRENDER
VALUE FROM THE POLICY. THE PARTIAL WITHDRAWAL MAY REDUCE THE AMOUNT OF BASE
DEATH BENEFIT AND TARGET DEATH BENEFIT IN FORCE. SEE PARTIAL WITHDRAWALS,
PAGE 32.
POLICY -- THE POLICY CONSISTING OF THE BASIC POLICY, ANY APPLICATIONS AND ANY
RIDERS OR ENDORSEMENTS.
POLICY LOAN -- THE SUM OF AMOUNTS BORROWED FROM THE POLICY, INCREASED BY ANY
POLICY LOAN INTEREST CAPITALIZED WHEN DUE, AND REDUCED BY ANY POLICY LOAN
REPAYMENTS.
POLICY DATE -- THE DATE UPON WHICH THE POLICY BECOMES EFFECTIVE. THE POLICY DATE
IS USED TO DETERMINE THE MONTHLY PROCESSING DATE, POLICY MONTHS, POLICY
YEARS, AND POLICY MONTHLY, QUARTERLY, SEMI-ANNUAL AND ANNUAL ANNIVERSARIES.
UNLESS OTHERWISE INDICATED, THE TERM "POLICY ANNIVERSARY" REFERS TO THE
ANNUAL ANNIVERSARY OF THE POLICY.
PORTFOLIOS -- THE INVESTMENT OPTIONS AVAILABLE TO THE DIVISIONS OF THE VARIABLE
ACCOUNT. EACH PORTFOLIO HAS A DEFINED INVESTMENT OBJECTIVE.
PREMIUM CLASS -- THE UNDERWRITING CLASS INTO WHICH THE INSURED IS CATEGORIZED.
THIS INCLUDES FACTORS SUCH AS THE SMOKING STATUS OF THE INSURED, THE
APPROACH TO MEDICAL EXAMINATIONS WE MAY USE IN ISSUING THE POLICY, AS WELL AS
ANY SUBSTANDARD RATINGS WHICH MAY APPLY. THE PREMIUM CLASS FOR THE POLICY IS
LISTED IN THE SCHEDULE.
RIDER -- A RIDER ADDS BENEFITS TO THE POLICY.
SCHEDULE -- THE PAGES CONTAINED IN ATTACHED TO THE POLICY WHICH INCLUDE THE
INFORMATION SPECIFIC TO THE POLICY, SUCH AS THE INSUREDS AGE, THE POLICY
DATE, ETC.
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Strategic Advantage 8
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SCHEDULED PREMIUM -- THE PREMIUM AMOUNT SPECIFIED BY THE OWNER ON THE
APPLICATION AS THE AMOUNT WHICH IS INTENDED TO BE PAID AT FIXED INTERVALS
OVER A SPECIFIED PERIOD OF TIME. WE WILL SEND PREMIUM REMINDER NOTICES FOR
THE AMOUNT OF THE SCHEDULED PREMIUM ON A QUARTERLY, SEMIANNUAL, OR ANNUAL
BASIS, AS SPECIFIED; THE SCHEDULED PREMIUM NEED NOT BE PAID, AND IT MAY BE
CHANGED AT ANY TIME. ALSO, WITHIN LIMITS, THE OWNER MAY PAY LESS OR MORE THAN
THE SCHEDULED PREMIUM. SEE SCHEDULED PREMIUMS, PAGE 21.
SEC -- THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION.
STATED DEATH BENEFIT -- THE INITIAL AMOUNT OF BASE DEATH BENEFIT UNDER THE
POLICY. THE STATED DEATH BENEFIT AMOUNT WILL NOT VARY UNLESS THE OWNER
CHANGES IT.
TARGET DEATH BENEFIT -- WHEN ADJUSTABLE TERM INSURANCE RIDER IS ADDED TO THE
POLICY, THE OWNER SPECIFIES THE TARGET DEATH BENEFIT AND STATED DEATH BENEFIT
IN THE APPLICATION FOR THE POLICY; THE ADJUSTABLE TERM INSURANCE RIDER DEATH
BENEFIT IS THE DIFFERENCE BETWEEN THE TARGET DEATH BENEFIT AND THE BASE DEATH
BENEFIT PROVIDED BY THE POLICY. IN NO EVENT WILL THE ADJUSTABLE TERM
INSURANCE RIDER DEATH BENEFIT BE LESS THAN ZERO. THE ADJUSTABLE TERM
INSURANCE RIDER AUTOMATICALLY ADJUSTS OVER TIME FOR CHANGES IN THE BASE DEATH
BENEFIT DUE TO THE FEDERAL INCOME TAX LAW DEFINITION OF LIFE INSURANCE TO
KEEP THE TARGET DEATH BENEFIT AT THE DESIRED AMOUNT. THE TARGET DEATH BENEFIT
FOR EACH YEAR WILL BE SHOWN IN THE SCHEDULE WHEN AN ADJUSTABLE TERM INSURANCE
RIDER EXISTS ON THE POLICY.
TARGET PREMIUM -- THE PREMIUM ON WHICH THE SALES CHARGE IS CALCULATED. SEE
SALES CHARGES, PAGE 34.
TRANSACTION DATE -- THE DATE WE RECEIVE A PREMIUM OR AN ACCEPTABLE WRITTEN OR
TELEPHONE REQUEST AT OUR CUSTOMER SERVICE CENTER. IF A PREMIUM OR REQUEST
REACHES OUR CUSTOMER SERVICE CENTER ON A DAY WHICH IS NOT A VALUATION DATE,
OR AFTER THE CLOSE OF BUSINESS ON A VALUATION DATE (THAT IS, AFTER 4:00 P.M.
EASTERN TIME), THE TRANSACTION DATE WILL BE THE NEXT SUCCEEDING VALUATION
DATE.
VALUATION DATE -- EACH DATE AS OF WHICH THE NET ASSET VALUE OF THE SHARES 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 THAT A
DIVISION'S CORRESPONDING PORTFOLIO DOES NOT VALUE ITS SHARES.
VALUATION PERIOD -- THE PERIOD WHICH BEGINS AT 4:00 P.M. EASTERN TIME ON A
VALUATION DATE AND ENDS AT 4:00 P.M. EASTERN TIME ON THE NEXT SUCCEEDING
VALUATION DATE.
VARIABLE ACCOUNT -- SECURITY LIFE SEPARATE ACCOUNT L1 ESTABLISHED BY SECURITY
LIFE TO SEGREGATE THE ASSETS FUNDING THE POLICY FROM THE ASSETS IN OUR
GENERAL ACCOUNT. THE VARIABLE ACCOUNT IS DIVIDED INTO DIVISIONS, EACH OF
WHICH INVESTS IN SHARES OF ONE OF THE PORTFOLIOS.
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Strategic Advantage 9
<PAGE>
POLICY SUMMARY
THE PURPOSE OF THIS POLICY SUMMARY IS TO PROVIDE A BRIEF OVERVIEW OF THE POLICY.
FURTHER DETAIL IS PROVIDED IN THE POLICY AND IN THE DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS
ASSUMES THAT ANY STATE VARIATION WILL BE COVERED IN A SPECIAL PROSPECTUS
SUPPLEMENT OR IN THE FORM OF POLICY APPROVED IN THAT STATE, AS APPROPRIATE. THE
TERMS UNDER WHICH THE POLICIES ARE ISSUED MAY ALSO VARY FROM THOSE DESCRIBED IN
THIS PROSPECTUS BASED ON PARTICULAR CIRCUMSTANCES. THE DESCRIPTION OF THE
POLICIES IN THIS PROSPECTUS IS SUBJECT TO THE TERMS OF THE POLICY PURCHASED BY
AN OWNER OR ANY RIDER TO IT. AN APPLICANT MAY REVIEW A COPY OF THE POLICY AND
ANY RIDER TO IT ON REQUEST.
GENERAL INFORMATION
The Policy provides life insurance protection on the life of the Insured. So
long as the Policy remains in force, we will pay a death benefit when the
Insured dies. We will pay a maturity benefit in lieu of a death benefit when the
Policy reaches the Maturity Date during the lifetime of the Insured.
Strategic Advantage is designed primarily for use on a multi-life basis where
the Insureds share a common employment or business relationship. The Policy may
be owned individually or by a corporation, trust, association or similar entity.
The Policy may be used for such purposes as informally funding non-qualified
executive deferred compensation or salary continuation plans, retiree medical
benefits, or other purposes.
DEATH BENEFITS
We will pay the Death Proceeds to the Beneficiary upon the death of the Insured
while the Policy remains in force. The Death Proceeds will be equal to the Base
Death Benefit plus any amounts payable from any additional benefits provided by
Rider, reduced by the amount of any outstanding Policy Loan and any accrued loan
interest. See Death Benefits, page 23. If the Policy is in the grace period,
the Death Proceeds will be paid but will be further reduced by any Policy
charges incurred but not deducted. The Death Proceeds may be paid in one sum or
under a variety of settlement options. See Settlement Provisions, page 48.
When we issue the Policy, the death benefit is equal to the Base Stated Death
Benefit applied for plus any amount added by Adjustable Term Insurance Rider.
The minimum Stated Death Benefit for which we will issue a Policy is $50,000;
however, we may lower the minimum Stated Death Benefit for certain group or
sponsored arrangements.
The Base Death Benefit may vary from the Stated Death Benefit as a result of
choice operation of a death benefit option, increases to keep the Base Death
Benefit in compliance with the FederalFederal income tax law definition of
life insurance, changes in the death benefit option, or increases and decreases
requested by the Owner.
The Owner may choose from three death benefit options, which may affect the
amount of the Base Death Benefit. See Death Benefit Options, page 23. The
total Stated Death Benefit is the sum of the Stated Death Benefits for all
coverage segments. The three death benefit options are:
Option 1: The Base Death Benefit equals the total Stated Death Benefit.
Option 2: The Base Death Benefit equals the total Stated Death Benefit plus
the Account Value. Under this option, the Base Death Benefit
fluctuates daily with the amount of the Account Value, but will
never be less than the Stated Death Benefit.
Option 3: The Base Death Benefit equals the total Stated Death Benefit plus
the sum of premiums paid minus Partial Withdrawals taken. In no
event will the Base Death Benefit be less than the Stated Death
Benefit.
The Owner may request a change to the death benefit option on any Policy
anniversary. We may require evidence of insurability according to our normal
rules of underwriting for this type of Policy for a change in death benefit
option. See Changes In Death Benefit Option, page 23.
The Adjustable Term Insurance Rider is available to provide term insurance
coverage which adjusts automatically over time to fill the difference between
the Target Death Benefit chosen and the Base Death Benefit (which may change as
often as daily). The Adjustable Term Insurance Rider has no externally defined
premium; instead, a cost of insurance charge is deducted monthly from the
Account Value for the Adjustable Term
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Strategic Advantage 10
<PAGE>
Insurance Rider amount in effect. See Adjustable Term Insurance Rider, page 26.
Generally, the Policy will remain in force only as long as the Net Account Value
is sufficient to pay all the monthly deductions. However, if the Guarantee
Period is in effect or the premiums paid meet the Minimum Annual Premium
requirement during the first three Policy years, the Stated Death Benefit of the
Policy will remain in force even if the Net Account Value is not sufficient to
pay the monthly deductions. The Adjustable Term Insurance Rider, any other
Riders, and any amount by which the Base Death Benefit exceeds the Stated Death
Benefit is not guaranteed to remain in force during the Guarantee Period. See
Guaranteed Minimum Death Benefit, page 24.
At least 30 days prior to a Policy anniversary, the Owner may request that the
insurance coverage be increased or decreased. Increases in the death benefit
are not allowed after the Insureds Age 85. The death benefit may be changed
only once each Policy year on the Policy anniversary. The change in coverage
may not be for an amount less than $1,000. We may require evidence of
insurability according to our normal rules of underwriting for this type of
Policy for an increase to the Stated or Target Death Benefit. The Stated Death
Benefit may be decreased if the effective date of the decrease will occur after
the later of two years from the Policy Date or two years after the prior
increase is made. Decreases in the death benefit may not decrease the Stated
Death Benefit below the minimum we require to issue this Policy.
Unless otherwise indicated, any request for an increase to the Target Death
Benefit will be assumed to also be a request for an increase to the Stated Death
Benefit so that the amount of the Adjustable Term Insurance Rider at the time of
the increase will not change. In some cases, we may not approve a change if it
would disqualify the Policy as life insurance under applicable Federal
income tax law. See Life Insurance Definition, page 40, and Changes In Death
Benefit Option, page 23.
BENEFITS AT MATURITY
If the Insured is still living on the Maturity Date, we will pay the Net Account
Value. The Policy will then end. See Benefits at Maturity, page 26.
ADDITIONAL BENEFITS
Additional benefits may be included with the Policy, and are attached to the
Policy by Rider. The charge for these additional benefits is deducted monthly
from the Account Value. We offer a variety of additional benefits. See
Additional Benefits, page 26.
PREMIUMS
The Policy is a flexible premium Policy, so the amount and frequency of premium
payments may vary, within limits. Other than the Minimum Annual Premium, 25% of
which must be paid in order for coverage to begin, and any payments required to
keep the Policy in force, there are no required premium payments. The
Scheduled Premium is selected by the Owner, within our limits, when application
for the Policy is made. It is the amount for which premium reminder notices will
be sent. The Scheduled Premium may not necessarily be sufficient to maintain the
Guarantee Period for one of the Guaranteed Minimum Death Benefit provisions or
keep the Policy in force. Premium reminder notices for the Scheduled Premiums
will be sent on an annual, semi-annual, or quarterly basis. Monthly payments may
be made by Electronic Funds Transferautomatic withdrawal from a checking
account. The financial institution making the Electronic Funds Transfers may
impose a charge for this service. See Premiums, page 21.
When applying for the Policy, the Owner will irrevocably choose which of two
tests for compliance with the Federal income tax law definition of
life insurance we will apply to the Policy. These tests are the Cash Value
Accumulation Test and the Guideline Premium/Cash Value Corridor Test. These
tests may limit the amount of premiums that may be paid. See Choice of
Definitional Tests, page 22, and Life Insurance Definition, page 40.
The Owner may also choose to purchase one of two Guaranteed Minimum Death
Benefit provisions. These provide a guarantee that the Stated Death Benefit will
remain in force for the Guarantee Period regardless of the amount of the Policys
Net Account Value. The provision allows a choice of the Guarantee Period: a)
ten-year or to the Insureds Age 65, whichever is later, or b) lifetime. Premium
levels higher than the Minimum Annual Premium will be required if one of the
Guaranteed Minimum Death Benefit provisions is chosen. An extra charge will be
deducted from the Account Value each month the Guaranteed Minimum Death Benefit
is in effect. In addition on all Monthly Processing Dates during the Guarantee
Period, the Net Account Value must remain diversified according to our
requirements. See Changes In Death Benefit Option, page 23.
We will notify the Policy Owner if the Scheduled Premium would cause the Policy
to immediately be a Modified Endowment Contract under Federal income tax law.
See Modified Endowment Contracts, page 22.
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Strategic Advantage 11
<PAGE>
Generally, unscheduled premium payments may be made at any time so long as each
payment is at least $100. We reserve the right to limit unscheduled premiums if
the payment would result in an increase in the amount of Base Death Benefit
required by the Federal income tax law definition of life insurance. If a Policy
Loan is outstanding, any payment which is not a Scheduled Premium payment
received before the Maturity Date is considered a loan repayment, unless
otherwise indicated. See Unscheduled Premium Payments, page 21.
Since this is a flexible premium life insurance Policy, the amount of premiums
paid will affect the length of time the Policy will stay in force. See Premium
Payments Affect The Continuation of Coverage, page 22.
ALLOCATION OF NET PREMIUMS
After certain premium-based charges are deducted from each premium, the balance,
called the Net Premium, is added to the Account Value based on the premium
allocation instructions. Net Premiums may be allocated to one or more of the
Divisions of the Variable Account, or to the Guaranteed Interest Division, or
both. Amounts allocated to the Divisions of the Variable Account will be held in
the Division investing in the Fidelity VIP Money Market Portfolio until the end
of the Free Look Period. At the end of the Free Look Period, this portion of the
Account Value will be reallocated according to the most recent premium
allocation instructions.
Net Premiums received after the Free-Look Period will be allocated upon receipt
according to the most recent written premium allocation instructions. Allocation
percentages must be in whole numbers, with the sum equaling 100%. See Allocation
of Net Premiums, page 22.
POLICY VALUES
The Policy Account Value is equal to the sum of the amounts in the Guaranteed
Interest Division and in the Divisions of the Variable Account. It also includes
any amount we set aside in the Loan Division as collateral for any outstanding
Policy Loan. The Account Value reflects Net Premiums paid, as well as deductions
for charges. It will also reflect the investment experience of amounts allocated
to the Divisions of the Variable Account, and interest earned on amounts
allocated to the Guaranteed Interest Division and the Loan Division. Any Partial
Withdrawal, and any service fee, will be deducted from the Account Value.
The Cash Surrender Value of the Policy is equal to the Account Value plus any
refund of sales charges due.
The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value
less the amount of any outstanding Policy Loan and accrued loan interest.
The Net Account Value of the Policy is equal to the Account Value less the
amount of any outstanding Policy Loan and accrued loan interest.
DETERMINING THE VALUE IN THE DIVISIONS OF THE VARIABLE ACCOUNT
The amounts included in the Divisions of the Variable Account are measured in
terms of Accumulation Units and Accumulation Unit Values. On any given day, the
value of the amount in a Division of the Variable Account is equal to the
Accumulation Unit Value times the number of Accumulation Units credited in that
Division. The Accumulation Units of each Division of the Variable Account will
have different Accumulation Unit Values. See Determining the Value of Amounts
in the Divisions of the Variable Account, page 28.
HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION
We determine Accumulation Unit Values for each Division of the Variable Account
as of each Valuation Date. All Policy transactions are effective as of a
Valuation Date. The Accumulation Unit Value of each Division reflects the
investment experience of the underlying Portfolio for the Valuation Period as
well as asset based charges deducted in connection with the Policy and the
expenses of the Portfolio. See How We Calculate Accumulation Unit Values for
Each Division. page 28.
TRANSFERS OF ACCOUNT VALUES
After the Free-Look Period, up to 12 transfers among Divisions of the Variable
Account or to the Guaranteed Interest Division may be made in each Policy year
without charge. There will be a $25 charge for each transfer over 12 in a Policy
year. Transfers due to the operation of Automatic Rebalancing or Dollar Cost
Averaging are not included in determining the limit on transfers without a
charge. The minimum amount we will transfer is $100.
Once during the first 30 days of each Policy year, transfers may be made from
the Guaranteed Interest Division. Transfer requests received within 30 days
prior to the Policy anniversary will be deemed to occur as of the Policy
anniversary. Transfer requests received on the
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Strategic Advantage 12
<PAGE>
Policy anniversary or within the following 30 days will be processed. Transfer
requests received at any other time will not be processed. Transfers of the
Account Value to the Guaranteed Interest Division are not limited to this 30-day
period.
Transfer amounts from the Guaranteed Interest Division to the Divisions of the
Variable Account are limited to the greatest of (i) 25% of the balance in the
Guaranteed Interest Division at the time of the first transfer or withdrawal in
a Policy year, (ii) the sum of any amounts transferred and withdrawn from the
Guaranteed Interest Division in the prior Policy year, or, (iii) $100. See
Transfers of Account Values, page 29.
DOLLAR COST AVERAGING
Dollar Cost Averaging is available by electing this feature on the application,
by completing the appropriate form or by telephone, if the proper telephone
authorization form is on file with us. We offer Dollar Cost Averaging to Owners
who have at least $10,000 either in the Division investing in the Fidelity VIP
Investments Money Market Portfolio Division or the Division investing in the
Neuberger & Berman AMT Limited Maturity Bond Portfolio Division of the Variable
Account. With Dollar Cost Averaging, a designated dollar amount of Account Value
in the selected Division will be transferred automatically as of each Monthly
Processing Date to one or more other Divisions of the Variable Account. The
monthly transfer under Dollar Cost Averaging may be no less than $100 per month.
Dollar Cost Averaging may also be used to meet the diversification requirements
of the Guaranteed Minimum Death Benefit provisions. There is no charge for this
feature.
If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost
Averaging will occur first. As of the first Valuation Date of the next calendar
quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will
begin. See Dollar Cost Averaging, page 29.
AUTOMATIC REBALANCING
Automatic Rebalancing is available by electing this feature on the application,
by completing the appropriate form or by telephoning us, if the proper telephone
authorization form is on file with us. Automatic Rebalancing allows the Owner to
match Account Value allocations over time to the premium allocation percentages.
As of the first Valuation Date of each calendar quarter, we will automatically
rebalance the amounts in the Divisions to match the current premium allocation
percentages according to the most recent instructions. This will rebalance the
Account Values that may be out of line with those allocation percentages, which
may result, for example, from Divisions which underperform other Divisions in
certain quarters.
With Automatic Rebalancing, Account Values may be reallocated among any number
of Divisions, and those allocations may, within certain limits, be changed at
any time. Automatic Rebalancing may also be used to simplify the process of
meeting the diversification requirements of the Guaranteed Minimum Death Benefit
provisions.
Any transfers as a result of the operation of the Automatic Rebalancing feature
are not counted toward the limit of 12 transfers than can be made each Policy
year without a transfer charge. However, we will charge a fee of $25 each time
premium allocation is changed more often than five times per Policy year;
otherwise, there is no charge for this feature.
If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost
Averaging will occur first. As of the first Valuation Date of the next calendar
quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will
begin. See Automatic Rebalancing, page 30.
LOANS
Loans may be taken against the Policys Account Value as of the Valuation Date
the loan request is processed. The loan must be at least $100. Loan interest
accrues at an annualized rate of 3.75%. An amount equal to the Policy Loan is
withdrawn from the Divisions of the Variable Account and from the Guaranteed
Interest Division and is placed in our General Account as collateral for the
loan. We call this segregated amount the Loan Division. The Loan Division earns
a guaranteed rate of interest equal to 3% on an annualized basis. Unless
otherwise indicated, we will assume that any payments, other than Scheduled
Premiums, constitute Policy Loan repayments and not premiums. See Policy Loans,
page 31.
PARTIAL WITHDRAWALS
A Partial Withdrawal of a portion of the Net Account Value may be requested any
time after the first Policy year, within limits.
One Partial Withdrawal is allowed each Policy year. The minimum Partial
Withdrawal is $100; the maximum Partial Withdrawal is the amount which will
leave $500
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Strategic Advantage 13
<PAGE>
as the Net Account Value. We will process only the amount of the Partial
Withdrawal request which will leave $500 as the Net Account Value. If more than
this maximum is requested, we will require a full surrender of the Policy. When
a Partial Withdrawal is taken, the amount of the withdrawal plus a service fee
is deducted from the Account Value. Depending on the amount of the withdrawal,
the Death Proceeds payable under the Policy may also be reduced. No Partial
Withdrawal will be allowed if the Stated Death Benefit remaining in force after
the Partial Withdrawal would be less than the minimum we require to issue this
Policy at the time of the reduction. See Partial Withdrawals, page 32.
SURRENDER
The Policy may be surrendered for its Net Cash Surrender Value at any time while
the Insured is living. The Net Cash Surrender Value of the Policy equals the
Cash Surrender Value minus any Policy Loan and accrued loan interest. We will
compute the Net Cash Surrender Value as of the Valuation Date we receive the
request for surrender and the Policy at our Customer Service Center, and all
insurance coverage will end on that date. See Surrender, page 33.
RIGHT TO EXCHANGE POLICY
At any time during the first 24 months following the Policy Date or a requested
increase to the Stated Death Benefit, the Owner may exercise the right to
exchange the Policy from one in which the Account Value is not guaranteed into a
guaranteed Policy. This is accomplished by the transfer of the entire amount in
the Divisions of the Variable Account to the Guaranteed Interest Division, the
allocation of all future premium payments to the Guaranteed Interest Division
and the removal of the right to allocate future amounts to the Variable Account.
See Right to Exchange Policy, page 33.
LAPSE
The Policy will generally remain in force only as long as the Net Account Value
is sufficient to pay all the deductions which are taken from the Account Value
each month. However, during the first three Policy years, if on each Monthly
Processing Date the sum of premiums paid, less the sum of Partial Withdrawals,
any outstanding Policy Loan and accrued loan interest is greater than or equal
to one twelfth of the Minimum Annual Premium times the number of completed
Policy months, then the Policy and all attached Riders are guaranteed not to
lapse, regardless of the Net Account Value.
Also, if the Guaranteed Minimum Death Benefit provision has been elected and the
Guarantee Period has not ended, the Stated Death Benefit will remain in effect
regardless of the amount of the Net Account Value. Any Policy charges during the
Guarantee Period which would reduce the Net Account Value below zero will be
waived. The Guarantee Period will end if the Policy does not meet the monthly
premium test or if on any Monthly Processing Date the Net Account Value is not
diversified according to our requirements as explained under Guaranteed Minimum
Death Benefit Provision, page 24. See Lapse, page 33.
REINSTATEMENT
A lapsed Policy and its Riders may be reinstated within five years of its lapse
if it has not been surrendered for its Net Cash Surrender Value. This will
require new evidence of insurability and payment of certain reinstatement
premiums. We will also reinstate any Policy Loan which existed when coverage
ended, with accrued loan interest to the date of lapse. See Reinstatement, page
34.
CHARGES AND DEDUCTIONS
Deductions From Premiums: The following charges are deducted from each premium
before it is applied to the Account Value:
(i) Tax Charges--A charge currently equal to 2.5% of premiums is deducted for
state and local premium taxes. A charge currently equal to 1.5% of each
premium is deducted to cover our estimated cost of the Federal income tax
treatment of deferred acquisition costs. We reserve the right to increase
or decrease the premium expense charges for taxes due to any change in tax
law. We further reserve the right to increase or decrease the premium
expense charge for the Federal deferred acquisition cost due to any change
in the cost to us.
(ii) Sales Charge--A charge equal to a percentage of each premium based on
the amount of premium paid and the number of years since the Policy Date
or the date of an increase in coverage is deducted to cover a portion of
our expenses in issuing this Policy. For each of the first five Policy
years, this charge is equal to 8% of premiums paid up to the Target
Premium and 3% of premiums paid in excess of the Target Premium. In the
sixth Policy year and thereafter,
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Strategic Advantage 14
<PAGE>
the sales charge is equal to 3% of all premiums paid.
See Deductions from Premiums, page 34
Deductions From The Variable Account: A mortality and expense risk charge is
assessed against the Divisions of the Variable Account in the amount of 0.75%
per annum (0.002055% per day). We assess the mortality and expense risk
charge to compensate us for assuming mortality and expense risks under the
Policies. See Daily Deductions from the Variable Account, page 35.
Monthly Deductions From The Account Value: The following charges are deducted
from the Account Value at the beginning of each Policy month:
(i) Initial Policy Charge--$10 per month for the first five Policy years.
(ii) Monthly Administrative Charge--$5 per month plus $0.0125 per thousand
of Stated Death Benefit or Target Death Benefit if greater. This charge
is limited to $20 per month.
(iii) Cost of Insurance Charge--A monthly charge based on the Net Amount at
Risk on the life of the Insured. The amount of this charge differs for
Base Death Benefit and Adjustable Term Insurance Rider, if any, as well
as for multiple base coverage segments.
(iv) Charges for Additional Benefits--The cost of any additional benefits
added by Rider, other than the Adjustable Term Insurance Rider.
(v) Guaranteed Minimum Death Benefit Charge--currently $0.005 per thousand of
the Stated Death Benefit during the Guarantee Period. This charge is
guaranteed to never be greater than $.01 per thousand of the Stated Death
Benefit.
See Monthly Deductions from the Account Value, page 35.
Policy Transaction Fees: Policy Transaction Fees are deducted from the Divisions
of the Variable Account and Guaranteed Interest Division in the same proportion
that the Account Value in each Division bears to the Net Account Value
immediately before the transaction for which the charge is made. See Policy
Transaction Fees, page 37.
Charges From Portfolios: Shares of the Portfolios are purchased at net asset
value, which reflects investment management and other direct expenses that have
already been deducted from the assets of the Portfolio. See Charges from
Portfolios, page 38.
PERSISTENCY REFUND
The Account Value will be credited with a Persistency Refund each Monthly
Processing Date after the 10th Policy anniversary. The refund is equivalent to
0.5% of the Account Value per year, adjusted for any coverage segment in force
for fewer than 10 years. See Persistency Refund, page 37.
REFUND OF SALES CHARGES
If the Policy has not lapsed, we will, upon full surrender of the Policy within
the first 2 Policy years, return a portion of the sales charges previously
deducted from premiums paid. See Refund of Sales Charges, page 38.
TAX CONSIDERATIONS
Under current Federal income tax law, death benefits of life insurance
policies are not subject to income tax. In order for this treatment of the death
benefit to apply, the Policy must qualify as a life insurance contract. The tax
code provides for two tests to qualify a Policy as a life insurance contract.
The Owner irrevocably selects which of these tests we will apply to the Policy
in the application. After the Policy Date, the Policy will reflect the test
chosen. See Life Insurance Definition, page 40.
Generally, under current Federal income tax law, Account Value earnings are not
subject to income tax as long as they remain within the Policy. Loans, Partial
Withdrawals, surrender, lapse or an exchange of Insured may result in
recognition of ordinary income for tax purposes and may result in penalties if
the Policy is considered a Modified Endowment Contract as explained in Modified
Endowment Contracts, page 41.
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Strategic Advantage 15
<PAGE>
INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT
OPTIONS AND THE GUARANTEED INTEREST DIVISION
SECURITY LIFE OF DENVER INSURANCE COMPANY
Security Life of Denver Insurance Company ("Security Life") is a stock life
insurance company organized under the laws of the State of Colorado in 1929. 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 1995, Security Life and its consolidated subsidiaries had
over $109 billion of life insurance in force. Our total assets exceeded $6
billion and our shareholders equity exceeded $746 million, on a generally
accepted accounting principles basis as of December 31, 1995. We offer a
complete line of life insurance and retirement products, including annuities,
individual and group life, and 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 worlds three largest diversified financial services
organizations. ING is headquartered in Amsterdam, Netherlands, and has
consolidated assets exceeding $247 billion on a Dutch (modified U.S.) generally
accepted accounting principles basis as of December 31, 1995.
The principal underwriter and distributor for the Policies is ING America
Equities, Inc. ("ING America Equities"), a wholly owned subsidiary of Security
Life. ING America Equities, Inc., 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.
SECURITY LIFE SEPARATE ACCOUNT L1
Security Life Separate Account L1 (the "Variable Account"), established on
November 3, 1993, under the Insurance Law of the State of Colorado, is a unit
investment trust registered with the SEC under the Investment Company Act of
1940. Such registration does not involve any supervision by the SEC of the
management of the Variable Account or Security Life.
The Variable Account is a separate investment account of Security Life used to
support our variable life insurance policies and for other purposes as
permitted by applicable laws and regulations. The assets of the Variable Account
are kept separate from our General Account and any other separate accounts we
may have. We may offer other variable life insurance contracts that will invest
in the Variable Account which are not discussed in this prospectus. The Variable
Account may also invest in other securities which are not available to the
Policy 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 Policy liabilities
with respect to the Variable Account is not chargeable with liabilities arising
out of any other business we conduct. The Variable Account may, however, be
subject to liabilities arising from Divisions of the Variable Account whose
assets are attributable to other variable life policies offered by the
Variable Account. If the assets exceed the required reserves and other
policy liabilities, we may transfer the excess to our General Account.
Before making any such transfer, Security Life will consider any possible
adverse effect the transfer might have on the Variable Account.
The Variable Account has several Divisions, each of which invests in shares of a
corresponding Portfolio of a mutual fund. Therefore, the investment experience
of a Policy depends on the experience of the Portfolios designated. For example,
the Neuberger and Berman Limited Maturity Bond Division invests solely in shares
of the Neuberger and Berman Advisers Management Trust Limited Maturity Bond
Portfolio. 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 may be available to certain pension accounts. They are not
available directly to individual investors.
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Strategic Advantage 16
<PAGE>
Each of the Portfolios is a separate series of an open-end management investment
company which receives investment advice from a registered investment adviser
not otherwise affiliated with Security Life. The Neuberger & Berman Advisers
Management Trust has organized its Portfolio to 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.
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." They may also sell shares to separate accounts to
serve as the underlying investment for both variable annuity contracts and
variable life insurance policies, known as "mixed funding." As a result, there
is a possibility that a material conflict may arise between the interests of
Owners of Policies in which Account Values are allocated to the Variable Account
and of owners of policies in which account 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 Portfolios prospectus.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS
Each Portfolio has a different investment objective that it tries to achieve by
following its investment strategy. The objectives and policies of each Portfolio
will affect its return and its risks. A summary of the investment objectives is
contained in the description of each Portfolio below. More detailed information
may be found in the current prospectus for each Portfolio. A prospectus for the
Portfolios being considered must accompany this prospectus and should be read in
conjunction with this prospectus.
