<PAGE>
As filed with the Securities and Exchange Commission on October 29, 1997
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. 3
_________________
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 Depositor's Principal Executive Offices)
Copy to:
GARY W. WAGGONER, ESQ. DIANE E. AMBLER, ESQ.
Security Life of Denver Insurance Company Mayer, Brown & Platt
1290 Broadway 2000 Pennsylvania Avenue, N.W.
Denver, Colorado 80203-5699 Washington, D.C. 20006-1882
(202) 778-0641
(Name and Address of Agent for Service)
____________________________
It is proposed that this filing will become effective:
____ on (date) pursuant to paragraph (a) of Rule 485
X 60 days after filing pursuant to paragraph (a) of Rule 485
-----
____ on May 1, 1997 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.
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 March 3, 1997 for its most recent fiscal year
ending December 31, 1996.
i
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 33-88148)
Cross-Reference Table
<TABLE>
<CAPTION>
Form N-8B-2 Item No. Caption in Prospectus
- - -------------------- ---------------------
<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 Amounts 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; Right 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
- - -------------------- ---------------------
<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
- - -------------------- ---------------------
<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 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 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"). Seventeen Divisions of the Variable Account
are available under the Policy. On or before May 1, 1998, six additional
Divisions of the Variable Account will become available. 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.
The Owner may utilize a maximum of 18 Divisions for investment over the lifetime
of the Policy until current administrative systems are enhanced. The Divisions
include the Divisions of the Variable Account and the Guaranteed Interest
Division, but exclude the Loan Division. For example, if the Owner has allocated
or transferred funds to 17 Divisions of the Variable Account and to the
Guaranteed Interest Division (or to 18 Divisions of the Variable Account), those
will be the only Divisions to which the Owner can subsequently allocate or
transfer funds. Therefore, Owners may prefer to utilize fewer Divisions in the
early years of the Policy so as to leave open the option to invest in other
Divisions in the future. An Owner who has used 18 Variable Divisions will no
longer have the Guaranteed Interest Division available for future use.
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 incurred prior
to the date of the Insured's death. 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.
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
<PAGE>
MUST ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ IN CONJUNCTION HEREWITH.
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.THE FEATURES OF ANY POLICY ISSUED MAY
VARY DEPENDING ON THE STATE IN WHICH THE CONTRACT IS ISSUED. NO PERSON IS
AUTHORIZED TO MAKE ANY REPRESENTATION REGARDING THE OFFERING DESCRIBED
IN THIS PROSPECTUS OTHER THAN THOSE IN CONTAINED IN THIS PROSPECTUS
OR ANY ATTACHED SUPPLEMENT HERETO.
DATE OF PROSPECTUS: DECEMBER 31, 1997
Form V-56-97
<PAGE>
The policy is guaranteed not to lapse, regardless of its Net Account Value 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 the sum of the
applicable minimum monthly premiums for each Policy Month starting with the
first Policy Month to and including the Policy Month which begins on the current
Monthly Processing Date. The minimum monthly premium is equal to one twelfth of
the Minimum Annual Premium. 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 two 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, and Option 2, a benefit that
equals the Stated Death Benefit plus the Account Value. 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.
When applying for the Policy, the Owner irrevocably chooses 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. If the Guideline Premium/Cash
Value Corridor Test is chosen, premium amounts will be limited based on the
death benefit of the Policy.
We will not allocate funds to the Policy until we receive the Initial 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). Net Premiums allocated to the
Variable Account will be held in the Division investing in the Fidelity VIP
Money Market Portfolio of the Variable Account during the Free Look Period. 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.
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
PROSPECTUS DATED: December 31, 1997
________________________________________________________________________________
Strategic Advantage 2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS........................... [6]
POLICY SUMMARY................................................................ [9]
General Information........................................................... [9]
Death Benefits................................................................ [9]
Benefits at Maturity.......................................................... [9]
Additional Benefits........................................................... [9]
Premiums...................................................................... [9]
Allocation of Net Premiums.................................................... [10]
Policy Values................................................................. [10]
Determining the Value in the Divisions of the Variable Account................ [10]
How We Calculate Accumulation Unit Values for Each Division................... [10]
Transfers of Account Values................................................... [10]
Dollar Cost Averaging......................................................... [11]
Automatic Rebalancing......................................................... [11]
Loans......................................................................... [11]
Partial Withdrawals........................................................... [11]
Surrender..................................................................... [11]
Right to Exchange Policy...................................................... [11]
Lapse......................................................................... [11]
Reinstatement................................................................. [11]
Charges and Deductions........................................................ [12]
Persistency Refund............................................................ [12]
Refund of Sales Charges....................................................... [12]
Tax Considerations............................................................ [12]
INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS
AND THE GUARANTEED INTEREST DIVISION .................................... [13]
Security Life of Denver Insurance Company..................................... [13]
Security Life Separate Account L1............................................. [13]
Maximum Number of Investment Divisions........................................ [14]
Investment Objectives of the Portfolios....................................... [14]
The Guaranteed Interest Division.............................................. [17]
DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
POLICY................................................................... [18]
Applying for a Policy......................................................... [18]
Premiums...................................................................... [18]
Scheduled Premiums..................................................... [19]
</TABLE>
________________________________________________________________________________
Strategic Advantage 3
<PAGE>
<TABLE>
<S> <C>
Unscheduled Premium Payments........................................... [19]
Minimum Annual Premium................................................. [19]
Special Continuation Period................................................... [19]
Choice of Definitional Tests........................................... [19]
Choice of Guaranteed Minimum Death Benefit Provisions.................. [20]
Modified Endowment Contracts........................................... [20]
Allocation of Net Premiums................................................... [20]
Death Benefits............................................................... [20]
Death Benefit Options................................................. [21]
Changes in Death Benefit Option....................................... [21]
Guaranteed Minimum Death Benefit Provision............................ [22]
Requirements to Maintain the Guarantee Period......................... [23]
Changes in Death Benefit Amounts...................................... [23]
Benefits at Maturity......................................................... [24]
Additional Benefits.......................................................... [24]
Accidental Death Benefit Rider........................................ [24]
Adjustable Term Insurance Rider....................................... [24]
Additional Insured Rider.............................................. [25]
Guaranteed Insurability Rider......................................... [25]
Right to Exchange Rider............................................... [25]
Waiver of Cost of Insurance Rider..................................... [25]
Waiver of Specified Premium Rider..................................... [25]
Policy Values................................................................ [25]
Account Value......................................................... [25]
Cash Surrender Value.................................................. [26]
Net Cash Surrender Value.............................................. [26]
Net Account Value..................................................... [26]
Determining the Value of Amounts in the Divisions of the Variable Account.... [26]
How We Calculate Accumulation Unit Values for Each Division.................. [26]
Transfers of Account Values.................................................. [27]
Dollar Cost Averaging........................................................ [27]
Automatic Rebalancing........................................................ [28]
Policy Loans................................................................. [29]
Partial Withdrawals.......................................................... [30]
Surrender.................................................................... [31]
Right to Exchange Policy..................................................... [31]
Lapse........................................................................ [31]
Grace Period................................................................. [32]
Reinstatement................................................................ [32]
CHARGES, DEDUCTIONS AND REFUNDS.............................................. [32]
Deductions from Premiums..................................................... [32]
Tax Charges........................................................... [32]
Sales Charges......................................................... [33]
Daily Deductions from the Variable Account................................... [33]
Mortality and Expense Risk Charge..................................... [33]
Monthly Deductions from the Account Value............................. [33]
Initial Policy Charge................................................. [33]
Monthly Administrative Charge......................................... [34]
Cost of Insurance Charges............................................. [34]
Charges for Additional Benefits....................................... [34]
Guaranteed Minimum Death Benefit Charge
</TABLE>
________________________________________________________________________________
Strategic Advantage 4
<PAGE>
<TABLE>
<S> <C>
............................................................................ [34]
Changes in Monthly Charges 35
............................................................................ [35]
Policy Transaction Fees..................................................... [35]
Partial Withdrawal................................................... [35]
Transfers............................................................ [35]
Allocation Changes................................................... [35]
Illustrations........................................................ [35]
Persistency Refund.......................................................... [35]
Refund of Sales Charges..................................................... [36]
Charges from Portfolios..................................................... [36]
Group or Sponsored Arrangements............................................. [39]
Other Charges............................................................... [39]
TAX CONSIDERATIONS.......................................................... [39]
Life Insurance Definition................................................... [39]
Diversification Requirements................................................ [40]
Modified Endowment Contracts................................................ [40]
Tax Treatment of Premiums................................................... [41]
Loans, Lapses, Surrenders and Withdrawals................................... [41]
If the Policy Is Not a Modified Endowment Contract................... [41]
If the Policy Is a Modified Endowment Contract....................... [41]
Alternative Minimum Tax..................................................... [42]
Section 1035 Exchanges...................................................... [42]
Tax-exempt Policy Owners.................................................... [42]
Changes to Comply with Law.................................................. [42]
Other....................................................................... [42]
ADDITIONAL INFORMATION ABOUT THE POLICY..................................... [43]
Voting Privileges........................................................... [43]
Right to Change Operations.................................................. [43]
Reports to Owners........................................................... [44]
OTHER GENERAL POLICY PROVISIONS............................................. [44]
Free Look Period............................................................ [44]
The Policy.................................................................. [44]
Age......................................................................... [45]
Ownership................................................................... [45]
Beneficiary................................................................. [45]
Collateral Assignment....................................................... [45]
Incontestability............................................................ [45]
Misstatements of Age or Sex................................................. [45]
Suicide..................................................................... [45]
Payment..................................................................... [46]
Notification and Claims Procedures.......................................... [46]
Telephone Privileges........................................................ [46]
Non-participating........................................................... [46]
Distribution of the Policies................................................ [47]
Settlement Provisions....................................................... [47]
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND ACCUMULATED
PREMIUMS................................................................. [49]
ADDITIONAL INFORMATION...................................................... [57]
</TABLE>
________________________________________________________________________________
Strategic Advangtage 5
<PAGE>
<TABLE>
<S> <C>
Directors and Officers...................................................... [57]
State Regulation............................................................ [60]
Legal Matters............................................................... [60]
Legal Proceedings........................................................... [60]
Experts..................................................................... [60]
Registration Statement...................................................... [60]
FINANCIAL STATEMENTS........................................................ [61]
APPENDIX A.................................................................. [135]
APPENDIX B.................................................................. [143]
APPENDIX C.................................................................. [144]
PERFORMANCE INFORMATION..................................................... [144]
</TABLE>
________________________________________________________________________________
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 an Accumulation Unit 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 Insured's Age at any time is his or her age on the birthday nearest
the Policy Date increased by the number of full Policy years elapsed since
the Policy Date.
BASE DEATH BENEFIT -- The Base Death Benefit 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 3, which is available only on policies delivered on or before
December 31, 1997, 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. The Base Death Benefit may be greater than the
amount described to comply with the Federal income tax law definition of
life insurance.
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 any Riders, if applicable, reduced by any
outstanding Policy Loan and accrued loan interest, further reduced by any
Policy charges incurred prior to the date of the insured's death but not
yet deducted.
DIVISION(S) -- The Loan Division and the investment options available: The
Divisions of the Variable Account, each of which invests in shares of one
of the Portfolios and the Guaranteed Interest 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.
GUARANTEE PERIOD -- The period during which the Stated Death Benefit is
guaranteed under the Guaranteed Minimum Death Benefit provision. The two
available Guarantee Periods are (i) to the Insured's 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 Guarantee Period Annual Premium has not been paid or on any Monthly
Processing Date that the Net Account Value is not diversified according to
our requirements.
________________________________________________________________________________
Strategic Advantage 7
<PAGE>
GUARANTEE PERIOD ANNUAL PREMIUM -- The premium payment level required to
maintain the Guarantee Period.
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.
GUARANTEED MINIMUM DEATH BENEFIT -- The optional 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.
INITIAL PREMIUM -- The premium which is required to be paid and received by our
Customer Service Center in order for coverage to begin. Initial Premium is
equal to the scheduled modal premiums which fall due from the policy
effective date through the Investment Date.
INSURED -- The person on whose life this Policy is issued and upon whose death
the Death Proceeds are payable.
INVESTMENT DATE -- The date we allocate funds to the Policy. We will allocate
the initial Net Premium to the Policy on the Valuation Date immediately
following the latest of the date we have received the Initial Premium, we
have approved the Policy for issue, and all issue requirements have been
met and received in our Customer Service Center.
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 100.
MINIMUM ANNUAL PREMIUM -- This premium must be paid during the first three
Policy years in order to maintain the requirements of the special
continuation period.
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 Account Value from
the Policy. The Partial Withdrawal may reduce the amount of Base Death
Benefit and Target Death Benefit in force.
POLICY -- The Policy consists of the basic Policy, any applications and any
Riders or endorsements.
POLICY LOAN -- The sum of amounts borrowed from the
________________________________________________________________________________
Strategic Advantage 8
<PAGE>
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 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 the Policy which include the information
specific to the Policy, such as the Insured's Age, the Policy Date, etc.
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. Premiums may be paid on a monthly,
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.
SEC -- The United States Securities and Exchange Commission.
SEGMENT -- The Stated Death Benefit on the Policy Date is the initial Segment,
or Segment 1. Each increase in the Stated Death Benefit (other than an
option change) is a new Segment. The first year for a Segment begins on the
effective date of the Segment and ends one year later. Each subsequent year
begins at the end of the prior segment year. Each new Segment may be
subject to a new Minimum Annual Premium, new sales charge, new cost of
insurance charges, new incontestability and suicide exclusion periods.
STATED DEATH BENEFIT -- The sum of the Segments under the Policy. The Stated
Death Benefit changes when there is an increase or a decrease or when a
transaction on the Policy causes it to change.
TARGET DEATH BENEFIT -- When an 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 of the
Policy when an Adjustable Term Insurance Rider exists on the Policy.
TARGET PREMIUM --The premium on which the sales charge is calculated.
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 or as may be
required by law, 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
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Strategic Advantage 9
<PAGE>
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 10
<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 20.
When we issue the Policy, the death benefit is equal to the 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 or corporate purchasers.
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 special
continuation period is in effect (during the first three policy years) and
minimum premiums have been paid as specified in the section on Lapse (see Lapse,
page 31) then the Policy and all Riders are guaranteed not to lapse, regardless
of the amount of the Net
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Strategic Advantage 11
<PAGE>
Account Value.
The Stated Death Benefit of the Policy may also remain in force after the first
three policy years (special continuation period) even if the Net Account Value
is insufficient to pay all the monthly deductions if the Guaranteed Minimum
Death Benefit provision is in effect and the requirements have been met. See
Guaranteed Minimum Death Benefit Provision, page 22.
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 24.
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 14,24.