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 level of 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 primarily by investing in
a diversified portfolio of short-to-intermediate term U.S. Government and
Agency securities and debt securities issued by financial institutions,
corporations and others, primarily of investment grade. The Limited
Maturity Bond Portfolio may invest up to 10% of its net assets, measured at
the time of investment, in debt 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 five years.
Government Income Portfolio--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. Invests
in securities believed to have maximum potential for long-term capital
appreciation. To maximize this potential, securities convertible into
common stocks and warrants and options to purchase stocks may be utilized.
This investment program involves greater risks and share price volatility
than
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Strategic Advantage 17
<PAGE>
programs that invest in more conservative securities.
Partners Portfolio--seeks capital growth through a conservative 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 long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities, primarily of companies that, at the time of purchase of
the securities, have "total market capitalization" - present market value
per share multiplied by the number of shares outstanding - within the range
of companies included in the Russell 2000 Growth Index, updated quarterly.
The Russell 2000 Growth Index is designed to track the performance of small
capitalization companies. As of December 31, 1995, the range of market
capitalization of these companies was $20 million to $2.2 billion.
Alger American MidCap Growth Portfolio--seeks long-term capital appreciation by
investing in a diversified, actively managed portfolio of equity
securities, primarily 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 December 31, 1995, the range of market
capitalization of these companies was $118 million to $7.5
billion.
Alger American Growth Portfolio--seeks long-term capital appreciation by
investing in a diversified, actively managed portfolio of equity
securities, primarily of companies with a total market capitalization of $1
billion or greater.
Alger American Leveraged AllCap Portfolio--seeks long-term capital appreciation
by investing in a diversified, actively managed portfolio of equity
securities. The Portfolio may engage in leveraging (up to 33 1/3% of its
assets) and options and futures transactions, which are deemed to be
speculative and which may cause the Portfolios net asset value to be more
volatile than the net asset value of a fund that does not engage in these
activities.
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 Fund's 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 & Poors Composite
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Strategic Advantage 18
<PAGE>
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 Funds 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, but secondary, consideration in the selection of portfolio
securities. The Industrial Income Portfolio seeks to achieve its investment
objective by investing in securities which will provide a relatively high
yield and stable return and which, over a period of years, also may provide
capital appreciation.
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 Portfolios 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 a 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 Gold and Natural Resources Fund and
Fiduciary International Inc. serves as a sub-investment adviser to the World
wide Balanced Fund.
Van Eck Worldwide Balanced Fund--seeks long-term capital appreciation together
with current income by investing in stocks, bonds and money market
instruments worldwide.
Van Eck Gold and Natural Resources Fund--seeks a long-term capital appreciation
by investing in equity and debt securities of companies engaged in the
exploration, development, production and distribution of gold and other
natural resources, such as strategic and other metals, minerals, forest
products, oil, natural gas and coal. Current income is not an investment
objective.
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Strategic Advantage 19
<PAGE>
THE GUARANTEED INTEREST DIVISION
All or a portion of Net Premiums and transfers of Net Account Value may be made
to the Guaranteed Interest Division, which is part of our General Account and
which pays interest at a declared rate. The General Account supports our non-
variable insurance and annuity obligations. Because of exemptive and
exclusionary provisions, interests in the Guaranteed Interest 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 interests therein are
generally subject to regulation under these Acts. As a result, the staff of the
SEC has not reviewed the disclosures 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 law
relating to the accuracy and completeness of statements made in this prospectus.
For more details regarding the General Account, see the Policy.
The amount in the Guaranteed Interest Division at any time is the sum of all Net
Premiums allocated to that Division, all transfers to the Guaranteed Interest
Division and earned interest. This amount is reduced by amounts transferred out
of or withdrawn from the Guaranteed Interest Division and deductions from
your Account Value allocated to the Guaranteed Interest Division.
Amounts may be accumulated in the Guaranteed Interest Division by (i) allocating
Net Premiums, (ii) transferring amounts from the Divisions of the Variable
Account, (iii) earning interest on amounts already in the Guaranteed Interest
Division, and (iv) repaying a Policy Loan to release amounts from the Loan
Division.
We pay a declared interest rate on all amounts in the Guaranteed Interest
Division. From time to time, we declare the rates that will apply to amounts in
the Guaranteed Interest Division. These annual interest rates will never be less
than the minimum guaranteed interest rate of 3% and will be in effect for at
least 12 months. The interest is credited as of each Valuation Date to the
amount 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.
DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
POLICY
This prospectus describes our standard Strategic Advantage Variable Universal
Life Policy. There may be differences in the Policy because of the requirements
of the state where the Policy is issued; any such changes will be defined in the
Policy.
The illustrations beginning on page 50 are intended to provide an idea of how
the key financial elements of Strategic Advantage work. The illustrations show
Premiums, Account Values, Cash Surrender Values and Death Benefits.
APPLYING FOR A POLICY
A Strategic Advantage Policy may be purchased by submitting an application to
us. On the Policy Date, the Insured must be no more than Age 85. Before issuing
any Policy or applying Net Premium to the Variable Account or the Guaranteed
Interest Division, we require satisfactory evidence of insurability, which may
include a medical examination, and completion of all underwriting
requirements.
The Investment Date is the date we have approved the Policy for issue, and we
receive and apply the first premium payment, in an amount not less than 25% of
the Minimum Annual Premium. The Policy is generally available with a minimum
Stated Death Benefit of $50,000; however, we may reduce this amount for certain
group or sponsored arrangements if the average Stated Death Benefit at issuance
for the single group or sponsored arrangement is at least $50,000. The maximum
Stated Death Benefit will be limited by our underwriting and reinsurance
procedures in effect at the time of application.
The Policy Date is the date upon which the Policy becomes effective. The Policy
Date is the date used to determine Policy years and Policy months regardless of
when the Policy is delivered. In the case of certain payroll deduction plans or
other automatic investment plans, the Policy Date may be different from the date
the first premium payment is received. If the Policy Date is prior to the
Investment Date, we will charge monthly deductions you for insurance
protection from the Policy Date.
If a premium payment in an amount not less than one-twelfth of the Minimum
Annual Premium is received with the application and there has been no
material
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Strategic Advantage 20
<PAGE>
misrepresentation in the application, temporary insurance equal to the face
amount applied for up to a maximum amount as described in the binding limited
life insurance coverage form will be in force. Coverage will begin when the
binding limited life insurance coverage form has been completed and signed, a
premium has been accepted by us and Part I of the application has been
completed. Binding limited life insurance coverage will end on the earliest of
the date: (i) premiums are returned five days after notice of termination is
mailed to the Owner's address on the application; (ii) coverage starts under the
Policy resulting from the application; (iii) a policy resulting from the
application is refused by us; or (iv) 90 days after the date the binding limited
life insurance coverage form is signed. In no event will a death benefit be
provided under the temporary insurance agreement if there was a material
misrepresentation in the answers to the questions in the binding limited life
insurance coverage form or any question or statement in the application, a
proposed Insured dies by suicide or intentional self-inflected injury, or the
premium check or authorized withdrawal is not honored.
PREMIUMS
The amount and frequency of premium payments are flexible, within the limits
described below.
SCHEDULED PREMIUMS
Even though premium amounts are flexible, the Schedule pages of the Policy will
show a "Scheduled Premium." The Scheduled Premium may be chosen by the Owner,
within our limits, when application for the Policy is made. The Scheduled
Premium is the amount which is to be paid over a specified period of time and
may not necessarily be sufficient to keep the Policy in force. The Owner will
receive premium reminder notices for the Scheduled Premium on a quarterly,
semiannual, or annual basis. Alternatively, the premiums, other than the first,
may be paid via Electronic Fund Transfer each month. The financial
institution making the Electronic Funds Transfer may impose a charge for this
service. The Owner is not required to pay the Scheduled Premium, and it may be
changed at any time subject to the maximum and minimum limits we may set. If one
of the Guaranteed Minimum Death Benefit provisions described below has been
chosen, the Scheduled Premium should not be less than the amount required to
maintain the guarantee.
UNSCHEDULED PREMIUM PAYMENTS
Generally, unscheduled premium payments may be made at any time as long as each
payment is at least $100. We may change this minimum if we give 90 days written
notice of the change. We reserve the right to limit the amount of unscheduled
premiums if the payment would result in an increase in the amount of the Base
Death Benefit required by the Federal income tax law definition of
life insurance, or to require suitable evidence of the insurability of the
Insured at the time of the unscheduled premium payment. Premiums may also be
limited if the Guideline Premium/Cash Value Corridor Test is chosen to comply
with the Federal income tax law definition of life insurance. We will
return premium payments if we determine the payment would cause the Policy to
immediately become a Modified Endowment Contract. After the Owner has signed a
form acknowledging that the Owner understands the Policy will be a
Modified Endowment Contract, we will apply future premium payments. See
Modified Endowment Contracts, page 41 and Changes to Comply with Law, page
43.
If a Policy Loan is outstanding, any payment which is not a Scheduled Premium
payment received before the Maturity Date is considered a loan repayment, unless
otherwise indicated. Applicable tax and sales charges are not deducted from a
loan repayment but are deducted from any payment which constitutes a premium.
MINIMUM ANNUAL PREMIUM
At least 25% of the Minimum Annual Premium must be paid and received by our
Customer Service Center before the insurance will go into effect. We determine
the applicable Minimum Annual Premium based on the Age, sex and Premium Class of
the Insured, the Stated Death Benefit of the Policy and any additional benefits
selected. We may reduce the Minimum Annual Premium for certain group or
sponsored arrangements. The Minimum Annual Premium for the Policy is shown in
the Schedule pages of the Policy.
If on each Monthly Processing Date during the first three Policy years, the sum
of premiums paid, less the sum of Partial Withdrawals and Policy Loans taken
including accrued loan interest, is greater than or equal to one twelfth of the
Minimum Annual Premium times the number of completed Policy months, the Policy
is guaranteed not to lapse, regardless of its Net Account Value. See Lapse,
page 33.
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Strategic Advantage 21
<PAGE>
PREMIUM PAYMENTS AFFECT THE CONTINUATION OF COVERAGE
If premium payments are discontinued, either temporarily or permanently, the
Policy will continue in effect until the Net Account Value can no longer cover
the monthly deductions for the benefits selected and the Policy will lapse. See
Lapse, page 33. If the Minimum Annual Premium requirements are satisfied, the
Policy is guaranteed not to lapse during the first three Policy years,
regardless of its Net Account Value. If one of the Guaranteed Minimum Death
Benefit provisions has been purchased, the Stated Death Benefit portion of the
Policy will remain in effect until the end of the Guarantee Period so long as
the conditions of the guarantee are met. See Guaranteed Minimum Death Benefit,
page 24.
CHOICE OF DEFINITIONAL TESTS
When application for the Policy is made, the Owner will irrevocably choose which
of the two tests for compliance with the Federal income tax law definition of
life insurance we will apply to the Policy. These tests are the Cash Value
Accumulation Test and the Guideline Premium/Cash Value Corridor Test. See Life
Insurance Definition, page 40. If the Guideline Premium/Cash Value Corridor Test
is chosen, the premium payments that may be made relative to the death benefit
of the Policy will be limited.
CHOICE OF GUARANTEED MINIMUM DEATH BENEFIT PROVISIONS
When applying for the Policy, the Owner will also have the opportunity to choose
from one of two Guaranteed Minimum Death Benefit provisions, which may extend
the period that the Stated Death Benefit of the Policy will remain in effect if
the Divisions of the Variable Account suffer adverse investment experience.
These provisions require premium payment levels which are higher than the
Minimum Annual Premium and an extra charge will be deducted from the Account
Value each month during the Guarantee Period. In addition, the Net Account Value
of the Policy must remain diversified according to our requirements. See
Guaranteed Minimum Death Benefit, page 24.
The required premium levels depend on which of the two Guarantee Periods is
chosen, as well as the Stated Death Benefit of the Policy, the Insureds Age,
sex, and Premium Class, the death benefit option chosen, and Rider coverage. For
Policies with no Rider coverage, the required premium level for the Lifetime
Guarantee Period will be equal to the guideline annual premium determined in
accordance with the Federal income tax law definition of life insurance; the
required premium level for the Ten Year/Age 65 Guarantee Period will be less
than the guideline annual premium. Adding additional benefits to the Policy will
increase the required premium levels above those indicated above.
Policy Owners should consider the Guaranteed Minimum Death Benefit provision
when setting the Scheduled Premium.
MODIFIED ENDOWMENT CONTRACTS
Regardless of which test for compliance with the Federal income tax
law definition of life insurance is chosen, Federal income tax law
provides special rules for the income taxation of distributions from life
insurance policies which are defined as "Modified Endowment Contracts." These
rules apply to distributions such as Policy Loans, surrenders and Partial
Withdrawals. The application of these rules depends upon whether premiums have
been paid which exceed a defined "seven-pay" limit. See Modified Endowment
Contracts, page 41. The seven-pay limit will always be greater than the Minimum
Annual Premium and the premiums required for the Guaranteed Minimum Death
Benefit provisions, but may be less than the Scheduled Premium selected. If we
determine that the Scheduled Premium will cause the Policy to be a Modified
Endowment Contract on the Policy Date, we will issue the Policy based on the
Scheduled Premium selected, but we will require the Owner to sign a form
acknowledging that the Policy is a Modified Endowment Contract. Alternatively,
the Scheduled Premium may be reduced to a level which will not cause the Policy
to become a Modified Endowment Contract, and we will issue the Policy based on
the revised Scheduled Premium.
ALLOCATION OF NET PREMIUMS
After certain premium-based charges are deducted from each premium, the balance,
called the Net Premium, is added to the Account Value based on the Owner's
instructions. Net Premium amounts allocated to the Guaranteed Interest Division
will be allocated to that Division upon receipt. During the Free-Look Period,
Net Premiums allocated to the Divisions of the Variable Account will be
allocated to the Division investing in Fidelity VIP Money Market Portfolio of
the Variable Account. At the end of the Free-Look Period, this portion of the
Account Value will be automatically allocated according to the most recent
premium allocation instructions. See Free Look Period, page 45.
Net Premiums received after the Free Look Period will be allocated upon receipt
according to the allocation instructions stated in the application for the
Policy or the most recent instructions. Allocation percentages must be
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Strategic Advantage 22
<PAGE>
in whole numbers, with the sum for all Divisions equaling 100%. Premium
allocation instructions may be changed up to five times per Policy year without
charge. Premium allocation changes exceeding five in a Policy year will be
subject to a $25 charge for each additional change.
DEATH BENEFITS
Strategic Advantage offers the flexibility to determine the amount of insurance
coverage needed, both now and in the future. It does this by combining the long-
term advantages of permanent life insurance coverage with the flexibility and
short-term advantages of term life insurance. Both permanent and term life
insurance are available in this single Policy, Strategic Advantage.
When a Policy is issued, an initial amount of insurance coverage is determined
according to the instructions included in the application. The death benefit
initially consists of a Stated Death Benefit and, if desired, an additional
amount of insurance coverage which is added by Adjustable Term Insurance Rider.
The Stated Death Benefit is the long-term element of the Policy; the Adjustable
Term Insurance Rider is the term insurance element of the Policy.
As described below, the Base Death Benefit may vary from the Stated Death
Benefit. This may result from choice operation of a death benefit option,
increases to comply with the Federal income tax law definition of life
insurance, changes in the death benefit option, or requested increases and
decreases.
The Adjustable Term Insurance Rider provides term insurance coverage which
adjusts automatically to fill the difference between the Target Death Benefit
chosen and the Base Death Benefit. The Adjustable Term Insurance Rider does not
have an externally defined premium; the cost is included in the monthly cost of
insurance charges discussed below. See Adjustable Term Insurance Rider, page
26.
So long as the Policy remains in force, we will pay an amount equal to the Death
Proceeds to the Beneficiary of this Policy when the Insured dies. The Death
Proceeds will consist of the Base Death Benefit, reduced by any outstanding
Policy Loan and accrued loan interest (and, if in the grace periodfollowing a
lapse, further reduced by any overdue charges). The Death Proceeds will also
include any amount provided by Rider on the primary Insured.
DEATH BENEFIT OPTIONS
The Owner may choose from three death benefit options: Option 1, Option 2 or
Option 3. These options may result in a Base Death Benefit under the Policy
which exceeds the Stated Death Benefit. The death benefit option may be changed
on any Policy anniversary. See Changes In Death Benefit Option, page 23
Under Option 1, the Base Death Benefit equals the Stated Death Benefit of the
Policy.
Under Option 2, the Base Death Benefit equals the Stated Death Benefit of the
Policy plus the Account Value. Under Option 2, the Base Death Benefit fluctuates
daily with the amount of the Account Value, but will never be less than the
Stated Death Benefit.
Under Option 3, the Base Death Benefit equals the Stated Death Benefit of the
Policy plus the sum of all premiums paid minus Partial Withdrawals taken under
the Policy. Therefore, the Base Death Benefit generally will increase as
premiums are paid and decrease as Partial Withdrawals are taken. In no event
will the Base Death Benefit be less than the Stated Death Benefit.
Owners who prefer to have any favorable investment experience reflected in
increased insurance coverage should choose Option 2. Owners who prefer to have
insurance coverage that does not vary in amount, and lower cost of insurance
charges, should choose Option 1. Owners who wish to have their coverage
generally reflect their premium outlay should choose Option 3.
Federal income tax law requires the death benefit to be at least as
great as the Account Value times a factor which is defined in the law. The
factors are determined based upon the Insureds Age and Premium Class at any
point in time as well as the test for compliance selected in the original
application for this Policy. See Life Insurance Definition, page 40, for a
description of the tests and these factors.
We will adjust the Policy the Base Death Benefit if necessary to continue to
qualify the Base Death Benefit of the Policy as life insurance under the
applicable provisions of the Federal income tax laws in existence at the time
the Policy is issued.
CHANGES IN DEATH BENEFIT OPTION
A change in death benefit option may be requested at least 30 days prior to a
Policy anniversary. The change will be effective as of the Policy anniversary.
The death benefit option change applies to the entire Stated Death Benefit. For
us to approve a change in the death benefit option from Option 1 to Option 2, or
from Option 1 to Option 3, evidence that the Insured is insurable according to
our normal rules of underwriting for that class of policy must be submitted to
us. We may not allow a change that would reduce the Stated Death Benefit below
the minimum we require to issue this Policy. After the
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Strategic Advantage 23
<PAGE>
effective date of the change, the Stated Death Benefit will
be changed according to the following table:
<TABLE>
<CAPTION>
OPTION CHANGE STATED DEATH BENEFIT
FROM TO FOLLOWING CHANGE
EQUALS:
<S> <C> <C>
Option 1 Option 2 Stated Death Benefit prior to such change minus the Account Value as of the effective date
of the change.
Option 2 Option 1 Stated Death Benefit prior to such change plus the Account Value as of the effective date of
the change.
Option 1 Option 3 Stated Death Benefit prior to such change minus (i) the sum of the premiums paid, plus (ii)
Partial Withdrawals taken as of the effective date of the change.
Option 3 Option 1 Stated Death Benefit prior to such change plus (i) the sum of the premiums paid, minus (ii)
Partial Withdrawals taken as of the effective date of the change.
Option 2 Option 3 Stated Death Benefit prior to such change plus (i) the Account Value as of the effective
date of the change, minus (ii) the sum of the premiums paid minus Partial Withdrawals taken
as of the effective date of the change.
Option 3 Option 2 Stated Death Benefit prior to such change plus (i) the sum of the premiums paid minus Partial
Withdrawals taken as of the effective date of the change, minus (ii) the Account Value as of the
effective date of the change.
</TABLE>
For purposes of a death benefit option change, the Account Value will be
allocated to each coverage segment in the same proportion that the Stated Death
Benefit of that segment bears to the sum of all Stated Death Benefit segments.
See Changes In Death Benefit Amounts, page 25.
We do not adjust the Target Premium when this type of change is made. See Sales
Charges, page 34. These increases and decreases in Stated Death Benefit are
made so that the amount of the Base Death Benefit remains the same on the date
of the change. When the Base Death Benefit remains the same, there is no
immediate change in the Net Amount at Risk, which is the amount on which our
cost of insurance charges are based. See Cost Of Insurance Charges, page 36.
In addition, there will be no change to the amount of term insurance Target
Death Benefit if Adjustable Term Insurance Rider has been added.
Any changes in the death benefit option of the Policy will go into effect as of
the Policy anniversary on or following the date we approve the request for the
change. A request for a change must be received at our Customer Service Center
at least 30 days prior to the Policy anniversary. After the request is approved,
we will send a written notice of the approval showing each change. This notice
should be attached to the Policy. We may also ask that the Policy be returned to
our Customer Service Center so that we can note the change in the Schedule.
GUARANTEED MINIMUM DEATH BENEFIT PROVISION
Generally, the length of time the Policy remains in force depends on the Net
Account Value of the Policy. Because the charges that maintain the Policy are
deducted monthly from the Account Value, coverage will last as long as the Net
Account Value is sufficient to pay these charges. The investment experience of
any amounts in the Divisions of the Variable Account and the interest earned in
the Guaranteed Interest Division will affect the amount of the Account Value
and, as a result, the length of time the Policy remains in force without the
payment of additional premiums.
When applying for the Policy, one of two Guaranteed Minimum Death Benefit
provisions may be chosen, which may extend the period that the Stated Death
Benefit of the Policy will remain in effect if the Divisions of the Variable
Account suffer adverse investment experience. The two options vary primarily by
the length of time which they cover, which we call the "Guarantee Period." The
first option has a Guarantee Period of 10 Policy years or to the Insureds Age
65, whichever is later; that is, it protects the Stated Death Benefit of the
Policy for a limited number of Policy years. The second option has a Lifetime
Guarantee Period; it protects the Stated Death Benefit for the life of the
Insured to the Maturity Date. See Choice of Guaranteed Minimum Death Benefit
Provisions, page 22.
However, the Guaranteed Minimum Death Benefit provision does not apply to the
Adjustable Term Insurance Rider or to any other Riders. Therefore, if the
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Strategic Advantage 24
<PAGE>
Net Account Value is insufficient to pay all of the deductions as they come due,
only the Stated Death Benefit portion of the Policy will be guaranteed to stay
in force under the Guaranteed Minimum Death Benefit provisions; any attached
Riders will lapse. See Lapse, page 33.
REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD
The Guaranteed Minimum Death Benefit provisions require premium payment levels
referred to as the "Guarantee Period Annual Premium" that are higher than the
Minimum Annual Premium. Although the required Guarantee Period Annual Premium
levels are different for the two Guarantee Periods, the mechanics of the
Guaranteed Minimum Death Benefit provisions are similar. As of each Monthly
Processing Date we will perform a test to see if sufficient premiums have been
paid to keep the guarantee in place. If (i) the actual premiums paid, minus the
amount of any Partial Withdrawals and any Policy Loan and accrued loan interest,
equals or exceeds (ii) one twelfth of the Guarantee Period Annual Premium for
the option chosen times the number of complete months the Policy has been in
force, the Guarantee Period will remain in effect regardless of the investment
experience of the Divisions of the Variable Account. If the Policy fails to meet
this test on any Monthly Processing Date, the Guarantee Period and therefore the
Guaranteed Minimum Death Benefit provision will terminate. The required
premiums for the Guarantee Period chosen will be listed in the Schedule of the
Policy. If the Policy benefits are increased, the Guarantee Period Annual
Premium will also be increased. In order to determine the required premium to
maintain the Guarantee Period, one twelfth of each Guarantee Period Annual
Premium is multiplied by the number of months this amount was in effect. Each
of these resulting amounts is summed and the total is used in (ii) above.
The Guarantee Period will also be terminated if the Net Account Value on any
Monthly Processing Date is not diversified according to the following rules:
a) No more than 35% of the Net Account Value may be invested in any one
Division, and
b) The Net Account Value must be invested in at least five Divisions.
The Automatic Rebalancing feature may be utilized to assist in meeting these
diversification requirements. Also, the Policy will be deemed to satisfy our
requirements for diversification if Dollar Cost Averaging is being utilized and
the resulting transfers are being directed into at least four other Divisions
with no more than 35% of any transfer being to any one Division. See Dollar
Cost Averaging, page 29, and Automatic Rebalancing, page 30.
Once terminated, the Guaranteed Minimum Death Benefit provision cannot be
reinstated.
There is a charge for the Guaranteed Minimum Death Benefit. See Guaranteed
Minimum Death Benefit Charge, page 36. This charge will end at the conclusion
of the Ten Year/Age 65 Guarantee Period if that option has been chosen, and it
will end for either option if the Policy fails the monthly premium test or the
diversification test.
Please refer to the Policy for additional information on the Guaranteed Minimum
Death Benefit provisions or ask a Registered Representative for a personalized
illustration of these options.
CHANGES IN DEATH BENEFIT AMOUNTS
An increase or a decrease in the death benefit of the Policy may be requested by
the Owner. This request must be received by our Customer Service Center at least
30 days prior to the Policy anniversary. Any change in coverage may not be for
an amount less than $1,000.
Any changes in the death benefit of the Policy will go into effect as of the
Policy anniversary on or following the date we approve the request for the
change. After the request is approved, we will send a new Schedule which will
include the Stated Death Benefit, the benefit under any Riders, if applicable,
the guaranteed cost of insurance rates, and the new guideline annual premium.
This notice should be attached to the Policy. We may also ask that the Policy be
returned to our Customer Service Center so that we can note the change in the
Schedule.
While the Policy is in force, its Target or Stated Death Benefit may be
increased prior to the Policy anniversary on which the Insured is Age 86. The
Stated Death Benefit may be decreased if the request occurs at least two years
from the Policy Date or at least two years after the last increase was made.
Decreases in the death benefit generally may not decrease the Stated Death
Benefit below the minimum we require to issue this Policy. Decreases to the
Stated Death Benefit will cause an equal decrease to the Target Death Benefit in
the current year and all future years, if Adjustable Term Insurance Rider is
part of the Policy. There may be tax consequences to the decrease, See Life
Insurance Definition, page 40, and Modified Endowment Contracts, page 41.
Satisfactory evidence that the Insured is still insurable must be provided when
the death benefit is increased.
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Strategic Advantage 25
<PAGE>
Unless otherwise indicated, any request for an increase to the Target Death
Benefit will be assumed to also be a request for an increase to the Stated Death
Benefit so that the amount of the Adjustable Term Insurance Rider, if it is
included with the Policy at the time of the increase, will not change.
A requested increase in the Stated Death Benefit will create a new coverage
segment for which cost of insurance and other charges will be computed
separately. See CHARGES, DEDUCTIONS AND REFUNDS, page 34. Increases in Stated
Death Benefit resulting from death benefit option changes do not create new
coverage segments, rather, they merely increase the size of the existing
segment(s) of Stated Death Benefit. As discussed below, once created, a new
coverage segment of Stated Death Benefit can never be entirely eliminated
unless required differently by state law.
If an increase creates a new coverage segment of Stated Death Benefit, premiums
paid after the increase will be allocated to the original and the new coverage
segments in the same proportion that the guideline annual premiums defined by
the FederalFederal income tax laws for each segment bear to the sum of the
guideline annual premiums for all segments. The guideline annual premiums will
be shown in the Schedule for each coverage segment. Net Amount at Risk will be
allocated to each coverage segment in the same proportion that the Stated Death
Benefit for that segment bears to the sum of the Stated Death Benefit for all
segments.
Reductions in the death benefit will first be applied to reduce the Target Death
Benefit. The Stated Death Benefit will be decreased only after all Adjustable
Term Insurance Rider coverage has been reduced to zero. If more than one
coverage segment of Stated Death Benefit exists, any subsequent reduction in
Stated Death Benefit will be allocated between coverage segments in the same
proportion that the Stated Death Benefit of each segment bears to the total
Stated Death Benefit prior to the reduction unless required differently by state
law.
In some cases, we may not approve a requested change because it would disqualify
the Policy as life insurance under applicable FederalFederal income tax law. If
we do not approve a change, we will provide notification of our decision about
making the change. See TAX CONSIDERATIONS, page 40.
An increase in the death benefit may be canceled by the Owner within the later
of (i) 45 days after the application for the increase is signed, (ii) 20 days
after receipt of a new Schedule showing the increase or as otherwise specified
by law, or (iii) 10 days after we mail or personally deliver the Notice of
Withdrawal Right. If an increase is canceled, we will refund any charges
attributable to the increase. If you cancel a scheduled change or ask for an
unscheduled decrease increase or decrease to your Target Death Benefit, we may
eliminate any future scheduled increases to the Target Death Benefit.
BENEFITS AT MATURITY
If the Insured is still living on the Maturity Date, we will pay the Net Account
Value to the Policy Owner. The Net Account Value is the Account Value reduced by
any outstanding Policy Loan and accrued loan interest. The Policy will then end.
The Maturity Date is the Policy anniversary nearest the date on which the on
whichInsured attains Age is 100.
ADDITIONAL BENEFITS
The Policy may include additional benefits, which are attached to the Policy by
Rider. A charge will be deducted monthly from the Account Value for each
additional benefit chosen. These benefits may be canceled at any time. See
Modified Endowment Contracts, page 41, for information on the tax effect of
adding or canceling these benefits. More details will be included in the Policy
if any of these benefits are chosen.
From time to time we may make available Riders other than those listed below.
Contact a Registered Representative for a complete list of the Riders available.
Certain Riders may not be available for all Policies.
ACCIDENTAL DEATH BENEFIT RIDER
This Rider will pay the benefit amount selected by the Owner if the Insured dies
as a result of an accident or if the Insured dies within 90 days of an injury
sustained in an accident and the death occurs prior to the Insureds Age 70.
ADJUSTABLE TERM INSURANCE RIDER
The Death Proceeds may be increased by adding the Adjustable Term Insurance
Rider on the life of the Insured. As the name suggests, the Adjustable Term
Insurance Rider adjusts over time.
At issue, a schedule of death benefits called the Target Death Benefit is
specified at levels to meet projected needs in the future. The Target Death
Benefit may be scheduled to vary as often as each Policy year. The Target Death
Benefit will be listed in the Schedule.
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Strategic Advantage 26
<PAGE>
Subject to our rules, the Target Death Benefit schedule may be changed after
issue. See Changes In Death Benefit Amounts, page 25.
The amount of Adjustable Term Insurance Rider in force at any time is the amount
needed to fill the difference between the Target Death Benefit specified in the
Schedule and the Base Death Benefit in effect. The Adjustable Term Insurance
Rider is dynamic in that it adjusts daily for variations in the Base Death
Benefit resulting from the Federal income tax law definition of life insurance
test chosen.
For example, assume the Base Death Benefit increases due to the Federal income
tax law definition of life insurancevaries according to the following schedule.
The Adjustable Term Insurance Rider will adjust to provide Death Proceeds equal
to the Target Death Benefit in each year:
<TABLE>
<CAPTION>
Base Death Target Death Adjustable Term
Benefit Benefit Insurance Rider Amount
- ------------ ------------ ----------------------
<S> <C> <C>
201,500 250,000 48,500
202,500 250,000 47,500
202,250 250,000 47,750
</TABLE>
Since the Adjustable Term Insurance Rider is dynamic, it is possible that the
Adjustable Term Insurance Rider amount may be eliminated entirely as a result of
increases in the Base Death Benefit due to the definition of life insurance
requirementsunder the Policy. Using the example outlined above, if the Base
Death Benefit under the Policy grew to $250,000, the Adjustable Term Insurance
Rider amount would be reduced to zero. (It can never be reduced below zero.)
Even though the Adjustable Term Insurance Rider amount is reduced to zero, the
Rider will remain in effect until it is removed from the Policy. Therefore, if
the Base Death Benefit under the Policy is subsequently reduced below the Target
Death Benefit scheduled, the Adjustable Term Insurance Rider amount will
reappear as needed to maintain the Target Death Benefit at the requested level.
Partial Withdrawals and base decreases may reduce the amount of the Target Death
Benefit. See Partial Withdrawal, page 37.
We generally restrict the amount of the Target Death Benefit to an amount not
more than 500% of the Stated Death Benefit. For example, if the Stated Death
Benefit is $100,000 then the maximum amount of Target Death Benefit we will
allow will be $500,000.
Given the flexible nature of the Adjustable Term Insurance Rider, there is no
defined premium for the amount of coverage. Instead, a cost of insurance charge
is deducted monthly from the Account Value for the Adjustable Term Insurance
Rider amount in effect. The cost of insurance charge may be lower than the rates
applicable to the Base Death Benefit in the early Policy years, and may be
higher in the later Policy years. See Cost Of Insurance Charges, page 36.
Since there is no defined premium related to the Adjustable Term Insurance
Rider, there are no tax or sales charges associated with this coverage. See
Changes In Death Benefit Amounts, page 25.
The Adjustable Term Insurance Rider provides life insurance coverage on the
Insured as long as the Net Account Value is sufficient to pay all of the
deductions that are taken out of the Account Value each month.
ADDITIONAL INSURED RIDER
This Rider provides for death benefits upon the death of immediate family
members of the Insured. A maximum of nine Additional Insured Riders may be added
to the Policy. The minimum amount of coverage for each Rider is $10,000 and the
maximum coverage for all Additional Insured Riders combined equals five times
the Stated Death Benefit of the Policy.
GUARANTEED INSURABILITY RIDER
This Rider will allow the Owner to increase the Stated Death Benefit of the
Policy without providing us with evidence that the Insured remains insurable.
Increases are limited in amount and timing.
RIGHT TO EXCHANGE RIDER
This Rider allows the Owner to change the person insured under the Policy. A
change of the Insured may have Federal income tax consequences. If an exchange
of Insured occurs, the cost of insurance charges in the future may change but
the Account Value will remain unchanged as of the exchange date. There is no
charge for this Rider.
WAIVER OF THE COST OF INSURANCE RIDER
This Rider provides that during the total disability of the Insured, while the
Policy remains in force, the monthly expense charges, cost of insurance charges
and Rider charges will be waived and therefore not deducted from the Account
Value. If this Rider is added to the Policy, Waiver of Specified Premium Rider
may not also be added.
WAIVER OF SPECIFIED PREMIUM RIDER
This Rider provides that during the total disability of the Insured, while the
Policy remains in force, a specified
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Strategic Advantage 27
<PAGE>
premium will be credited monthly to the Policy. The amount of premium to be
waived, within limits, is the amount specified in the application. If this Rider
is added to the Policy, the Waiver of Cost of Insurance Rider may not also be
added.
POLICY VALUES
ACCOUNT VALUE
The amount of the Account Value is the sum of the amounts in the Guaranteed
Interest Division and in the various Divisions of our Variable Account. It also
includes any amount we have set aside in the Loan Division to secure any
outstanding Policy Loan. The Account Value therefore reflects all premiums paid,
charges made, Loans and Partial Withdrawals taken, investment experience of the
Variable Account and earnings accrued in the Guaranteed Interest and Loan
Divisions.
CASH SURRENDER VALUE
The Cash Surrender Value of the Policy equals the Account Value plus any refund
of sales charges due.
NET CASH SURRENDER VALUE
The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value
less the amount of any outstanding Policy Loan and any accrued loan interest.
NET ACCOUNT VALUE
The Net Account Value of the Policy is equal to the Account Value less the
amount of any outstanding Policy Loan and any accrued loan interest.
DETERMINING THE VALUE OF AMOUNTS IN THE DIVISIONS OF THE VARIABLE ACCOUNT
The amounts included in the Divisions of the Variable Account are measured in
terms of Accumulation Units and Accumulation Unit Values. On any given day, the
value of the amount in a Division of the Variable Account is equal to the
Accumulation Unit Value times the number of Accumulation Units credited to the
Policy in that Division. The Accumulation Units of each Division of the Variable
Account will have different Accumulation Unit Values.
Accumulation Units of a Division are purchased whenever premiums or transfer
amounts are allocated to that Division (including transfers from the Loan
Division). Accumulation Units are redeemed when Partial Withdrawals are taken or
amounts are transferred from a Division of the Variable Account (including
transfers to the Loan Division) and to pay the death benefit when the Insured
dies. We also redeem Accumulation Units for the monthly deductions from the
Account Value and for Policy transaction charges, if any.
The number of Accumulation Units purchased or redeemed in a Division of the
Variable Account as of any Valuation Date is calculated by dividing the dollar
amount of the transaction by the Divisions Accumulation Unit Value calculated
after the close of business that day. The Accumulation Unit Value of each
Division fluctuates with the investment experience of the corresponding
Portfolio and reflects the investment income, realized and unrealized capital
gains and losses and expenses of the Portfolio. The Accumulation Unit Values
also reflect the mortality and expense risk charges we make each day to the
Variable Account. See How We Calculate Accumulation Unit Values for Each
Division, page 28.
Transactions are processed as of the Transaction Date. The Transaction Date is
the date we receive a premium or an acceptable written or telephone request at
our Customer Service Center. If the premium or request reaches our Customer
Service Center on a day which is not a Valuation Date, or after the close of
business on a Valuation Date (that is, after 4:00 p.m. Eastern Time), the
Transaction Date will be the next succeeding Valuation Date.
Monthly deductions against the Account Value are made as of the Monthly
Processing Date. Transaction charges are made as of the Transaction Date.
The value of any amount allocated to a Division of our Variable Account will go
up or down depending on the investment experience of that Division. For amounts
allocated to the Divisions of the Variable Account, there is no guaranteed
minimum cash value.
HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION
We determine Accumulation Unit Values for the Divisions of the Variable Account
as of each Valuation Date. All Policy transactions are performed as of a
Valuation Date.
The Accumulation Unit Value for each Division will generally be set at $10 on
the first Valuation Date that there are Policy transactions in that Division of
the Variable Account. After that, the Accumulation Unit
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Strategic Advantage 28
<PAGE>
Value as of any Valuation Date is equal to the Accumulation Unit Value for the
preceding Valuation Date multiplied by the Accumulation Experience Factor for
that Division for the Valuation Period.
We calculate an Accumulation Experience Factor for each Division every Valuation
Date as follows:
1. We take the value of the shares belonging to the Division in the
corresponding Portfolio as of the close of business that Valuation Date
(before giving effect to any Policy transactions for that day, such as
premium payments or surrenders). For this purpose, we use the share value
reported to us by the managers of the Portfolio.
2. We add any dividends or capital gains distributions declared and reinvested
by the Portfolio during the Valuation Period. We subtract from this amount
a charge for taxes, if any.
3. We divide this amount by the value of the shares belonging to the Division
in the corresponding Portfolio as of the close of business on the preceding
Valuation Date. This amount represents the gross experience factor per
Accumulation Unit, before reduction for the expenses of the Variable
Account.
4. We subtract a charge for the mortality and expense risk assumed by us under
the Policy. The daily charge is .002055% of the Accumulation Unit Value,
which is equivalent to an annual rate of .75% of the Accumulation Unit
Value. If the previous day was not a Valuation Date, then the charge is
adjusted for the additional days between valuations.
The resulting amount is the Accumulation Experience Factor for the Valuation
Period.
TRANSFERS OF ACCOUNT VALUES
After the Free Look Period, up to 12 transfers between Divisions of the Variable
Account or to the Guaranteed Interest Division may be made in each Policy year
without charge. There is no limit on the number of transfers that may be made,
but we charge a fee of $25 for each additional transfer beyond the first 12.
Transfers due to the operation of Automatic Rebalancing or Dollar Cost Averaging
are not included in determining the limit on transfers without a charge.
Transfer requests should be made in writing to our Customer Service Center. The
transfer will take effect as of the Valuation Date we receive the request. The
minimum amount we will transfer on any date is $100. This minimum need not come
from any one Division or be transferred to any one Division as long as the total
amount requested to be transferred equals at least the minimum. However, we will
transfer the entire amount in any Division of the Variable Account from which a
transfer is requested, if the amount remaining in that Division is less than
$100.
We reserve the right to limit excessive trading activity, which can disrupt
Portfolio management strategy and increase Portfolio expenses. For example, we
may refuse to accept or may 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.
Transfers from the Guaranteed Interest Division may only be made as described
below. Once during the first 30 days of each Policy year, the Owner may transfer
amounts from the Guaranteed Interest Division. Transfer requests received within
30 days prior to the Policy anniversary will be deemed to occur as of the Policy
anniversary. Transfer requests received on the Policy anniversary or within the
following 30 days will be processed. Transfer requests received at any other
time will not be processed. Transfer amounts from the Guaranteed Interest
Division to the Divisions of the Variable Account are limited to the greatest of
(i) 25% of the balance in the Guaranteed Interest Division at the time of the
first transfer or withdrawal in a Policy year, (ii) the sum of any amounts
transferred and withdrawn from the Guaranteed Interest Division in the prior
Policy year or, (iii) $100.
If telephone privileges have been elected in an application or written notice
has been sent to our Customer Service Center requesting this privilege,
transfers may be made by telephoning our Customer Service Center. See Telephone
Privileges, page 47.
DOLLAR COST AVERAGING
We offer a feature called Dollar Cost Averaging to Owners who have at least
$10,000 of Account Value invested in either the Division investing in the
Fidelity VIP Money Market Portfolio or the Neuberger & Berman AMT Limited
Maturity Bond Portfolio of the Variable Account. The main objective of Dollar
Cost Averaging is
- -------------------------------------------------------------------------------
Strategic Advantage 29
<PAGE>
to protect Policy values from short-term price fluctuations. Since the same
dollar amount is transferred to other Divisions 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 allocating
Policy values reduces the risk of investing too much when the price of a
Portfolio's shares is high and too little when the price of a Portfolio's shares
is low.
With Dollar Cost Averaging, a designated dollar amount of Account Value will be
transferred automatically each month from the selected Division to one or more
other Divisions of the Variable Account. Dollar Cost Averaging transfers may not
be made to the Guaranteed Interest Division. 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. If the
Owner elects to transfer to a particular Division, the minimum percentage that
may be transferred to that Division is 1% of the total amount transferred. A
date for Dollar Cost Averaging to terminate may be specified. You may also
specify a A dollar amount may be specified so that when the balance remaining in
either the Division investing in the Fidelity VIP Money Market Portfolio or the
Neuberger & Berman AMT Limited Maturity Bond Portfolio reaches this dollar
amount, Dollar Cost Averaging will terminate.
The monthly transfer under Dollar Cost Averaging may be no less than $100 per
month and may be no more than one twelfth of the Account Value at the time
Dollar Cost Averaging is elected in the Division from which the Dollar Cost
Averaging transfers are to be made. Each automatic monthly transfer will take
place on the Monthly Processing Date beginning with the first Monthly Processing
Date which is at least 30 days after our receipt of the request for Dollar Cost
Averaging. However, in no event will Dollar Cost Averaging begin before the
Monthly Processing Date following the end of the Free Look PeriodFree-look
Period. If a request for Dollar Cost Averaging is submitted with the
application, the first transfer will take place on the first Monthly Processing
Date following the date on which at least $10,000 has been accumulated in the
selected Division. If on any Monthly Processing Date, the amount in the Division
from which transfers are to be made is equal to or less than the amount to be
transferred, the entire remaining amount will be transferred, and Dollar Cost
Averaging will end. The amount to be transferred or the Divisions to which
transfers are to be made may be changed once each Policy year, and Dollar Cost
Averaging may be canceled completely by sending satisfactory notice to our
Customer Service Center at least seven days before the next transfer date.
If both Dollar Cost Averaging and Automatic Rebalancing are elected, 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 telephone privileges have been elected in an application or if written notice
has been sent to our Customer Service Center requesting this privilege, changes
to your Dollar Cost Averaging options can be made by telephoning our Customer
Service Center. See Telephone Privileges, page 47.
AUTOMATIC REBALANCING
The Automatic Rebalancing feature provides a method for maintaining a balanced
approach to investing Account Values and for simplifying the process of asset
allocation over time. There is no charge for this feature and any transfers as a
result of the operation of this feature are not counted toward the limit of 12
transfers per Policy year without an additional transfer charge. During the
operation of the Automatic Rebalancing feature, transfers among the Divisions
may be accomplished only by changing premium allocation percentages.
The Automatic Rebalancing feature may be elected by designation on the
application or at any subsequent time by completing the appropriate form.
Automatic Rebalancing matches Account Value allocations over time to the
allocation percentages for new premiums. As of the first Valuation Date of each
calendar quarter, we will automatically rebalance the amounts in each of the
Divisions to match the current premium allocation percentages. This will
rebalance the amounts in Divisions that may be out of line with the allocation
percentages, which may result, for example, from Divisions which underperform
the other Divisions in certain quarters.
If this feature is elected, as of the first Valuation Date of the next calendar
quarter we will transfer amounts among the Division so that the ratio of the A
ccumulat i on Value in each Division to the to tal Account Value matches the
selected allocation percentage for that Division.
If Automatic Rebalancing is elected with the Policy 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 this feature is elected after the
Policy Date, the first transfer will be processed as of the first Valuation Date
of the next calendar quarter after we receive notification at our Customer
Service Center and the Free Look Period has ended.
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Strategic Advantage 30
<PAGE>
The allocation percentages for Automatic Rebalancing may be changed at any time
and the Account Value will be reallocated as of the Valuation Date that we
receive the allocation instructions at our Customer Service Center. Any
reduction in the allocation to the Guaranteed Interest Division, however, will
be considered a transfer from the Division and, therefore, must comply wit h the
maximum transfer amount and time limitations on transfers from the Guaranteed
Interest Division, as described in Transfers of Account Values on page 29. We
will not process an Automatic Rebalancing request which is in conflict with
these provisions.
The Automatic Rebalancing feature 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 the Guarantee Period is in
effect and the Automatic Rebalancing feature is terminated, diversification of
the Net Account Value must be maintained for the guarantee to continue. See
Guaranteed Minimum Death Benefit, page 24. If the Automatic Rebalancing
feature is active on a Policy and a request for an allocation which does not
meet the requirements is made, we will notify the Owner that the allocation must
be changed.
Any transfers as a result of the operation of the Automatic Rebalancing feature
are not counted toward the limit of 12 transfers that can be made each Policy
year without a transfer charge. However, we will charge a fee of $25 each time
premium allocation is changed more often than five times per Policy year;
otherwise, there is no charge for this feature.
If both Dollar Cost Averaging and Automatic Rebalancing have been elected,
Dollar Cost Averaging will take place first. As of the first Valuation Date of
the calendar quarter after Dollar Cost Averaging has terminated, Automatic
Rebalancing will begin.
If telephone privileges have been elected in an application or if written
notice has been sent to our Customer Service Center requesting this privilege,
changes to the Automatic Rebalancing options can be made by telephoning our
Customer Service Center. See Telephone Privileges, page 47.
POLICY LOANS
At any time after the first Policy anniversary or as otherwise required by law,
the Owner may borrow against the Policy by using it as security for a loan. The
amount borrowed is called a Policy Loan. Any new Policy Loan must be at least
$100. The maximum amount which can be borrowed as of any Valuation Date equals
(a) minus (b) where (a) is equal to 1.) Account Value minus 12 times the current
monthly deduction; 2.) multiplied by 1.03; 3.) divided by 1.0375; and where (b)
is equal to any outstanding Policy Loan and accrued loan interest. A Policy Loan
may be requested by contacting our Customer Service Center.
Loan interest charges on a Policy Loan accrue daily at a compound annual
interest rate of 3.75%. Interest is due in arrears on each Policy anniversary.
If the interest is not paid when it is due, it will be added to the Policy Loan
as of the Policy anniversary.
When an additional loan is requested, the amount taken will be added to the
outstanding Policy Loan so only one loan is outstanding at any time. A Policy
Loan may be fully or partially repaid at any time while the Policy is in force.
Unless otherwise indicated, we will assume that any payments, other than
Scheduled Premiums, constitute Policy Loan repayments and not premiums.
When a Policy Loan is taken, or if the loan interest is not paid on the Policy
anniversary, an amount equal to the Policy Loan amount or interest due is
transferred from the Divisions of the Variable Account and the Guaranteed
Interest Division to the Loan Division to secure the loan. The Loan Division is
part of our General Account, separate from the Guaranteed Interest Division.
When transfers are made to the Loan Division, units of the Variable Account
Divisions are redeemed sufficient to cover the amount of the loan which is taken
from the Variable Account. We will deduct the amount transferred from each
Division in the same proportion that the Account Value in that Division bears to
the Net Account Value immediately prior to the loan transaction. The amounts in
each Division will be determined as of the Valuation Date we receive the request
for a loan. The Loan Division is credited as of each Valuation Date with
interest at a compound annual rate of 3% in all Policy years.
On Policy anniversaries, the amount of interest credited to the Loan Division
for the Policy year will be transferred from the Loan Division. When a loan
repayment is made, an amount equal to the payment is transferred from the Loan
Division. Amounts transferred from the Loan Division will be allocated to the
Divisions of the Variable Account and the Guaranteed Interest Division based on
the current premium allocation instructions unless a different allocation is
requested.
A Loan against the Policy will have a permanent effect on the Account Value and,
therefore, on the benefits under this Policy, even if the Loan is repaid. When
borrowing against the Policy, an amount equal to the Policy Loan is transferred
to the Loan Division where it earns a
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Strategic Advantage 31
<PAGE>
guaranteed rate of interest. Premiums or transfer amounts may not be allocated
to the Loan Division other than by borrowing additional amounts. If not repaid,
the Policy Loan and accrued loan interest will be deducted from the amount of
the Death Proceeds paid, the Cash Surrender Value paid on surrender, or the
Account Value upon maturity. It may also have an effect on the Guarantee Period
and on the length of time the Policy remains in force, since in many cases the
Policy will lapse when the Account Value minus Policy Loans and accrued loan
interest is insufficient to cover the monthly deductions against the Policy's
Account Value.
If telephone privileges have been elected in an application or requested by
written notice to our Customer Service Center, a Policy Loan may be requested by
telephoning our Customer Service Center. Any telephone request for a Policy Loan
must be for an amount less than $25,000. See Telephone Privileges, page 47.
PARTIAL WITHDRAWALS
A Partial Withdrawal may be requested on any Monthly Processing Date after the
first Policy anniversary by writing to us at our Customer Service Center. One
Partial Withdrawal is allowed each Policy year.
The minimum Partial Withdrawal is $100. The maximum Partial Withdrawal is the
amount which will leave $500 as the Net Account Value. If a withdrawal of more
than this maximum is requested, we will require a full surrender of the Policy.
When a Partial Withdrawal is taken, the amount of the withdrawal plus a service
fee is deducted from the Account Value.
The Stated Death Benefit is not reduced by a Partial Withdrawal taken when the
Base Death Benefit has been increased to qualify the Policy as life insurance
under the Federal income tax laws (see Life Insurance Definition,
page 40) and the amount withdrawn is no greater than that amount which reduces
the Account Value to the level which no longer requires the Base Death Benefit
to be increased for Federal income tax law purposes.
For a Policy under an Option 1 death benefit, the Stated Death Benefit is not
reduced by a Partial Withdrawal in the circumstances described above. In
addition, if no more than 16 years have elapsed since the Policy Date and the
Insured is not yet Age 81, a Partial Withdrawal of an amount up to 10% of the
Account Value or, if greater, 5% of the Stated Death Benefit, calculated
immediately before the Partial Withdrawal is taken will not reduce the Stated
Death Benefit. Any additional amount withdrawn reduces the Stated Death Benefit
by that additional amount. For a Policy under an Option 2 death benefit, a
Partial Withdrawal does not reduce the Stated Death Benefit. For a Policy under
an Option 3 death benefit, the Stated Death Benefit will be reduced by any
amount of the Partial Withdrawal in excess of premiums paid minus prior Partial
Withdrawals taken to the date of the Partial Withdrawal (the excess will be
treated as if the Policy were under death benefit Option 1). See Death Benefit
Options, page 23.
No Partial Withdrawal will be allowed if the Stated Death Benefit remaining in
force after the Partial Withdrawal would be reduced below the minimum we require
to issue this Policy at the time of the reduction. See Group or Sponsored
Arrangements, page 40.
Under any death benefit option, if the Base Death Benefit has been increased in
order to qualify the Policy as a life insurance contract under the Federal
income tax laws, the Partial Withdrawal reduces the Base Death Benefit by an
amount greater than the withdrawal, but in no event less than the Stated Death
Benefit after the Partial Withdrawal.
If the Stated Death Benefit of the Policy is reduced by a Partial Withdrawal,
the Target Death Benefit, if any, for the current year and all future years will
be reduced by an equal amount.
Unless otherwise indicated, we will make the withdrawal from the Guaranteed
Interest Division and the Divisions of the Variable Account in the same
proportion that each Division bears to the Net Account Value immediately prior
to the withdrawal. Withdrawals from the Guaranteed Interest Division may not
exceed an amount that is greater than the total withdrawal times the ratio of
the Account Value in the Guaranteed Interest Division to the total Net Account
Value immediately prior to the withdrawal.
A new Schedule reflecting the effect of the withdrawal will be sent if there is
a change to the Stated Death Benefit or to the Target Death Benefit. We may ask
that the Policy be returned to our Customer Service Center to make this change.
The withdrawal and any reductions in death benefits will be effective as of the
Valuation Date we receive the request.
If telephone privileges have been elected, requests for Partial Withdrawals may
be made by telephoning our Customer Service Center. Any telephone request for a
Partial Withdrawal must be for an amount less than $25,000. See Telephone
Privileges, page 47.
Partial Withdrawals may have adverse tax consequences. See Modified Endowment
Contracts, page 41.
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Strategic Advantage 32
<PAGE>
SURRENDER
The Policy may be surrendered for its Net Cash Surrender Value at any time while
the Insured is living. In order to surrender the Policy, a written request and
the Policy should be sent to our Customer Service Center. The Net Cash Surrender
Value of the Policy equals the Cash Surrender Value minus any Policy Loan and
accrued loan interest. We will compute the Net Cash Surrender Value as of the
Valuation Date we receive the request and the Policy at our Customer Service
Center, and all insurance coverage under the Policy will end as of that date.
A surrender of the Policy for its Net Cash Surrender Value may have adverse tax
consequences. See Modified Endowment Contracts, page 41.
RIGHT TO EXCHANGE POLICY
During the first 24 months following the date we issue the Policy or add a
coverage segment, the Policy provides a right to exchange the Policy from one in
which the investment experience is not guaranteed into a guaranteed Policy. This
is accomplished by the transfer of the entire amount in the Divisions of the
Variable Account to the Guaranteed Interest Division, and the allocation of all
future premium payments to the Guaranteed Interest Division. This will, in
effect, serve as an exchange of the Policy for the equivalent of a flexible
premium universal life insurance policy. No charge will be imposed on the
transfer in exercising this exchange privilege. See The Guaranteed Interest
Division, page 20.
When this right is exercised, we will not allow for the allocation of future
premium payments or transfers to the Divisions of the Variable Account.
LAPSE
The insurance coverage provided by the Policy will continue as long as the Net
Account Value of the Policy is sufficient to pay all the deductions that are
taken out of the Account Value each month. In addition, during the first three
Policy years (the special continuation period), if on each Monthly Processing
Date the sum of premiums paid, less the sum of Partial Withdrawals taken and any
outstanding Policy Loan and accrued loan interest is greater than or equal to
one twelfth of the Minimum Annual Premium times the number of completed Policy
months, the Policy and all attached Riders are guaranteed not to lapse,
regardless of the Net Account Value.
IF GUARANTEED MINIMUM DEATH BENEFIT PROVISION IS NOT IN EFFECT
Unless the Guaranteed Minimum Death Benefit provision is in effect, or the
special continuation period is in effect and its requirements have been met,
the Policy including all attached Riders will lapse in its entirety on any
Monthly Processing Date that the Net Account Value of the Policy is not
sufficient to pay all the monthly deductions from the Account Value. A 61-day
grace period will begin on that Monthly Processing Date. See Grace Period, page
34.
If we do not receive payment of the requested amount in full within the 61 days,
the Policy and all Riders attached will lapse without value. We will withdraw
any remaining balance of the Account Value from the Divisions of the Variable
Account and Guaranteed Interest Division. We will deduct any amount owed to us
against the Account Value. We will inform the Owner that the Policy has ended.
If the Insured dies during the grace period, we will pay the Death Proceeds to
the Beneficiary that reflect reductions for Policy Loans, accrued loan interest
and any monthly deductions due.
IF THE GUARANTEED MINIMUM DEATH BENEFIT PROVISION IS IN EFFECT
If the Guaranteed Minimum Death Benefit provision is in effect, the Stated Death
Benefit of the Policy will not lapse during the Guarantee Period even if the Net
Account Value is not sufficient to cover all the deductions from the Account
Value on any Monthly Processing Date. See Guaranteed Minimum Death Benefit,
page 24.
The benefits provided by Riders attached to the Policy and any amount by which
the Base Death Benefit exceeds the Stated Death Benefit are not protected by the
Guaranteed Minimum Death Benefit provision. Therefore, these portions of the
Policy benefits will lapse if the Net Account Value is not sufficient to cover
all the deductions from the Account Value on any Monthly Processing Date.
While the Guaranteed Minimum Death Benefit provision applies, the Account Value
may be reduced by monthly deductions, but not below zero. Any monthly deductions
during the Guarantee Period which would reduce the Net Account Value below zero
will be permanently waived.
The Guaranteed Minimum Death Benefit provision will be terminated if the Policy
does not meet the monthly premium test or if the Net Account Value is not
diversified according to our requirements as explained in
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Strategic Advantage 33
<PAGE>
Guaranteed Minimum Death Benefit, page 24. If the Guaranteed Minimum Death
Benefit provision is terminated the normal premium test for lapse will resume.
See Lapse, page 33.
GRACE PERIOD
If the following conditions occur as of a Monthly Processing Date, the
Policy will enter into the 61-day Grace Period:
(i) The Account Value is zero or less; and
(ii) The three year special continuation period has expired or the required
premium has not been paid; and
(iii) The Guarantee Period has expired or been terminated.
We will, at least 30 days before the end of a grace period, notify the Owner or
any assignee in writing at the last known address on our records that the grace
period has begun. The notification will include the amount of premium payment
necessary to reinstate the Policy and all Riders attached. The premium required
to reinstate the Policy is generally the amount of past due charges plus the
amount that will cover estimated monthly deductions for the Policy and all
attached Riders for the following two months. If we receive payment of this
amount before the end of the grace period, we will use the amount sent us to
make the overdue deductions. Any balance remaining will be applied to the
Account Value in the same manner as other premium payments.
REINSTATEMENT
The Policy and its Riders may be reinstated within five years after lapse for
failure to pay sufficient premiums prior to the end of the grace period. We will
reinstate the Policy and any Riders if:
(i) The Policy has not been surrendered for its Net Cash Surrender Value;
(ii) Evidence satisfactory to us that the Insured and the Insureds under any
Riders are still insurable according to our normal rules of underwriting
for this type of Policy is provided to us; and
(iii) A premium payment sufficient to keep the Policy and any Riders in force
from the beginning of the grace period to the end of the grace period
and for two months following the date of the reinstatement is made.
The reinstatement will be effective as of the Monthly Processing Date following
our approval of the reinstatement application. We will also reinstate any Policy
Loan which existed when coverage ended, with accrued loan interest to the date
of lapse. Net Premiums received after reinstatement will be allocated according
to the premium allocation instructions in effect at the start of the grace
period or as otherwise directed by the Owner.
CHARGES, DEDUCTIONS AND REFUNDS
DEDUCTIONS FROM PREMIUMS
Unless a Policy Loan is outstanding (see Policy Loans, page 31), any payment
received before the Maturity Date is considered a premium. Certain expenses are
deducted from premium payments. The remainder of each premium (the Net Premium)
is then added to the Account Value. The expenses which are deducted from the
premium include the tax charges and the sales charge.
TAX CHARGES
All states levy taxes on life insurance premium payments. The amount of these
taxes vary from state to state, and may vary from jurisdiction to jurisdiction
within a state. We currently deduct an amount equal to 2.5% of each premium to
pay applicable premium taxes. The 2.5% rate approximates the average tax rate we
expect to pay on premiums from all states.
A charge currently equal to 1.5% of each premium payment is deducted to cover
our estimated cost for the Federal income tax treatment of deferred acquisition
costs determined solely by the amount of life insurance premiums we receive.
This charge for deferred acquisition costs is reasonable in relation to Security
Life's increased Federal income tax burden under Internal Revenue Code Section
848 resulting from the receipt of premium payments.
We reserve the right to increase or decrease the premium expense charge for
taxes due to any change in tax law. We further reserve the right to increase or
decrease the premium expense charge for the Federal income tax treatment of
deferred acquisition costs due to any change in the cost to us.
SALES CHARGES
A percentage of each premium is deducted to compensate us for a portion of the
cost of selling the Policy. The
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Strategic Advantage 34
<PAGE>
percentage deducted is based on the amount of premium paid and the number of
years since the Policy Date or the date of an increase in coverage. For each of
the first five Policy years, this charge is equal to 8% of premiums paid up to
the Target Premium and 3% of premiums paid in excess of the Target Premium. In
the sixth Policy year and thereafter, the sales charge is equal to 3% of all
premiums paid.
Target Premiums are not based on the Scheduled Premium determined when the
Policy is purchased. Target Premiums are actuarially determined based on the
Age, sex and Premium Class of the Insured. See Premiums, page 21. The Target
Premium for the Policy and any Stated Death Benefit coverage segments added
since the Policy Date will be listed in the Schedule.
For a Policy with multiple coverage segments of Stated Death Benefit, premiums
paid are allocated to the segments in the same proportion that the guideline
annual premium (as defined by the Federal income tax law) for each segment bears
to the total guideline annual premium for the Stated Death Benefit of the
Policy.
The sales charge covers the cost of distribution, costs of preparing our sales
literature, other promotional expenses, and other direct and indirect expenses.
The amount of this charge cannot be specifically related to sales expenses in a
particular year since we recover these costs over the period the Policies remain
in effect. We pay the sales expenses from our own resources, including this
sales charge and any profit we may earn on the other charges deducted under the
Policy. The sales charge may be reduced or waived for certain group or sponsored
arrangements.
DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE
Each day a charge is deducted for mortality and expense risks we assume. This
charge is equal to 0.002055% per day of the amount in the Divisions of the
Variable Account, which is equivalent to an annual rate of 0.75% of the portion
of the Account Value allocated to the Variable Account.
We assess the mortality and expense risk charge to compensate us for assuming
mortality and expense risks under the Policies. The mortality risk we assume is
that Insureds, as a group, may live for a shorter period of time than estimated.
The expense risk we assume is that other expenses we incur in issuing and
administering the Policies and operating the Variable Account will be greater
than the amount we estimated when setting the charges for these expenses. We
will realize a profit from this fee to the extent it is not needed to provide
benefits and pay expenses under the Policies. We may use this profit for other
purposes, including any distribution expenses not covered by the sales charge.
This charge is not assessed against the amount of Account Value which is
allocated to the Guaranteed Interest Division, nor to amounts in the Loan
Division. We credit the Account Value with a persistency refund equivalent to
0.5% per year for each coverage segment of Stated Death Benefit that has been in
force for at least 10 Policy years, which effectively reduces the charge for
mortality and expense risks. See Persistency Refund, page 37.
MONTHLY DEDUCTIONS FROM THE ACCOUNT VALUE
The following charges are deducted from the Account Value on each Monthly
Processing Date. These deductions are taken from the Divisions of the Variable
Account and the Guaranteed Interest Division in the same proportion that the
Account Value in each Division bears to the total Net Account Value as of the
Monthly Processing Date.
INITIAL POLICY CHARGE
The initial Policy charge is $10 per month for the first five Policy years and
is guaranteed never to exceed this amount. This charge covers the costs of
setting up the Policy, other than sales expenses, such as application
processing, medical examinations, establishment of Policy records and insurance
underwriting costs. This charge is designed to reimburse us for expenses and we
do not expect to gain from it.
MONTHLY ADMINISTRATIVE CHARGE
This charge is comprised of a per Policy charge of $5 per month plus a charge of
$0.0125 per thousand of Stated Death Benefit or Target Death Benefit, if
greater, and is guaranteed never to exceed this amount. This charge is limited
to a maximum of $20 per month. This charge is designed to cover the ongoing
costs of maintaining the Policy, such as premium billing and collections, claim
processing, Policy transactions, recordkeeping, reporting and other
communications with Owners, and other expenses and overhead. This charge is
designed to reimburse us for expenses and we do not expect to gain from it.
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Strategic Advantage 35
<PAGE>
COST OF INSURANCE CHARGES
The cost of insurance charges compensate us for providing insurance protection
under the Policy. The cost of insurance charges are calculated monthly, and
equal our current monthly cost of insurance rate times the Net Amount at Risk
for each portion of the death benefit. Net Amount at Risk for each portion of
the death benefit is calculated at the beginning of the Policy month. The Net
Amount at Risk for the Base Death Benefit is equal to the difference between the
current Base Death Benefit and the amount of the Account Value. For this
purpose, the amount of the Account Value is determined after deduction of
charges due on that date, other than cost of insurance charges for the Base
Death Benefit, any Adjustable Term Insurance Rider, and Waiver of Cost of
Insurance Rider. The Net Amount at Risk for the Adjustable Term Insurance Rider
is equal to the amount of the benefit provided. If the Base Death Benefit at the
beginning of the month is increased due to the requirements of Federal income
tax law definition of life insurance, Net Amount at Risk for the Base Death
Benefit that month will also increase, but the Net Amount at Risk for any
Adjustable Term Insurance Rider may be reduced. Therefore, the amount of the
cost of insurance charges will vary from month to month with changes in the Net
Amount at Risk, changes in the relative makeup of the death benefit, and with
increasing Age of the Insured.