PREMIUMS
The Policy is a flexible premium Policy, so the amount and frequency of the
premiums may vary, within limits. There are no required premium payments other
than payments required to keep the policy in force or payments required to
maintain certain benefits as described below.
The Initial Premium must be paid in order for us to issue the Policy. The
Minimum Annual Premium must be paid in order to meet the requirements for the
three year special continuation period. If the Owner purchases one of two
Guaranteed Minimum Death Benefit provisions, the Guarantee Period Annual Premium
must be paid to maintain the Guarantee Period.
The Scheduled Premium is selected by the Owner and specified when application is
made for the Policy. The Scheduled Premium may not necessarily be sufficient to
maintain the Guarantee Period for one of the Guaranteed Minimum Death Benefit
provisions or to keep the Policy in force
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Strategic Advantage 12
<PAGE>
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 19.
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. However, amounts can be allocated to no more than 18 Divisions over the
life of the Policy. 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. Amounts allocated to the
Guaranteed Interest Division will be allocated to that Division upon receipt. At
the end of the Free Look Period, the funds held in the Fidelity VIP Money Market
Division will be reallocated to other Divisions of the Variable Account
according to the most recent premium allocation instructions. The amounts
allocated to the Guaranteed Interest Division will remain in that Division.
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 20.
MAXIMUM NUMBER OF INVESTMENT DIVISIONS
The Owner may utilize a maximum of 18 Divisions for investment over the lifetime
of the Policy until current administrative systems are enhanced. See Maximum
Number of Investment Divisions, page 14.
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 to 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 26.
HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION
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Strategic Advantage 13
<PAGE>
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 26.
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 amounts from the Guaranteed Interest
Division to the Divisions of the Variable Account are limited. Transfers of the
Account Value to the Guaranteed Interest Division are not limited to this 30-day
period.
See Transfers of Account Values, page 27.
DOLLAR COST AVERAGING
Dollar Cost Averaging is available by electing this feature at the time of
application or by completing the appropriate form. We offer Dollar Cost
Averaging to Owners who have at least $10,000 either in the Division investing
in the Fidelity VIP Money Market Portfolio or the Division investing in the
Neuberger & Berman AMT Limited Maturity Bond Portfolio of the Variable Account.
There is no charge for this feature.
See Dollar Cost Averaging, page 27.
AUTOMATIC REBALANCING
Automatic Rebalancing is available by electing this feature at the time of
application or by completing the appropriate form. Automatic Rebalancing allows
the Owner to match Account Value allocations over time to allocation percentages
specified. We will charge a fee of $25 each time the allocation is changed more
often than five times per Policy year; otherwise, there is no charge for this
feature.
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Strategic Advantage 14
<PAGE>
See Automatic Rebalancing, page 28.
LOANS
Loans may be taken against the Policy's Account Value. Unless otherwise required
by state law, the loan must be at least $100. Loan interest accrues at an
annualized rate of 3.75%. The Loan Division earns a guaranteed rate of interest
equal to 3% on an annualized basis. See Policy Loans, page 29.
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. See Partial Withdrawals,
page 30.
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 31.
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 unless required differently by state law. See Right to
Exchange Policy, page 31.
LAPSE
Insurance coverage 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 if the conditions of the
special continuation period have been met, the Policy and all attached Riders
are guaranteed not to lapse, regardless of the amount of the Net Account
Value.
Also, if the Guaranteed Minimum Death Benefit provision has been elected and the
requirements to maintain the Guarantee Period have been met, the Stated Death
Benefit portion of the Policy will remain in effect after the first three policy
years (special continuation period) regardless of the amount of the Net Account
Value. However, if the requirements to maintain the Guarantee Period have not
been met, the Guaranteed Minimum Death Benefit provision will lapse. See Lapse,
page 31.
REINSTATEMENT
A lapsed Policy and its Riders may be reinstated within five
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Strategic Advantage 15
<PAGE>
years of its lapse if it has not been surrendered for its Net Cash Surrender
Value. However the Guaranteed Minimum Death Benefit Provision cannot be
reinstated. New evidence of insurability and payment of certain reinstatement
premiums will be required. We will also reinstate any Policy Loan which existed
when coverage ended, with accrued loan interest to the date of lapse. See
Reinstatement, page 32.
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, the sales charge is equal to 3% of all premiums paid.
See Deductions from Premiums, page 32.
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 33.
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). The per
thousand charge is limited to $15 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 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 after the transaction for which the charge is made. See Policy
Transaction Fees, page 35.
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 36.
PERSISTENCY REFUND
The Account Value will be credited with a Persistency Refund each Monthly
Processing Date after the 10th Policy anniversary. See Persistency Refund, page
35.
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 in the first policy year. See, Refund of Sales
Charges, page
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Strategic Advantage 16
<PAGE>
36.
TAX CONSIDERATIONS
Under current Federal income tax law, death benefits of life insurance policies
generally are not subject to income tax. In order for this treatment 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 will apply to the
Policy in the application. After the Policy Date, the Policy will reflect the
test chosen. See Life Insurance Definition, page 39.
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 20.
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 1996, Security Life and its consolidated subsidiaries had
over $139.9 billion of life insurance in force. Our total assets exceeded $7.1
billion and our shareholder's equity exceeded $778 million, on a generally
accepted accounting principles basis as of December 31, 1996. We offer a
complete line of life insurance and retirement products, including annuities,
individual and group life, 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 world's three largest diversified financial services organizations.
ING is headquartered in Amsterdam, Netherlands, and has consolidated assets
exceeding $277.9 billion on a Dutch (modified U.S.) generally accepted
accounting principles basis as of December 31, 1996.
The principal underwriter and distributor for the Policies is ING America
Equities, Inc. ("ING America Equities"), a wholly owned subsidiary of Security
Life. ING America Equities is registered as a broker-dealer with the SEC and is
a member of the NASD. The current address for ING America Equities is 1290
Broadway, Denver, Colorado, 80203-5699.
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. In accordance with and under the
provisions of Section 10-3-501(2) of the Colorado Revised Statutes, 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. This means that in the
event Security Life were ever to become insolvent, the assets of the
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Strategic Advantage 17
<PAGE>
Variable Account are to be used first to pay Variable Account policy claims.
Only if assets remain in the Variable Account after those claims have been
satisfied can those assets be used to pay other policy Owners and creditors of
Security Life. 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. If the assets in the Variable Account are
insufficient to satisfy Variable Account Policy owner claims, Section 10-3-541
provides that under certain circumstances the amount of those claims which are
not satisfied are to be treated as Policy owner claims against the general
account assets of the insurance company.
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. 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.
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 Portfolio's prospectus.
The Divisions of the Variable Accounts investing in the Neuberger & Berman
Advisers Management Trust Government Income Portfolio and the Van Eck Worldwide
Balanced Fund will no longer accept new investments, including through
transfers, automatic rebalancing or dollar cost averaging. Existing investments
in these Funds will not need to be moved at this time, however, Security Life
encourages investors in these Portfolios to consider making a voluntary exchange
to another Division. Transfers of account values from the Government Income
Portfolio Division or the Worldwide Balanced Fund Division to another Division
of the Variable Account or to the Guaranteed Interest Division will not count
against the 12 transfers permitted annually without charge under the
Contract.
MAXIMUM NUMBER OF INVESTMENT DIVISIONS
The Owner may utilize a maximum of 18 Divisions for investment over the lifetime
of the Policy until current administrative systems are enhanced. The Divisions
include the Divisions of the Variable Account and the Guaranteed Interest
Division, but exclude the Loan Division. For example, if the Owner has allocated
or transferred funds to 17 Divisions of the Variable Account and to the
Guaranteed Interest Division (or to 18 Divisions of the Variable Account), those
will be the only Divisions to which the Owner can subsequently allocate or
transfer funds. Therefore, Owners may prefer to utilize fewer Divisions in the
early years of the Policy so as to leave open the option to transfer to other
Divisions in the future. An Owner who has used 18 Variable Divisions will no
longer have the Guaranteed Interest Division available for future use.
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
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Strategic Advantage 18
<PAGE>
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 it.
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.L.C. as sub-
adviser.
Limited Maturity Bond Portfolio -- seeks the highest current income consistent
with low risk to principal and liquidity. As a secondary objective, it also
seeks to enhance its total return. The Limited Maturity Bond Portfolio
pursues its investment objectives by investing in a diversified portfolio
of U.S. Government and Agency securities and investment grade debt
securities issued by financial institutions, corporations and others. The
Limited Maturity Bond Portfolio may invest up to 10% of its net assets,
measured at the time of investment, in fixed income securities rated below
investment grade or in comparable unrated securities. The Limited Maturity
Bond Portfolio's dollar weighted average portfolio duration may range up to
four years.
Government Income Portfolio -- (no longer available for new investments) seeks a
high level of current income and total return, consistent with safety of
principal. The Portfolio invests at least 65% of its total assets in U.S.
Government and Agency securities, with an emphasis on U.S. Government mortgage
backed securities. In addition, the Portfolio invests at least 25% of its
total assets in mortgage backed securities (including U.S. Government mortgage
backed securities) and asset backed securities. The investment manager follows
a flexible investment strategy depending on market conditions and interest
rate trends.
Growth Portfolio -- seeks capital appreciation without regard to income and
invests in small-, medium-, and large-, capitalization securities believed to
have maximum potential for long-term capital appreciation. The portfolio is
managed using a growth-oriented investment approach. A growth-oriented
approach seeks stocks of companies that are projected to grow at above-average
rates and faster than others expect.
Partners Portfolio -- seeks capital growth through an investment approach that
is designed to increase capital with reasonable risk. Its investment program
seeks securities believed to be undervalued based on strong fundamentals such
as low price to earnings ratio, consistent cash flow, and the Company's track
record through all points of the market cycle. 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 or comparable unrated securities.
THE ALGER AMERICAN FUND
The Alger American Fund is a registered investment company organized on April 6,
1988 as a multi-series Massachusetts business trust. The Fund's investment
manager is Fred Alger Management, Inc., which has been in the business of
providing investment advisory services since 1964.
Alger American Small Capitalization Portfolio -- seeks to obtain long term
capital appreciation. Except during temporary defensive periods, the Portfolio
invests at least 65% of its total assets in equity securities of companies
that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the Russell 2000
Growth Index ("Russell Index") or the S&P SmallCap 600 Index ("S&P Index"),
updated quarterly. Both indexes are broad indexes of small capitalization
stocks. As of June 30, 1997, the range of market capitalization of the
companies in the Russell Index was $13 million to $1.56 billion; the range of
market capitalization of the companies in the S&P Index at that date was $35
million to $3.025 billion. The combined range was $13 million to $ 3.025
billion.
Alger American MidCap Growth Portfolio -- seeks long-term capital appreciation.
Except during temporary defensive periods, the Portfolio invests at least 65%
of its total assets in equity securities of companies that, at the time of
purchase of the securities, have total market
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Strategic Advantage 19
<PAGE>
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 June 30, 1997, the range
of market capitalization of these companies was $100 million to $9.149
billion.
Alger American Growth Portfolio -- seeks to obtain long-term capital
appreciation. The Portfolio will invest its assets primarily in companies
whose securities are traded on domestic stock exchanges or in the over-the-
counter market. Except during temporary defensive periods, the Portfolio will
invest at least 65% of its total assets in the securities of companies that,
at the time of purchase of the securities, have a total market capitalization
of $1 billion or greater.
Alger American Leveraged AllCap Portfolio -- seeks long-term capital
appreciation. The Portfolio may purchase put and call options and sell (write)
covered call and put options on securities and securities indexes to increase
gain and to hedge against the risk of unfavorable price movements, and may
enter into futures contracts on securities indexes and purchase and sell call
and put options on these futures. The Portfolio may also borrow money for the
purchase of additional securities. The Portfolio may borrow only from banks
and may not borrow in excess of one third of the market value of its assets,
less liabilities other than such borrowing. Except during temporary defensive
periods, the Portfolio will invest 85% of its net assets in equity securities
of companies of any size.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND
II
Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund
II are open-end, diversified, management investment companies organized as
Massachusetts business trusts on November 13, 1981 and March 21, 1988,
respectively. The funds are managed by Fidelity Management & Research Company
("FMR") which handles the Funds' business affairs, with the exception of the VIP
II Index 500 Portfolio which is sub-advised by Bankers Trust Company. FMR is the
management arm of Fidelity Investments, which was established in 1946 and is now
America's largest mutual fund manager.
VIP Growth Portfolio -- seeks capital appreciation by investing in common
stocks, although the Portfolio is not limited to any one type of security.
VIP Overseas Portfolio -- seeks long term growth of capital primarily through
investments in foreign securities. The Overseas Portfolio provides a means for
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.
VIP Money Market Portfolio -- seeks as high a level of current income as is
consistent with preserving capital and providing liquidity. The Portfolio will
invest only in high quality U.S. dollar-denominated money market securities of
domestic and foreign issuers.
VIP II Asset Manager Portfolio -- seeks high total return with reduced risk over
the long-term by allocating its assets among domestic and foreign stocks,
bonds, and short-term fixed-income instruments.
VIP II Index 500 Portfolio -- seeks to provide investment results that
correspond to the total return (i.e., the combination of capital changes and
income) of common stocks publicly traded in the United States. In seeking this
objective, the Portfolio attempts to duplicate the composition and total
return of the Standard & Poor's Composite Index of 500 Stocks while keeping
transaction costs and other expenses low. The Portfolio is designed as a long-
term investment option.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO Variable Investment Funds, Inc. is a registered, open-end management
investment company that was organized as a Maryland corporation on August 19,
1993, and is currently comprised of five diversified investment Portfolios,
described below. INVESCO Funds Group, Inc., the Funds' investment adviser, is
primarily responsible for providing the Portfolios with various administrative
services and supervising the Fund's daily business affairs. INVESCO
Distributors, Inc. ("IDI"), provides distribution services for the INVESCO
Variable Investment Funds, Inc. Portfolio management is provided to each
Portfolio by its sub-adviser. INVESCO Trust Company serves as sub-adviser to the
Industrial Income, High Yield and Utilities Portfolios. INVESCO Capital
Management, Inc. serves as sub-adviser to the Total Return Portfolio.
INVESCO VIF Total Return Portfolio -- seeks a high total return on investment
through capital appreciation and current income. The Total Return Portfolio
seeks to achieve its investment objective by investing in a combination of
equity securities (consisting of common stocks and, to a lesser degree,
securities convertible into common stock) and fixed income securities.
INVESCO VIF Industrial Income Portfolio -- seeks the best possible current
income, while following sound investment practices. Capital growth potential
is an additional consideration in the selection of portfolio
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Strategic Advantage 20
<PAGE>
securities. The Portfolio normally invests at least 65% of its total assets in
dividend-paying common stocks. Up to 10% of the Portfolio's total assets may
be invested in equity securities that do not pay regular dividends. The
remaining assets are invested in other income-producing securities, such as
corporate bonds. The Portfolio also has the flexibility to invest in other
types of securities.