The cost of insurance rates are based on the Age, sex and Premium Class of the
Insured on the Policy Date or at the time a Base coverage segment is added, as
well as the length of time the Policy or coverage segment has been in effect.
Unisex rates are used where appropriate under applicable law, currently
including the state of Montana and any Policies purchased by employers and
employee organizations in connection with employment-related insurance or
benefit programs. Net Amount at Risk is allocated to Stated Death Benefit
coverage segments in the same proportion that the Stated Death Benefit of each
segment bears to the sum of the Stated Death Benefit for all coverage segments
as of the Monthly Processing Date. Separate cost of insurance rates apply to the
Base Death Benefit, the Adjustable Term Insurance Rider and any additional Base
coverage segments. We may change these rates from time to time, but they will
never be more than the guaranteed maximum rates set forth in the Policy. The
guaranteed maximum rates for fully underwritten policies are based on the 1980
Commissioners Standard Ordinary Mortality Table.
We may offer Policies on a guaranteed issue basis to certain group or sponsored
arrangements. If an eligible group or sponsored arrangement purchases Policies
on a guaranteed issue basis, the Policies will be issued up to a predetermined
face amount limit, with only minimal evidence of insurability. Because only
limited underwriting information is obtained, Policies issued on a guaranteed
issue basis may present additional mortality cost to us compared to underwritten
Policies. We will charge increased cost of insurance rates for guaranteed issue
Policies. The amount of the increased charges will depend on the issue Age of
the Insured, and may also depend on the size of the group and the total premium
to be paid by the group. Under guaranteed issue Policies, the overall charges
for insurance will be higher than under a comparable underwritten Policy issued
in the nonsmoker standard or smoker standard class. This means that an Insured
may be able to obtain individual, underwritten insurance coverage at a lower
overall cost.
The guaranteed rates for guarantee issue policies are no greater than 135
percent of the maximum rates that could be charged based on the 1980
Commissioner's Standard Ordinary Mortality Table ("1980 CSO Table"). The
guaranteed rates are higher than 100 percent of the maximum rates in the 1980
CSO Table because we use simplified underwriting procedures whereby the Insured
may not be required to submit to a medical or paramedical examination. The
current cost of insurance rates after the 15th Policy Year are generally lower
than 100 percent of the 1980 CSO Table. Any change in the current cost of
insurance rates will apply to all persons of the same Age and rate class. The
maximum rates for the initial and any new coverage segment will be printed in
the Schedule which we will provide to you.
CHARGES FOR ADDITIONAL BENEFITS
The cost of any additional benefits added by Rider will be deducted monthly on
the Monthly Processing Date. We may change these charges, but the Schedule
contains tables showing the guaranteed maximum rates for all of these benefits.
See Additional Benefits, page 26.
GUARANTEED MINIMUM DEATH BENEFIT CHARGE
If the Guaranteed Minimum Death Benefit is purchased, we currently charge $0.005
per thousand of Stated Death Benefit each month during the Guarantee Period.
This charge is guaranteed never to exceed $0.01 per thousand of Stated Death
Benefit each month.
CHANGES IN MONTHLY CHARGES
Any changes in the cost of insurance charges, charges for additional benefits,
or guaranteed minimum death benefit charge will be made by class of Insured and
will be based on changes in future expectations about such things as
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Strategic Advantage 36
<PAGE>
investment earnings, mortality, the length of time policies will remain in
effect, expenses and taxes. In no event will they exceed the guaranteed maximum
rates defined in the Policy.
POLICY TRANSACTION FEES
In addition to the deductions described above, we charge fees for certain Policy
transactions.
Transaction fees are taken from the Divisions of the Variable Account and the
Guaranteed Interest Division in the same proportion that the Account Value in
each Division bears to the total Net Account Value immediately before the
transaction for which the fee is charged.
PARTIAL WITHDRAWAL
A service fee equal to the lesser of $25 or 2% of the amount requested will be
charged against the Account Value for each Partial Withdrawal. See Partial
Withdrawals, page 32.
TRANSFERS
We charge a fee of $25 for each additional transfer beyond the first twelve in a
Policy year. See Transfers of Account Values, page 29. All transfers for a
single Policy included in one transfer request count as a single transfer when
we calculate the fee. There will not be a transfer fee for transfers of Account
Value into the Guaranteed Interest Division pursuant to the Exchange Right
provided by this Policy. See Right to Exchange Policy, page 33.
PREMIUM ALLOCATION CHARGES
We charge a fee of $25 each time the premium allocation is changed beyond five
times per Policy year.
ILLUSTRATIONS
We reserve the right to charge a fee, not to exceed $25, for Policy
illustrations in excess of one per Policy year.
PERSISTENCY REFUND
Long-term Owners of Strategic Advantage will receive a persistency refund.
Each month the Policy or a coverage segment of Stated Death Benefit remains in
force after its tenth Policy anniversary, we will credit the Account Value with
a refund equivalent to 0.5% of the Account Value on an annual basis for that
segment (0.04167% monthly). For purposes of this calculation, Account Value will
be allocated to each coverage segment based upon the number of completed Policy
years that segment has been in force and the size of the guideline annual
premium as defined by the Federal income tax law definition of life
insurance.
The Persistency refund will be added to the Divisions of the Variable Account
and the Guaranteed Interest Division in the same proportion that the Account
Value in each Division bears to the Net Account Value as of the Monthly
Processing Date.
The following is an example of how the persistency refund affects the Account
Value each month if the policy has no loan:
Account Value = $10,000 (all in the Variable Divisions)
Monthly persistency refund Rate = .0004167
Persistency refund = 10,000 x .0004167 = $4.17
Before Persistency After Persistency
Refund Refund
------------------ -----------------
Variable $10,000.00 $10,004.17
Divisions
The following is an example of how the persistency refund affects the Account
Value each month if the Policy has a loan:
Account Value = $10,000
Account Value in the Variable Divisions = $5,000
Account Value in the Loan Division = $5,000
Monthly persistency refund Rate = .0004167
Persistency refund = 10,000 x .0004167=$4.17
Before Persistency After Persistency
Refund Refund
------------------ -----------------
Variable $5,000.00 $5,004.17
Divisions
Loan $5,000.00 $5,000.00
Division
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Strategic Advantage 37
<PAGE>
REFUND OF SALES CHARGES
If the Policy has not lapsed, we will, upon full surrender of the Policy within
the first two Policy years, refund a portion of the sales charges previously
deducted from premiums paid. In the first Policy year, the amount of the refund
is equal to 5% of the premiums paid in that year. In the second Policy year, the
refund is equal to 2.5% of the premiums paid in the first Policy year. After the
second Policy anniversary, there is no refund of sales charges.
CHARGES FROM PORTFOLIOS
Our Variable Account purchases shares of the Portfolios at net asset value. That
price reflects investment management fees and other direct expenses that have
already been deducted from the assets of the Portfolio. The following table
describes these investment management fees and other direct expenses of the
Portfolios.
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Strategic Advantage 38
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET
ASSETS)/1/
TOTAL
MANAGEMENT OTHER PORTFOLIO
PORTFOLIO FEES EXPENSES EXPENSES
- --------------------------- ---------- -------- ---------
<S> <C> <C> <C>
Neuberger & Berman Advisers Management Trust /2/
Limited Maturity
Bond Portfolio 0.65% 0.10% 0.75%
Government Income
Portfolio /3/ 0.00% 1.04% 1.04%
Growth Portfolio 0.84% 0.10% 0.94%
Partners Portfolio 0.85% 0.30% 1.15%
The Alger American Fund
Alger American
Small Capitalization
Portfolio 0.85% 0.07% 0.92%
Alger American
MidCap Growth Portfolio 0.80% 0.10% 0.90%
Alger American
Growth Portfolio 0.75% 0.10% 0.85%
Alger American
Leveraged AllCap
Portfolio 0.85% 0.71%/4/ 1.56%/4/
Fidelity Variable Insurance
Products Fund
VIP Growth Portfolio 0.61% 0.09% 0.70%
VIP Overseas Portfolio 0.76% 0.15% 0.91%
VIP Money Market Portfolio 0.24% 0.09% 0.33%
Fidelity Variable Insurance
Products Fund II
VIP II Asset Manager
Portfolio 0.71% 0.08% 0.79%/5/
VIP II Index 500
Portfolio 0.00% 0.28% 0.28%/6/
INVESCO Variable Investment
Funds, Inc.
INVESCO VIF -
Total Return Portfolio 0.75% 0.26% 1.01%/7//8/
INVESCO VIF -
Industrial Income
Portfolio 0.75% 0.28% 1.03%/7//9/
INVESCO VIF -
High Yield Portfolio 0.60% 0.37% 0.97%/7//10/
INVESCO VIF -
Utilities Portfolio 0.60% 1.20% 1.80%/7//11/
Van Eck Worldwide
Insurance Trust
Worldwide Balanced Fund 0.00%/12/ 0.00%/12/ 0.00%/12/
Gold and Natural
Resources Fund 1.00% 0.21% 1.21%
</TABLE>
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/1/ The preceding Portfolio expense information was provided to us by the
Portfolios, and we have not independently verified such information. These
Portfolio expenses are not direct charges against Division assets or
reductions from Account 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.
/2/ 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 Portfolio's 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.
/3/ Expenses reflect expense reimbursement. NBMI has undertaken to reimburse
the Government Income Portfolio for certain operating expenses, including
the compensation of NBMI and excluding taxes, interest, extraordinary
expense, brokerage commissions and transaction costs, that exceed 1% of
the Government Income Portfolios average daily net asset value. Absent
such reimbursement, the "Total Portfolio Expenses" for the year ended
December 31, 1995, would have been 4.80%. These expense reimbursement
policies are subject to termination upon 60 days written notice to the
Portfolio.
/4/ The Alger American Leveraged AllCap Portfolio's "Other Expenses" includes
0.06% of interest expense. Absent reimbursements to the Portfolio by its
Manager, the amount of "Other Expenses" and "Total Portfolio Expenses"
would have been 3.07% and 3.92%, respectively.
/5/ A portion of the brokerage commissions the Portfolio paid was used to
reduce its expenses. Without this reduction, "Total Portfolio Expenses"
would have been 0.81%.
/6/ The Portfolio's expenses were voluntarily reduced by the Portfolio's
investment adviser. Absent such reimbursement, "Management Fees," "Other
Expenses" and "Total Portfolio Expenses" would have been 0.28%, 0.19% and
0.47%, respectively.
/7/ The Portfolio's custodian fees were reduced under an expense offset
arrangement. In addition, certain expenses of the Portfolios 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.
/8/ In the absence of the voluntary expense limitation, the Total Return
Portfolio's "Other Expenses" and "Total Portfolio Expenses" would have
been 1.76% and 2.51%, respectively, based on the Portfolio's actual
expenses for the fiscal year ended December 31, 1995.
/9/ In the absence of the voluntary expense limitation, the Industrial Income
Portfolio's "Other Expenses" and "Total Portfolio Expenses" would have
been 1.56% and 2.31%, respectively, based on the Portfolio's actual
expenses for the fiscal year ended December 31, 1995.
/10/ In the absence of the voluntary expense limitation, the High Yield
Portfolio's "Other Expenses" and "Total Portfolio Expenses" would have
been 2.11% and 2.71%, respectively, based on the Portfolio's actual
expenses for the fiscal year ended December 31, 1995.
/11/ In the absence of the voluntary expense limitation, the Utilities
Portfolio's "Other Expenses" and "Total Portfolio Expenses" would have
been 56.53% and 57.13%, respectively, based on the Portfolio's actual
expenses for the fiscal year ended December 31, 1995.
/12/ 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.
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Strategic Advantage 39
<PAGE>
GROUP OR SPONSORED ARRANGEMENTS
This Policy is available for purchase by individuals, corporations and other
institutions. For group or sponsored arrangements (including home office
employees of Security Life) and for special exchange programs which Security
Life may offer from time to time, we may reduce or eliminate the sales charge,
the length of time the sales charge applies, the administrative charge, the
minimum Stated Death Benefit, the maximum Target Death Benefit, the Minimum
Annual Premium, the Target Premium, cost of insurance charges, or other charges
normally assessed to reflect the expected economies resulting from a group or
sponsored arrangement. We may also allow Partial Withdrawals to be taken without
a charge. Group arrangements include those in which a trustee, an employer or an
association either purchases Policies covering a group of individuals on a group
basis or endorses the Policy to a group of individuals. Sponsored arrangements
include those in which an employer or association allows us to offer Policies to
its employees or members on an individual basis.
Our 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 according to our rules in effect when an application form for a
Policy is approved. We may change these rules from time to time. Any variation
in the sales charge, administrative charge or other charges, fees and privileges
will reflect differences in costs or services and will not be unfairly
discriminatory.
OTHER CHARGES
Under current law we pay no tax on investment income and capital gains reflected
in variable life insurance policy reserves (except to the extent the Federal
deferred acquisition cost may be considered such a tax). Consequently, no charge
is currently being made to any Division of our Variable Account for our Federal
income taxes. We reserve the right, however, to make such a charge in the future
if the tax law changes and we incur Federal income tax which is attributable to
the Variable Account.
We must pay state and local taxes (in addition to applicable taxes based on
premiums) in several states. At the present time, these taxes are not
substantial. However, if these taxes increase, we also reserve the right to make
charges for such taxes when they are attributable to our Variable Account.
TAX CONSIDERATIONS
The following discussion provides a general description of the Federal income
tax consequences of the Policy, based on our understanding of the present
Federal income tax laws as they are currently interpreted by the Internal
Revenue Service ("IRS"). No representation is made as to the likelihood of
continuation of the present Federal income tax laws or of the current
interpretations by the IRS. This discussion is general in nature, and should not
be considered tax advice. Further, it is not intended to present an exhaustive
survey of all the tax issues that might arise under the Policy. Because of the
complexity of the laws and the fact that tax results will vary according to the
particular circumstances of the Owner, a legal or tax adviser should be
consulted prior to purchasing the Policy.
LIFE INSURANCE DEFINITION
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code"), sets
forth the definition of a life insurance contract for Federal tax purposes. The
Secretary of the Treasury (the "Treasury") is authorized to prescribe
regulations implementing Section 7702. While proposed regulations and other
interim guidance has been issued, final regulations have not been adopted. In
short, guidance as to how Section 7702 is to be adopted is limited. If a Policy
were determined not to be a life insurance contract for purposes of Section
7702, such Policy would not qualify for the favorable tax treatment normally
provided to a life insurance policy.
Section 7702 provides that if one of two alternate tests are met, a Policy will
be treated as a life insurance policy for Federal income tax purposes. These
tests are referred to as the "Cash Value Accumulation Test" and the "Guideline
Premium/Cash Value Corridor Test."
Under the Cash Value Accumulation Test, there is no limit to the amount that may
be paid in premiums as long as there is enough death benefit in relation to
Account Value at all times. The death benefit at all times must be at least
equal to an actuarially determined factor, depending on the Insured's Age, sex
and Premium Class at any point in time, times the Account Value. See APPENDIX A,
page 120, for a table of the Cash Value Accumulation Test factors.
The Guideline Premium/Cash Value Corridor Test provides for a maximum premium in
relation to the Death Benefit, and a minimum "corridor" of death benefit in
relation to Account Value. In most situations, the death benefit that results
from the Guideline Premium/Cash Value Corridor Test will ultimately be less than
the amount of death benefit required under the Cash Value
- -------------------------------------------------------------------------------
Strategic Advantage 40
<PAGE>
Accumulation Test. See APPENDIX B, page 128, for a table of the Guideline
Premium/Cash Value Corridor Test factors.
This Policy allows the Owner to choose, at the time of application, which of
these tests we will always apply to the Policy. A choice of tests is
irrevocable. Regardless of which test is chosen, we will at all times assure
that the Policy meets the statutory definition which qualifies the Policy as
life insurance for Federal income tax purposes. Therefore, the entire death
benefit should be excludable from gross income of the beneficiary under Section
101(a)(1) of the Code. In addition, so long as the Policy remains in force,
increases in Account Value as a result of interest or investment experience will
not be subject to Federal income tax unless and until there is a distribution
from the Policy, such as a Partial Withdrawal or loan.
The favorable tax treatment of Section 101(a) will not apply to benefits paid at
maturity of the policy (age 100). See Benefits at Maturity, page 26. Also, any
interest payment accrued on Death Proceeds paid either as a lump sum or other
than in one lump sum may be subject to tax. See Settlement Provisions, page
48.
The Federal government has in the past and may in the future consider new
legislation or regulations that, if enacted, could change the FederalFederal
income tax treatment of life insurance policy income or death benefits. Any such
change could have a retroactive effect. Such concerns should be addressed by a
legal or tax adviser.
DIVERSIFICATION REQUIREMENTS
In addition to meeting the tests required under Section 7702, Section 817(h) of
the Code requires that the investments of separate accounts such as the Variable
Account be adequately diversified. Regulations issued by the Secretary of the
Treasury set the standards for measuring the adequacy of this diversification.
To be adequately diversified, each Division of the Variable Account must meet
certain tests. A variable life policy that is not adequately diversified under
these regulations would not be treated as life insurance under Section 7702 of
the Code. If this were to occur, the Owner would be subject to Federal
income tax on the income under the Policy as it is earned. The Portfolios in
which the Variable Account invests have provided certain assurances that they
will meet the applicable diversification standards.
In certain circumstances, owners of variable life insurance contracts may be
considered the owners, for Federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includable in the
variable contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The
Treasury also announced, in connection with the issuance of temporary
regulations concerning diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
policyowner), rather than the insurance company, to be treated as the owner of
the assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in certain
respects from, those described by the IRS in rulings in which it was determined
that policy holders were not owners of separate account assets. For example,
the Owner has additional flexibility in allocating premium payments and Policy
values. These differences could result in an Owner being treated as the owner
of a pro rata portion of the assets of the Variable Account. In addition,
Security Life does not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury has stated it expects to issue.
Security Life therefore reserves the right to modify the Policy as necessary to
attempt to prevent an Owner from being considered the owner of a pro rata share
of the assets of the Variable Account or to otherwise qualify the Policy for
favorable tax treatment.
MODIFIED ENDOWMENT CONTRACTS
Code Section 7702A establishes a class of life insurance contracts designated as
"Modified Endowment Contracts," which applies to Policies entered into or
materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified Endowment Contract
will depend on the individual circumstances of each Policy. In general, a
Policy will be a Modified Endowment Contract if the accumulated premiums paid at
any time during the first seven Policy years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. The determination of whether a Policy will be a Modified
- -------------------------------------------------------------------------------
Strategic Advantage 41
<PAGE>
Endowment Contract after a material change generally depends upon the
relationship of the death benefit and the Account Value at the time of such
change and the additional premiums paid in the seven years following the
material change.
The rules relating to whether a Policy will be treated as a Modified Endowment
Contract are extremely complex and cannot be fully described in the limited
confines of this summary. Therefore, a current or prospective Owner should
consult with a competent advisor to determine whether a Policy transaction will
cause the Policy to be treated as a Modified Endowment Contract. Security Life
will, however, monitor Policies and will attempt to notify an Owner on a timely
basis if the Owner's Policy becomes a Modified Endowment Contract.
TAX TREATMENT OF PREMIUMS
No deduction is allowed for premiums paid on any life insurance policy covering
the life of any officer or employee, or of any person financially interested in
any business carried on by the taxpayer, when the taxpayer is a beneficiary
(directly or indirectly) under such policy.
LOANS, SURRENDERS AND WITHDRAWALS
IF THE POLICY IS NOT A MODIFIED ENDOWMENT CONTRACT
If a Policy is not a Modified Endowment Contract, as long as it remains in
force, a loan under the Policy will be treated as indebtedness and no part of
the loan will be subject to current Federal income tax. Interest paid (or
accrued by an accrual basis taxpayer) on the loan may or may not be tax
deductible. Consult your tax adviser for advice on the availability of
deductions.
Any time a Policy is surrendered or lapses, the excess, if any, of the Cash
Surrender Value over the Owner's "investment in the Policy" will be subject to
Federal income tax as ordinary income. ("investment in the Policy" means (i) the
aggregate amount of any premiums or other consideration paid for a Policy, minus
(ii) the aggregate amount received under the Policy which is excluded from gross
income of the Owner (except that the amount of any loan from, or secured by, a
Policy that is a Modified Endowment Contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Owner.) It is
important to note that for this calculation, if the Policy terminates while a
Policy Loan is outstanding, the total amount of the loan and accrued loan
interest will be treated as a distribution and could be subject to tax under the
above rules. As a result, in certain circumstances this may result in taxable
income to the Owner even though the Policy has no Net Cash Surrender Value.
Proceeds received on a Withdrawal may or may not be taxable depending on the
Owners particular circumstances. During the first 15 Policy years, the proceeds
from a Partial Withdrawal could be subject to Federal income tax to the extent
the Cash Surrender Value exceeds investment in the Policy. The portion subject
to tax will depend upon the ratio of the death benefit to Account Value under
the Policy and the Age of the Insured at the time of the withdrawal. After the
first 15 Policy years, the proceeds from a Partial Withdrawal will not be
subject to Federal income tax except to the extent such proceeds exceed
investment in the Policy.
IF THE POLICY IS A MODIFIED ENDOWMENT CONTRACT
If a Policy is a Modified Endowment Contract, any pre-death distribution from
the Policy will be taxed on an "income-first" basis, similar to the treatment of
annuities for individuals. Distributions for this purpose include a surrender,
Partial Withdrawal or Policy Loan, including any increase in a loan amount to
pay interest on an existing loan or an assignment or a pledge to secure a loan.
Any such distributions will be considered taxable income to the Owner to the
extent the Account Value exceeds investment in the Policy immediately before the
distribution. All Modified Endowment Contracts that are issued by Security Life
(and its affiliates) to the same Owner during any calendar year are treated as
one Modified Endowment Contract for purposes of determining the amount
includable in the gross income under Code Section 72(c).
A 10% penalty tax will also apply to the taxable portion of a distribution from
a Modified Endowment Contract, unless an exception applies. The penalty tax will
not apply to distributions (i) when the taxpayer is at least 59 1/2 years of
age, (ii) in the case of a disability (as defined in the Code) or (iii) received
as part of a series of substantially equal periodic payments, 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 or her beneficiary. Since
these exclusions do not apply to corporations or other business entities, the
10% penalty tax would always apply to these types of owners. If the Policy is
surrendered, the excess, if any, of the Cash Surrender Value over investment in
- -------------------------------------------------------------------------------
Strategic Advantage 42
<PAGE>
the Policy will be subject to Federal income tax and, unless one of the above
exceptions applies, the 10% penalty tax.
If a Policy was not originally a Modified Endowment Contract but later becomes
one, distributions that occur during the Policy year it becomes a Modified
Endowment Contract and any subsequent Policy year will be taxed as described in
the two preceding paragraphs. In addition, any distributions from the Policy
made within two years before it becomes a Modified Endowment Contract will be
treated as having been made in anticipation of the change and will be subject to
tax in this manner. This means that a distribution made from a Policy that is
not a modified endowment could later become taxable as a distribution from a
Modified Endowment Contract. The Treasury has been authorized to prescribe rules
which would address this issue.
ALTERNATIVE MINIMUM TAX
For purposes of the alternative minimum tax adjusted current earnings
adjustment, special rules apply with respect to life insurance contracts. Under
these rules, death benefit proceeds are taken into account, increases in cash
value attributable to investment performance are taken into account currently
and the distribution tax rules apply in a modified form.
TAX-EXEMPT POLICY OWNERS
Special rules may apply in the case of a Policy owned by a tax-exempt entity.
Accordingly, tax-exempt entities should consult with a tax advisor regarding the
consequences of purchasing and owning a Policy, including the effect, if any, on
the tax-exempt status of the entity and the application of the unrelated
business income tax.
CHANGES TO COMPLY WITH LAW
To assure that the Policy continues to qualify as life insurance under the Code,
we reserve the right to decline to accept all or part of any premium payments,
to decline to change death benefits, or to decline to make Partial Withdrawals
that would cause the Policy to fail to qualify. We may also make changes in the
Policy or its Riders, require additional premium payments or make distributions
from the Policy to the extent we deem necessary to qualify the Policy as life
insurance for tax purposes. Any such change will apply uniformly to all policies
that are affected. The Policy Owner will be given advance notice of such
changes.
The tax law limits the allowable charges for mortality costs and other expenses
that may be used in making calculations to determine whether a Policy qualifies
as life insurance for Federal income tax purposes. These calculations must be
based upon reasonable mortality charges and other charges reasonably expected to
be paid. The Treasury has issued proposed regulations on the reasonableness
standards for mortality charges. Security Life believes that the charges used
for this purpose in the Policy should meet the current requirement for
reasonableness. Security Life reserves the right to make modifications to the
mortality charges if future regulations contain standards which make
modification necessary in order to continue qualification of the Policy as life
insurance for Federal income tax purposes.
In addition, assuming that the Policy is not intended by the Owner to be or
become a Modified Endowment Contract, we will include an endorsement to the
Policy whereby we reserve the right to amend the Policy, including any Rider,
to assure that the Policy continues to comply with the seven-pay test for
Federal income tax purposes. If at any time the premium paid under the Policy
exceeds the seven-pay limit, we reserve the right to remove such excess premium
or make any appropriate adjustments to the Policy's Account Value and death
benefits. Any death benefit increase will cause an increase in the cost of
insurance charges.
OTHER
The Policies may be used in various arrangements, including nonqualified
deferred compensation or salary continuance plans, split dollar insurance plans,
executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if the Owner is
contemplating the use of the Policies in any arrangement the value of which
depends in part on its tax consequences, the Owner should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
We are required to withhold income taxes from any portion of the amounts
received by individuals in a taxable transaction, unless an election is made in
writing not to have withholding apply. If the election not to have withholding
is made, or if the amount withheld is insufficient, income taxes, and possibly
penalties, may have to be paid later.
Federal estate and gift taxes and state and local inheritance, estate, and other
tax consequences of ownership or receipt of Policy benefits depend on the
- -------------------------------------------------------------------------------
Strategic Advantage 43
<PAGE>
particular jurisdiction and the circumstances of each Owner and Beneficiary.
QUALIFIED LEGAL OR TAX ADVISERS SHOULD BE CONSULTED FOR COMPLETE INFORMATION ON
FEDERAL, STATE, LOCAL AND OTHER TAX CONSIDERATIONS.
ADDITIONAL INFORMATION ABOUT THE POLICY
VOTING PRIVILEGES
We invest the assets in the Divisions of the Variable Account in shares of the
corresponding Portfolios. See Investment Objectives of the Portfolios, page 17.
We are the legal owner of the shares held in the Variable Account and, as such,
have the right to vote on certain matters. Among other things, we may vote on
any matters described in the Funds current prospectus or requiring a vote by
shareholders under the Investment Company Act of 1940.
Even though we own the shares, to the extent required by the interpretations of
the SEC, we give Owners the opportunity to tell us how to vote the number of
shares that are attributable to their Policies. We will vote those shares at
meetings of Portfolio shareholders according to these instructions. We will also
vote any Portfolio shares that are not attributable to the Policies and shares
for which instructions from Owners were not received in the same proportion that
Owners vote. If the FederalFederal 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.
Owners may participate in voting only on matters affecting the Portfolios in
which the Owners assets have been invested. We determine the number of Portfolio
shares in each Division that are attributable to a Policy by dividing the
Account Value allocated to that Division by the net asset value of one share of
the corresponding Portfolio. The number of shares as to which an Owner may give
instructions will be determined as of the record date set by the Portfolios
Board for the Portfolio's shareholders meeting. We count fractional shares.
Owners having a voting interest will be sent 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 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. If there is a material conflict, we will
have an obligation to determine what action should be taken including the
removal of the affected Portfolios from eligibility for investment by the
Variable Account. We will consider taking other action to protect Owners.
However, there could be unavoidable delays or interruptions of operations of the
Variable Account that we 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 semi-annual report to Owners.
Under the Investment Company Act of 1940, certain actions affecting the Variable
Account (such as some of those described under Right To Change Operations) may
require Owner approval. In that case, each Owner will be entitled to one vote
for every $100 of value held in the Divisions of the Variable Account. We will
cast votes attributable to amounts in the Divisions of the Variable Account not
attributable to Policies in the same proportions as votes cast by Owners.
- -------------------------------------------------------------------------------
Strategic Advantage 44
<PAGE>
RIGHT TO CHANGE OPERATIONS
We may from time to time make the following changes to the Variable Account:
(i) Make additional Divisions available. These Divisions will invest in
Portfolios we find suitable for the Policy.
(ii) 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 Policy. 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.
(iii) Transfer assets of the Variable Account, which we determine to be
associated with the class of policies to which an Owner's Policy belongs,
to another Variable Account.
(iv) Withdraw the Variable Account from registration under the 1940 Act.
(v) Operate the Variable Account as a management investment company under the
1940 Act.
(vi) Cause one or more Divisions to invest in a mutual fund other than or in
addition to the Portfolios.
(vii) Discontinue the sale of Policies and certificates.
(viii) Terminate any employer or plan trustee agreement with us pursuant to its
terms.
(ix) Restrict or eliminate any voting rights as to the Variable Account.
(x) Make any changes required by the 1940 Act or the rules or regulations
thereunder.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. Owners will be notified of any changes.
If an Owner then wishes to transfer the amount in that Division to another
Division of the Variable Account or to the Guaranteed Interest Division, they
may do so, without charge, by notifying us. At the same time, changes in Net
Premium and deduction allocations may also be made, without charge.
REPORTS TO OWNERS
We will maintain all records relating to the Variable Account, its Divisions and
the Guaranteed Interest Division. At the end of each Policy year we will send
the Owner a report that shows the Total Policy Death Benefit (Base Death Benefit
plus Adjustable Term Insurance Rider Death Benefit, if any), the Account Value,
the Policy Loan plus accrued Loan Interest and Net Cash Surrender Value.amount
of the Stated Death Benefit for the Policy, the Target Death Benefit if the
Adjustable Term Insurance Rider is included, the current Death Benefit, the
Account Value, the Cash Surrender Value of the Policy, the amount of any
outstanding Policy Loan, and the amount of any interest owed on the loan. We
will also include information about the Divisions of the Variable Account. The
report also shows any transactions involving the Account Value that occurred
during the year such as premium allocations, deductions, and any loanstransfers
or withdrawals in that year.
We will also send semi-annual reports to the Owner, which will include financial
information on the Portfolios, including a list of the investments held by each
Portfolio.
Confirmation notices will be sent to the Owner during the year for certain
Policy transactions.
OTHER GENERAL POLICY PROVISIONS
FREE LOOK PERIOD
Owners have the right to examine the Policy. If for any reason the Owner is not
satisfied with the Policy, it may be returned to us or the Registered
Representative within the time limit described below and it will be deemed void
as of the Policy Date. A request to cancel this Policy must be postmarked no
later than i) 45 days after Part I of the Policy application, ii) 20 days after
the Policy is received, or iii) 10 days after we mail the Notice of Withdrawal
Right, whichever is latest or as otherwise specified by the state. The Policy
will be deemed to have been received by the Owner 15 days after it is mailed
from our Customer Service Center. If a Policy is canceled under this provision,
we will refund an amount equal to the full amount of any premiums paid.
Insurance coverage ends when the request is sent.
Amounts allocated to the Divisions of the Variable Account will be held in the
Division investing in the Fidelity VIP Money Market Portfolio until the end of
the Free Look Period. At the end of the Free Look Period, this portion of the
Account Value will be reallocated according to the most recent premium
allocation instructions.
- -------------------------------------------------------------------------------
Strategic Advantage 45
<PAGE>
THE POLICY
This Policy is a contract between the Owner and us. The Policy, including a copy
of the original application and any applications for an increase, Riders,
endorsements, Schedule pages, and any reinstatement applications make up the
entire contract. A copy of any application as well as a new Schedule will be
attached or furnished to the Owner for attachment to the Policy at the time of
any change in coverage. In the absence of fraud, all statements made in any
application will be considered representations and are not warranties. No
statement will be used to deny a claim unless it is in an application.
AGE
This Policy is issued at the Age stated in the Schedule. This is the Insured's
Age nearest birthday, calculated as of the Policy Date. The Age of the Insured
at any time is calculated by adding the number of completed Policy years to the
Age shown in the Schedule.
OWNERSHIP
The original Owner is the person named in the application. The Owner can
exercise all rights and receive the benefits during the Insured's lifetime
before the Maturity Date. This includes the right to change the Owner,
Beneficiaries, and methods for the payment of proceeds. All rights of the Owner
are subject to the rights of any assignee and any irrevocable Beneficiary.