INVESCO VIF High Yield Portfolio -- seeks a high level of current income by
investing substantially all of its assets in lower rated bonds and debt
securities and in preferred stock. Under normal circumstances, at least 65% of
the Portfolio's total assets will be invested in debt securities having
maturities at the time of issuance of at least three years. Potential capital
appreciation is a factor in the selection of investments, but is secondary to
the Portfolio's primary objective. This Portfolio may not be appropriate for
all Owners due to the higher risk of lower rated bonds commonly known as "junk
bonds." See the prospectus for the INVESCO VIF High Yield Portfolio for more
information concerning these risks.
INVESCO VIF Utilities Portfolio -- seeks capital appreciation and income through
investments primarily in equity securities of companies principally engaged in
the public utilities business.
INVESCO VIF Small Company Growth Fund -- (will become available for investment
on or before May 1, 1998) seeks long-term capital growth through the
investment of 65% or more of its total assets in equity securities of
companies with market capitalization of $1 billion or less at the time of
purchase ("small-cap companies"). The balance of the Fund's assets may be
invested in the equity securities of companies with market capitalizations in
excess of $1 billion, debt securities and short-term investments.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment company
organized as a "business trust" under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as
investment adviser and manager to the Worldwide Hard Assets Fund, Worldwide Real
Estate Fund, Worldwide Emerging Markets Fund, Worldwide Bond Fund, and Worldwide
Balanced Fund. Fiduciary International Inc. does not currently serve as sub-
investment adviser to the Worldwide Balanced Fund, but it is expected to do so
when the fund's assets reach a point at which it is appropriate to utilize the
sub-investment adviser's services.
On April 30, 1997, the Van Eck Gold and Natural Resources Fund was renamed the
Worldwide Hard Assets Fund to reflect the Fund's new investment objective and
concentration policy approved by shareholders on April 9, 1997. The Fund's new
investment objective is described below.
Van Eck Worldwide Hard Assets Fund -- seeks long-term capital appreciation by
investing globally, primarily in "Hard Assets Securities." Hard Assets are
tangible, finite assets, such as real estate, energy, timber, and industrial
and precious metals. Income is a secondary consideration.
Van Eck Worldwide Real Estate Fund --(will become available for investment on or
before May 1, 1998) seeks to maximize total return by investing primarily in
equity securities of domestic and foreign companies which are principally
engaged in the real estate industry or which own significant real estate
assets.
Van Eck Worldwide Bond Fund --(will become available for investment on or before
May 1, 1998) seeks high total return through a flexible policy of investing
globally, primarily in debt securities.
Van Eck Worldwide Emerging Markets Fund --(will become available for investment
on or before May 1, 1998) seeks long term capital appreciation by investing
primarily in equity securities in emerging markets around the world. Peregrine
Asset Management (Hong Kong) Limited serves as sub-investment adviser to this
Fund.
Van Eck Worldwide Balanced Fund -- (no longer available for new investments)
seeks long term capital appreciation together with current income by investing
in stocks, bonds and money market instruments worldwide.
AIM VARIABLE INSURANCE FUNDS, INC.
AIM Variable Insurance Funds, Inc. is a registered, open-end, series, management
investment company. AIM Advisors, Inc., ("AIM") manages each Fund's assets
pursuant to a master investment advisory agreement dated February 28, 1997. AIM
was organized in 1976 and is a wholly-owned subsidiary of AIM Management Group,
Inc., an indirect subsidiary of AMVESCAP plc, (formerly INVESCO plc).
AIM VI Capital Appreciation Portfolio -- (will become available for investment
on or before May 1, 1998) seeks to provide capital appreciation through
investments in common stocks, with emphasis on medium-sized and smaller
emerging growth companies. AIM will be particularly interested in companies
that are likely to
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Strategic Advantage 21
<PAGE>
benefit from new or innovative products, services or processes that
should enhance such companies prospects for future growth in
earnings.
AIM VI Government Securities Portfolio -- (will become available for investment
on or before May 1, 1998) seeks to achieve a high level of current income
consistent with reasonable concern for safety of principal by investing
in debt securities issued, guaranteed of otherwise backed by the U.S.
Government.
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, completion of all underwriting
requirements, and satisfaction of issue requirements.
The Investment Date is the date we allocate funds to the Policy. We will
allocate the initial Net Premium to the Policy on the Valuation Date immediately
following the latest of the date we receive the Initial Premium, approve the
Policy for issue, and all issue requirements have been met and received in our
Customer Service Center. 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
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Strategic Advantage 22
<PAGE>
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 from the
Policy Date.
If a premium payment in an amount not less than the Scheduled Premium is
received with the application and there has been no material 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 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 may
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 Period.
UNSCHEDULED PREMIUM PAYMENTS
Generally, unscheduled premium payments may be made at any time. 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.
Evidence of insurability may also be required if the net amount at risk is
increased as a result of an 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 which exceed the "seven-pay" limit for the Policy 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
accept the excess premium payments. See Modified Endowment Contracts, page 40
and Changes to Comply with Law, page 42.
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
The Minimum Annual Premium must be paid during the first three Policy years in
order to maintain the requirements for the three year special continuation
period. 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
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Strategic Advantage 23
<PAGE>
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.
SPECIAL CONTINUATION PERIOD
The Policy is guaranteed not to lapse, regardless of its Net Account Value 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 the sum of the
applicable minimum monthly premiums for each Policy month starting with the
first Policy month to and including the Policy month which begins on the current
Monthly Processing Date. The minimum monthly premium is equal to one twelfth of
the Minimum Annual Premium. See Lapse, page 31.
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 31. 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. See Special Continuation Period, page
19. If one of the Guaranteed Minimum Death Benefit provisions has been
elected, 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 Provision, page 22.
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 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 39. 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
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 (the Guarantee Period Annual
Premium) 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 22.
The Guarantee Period Annual Premium depends on which of the two Guarantee
Periods is chosen, as well as the Stated Death Benefit of the Policy, the
Insured's Age, sex, and Premium Class, the death benefit option chosen, and
Rider coverage. For Policies with no other Rider coverage, the Guarantee
Period Annual Premium 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 Guarantee Period Annual Premium 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 Guarantee Period
Annual Premium 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 40.
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
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Strategic Advantage 24
<PAGE>
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.
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 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.
The Owner may utilize a maximum of 18 Divisions for investment over the lifetime
of the Policy until current administrative systems are enhanced. The Divisions
include the Divisions of the Variable Account and the Guaranteed Interest
Division, but exclude the Loan Division. For example, if the Owner has
allocated or transferred funds to 17 Divisions of the Variable Account and to
the Guaranteed Interest Division (or to 18 Divisions of the Variable Account),
those will be the only Divisions to which the Owner can subsequently allocate or
transfer funds. Therefore, Owners may prefer to utilize fewer Divisions in the
early years of the Policy so as to leave open the option to invest in other
Divisions in the future. An Owner who has used 18 Variable Divisions will no
longer have the Guaranteed Interest Division available for future use.
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 of death benefit option, increases to
comply with the Federal income tax law definition of life insurance, changes in
the death benefit option, partial withdrawals, requested increases and
decreases, or when a transaction on the Policy causes the Base Death Benefit to
change.
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
24.
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 as of the date of the Insured's
death, reduced by any outstanding Policy Loan and accrued loan interest (and, if
in the grace period or 3 year special continuation period, further reduced by
any unpaid charges incurred prior to the date of the Insured's death).The Death
Proceeds will also include any amount provided by Rider on the primary Insured.
DEATH BENEFIT OPTIONS
The Owner may choose from two death benefit options: Option 1 or Option 2.
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 21.
Under Option 1, the Base Death Benefit is the greater of:
(a) the Stated Death Benefit on the date of the Insured's death; or
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Strategic Advantage 25
<PAGE>
(b) your Account Value on the date of the Insured's death multiplied by
the appropriate factor from the Definition of Life Insurance Factors
shown in Appendix A or B.
Under Option 2, the Base Death Benefit is the greater of:
(a) the Stated Death Benefit plus the Account Value on the date of the
Insured's death; or
(b) the Account Value on the date of the Insured's death multiplied by the
appropriate factor from the Definition of Life Insurance Factors shown
in Appendix A or B.
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.
If the policy was delivered on or before December 31, 1997, the Owner may choose
Option 3.
Under Option 3, the Base Death Benefit is the greater of:
(a) the Stated Death Benefit of the Policy plus the sum of all premiums
paid minus the Partial Withdrawals taken under the Policy; or
(b) the Account Value on the date of the insured's death multiplied by the
appropriate factor from the Definition of Life Insurance Factors shown
in Appendix A or B.
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.
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 Insured's Age and possibly Premium Class and sex 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 39, for a
description of the tests and these factors.
We will adjust the Policy if necessary to continue to qualify 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.
Changes which involve Option 3 are available on policies delivered on or before
December 31, 1997. 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
effective date of the change, the Stated Death Benefit will be changed according
to the following table:
OPTION CHANGE STATED DEATH BENEFIT
FROM TO FOLLOWING CHANGE
EQUALS:
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.
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Strategic Advantage 26
<PAGE>
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
Account Value as of the effective date of the change.
For purposes of a death benefit option change, the Account Value will be
allocated to each Segment in the same proportion that the Segment bears to the
Stated Death Benefit. See Changes In Death Benefit Amounts, page 23.
We do not adjust the Target Premium when this type of change is made. See Sales
Charges, page 33. 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 34.
In addition, there will be no change to the amount of term insurance 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 new policy schedule page. This schedule 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, the Guarantee Period. The first option has
a Guarantee Period of 10 Policy years or to the Insured's 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 20.
However, the Guaranteed Minimum Death Benefit provision does not apply to the
Adjustable Term Insurance Rider or to any other Riders. Therefore, if the 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 31.
The Guaranteed Minimum Death Benefit provision is not available in Texas,
Maryland, or Massachusetts.
REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD
The Guaranteed Minimum Death Benefit provisions require premium payment levels,
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) the sum of the Guarantee Period Monthly Premiums for each Policy
Month starting with the first Policy Month to and including the Policy Month
that begins on the current Monthly Processing Date, 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
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Strategic Advantage 27
<PAGE>
Processing Date, the Guarantee Period and therefore the Guaranteed Minimum Death
Benefit provision will terminate. The Guarantee Period Annual Premium will be
listed in the Schedule of the Policy. If the Policy benefits are increased, the
Guarantee Period Annual Premium will also be increased. The Guarantee Period
Monthly Premium is one twelfth of the Guarantee Period Annual Premium. 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.
These diversification requirements will be satisfied if the Automatic
Rebalancing Feature has been elected and conditions a) and b) above are met.
The Policy will also be deemed to satisfy the requirements for diversification
if Dollar Cost Averaging is elected and the resulting transfers are directed
into at least four other Divisions with no more than 35% of any transfer
directed to any one Division. See Dollar cost Averaging, page 27, and
Automatic Rebalancing, page 28.
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 34. 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.
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. There may be tax
consequences to the decrease, See Life Insurance Definition, page 39, and
Modified Endowment Contract, page 40.
Satisfactory evidence that the Insured is still insurable must be provided when
the death benefit is increased.
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. The
Target Death Benefit may be changed only once each year.
A requested increase in the Stated Death Benefit will create a new Segment.
Increases in Stated Death Benefit resulting from death benefit option changes do
not create new Segments, rather, they merely increase the size of the existing
Segment(s). As discussed below, once created, a new Segment can never be
entirely eliminated unless required differently by state law.
If an increase creates a new Segment, premiums paid after the increase will be
allocated to the original and the new Segments in the same proportion that the
guideline annual premiums defined by the Federal income tax laws for each
Segment bear to the sum of the
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Strategic Advantage 28
<PAGE>
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 Segment in the same proportion that the Segment bears to the
total stated Death Benefit.
Requested reductions in the death benefit or an option change that causes a
reduction will first be applied to reduce the Target Death Benefit. The Stated
Death Benefit will be decreased only after Adjustable Term Insurance Rider
coverage has been reduced to zero. If more than one Segment exists, any
subsequent reduction in Stated Death Benefit will be allocated among Segments in
the same proportion 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 Federal 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 39.
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 date on which the Insured
attains Age 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 40, 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 Insured's 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.
Subject to our rules, the Target Death Benefit schedule may be changed after
issue. See Changes In Death Benefit Amount, page 23.
If at any time you cancel a scheduled change or ask for an unscheduled decrease
to your Target Death Benefit, we may deny any future scheduled increases to the
Target Death Benefit.
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 compliance with 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 insurance. The Adjustable Term Insurance Rider will
adjust to provide Death Proceeds equal to the Target Death Benefit in each year:
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Strategic Advantage 29
<PAGE>
<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
requirements. 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,
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
Withdrawals, page 30.
We generally restrict the amount of the Target Death Benefit to an amount not
more than ten times 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 $1,000,000.
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 34.
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 23.
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 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 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.
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Strategic Advantage 30
<PAGE>
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 Division's 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 26.
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 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
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Strategic Advantage 31
<PAGE>
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.
The Owner may utilize a maximum of 18 Divisions for investment over the lifetime
of the Policy until current administrative systems are enhanced. The Divisions
include the Divisions of the Variable Account and the Guaranteed Interest
Division, but exclude the Loan Division. For example, if the Owner has
allocated or transferred funds to 17 Divisions of the Variable Account and to
the Guaranteed Interest Division (or to 18 Divisions of the Variable Account),
those will be the only Divisions to which the Owner can subsequently allocate or
transfer funds. Therefore, Owners may prefer to utilize fewer Divisions in the
early years of the Policy so as to leave open the option to transfer Account
Values to other Divisions in the future. An Owner who has used 18 Variable
Divisions will no longer have the Guaranteed Interest Division available for
future use.
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 46.
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 to protect Policy values from short-term price fluctuations.
Since the same dollar amount is transferred to other Divisions each period,
more units are purchased in a Division if the value per unit is low, and fewer
units are purchased if the value per unit 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 period 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
________________________________________________________________________________
Strategic Advantage 32
<PAGE>
Interest Division.
Dollar Cost Averaging allocations must be designated as whole percentages. 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.
The transfer amount under Dollar Cost Averaging may be no less than $100.
The first Dollar Cost Averaging date must be 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 end of the Free Look Period. Dollar Cost Averaging
will take place monthly, on the Monthly Processing Date.
If on any Dollar Cost Averaging 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. Changes to the Dollar Cost Averaging program may be made once each Policy
year or Dollar Cost Averaging may be canceled completely by sending satisfactory
notice to our Customer Service Center at least seven days before the next Dollar
Cost Averaging date. If telephone privileges are in effect, changes to the
Dollar Cost Averaging program can be made by telephoning our Customer Service
Center. See Telephone Privileges, page 46.