An Owner may name a new Owner by giving us written notice. The effective date of
the change to the new Owner will be the date the notice is signed. The change
will not affect any payment made or action taken by us before recording the
change at our Customer Service Center.
BENEFICIARY
The Owner names the Beneficiary when applying for the Policy. The primary
Beneficiary surviving the Insured will receive any Death Proceeds which become
payable. Surviving contingent Beneficiaries are paid Death Proceeds only if no
primary Beneficiary has survived the Insured. If more than one Beneficiary
survives the Insured, they will share the Death Proceeds equally, unless the
designation provides otherwise. If there is no designated Beneficiary surviving,
Death Proceeds will be paid to the Owner or the Owner's estate.
The Beneficiary designation will be on file with us or at a location designated
by us. A new Beneficiary may be named during the Insured's lifetime. We will pay
the proceeds to the most recent Beneficiary designation on file. We will not be
subject to multiple payments.
COLLATERAL ASSIGNMENT
This Policy may be assigned as collateral security by sending written notice to
us. Once it is recorded with us, the rights of the Owner and the Beneficiary are
subject to the assignment. It is the Owners responsibility to make sure the
assignment is valid.
INCONTESTABILITY
We can challenge the validity of the insurance Policy if it appears that there
have been material misstatements in the application. However, there are limits
as to how and when we can challenge the Policy:
.. We will not contest the statements in the application attached at issue after
the Policy has been in effect, during the Insured's lifetime, for two years
from the Policy Date.
.. We will not contest the statements in the application for any reinstatement
after the reinstatement has been in effect, during the Insured's lifetime, for
two years from the effective date of such reinstatement.
.. We will not contest the statements in the application for any coverage change
that increases any benefit with respect to the Insured (such as an increase in
Stated Death Benefit) after the change has been in effect, during the
Insured's lifetime, for two years from the effective date of such increase.
MISSTATEMENTS OF AGE OR SEX
If the Age or sex of the Insured has been misstated, the death benefit will be
adjusted. The death benefit will be adjusted to the amount which would have been
purchased for the Insured's correct Age and sex based on the cost of insurance
charges which were deducted from the Account Value on the last Monthly
Processing Date prior to the Insureds death. If unisex cost of insurance rates
apply, we will not make an adjustment for a misstatement of sex.
SUICIDE
If the Insured commits suicide within two years of the Policy Date or date of
reinstatement, the death benefit will be limited to the total of all premiums
that have been paid to the time of death minus the amount of any outstanding
Policy Loan and accrued loan interest and minus any withdrawals, unless
otherwise required by law.
- -------------------------------------------------------------------------------
Strategic Advantage 46
<PAGE>
If the Insured has been changed and the new Insured dies by suicide within two
years of the exchange date, the death benefit will be limited to the Net Account
Value as of the exchange date, plus the premiums paid since that date, less the
sum of any increases in Policy Loan, accrued loan interest and any Withdrawals
since the exchange date. If the Insured commits suicide within two years after
the effective date of an increase in the Stated Death Benefit or the Target
Death Benefit that was requested, we will pay the death benefit which was in
effect before the increase, plus a refund of the amount of the monthly cost of
insurance deductions related to the increased death benefit, unless otherwise
required by law.
PAYMENT
We will pay the Death Proceeds, Net Cash Surrender Value upon surrender, Partial
Withdrawals, and loan proceeds within seven days after we receive the
information required to process the payment. We will also execute a transfer
among Divisions of the Variable Account as of the Valuation Date on or next
following our receipt of a request at our Customer Service Center. Transfers
from the Guaranteed Interest Division to the Divisions of the Variable Account
will be made only within the time periods indicated in this prospectus. See
Transfers of Account Values, page 29.
We may, however, postpone the processing of any such transactions for any of the
following reasons:
.. When the NYSE is closed for trading;
.. When trading on the NYSE is restricted by the SEC;
.. 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
.. When a governmental body having jurisdiction over the Variable Account
permits such suspension by order.
Rules and regulations of the SEC, if any, are applicable and will govern the
determination as to whether the above conditions exist.
Death Proceeds are determined as of the Valuation Date we receive due proof of
death of the Insured. Once we determine this amount, the Death Proceeds will not
be affected by subsequent changes in the values of the Divisions of the Variable
Account. We will pay interest at the rate declared by us or at any higher rate
required by law from the date we determine the amount of the Death Proceeds to
the date of payment.
Death Proceeds are not subject to deferment. However, we may defer for up to six
months payment of any surrender proceeds, withdrawal amounts, or loan amounts
from our Guaranteed Interest Division, unless otherwise required by law. We will
pay interest at the rate declared by us or at any higher rate required by law
from the date we receive a request if we delay payment more than 30 days.
NOTIFICATION AND CLAIMS PROCEDURES
We must receive in writing any election, designation, change, assignment, or
request made. It must be on a form acceptable to us. We are not liable for any
action we take before we receive and record the written notice. We may require
that the Policy be returned for any Policy change or upon its surrender.
We, or the Registered Representative, should be informed as soon as possible
following an Insured's death while the Policy is in force. Claim procedure
instructions will be sent immediately. As due proof of death, we may require
proof of Age and a certified copy of a death certificate. We may also require
the Beneficiary and the Insured's next of kin to sign authorizations as part of
this process. These authorization forms allow us to obtain information about the
Insured, including but not limited to medical records of physicians and
hospitals used by the Insured.
TELEPHONE PRIVILEGES
If telephone privileges have been elected in a form required by us, transfers or
changes in your Dollar Cost Averaging and Automatic Rebalancing options, or
requests for Partial Withdrawals and Policy Loans may be made 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 of telephone instructions. A 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.
- --------------------------------------------------------------------------------
Strategic Advantage 47
<PAGE>
NON-PARTICIPATING
The Policy does not participate in Security Life's surplus earnings.
DISTRIBUTION OF THE POLICIES
The principal underwriter and distributor for the policies is 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. We pay
ING America Equities for acting as the principal underwriter under a
Distribution Agreement.
We sell our Policies through Registered Representatives of other broker-dealers
which have entered into selling agreements with us. These Registered
Representatives are also licensed by state insurance officials to sell our
variable life policies. Each of the broker-dealers we enter into selling
agreements with are registered with the SEC and are members of the NASD.
Under these selling agreements, we pay a distribution allowance to the other
broker-dealers, which in turn pay commissions to the Registered Representative
who sells this Policy. During the first Policy year, the distribution allowance
may equal an amount up to 15% of the Target Premium paid and 3% of premiums paid
in excess of the Target Premium. For Policy years 2 through 5, the allowance may
equal an amount up to 10% of Target Premium and 3% of premiums paid in excess of
the Target Premium. For subsequent Policy years the distribution allowance may
equal 3% of premiums paid. Broker-dealers may also receive annual renewal
compensation of up to 0.15% of the Net Account Value beginning in the sixth
Policy year. Compensation arrangements may vary among broker-dealers. In
addition, we may also pay override payments, expense allowances, bonuses,
wholesaler fees, and training allowances. Registered Representatives who meet
specified production levels may qualify, under our sales incentive programs, to
receive non-cash compensation such as expense-paid trips, expense-paid
educational seminars and merchandise.
We pay the distribution allowance from our own resources (including any sales
charges deducted from premiums).
SETTLEMENT PROVISIONS
During the Insured's lifetime, the Owner may elect that the Beneficiary receive
the Death Proceeds other than in one sum. If this election has not been made,
the Beneficiary may do so within 60 days after the Insured's death. The Owner
may also elect to take the Net Cash Surrender Value other than in one sum.
Payments under these options are not affected by the investment experience of
any Division of our Variable Account. Instead, interest accrues pursuant to the
options chosen. Payment options will also be subject to our rules at the time of
selection. Currently, these alternate payment options are only available if the
proceeds applied are $2000 or more and any periodic payment will be at least
$20.
The following payment options are available:
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. The installment dollar amounts will be equal
except for any excess interest. The amount of the first monthly
payout for each $1,000 of Account Value applied is shown in
Settlement Option Table I in the Policy.
Option II: Life Income with Payouts Guaranteed for a Designated Period: Payouts
will be made in 1, 2, 4 or 12 installments per year throughout the
payees lifetime, or if longer, for a period of 5, 10, 15, or 20
years as elected. The installment dollar amounts will be equal
except for any excess interest. The amount of the first monthly
payout for each $1,000 of Account Value applied is shown in
Settlement Option Table II in the Policy. This option is not
available for ages not shown in this Table.
Option III: Hold at Interest: Amounts may be left on deposit with us to be paid
upon the death of the payee or at any earlier date elected. Interest
on any unpaid balance will be at the rate declared by us or at any
higher rate required by law. Interest may be accumulated or paid in
1, 2, 4 or 12 installments per year, as elected. Money may not be
left on deposit for more than 30 years.
Option IV: Payouts of a Designated Amount: Payouts will be made until proceeds,
together with interest, which will be at the rate declared by us or
at any higher rate required by law, are exhausted. Payouts will be
made in 1, 2, 4, or 12 equal installments per year, as elected.
- -------------------------------------------------------------------------------
Strategic Advantage 48
<PAGE>
Option V: Other: The Owner may ask us to apply the money under any option that
we make available at the time the benefit is paid.
The Beneficiary or any other person who is entitled to receive payment may name
a successor to receive any amount that we would otherwise pay to that person's
estate if that person died. The person who is entitled to receive payment may
change the successor at any time.
We must approve any arrangements that involve a payee who is not a natural
person (for example, a corporation), or a payee who is a fiduciary. Also, the
details of all arrangements will be subject to our rules at the time the
arrangements take effect. This includes rules on the minimum amount we will pay
under an option, minimum amounts for installment payments, withdrawal or
commutation rights (i.e., the rights to receive payments over time, for which we
may offer a lump sum payment), the naming of people who are entitled to receive
payment and their successors, and the ways of proving Age and survival.
- -------------------------------------------------------------------------------
Strategic Advantage 49
<PAGE>
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND
ACCUMULATED PREMIUMS
The following tables illustrate how the key financial elements of the Policy
work, specifically, how the death benefits, Account Values and Cash Surrender
Values could vary over an extended period of time. In addition, each table
compares these values with premiums paid accumulated with interest.
The Policies illustrated include the following:
<TABLE>
<CAPTION>
Definition
Death of Life Stated Target
Smoker Benefit Insurance Death Death
Sex Age Status Option Test Benefit Premium Benefit Page
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Male 45 Non-Smoker 1 CVAT 300,000 $5,750 300,000 52
Male 45 Non-Smoker 1 CVAT 150,000 $5,750 300,000 54
Male 45 Non-Smoker 1 GP 300,000 $5,750 300,000 56
</TABLE>
The tables show how death benefits, Account Values and Cash Surrender Values of
a hypothetical Policy could vary over an extended period of time if the
Divisions of the Variable Account had constant hypothetical gross annual
investment returns of 0%, 6% or 12% over the periods indicated in each table.
The values will differ from those shown in the tables if the annual investment
returns are not absolutely constant. That is, the death benefits, Account Values
and Cash Surrender Values will be different if the returns averaged 0%, 6% or
12% over a period of years but went above or below those figures in individual
Policy years. These illustrations assume that no Policy Loan has been taken. The
amounts shown would differ if female or unisex rates were used or for a risk
classification other than non-smoker standard.
The third column of each table shows what would happen if an amount equal to the
premiums were invested to earn interest, after taxes, of 5% compounded annually.
All premium payments are illustrated as if they were made at the beginning of
the year.
The amounts shown for death benefits, Account Values and Cash Surrender Values
reflect the fact that the net investment return on the Policy is lower than the
gross investment return on the Divisions of the Variable Account. This results
from the charges levied against the Divisions of the Variable Account (i.e., the
mortality and expense risk charge) as well as the premium loads, and
administrative charges. The difference between the Account Value and the Cash
Surrender Value in the first 2 years is the refund of sales charges.
The tables illustrate cost of insurance and expense charges at both our current
rates (which are described under Cost Of Insurance Charges, page 36) and at
the maximum rates we guarantee in the Policies. The amounts shown at the end of
each Policy year reflect a daily charge against the Variable Account Divisions.
This charge includes the charge against the Variable Account for mortality and
expense risks and the effect on each Divisions investment experience of the
charge to Portfolio assets for investment management and direct expenses. The
mortality and expense risk fee is 0.75% annually on a guaranteed basis;
illustrations showing current rates reflect a guaranteed persistency refund
equivalent to 0.5% of the Account Value annually beginning after the 10th Policy
anniversary.
The tables also reflect a daily investment advisory fee equivalent to an annual
rate of 0.6127% of the aggregate average daily net assets of the Portfolios.
This hypothetical rate is representative of the average maximum investment
advisory fee applicable to the Divisions of the Variable Account. Other expenses
of the Portfolios are assumed at the rate of 0.2892% of the average daily net
assets of the Portfolio, which is an average of all the Portfolio's other
expenses, including interest expenses. This amounts to 0.9019% of the average
daily net assets of an investment division including the investment advisory
fee. Actual fees vary by Portfolio and may be subject to agreements by the
sponsor to waive or otherwise reimburse each investment Division for operating
expenses which exceed certain limits. There can be no assurance that the expense
reimbursement arrangements will continue in the future, and any unreimbursed
expenses would be reflected in the values included on the tables.
The effect of these investment management, direct expenses and mortality and
expense risk charges on a 0% gross rate of return would result in a net rate of
return of (1.65)%, on 6% it would be 4.31%, and on 12% it would be 10.26%.
- -------------------------------------------------------------------------------
Strategic Advantage 50
<PAGE>
The tables assume the deduction of charges including administrative and sales
charges. The tables reflect the fact that we do not currently make any charge
against the Variable Account for state or Federal taxes. If such a charge is
made in the future, it will take a higher gross rate of return than the rates
shown to produce the death benefits, Account Values and Cash Surrender Values
shown.
We will furnish, upon request, a comparable illustration based on the Age and
sex of the proposed Insured, standard Premium Class assumptions and any initial
Stated Death Benefit, death benefit option and Scheduled Premiums requested and
consistent with the Policy form. If a Policy is purchased, we will deliver an
individualized illustration reflecting the Scheduled Premium chosen and the
Insured's actual risk class. After issuance we will provide upon request an
illustration of future Policy benefits based on both guaranteed and current cost
factor assumptions and actual Account Value.
- -------------------------------------------------------------------------------
Strategic Advantage 51
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $5750.00
CASH VALUE ACCUMULATION TEST
SUMMARY PAGE
ASSUMING GUARANTEED CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------0.00%---------- ----------12.00%--------- ----------6.00%---------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
1 5750 6037 3782 4070 300000 4309 4597 300000 4045 4333 300000
2 5750 12377 7437 7581 300000 8994 9137 300000 8199 8343 300000
3 5750 19033 10961 10961 300000 14090 14090 300000 12461 12461 300000
4 5750 26022 14353 14353 300000 19640 19640 300000 16835 16835 300000
5 5750 33361 17606 17606 300000 25683 25683 300000 21317 21317 300000
6 5750 41067 21120 21120 300000 32717 32717 300000 26334 26334 300000
7 5750 49157 24474 24474 300000 40391 40391 300000 31471 31471 300000
8 5750 57653 27653 27653 300000 48761 48761 300000 36721 36721 300000
9 5750 66573 30646 30646 300000 57898 57898 300000 42078 42078 300000
10 5750 75939 33434 33434 300000 67873 67873 300000 47531 47531 300000
15 5750 130281 44883 44883 300000 137318 137318 300000 77897 77897 300000
20 5750 199636 48627 48627 300000 248792 248792 443099 111166 111166 300000
25 5750 288152 38926 38926 300000 416107 416107 657032 146353 146353 300000
30 5750 401124 3208 3208 300000 660366 660366 939040 183203 183203 300000
AGE 65 5750 215655 47991 47991 300000 277161 277161 481152 118055 118055 300000
</TABLE>
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE
WHICH WERE USED TO CALCULATE THE ABOVE VALUES.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF
THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT
EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE
HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID
IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
- -------------------------------------------------------------------------------
Strategic Advantage 52
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $5750.00
CASH VALUE ACCUMULATION TEST
SUMMARY PAGE
ASSUMING CURRENT CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------0.00%---------- ---------12.00%---------- ---------6.00%----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
1 5750 6037 4237 4524 300000 4792 5080 300000 4514 4802 300000
2 5750 12377 8177 8321 300000 9838 9982 300000 8991 9134 300000
3 5750 19033 11867 11867 300000 15209 15209 300000 13470 13470 300000
4 5750 26022 15408 15408 300000 21047 21047 300000 18056 18056 300000
5 5750 33361 18885 18885 300000 27487 27487 300000 22838 22838 300000
6 5750 41067 22699 22699 300000 35038 35038 300000 28246 28246 300000
7 5750 49157 26442 26442 300000 43374 43374 300000 33887 33887 300000
8 5750 57653 30079 30079 300000 52543 52543 300000 39736 39736 300000
9 5750 66573 33592 33592 300000 62619 62619 300000 45783 45783 300000
10 5750 75939 36976 36976 300000 73699 73699 300000 52034 52034 300000
15 5750 130281 52644 52644 300000 151784 151784 309336 88317 88317 300000
20 5750 199636 61671 61671 300000 276329 276329 492143 130113 130113 300000
25 5750 288152 60272 60272 300000 467137 467137 737610 178915 178915 300000
30 5750 401124 39192 39192 300000 751332 751332 1068394 236350 236350 336090
AGE 65 5750 215655 62406 62406 300000 308398 308398 535379 139234 139234 300000
</TABLE>
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL
VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT
MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT
DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND
THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT
THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID
IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
- -------------------------------------------------------------------------------
Strategic Advantage 53
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $150000 DEATH BENEFIT OPTION 1
INITIAL ADJUSTABLE TERM RIDER: $ 150000 ANNUAL PREMIUM: $ 5750.00
CASH VALUEACCUMULATION TEST
SUMMARY PAGE
ASSUMING GUARANTEED CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------0.00%----------- ---------12.00%--------- ---------6.00%---------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
1 5750 6037 3782 4069 300000 4309 4596 300000 4045 4332 300000
2 5750 12377 7436 7580 300000 8993 9136 300000 8198 8342 300000
3 5750 19033 10960 10960 300000 14089 14089 300000 12460 12460 300000
4 5750 26022 14352 14352 300000 19638 19638 300000 16833 16833 300000
5 5750 33361 17604 17604 300000 25680 25680 300000 21315 21315 300000
6 5750 41067 21118 21118 300000 32714 32714 300000 26331 26331 300000
7 5750 49157 24472 24472 300000 40388 40388 300000 31468 31468 300000
8 5750 57653 27651 27651 300000 48758 48758 300000 36718 36718 300000
9 5750 66573 30644 30644 300000 57894 57894 300000 42076 42076 300000
10 5750 75939 33433 33433 300000 67870 67870 300000 47530 47530 300000
15 5750 130281 44897 44897 300000 137322 137322 300000 77911 77911 300000
20 5750 199636 48699 48699 300000 248799 248799 443111 111236 111236 300000
25 5750 288152 39204 39204 300000 416116 416116 657048 146577 146577 300000
30 5750 401124 4178 4178 300000 660380 660380 939061 183803 183803 300000
AGE 65 5750 215655 48087 48087 300000 277169 277169 481165 118145 118145 300000
</TABLE>
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE
WHICH WERE USED TO CALCULATE THE ABOVE VALUES.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF
THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT
EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE
HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID
IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
- -------------------------------------------------------------------------------
Strategic Advantage 54
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $150000 DEATH BENEFIT OPTION 1
INITIAL ADJUSTABLE TERM RIDER: $150000 ANNUAL PREMIUM: $ 5750.00
CASH VALUE ACCUMULATION TEST
SUMMARY PAGE
ASSUMING CURRENT CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----------0.00%----------- ---------12.00%--------- ---------6.00%---------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
1 5750 6037 4417 4705 300000 4984 5272 300000 4701 4988 300000
2 5750 12377 8611 8755 300000 10322 10466 300000 9449 9593 300000
3 5750 19033 12610 12610 300000 16081 16081 300000 14276 14276 300000
4 5750 26022 16475 16475 300000 22366 22366 300000 19244 19244 300000
5 5750 33361 20252 20252 300000 29281 29281 300000 24405 24405 300000
6 5750 41067 24344 24344 300000 37338 37338 300000 30193 30193 300000
7 5750 49157 28345 28345 300000 46217 46217 300000 36213 36213 300000
8 5750 57653 32245 32245 300000 55996 55996 300000 42468 42468 300000
9 5750 66573 36032 36032 300000 66751 66751 300000 48954 48954 300000
10 5750 75939 39689 39689 300000 78540 78540 300000 55670 55670 300000
15 5750 130281 56573 56573 300000 160697 160697 327500 94413 94413 300000
20 5750 199636 67239 67239 300000 290506 290506 517391 139249 139249 300000
25 5750 288152 69270 69270 300000 489331 489331 772654 192253 192253 303567
30 5750 401124 55280 55280 300000 785407 785407 1116849 252306 252306 358779
AGE 65 5750 215655 68457 68457 300000 323925 323925 562335 149109 149109 300000
</TABLE>
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL
VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT
MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT
DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND
THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT
THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%. 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID
IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
- -------------------------------------------------------------------------------
Strategic Advantate 55
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $5750.00
GUIDELINE PREMIUM TEST
SUMMARY PAGE
ASSUMING GUARANTEED CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------0.00%--------- ---------12.00%--------- ---------6.00%----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
1 5750 6037 3782 4070 300000 4309 4597 300000 4045 4333 300000
2 5750 12377 7437 7581 300000 8994 9137 300000 8199 8343 300000
3 5750 19033 10961 10961 300000 14090 14090 300000 12461 12461 300000
4 5750 26022 14353 14353 300000 19640 19640 300000 16835 16835 300000
5 5750 33361 17606 17606 300000 25683 25683 300000 21317 21317 300000
6 5750 41067 21120 21120 300000 32717 32717 300000 26334 26334 300000
7 5750 49157 24474 24474 300000 40391 40391 300000 31471 31471 300000
8 5750 57653 27653 27653 300000 48761 48761 300000 36721 36721 300000
9 5750 66573 30646 30646 300000 57898 57898 300000 42078 42078 300000
10 5750 75939 33434 33434 300000 67873 67873 300000 47531 47531 300000
15 5750 130281 44883 44883 300000 137318 137318 300000 77897 77897 300000
20 5750 199636 48627 48627 300000 254777 254777 310829 111166 111166 300000
25 5750 288152 38926 38926 300000 451665 451665 523931 146353 146353 300000
30 5750 401124 3208 3208 300000 773536 773536 827684 183203 183203 300000
AGE 65 5750 215655 47991 47991 300000 286950 286950 344340 118055 118055 300000
</TABLE>
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE
WHICH WERE USED TO CALCULATE THE ABOVE VALUES.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF
THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT
EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE
HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID
IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
- -------------------------------------------------------------------------------
Strategic Advantage 56
<PAGE>
PROSPECT: INSURED'S NAME:
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $5750.00
GUIDELINE PREMIUM TEST
SUMMARY PAGE
ASSUMING CURRENT CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------0.00%--------- ---------12.00%--------- ---------6.00%----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
1 5750 6037 4237 4524 300000 4792 5080 300000 4514 4802 300000
2 5750 12377 8177 8321 300000 9838 9982 300000 8991 9134 300000
3 5750 19033 11867 11867 300000 15209 15209 300000 13470 13470 300000
4 5750 26022 15408 15408 300000 21047 21047 300000 18056 18056 300000
5 5750 33361 18885 18885 300000 27487 27487 300000 22838 22838 300000
6 5750 41067 22699 22699 300000 35038 35038 300000 28246 28246 300000
7 5750 49157 26442 26442 300000 43374 43374 300000 33887 33887 300000
8 5750 57653 30079 30079 300000 52543 52543 300000 39736 39736 300000
9 5750 66573 33592 33592 300000 62619 62619 300000 45783 45783 300000
10 5750 75939 36976 36976 300000 73699 73699 300000 52034 52034 300000
15 5750 130281 52644 52644 300000 151793 151793 300000 88317 88317 300000
20 5750 199636 61671 61671 300000 283092 283092 345372 130113 130113 300000
25 5750 288152 60272 60272 300000 500480 500480 580557 178915 178915 300000
30 5750 401124 39192 39192 300000 856823 856823 916800 239145 239145 300000
AGE 65 5750 215655 62406 62406 300000 318528 318528 382234 139234 139234 300000
</TABLE>
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL
VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT
MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT
DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND
THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT
THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%. 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID
IN A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
- -------------------------------------------------------------------------------
Strategic Advantage 57
<PAGE>
ADDITIONAL INFORMATION
DIRECTORS AND OFFICERS
Set forth below is information regarding the directors and principal officers of
Security Life of Denver Insurance Company. Security Life's address, and the
business address of each person named, except as noted with an asterisk (*), is
Security Life Center, 1290 Broadway, Denver, Colorado 80203-5699. The business
address of each person denoted with an asterisk (*) is ING North America
Insurance Corporation, 5780 Powers Ferry Road, Atlanta, Georgia 30327-4390.
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- -------------------- -------------------------------------------------
R. Glenn Hilliard* Chairman of the Board of Directors
Robert J. St. Jacques* Director, Vice Chairman and Chief
Executive Officer
Stephen M. Christopher Director, President and Chief Operating Officer
Catherine T. Fitzgerald* Executive Vice President
Keith T. Glover* Executive Vice President
Thomas F. Conroy Director and President - Reinsurance and
Institutional Markets
Michael W. Cunningham* Director
Linda B. Emory* Director
Wayne D. Bidelman Sr. Vice President and Chief Operating
Officer - Reinsurance
Eugene L. Copeland Sr. Vice President, General Counsel &
Corporate Secretary
Benjamin A. Currier Sr. Vice President - Operations
James L. Livingston Sr. Vice President and Chief Actuary
Jeffery W. Seel* Sr. Vice President and Chief Investment Officer
Jess A. Skriletz Sr. Vice President - Institutional Markets
- --------------------------------------------------------------------------------
Strategic Advantage 58
<PAGE>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- -------------------- -------------------------------------------------
Louis N. Trapolino Sr. Vice President - Marketing and Chief
Marketing Officer
William D. Tyler Sr. Vice President and Chief Information
Officer
Kevin W. Ahern Vice President and Sr. Portfolio Manager
William H. Alexander Vice President and Medical Director -
Reinsurance
Evelyn A. Bentz Vice President - M Financial Sales
Daniel S. Clements Vice President and Chief Underwriter
Jeffery L. Davis Vice President - Marketing Systems
Linda Elliott Vice President - Systems Development
Lyndon E. Oliver* Vice President and Treasurer
John F. Kerper* Vice President and Actuary
Richard D. King Vice President and Medical Director
Philip R. Kruse Vice President - Reinsurance Marketing
Charles D. Lewis, Jr. Vice President - Corporate Education and
Development
Charles Lynn McPherson* Vice President - Business Insurance
Operations
Sue A. Miskie Vice President - Corporate Services
Donna T. Mosely Vice President - Valuation
Daniel G. Patsey Vice President - Strategic Technology
Ronald K. Peterson Vice President - Pricing & Financial
Planning
Kristen Rhodes-Anderson Vice President - Strategic Marketing
- -------------------------------------------------------------------------------
Strategic Advantage 59
<PAGE>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- -------------------- -------------------------------------------------
Christiaan M. Rutten Vice President - Structured Reinsurance
Mark A. Smith Vice President - Insurance Services
Jerome M. Strop Vice President - Finance
William J. Wagner Vice President - Product Development
James L. Walker Vice President and Chief Underwriter -
Reinsurance
Richard L. Wisott Vice President - New Market Development
Frank T. Wright Vice President - Variable Sales
T. Kirby Brown, Jr. Second Vice President and Senior Portfolio
Manager
John G. Grant Second Vice President and Senior Portfolio
Manager
Edward K. Campbell Legal Officer
Irene M. Colorosa Assistant Secretary
Marsha K. Crest Agency Administration Officer
John B. Dickinson Actuarial Officer
Denise S. Dumont Computer Services Officer
Pamela C. Erbes New Market Development Officer
Relda A. Fleshman Legal Officer
Leonard Heim Actuarial Officer
Shirley A. Knarr Actuarial Officer
Casey J. Scott Field Operations Officer
- -------------------------------------------------------------------------------
Strategic Advantage 60
<PAGE>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- -------------------- -------------------------------------------------
Lisa K. Smith Denver Operations Management Officer
Glen E. Stark Actuarial Officer
Gary W. Waggoner Legal Officer
Amy L. Winsor Finance and Tax Officer
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. In addition, we are subject to the insurance
laws and regulations in every jurisdiction in which we do business. As a result,
the provisions of this Policy may vary somewhat from jurisdiction to
jurisdiction.
We are required to submit annual statements, including financial statements, on
our operations and finances to the Insurance Departments of the various
jurisdictions in which we do business to determine solvency and compliance with
state insurance laws and regulations.
We are also subject to various Federal securities laws and regulations.
LEGAL MATTERS
The legal matters in connection with the Policy described in this prospectus
have been passed on by Eugene L. Copeland, the General Counsel of Security
Life.
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 Policy or to the Variable Account, and
we do not expect to incur significant losses from such actions. ING America
Equities, Inc., the principal underwriter and distributor of the Policy, is not
engaged in any litigation of any material nature.
EXPERTS
The consolidated financial statements of Security Life of Denver Insurance
Company and Subsidiaries at December 31, 1995 and 1994, and for each of the
three years in the period ended December 31, 1995, and the financial statements
of the Separate Account L1 at December 31, 1995, and for each of the two years
in the period ended December 31, 1995, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein 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.
Actuarial matters in this prospectus have been examined by Shirley A. Knarr,
F.S.A., M.A.A.A., who is the Variable Products Portfolio Manager and Actuarial
Officer of Security Life. Her opinion on actuarial matters is filed as an
exhibit to the Registration Statement we filed with the SEC.
- -------------------------------------------------------------------------------
Strategic Advantage 61
<PAGE>
REGISTRATION STATEMENT
We have filed a Registration Statement relating to the Variable Account and the
variable life insurance policy described in this prospectus with the SEC. The
Registration Statement, which is required by the Securities Act of 1933,
includes additional information that is not required in this prospectus under
the rules and regulations of the SEC. The additional information may be obtained
from the SECs principal office in Washington, DC. You will have to pay a fee for
the material.
FINANCIAL STATEMENTS
The consolidated financial statements of Security Life of Denver Insurance
Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1995
and 1994, and for each of the two years in the period ended December 31, 1995,
are prepared in accordance with generally accepted accounting principles and
start on page 63.
The financial statements included for the Security Life Separate Account L1 at
December 31, 1995 and for the year then ended, are prepared in accordance with
generally accepted accounting principles and represent those Divisions that had
commenced operations by that date.
The consolidated financial statements of Security Life and Subsidiaries referred
to above have been audited by Ernst & Young LLP. The consolidated financial
statements of Security Life and Subsidiaries should be distinguished from the
financial statements of the Security Life Separate Account L1 and should be
considered only as bearing upon the ability of Security Life and Subsidiaries to
meet its obligations under the Policies. They should not be considered as
bearing upon the investment experience of the Divisions of Security Life
Separate Account L1.