A date for Dollar Cost Averaging to terminate may be specified. 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.
If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost
Averaging will take place first. After Dollar Cost Averaging has terminated,
Automatic Rebalancing will begin.
On or before May 1, 1998, the following additional options will be made
available under the Dollar Cost Averaging program:
. A designated dollar amount or a percentage of the Account Value of the
Division investing in the Fidelity VIP Money Market Portfolio or the
Neuberger Berman AMT Limited Maturity Bond Portfolio may be transferred
automatically to other Divisions of the Variable Account.
. Periodic transfers may occur either monthly, quarterly, semi-annually, or
annually; beginning on the date requested by the Owner. Unless specified
otherwise, Dollar Cost Averaging will take place monthly, on the Monthly
Processing Date
. A Dollar Cost Averaging Program and an Automatic Rebalancing Program may
run at the same time
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. During the operation of Automatic Rebalancing, transfers
among Divisions may be accomplished only by changing premium allocation
percentages.
The Automatic Rebalancing feature may be elected with the application or at any
subsequent time by completing the appropriate form. Automatic Rebalancing
matches Account Value allocations over time to the allocation percentages set by
the Owner. Automatic Rebalancing will take place on the First Valuation Date of
each calendar quarter. This will automatically rebalance the amounts in each
________________________________________________________________________________
Strategic Advantage 33
<PAGE>
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 periods.
If this feature is elected we will transfer amounts among the Divisions so that,
after the transfers, the ratio of the Account Value in each Division to the
total Account Value matches the allocation percentage for that Division.
If Automatic Rebalancing is elected with the Policy application, the first
transfer will occur 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.
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 with the
maximum transfer amount and time limitations on transfers from the Guaranteed
Interest Division, as described in Transfers of Account Values on page 27. If
we receive an Automatic Rebalancing request which is in conflict with these
provisions, we will ask for revised instructions.
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 next
Automatic Rebalancing. 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 Period to continue. If the Automatic
Rebalancing feature is active, and the Guarantee Period is in effect on a Policy
and a request is received for an allocation which does not meet the
diversification Requirements to Maintain the Guarantee Period, we will notify
the Owner that the allocation must be changed. See Guaranteed Minimum Death
Benefit Provision, page 34.
Any transfers that are a result 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 the
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. After Dollar Cost Averaging has
terminated, Automatic Rebalancing will begin.
On or before May 1, 1998, the following additional options will be made
available under the Automatic Rebalancing program:
. During the operation of the Automatic Rebalancing feature, transfers among
the Divisions may occur monthly, quarterly, semi-annually, or annually as
specified by the Owner. Unless specified otherwise, Automatic Rebalancing
will take place on the last Valuation Date of each quarter.
. If Automatic Rebalancing is elected with the Policy application, the first
transfer will occur on the date specified by the Owner, 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 date requested by the Owner
after we receive notification at our Customer Service Center and the Free
Look Period has ended .
. Automatic Rebalancing allocations may be different than premium
allocations. Automatic Rebalancing allocations may be specified for all or
some of the Divisions in which the Account Value is invested. We will
transfer amounts among the Divisions so that, after the transfers, the
ratio of Account Value in each Division to the total Account Value of all
Divisions included in Automatic Rebalancing matches the Automatic
Rebalancing allocation percentage for that Division.
. An Automatic Rebalancing program may be run simultaneously with a Dollar
Cost Averaging program.
. We will charge a fee of $25 each time the Automatic Rebalancing allocation
is changed more than five times per Policy year. Otherwise there is no
charge for this feature.
POLICY LOANS
________________________________________________________________________________
Strategic Advantage 34
<PAGE>
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. Unless otherwise required by state
law, any new Policy Loan must be at least $100. The maximum amount which can be
borrowed as of any Valuation Date equals the Net Account Value less monthly
deductions to the next Policy Anniversary. Maximum loan amounts may be
different if required by state law. 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 or as otherwise
specified by the Owner's instructions. 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 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 according to
premium allocation instructions. 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 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 46.
Loans may have adverse tax consequences. See Modified Endowment Contracts, page
40.
PARTIAL WITHDRAWALS
A Partial Withdrawal may be requested on any Monthly Processing Date after the
first Policy anniversary by contacting 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 39) 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
________________________________________________________________________________
Strategic Advantage 35
<PAGE>
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 15 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 may be
reduced by the 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 21.
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 39.
A Partial Withdrawal may also reduce the Target Death Benefit.
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 46.
Partial Withdrawals may have adverse tax consequences. See Modified Endowment
Contracts, page 40.
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 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 40.
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
unless required differently by state law. 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 17.
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
Insurance coverage 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.
________________________________________________________________________________
Strategic Advantage 36
<PAGE>
The Policy is guaranteed not to lapse, regardless of its Net Account Value 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 the sum of the
applicable minimum monthly premiums for each Policy month starting with the
first Policy month to and including the Policy month which begins on the current
Monthly Processing Date. The minimum monthly premium is equal to one twelfth of
the Minimum Annual Premium.
IF THE 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 32.
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
After the special continuation period, 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 Provision, page 22.
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 (unless
the policy is in the three year special continuation period).
While the Guaranteed Minimum Death Benefit provision applies (unless the policy
is in the three year special continuation period), 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 Guaranteed Minimum
Death Benefit Provision, page 22. If the Guaranteed Minimum Death Benefit
provision is terminated the normal test for lapse will resume.
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 Net 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
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Strategic Advantage 37
<PAGE>
If the Policy owner fails to pay sufficient premiums prior to the end of the
Grace Period, the Policy and its Riders other than the Guaranteed Minimum Death
Benefit Provision may be reinstated within five years after the Grace Period.
Unless otherwise required by state law, 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
(unless required differently by state law).
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 29), 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.
Except as limited by state law, 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 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 18. The Target
Premium for the Policy and any Segments added since the Policy Date will be
listed in the Schedule.
For a Policy with multiple Segments, 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.
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
________________________________________________________________________________
Strategic Advantage 38
<PAGE>
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 Segment 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 35.
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. The per thousand charge
is limited to $15 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, record keeping, 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.
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 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
________________________________________________________________________________
Strategic Advantage 39
<PAGE>
time a Segment is added, as well as the length of time the Policy or 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 Segments in the same
proportion that each Segment bears to the total Stated Death Benefit 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 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 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. See Additional Benefits,
page 14,24.
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 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 Net Account Value immediately after 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 30.
TRANSFERS
We charge a fee of $25 for each additional transfer beyond
________________________________________________________________________________
Strategic Advantage 40
<PAGE>
the first twelve in a Policy year. See Transfers of Account Values, page 27. All
transfers 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 31.
ALLOCATION CHANGES
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 Segment 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
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 After
Persistency 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 After
Persistency Persistency
Refund Refund
------ ------
Variable $5,000.00 $5,004.17
Divisions
Loan $5,000.00 $5,000.00
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 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
The 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 41
<PAGE>
PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)/1/
<TABLE>
<CAPTION>
Investment Total Portfolio
Portfolio Management Other Expenses Expenses
--------- ---------- -------------- --------
Fees
<S> <C> <C> <C>
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST /2/
Limited Maturity Bond Portfolio 0.65% 0.13% 0.78%
Growth Portfolio 0.83% 0.09% 0.92%
Partners Portfolio 0.84% 0.11% 0.95%
Government Income Portfolio/ 12/ 0.00% 1.02% 1.02%
THE ALGER AMERICAN FUND
Alger American Small Capitalization Portfolio 0.85% 0.03% 0.88%
Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84%
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Leveraged AllCap Portfolio 0.85% 0.24% 1.09/3/
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP Growth Portfolio 0.61% 0.08% 0.69%/4/
VIP Overseas Portfolio 0.76% 0.17% 0.93%/4/
VIP Money Market Portfolio 0.21% 0.09% 0.30%
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II Asset Manager Portfolio 0.64% 0.10% 0.74%/4/
VIP II Index 500 Portfolio 0.13% 0.15% 0.28%/5/
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - Total Return Portfolio 0.75% 0.19% 0.94%/6,7/
INVESCO VIF - Industrial Income Portfolio 0.75% 0.20% 0.95% /6,8/
INVESCO VIF - High Yield Portfolio 0.60% 0.27% 0.87% /6.9/
INVESCO VIF - Utilities Portfolio 0.60% 0.56% 1.16% /6,10/
INVESCO VIF - Small Company Growth Fund /13/ 0.75% 0.25% 1.00%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund (formerly Gold and Natural Resources 1.00% 0.11% 1.11%
Fund)
Worldwide Real Estate Fund/ 13/ 1.00% 0.25% 1.25%
Worldwide Emerging Markets Fund /13/ 1.00% 0.27% 1.27%
Worldwide Bond Fund /13/ 1.00% 0.12% 1.12%
Worldwide Balanced Fund /12/ 0.00%/11/ 0.00%//11/ 0.00%/11/
AIM Variable Insurance Funds, Inc.
AIM VI - Capital Appreciation /13/ 0.64% 0.09% 0.73%
AIM VI - Government Securities /13/ 0.50% 0.41% 0.91%
</TABLE>
________________________________________
/1/ The preceding Portfolio expense information was provided to us by the
Portfolios, and we have not independently verified such information. These
Portfolio expenses are not direct charges against Division assets or reduction
from Contract values; rather these Portfolio expenses are taken into
consideration in computing each underlying Portfolio's net asset value, which
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.
________________________________________________________________________________
Strategic Advantage 42
<PAGE>
/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. The
figures reported under "Investment Management and Administration Fees" include
the aggregate of the administration fees paid by the Portfolio and the
management fees paid by its corresponding Series. Similarly, the "other
Expenses" includes all other expenses of the Portfolio and its corresponding
series. See "Expenses" in the Trust's Prospectus. Expenses reflect expense
reimbursement. NBMI has voluntarily undertaken to limit the Portfolios'
compensation of NBMI and excluding taxes, interest, extraordinary expense,
brokerage commissions and transaction costs, that exceed 1% of the Portfolios'
average daily net asset value. These expense reimbursement policies are subject
to termination upon 60 days written notice to the Portfolios.
/3/ The Alger American Leverage AllCap Portfolio's "Other Expenses" includes
0.03% of interest expense.
/4/ A portion of the brokerage commissions the Portfolio paid was used to
reduce its expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent expenses. Including these reductions,
the total operating expenses presented in the table would have been 0.67% for
Growth Portfolio, 0.92% for Overseas Portfolio, and 0.73% for Asset Manager
Portfolio.
/5/ FMR agreed to reimburse a portion of Index 500 Portfolio's expenses during
the period. Without this reimbursement, the funds' management fee, other
expenses and total expenses would have been 0.28%, 0.15% and 0.43% respectively
for Index 500 Portfolio on a annualized basis.
/6/ The Portfolios' custodian fees were reduced under an expense offset
arrangement. In addition, certain expenses of the Portfolio's are being
absorbed voluntarily by INVESCO Funds Group, Inc. ("IFG"). The above ratios
reflect total expenses, less expenses absorbed by IFG, prior to any expense
offset.
/7/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the
years ended December 31, 1996 and 1995 and the period December 31, 1994. If
such expenses had not been voluntarily absorbed, ratio expenses to average net
assets would have been 1.30%, 2.51% and 16.44%, respectively, and ratio of net
investment income to average net assets would have been 3.08%, 2.41% and
(11.72%), respectively.
/8/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the
years ended December 31, 1996 and 1995 and the period ended December 31, 1994.
If such expenses had not been voluntarily absorbed, ratio of expenses to average
net assets would have been 1.19%, 2.31% and 32.55%, respectively, and ratio of
net investment income to average net assets would have been 2.63%, 2.22% and
(30.07%), respectively.
/9/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the
years ended December 31, 1996 and 1995 and the period ended December 31, 1994.
If such expenses had not been voluntarily absorbed, ratio of expenses to average
net assets would have been 1.32%, 2.71% and 30.38% respectively, and ratio of
net investment income to average net assets would have been 8.74%, 7.05% and
(26.92%), respectively.
/10/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the
years ended December 31, 1996 and 1995. If such expenses had not been
voluntarily absorbed, ratio expenses to average net assets would have been
5.36%, and 57.13%, respectively, and ratio of net investment income to average
net assets would have been (1.28%), and (52.86), respectively.
/11/ 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.
/12/ No longer available for new investors.
/13/ Will become available on or before May 1, 1998.
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Strategic Advantage 43
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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
entire death benefit of a life insurance contract is excludable from gross
income of the beneficiary under Section 101(a)(1) of the Code. However, there
are exceptions to this general rule such as transfers for value and
distributions from a policy owned by a qualified plan. 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 136, 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
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Strategic Advantage 44
<PAGE>
the Guideline Premium/Cash Value Corridor Test will ultimately be less than the
amount of death benefit required under the Cash Value Accumulation Test. See
APPENDIX B, page 143, 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. 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 24. 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 47.
The Federal government has in the past and may in the future consider new
legislation or regulations that, if enacted, could change the Federal 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 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
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Strategic Advantage 45
<PAGE>
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 adviser 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. Consult your tax adviser for advice
on the availability of deductions.
LOANS, LAPSES, 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
Owner's 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 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
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Strategic Advantage 46
<PAGE>
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.
SECTION 1035 EXCHANGES
Section 1035 of the Internal Revenue Code generally provides that no gain or
loss shall be recognized on the exchange of one life insurance policy for
another life insurance policy or for an endowment or annuity contract. Special
rules and procedures apply to Section 1035 transactions. Prospective owners
wishing to take advantage of Section 1035 should consult their tax adviser.
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 adviser 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 qualified plans,
non-qualified 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 adviser 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
particular jurisdiction and the circumstances of each Owner and Beneficiary.
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Strategic Advantage 47
<PAGE>
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
14. 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 Fund's 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 Federal securities laws or regulations or
interpretations of them change so that we are permitted to vote shares of a
Portfolio in our own right or to restrict Owner voting, we reserve the right to
do so.
Owners may participate in voting only on matters affecting the Portfolios in
which the Owner's 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
Portfolio's 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 betaken 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.
RIGHT TO CHANGE OPERATIONS
Subject to state limitations, the Company may from time to time change the
investment objective of, or 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,
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Strategic Advantage 48
<PAGE>
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.
(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 until it becomes effective with the SEC or without
any necessary approval of the 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 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. 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 loans 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 when issued, the Policy 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 10 days after it is received, or as otherwise specified
by state law. The Policy will be deemed to have been received by the Owner 5
days after it is mailed from out 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 or as otherwise specified by state law. Insurance coverage
ends when the request is sent.
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
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Strategic Advantage 49
<PAGE>
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.
All changes or amendments to this Policy made by us must be signed by our
president or an officer of the Company and by our secretary or assistant
secretary. No other person is authorized to change the terms or conditions of
this policy.