- --------------------------------------------------------------------------------
Strategic Advantage 62
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
SECURITY LIFE OF DENVER
INSURANCE COMPANY
AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
WITH REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
63
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Financial Statements and Schedules
Years ended December 31, 1995, 1994 and 1993
CONTENTS
PAGE
Report of Independent Auditors......................... 65
Audited Consolidated Financial Statements
Consolidated Balance Sheets....................... 66
Consolidated Statements of Income................. 68
Consolidated Statements of Stockholder's Equity... 69
Consolidated Statements of Cash Flows............. 70
Notes to Consolidated Financial Statements........ 72
- -------------------------------------------------------------------------------
64
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
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, 1995 and 1994, 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, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Security Life of
Denver Insurance Company and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
made certain accounting changes in 1995, 1994 and 1993.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Denver, Colorado
April 5, 1996
- -------------------------------------------------------------------------------
65
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Investments (Note 4):
Fixed maturities $2,470,944 $1,955,460
Equity securities 8,369 11,904
Mortgage loans on real estate 285,544 175,459
Investment real estate, at cost, less accumulated
depreciation (1995-$640;1994-$378) 2,908 3,152
Policy loans 754,240 690,494
Other long-term investments 11,870 10,765
Short-term investments 10,946 7,978
---------- ----------
Total investments 3,544,821 2,855,212
Cash 32,044 17,719
Accrued investment income 38,132 32,393
Reinsurance recoverable:
Paid benefits 11,096 14,734
Unpaid benefits 13,581 9,919
Prepaid reinsurance premiums (Note 10) 1,614,959 1,360,991
Deferred policy acquisition costs (DPAC) 595,232 620,439
Property and equipment, at cost, less
accumulated depreciation (1995-$19,556;
1994-$15,938) 40,418 42,648
Federal income tax recoverable (Note 11) 62,990 -
Deferred federal income taxes (Note 11) - 62,694
Indebtedness of related parties 33,418 10,178
Other assets 64,314 72,912
Separate account asset (Note 8) 31,825 -
----------------------
Total assets $6,082,830 $5,099,839
======================
</TABLE>
See accompanying notes
- -------------------------------------------------------------------------------
66
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits (Note 10):
Life and annuity reserves $3,328,405 $2,827,307
Guaranteed investment contracts 1,520,926 1,303,815
Policyholders' funds 75,809 62,099
Advance premiums 231 1,332
Accrued dividends and dividends on deposit 19,886 21,558
Unpaid claims 79,821 53,158
Funds held under reinsurance treaties 32,793 58,315
---------- ----------
Total future policy benefits 5,057,871 4,327,584
Accounts payable and accrued expenses 75,019 60,687
Indebtedness to related parties 16,248 112,742
Long-term debt to related parties (Note 12) 50,032 50,032
Other liabilities 60,443 47,402
Federal income taxes payable (Note 11) - 11,218
Deferred federal income taxes (Note 11) 44,746 -
Separate account liability (Note 8) 31,825 -
---------- ----------
Total liabilities 5,336,184 4,609,665
Commitments and contingent liabilities
(Notes 9, 10 and 14)
Stockholder's equity (Note 13):
Common stock, $20,000 par value:
Authorized - 149 shares
Issued and outstanding - 144 shares 2,880 2,880
Additional paid-in capital 297,422 150,792
Net unrealized gains 72,973 6,862
Retained earnings 373,371 329,640
---------- ----------
Total stockholder's equity 746,646 490,174
---------- ----------
Total liabilities and stockholder's equity $6,082,830 $5,099,839
========== ==========
</TABLE>
See accompanying notes
- -------------------------------------------------------------------------------
67
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Revenues:
Traditional life insurance premiums $150,372 $ 144,838 $118,355
Universal life and investment product charges 191,869 152,771 124,206
Reinsurance premiums assumed 279,308 299,632 274,218
-------- --------- --------
621,549 597,241 516,779
Reinsurance premiums ceded (96,082) (101,459) (92,918)
-------- --------- --------
525,467 495,782 423,861
Net investment income 256,065 209,605 195,269
Net realized gains (losses) on investments 6,564 (7,245) 18,733
Miscellaneous Income 1,941 6,312 2,120
-------- --------- --------
790,037 704,454 639,983
Benefits and expenses:
Benefits:
Traditional life insurance:
Death benefits 217,136 231,018 225,021
Other benefits 88,326 72,298 55,177
Universal life and investment contracts:
Interest credited to account balances 164,536 139,942 115,761
Death benefit incurred in excess of account
balances 63,672 73,869 56,130
Increase in policy reserves and other funds 12,856 85,968 114,009
Reinsurance recoveries (74,305) (73,379) (70,613)
Product conversions 74,291 - -
-------- --------- --------
546,512 529,716 495,485
Expenses:
Commissions 50,914 16,564 37,530
Insurance operating expenses 52,414 50,309 36,805
Amortization of deferred policy acquisition costs 71,450 65,393 8,742
-------- --------- --------
721,290 661,982 578,562
-------- --------- --------
Income before federal income taxes 68,747 42,473 61,421
Federal income taxes (Note 11) 24,296 14,921 21,605
-------- --------- --------
Net income before cumulative effect of accounting
changes 44,451 27,552 39,816
Cumulative effect of accounting changes (net of tax):
Accounting for income taxes (Note 11) - - 16,933
Employers accounting for OPEB (Note 7) - - (5,102)
Employers accounting for postemployment
benefits (Note 7) - (1,381) -
-------- --------- --------
Net income $ 44,451 $ 26,171 $ 51,647
======== ========= ========
</TABLE>
See accompanying notes
- -------------------------------------------------------------------------------
68
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
--------------------------------
<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 $150,792 $ 150,792 $135,792
Capital contribution 146,630 - 15,000
-------- --------- --------
Balance at end of year $297,422 $ 150,792 $150,792
======== ========= ========
Net unrealized gains (losses) on investments:
Balance at beginning of year $ 6,862 $ (131) $ (505)
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 118,654 (106,911) 374
Effect on DPAC of unrealized gains and losses
on fixed maturities, net of tax (52,543) 45,064 -
-------- --------- --------
Balance at end of year $ 72,973 $ 6,862 $ (131)
======== ========= ========
Retained earnings:
Balance at beginning of year $329,640 $ 306,349 $257,582
Net income 44,451 26,171 51,647
Dividends paid to stockholder (720) (2,880) (2,880)
-------- --------- --------
Balance at end of year $373,371 $ 329,640 $306,349
======== ========= ========
Total stockholder's equity $746,646 $ 490,174 $459,890
======== ========= ========
</TABLE>
See accompanying notes
- --------------------------------------------------------------------------------
69
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
--------- --------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 44,451 $ 26,171 $ 51,647
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefits 471,331 621,578 690,875
Net decrease (increase) in federal income taxes 33,232 (25,506) (36,930)
Increase in accounts payable and accrued
expenses 26,751 3,771 30,276
Increase in accrued investment income (5,739) (5,651) (9,194)
Increase in reinsurance recoverable (24) (1,767) (13,630)
Increase in prepaid reinsurance premiums (253,968) (397,463) (411,053)
Net realized investment (gains) losses (6,564) 7,245 (18,733)
Depreciation and amortization expense 4,036 3,500 3,780
Policy acquisition costs deferred (127,069) (127,305) (91,343)
Amortization of deferred policy
acquisition costs 71,450 65,393 8,742
Cumulative effect of accounting changes - 1,381 (11,831)
Increase in accrual for postretirement benefits 623 851 -
Other, net (9,784) (4,894) 6,375
--------- --------- -----------
Net cash provided by operating activities 248,726 167,304 198,981
INVESTING ACTIVITIES
Securities available for sale:
Sales:
Fixed maturities 357,059 73l,460
Equity securities 4,730 148,176 -
Maturities-fixed maturities 280,581 237,586 -
Purchases:
Fixed maturities (935,210) (1,202,024) -
Equity securities (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:
Fixed maturities - - 973,460
Equity securities - - l05,229
Mortgage loans on real estate 16,061 17,570 14,012
Investment real estate 215 1,534 636
Other long-term investments 1,064 - 1,871
</TABLE>
- --------------------------------------------------------------------------------
70
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
--------- --------- -----------
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Purchase or issuance of investments:
Fixed maturities $ $ $(1,311,286)
- -
Equity securities - - (142,906)
Mortgage loans on real estate (136,218) (91,410) (44,543)
Investment real estate 14 (156) -
Policy loans, net (63,746) (72,017) (73,943)
Other long-term investments (2,169) (399) (3,316)
Short-term investments, net (9,154) 4,099 102,259
Additions to property and equipment (1,812) (2,280) (3,722)
Disposal of property and equipment 79 (177) -
Purchase of subsidiary - - (7,937)
--------- --------- -----------
Net cash used by investing activities (475,650) (399,683) (390,186)
FINANCING ACTIVITIES
(Decrease) increase in indebtedness to related parties (16,987) 52,231 102,522
Cash contributions from parent - 15,000 -
Receipts from interest sensitive products
credited to policyholder account balances 387,904 250,396 225,967
Return of policyholder account balances on
interest sensitive policies (128,948) (89,532) (119,743)
Dividends paid to stockholder (720) (2,880) (2,880)
--------- --------- -----------
Net cash provided by financing activities 241,249 225,215 205,866
--------- --------- -----------
Net increase (decrease) in cash 14,325 (7,164) 14,661
Cash at beginning of year 17,719 24,883 10,222
--------- --------- -----------
Cash at end of year $ 32,044 $ 17,719 $ 24,883
========= ========= ===========
</TABLE>
Noncash transactions:
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.
In 1993, the Company's parent contributed $15,000,000 to additional paid-in
capital. As of December 31, 1993, the cash representing the capital
contribution had not yet been received and the amount is presented as
indebtedness of related parties. The cash was received by the Company in
February 1994.
See accompanying notes
- -------------------------------------------------------------------------------
71
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNT 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, and universal 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.
- --------------------------------------------------------------------------------
72
<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, 1993 the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. This statement requires that the projected future
cost of providing postretirement benefits, such as health care and life
insurance be recognized as an expense as employees render service rather than
when benefits are paid. The effect of adopting the new rules decreased 1993
net income before cumulative effect of accounting change by $653,000 and
decreased 1993 net income by $5,755,000. The effect on net income for 1993
includes the adjustment of $5,102,000 (net of tax of $2,747,000) to
retroactively apply the new rules.
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
Accounting for Income Taxes which requires the adoption of the liability method
for computing deferred tax assets and liabilities. The cumulative effect of
adopting FASB Statement 109 as of January 1, 1993 was to increase net income by
$16,933,000.
Effective January 1, 1994, the Company adopted 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
benefit will be paid and when sufficient information exists to make reasonable
estimates of the amounts to be paid. As required by the statement, prior year
financial statements have not been restated to reflect the change in accounting
methods.
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. In accordance with the statement,
prior period financial statements have not been restated to reflect the change
in accounting principle. The cumulative effect as of January 1, 1994 of
adopting 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 profits.
- -------------------------------------------------------------------------------
73
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
No. 114. Under the amended statement, the 1995 allowance for credit losses
related to loans that are identified for evaluation in accordance with Statement
114 is based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans. Adoption of this standard resulted in an insignificant impact
to net income and stockholder's equity.
INVESTMENTS
Investments are shown on the following bases:
The carrying value of fixed maturities depends on the classification of the
security: securities held to maturity, securities available for sale, and
trading securities. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Prior to the reassessment described above, debt
securities were classified as held-to-maturity when the Company had the positive
intent and ability to hold the securities to maturity. Held-to-maturity
securities were stated at amortized cost.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax and
deferred acquisition cost adjustments, reported in a separate component of
stockholder's equity.
- --------------------------------------------------------------------------------
74
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
The Company does not hold 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.
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.
- --------------------------------------------------------------------------------
75
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring traditional life insurance, universal
life insurance (including interest sensitive products) and investment products
that vary with and are primarily related to the production of new and renewal
business have been deferred. Traditional life insurance acquisition costs are
being amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policy benefit reserves. For
universal life insurance and investment products, acquisition cost are being
amortized generally in proportion to the present value (using the assumed
crediting rate) of expected gross profits from surrender charges and investment,
mortality, and expense margins. This amortization is adjusted retrospectively
when estimates of current or future gross profits to be realized from a group of
products are revised.
Deferred policy acquisition costs are adjusted to reflect changes that would
have been necessary if unrealized investment gains and losses related to
available-for-sale securities had been realized. The Company has reflected
those adjustments in the asset balance with the offset as a direct adjustment to
stockholder's equity.
FUTURE POLICY BENEFITS
Benefit reserves, with the exception of reserves for universal life-type
policies and investment products are computed using a net level premium method
including assumptions as to investment yields, mortality, withdrawals and other
assumptions based on the Company's and industry experience, modified as
necessary to reflect anticipated trends to include provisions for possible
unfavorable deviations. Reserve interest assumptions are those deemed
appropriate at the time of policy issue, and range from 2% to 10%. Policy
benefit claims are charged to expense in the year that the claims are incurred.
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 8.10% during 1995, 6.15% to 8.10% during 1994, and 6.15% to 8.75%
during 1993.
Included in life and annuity reserves is an unearned revenue reserve that
reflects the unamortized balance of excess first year policy service fees over
renewal period policy service fees on universal life and investment products.
These excess fees have been deferred and are being recognized in income over the
periods benefited, using the same assumptions and factors used to amortize
deferred policy acquisition costs.
- --------------------------------------------------------------------------------
76
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 $6,218,000 and $6,052,000 at
December 31, 1995 and 1994, respectively. Participating business approximates
..5% of the Company's ordinary life insurance in force and 1.5% 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 $2,964,000, $3,683,000,
and $3,028,000 were incurred in 1995, 1994, and 1993, 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 $4,861,000, $538,000, and $1,661,000
for 1995, 1994, and 1993, respectively.
- -------------------------------------------------------------------------------
77
<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 STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt Statement 121 in the first
quarter of 1996 and, based on current circumstances, management does not believe
the effect of adoption will be material.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1994 financial statements have been reclassified
to conform to the 1995 presentation.
2. 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 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.
- --------------------------------------------------------------------------------
78
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1995 and 1994 are summarized below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------- ----------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities (Note 4) $2,470,944 $2,470,944 $1,955,460 $1,951,460
Equity securities (Note 4) 8,369 8,369 11,904 11,904
Commercial mortgages 276,552 304,442 165,992 163,215
Residential mortgages 8,992 9,172 9,467 9,467
Policy loans 754,240 754,240 690,494 690,494
Short-term investments 10,946 10,946 7,978 7,978
LIABILITIES
Guaranteed investment
contracts, net of
reinsurance - - 32,779 32,029
Supplemental contracts
without
life contingencies 3,033 3,033 3,135 3,135
Other policyholder funds
left on deposit 92,893 92,893 81,854 81,854
Individual and group
annuities, net of
reinsurance 49,020 48,457 50,701 49,931
</TABLE>
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 using a current market rate applicable to the yield, credit quality,
and maturity of the investments. The discount rate used as of December 31, 1995
and 1994 was 10%. The fair value of equity securities are based on quoted
market prices.
- --------------------------------------------------------------------------------
79
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
MORTGAGE LOANS: Estimated market values for commercial real estate loans
--------------
were generated using a discounted cash flow approach. Loans in good standing
are discounted using interest rates determined by U.S. Treasury yields on
December 31, and spreads required on new loans with similar characteristics.
The amortizing features of all loans were incorporated in the valuation.
Where data on option features was available, option values were determined
using a binomial valuation method, and were incorporated into the mortgage
valuation. Restructured loans are valued in the same manner; however, these
were discounted at a greater spread to reflect increased risk. The carrying
value for residential loans approximates the fair value.
All residential loans are valued at their outstanding principal balances,
which approximates their fair values.
POLICY LOANS: The carrying amounts reported in the balance sheet 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.
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 contact sales in the amounts of $10,358,000 and $78,428,000 in
1995 and 1994, 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 $695,288,000 and $684,578,000 at
December 31, 1995 and 1994, 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 86% 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.
- -------------------------------------------------------------------------------
80
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
LETTERS OF CREDIT
- -----------------
The Company is the beneficiary of letters of credit totaling $71,615,000 which
have a market value to the Company of $0 and two lines of credit totaling
$161,411,000 which have a market value to the Company of $0. (see Note 15).
3. ACQUISITION
Effective March 31, 1993, the Company completed the acquisition of 100% of the
capital stock of First ING for a total cash consideration of $9,563,000
(including $354,000 of fees and miscellaneous expenses). The acquisition was
accounted for using the purchase method of accounting. The fair market value of
assets acquired totaled $19,108,000 (primarily investment securities), and
liabilities assumed totaled $9,899,000. The purchase price equals the fair
market value of net assets acquired; thus, no goodwill was generated from this
transaction. The accompanying consolidated income statement for 1993 includes
the results of First ING operations for the period from April 1, 1993, to
December 31, 1993. On a pro forma basis, assuming the acquisition had occurred
on January 1, 1993, revenues would have been $641,446,000 and net income would
have been $50,927,000 for the year ended December 31, 1993.
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 Equities, Inc. consists only of
distribution of variable life and annuity contracts. ING America Equities, Inc.
does not hold customer funds or securities.
4. INVESTMENTS
The amortized cost and fair value of investments in fixed maturities and equity
securities are as follows at December 31, 1995 and 1994 (in thousands):
- -------------------------------------------------------------------------------
81
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<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 -0- -0- 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 5) 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>
- --------------------------------------------------------------------------------
82
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 175,092 $ 198 $ 5,843 $ 169,447
States, municipalities and political
subdivisions 72,203 - 7,668 64,535
Public utilities securities 84,264 841 5,588 79,517
Debt securities issued by foreign
governments 3,272 - 35 3,237
Corporate securities 433,016 3,913 22,445 414,484
Mortgage-backed securities 1,010,939 85,077 76,251 1,019,765
Other asset-backed securities 86,159 180 3,474 82,865
Derivatives hedging fixed
maturities (Note 5) 6,221 4,637 2,539 8,319
---------- ------- -------- ----------
Total fixed maturities 1,871,166 94,846 123,843 1,842,169
Preferred stocks (nonredeemable) 10,559 262 1,058 9,763
Common stocks 2,203 - 62 2,141
---------- ------- -------- ----------
Total $1,883,928 $95,108 $124,963 $1,854,073
========== ======= ======== ==========
Held-to-maturity:
States, municipalities and political
subdivisions $ 500 $ - $ 33 $ 467
Public utilities securities 11,649 - 571 11,078
Corporate securities 100,641 457 4,107 96,991
Other asset-backed securities 501 4 - 505
---------- ------- -------- ----------
Total $ 113,291 $ 461 $ 4,711 $ 109,041
========== ======= ======== ==========
</TABLE>
- -------------------------------------------------------------------------------
83
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
Reconciliation of fixed maturities to the consolidated balance sheet at December
31 is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Available for sale $2,470,944 $1,842,169
Held to Maturity -0- 113,291
---------- ----------
Total fixed maturities $2,470,944 $1,955,460
========== ==========
</TABLE>
The amortized cost and fair value of investments in fixed maturities at December
31, 1995, 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 FAIR
COST VALUE
----------- ----------
<S> <C> <C>
Available for sale:
Due in one year or less $ 21,465 $ 21,723
Due after one year through five years 328,210 338,964
Due after five years through ten years 461,294 485,319
Due after ten years 106,279 110,760
---------- ----------
917,248 956,766
Mortgage-backed securities 1,230,943 1,335,559
Other asset-backed securities 169,847 178,619
---------- ----------
Total available-for-sale $2,318,038 $2,470,944
========== ==========
</TABLE>
- -------------------------------------------------------------------------------
84
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
Changes in unrealized gains (losses) on investments in available-for-sale
securities for the year ended December 31, 1995 and 1994 are summarized as
follows (in thousands):
<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
======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
FIXED EQUITY TOTAL
------------------------------
<S> <C> <C> <C>
Gross unrealized gains $ 94,846 $ 262 $ 95,108
Gross unrealized losses 123,843 1,120 124,963
--------- ------ ---------
Net unrealized losses (28,997) (858) (29,855)
Deferred income tax benefit 10,143 300 10,443
--------- ------ ---------
Net unrealized losses after taxes (18,854) (558) (19,412)
Less:
Balance at beginning of year - (131) (131)
Adjustments for change in accounting
method (net of tax of $46,916) 87,630 - 87,630
--------- ------ ---------
Change in net unrealized losses $(106,484) $ (427) $(106,911)
========= ====== =========
</TABLE>
- -------------------------------------------------------------------------------
85
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
Changes in unrealized gains (losses) on securities for the year ended December
31, 1993 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1993
FIXED EQUITY TOTAL
---------- -------- ----------
<S> <C> <C> <C>
Gross unrealized gains $156,410 $1,735 $158,145
Gross unrealized losses 16,601 1,664 18,265
-------- ------ --------
Net unrealized gains 139,809 71 139,880
Deferred income tax expense (48,933) (202) (49,135)
-------- ------ --------
Net unrealized gains (losses) after taxes 90,876 (131) 90,745
Less:
Balance at beginning of year 64,755 (505) 64,250
-------- ------ --------
Change in net unrealized gains (losses) $ 26,121 $ 374 $ 26,495
======== ====== ========
</TABLE>
As part of its overall investment management strategy, the Company has entered
into agreements to purchase $36,700,000 in mortgage loans as of December 31,
1995. These agreements were settled during 1996. The Company had no agreements
to sell securities at December 31, 1995.
Major categories of investment income for the years ended December 31 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities $190,327 $153,777 $143,584
Mortgage loans on real estate 16,601 12,221 8,110
Policy loans 55,438 42,456 43,638
Other investments 4,360 5,654 6,000
-------- -------- --------
266,726 214,108 201,332
Investment expenses (10,661) ( 4,503) (6,063)
-------- -------- --------
Net investment income $256,065 $209,605 $195,269
======== ======== ========
</TABLE>
- -------------------------------------------------------------------------------
86
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
Net realized gains (losses) on investments for the years ended December 31 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ---------- ---------
<S> <C> <C> <C>
Fixed maturities $6,538 $( 3,847) $17,340
Equity securities 5 (1,761) (770)
Real estate and other 21 (1,637) 2,163
------ -------- -------
Net realized gains (losses) on
investments $6,564 $ (7,245) $18,733
====== ======== =======
</TABLE>
During 1995 and 1994, debt and marketable equity securities available-for-sale
were sold with fair value at the date of sale of $306,219,000 and $292,483,000
respectively. Gross gains of $9,691,000 and $6,125,000 and gross losses of
$3,148,000 and $11,733,000 were realized on those sales in 1995 and 1994
respectively.
Proceeds from sales of investments in fixed maturities during 1993 were
$973,460,000. Gross gains of $11,374,000 and gross losses of $9,011,000 were
realized on those sales in 1993.
At December 31, 1995 and 1994, bonds with an amortized cost of $26,730,000 and
$24,547,000, respectively, were on deposit with various state insurance
departments to meet regulatory requirements.
5. 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. Option agreements owned are used to facilitate asset
liability matching with respect to certain of the Company's Guaranteed
Investment Contract (GIC) liabilities. These contracts give the Company the
option of entering into swaps at specified dates in the future.
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
- -------------------------------------------------------------------------------
87
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
(CONTINUED)
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 market 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 counterparty 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.
The table below summarizes the Company's interest rate contracts at December 31,
1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
----------- ---------- -------- --------
<S> <C> <C> <C> <C>
Interest rate contacts:
Swaps $ 884,632 $ 448 $ 4,034 $ 4,034
Swaps-affiliates 864,632 (448) (3,453) (3,453)
---------- ------- ------- -------
Total swaps 1,749,264 -0- 581 581
Caps owned 400,000 3,580 1,308 1,308
Caps owned-affilaites 40,000 61 -0- -0-
---------- ------- ------- -------
Total caps owned 440,000 3,641 1,308 1,308
Floors owned 100,000 57 326 326
Floors owned-affiliates -0- -0- -0- -0-
---------- ------- ------- -------
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 -0- -0- -0-
---------- ------- ------- -------
$2,593,264 $ 3,698 $ 2,215 $ 2,215
========== ======= ======= =======
</TABLE>
- -------------------------------------------------------------------------------
88
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest rate contacts:
Swaps $ 571,700 $ $(22,387) $(22,387)
-
Swaps-affiliates 567,700 - 20,322 20,322
---------- ------ -------- --------
Total swaps 1,139,400 - (2,065) (2,065)
Caps owned 560,000 5,080 7,822 7,822
Caps owned-affiliates 165,000 1,034 2,552 2,552
---------- ------ -------- --------
Total caps owned 725,000 6,114 10,374 10,374
Floors owned 120,000 107 10 10
Floors owned-affiliates - - - -
---------- ------ -------- --------
Total floors owned 120,000 107 10 10
---------- ------ -------- --------
$1,984,400 $6,221 $ 8,319 $ 8,319
========== ====== ======== ========
</TABLE>
6. CONCENTRATIONS OF CREDIT RISK
At December 31, 1995, the Company held less-than-investment-grade bonds
classified as available-for-sale with a carrying value of $5,003,000 and market
value of $5,105,000. These holdings amounted to 2% of the Company's investments
in bonds and less than 1% of total assets. The holdings of less-than-investment-
grade bonds are widely diversified and of satisfactory quality based on the
Company's investment policies and credit standards.
At December 31, 1995, the Company's commercial mortgages involved a
concentration of properties located in Colorado (10%), Florida (21%), and
Georgia (10%). The remaining commercial mortgages relate to properties located
in 26 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
$8,202,000.
- -------------------------------------------------------------------------------
89
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEES BENEFIT PLAN
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 permanent 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 Employees 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
1995 1994
-----------------------------------------
QUALIFIED QUALIFIED
PLAN SERP PLAN SERP
-----------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit
obligation:
Vested $(13,318) $(5,637) $(13,375) $(1,552)
Nonvested (9,370) - (857) -
-------- ------- -------- -------
(22,688) (5,637) (14,232) (1,552)
Effect of projected future compensation (5,355) (1,297) (7,337) (1,478)
-------- ------- -------- -------
Projected benefit obligation (28,043) (6,934) (21,569) (3,030)
Less plan assets at fair value 31,074 - 28,147 -
-------- ------- -------- -------
Plan assets in excess of projected benefit obligation 3,031 (6,934) 6,578 (3,030)
Unrecognized net asset (1,601) - (1,885) -
Unrecognized prior service benefit cost (109) 267 (122) 297
Unrecognized net loss (gain) 998 4,507 (2,193) 1,310
-------- ------- -------- -------
Net pension asset (liability) $ 2,319 $(2,160) $ 2,378 $(1,423)
======== ======= ======== =======
</TABLE>
- -------------------------------------------------------------------------------
90
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEES BENEFIT PLAN (CONTINUED)
PENSION PLAN (CONTINUED)
The net periodic pension cost for the defined benefit plans included the
following components (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------------------------------
QUALIFIED QUALIFIED QUALIFIED
PLAN SERP Plan SERP Plan SERP
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1,147 $ 285 $1,369 $ 248 $1,303 $85
Interest cost 1,856 517 1,521 219 1,373 165
Return on plan assets (3,497) (1,900) - (7,618) -
Net amortization and deferral 553 239 (659) 200 5,250 163
---------------------------------------------------------
Net periodic pension expense $ 59 $ 1,041 $ 331 $ 667 $ 308 $413
=========================================================
</TABLE>
Assumptions used in accounting for the defined benefit plans as of
December 31, 1995, 1994, and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.25% 8.00% 7.00%
Rate of increase in compensation level 4.25% 6.00% 5.00%
Expected long-term rate of return on assets 9.50% 8.50% 8.50%
</TABLE>
Plan assets of the defined benefit plans at December 31, 1995 are invested
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 $9,240 in 1995 and 1994, and $8,994 in 1993. Such
contributions are not currently taxable to the participants. Beginning in 1994,
the Company matched 100% of the first 3% of participants' contributions, plus
50% of contributions which exceeded 3% of participants' compensation, subject to
a maximum matching percentage of 4 1/2% of the individual's salary. Prior to
1994, the Company matched participant contributions up to 3% of the individual's
salary, subject to a maximum matching contribution of $1,500 per year. Company
matching contributions were $1,071,000 for 1995, $1,042,000 for 1994, and
$570,000 for 1993.
- -------------------------------------------------------------------------------
91
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
401(K) PLAN (CONTINUED)
Plan assets of the Savings Plan at December 31, 1995 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
$23.9 million and $21.6 million at December 31, 1995 and 1994, 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
---------------------------------------------------------------
1995 1994
---------------------------------------------------------------
LIFE LIFE
MEDICAL INSURANCE MEDICAL INSURANCE
PLAN PLAN TOTAL PLAN PLAN TOTAL
--------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees $(1,234) $(1,140) $ (2,374) $(2,612) $(274) $(2,886)
Fully eligible active plan
participants (383) (364) (747) (492) (65) (557)
Other active plan participants (1,913) (1,134) (3,047) (2,347) (197) (2,544)
------- ------- -------- ------- ----- -------
(3,530) (2,638) (6,168) (5,451) (536) (5,987)
Plan assets at fair value - - - - - -
------- ------- -------- ------- ----- -------
Accumulated postretirement benefit
obligation in excess of plan assets (3,530) (2,638) (6,168) (5,451) (536) (5,987)
Unrecognized prior service cost 463 42 505 571 52 623
Unrecognized net gain (6,114) 1,449 (4,665) (3,982) (359) (4,341)
------- ------- -------- ------- ----- -------
Accrued postretirement benefit cost $(9,181) $(1,147) $(10,328) $(8,862) $(843) $(9,705)
======= ======= ======== ======= ===== =======
</TABLE>
- -------------------------------------------------------------------------------
92
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POSTRETIREMENT BENEFITS (CONTINUED)
Net periodic postretirement benefit cost for 1995, 1994, and 1993 included the
following components (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------------------------------------------------------------------
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 $ 359 $175 $ 534 $436 $30 $ 466 $ 434 $22 $ 456
Interest cost 291 112 403 448 39 487 573 36 609
Net amortization and
deferral (209) 65 (144) (93) (8) (101) - - -
------------------------------------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 441 $352 $ 793 $791 $61 $ 852 $1,007 $58 $1,065
=======================================================================================================
</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% graded to 5%
over 18 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, 1995 by $582,200 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1995 by $122,500.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 1995 and 8.5% at
December 31, 1994.
8. 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.
- -------------------------------------------------------------------------------
93
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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>
<CAPTION>
<S> <C>
1996 $ 4,064
1997 4,207
1998 3,343
1999 271
2000 247
-------
$12,132
=======
</TABLE>
These leases expire between 1996 and 2000. Rental expense for all equipment
leases was approximately $4,344,000, $5,620,000, and $4,798,000 for the years
ended December 31, 1995, 1994, and 1993, respectively.
10. 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, 1995, 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, expense reimbursements, and reserves related
to reinsured business are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contacts.
To the extent that the assuming companies become unable to meet their
obligations under these treaties, the Company remains contingently liable to its
policyholders for the portion reinsured. Consequently, allowances are
established for amounts deemed uncollectible. To minimize its exposure to
significant losses from reinsurer insolvencies, the Company evaluates the
financial condition of the reinsurer and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic characteristics
of the reinsurer.
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.
- --------------------------------------------------------------------------------
94
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. REINSURANCE (CONTINUED)
These transactions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
--------------------------------------------------
1995 1994
--------------------------------------------------
PREMIUMS RESERVES PREMIUMS RESERVES
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Direct (nonaffiliated) $ 556,571 $ 1,380,951 $ 660,030 $ 1,200,001
Assumed from Life Insurance Company of Georgia 25,000 128,137 47,450 103,553
Assumed from Southland Life Insurance Company 8,000 11,838
Ceded to Columbine Life Insurance Company (530,291) (1,328,950) (602,680) (1,163,910)
Ceded to Life Insurance Company of Georgia (78.200) (191,976) (104,800) (106,865)
-------------------------------------------------
Net $ (18,920) $ - $ - $ 32,779
==================================================
</TABLE>
Ceded GIC reserves totalling $1,521 million are classified as part of prepaid
reinsurance premiums. GIC reserves are reflected at their gross value of $1,521
million.
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.
11. 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 entered into a tax sharing agreement that provides for an
allocation of taxes among life and nonlife members. Under the agreement, a life
member may not receive the full benefit of a taxable loss in the year the loss
is incurred. The agreement provides that a loss member will receive at least
50% of the loss utilized by other members, and that any remaining benefit will
be fully repaid when the loss member could have used the loss if they filed a
separate federal income tax return. The deferred payments or receipts for the
use of losses are accounted for as a component of the Company's deferred tax
liability. At December 31, 1995, there were no deferred benefits or liabilities
recorded with respect to life member losses.
- --------------------------------------------------------------------------------
95
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 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
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $(197,355) $(203,468)
Unrealized gains/losses (53,440) 10,449
--------- ---------
Total deferred tax liabilities $(250,795) $(193,019)
--------- ---------
Deferred tax assets:
Benefit reserves and surplus relief $ 120,439 $ 172,760
Tax-basis deferred acquisition costs 48,945 41,183
Investment income 12,060 29,806
Unearned investment income 9,383 9,789
Nonqualified deferred compensation 8,785 6,326
Post retirement employee benefits 3,615 3,397
Other, net 2,822 (7,110)
--------- ---------
Total deferred tax assets $ 206,049 $ 256,151
Valuation allowances for deferred tax assets -0- (438)
--------- ---------
Net deferred tax assets 206,049 255,713
--------- ---------
Net deferred tax (liabilities) assets $ (44,746) $ 62,694
========= =========
</TABLE>
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 judgement about the realization of the
deferred tax asset occurred and the valuation allowance was removed.
- --------------------------------------------------------------------------------
96
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The components of federal income tax expense (benefit) consists of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current $(48,136) $ 44,121 $ 31,721
Deferred 72,870 (29,200) (10,339)
Current year change in valuation allowance (438) - 223
-------- -------- --------
Federal income tax expense $ 24,296 $ 14,921 $ 21,605
======== ======== ========
</TABLE>
The Company's effective income tax rate did not vary significantly from the
statutory federal income tax rate.
The Company had net income tax payments of $25,875,000 during 1995, $41,278,000
during 1994, and $39,042,000 during 1993, 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.