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. A change in ownership may cause
recognition of taxable income or gain, if any, to the old owner.
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, unless the Beneficiary was designated as an
irrevocable Beneficiary prior to the assignment. It is the Owner's
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 or the date specified by state law.
. 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 creates a new Segment or 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 the new Segment or increase.
We have the right to rescind this Policy if we issued or reinstated the Policy
based on a statement in an application, including a reinstatement application,
that was false or misleading.
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 Insured's death or as
________________________________________________________________________________
Strategic Advantage 50
<PAGE>
otherwise required by state law. 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. 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, while sane or insane, within 2 years of the effective date of a new
Segment or of an increase in any other benefit, we will make a limited payment
to the beneficiary for the new Segment or other increase. This payment will
equal the cost of insurance and any applicable monthly expense charges deducted
for such increase.
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 27.
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.
________________________________________________________________________________
Strategic Advantage 51
<PAGE>
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.
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,
including VESTAX Securities Corporation, a subsidiary of ING America Insurance
Holdings, Inc., and Locust Street Securities, Inc., an affiliate of Security
Life of Denver Insurance Company, 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 and
depend on particular circumstances. In addition, we may also pay override
payments, expense allowances, bonuses, special marketing fees, 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
payee's 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
________________________________________________________________________________
Strategic Advantage 52
<PAGE>
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.
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 53
<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 Nonsmoker 1 CVAT 300,000 $5,750 300,000 54
Male 45 Nonsmoker 1 CVAT 150,000 $5,750 300,000 56
Male 45 Nonsmoker 1 GP 300,000 $5,750 300,000 58
</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.
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
sections 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,
administrative charges and Surrender Charges. The difference between the
Account Value and the Cash Surrender Value in the first 14 years is the
Surrender Charge.
The tables illustrate cost of insurance and expense charges at both our current
rates (which are described under Monthly Deductions from the Account Value, page
(33) 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 Division's 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 .6886% 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 .1598% of the average
daily net assets of the Portfolio, which is an average of all the Portfolios'
other expenses, including interest expenses. This amounts to .8484% 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
________________________________________________________________________________
Strategic Advantage 54
<PAGE>
would result in a net rate of return of (1.59)%, on 6% it would be 4.36%, and on
12% it would be 10.32%. 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 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 an initial
Stated Death Benefit, death benefit option and Scheduled Premiums chosen and
consistent with the Policy form. If the Owner purchases a Policy, 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 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
CASH VALUE ACCUMULATION TEST
SUMMARY PAGE
ASSUMING GUARANTEED CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
----------0.00%---------- -----------12.00%----------- -------------6.00%-----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5750 6037 3783 4070 300000 4310 4597 300000 4046 4333 300000
2 5750 12377 7428 7582 300000 8995 9139 300000 8200 8344 300000
3 5750 19033 10964 10964 300000 14093 14093 300000 12464 12464 300000
4 5750 26022 14657 14357 300000 19645 19645 300000 16840 16840 300000
5 5750 33361 17612 17612 300000 25692 25692 300000 21324 21324 300000
6 5750 41067 21129 21129 300000 32730 32730 300000 26344 26344 300000
7 5750 49157 24485 24485 300000 40409 40409 300000 31485 31485 300000
8 5750 57653 27667 27667 300000 48786 48786 300000 36740 36740 300000
9 5750 66573 30663 30663 300000 57931 57931 300000 42102 42102 300000
10 5750 75939 33455 33455 300000 67917 67917 300000 47562 47562 300000
15 5750 130281 44927 44927 300000 137461 137461 300000 77976 77976 300000
20 5750 199636 48700 48700 300000 222319 222319 395950 111334 111334 300000
25 5750 288152 39032 39032 300000 340851 340851 538203 146677 146677 300000
30 5750 401124 3349 3349 300000 512938 512938 729398 183825 183825 300000
AGE 65 5750 215655 48070 48070 300000 242470 242470 420929 118247 118427 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.
________________________________________________________________________________
Stategic 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
CASH VALUE ACCUMULATION TEST
SUMMARY PAGE
ASSUMING CURRENT CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
----------0.00%---------- -----------12.00%----------- -------------6.00%-----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5750 6037 4237 4525 300000 4793 5080 300000 4515 4802 300000
2 5750 12377 8179 8323 300000 9840 9983 300000 8992 9136 300000
3 5750 19033 11869 11869 300000 15212 15212 300000 13473 13473 300000
4 5750 26022 15413 15413 300000 21053 21053 300000 18061 18061 300000
5 5750 33361 18892 18892 300000 27497 27497 300000 22846 22846 300000
6 5750 41067 22708 22708 300000 35052 35052 300000 28258 28258 300000
7 5750 49157 26454 26454 300000 43394 43394 300000 33903 33903 300000
8 5750 57653 30094 30094 300000 52570 52570 300000 39756 39756 300000
9 5750 66573 33611 33611 300000 62655 62655 300000 45809 45809 300000
10 5750 75939 36999 36999 300000 73745 73745 300000 52067 52067 300000
15 5750 130281 52693 52693 300000 151935 151935 309644 88403 88403 300000
20 5750 199636 1753 61753 300000 249622 249622 444577 130294 130294 300000
25 5750 288152 0394 60394 300000 390312 390312 616303 179265 179265 300000
30 5750 401124 9361 39361 300000 598898 598898 851633 236906 236906 300000
AGE 65 5750 215655 62495 62495 300000 273319 273319 474481 139442 139442 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>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFESTRATEGIC 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 GUARANTEED CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
----0.00%---- ----12.00%---- ----6.00%----
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
`1 5750 6037 3782 4070 300000 4309 459 300000 4045 4333 300000
2 5750 12377 7437 7581 300000 8994 9138 300000 8199 8343 300000
3 5750 19033 10962 10962 300000 14092 14092 300000 12463 12463 300000
4 5750 26022 14356 14356 300000 19643 19643 300000 16838 16838 300000
5 5750 33361 17610 17610 300000 25689 25689 300000 21322 21322 300000
6 5750 41067 21127 21127 300000 32727 32727 300000 26342 26342 300000
7 5750 49157 24483 24483 300000 40406 40406 300000 31483 31483 300000
8 5750 57653 27665 27665 300000 48783 48783 300000 36737 36737 300000
9 5750 66573 30662 30662 300000 57928 57928 300000 42100 42100 300000
10 5750 75939 33454 33454 300000 67914 67914 300000 47560 47560 300000
15 5750 130281 44941 44941 300000 137465 137465 300000 77990 77990 300000
20 5750 199636 48772 48772 300000 222325 222325 395962 111404 111404 300000
25 5750 288152 39310 39310 300000 340860 340860 538218 146901 146901 300000
30 5750 401124 4319 4319 300000 512952 512952 729418 184421 184421 300000
AGE 65 5750 215655 48166 48166 300000 242477 242477 420940 118337 118337 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 58
<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>
----0.00%---- ----12.00%---- ----6.00%----
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5750 6037 4418 4705 300000 4985 5272 300000 4701 4989 300000
2 5750 12377 8612 8756 300000 10324 10468 300000 9451 9595 300000
3 5750 19033 12613 12613 300000 16084 16084 300000 14279 14279 300000
4 5750 26022 16480 16480 300000 22372 22372 300000 19249 19249 300000
5 5750 33361 20258 20258 300000 29290 29290 300000 24413 24413 300000
6 5750 41067 24353 24353 300000 37353 37353 300000 30204 30204 300000
7 5750 49157 28357 28357 300000 46237 46237 300000 36229 36229 300000
8 5750 57653 32261 32261 300000 56024 56024 300000 42489 42489 300000
9 5750 66573 36051 36051 300000 66789 66789 300000 48982 48982 300000
10 5750 75939 39713 39713 300000 78589 78589 300000 55704 55704 300000
15 5750 130281 56624 56624 300000 160583 160853 327819 94503 94503 300000
20 5750 199636 67326 67326 300000 263814 263814 469853 139437 139437 300000
25 5750 288152 69401 69401 300000 412540 412540 651401 192605 192605 304123
30 5750 401124 55467 55467 300000 633043 633043 900187 252841 252841 359540
AGE 65 5750 215655 68552 68552 300000 288864 288864 501468 149324 149324 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 59
<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>
---------0.00%--------- ----------12.00%--------- -----------6.00%-----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5750 6037 3783 4070 300000 4310 4597 300000 4046 4333 300000
2 5750 12377 7438 7582 300000 8995 9139 300000 8200 8344 300000
3 5750 19033 10964 10964 300000 14093 14093 300000 12464 12464 300000
4 5750 26022 14357 14357 300000 19645 19645 300000 16840 16840 300000
5 5750 33361 17612 17612 300000 25692 25692 300000 21324 21324 300000
6 5750 41067 21129 21129 300000 32730 32730 300000 26344 26344 300000
7 5750 49157 24485 24485 300000 40409 40409 300000 31485 31485 300000
8 5750 57653 27667 27667 300000 48786 48786 300000 36740 36740 300000
9 5750 66573 30663 30663 300000 57931 57931 300000 42102 42102 300000
10 5750 75939 33455 33455 300000 67917 67917 300000 47562 47562 300000
15 5750 130281 44927 44927 300000 137461 137461 300000 77976 77976 300000
20 5750 199636 48700 48700 300000 255159 255159 311294 111334 111334 300000
25 5750 288152 39032 39032 300000 452503 452503 524903 146677 146677 300000
30 5750 401124 3349 3349 300000 775280 775280 829550 183825 183825 300000
AGE 65 5750 215655 48070 48070 300000 287399 287399 344879 118247 118247 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 60
<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>
---------0.00%--------- ----------12.00%--------- -----------6.00%-----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5750 6037 4237 4525 300000 4793 5080 300000 4515 4802 300000
2 5750 12377 8179 8323 300000 9840 9983 300000 8992 9136 300000
3 5750 19033 11869 11869 300000 15212 15212 300000 13473 13473 300000
4 5750 26022 15413 15413 300000 21053 21053 300000 18061 18061 300000
5 5750 33361 18892 18892 300000 27497 27497 300000 22846 22846 300000
6 5750 41067 22708 22708 300000 35052 35052 300000 28258 28258 300000
7 5750 49157 26454 26454 300000 43394 43394 300000 33903 33903 300000
8 5750 57653 30094 30094 300000 52570 52570 300000 39756 39756 300000
9 5750 66573 33611 33611 300000 62655 62655 300000 45809 45809 300000
10 5750 75939 36999 36999 300000 73745 73745 300000 52067 52067 300000
15 5750 130281 52693 52693 300000 151945 151945 300000 88403 88403 300000
20 5750 199636 61753 61753 300000 283490 283490 345858 130294 130294 300000
25 5750 288152 60394 60394 300000 501374 501374 581594 179265 179265 300000
30 5750 401124 39361 39361 300000 858704 858704 918814 239810 239810 300000
AGE 65 5750 215655 62495 62495 300000 319000 319000 382800 139442 139442 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 61
<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. The
business address of each person denoted with two asterisks (**) is Security Life
of Denver Insurance Company, 9140 Arrowpoint Blvd., Suite 400, Charlotte, North
Carolina 28273.
<TABLE>
<CAPTION>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- - -------------------- -------------------------------------------------
<S> <C>
R. Glenn Hilliard* Chairman, & CEO
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,
Institutional Markets Security Life Reinsurance and
Michael W. Cunningham* Director, Executive Vice President
Linda B. Emory* Director, Vice President and Appointed Actuary
John R. Barmeyer Senior Vice President and Chief Legal Officer
Wayne D. Bidelman Senior Vice President
Eugene L. Copeland Senior Vice President and General Counsel,
Reinsurance and Security Life
Institutional Markets
Michael Fisher Senior Vice President, Litigation
Carol D. Hard Senior Vice President
Philip R. Kruse Senior Vice President, Sales & Marketing
Charles LeDoyen** Senior Vice President, Structured Settlements
James L. Livingston, Jr. Senior Vice President and Chief Actuary
Timothy P. McCarthy Senior Vice President, Marketing Services
</TABLE>
________________________________________________________________________________
Strategic Advantage 62
<PAGE>
<TABLE>
<S> <C>
Jeffery W. Seel* Senior Vice President and Chief Investment Officer
</TABLE>
<TABLE>
<CAPTION>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- - -------------------- -------------------------------------------------
<S> <C>
Jess A. Skriletz Senior Vice President, Institutional Markets
Louis N. Trapolino Senior Vice President, Distribution
William D. Tyler Senior Vice President and Chief Information Officer
William H. Alexander Vice President and Medical Director
Katherine Anderson Vice President, Chief Product Actuary, Security Life
Reinsurance
Carole A. Baumbush Vice President, Reinsurance Operations
Evelyn A. Bentz Vice President, M Financial Sales
Thomas Kirby Brown Vice President, Institutional Markets
Daniel S. Clements Vice President and Chief Underwriter
Denise S. Dumont Vice President, Utility Services
Linda Elliott Vice President, CIO Information Technology
Larry D. Erb Vice President, Information Technology
Martha K. Evans Vice President, Variable Operations
Deborah B. Holden Vice President, Human Resources
Brian Holland Vice President, Sales and International Risk
Management
Kenneth Kiefer** Vice President, Operations, Structured Settlements
Richard D. King Vice President and Medical Director
Greg McGreevey Vice President, Marketing, Institutional Markets
</TABLE>
________________________________________________________________________________
Strategic Advantage 63
<PAGE>
<TABLE>
<S> <C>
C. Lynn McPherson* Vice President
Sue A. Miskie Vice President, Corporate Services
Donna T. Mosely Vice President, Valuation
Daniel G. Patsey Vice President, Strategic Technology
</TABLE>
<TABLE>
<CAPTION>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- - -------------------- -------------------------------------------------
<S> <C>
David S. Pendergrass Vice President and Treasury Officer
Steve Pryde Vice President, Administration, Security Life
Reinsurance
Christiaan M. Rutten Vice President, Structured Reinsurance
Casey J. Scott Vice President, Sales Operations
Alan C. Singer Vice President, Customer Relations and Regulatory
Compliance
Mark A. Smith Vice President, Insurance Services
Jerome M. Strop Vice President, Strategic Marketing
Larry D. Taylor Vice President, Product Development
Gary W. Waggoner Vice President, General Counsel and Secretary
William Wojciechowski Vice President, Business Consulting and Financial
Markets
Stephen J. Yarina Vice President, Treasurer and Chief Financial Officer
Roger O. Beebe Actuarial Officer
Eric Banta Assistant Secretary
Marsha K. Crest Agency Administration Officer
John B. Dickinson Actuarial Officer
Relda A. Fleshman Deputy General Counsel
Sandra J. Forte Assistant Secretary
</TABLE>
________________________________________________________________________________
Strategic Advantage 64
<PAGE>
<TABLE>
<S> <C>
Shirley A. Knarr Actuarial Officer
Lisa K. Smith Multi-Life Officer
Glen E. Stark Actuarial Officer
William J. Wagner Actuarial Officer
Amy L. Winsor Tax and Finance Officer
</TABLE>
________________________________________________________________________________
Strategic Advantage 65
<PAGE>
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 the General Counsel of Security Life and Mayer, Brown and
Platt.