12. LONG-TERM DEBT
Long-term indebtedness to related parties for $50,000,000 represents the initial
cash draw on a $100,000,000 commitment from ING America Insurance Holdings, Inc.
on December 29, 1994. 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.
- --------------------------------------------------------------------------------
97
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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. On December
29, 1995 after receiving approval from the Colorado State Commissioner of
Insurance a payment of $4,024,000 was made for accrued interest.
Future minimum payments, assuming a current effective interest rate of 5.57%,
are as follows (in thousand):
<TABLE>
<CAPTION>
TOTAL
YEAR PAYMENTS
-------------------------------- --------
<S> <C>
1999 $14,000
2000 14,000
Subsequent years 42,002
-------
Total 70,002
Less imputed interest 20,002
-------
Present value of payments $50,000
=======
</TABLE>
13. 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 1997, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting practices that insurance companies use to prepare their statutory
financial statements.
- --------------------------------------------------------------------------------
98
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED)
Prescribed statutory reserve methodology does not fully encompass universal
life-type products. The NAIC, however, has promulgated a Model Regulation
regardingUniversal 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, 1995 the Company met RBC requirements.
Capital and surplus, determined in accordance with statutory accounting
practices (SAP), was $333,686,000 and $308,933,000 at December 31, 1995 and
1994, respectively. Net income, determined in accordance with SAP, was
$11,771,000, $9,383,000, and $23,813,000 for the years ended December 31, 1995,
1994, and 1993, 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 a 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, 1995. 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.
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 materially adverse effect on the Company's financial position or interfere
with its operations.
- --------------------------------------------------------------------------------
99
<PAGE>
SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. FINANCING ARRANGEMENTS
The Company has a $86,411,000 line of credit issued by the Company's parent to
provide short-term liquidity. The amount of funds available under this line
are reduced by any other indebtedness outstanding to the parent including long-
term indebtedness (Note 12). The Company has an additional non-affiliated line
of credit of $75,000,000 also to provide short-term liquidity which expires
March 31, 1996. There were no outstanding borrowings under either of these
agreements at December 31, 1995 or 1994. The average balance of short-term
debt was $20.8 million during 1995. The weighted average interest rate paid on
this debt during 1995 was 5.93%.
The Company is the beneficiary of letters of credit totaling $71,615,000 that
were established in accordance with the terms of reinsurance agreements. The
letters of credit expired on December 31, 1995 and were renewed in 1996. The
letters were unused during both 1995 and 1994.
- --------------------------------------------------------------------------------
100
<PAGE>
Security Life of Denver Separate Account L1
Financial Statements
Year ended December 31, 1995
CONTENTS
PAGE
Report of Independent Auditors................................... 102
Audited Financial Statements
Statement of Net Assets.................................. 103
Statement of Operations.................................. 105
Statements of Changes in Net Assets...................... 108
Notes to Financial Statements............................ 111
- --------------------------------------------------------------------------------
101
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
Contractholders
Security Life of Denver Separate Account L1 of
Security Life of Denver Insurance Company
We have audited the accompanying statement of net assets of Security Life of
Denver Separate Account L1 (comprising, respectively, the Neuberger & Berman
Advisers Management Trust (comprising the Limited Maturity Bond, Growth,
Government Income and Partners Portfolios) ("Neuberger and Berman"), the Alger
American Fund (comprising the American Small Capitalization, American MidCap
Growth, American Growth and American Leveraged All Cap 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 Investments"), 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, 1995, and the related statements of operations and changes in net
assets for each of the two years in the period then ended. These financial
statements are the responsibility of the 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, 1995, 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 of Denver
Separate Account L1 at December 31, 1995, and the results of its operations and
changes in its net assets for each of the two years in the period then ended, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Denver, Colorado
April 1, 1996
- --------------------------------------------------------------------------------
102
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS DIVISIONS
-------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 NEUBERGER & BERMAN ALGER
----------------------------------------------------- ------------------------------------------
LIMITED GOVERN- AMERICAN AMERICAN AMERICAN
MATURITY MENT SMALL MIDCAP AMERICAN LEVERAGED
COMBINED BOND GROWTH INCOME PARTNERS CAPITAL GROWTH GROWTH ALLCAP
----------- ---------- -------- -------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value (combined cost
$12,967,718) - Note C $13,154,445 $1,783,126 $763,600 $832,261 $965,737 $1,128,775 $275,639 $839,236 $37,332
----------- ---------- -------- -------- -------- ---------- -------- -------- -------
TOTAL ASSETS 13,154,445 1,783,126 763,600 832,261 965,737 1,128,775 275,639 839,236 37,332
----------- ---------- -------- -------- -------- ---------- -------- -------- -------
LIABILITIES
Due to (from) Security Life of
Denver (72,089) (382) 443 (208) (884) 760 552 1,224 372
Due to (from) other divisions 0 0 0 0 0 30 0 0 0
----------- ---------- -------- -------- -------- ---------- -------- -------- -------
TOTAL LIABILITIES (72,089) (382) 443 (208) (884) 790 552 1,224 372
----------- ---------- -------- -------- -------- ---------- -------- -------- -------
NET ASSETS $13,226,534 $1,783,508 $763,157 $832,469 $966,621 $1,127,985 $275,087 $838,012 $36,960
=========== ========== ======== ======== ======== ========== ======== ======== =======
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders - Note B $13,226,534 $1,783,508 $763,157 $832,469 $966,621 $1,127,985 $275,087 $838,012 $36,960
----------- ---------- -------- -------- -------- ---------- -------- -------- -------
TOTAL POLICYHOLDER
RESERVES $13,226,534 $1,783,508 $763,157 $832,469 $966,621 $1,127,985 $275,087 $838,012 $36,960
=========== ========== ======== ======== ======== ========== ======== ======== =======
Number of divisional units
outstanding - Note G 162,009.578 60,162.107 77,187.706 73,535.288 80,027.266 19,692.860 69,805.233 2,494.731
Value per divisional unit $11.01 $12.69 $10.78 $13.14 $14.10 $13.97 $12.01 $14.82
=========== ========== ========== ========== ========== ========== ========== =========
</TABLE>
See the accompanying notes to these financial statements.
- -------------------------------------------------------------------------------
103
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
STATEMENT OF NET ASSETS
(CONTINUED)
<TABLE>
<CAPTION>
DIVISIONS
----------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 FIDELTITY INVESTMENTS INVESCO
----------------------------------------------------------------------------------------------------
INDUS-
ASSET MONEY TOTAL TRIAL HIGH
MANAGER GROWTH OVERSEAS MARKET INDEX 500 RETURN INCOME YIELD UTILITIES
--------- ---------- -------- ---------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in
mutual funds
at market value $127,724 $1,348,847 $971,426 $1,801,755 $1,203,939 $153,331 $260,518 $545,523 $20,382
-------- ---------- -------- ---------- ---------- -------- -------- -------- -------
TOTAL ASSETS 127,724 1,348,847 971,426 1,801,755 1,203,939 153,331 260,518 545,523 20,382
-------- ---------- -------- ---------- ---------- -------- -------- -------- -------
LIABILITIES
Due to(from) Security
Life of Denver 233 2,690 688 (78,371) (83) (232) 830 18 33
Due to(from) other
divisions 0 49 40 (198) 0 0 49 30 0
-------- ---------- -------- ---------- ---------- -------- -------- -------- -------
TOTAL LIABILITIES 233 2,739 728 (78,569) (83) (232) 879 48 33
-------- ---------- -------- ---------- ---------- -------- -------- -------- -------
NET ASSETS $127,491 $1,346,108 $970,698 $1,880,324 $1,204,022 $153,563 $259,639 $545,475 $20,349
======== ========== ======== ========== ========== ======== ======== ======== =======
POLICYHOLDER RESERVES
Reserves attributable
to the policyholders
- Note B $127,491 $1,346,108 $970,698 $1,880,324 $1,204,022 $153,563 $259,639 $545,475 $20,349
-------- ---------- -------- ---------- ---------- -------- -------- -------- -------
TOTAL POLICYHOLDER
RESERVES $127,491 $1,346,108 $970,698 $1,880,324 $1,204,022 $153,563 $259,639 $545,475 $20,349
======== ========== ======== ========== ========== ======== ======== ======== =======
Number of divisional
units outstanding
- Note G 11,627.088 102,248.988 93,906.733 178,653.159 91,903.027 12,602.664 20,026.102 45,708.358 1,879.859
Value per divisional
unit $10.96 $13.17 $10.34 $10.52 $13.10 $12.18 $12.97 $11.93 $10.82
======== ========== ======== ========== ========== ======== ======== ======== =======
---------------------
VAN ECK
---------------------
GOLD AND
WORLDWIDE NATURAL
BALANCED RESOURCES
--------- ----------
ASSETS
Investments in
mutual funds
at market value $76,996 $18,298
-------- ----------
TOTAL ASSETS 76,996 18,298
-------- ----------
LIABILITIES
Due to(from) Security
Life of Denver 184 44
Due to(from) other
divisions 0 0
-------- ----------
TOTAL LIABILITIES 184 44
-------- ----------
NET ASSETS $76,812 $18,254
======== ==========
POLICYHOLDER RESERVES
Reserves attributable
to the policyholders
- Note B $76,812 $18,254
-------- ----------
TOTAL POLICYHOLDER
RESERVES $76,812 $18,254
======== ==========
Number of divisional
units outstanding
- Note G 7,739.274 1,765.913
Value per divisional
unit $9.92 $10.34
======== ==========
</TABLE>
See the accompanying notes to these financial statements.
- --------------------------------------------------------------------------------
104
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
STATEMENT OF OPERATIONS
DECEMBER 31, 1995
<TABLE>
<CAPTION> DIVISIONS
--------------------------------------------------------------------------------------------
NEUBERGER & BERMAN ALGER
------------------------------------------------- -----------------------------------------
LIMITED GOVERN- AMERICAN AMERICAN AMERICAN
MATURITY MENT SMALL MIDCAP AMERICAN LEVERAGED
COMBINED BOND GROWTH INCOME PARTNERS CAPITAL GROWTH GROWTH ALLCAP
-------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $134,683 $65 $34 $0 $5 $0 $3 $0 $0
Less: Valuation period deductions
- Note B (37,280) (4,624) (1,717) (2,366) (2,570) (2,496) (551) (2,242) (142)
-------- ------- ------ ------ ------ ------ ------- ------ -------
NET INVESTMENT INCOME 97,403 (4,559) (1,683) (2,366) (2,565) (2,496) (548) (2,242) (142)
-------- ------- ------ ------ ------ ------ ------- ------- -------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 76,547 8,399 4,077 2,729 10,213 19,457 3,402 1,513 (7,229)
Net unrealized gains (losses) on
investments 186,727 54,564 (1,928) 33,629 58,164 (57,427) 3,400 (1,664) 1,120
-------- ------- ------ ------ ------ ------- ------- ------- -------
Net realized and unrealized gains
(losses) on investments 263,274 62,963 2,149 36,358 68,377 (37,970) 6,802 (151) (6,109)
-------- ------- ------ ------ ------ ------- ------- ------- -------
NET INCREASE(DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS $360,677 $58,404 $466 $33,992 $65,812 ($40,466) $6,254 ($2,393) ($6,251)
======== ======= ====== ======= ======= ======== ====== ======= ========
</TABLE>
See the accompanying notes to these financial statements.
- --------------------------------------------------------------------------------
105
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
STATEMENT OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION> DIVISIONS
-------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 FIDELITY INVESTMENTS INVESCO VAN ECK
------------------------------------------- ----------------------------------- ---------------
GOLD
AND
INDUS- WORLD NATURAL
ASSET MONEY INDEX TOTAL TRIAL HIGH WIDE RE-
MANAGER GROWTH OVERSEAS MARKET 500 RETURN INCOME YIELD UTILITIES BALANCED SOURCES
------- ------ -------- ------- ------ ------ ------ ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $0 $0 $0 $78,541 $0 $3,093 $9,220 $43,135 $127 $416 $44
Less: Valuation period deductions
- Note B (257) (3,373) (2,080) (10,362) (2,406) (243) (567) (1,017) (36) (171) (60)
----- ------ ------ ------- ------ ------ ------ ------- ------- ---- ---
NET INVESTMENT INCOME (257) (3,373) (2,080) 68,179 (2,406) 2,850 8,653 42,118 91 245 (16)
----- ------ ------ ------- ------ ------ ------ ------- ------- ---- ---
REALIZED AND UNREALIZED GAINS
LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 632 13,932 2,684 0 11,592 2,380 1,156 1,237 15 (5) 363
----- ------ ------ ------- ------ ------ ------ ------- ------- ---- ---
Net unrealized gains (losses) on
investments 6,607 (11,822) 28,250 0 79,889 2,264 12,495 (22,224) 891 (62) 581
----- ------- ------ ------- ------ ------ ------ ------- ------- ---- ---
Net realized and unrealized gains
(losses) on investments 7,239 2,110 30,934 0 91,481 4,644 13,651 (20,987) 906 (67) 944
----- ------- ------ ------- ------ ------ ------ ------- ------- ---- ---
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS $6,982 ($1,263) $28,854 $68,179 $89,075 $7,494 $22,304 $21,131 $997 $178 $928
====== ======= ======= ======= ======= ====== ======= ======= ======= ==== ====
</TABLE>
See the accompanying notes to these financial statements.
- -------------------------------------------------------------------------------
106
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
STATEMENT OF OPERATIONS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
DIVISIONS
----------------------------------
FIDELITY INVESTMENTS
--------------------
COMBINED MONEY MARKET
-------- --------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $39 $39
Less: Valuation period deductions (5) (5)
--- ---
NET INVESTMENT INCOME 34 34
--- ---
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS --- ---
$34 $34
=== ===
</TABLE>
See the accompanying notes to these financial statements.
- --------------------------------------------------------------------------------
107
<PAGE>
<TABLE>
<CAPTION>
SECURITY LIFE SEPARATE ACCOUNT L1
STATEMENT OF CHANGES
IN NET ASSETS DIVISIONS
-------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 NEUBERGER & BERMAN ALGER
-------------------------------------------------------------------------------------------------------
LIMITED AMERICAN AMERICAN
MATURITY GOVERNMENT AMERICAN MIDCAP AMERICAN LEVERAGED
COMBINED BOND GROWTH INCOME PARTNERS SMALL CAPITAL GROWTH GROWTH ALLCAP
-------- -------- ------ ---------- -------- ------------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
OPERATIONS
Net investment income $97,403 ($4,559) ($1,683) ($2,366) ($2,565) ($2,496) ($548) ($2,242) ($142)
Net realized gains (losses)
on investments 76,547 8,399 4,077 2,729 10,213 19,457 3,402 1,513 (7,229)
Net unrealized gains (losses)
on investments 186,727 54,564 (1,928) 33,629 58,164 (57,427) 3,400 (1,664) 1,120
----------- ----------- -------- -------- -------- ---------- -------- -------- -------
INCREASE(DECREASE) IN NET
ASSETS FROM OPERATIONS 360,677 58,404 466 33,992 65,812 (40,466) 6,254 (2,393) (6,251)
----------- ----------- -------- -------- -------- ---------- -------- -------- -------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 13,329,581 4,133 13,771 12,086 9,562 224,681 18,375 9,493 3,155
Cost of insurance and
administrative expenses (515,616) (25,947) (23,846) (15,635) (28,681) (24,235) (8,062) (38,073) (2,121)
Net transfers among
divisions (including
the guaranteed interest
division in the general
account) 0 1,745,908 770,482 801,675 917,184 963,613 257,593 866,852 42,398
Other 19,851 1,010 2,284 351 2,744 4,392 927 2,133 (221)
----------- ----------- -------- -------- -------- ---------- -------- -------- -------
TOTAL INCREASE
(DECREASE) FROM
PRINCIPAL OPERATIONS 12,833,816 1,725,104 762,691 798,477 900,809 1,168,451 268,833 840,405 43,211
----------- ----------- -------- -------- -------- ---------- -------- -------- -------
TOTAL INCREASE IN NET
ASSETS 13,194,493 1,783,508 763,157 832,469 966,621 1,127,985 275,087 838,012 36,960
Net assets at beginning
of year
32,041 0 0 0 0 0 0 0 0
NET ASSETS AT END OF
YEAR $13,226,534 $1,783,508 $763,157 $832,469 $966,621 $1,127,985 $275,087 $838,012 $36,960
=========== ========== ======== ======== ======== ========== ======== ======== =======
</TABLE>
See the accompanying notes to these financial statements.
- --------------------------------------------------------------------------------
108
<PAGE>
<TABLE>
<CAPTION>
SECURITY LIFE SEPARATE ACCOUNT L1
STATEMENT OF CHANGES IN NET ASSETS DIVISIONS
(CONTINUED)
-------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 FIDELITY INVESTMENTS INVESCO VAN ECK
----------------------------------------- ------------------------------------ ----------------------
Gold and
Asset Money Index Total Industrial High Worldwide Natural
Manager Growth Overseas Market 500 Return Income Yield Utilities Balance Resources
---------------------------------------- ------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
OPERATIONS
Net investment income ($257) ($3,373) ($2,080) $68,179 ($2,406) $2,850 $8,653 $42,118 $91 $245 ($16)
Net realized gains (losses)
on investments 632 13,932 2,684 0 11,592 2,380 1,156 1,237 15 (5) 363
Net unrealized gains (losses)
on investments
6,607 (11,822) 28,250 0 79,889 2,264 12,495 (22,224) 891 (62) 581
---------------------------------------- ------------------------------------- -----------------------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS 6,982 (1,263) 28,854 68,179 89,075 7,494 22,304 21,131 997 178 928
---------------------------------------- ------------------------------------- -----------------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 18,939 37,113 24,03 712,848,110 67,827 3,844 12,548 8,941 2,701 6,352 3,913
Cost of insurance and
administrative expenses (5,716) (45,365) (17,969) (242,041) (16,704) (4,401) (5,390) (6,776) (1,290) (2,360) (1,004)
Net transfers among
divisions (including the
guaranteed interest
division in the general
account) 107,141 1,355,450 935,792 (10,830,183) 1,063,282 145,676 230,040 522,094 17,934 72,661 14,408
Other 145 173 (16) 4,218 542 950 137 85 7 (19) 9
---------------------------------------- ------------------------------------- -----------------------
TOTAL INCREASE
(DECREASE)
FROM PRINCIPAL
OPERATIONS 120,509 1,347,371 941,844 1,780,104 1,114,947 146,069 237,335 524,344 19,352 76,634 17,326
---------------------------------------- ------------------------------------- -----------------------
TOTAL INCREASE IN
NET ASSETS 127,491 1,346,108 970,698 1,848,283 1,204,022 153,563 259,639 545,475 20,349 76,812 18,254
Net assets at beginning
of year 0 0 0 32,041 0 0 0 0 0 0 0
---------------------------------------- ------------------------------------- -----------------------
NET ASSETS AT END
OF YEAR $127,491 $1,346,108 $970,698 $1,880,324 $1,204,022 $153,563 $259,639 $545,475 $20,349 $76,812 $18,254
======================================== ===================================== =======================
</TABLE>
See the accompanying notes to these financial statements.
- --------------------------------------------------------------------------------
109
<PAGE>
<TABLE>
<CAPTION>
SECURITY LIFE SEPARATE ACCOUNT L1
STATEMENT OF CHANGES IN NET ASSETS
DECEMBER 31, 1994 DIVISIONS
----------------------------
INCREASE (DECREASE) IN NET ASSETS FIDELITY
INVESTMENTS
Combined Money Market
OPERATIONS -------------- -------------
<S> <C> <C>
Net investment income $34 $34
-------------- -------------
INCREASE IN NET ASSETS FROM OPERATIONS 34 34
-------------- -------------
CHANGES FROM PRINCIPAL TRANSACTIONS
Net premiums 37,065 37,065
Cost of insurance and administrative
expenses (5,058) (5,058)
-------------- -------------
TOTAL INCREASE FROM PRINCIPAL
TRANSACTIONS 32,007 32,007
-------------- -------------
TOTAL INCREASE IN NET ASSETS 32,041 32,041
Net assets at beginning of year 0 0
-------------- -------------
NET ASSETS AT END OF YEAR $32,041 $32,041
============== =============
</TABLE>
See the accompanying notes to these financial statements.
- --------------------------------------------------------------------------------
110
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE A - ORGANIZATION
The Security Life Separate Account L1 (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 was inactive
prior to December 22, 1994, except for matters relating to its organization as a
unit investment trust registered with the Securities and Exchange Commission
under the Investment Company Act of 1940.
The Separate Account supports the operations of the FirstLine Variable Universal
Life (FirstLine) policies offered by the Company. The Separate Account may be
used to support other variable life policies as they are offered by the Company.
The assets of the Separate Account are the property of the Company. However,
the portion of the Separate Account's assets attributable to the policies will
not be chargeable with liabilities arising out of any other operations of the
Company.
The Separate Account currently consists of nineteen investment divisions
available to the policyholders, each of which invests in an independently
managed mutual fund portfolio (Fund). The Funds are as follows:
Portfolio Managers/Portfolios (Funds)
Neuberger & Berman
Neuberger & Berman Limited Maturity Bond Portfolio
Neuberger & Berman Growth Portfolio
Neuberger & Berman Government Income Portfolio
Neuberger & Berman Partners Portfolio
- --------------------------------------------------------------------------------
111
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE A - ORGANIZATION (CONTINUED)
Fred Alger Management, Inc.
Alger American Small Capitalization Portfolio
Alger American MidCap Growth Portfolio
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Fidelity Management & Research Company
Fidelity Investments Growth Portfolio
Fidelity Investments Overseas Portfolio
Fidelity Investments Money Market Portfolio
Fidelity Investments Asset Manager Portfolio
Fidelity Investments Index 500 Portfolio
INVESCO Funds Group, Inc.
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 Worldwide Balanced Portfolio
Van Eck Gold and Natural Resources Portfolio
The FirstLine policies allow the policyholders to specify the allocation of
their net premium to the various Funds. They can also transfer their account
values among the Funds. The FirstLine product also provides the policyholders
the option to allocate their net premiums, or to transfer their account values,
to a Guaranteed Interest Division (GID). The GID guarantees a rate of interest
to the policyholder and it is not variable in nature. Therefore, it is not
included in these Separate Account statements.
- -------------------------------------------------------------------------------
112
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of the Separate Account have been prepared
on the basis of generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with 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:
SECURITY VALUATION - The investment 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.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - The investment in shares
of the Funds are accounted for on the date the order to buy or sell is executed
(trade date). Dividend income and distributions of capital gains are recorded
on the ex-dividend date. Realized gains and losses from 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.
- -------------------------------------------------------------------------------
113
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For FirstLine policies, a daily deduction, at an annual rate of .75% 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, 1995 were $37,280.
POLICYHOLDER RESERVES - Policyholder reserves are recorded in the Separate
Account at the aggregate account values of the policyholders invested in the
Separate Account divisions. To the extent that benefits to be paid to the
policyholders exceed their account values, the Company will contribute
additional funds to the benefit proceeds.
NOTE C - INVESTMENTS
Fund shares are purchased at net asset value with net premiums (premium
payments, less sales and tax loads charged by the Company) and divisional
transfers from other divisions. Fund shares are redeemed for the payment of
benefits, for surrenders, for transfers to other divisions, and for charges by
the Company for certain cost of insurance & administrative charges. The cost of
insurance and administrative charges were $515,616 for the year ended December
31, 1995. Distributions made by the Funds are reinvested in the Funds.
- --------------------------------------------------------------------------------
114
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE C - INVESTMENTS (CONTINUED)
The following is a summary of fund shares owned as of December 31, 1995.
<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 121,218.627 $14.71 $1,783,126 $ 1,728,562
Growth 29,533.890 25.86 763,600 765,528
Government Income 76,144.619 10.93 832,261 798,632
Partners 72,995.960 13.23 965,737 907,573
Fred Alger Management, Inc.:
American Small Capital 28,641.801 39.41 1,128,775 1,186,202
American MidCap Growth 14,179.178 19.44 275,639 272,239
American Growth 26,933.111 31.16 839,236 840,900
American Leveraged AllCap 2,141.851 17.43 37,332 36,212
Fidelity Management & Research Co.:
Asset Manager 8,089.073 15.79 127,724 121,117
Growth 46,193.461 29.20 1,348,847 1,360,669
Overseas 56,983.877 17.05 971,426 943,176
Money Market 1,801,734.580 1.00 1,801,755 1,801,755
Index 500 15,901.893 75.71 1,203,939 1,124,050
INVESCO Funds Group, Inc.:
Total Return 12,631.624 12.14 153,331 151,067
Industrial Income 20,710.894 12.58 260,518 248,023
High Yield 49,413.305 11.04 545,523 567,747
Utilities 1,880.274 10.84 20,382 19,491
Van Eck Investment Trust:
Worldwide Balanced 7,703.509 9.99 76,996 77,058
Gold & Natural Resources 1,268.856 14.42 18,298 17,717
----------- -----------
Totals $13,154,445 $12,967,718
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
115
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE C - INVESTMENTS (CONTINUED)
For the year ended December 31, 1995, the aggregate cost of purchases (plus
reinvested dividends) and the proceeds from sales of investments were
$26,098,897 and $13,239,772, respectively.
NOTE D - OTHER POLICY DEDUCTIONS
The FirstLine product provides for certain deductions for sales and tax loads
from premium payments received from the policyholders and for surrender charges
and taxes from amounts paid to policyholders. Such deductions are taken before
the purchase of divisional units or after the redemption of divisional units of
the Separate Account. Such deductions are not included in the Separate Account
financial statements.
NOTE E - POLICY LOANS
The Firstline Policies allow the policyholders to borrow against their policies
by using it as collateral for a loan. At the time they borrow against their
policy an amount equal to the loan amount is transferred from the Separate
Account divisions to a Loan Division to secure the loan. As payments are made on
the policy loan, amounts are transferred back from the Loan Division to the
Separate Account divisions. Interest is credited to the balance in the Loan
Division at a fixed rate. The Loan Division is not variable in nature and is
not included in these Separate Account statements.
NOTE F - FEDERAL INCOME TAXES
The Separate Account is not taxed separately because the operations of the
Separate Account are part of the total operations of the Company. The Company
is taxed as a life insurance company under the Internal Revenue Code. The
Separate Account is not taxed as a "Regulated Investment Company" under
subchapter "M" of the Internal Revenue Code.
- -------------------------------------------------------------------------------
116
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE G - SUMMARY OF CHANGES IN UNITS
The following schedule summarizes the change in divisional units for the year
ended December 31, 1995:
<TABLE>
<CAPTION>
DIVISIONAL UNITS
------------------------------------------------------------------
INCREASE
OUTSTANDING INCREASE (DECREASE) (DECREASE)
AT FOR FOR FOR COI OUTSTANDING
BEGINNING PAYMENTS DIVISIONAL AND ADMIN. AT END
DIVISION OF YEAR RECEIVED TRANSFERS CHARGES OF YEAR
- --------------------------- ----------- -------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Neuberger & Berman:
Limited Maturity Bond 0.000 382.961 164,031.781 (2,405.164) 162,009.578
Growth 0.000 1,107.568 60,922.448 (1,867.909) 60,162.107
Government Income 0.000 1,154.992 77,524.888 (1,492.174) 77,187.706
Partners 0.000 777.847 75,027.133 (2,269.692) 73,535.288
Fred Alger Management, Inc.:
American Small Capital 0.000 15,032.912 66,694.332 (1,699.978) 80,027.266
American MidCap Growth 0.000 1,336.898 18,942.171 (586.209) 19,692.860
American Growth 0.000 795.728 72,142.081 (3,132.576) 69,805.233
American Leveraged AllCap 0.000 217.078 2,424.066 (146.413) 2,494.731
Fidelity Management & Research Co.:
Asset Manager 0.000 1,811.445 10,363.454 (547.811) 11,627.088
Growth 0.000 2,796.390 102,856.769 (3,404.171) 102,248.988
Overseas 0.000 2,389.778 93,305.776 (1,788.821) 93,906.733
Money Market 3,200.637 1,244,243.280 (1,045,323.517) (23,467.241) 178,653.159
Index 500 0.000 5,636.625 87,615.828 (1,349.426) 91,903.027
INVESCO Funds Group, Inc.:
Total Return 0.000 329.342 12,652.423 (379.101) 12,602.664
Industrial Income 0.000 1,040.189 19,427.874 (441.961) 20,026.102
High Yield 0.000 766.963 45,527.967 (586.572) 45,708.358
Utilities 0.000 261.166 1,744.166 (125.473) 1,879.859
Van Eck Investment Trust:
Worldwide Balanced 0.000 639.571 7,336.953 (237.250) 7,739.274
Gold & Natural Resources 0.000 384.059 1,482.141 (100.287) 1,765.913
</TABLE>
- --------------------------------------------------------------------------------
117
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
The following schedule summarizes the change in divisional units for year ended
December 31, 1994:
<TABLE>
<CAPTION>
DIVISIONAL UNITS
-------------------------------------------------------------
INCREASE
OUTSTANDING INCREASE (DECREASE) (DECREASE)
AT FOR FOR FOR COI OUTSTANDING
BEGINNING PAYMENTS DIVISIONAL AND ADMIN AT END
DIVISION OF YEAR RECEIVED TRANSFERS CHARGES OF YEAR
- --------------- ------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Fidelity Management & Research Co.:
Money Market 0.000 3,706.444 0.000 (505.807) 3,200.637
</TABLE>
- -------------------------------------------------------------------------------
118
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE H - NET ASSETS
Net assets at December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
ACCUMULATED NET
NET REALIZED UNREALIZED
ACCUMULATED GAINS GAINS
PRINCIPAL INVESTMENT (LOSSES) ON (LOSSES) ON
DIVISION TRANSACTIONS INCOME INVESTMENTS INVESTMENTS NET ASSETS
-------- ---------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Neuberger & Berman:
Limited Maturity Bond $1,725,104 ($4,559) $ 8,399 $ 54,564 $1,783,508
Growth 762,691 (1,683) 4,077 (1,928) 763,157
Government Income 798,477 (2,366) 2,729 33,629 832,469
Partners 900,809 (2,565) 10,213 58,164 966,621
Fred Alger Management, Inc.:
American Small Capital 1,168,451 (2,496) 19,457 (57,427) 1,127,985
American MidCap Growth 268,833 (548) 3,402 3,400 275,087
American Growth 840,405 (2,242) 1,513 (1,664) 838,012
American Leveraged AllCap 43,211 (142) (7,229) 1,120 36,960
Fidelity Management & Research Co.:
Asset Manager 120,509 (257) 632 6,607 127,491
Growth 1,347,371 (3,373) 13,932 (11,822) 1,346,108
Overseas 941,844 (2,080) 2,684 28,250 970,698
Money Market 1,812,111 68,213 0 0 1,880,324
Index 500 1,114,947 (2,406) 11,592 79,889 1,204,022
INVESCO Funds Group, Inc.:
Total Return 146,069 2,850 2,380 2,264 153,563
Industrial Income 237,335 8,653 1,156 12,495 259,639
High Yield 524,344 42,118 1,237 (22,224) 545,475
Utilities 19,352 91 15 891 20,349
Van Eck Investment Trust:
Worldwide Balanced 76,634 245 (5) (62) 76,812
Gold & Natural Resources 17,326 (16) 363 581 18,254
----------- ------- ------- -------- -----------
Totals $12,865,823 $97,437 $76,547 $186,727 $13,226,534
=========== ======= ======= ======== ===========
</TABLE>
- -------------------------------------------------------------------------------
119
<PAGE>
APPENDIX A
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
MALE NONSMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
<S> <C> <C> <C> <C> <C> <C> <C>
0 12.574 25 6.095 50 2.671 75 1.396
1 12.681 26 5.904 51 2.589 76 1.372
2 12.341 27 5.717 52 2.509 77 1.349
3 11.996 28 5.533 53 2.433 78 1.328
4 11.655 29 5.354 54 2.360 79 1.307
5 11.316 30 5.179 55 2.290 80 1.288
6 10.979 31 5.008 56 2.223 81 1.270
7 10.644 32 4.843 57 2.159 82 1.253
8 10.311 33 4.682 58 2.097 83 1.236
9 9.982 34 4.527 59 2.038 84 1.221
10 9.660 35 4.376 60 1.982 85 1.207
11 9.345 36 4.231 61 1.928 86 1.195
12 9.041 37 4.091 62 1.877 87 1.183
13 8.750 38 3.955 63 1.828 88 1.172
14 8.476 39 3.825 64 1.781 89 1.161
15 8.218 40 3.699 65 1.736 90 1.151
16 7.973 41 3.577 66 1.694 91 1.141
17 7.740 42 3.461 67 1.654 92 1.131
18 7.517 43 3.348 68 1.615 93 1.120
19 7.301 44 3.240 69 1.579 94 1.109
20 7.091 45 3.136 70 1.544 95 1.097
21 6.886 46 3.036 71 1.511 96 1.083
22 6.684 47 2.939 72 1.480 97 1.069
23 6.484 48 2.847 73 1.450 98 1.054
24 6.288 49 2.757 74 1.422 99 1.040
100 1.000
</TABLE>
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
- --------------------------------------------------------------------------------
Strategic Advantage 120
<PAGE>
APPENDIX A (CONT.)
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
MALE SMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
<S> <C> <C> <C> <C> <C> <C> <C>
0 10.511 25 4.963 50 2.267 75 1.330
1 10.508 26 4.811 51 2.205 76 1.312
2 10.203 27 4.661 52 2.145 77 1.295
3 9.897 28 4.515 53 2.088 78 1.280
4 9.597 29 4.371 54 2.034 79 1.265
5 9.301 30 4.231 55 1.982 80 1.251
6 9.007 31 4.094 56 1.933 81 1.238
7 8.718 32 3.962 57 1.886 82 1.225
8 8.433 33 3.834 58 1.841 83 1.213
9 8.153 34 3.710 59 1.798 84 1.202
10 7.879 35 3.590 60 1.757 85 1.191
11 7.613 36 3.475 61 1.717 86 1.182
12 7.356 37 3.363 62 1.680 87 1.173
13 7.109 38 3.256 63 1.644 88 1.164
14 6.876 39 3.153 64 1.610 89 1.155
15 6.654 40 3.054 65 1.577 90 1.147
16 6.456 41 2.959 66 1.547 91 1.138
17 6.269 42 2.869 67 1.518 92 1.129
18 6.091 43 2.782 68 1.490 93 1.120
19 5.919 44 2.698 69 1.464 94 1.109
20 5.752 45 2.619 70 1.438 95 1.097
21 5.590 46 2.542 71 1.414 96 1.083
22 5.430 47 2.469 72 1.391 97 1.069
23 5.272 48 2.399 73 1.369 98 1.054
24 5.117 49 2.331 74 1.349 99 1.040
100 1.000
</TABLE>
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
- --------------------------------------------------------------------------------
Strategic Advantage 121
<PAGE>
APPENDIX A (CONT.)
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
FEMALE NONSMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
<S> <C> <C> <C> <C> <C> <C> <C>
0 14.687 25 6.861 50 3.013 75 1.493
1 14.680 26 6.638 51 2.920 76 1.461
2 14.279 27 6.421 52 2.831 77 1.430
3 13.873 28 6.211 53 2.745 78 1.401
4 13.471 29 6.007 54 2.662 79 1.373
5 13.073 30 5.809 55 2.583 80 1.347
6 12.682 31 5.618 56 2.507 81 1.322
7 12.294 32 5.432 57 2.433 82 1.299
8 11.915 33 5.252 58 2.362 83 1.278
9 11.541 34 5.078 59 2.293 84 1.257
10 11.175 35 4.910 60 2.226 85 1.239
11 10.817 36 4.747 61 2.162 86 1.221
12 10.469 37 4.590 62 2.100 87 1.205
13 10.132 38 4.439 63 2.040 88 1.190
14 9.807 39 4.294 64 1.983 89 1.176
15 9.494 40 4.154 65 1.928 90 1.163
16 9.192 41 4.019 66 1.876 91 1.150
17 8.899 42 3.890 67 1.826 92 1.137
18 8.617 43 3.765 68 1.778 93 1.125
19 8.344 44 3.645 69 1.732 94 1.112
20 8.078 45 3.530 70 1.688 95 1.098
21 7.821 46 3.419 71 1.645 96 1.084
22 7.571 47 3.312 72 1.604 97 1.069
23 7.327 48 3.208 73 1.565 98 1.054
24 7.091 49 3.109 74 1.528 99 1.040
100 1.000
</TABLE>
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
- --------------------------------------------------------------------------------
Strategic Advantage 122
<PAGE>
APPENDIX A (CONT.)
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
FEMALE SMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
<S> <C> <C> <C> <C> <C> <C> <C>
0 13.162 25 6.032 50 2.728 75 1.451
1 13.099 26 5.836 51 2.651 76 1.423
2 12.723 27 5.647 52 2.578 77 1.396
3 12.346 28 5.463 53 2.507 78 1.371
4 11.974 29 5.285 54 2.438 79 1.347
5 11.608 30 5.113 55 2.373 80 1.325
6 11.248 31 4.946 56 2.310 81 1.303
7 10.894 32 4.785 57 2.249 82 1.283
8 10.547 33 4.629 58 2.190 83 1.263
9 10.207 34 4.478 59 2.132 84 1.246
10 9.874 35 4.332 60 2.076 85 1.229
11 9.550 36 4.192 61 2.022 86 1.214
12 9.234 37 4.056 62 1.969 87 1.199
13 8.930 38 3.926 63 1.919 88 1.186
14 8.636 39 3.801 64 1.870 89 1.173
15 8.352 40 3.682 65 1.824 90 1.161
16 8.085 41 3.568 66 1.780 91 1.149
17 7.826 42 3.459 67 1.738 92 1.137
18 7.577 43 3.354 68 1.697 93 1.125
19 7.336 44 3.254 69 1.658 94 1.112
20 7.102 45 3.158 70 1.620 95 1.098
21 6.876 46 3.065 71 1.583 96 1.084
22 6.655 47 2.976 72 1.547 97 1.069
23 6.441 48 2.890 73 1.513 98 1.054
24 6.234 49 2.808 74 1.481 99 1.040
100 1.000
</TABLE>
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
- --------------------------------------------------------------------------------
Strategic Advantage 123
<PAGE>
APPENDIX A (CONT.)
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
UNISEX 1 NONSMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
<S> <C> <C> <C> <C> <C> <C> <C>
0 12.574 25 6.095 50 2.671 75 1.396
1 12.681 26 5.904 51 2.589 76 1.372
2 12.341 27 5.717 52 2.509 77 1.349
3 11.996 28 5.533 53 2.433 78 1.328
4 11.655 29 5.354 54 2.360 79 1.307
5 11.316 30 5.179 55 2.290 80 1.288
6 10.979 31 5.008 56 2.223 81 1.270
7 10.644 32 4.843 57 2.159 82 1.253
8 10.311 33 4.682 58 2.097 83 1.236
9 9.982 34 4.527 59 2.038 84 1.221
10 9.660 35 4.376 60 1.982 85 1.207
11 9.345 36 4.231 61 1.928 86 1.195
12 9.041 37 4.091 62 1.877 87 1.183
13 8.750 38 3.955 63 1.828 88 1.172
14 8.476 39 3.825 64 1.781 89 1.161
15 8.218 40 3.699 65 1.736 90 1.151
16 7.973 41 3.577 66 1.694 91 1.141
17 7.740 42 3.461 67 1.654 92 1.131
18 7.517 43 3.348 68 1.615 93 1.120
19 7.301 44 3.240 69 1.579 94 1.109
20 7.091 45 3.136 70 1.544 95 1.097
21 6.886 46 3.036 71 1.511 96 1.083
22 6.684 47 2.939 72 1.480 97 1.069
23 6.484 48 2.847 73 1.450 98 1.054
24 6.288 49 2.757 74 1.422 99 1.040
100 1.000
</TABLE>
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
- --------------------------------------------------------------------------------
Strategic Advantage 124
<PAGE>
APPENDIX A (CONT.)
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
UNISEX 1 SMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
<S> <C> <C> <C> <C> <C> <C> <C>
0 10.511 25 4.963 50 2.267 75 1.330
1 10.508 26 4.811 51 2.205 76 1.312
2 10.203 27 4.661 52 2.145 77 1.295
3 9.897 28 4.515 53 2.088 78 1.280
4 9.597 29 4.371 54 2.034 79 1.265
5 9.301 30 4.231 55 1.982 80 1.251
6 9.007 31 4.094 56 1.933 81 1.238
7 8.718 32 3.962 57 1.886 82 1.225
8 8.433 33 3.834 58 1.841 83 1.213
9 8.153 34 3.710 59 1.798 84 1.202
10 7.879 35 3.590 60 1.757 85 1.191
11 7.613 36 3.475 61 1.717 86 1.182
12 7.356 37 3.363 62 1.680 87 1.173
13 7.109 38 3.256 63 1.644 88 1.164
14 6.876 39 3.153 64 1.610 89 1.155
15 6.654 40 3.054 65 1.577 90 1.147
16 6.456 41 2.959 66 1.547 91 1.138
17 6.269 42 2.869 67 1.518 92 1.129
18 6.091 43 2.782 68 1.490 93 1.120
19 5.919 44 2.698 69 1.464 94 1.109
20 5.752 45 2.619 70 1.438 95 1.097
21 5.590 46 2.542 71 1.414 96 1.083
22 5.430 47 2.469 72 1.391 97 1.069
23 5.272 48 2.399 73 1.369 98 1.054
24 5.117 49 2.331 74 1.349 99 1.040
100 1.000
</TABLE>
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
- --------------------------------------------------------------------------------
Strategic Advantage 125
<PAGE>
APPENDIX A (CONT.)
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
UNISEX 2 NONSMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
<S> <C> <C> <C> <C> <C> <C> <C>
0 12.943 25 6.234 50 2.733 75 1.418
1 13.032 26 6.037 51 2.649 76 1.392
2 12.683 27 5.845 52 2.568 77 1.368
3 12.327 28 5.657 53 2.490 78 1.345
4 11.975 29 5.473 54 2.415 79 1.323
5 11.626 30 5.294 55 2.343 80 1.303
6 11.278 31 5.120 56 2.275 81 1.283
7 10.934 32 4.950 57 2.209 82 1.265
8 10.593 33 4.786 58 2.146 83 1.247
9 10.256 34 4.627 59 2.085 84 1.231
10 9.926 35 4.474 60 2.027 85 1.216
11 9.604 36 4.325 61 1.972 86 1.202
12 9.292 37 4.182 62 1.918 87 1.190
13 8.994 38 4.043 63 1.868 88 1.178
14 8.710 39 3.910 64 1.819 89 1.166
15 8.443 40 3.782 65 1.773 90 1.155
16 8.188 41 3.658 66 1.729 91 1.144
17 7.945 42 3.539 67 1.687 92 1.133
18 7.712 43 3.424 68 1.647 93 1.122
19 7.487 44 3.314 69 1.609 94 1.110
20 7.267 45 3.208 70 1.573 95 1.097
21 7.053 46 3.106 71 1.538 96 1.084
22 6.843 47 3.007 72 1.506 97 1.069
23 6.637 48 2.912 73 1.475 98 1.054
24 6.433 49 2.821 74 1.445 99 1.040
100 1.000
</TABLE>
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
- --------------------------------------------------------------------------------
Strategic Advantage 126
<PAGE>
APPENDIX A (CONT.)
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
UNISEX 2 SMOKER
<TABLE>
<CAPTION>
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
<S> <C> <C> <C> <C> <C> <C> <C>
0 10.942 25 5.143 50 2.347 75 1.361
1 10.931 26 4.984 51 2.282 76 1.341
2 10.616 27 4.828 52 2.221 77 1.323
3 10.298 28 4.675 53 2.162 78 1.306
4 9.985 29 4.526 54 2.105 79 1.289
5 9.677 30 4.380 55 2.052 80 1.274
6 9.373 31 4.239 56 2.000 81 1.259
7 9.072 32 4.102 57 1.951 82 1.244
8 8.777 33 3.969 58 1.904 83 1.230
9 8.487 34 3.841 59 1.859 84 1.217
10 8.203 35 3.717 60 1.816 85 1.205
11 7.927 36 3.597 61 1.774 86 1.194
12 7.660 37 3.481 62 1.735 87 1.183
13 7.405 38 3.371 63 1.697 88 1.173
14 7.161 39 3.264 64 1.660 89 1.163
15 6.930 40 3.162 65 1.626 90 1.153
16 6.721 41 3.064 66 1.594 91 1.143
17 6.523 42 2.970 67 1.563 92 1.133
18 6.334 43 2.880 68 1.534 93 1.122
19 6.152 44 2.794 69 1.505 94 1.110
20 5.975 45 2.711 70 1.478 95 1.097
21 5.803 46 2.632 71 1.452 96 1.084
22 5.634 47 2.556 72 1.427 97 1.069
23 5.468 48 2.484 73 1.404 98 1.054
24 5.305 49 2.414 74 1.382 99 1.040
100 1.000
</TABLE>
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
- --------------------------------------------------------------------------------
Strategic Advantage 127
<PAGE>
APPENDIX B
TABLES OF DEATH BENEFITS BASED ON PERCENTAGE OF ACCOUNT VALUE
For Policies Tested under the Guideline Premium/Cash Value Corridor Test
<TABLE>
<CAPTION>
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
<S> <C> <C> <C> <C> <C> <C> <C>
0 2.50 25 2.50 50 1.85 75 1.05
1 2.50 26 2.50 51 1.78 76 1.05
2 2.50 27 2.50 52 1.71 77 1.05
3 2.50 28 2.50 53 1.64 78 1.05
4 2.50 29 2.50 54 1.57 79 1.05
5 2.50 30 2.50 55 1.50 80 1.05
6 2.50 31 2.50 56 1.46 81 1.05
7 2.50 32 2.50 57 1.42 82 1.05
8 2.50 33 2.50 58 1.38 83 1.05
9 2.50 34 2.50 59 1.34 84 1.05
10 2.50 35 2.50 60 1.30 85 1.05
11 2.50 36 2.50 61 1.28 86 1.05
12 2.50 37 2.50 62 1.26 87 1.05
13 2.50 38 2.50 63 1.24 88 1.05
14 2.50 39 2.50 64 1.22 89 1.05
15 2.50 40 2.50 65 1.20 90 1.05
16 2.50 41 2.43 66 1.19 91 1.04
17 2.50 42 2.36 67 1.18 92 1.03
18 2.50 43 2.29 68 1.17 93 1.02
19 2.50 44 2.22 69 1.16 94 1.01
20 2.50 45 2.15 70 1.15 95 1.00
21 2.50 46 2.09 71 1.13 96 1.00
22 2.50 47 2.03 72 1.11 97 1.00
23 2.50 48 1.97 73 1.09 98 1.00
24 2.50 49 1.91 74 1.07 99 1.00
100 1.00
</TABLE>
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
- --------------------------------------------------------------------------------
Strategic Advantage 128
<PAGE>
APPENDIX C
PERFORMANCE INFORMATION
The following hypothetical illustrations demonstrate how the actual investment
experience of each Division of the Variable Account affects the Cash Surrender
Value, Account Value and Death Benefit of a Policy. These hypothetical
illustrations are based on the actual historical return of each Portfolio as if
a Policy had been issued on the date indicated. Past performance is no
indication of future performance. Each Portfolio's Annual Total Return return is
based on the total return calculated for each fiscal year. These Annual Total
Return figures reflect the Portfolio's management fees and other operating
expenses but do not reflect the Policy level or Variable Account asset based
charges and deductions, which if reflected, would result in lower total return
figures than those shown. No hypothetical illustrations are return is shown for
the Alger American Leveraged AllCap Portfolio or the Van Eck Balanced Fund
because these Portfolios have been Portfolios in existence for less than one
full fiscal year.
The illustrations are based on the payment of a $5,750 annual premium, paid at
the beginning of each year, for a hypothetical fully-underwritten Policy with a
$300,000 face amount, the Cash Value Accumulation Test, death benefit Option 1,
issued to a standard, nonsmoker male, Age 45. In each case, it is assumed that
all premiums are allocated to the Division illustrated for the period shown. The
benefits are calculated for a specific date. The amount and timing of Premium
Payments and the use of other Policy features, such as Policy Loans, would
affect individual Policy benefits.
The amounts shown for the Cash Surrender Values, Account Values and Death
Benefits take into account the charges against premiums, current cost of
insurance and monthly deductions, the daily charge against the Variable Account
for mortality and expense risks, and each Portfolio's charges and expenses. See
CHARGES, DEDUCTIONS AND REFUNDS, page 34. This prospectus also contains
illustrations based on assumed rates of return. See ILLUSTRATIONS OF DEATH
BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND ACCUMULATED PREMIUMS, page
50.
- --------------------------------------------------------------------------------
Strategic Advantage 129
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
<TABLE>
<CAPTION>
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $ 5,750
- --------------------------------------------------------------------------------
NEUBERGER & BERMAN AMT LIMITED MATURITY BOND PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/86 13.83% 5,210 4,922 300,000
12/31/87 2.89% 9,353 9,209 300,000
12/31/88 7.17% 13,980 13,980 300,000
12/31/89 10.77% 19,627 19,627 300,000
12/31/90 8.32% 25,252 25,252 300,000
12/31/91 11.34% 32,636 32,636 300,000
12/31/92 5.18% 38,515 38,515 300,000
12/31/93 6.63% 45,241 45,241 300,000
12/31/94 (0.15)% 48,944 48,944 300,000
12/31/95 10.94% 58,463 58,463 300,000
NEUBERGER & BERMAN AMT GOVERNMENT INCOME PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 11.76 5,111 4,823 300,000
NEUBERGER & BERMAN AMT GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/86 14.94% 5,259 4,971 300,000
12/31/87 (4.89)% 8,669 8,525 300,000
12/31/88 25.97% 15,675 15,675 300,000
12/31/89 29.47% 25,235 25,235 300,000
12/31/90 (8.19)% 26,440 26,440 300,000
12/31/91 29.73% 39,662 39,662 300,000
12/31/92 9.54% 47,804 47,804 300,000
12/31/93 6.79% 55,196 55,196 300,000
12/31/94 (4.99)% 55,969 55,969 300,000
12/31/95 31.73% 78,787 78,787 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 129.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable
Account asset based charges and deductions, which if reflected, would result
in lower total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 130
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
<TABLE>
<CAPTION>
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $ 5,750
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEUBERGER & BERMAN AMT PARTNERS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 36.47% 6,260 5,972 300,000
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/89 64.48% 7,568 7,280 300,000
12/31/90 8.71% 12,451 12,307 300,000
12/31/91 57.54% 25,695 25,695 300,000
12/31/92 3.55% 30,392 30,392 300,000
12/31/93 13.28% 38,585 38,585 300,000
12/31/94 (4.38)% 40,650 40,650 300,000
12/31/95 44.31% 64,597 64,597 300,000
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/94 (1.54)% 4,495 4,207 300,000
12/31/95 44.45% 12,244 12,100 300,000
ALGER AMERICAN GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 4.14% 4,758 4,470 300,000
12/31/91 40.39% 12,256 12,112 300,000
12/31/92 12.38% 17,936 17,936 300,000
12/31/93 22.47% 26,593 26,593 300,000
12/31/94 1.45% 30,651 30,651 300,000
12/31/95 36.37% 47,446 47,446 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 129.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable
Account asset based charges and deductions, which if reflected, would result
in lower total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 131
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
<TABLE>
<CAPTION>
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $ 5,750
- --------------------------------------------------------------------------------
FIDELITY VIP GROWTH PORTFOLIO
<S> <C> <C> <C> <C>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/87 3.66% 4,736 4,448 300,000
12/31/88 15.58% 10,002 9,858 300,000
12/31/89 31.51% 18,137 18,137 300,000
12/31/90 (11.73)% 19,175 19,175 300,000
12/31/91 45.51% 33,494 33,494 300,000
12/31/92 9.32% 41,010 41,010 300,000
12/31/93 19.37% 53,751 53,751 300,000
12/31/94 (0.02)% 57,563 57,563 300,000
12/31/95 35.36% 83,220 83,220 300,000
FIDELITY VIP OVERSEAS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/88 8.13% 4,943 4,655 300,000
12/31/89 26.28% 11,220 11,076 300,000
12/31/90 (1.67)% 14,608 14,608 300,000
12/31/91 8.00% 19,797 19,797 300,000
12/31/92 (10.72)% 20,858 20,858 300,000
12/31/93 37.35% 34,391 34,391 300,000
12/31/94 1.72% 39,007 39,007 300,000
12/31/95 9.68% 47,091 47,091 300,000
FIDELITY VIP MONEY MARKET PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/86 6.70% 4,876 4,588 300,000
12/31/87 6.44% 9,334 9,190 300,000
12/31/88 7.39% 13,989 13,989 300,000
12/31/89 9.12% 19,335 19,335 300,000
12/31/90 8.04% 24,871 24,871 300,000
12/31/91 6.09% 30,667 30,667 300,000
12/31/92 3.90% 36,001 36,001 300,000
12/31/93 3.23% 41,192 41,192 300,000
12/31/94 4.25% 46,922 46,922 300,000
12/31/95 5.87% 53,624 53,624 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 129.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable
Account asset based charges and deductions, which if reflected, would result
in lower total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 132
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
<TABLE>
<CAPTION>
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $ 5,750
- --------------------------------------------------------------------------------
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/90 6.72% 4,877 4,589 300,000
12/31/91 22.56% 10,799 10,655 300,000
12/31/92 11.71% 16,205 16,205 300,000
12/31/93 21.23% 24,227 24,227 300,000
12/31/94 (6.09)% 26,115 26,115 300,000
12/31/95 16.96% 35,319 35,319 300,000
FIDELITY VIP II INDEX 500 PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/93 9.74% 5,017 4,729 300,000
12/31/94 1.04% 8,986 8,842 300,000
12/31/95 37.19% 17,559 17,559 300,000
INVESCO VIF TOTAL RETURN PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 22.79% 5,623 5,335 300,000
INVESCO VIF INDUSTRIAL INCOME PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 29.25% 5,924 5,636 300,000
INVESCO VIF HIGH YIELD PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 19.76% 5,482 5,194 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 129.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable
Account asset based charges and deductions, which if reflected, would result
in lower total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 133
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
<TABLE>
<CAPTION>
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $ 5,750
- --------------------------------------------------------------------------------
INVESCO VIF UTILITIES PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 9.08% 4,987 4,699 300,000
VAN ECK GOLD AND NATURAL RESOURCES FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
4/30/91 (5.67)% 4,304 4,016 300,000
4/30/92 (5.62)% 7,704 7,560 300,000
4/30/93 29.19% 14,850 14,850 300,000
4/30/94 23.96% 23,114 23,114 300,000
4/30/95 3.43% 27,678 27,678 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 129.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operation expenses but do not reflect the Policy level or Variable
Account asset based charges and deductions, which if reflected, would result
in lower total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 134
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form
S-6 Registration Statement of Security Life of Denver Insurance Company and its
Security Life Separate Account L1, filed with the Securities and Exchange
Commission on August 4, 1995 (File No. 33-88148).
UNDERTAKING REGARDING INDEMNIFICATION
Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-
6 Registration Statement of Security Life of Denver Insurance Company and its
Security Life Separate Account L1, filed with the Securities and Exchange
Commission on August 4, 1995 (File No. 33-88148).
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-Reference table
The prospectus.
Financial data schedules.
The undertaking to file reports.
The undertaking regarding indemnification.
The signatures.
Written consents of the following persons:
Shirley A. Knarr (See Exhibits 6.(a))
Ernst & Young LLP (See Exhibit 7)
II-1
<PAGE>
The following exhibits:
1.A. (1) Resolution of the Executive Committee of the Board of Directors
of Security Life of Denver Insurance Company ("Security Life of
Denver") authorizing the establishment of the Registrant. 1/
(2) Not applicable
(3) (a) Security Life of Denver Distribution Agreement.
2/
(b) Specimen Broker/Dealer Supervisory and Selling
Agreement for Variable Contracts 3/, and
Compensation Schedule. 1/
(c) Commission Schedule for Policies 1/
(4) Not Applicable
(5) (a) Specimen Variable Universal Life Insurance Policy
(Form No. 1197 (VUL)). 1/
(b) Adjustable Term Insurance Rider (Form NO. R-
1500). 1/
(6) (a) Security Life of Denver's Restated Articles of
Incorporation. 1/
(b-g) Amendments to Articles of Incorporation through
June 12, 1987. 4/
(h) Security Life of Denver's By-laws. 1/
(7) Not Applicable
(8) (a) Participation Agreements 3/ and Addendum to Sales
Agreement. 1/
(b) Amendments to Participation Agreements. 1/
(c) Service Agreement. 1/
(d) Administrative Services Agreement between
Security Life of Denver and Financial
Administrative Services Corporation. 2/
(e) Amendment to Administrative Services Agreement
between Security Life of Denver and Financial
Administrative Services Corporation. 5/
(9) Not Applicable
II-2
<PAGE>
(a) Specimen Flexible Premium Variable Life
Insurance Application (Form No. Q-115).1/
(b) Specimen Flexible Premium Variable Life
Insurance Guaranteed Issue Application (Form
No. Q-115695).1/
2. Included as Exhibit 1.A(5) above.
3. (a) Opinion and Consent of Eugene L. Copeland as
to securities being registered.1/
4. Not Applicable
5. Not Applicable
6. (a) Opinion and Consent of Shirley A. Knarr.
(b) Opinion and Consent of Shirley A. Knarr
regarding DAC tax charge.1/
7. Consent of Ernst & Young LLP
8. Notice of Withdrawal Right for Policies. 1/
9. Representations, Description and Undertaking pursuant to
Rule 6e-3(T)(b)(13)(iii)(F) under the Investment Company Act
of 1940. 6/
10. Powers of Attorney. 1/
11. Financial Data Schedule
- ------------
1/ Incorporated herein by reference to Pre-Effective Amendment No. 1
to the Form S-6 Registration Statement of Security Life of Denver
Insurance Company and its Security Life Separate Account L1, filed
with the Securities and Exchange Commission on August 4, 1995 (File
No. 33-88148).
2/ Incorporated herein by reference to Pre-Effective Amendment No. 1
to the Form N-4 Registration Statement of Security Life of Denver
Insurance Company and its Security Life Separate Account A1, filed
with the Securities and Exchange Commission on February 21, 1995
(File No. 33-72564).
3/ Incorporated herein by reference to Pre-Effective Amendment No. 2
to the Form S-6 Registration Statement of Security Life of Denver
Insurance Company and its Security Life Separate Account L1, filed
with the Securities and Exchange Commission on October 25, 1994
(File No. 33-74190)
II-3
<PAGE>
4/ Incorporated herein by reference to the Form N-4 Registration
Statement of Security Life of Denver and its Security Life Separate
Account A1, filed with the Securities and Exchange Commission on
December 3, 1993 (File No. 33-72564).
5/ Incorporated herein by reference to Post-Effective Amendment No. 2
to the Form N-4 Registration Statement of Security Life of Denver
Insurance Company and its Security Life Separate Account A1, filed
with the Securities and Exchange Commission on April 28, 1995 (File
No. 33-78444).
6/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Form S-6 Registration Statement of Security Life of Denver
Insurance Company and its Security Life Separate Account L1, filed
with the Securities and Exchange Commission on August 31, 1994 (File
No. 33-74190).
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Security Life of
Denver Insurance Company and the Registrant, Security Life Separate Account L1,
certify that they meet the requirements of Securities Act Rule 485(b) for
effectiveness of Post-Effective Amendment No. 1 to the Registration Statement,
and have duly caused this Post-Effective Amendment No. 1 to the Registration
Statement to be signed on their behalf by the undersigned, thereunto duly
authorized, and their seal to be hereunto fixed and attested, all in the City
and County of Denver and the State of Colorado on the 23rd day of April, 1996.
SECURITY LIFE OF DENVER INSURANCE COMPANY
(Depositor)
BY: /s/: Stephen M. Christopher
----------------------------
Stephen M. Christopher
President and Chief Operating Officer
(Seal)
ATTEST:
/s/: Eugene L. Copeland
- ------------------------
Eugene L. Copeland
SECURITY LIFE SEPARATE ACCOUNT L1
(Registrant)
By: SECURITY LIFE OF DENVER INSURANCE COMPANY
(Depositor)
BY: /s/: Stephen M. Christopher
----------------------------
Stephen M. Christopher
President and Chief Operating Officer
(Seal)
ATTEST:
/s/: Eugene L. Copeland
- ------------------------
Eugene L. Copeland
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities with Security Life of Denver Insurance
Company and on the date indicated.
PRINCIPAL EXECUTIVE OFFICERS:
/s/: Robert J. St. Jacques
- ---------------------------
Robert J. St. Jacques
Chief Executive Officer
/s/: Stephen M. Christopher
- ----------------------------
Stephen M. Christopher
President and Chief Operating Officer
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/: Michael W. Cunningham
- ---------------------------
Michael W. Cunningham
Acting Chief Financial Officer and Acting Principal Accounting Officer
DIRECTORS:
/s/: R. Glenn Hilliard (Chairman)*
- -----------------------------------
R. Glenn Hilliard
/s/: Robert J. St. Jacques*
- -----------------------------
Robert J. St. Jacques
/s/: Thomas F. Conroy*
- ------------------------
Thomas F. Conroy
II-6
<PAGE>
/s/: Michael W. Cunningham*
- -----------------------------
Michael W. Cunningham
/s/: Linda B. Emory*
- ----------------------
Linda B. Emory
/s/: Stephen M. Christopher*
- ------------------------------
Stephen M. Christopher
* By: Edward K. Campbell
------------------
Edward K. Campbell
Attorney-in-fact
April 23, 1996
II-7
<PAGE>
EXHIBIT INDEX
Security Life Separate Account L1
(File No. 33-88148)
Exhibit Number Description
- -------------- -----------
6.(a) Opinion and Consent of Shirley A. Knarr
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
<PAGE>
April 17, 1996
Security Life of Denver Insurance Company
1290 Broadway
Denver, CO 80203-5699
Re: Security Life Separate Account L1
Post-Effective Amendment No. 1; SEC File No. 33-88148
Gentlemen:
In my capacity as Variable Products Portfolio Manager and Actuarial Officer of
Security Life of Denver Insurance Company ("Security Life"), I have provided
actuarial advice concerning:
* The preparation of Post-Effective Amendment No. 1 to the Registration
Statement on Form S-6 (File No. 33-88148) to be filed by Security Life and
its Security Life Separate Account L1 (the "Separate Account") with the
Securities and Exchange Commission ("SEC") under the Securities Act of 1933
with respect to the "Strategic Advantage" variable universal life insurance
policy; and
* The preparation of the policy forms for the variable universal life
insurance policy described in Post-Effective Amendment No. 1 (the
"Policy").
It is my professional opinion that:
1. The total dollar amount of sales load under the Policy is no higher than
would be permitted by Rule 6e-3(T)(b)(13)(i)(A) under the Investment Company Act
of 1940.
2. The total sales load applicable to the original Stated Death Benefit and the
total sales load applicable to any coverage increases in the Stated Death
Benefit on premiums received within two years of issue or increase will never
exceed the sum of the following:
(a) 30% of the first guideline annual premium as defined in Rule
6e-3(T)(c)(8)(i), plus
(b) 10% of the second guideline annual premiums, plus
(c) 9% of any premium in excess of the first two guideline annual
premiums.
Therefore, a refund of excess sales load will never be necessary.
<PAGE>
Security Life of Denver Insurance Company
April 17, 1996
Page Two
3. The illustrations of death benefits, account value, cash surrender value and
total premiums paid plus interest at 5% shown in the Prospectus, based on the
assumptions stated in the illustration, are consistent with the provisions of
the Policy. The rate structure of the Policy has not been designed so as to
make the relationship between premiums and benefits, as shown in the
illustrations included, appear to be correspondingly more favorable to
prospective buyers than other illustrations which could have been provided at
other combinations of ages, sex of the insured, death benefit option and amount,
definition life insurance test, premium class and premium amounts. Insureds of
other premium classes may have higher cost of insurance charges.
4. All other numerical examples shown in the Prospectus are consistent with the
Policy and our other practices, and have not been designed to appear more
favorable to prospective buyers than other examples which could have been
provided.
I hereby consent to the filing of this opinion as an Exhibit to Post-Effective
Amendment No. 1 to the Registration Statement and the use of my name under the
heading "Experts" in the Prospectus.
Sincerely,
/s/: SHIRLEY A. KNARR
Shirley A. Knarr, FSA, MAAA
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated April 1, 1996 (with respect to Security Life Separate
Account L1) and April 5, 1996 (with respect to Security Life of Denver Insurance
Company), in Post-Effective Amendment No. 1 to the Registration Statement (Form
S-6 No. 33-88148) and related Prospectus of Security Life of Denver Insurance
Company and Security Life Separate Account L1 dated May 1, 1996.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Denver, Colorado
April 23, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SECURITY
LIFE SEPARATE ACCOUNT L1 FINANCIAL STATEMENTS AT 12/31/95 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 12,967,718
<INVESTMENTS-AT-VALUE> 13,154,445
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,154,445
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,154,445
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 13,226,534
<DIVIDEND-INCOME> 134,683
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 37,280
<NET-INVESTMENT-INCOME> 97,403
<REALIZED-GAINS-CURRENT> 76,547
<APPREC-INCREASE-CURRENT> 186,727
<NET-CHANGE-FROM-OPS> 360,677
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 13,194,493
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