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, 1996 and 1995, and for each of the
three years in the period ended December 31, 1996, and the financial statements
of the Separate Account L1 at December 31, 1996, and for each of the two years
in the period ended December 31, 1996, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their 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.
REGISTRATION STATEMENT
We have filed a Registration Statement relating to the Variable Account and the
variable life insurance policy described in this prospectus with the SEC. The
Registration Statement, which is required by the Securities Act of 1933,
includes additional information that is not required in this prospectus under
the rules and regulations of the SEC. The additional information may be obtained
from the SEC's principal office in Washington, DC. You will have to pay a fee
for the material.
________________________________________________________________________________
Strategic Advantage 66
<PAGE>
FINANCIAL STATEMENTS
The consolidated financial statements of Security Life of Denver Insurance
Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
are prepared in accordance with generally accepted accounting principles and
start on page 62.
The financial statements included for the Security Life Separate Account L1 at
December 31, 1996 and for each of the two years in the period ended December 31,
1996, 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.
The most current financial statements are those as of the end of the most recent
fiscal year. The Company does not prepare financial statements more often than
annually and believes that any incremental benefit to prospective policy holders
that may result from preparing and delivering more current financial statements,
though unaudited, does not justify the additional cost that would be incurred.
In addition, the Company represents that there have been no significant adverse
changes in the financial condition or operations of the Company between the end
of the most current fiscal year and the date of this prospectus.
________________________________________________________________________________
Strategic Advantages 67
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Financial Statements
Security Life of Denver
Insurance Company
and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
with Report of Independent Auditors
________________________________________________________________________________
68
Strategic Advantage
<PAGE>
CONTENTS
--------
<TABLE>
<S> <C>
Report of Independent Auditors....................................... 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets.......................................... 2
Consolidated Statements of Income.................................... 4
Consolidated Statements of Stockholder's Equity...................... 5
Consolidated Statements of Cash Flows................................ 6
Notes to Consolidated Financial Statements........................... 8
</TABLE>
________________________________________________________________________________
69
Strategic Advantage
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholder
Security Life of Denver Insurance Company
We have audited the accompanying consolidated balance sheets of Security Life of
Denver Insurance Company (a wholly-owned subsidiary of ING America Insurance
Holdings, Inc.) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Security Life of
Denver Insurance Company and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/
ERNST & YOUNG LLP
Denver, Colorado
April 11, 1997
________________________________________________________________________________
70
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-----------------------------------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed maturities, at fair value (amortized cost:
1996--$2,765,488; 1995--$2,318,038) $2,875,084 $2,470,944
Equity securities, at fair value (cost: 1996--$4,899;
1995--$8,593) 5,345 8,369
Mortgage loans on real estate 452,795 285,544
Investment real estate, at cost, less accumulated
depreciation (1996--$628; 1995--$640) 1,769 2,908
Policy loans 795,311 754,240
Other long-term investments 11,063 11,870
Short-term investments 7,019 10,946
-----------------------------------
Total investments 4,148,386 3,544,821
Cash 13,821 32,044
Accrued investment income 45,426 38,132
Reinsurance recoverable:
Paid benefits 10,188 11,096
Unpaid benefits 19,703 13,581
Prepaid reinsurance premiums (Note 9) 1,951,012 1,614,959
Deferred policy acquisition costs (DPAC) 673,560 595,232
Property and equipment, at cost, less accumulated
depreciation (1996--$21,407; 1995--$19,556) 38,848 40,418
Federal income tax recoverable (Note 10) - 62,990
Indebtedness of related parties 5,383 33,418
Other assets 99,683 64,314
Separate account assets (Note 7) 124,986 31,825
-----------------------------------
Total assets $7,130,996 $6,082,830
===================================
</TABLE>
________________________________________________________________________________
71
Strategic Advantage
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits (Note 9):
Life and annuity reserves $3,834,140 $3,328,405
Guaranteed investment contracts 1,911,201 1,520,926
Policyholders' funds 81,273 75,809
Advance premiums 236 231
Accrued dividends and dividends on deposit 20,338 19,886
Unpaid claims 88,074 79,821
Funds held under reinsurance treaties 18,967 32,793
---------------------------------------
Total future policy benefits 5,954,229 5,057,871
Accounts payable and accrued expenses 75,790 75,019
Indebtedness to related parties 5,427 16,224
Long-term debt to related parties (Note 11) 75,000 50,032
Accrued interest on long-term debt to related
parties (Note 11) 3,700 24
Other liabilities 53,311 60,443
Federal income taxes payable (Note 10) 11,883 -
Deferred federal income taxes (Note 10) 48,541 44,746
Separate account liabilities (Note 7) 124,986 31,825
---------------------------------------
Total liabilities 6,352,867 5,336,184
Commitments and contingent liabilities
(Notes 8, 9 and 14)
Stockholder's equity (Note 12):
Common stock, $20,000 par value:
Authorized - 149 shares
Issued and outstanding - 144 shares 2,880 2,880
Additional paid-in capital 302,722 297,422
Net unrealized gains on investments 58,718 72,973
Retained earnings 413,809 373,371
---------------------------------------
Total stockholder's equity 778,129 746,646
---------------------------------------
Total liabilities and stockholder's equity $7,130,996 $6,082,830
=============== ===============
</TABLE>
See accompanying notes.
________________________________________________________________________________
72
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Income
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Revenues:
Traditional life insurance premiums $ 118,200 $ 124,619 $ 140,633
Universal life and investment product charges 202,081 202,908 164,526
Reinsurance premiums assumed 333,851 321,731 299,632
---------------------------------------------------
654,132 649,258 604,791
Reinsurance premiums ceded (117,880) (117,061) (101,459)
---------------------------------------------------
536,252 532,197 503,332
Net investment income 312,121 256,065 209,605
Net realized gains (losses) on investments 4,770 6,564 (7,245)
Miscellaneous income 526 1,941 6,313
---------------------------------------------------
853,669 796,767 712,005
Benefits and expenses:
Benefits:
Traditional life insurance:
Death benefits 235,828 217,136 231,018
Other benefits 71,939 88,326 72,298
Universal life and investment contracts:
Interest credited to account balances 186,908 164,536 139,942
Death benefits incurred in excess of account
balances 54,004 63,672 73,869
Increase in policy reserves and other funds 121,946 23,895 97,723
Reinsurance recoveries (80,276) (74,305) (73,379)
Product conversions 16,379 74,291 -
---------------------------------------------------
606,728 557,551 541,471
Expenses:
Commissions 20,362 46,605 12,359
Insurance operating expenses 69,580 52,414 50,309
Amortization of deferred policy acquisition costs 94,685 71,450 65,393
---------------------------------------------------
791,355 728,020 669,532
---------------------------------------------------
Income before federal income taxes 62,314 68,747 42,473
Federal income taxes (Note 10) 21,876 24,296 14,921
---------------------------------------------------
Net income before cumulative effect of accounting
changes 40,438 44,451 27,552
Cumulative effect of change in accounting for
postemployment benefits (net of tax) (Note 6) - - (1,381)
---------------------------------------------------
Net income $ 40,438 $ 44,451 $ 26,171
===================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
73
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year $ 2,880 $ 2,880 $ 2,880
================================================
Additional paid-in capital:
Balance at beginning of year $297,422 $150,792 $ 150,792
Capital contributions 5,300 146,630 -
------------------------------------------------
Balance at end of year $302,722 $297,422 $ 150,792
================================================
Net unrealized gains on investments:
Balance at beginning of year $ 72,973 $ 6,862 $ (131)
Adjustment to beginning balance for
change in accounting method, net of
income taxes of $46,916 (Note 1) - - 87,630
Effect on DPAC of change in accounting
method, net of income taxes of $10,117 - - (18,790)
Net change in unrealized gains (losses),
net of tax (27,716) 118,654 (106,911)
Effect on DPAC of unrealized gains and
losses on fixed maturities, net of tax 13,461 (52,543) 45,064
------------------------------------------------
Balance at end of year $ 58,718 $ 72,973 $ 6,862
================================================
Retained earnings:
Balance at beginning of year $373,371 $329,640 $ 306,349
Net income 40,438 44,451 26,171
Dividends paid to stockholder - (720) (2,880)
------------------------------------------------
Balance at end of year $413,809 $373,371 $ 329,640
================================================
Total stockholder's equity $778,129 $746,646 $ 490,174
===============================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
74
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 40,438 $ 44,451 $ 26,171
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefits 585,581 471,331 621,578
Net decrease (increase) in federal income taxes 78,668 33,232 (25,506)
Increase (decrease) in accounts payable and
accrued expenses (6,845) 26,751 3,771
Increase in accrued interest on long-term debt 3,676 24 -
Increase in accrued investment income (7,294) (5,739) (5,651)
Increase in reinsurance recoverable (5,214) (24) (1,767)
Increase in prepaid reinsurance premiums (336,053) (253,968) (397,463)
Net realized investment (gains) losses (4,770) (6,564) 7,245
Depreciation and amortization expense 3,857 4,036 3,500
Policy acquisition costs deferred (152,299) (127,069) (127,305)
Amortization of deferred policy acquisition
costs 94,685 71,450 65,393
Cumulative effect of accounting changes - 1,381
Increase in accrual for postretirement benefits 484 623 851
Other, net (10,055) (9,784) (4,894)
=======================================================
Net cash provided by operating activities 284,859 248,750 167,304
INVESTING ACTIVITIES
Securities available-for-sale:
Sales:
Fixed maturities 334,482 357,059 731,460
Equity securities 4,198 4,730 148,176
Maturities--fixed maturities 727,937 280,581 237,586
Purchases:
Fixed maturities (1,522,369) (935,210) (1,202,024)
Equity securities (428) (1,300) (130,856)
Securities held-to-maturity:
Maturities--fixed maturities - 14,156 1,665
Purchases--fixed maturities - - (42,454)
Sale, maturity or repayment of investments:
Mortgage loans on real estate 18,102 16,061 17,570
Investment real estate 1,354 215 1,534
Other long-term investments - 1,064 -
</TABLE>
________________________________________________________________________________
75
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<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Purchase or issuance of investments:
Mortgage loans on real estate $(186,228) $(136,218) $ (91,410)
Investment real estate - 14 (156)
Policy loans, net (41,071) (63,746) (72,017)
Other long-term investments 809 (2,169) (399)
Short-term investments, net 3,942 (9,154) 4,099
Additions to property and equipment (4,482) (1,812) (2,280)
Disposals of property and equipment 2,389 79 (177)
-----------------------------------------------------
Net cash used by investing activities (661,365) (475,650) (399,683)
FINANCING ACTIVITIES
Increase (decrease) in indebtedness to related parties 42,206 (17,011) 52,231
Cash contributions from parent 5,300 - 15,000
Receipts from interest sensitive products
credited to policyholder account balances 434,726 387,904 250,396
Return of policyholder account balances on
interest sensitive policies (123,949) (128,948) (89,532)
Dividends paid to stockholder - (720) (2,880)
-----------------------------------------------------
Net cash provided by financing activities 358,283 241,225 225,215
-----------------------------------------------------
Net (decrease) increase in cash (18,223) 14,325 (7,164)
Cash at beginning of year 32,044 17,719 24,883
-----------------------------------------------------
Cash at end of year $ 13,821 $ 32,044 $ 17,719
=====================================================
</TABLE>
Noncash transaction:
In 1995, the Company received a capital contribution of $124,630,000 in
fixed maturities and equity securities. The Company's parent also contributed
$22,000,000 in cash to additional paid-in capital. As of December 31, 1995, the
cash representing the capital contribution had not been received, and the amount
is presented as indebtedness of related parties in the accompanying consolidated
balance sheet. The cash was received by the Company in January 1996.
See accompanying notes.
________________________________________________________________________________
76
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts and
operations, after intercompany eliminations, of Security Life of Denver
Insurance Company (Security Life) and its wholly-owned subsidiaries: Midwestern
United Life Insurance Company (Midwestern United); First ING Life Insurance
Company of New York, formerly the Urbaine Life Reinsurance Company (First ING);
First Secured Mortgage Deposit Corporation; and ING America Equities, Inc.,
formerly SLD Equities, Inc.
NATURE OF OPERATIONS
Security Life of Denver Insurance Company and its subsidiaries (the Company) is
a wholly-owned subsidiary of ING America Insurance Holdings, Inc. (ING America).
The Company focuses on two markets, the advanced market and reinsurance to other
insurers. The life insurance products offered for the advanced market include
wealth transfer and estate planning, executive benefits, charitable giving and
corporate owned life insurance. These products include traditional life,
interest sensitive life, universal life, variable annuity and variable life.
Operations are conducted almost entirely on the general agency basis and the
Company is presently licensed in all states (approved for reinsurance only in
New York), the District of Columbia and the Virgin Islands. In the reinsurance
market, the Company focuses on automatic reinsurance coverages provided to other
insurance companies.
The significant accounting policies followed by the Company that materially
affect the financial statements are summarized below:
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) which, as to the
insurance companies included in the consolidation, differ from statutory
accounting practices prescribed or permitted by state insurance regulatory
authorities.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
________________________________________________________________________________
77
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
Effective January 1, 1994, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 112, Employers' Accounting for Postemployment
Benefits, in accounting for disability benefits. The cumulative effect as of
January 1, 1994 of this change in accounting was to decrease net income by
$1,381,000 (net of tax of $743,000). The effect of the change on 1994 income
before the cumulative effect of the change was not material. Prior to January
1, 1994, the Company recognized the cost of providing these benefits on a cash
basis. Under the new method of accounting, the Company accrues the benefits
when it becomes probable that such benefits will be paid and when sufficient
information exists to make reasonable estimates of the amounts to be paid.
In May 1993, the Financial Accounting Standards Board issued FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities (FASB
115). The Company adopted the provisions of the new standard for investments
held as of or acquired after January 1, 1994. The cumulative effect as of
January 1, 1994 of adopting FASB 115 had no impact on income. The opening
balance of stockholder's equity was increased by $68,840,000 (net of tax of
$36,799,000) to reflect the net unrealized holding gains on securities
classified as available-for-sale previously carried at amortized cost less an
adjustment to deferred policy acquisition costs for the change in expected
future gross margins.
Because of the numerous questions that arose during the implementation of FASB
115, the Financial Accounting Standards Board issued A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities in November 1995. This Special Report provided interpretive guidance
to the implementation of FASB 115 and provided companies with a one-time period
until December 31, 1995 to reassess the appropriateness of the classifications
of all securities held at the time and account for any resulting
reclassifications at fair value. Reclassifications from the held-to-maturity
category that result from this one-time reassessment do not call into question
the intent of an enterprise to hold other debt securities to maturity in the
future. As a result of this reassessment, the Company reclassified all held-to-
maturity securities to the available-for-sale category effective December 26,
1995. The book value of these securities at the date of transfer was
$98,818,000. At transfer, an unrealized gain of $4,082,000 (net of tax of
$2,198,000) was recognized as a direct increase to stockholder's equity.
________________________________________________________________________________
78
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Beginning in 1995, the Company adopted FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan, and Statement No. 118, which amends
Statement 114. Under the amended statement, the 1996 and 1995 allowances for
credit losses related to loans that are identified for evaluation in accordance
with Statement 114 are based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. Adoption of this standard resulted in an
insignificant impact to net income and stockholder's equity.
Effective January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. Adoption of this standard
resulted in an insignificant impact to net income and stockholder's equity.
INVESTMENTS
Investments are presented on the following bases:
The carrying value of fixed maturities depends on the classification of the
security: securities held-to-maturity, securities available-for-sale, and
trading securities. Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax and
deferred acquisition cost adjustments, reported in a separate component of
stockholder's equity.
The Company does not hold any securities classified as held-to-maturity or
trading securities.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in net investment income
as earned.
________________________________________________________________________________
79
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans are carried at the unpaid balances. Investment real estate is
carried at cost, less accumulated depreciation. Policy loans are carried at
unpaid balances. Short-term investments are carried at cost, which approximates
fair value. Derivatives are accounted for on the same basis as the asset
hedged.
Realized gains and losses, and declines in value judged to be other-than-
temporary are included in net realized gains (losses) on investments. The cost
of securities sold is based on the specific identification method.
RECOGNITION OF PREMIUM REVENUES
Premiums for traditional life insurance products, which include those products
with fixed and guaranteed premiums and benefits and consist principally of whole
life insurance policies, are recognized as revenue when due. Revenues for
universal life insurance policies and for investment products consist of policy
charges for the cost of insurance, policy administration charges, and surrender
charges assessed against policyholder account balances during the year.
DEFERRED POLICY ACQUISITION COSTS
Commissions, reinsurance allowances, and other costs of acquiring traditional
life insurance including reinsurance assumed, universal life insurance
(including interest sensitive products) and investment products that vary with
and are primarily related to the production of new and renewal business have
been deferred. Traditional life insurance acquisition costs are being amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For universal
life insurance and investment products, acquisition costs are being amortized
generally in proportion to the present value (using the assumed crediting rate)
of expected gross margins from surrender charges, investments, mortality, and
expenses. This amortization is adjusted retrospectively when estimates of
current or future gross margins to be realized from a group of products are
revised.
Deferred policy acquisition costs are adjusted to reflect changes that would
have been necessary if unrealized investment gains and losses related to
available-for-sale securities had been realized. The Company has reflected those
adjustments in the asset balance with the offset as a direct adjustment to
stockholder's equity.
________________________________________________________________________________
80
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE POLICY BENEFITS
Benefit reserves for traditional life insurance products (other than reinsurance
assumed) are computed using a net level premium method including assumptions as
to investment yields, mortality, withdrawals and other assumptions based on the
Company's and industry experience, modified as necessary to reflect anticipated
trends to include provisions for possible unfavorable deviations. Reserve
interest assumptions are those deemed appropriate at the time of policy issue,
and range from 2% to 10%. Policy benefit claims are charged to expense in the
year that the claims are incurred.
Benefit reserves for reinsurance assumed are computed using pricing assumptions
with provisions for adverse deviation. Benefits for level-term reinsurance
assumed are computed to recognize profits in proportion with premiums. Benefit
reserves for all other reinsurance assumed are computed to recognize profits in
proportion to the coverage provided.
Benefit reserves for universal life-type policies (including interest sensitive
products) and investment products are computed under a retrospective deposit
method and represent policy account balances before applicable surrender
charges. Policy benefits and claims that are charged to expense include benefit
claims incurred during the year in excess of related policy account balances.
Interest crediting rates for universal life and investment products range from
4.60% to 7.45% during 1996, 4.60% to 8.10% during 1995, and 6.15% to 8.10%
during 1994.
Included in life and annuity reserves is an unearned revenue reserve that
reflects the unamortized balance of excess first year policy service fees over
renewal period policy service fees on universal life and investment products.
These excess fees have been deferred and are being recognized in income over the
periods benefited, using the same assumptions and factors used to amortize
deferred policy acquisition costs.
UNPAID CLAIMS
The liabilities for unpaid claims include estimates of amounts due on reported
claims and claims that have been incurred but were not reported as of December
31. Such estimates are based on actuarial projections applied to historical
claim payment data and are considered reasonable and adequate to discharge the
Company's obligations for claims incurred but unpaid as of December 31.
________________________________________________________________________________
81
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HOME OFFICE PROPERTY AND EQUIPMENT
Home office property and equipment are carried at cost less accumulated
depreciation. Depreciation for major classes of assets is calculated on a
straight-line basis.
PARTICIPATING INSURANCE
The Company accrues a liability for earnings on participating policies that
cannot inure to the benefit of the Company's stockholder. The liability is
determined based on earnings on participating policies in excess of 10% of
profits on participating business before payment of policyholder dividends. The
liability for these undistributed earnings was $6,211,000 and $6,218,000 at
December 31, 1996 and 1995, respectively. Participating business approximates
.4% of the Company's ordinary life insurance in force and 1.4% of premium
income. Earnings for participating insurance are based on the actual earnings
of the participation block of policies. Expenses and taxes are allocated based
on the amount of participating insurance in force. Investment income is
allocated based on the yield of the participating investment portfolio. The
amount of dividends to be paid is determined annually by the Board of Directors.
Amounts allocable to participating policyholders are based on published dividend
projections or expected dividend scales. Dividends of $3,307,000, $2,964,000,
and $3,683,000 were incurred in 1996, 1995, and 1994, respectively.
FEDERAL INCOME TAXES
Deferred federal income taxes have been provided or credited to reflect
significant temporary differences between income reported for tax and financial
reporting purposes using reasonable assumptions.
CASH FLOW INFORMATION
Cash includes cash on hand and demand deposits. Included as a component of
operating activities is interest paid of $1,016,000, $4,861,000, and $538,000
for 1996, 1995, and 1994, respectively.
________________________________________________________________________________
82
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GUARANTY FUND ASSESSMENTS
Insurance companies are assessed the costs of funding the insolvencies of other
insurance companies by the various state guaranty associations generally based
on the amount of premium companies collect in that state. The Company accrues
the cost of future guaranty fund assessments based on estimates of insurance
company insolvencies provided by the National Organization of Life and Health
Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in
each state. The Company reduces the accrual by credits allowed in some states
to reduce future premium taxes by a portion of assessments in that state.
PENDING ACCOUNTING STANDARD
During 1996, the FASB issued Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which requires
an entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when control has
been surrendered in accordance with the criteria provided in the Statement. The
Company will apply the new rules prospectively to transactions beginning in the
first quarter of 1997. Based on current circumstances, the Company believes the
application of the new rules will not have a material impact on the financial
statements.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been reclassified
to conform to the 1996 presentation.
2. ACQUISITION
During 1994, Security Life contributed capital of $317,000 in creation of ING
America Equities, Inc., a wholesale broker/dealer incorporated September 27,
1993 and approved for membership in the National Association of Securities
Dealers on August 18, 1994. The business of ING America Equities, Inc. consists
only of distribution of variable life and annuity contracts. ING America
Equities, Inc. does not hold customer funds or securities.
________________________________________________________________________________
83
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS
The amortized cost and fair value of investments in fixed maturities and equity
securities are as follows at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 88,526 $ 1,035 $ 858 $ 88,703
States, municipalities and political
subdivisions 71,857 984 1,058 71,783
Public utilities securities 105,110 1,130 748 105,492
Debt securities issued by foreign
governments 3,272 - - 3,272
Corporate securities 921,565 20,095 5,646 936,014
Mortgage-backed securities 1,273,251 108,367 18,924 1,362,694
Other asset-backed securities 299,809 8,186 1,286 306,709
Derivatives hedging fixed maturities
(Note 4) 2,098 292 1,973 417
------------------------------------------------
Total fixed maturities 2,765,488 140,089 30,493 2,875,084
Preferred stocks (nonredeemable) 2,112 66 301 1,877
Common stocks 2,787 756 75 3,468
------------------------------------------------
Total $2,770,387 $140,911 $30,869 $2,880,429
================================================
</TABLE>
________________________________________________________________________________
84
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 99,780 $ 3,503 $ 154 $ 103,129
States, municipalities and political
subdivisions 74,126 1,760 234 75,652
Public utilities securities 76,470 2,841 50 79,261
Debt securities issued by foreign
governments 3,272 - - 3,272
Corporate securities 659,902 34,246 911 693,237
Mortgage-backed securities 1,230,943 123,306 18,690 1,335,559
Other asset-backed securities 169,847 10,946 2,174 178,619
Derivatives hedging fixed maturities
(Note 4) 3,698 909 2,392 2,215
------------------------------------------------
Total fixed maturities 2,318,038 177,511 24,605 2,470,944
Preferred stocks (nonredeemable) 6,196 275 443 6,028
Common stocks 2,397 13 69 2,341
------------------------------------------------
Total $2,326,631 $177,799 $25,117 $2,479,313
================================================
</TABLE>
________________________________________________________________________________
85
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and fair value of investments in fixed maturities at December
31, 1996, by contractual maturity, are shown in the following table (in
thousands). Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED COST
FAIR VALUE
----------------------------
<S> <C> <C>
Available for sale:
Due in one year or less $ 25,893 $ 26,250
Due after one year through five years 349,962 354,031
Due after five years through ten years 466,457 472,014
Due after ten years 350,116 353,386
-----------------------------
1,192,428 1,205,681
Mortgage-backed securities 1,273,251 1,362,694
Other asset-backed securities 299,809 306,709
----------------------------
Total available-for-sale $2,765,488 $2,875,084
============================
</TABLE>
Changes in unrealized gains (losses) on investments in available-for-sale
securities for the years ended December 31, 1996, 1995 and 1994 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------
FIXED EQUITY TOTAL
--------------------------------
<S> <C> <C> <C>
Gross unrealized gains $140,089 $ 822 $140,911
Gross unrealized losses 30,493 376 30,869
--------------------------------
Net unrealized gains (losses) 109,596 446 110,042
Deferred income tax (expense)
benefit (38,359) (157) (38,516)
--------------------------------
Net unrealized gains (losses) after
taxes 71,237 289 71,526
Less:
Balance at beginning of year 99,389 (147) 99,242
--------------------------------
Change in net unrealized gains
(losses) $(28,152) $ 436 $(27,716)
================================
</TABLE>
________________________________________________________________________________
86
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------
FIXED EQUITY TOTAL
--------------------------------
<S> <C> <C> <C>
Gross unrealized gains $ 177,511 $ 288 $ 177,799
Gross unrealized losses 24,605 512 25,117
--------------------------------
Net unrealized gains (losses) 152,906 (224) 152,682
Deferred income tax (expense)
benefit (53,517) 77 (53,440)
--------------------------------
Net unrealized gains (losses) after
taxes 99,389 (147) 99,242
Less:
Balance at beginning of year (18,854) (558) (19,412)
--------------------------------
Change in net unrealized gains
(losses) $ 118,243 $ 411 $ 118,654
================================
</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 gains (losses) (28,997) (858) (29,855)
Deferred income tax (expense)
benefit 10,143 300 10,443
--------------------------------
Net unrealized gains (losses) after
taxes (18,854) (558) (19,412)
Less:
Balance at beginning of year - (131) (131)
Adjustment for change in accounting
method (net of tax of $46,916) 87,630 - 87,630
--------------------------------
Change in net unrealized gains
(losses) $(106,484) $ (427) $(106,911)
================================
</TABLE>
As part of its overall investment management strategy, the Company has entered
into agreements to purchase $21,538,000 in mortgage loans as of December 31,
1996. These agreements were settled during 1997. The Company had no agreements
to sell securities at December 31, 1996.
________________________________________________________________________________
87
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Major categories of investment income for the years ended December 31 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Fixed maturities $240,931 $190,327 $153,777
Mortgage loans on real estate 29,143 16,601 12,221
Policy loans 52,205 55,438 42,456
Other investments 2,197 4,360 5,654
--------------------------------
324,476 266,726 214,108
Investment expenses (12,355) (10,661) (4,503)
--------------------------------
Net investment income $312,121 $256,065 $209,605
================================
</TABLE>
Net realized gains (losses) on investments for the years ended December 31 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Fixed maturities $ 4,540 $ 6,538 $ (3,847)
Equity securities 79 5 (1,761)
Real estate and other 151 21 (1,637)
--------------------------------
Net realized gains (losses) on
investments $ 4,770 $ 6,564 $ (7,245)
================================
</TABLE>
During 1996, 1995 and 1994, debt and marketable equity securities available-for-
sale were sold with fair values at the date of sale of $334,482,000,
$306,219,000 and $292,483,000, respectively. Gross gains of $7,248,000,
$9,691,000, and $6,125,000 and gross losses of $2,629,000, $3,148,000 and
$11,733,000 were realized on those sales in 1996, 1995, and 1994,
respectively.
At December 31, 1996 and 1995, bonds with an amortized cost of $26,140,000 and
$26,730,000, respectively, were on deposit with various state insurance
departments to meet regulatory requirements.
________________________________________________________________________________
88
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company enters into interest rate contracts, including swaps, caps, floors,
and options, to reduce and manage risks which include the risk of a change in
the value, yield, price, cash flows, or quantity of, or a degree of exposure
with respect to assets, liabilities, or future cash flows which the Company has
acquired or incurred. Hedge accounting practices are supported by cash flow
matching, scenario testing and duration matching.
Interest rate swap agreements generally involve the exchange of fixed and
floating interest payments over the life of the agreement without an exchange of
the underlying principal amount. Interest rate cap and interest rate floor
agreements owned entitle the Company to receive payments to the extent reference
interest rates exceed or fall below strike levels in the contracts based on the
notional amounts.
Premiums paid for the purchase of interest rate contracts are included in other
assets and are being amortized to interest expense over the remaining terms of
the contracts or in a manner consistent with the financial instruments being
hedged. Amounts paid or received, if any, from such contracts are included in
interest expense or income. Accrued amounts payable to or receivable from
counterparties are included in other liabilities or assets.
Gains and losses as a result of early terminations of interest rate contracts
are amortized to investment income over the remaining term of the items being
hedged to the extent the hedge is considered to be effective; otherwise, they
are recognized upon termination.
Interest rate contracts that are matched or otherwise designated to be
associated with other financial instruments are recorded at fair value if the
related financial instruments mature, are sold, or are otherwise terminated or
if the interest rate contracts cease to be effective hedges.
The Company manages the potential credit exposure from interest rate contracts
through careful evaluation of the counterparties' credit standing, collateral
agreements, and master netting agreements.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate contracts; however, the Company does not
anticipate nonperformance by any of these counterparties. The amount of such
exposure is generally the unrealized gains in such contacts.
________________________________________________________________________________
89
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
(CONTINUED)
The table below summarizes the Company's interest rate contracts at December 31,
1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
-------------------------------------------
Interest rate contracts:
<S> <C> <C> <C> <C>
Swaps $ 794,520 $ - $(1,452) $(1,452)
Swaps-affiliates 774,520 - 1,272 1,272
-------------------------------------------
Total swaps 1,569,040 - (180) (180)
Caps owned 400,000 2,073 592 592
Caps owned-affiliates - - - -
-------------------------------------------
Total caps owned 400,000 2,073 592 592
Floors owned 100,000 25 5 5
Floors owned-affiliates - - - -
-------------------------------------------
Total floors owned 100,000 25 5 5
Options owned 212,000 3,330 3,772 3,772
Options owned-affiliates 212,000 (3,330) (3,772) (3,772)
-------------------------------------------
Total options owned 424,000 - - -
-------------------------------------------
Total derivatives $2,493,040 $ 2,098 $ 417 $ 417
===========================================
</TABLE>
________________________________________________________________________________
90
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
---------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts:
Swaps $ 884,632 $ 448 $ 4,034 $ 4,034
Swaps-affiliates 864,632 (448) (3,453) (3,453)
---------------------------------------------
Total swaps 1,749,264 - 581 581
Caps owned 400,000 3,580 1,308 1,308
Caps owned-affiliates 40,000 61 - -
---------------------------------------------
Total caps owned 440,000 3,641 1,308 1,308
Floors owned 100,000 57 326 326
Floors owned-affiliates - - - -
---------------------------------------------
Total floors owned 100,000 57 326 326
Options owned 152,000 2,848 2,255 2,255
Options owned-affiliates 152,000 (2,848) (2,255) (2,255)
---------------------------------------------
Total options owned 304,000 - - -
---------------------------------------------
Total derivatives $2,593,264 $ 3,698 $ 2,215 $ 2,215
=============================================
</TABLE>
5. CONCENTRATIONS OF CREDIT RISK
At December 31, 1996, the Company held less-than-investment-grade bonds
classified as available-for-sale with a carrying value and market value of
$74,964,000. These holdings amounted to 3% of the Company's investments in fixed
maturity securities and 1% of total assets. The holdings of less-than-
investment-grade bonds are widely diversified and of satisfactory quality based
on the Company's investment policies and credit standards.
At December 31, 1996, the Company's commercial mortgages involved a
concentration of properties located in Florida (18%), Texas (13%), and Georgia
(10%). The remaining commercial mortgages relate to properties located in 23
other states. The portfolio is well diversified, covering many different types
of income-producing properties on which the Company has first mortgage liens.
The maximum mortgage outstanding on any individual property is $13,517,000.
________________________________________________________________________________
91
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a qualified noncontributory defined benefit retirement plan as
well as a non-qualified unfunded Supplemental Employees Retirement Plan (SERP)
covering substantially all employees. The benefits are based on final average
earnings from the time of eligibility for the plan, subject to minimum benefits
based on career earnings. The Company's funding policy for the qualified plan is
to contribute amounts annually to the plan sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Income Security Act of
1974, plus additional amounts as may be determined to be appropriate.
The funded status and the amounts recognized in the balance sheets for the
defined benefit plan are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1996 1995
-------------------------------------------
QUALIFIED QUALIFIED
PLAN SERP PLAN SERP
-------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated
benefit obligation:
Vested $(26,058) $(6,725) $(21,032) $(5,637)
Nonvested (733) (132) (1,656) -
-------------------------------------------
(26,791) (6,857) (22,688) (5,637)
Effect of projected future compensation (5,479) (951) (5,355) (1,297)
-------------------------------------------
Projected benefit obligation (32,270) (7,808) (28,043) (6,934)
Less plan assets at fair value 33,682 - 31,074 -
Plan assets in excess of projected
benefit obligation 1,412 (7,808) 3,031 (6,934)
Unrecognized net asset (1,316) - (1,601) -
Unrecognized prior service benefit cost (97) 236 (109) 267
Unrecognized net loss (gain) 1,930 4,622 998 4,507
-------------------------------------------
Net pension asset (liability) $ 1,929 $(2,950) $ 2,319 $(2,160)
===========================================
</TABLE>
As of December 31, 1996 and 1995, the Company recognized an additional liability
on the SERP of $3,671,000 and $3,210,000, respectively, as this plan is unfunded
and the actuarial present value of accumulated benefit obligation exceeds the
net pension liability.
________________________________________________________________________________
92
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The net periodic pension cost for the defined benefit plans includes the
following components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------
QUALIFIED QUALIFIED QUALIFIED
PLAN SERP PLAN SERP PLAN SERP
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1,320 $ 388 $ 1,147 $ 285 $ 1,369 $248
Interest cost 2,262 463 1,856 517 1,521 219
Return on plan assets (4,075) 258 (3,497) - (1,900) -
Net amortization and
deferral 883 - 553 239 (659) 200
-------------------------------------------------------------
Net periodic pension
expense $ 390 $1,109 $ 59 $1,041 $ 331 $667
=============================================================
</TABLE>
Assumptions used in accounting for the defined benefit plans as
of December 31, 1996, 1995, and 1994
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.50% 7.25% 8.00%
Rate of increase in compensation level 4.50% 4.25% 6.00%
Expected long-term rate of return on assets 9.50% 9.50% 8.50%
</TABLE>
Plan assets of the defined benefit plans at December 31, 1996 are 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 $9,500 in 1996 and $9,240 in 1995 and 1994. Such
contributions are not currently taxable to the participants. The Company matches
100% of the first 3% of participants' contributions, plus 50% of contributions
which exceed 3% of participants' compensation, subject to a
________________________________________________________________________________
93
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
maximum matching percentage of 4 1/2% of the individual's salary. Company
matching contributions were $1,143,000 for 1996, $1,071,000 for 1995, and
$1,042,000 for 1994.
Plan assets of the Savings Plan at December 31, 1996 are invested in a group
deposit administration contract (the Contract) with the Company, various mutual
funds maintained by the Principal Financial Group, and loans to participants.
The Contract is a policyholder liability of the Company and had a balance of
$25.5 million and $23.9 million at December 31, 1996 and 1995, respectively.
POSTRETIREMENT BENEFITS
In addition to providing pension and profit sharing plans, the Company provides
certain health care and life insurance benefits for retired employees. Under
the current plans, all employees become eligible for these benefits if they
achieve a minimum of 120 months of service prior to retirement. The plans are
contributory, with retiree contributions adjusted annually, and contain other
cost-sharing features such as deductible amounts and coinsurance.
The following table presents the amounts recognized in the Company's balance
sheets (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------------------------------------------------
LIFE LIFE
MEDICAL INSURANCE MEDICAL INSURANCE
PLAN PLAN TOTAL PLAN PLAN TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees $(1,315) $(1,226) $ (2,541) $(1,234) $(1,140) $ (2,374)
Fully eligible active plan
participants (409) (392) (801) (383) (364) (747)
Other active plan participants (2,038) (1,220) (3,258) (1,913) (1,134) (3,047)
-------------------------------------------------------------------
(3,762) (2,838) (6,600) (3,530) (2,638) (6,168)
Plan assets at fair value - - - - - -
-------------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets (3,762) (2,838) (6,600) (3,530) (2,638) (6,168)
Unrecognized prior service cost 355 32 387 463 42 505
Unrecognized net gains (losses) (5,870) 1,271 (4,599) (6,114) 1,449 (4,665)
-------------------------------------------------------------------
Accrued postretirement benefit cost $(9,277) $(1,535) $(10,812) $(9,181) $(1,147) $(10,328)
===================================================================
</TABLE>
________________________________________________________________________________
94
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic postretirement benefit cost for 1996, 1995, and 1994 includes the
following components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------------------------
LIFE LIFE LIFE
MEDICAL INSURANCE MEDICAL INSURANCE MEDICAL INSURANCE
PLAN PLAN TOTAL PLAN PLAN TOTAL PLAN PLAN TOTAL
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost $ 236 $151 $ 387 $ 359 $175 $ 534 $436 $30 $ 466
Interest cost 268 200 468 291 112 403 448 39 487
Net amortization and deferral (275) 89 (186) (209) 65 (144) (93) (8) (101)
Net periodic postretirement benefit
cost $ 229 $440 $ 669 $ 441 $352 $ 793 $791 $61 $ 852
==========================================================================================
</TABLE>
The annual assumed rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) for the medical plan is 11.25% graded to 5%
over 12.5 years. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the assumed health care
cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation for the medical plan as of
December 31, 1996 by $656,000 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1996 by $81,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.50% at December 31, 1996 and 7.25% at
December 31, 1995.
7. SEPARATE ACCOUNTS
Separate account assets and liabilities represent funds segregated by the
Company for the benefit of certain policyholders who bear the investment risk.
The separate account assets and liabilities are carried at fair value. Revenues
and expenses on the separate account assets and related liabilities equal the
benefits paid to the separate account policyholders and are excluded from the
amounts reported in the Consolidated Statements of Income except for fees
charged for administration services and mortality risk.
________________________________________________________________________________
95
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. LEASES
The Company is committed under various noncancellable long-term operating leases
relating to electronic data processing equipment that provide for annual rentals
as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $2,985
1998 2,278
1999 35
2000 -
2001 -
-----------
$5,298
===========
</TABLE>
These leases expire between 1997 and 2000. Rental expense for all equipment
leases was approximately $6,151,000, $4,344,000, and $5,620,000 for the years
ended December 31, 1996, 1995, and 1994, respectively.
9. REINSURANCE
The Company is involved in both ceded and assumed reinsurance with other
companies for the purpose of diversifying risk and limiting exposure on larger
risks. As of December 31, 1996, the Company's retention limit for acceptance of
risk on life insurance policies had been set at various levels up to $1,500,000.
Reinsurance premiums, commissions, and expense reimbursements related to
reinsured business are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Reserves are based on the terms of the reinsurance contracts, and
are consistent with the risks assumed.
________________________________________________________________________________
96
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. REINSURANCE (CONTINUED)
To the extent that the assuming companies become unable to meet their
obligations under these treaties, the Company remains contingently liable to its
policyholders for the portion reinsured. Consequently, allowances are
established for amounts deemed uncollectible. To minimize its exposure to
significant losses from reinsurer insolvencies, the Company evaluates the
financial condition of the reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic characteristics
of the reinsurers.
The Company assumes and cedes, on a coinsurance basis, guaranteed investment
contracts (GICs) to and from affiliates under common ownership. In 1995, the
Company ceded a block of GIC business issued in prior years to an affiliate. No
gain or loss was recognized on the transaction. The Company does not hold any
collateral under these agreements.
These transactions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------
PREMIUMS RESERVES PREMIUMS RESERVES
---------------------------------------------------
<S> <C> <C> <C> <C>
Direct (nonaffiliated) $ 767,312 $ 1,785,689 $ 556,571 $ 1,380,951
Assumed from Life Insurance Company of
Georgia 50,000 125,512 25,000 128,137
Assumed from Southland Life Insurance
Company - - 8,000 11,838
Ceded to Columbine Life Insurance Company (484,512) (1,425,545) (530,291) (1,328,950)
Ceded to Life Insurance Company of Georgia (282,800) (435,586) (78,200) (191,976)
---------------------------------------------------
Net $ 50,000 $ 50,070 $ (18,920) $ -
===================================================
</TABLE>
Ceded GIC reserves totaling $1,861 and $1,521 million as of December 31, 1996
and 1995, respectively, are classified as part of prepaid reinsurance premiums.
GIC reserves are reflected at their gross value of $1,911 and $1,521 million as
of December 31, 1996 and 1995.
________________________________________________________________________________
97
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. REINSURANCE (CONTINUED)
As of December 31, 1996 and 1995, the Company has ceded blocks of insurance
under reinsurance treaties to provide funds for financial and other purposes.
These reinsurance transactions, generally known as "surplus relief reinsurance,"
represent financial arrangements and, in accordance with generally accepted
accounting principles, are not reflected in the accompanying financial
statements except for the risk fees paid to or received from reinsurers.
Surplus relief reinsurance has the effect of increasing current statutory
surplus while reducing future statutory surplus as amounts are recaptured from
reinsurers. During 1995, most of the agreements were recaptured as part of an
overall capital restructuring plan. This capital restructuring also resulted in
a capital contribution from the Company's parent of $146,630,000 to replace the
reduction in statutory surplus that resulted from the recapture.
10. INCOME TAXES
The Company files a consolidated federal income tax return with its parent and
other U.S. affiliates and subsidiaries, with the exception of First ING. The
affiliated companies that join in the filing of the consolidated federal income
tax return have an agreement for the allocation of taxes between members that
join in the consolidated return. The agreement specifies that the separate
return payable or the separate return receivable of each member will be the
federal income tax liability or receivable that the member would have had for
the period had it filed a separate return.
________________________________________________________________________________
98
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
Deferred tax liabilities:
<S> <C> <C>
Deferred policy acquisition costs $(236,445) $(197,355)
Unrealized gains/losses (38,516) (53,440)
-----------------------
Total deferred tax liabilities (274,961) (250,795)
Deferred tax assets:
Benefit reserves and surplus relief 123,410 120,439
Tax-basis deferred acquisition costs 60,727 48,945
Investment income 11,037 12,060
Unearned investment income 8,705 9,383
Nonqualified deferred compensation 10,649 8,785
Postretirement employee benefits 3,784 3,615
Other, net 8,108 2,822
-----------------------
Net deferred tax assets 226,420 206,049
-----------------------
Net deferred tax (liabilities) assets $ (48,541) $ (44,746)
=======================
</TABLE>
The components of federal income tax expense consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Current $10,340 $ (48,136) $ 44,121
Deferred 11,536 72,870 (29,200)
Current year change in valuation
allowance - (438) -
--------------------------------
Federal income tax expense $21,876 $ 24,296 $ 14,921
================================
</TABLE>
________________________________________________________________________________
99
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The Company's effective income tax rate did not vary significantly from the
statutory federal income tax rate.
Prior to 1995 a valuation allowance had been established by the Company to
account for the fact that the full benefit of the deferred tax asset established
by First ING for tax-basis deferred acquisition costs more than likely would not
be fully realized. In 1995, a change in judgment about the realization of the
deferred tax asset occurred and the valuation allowance was removed.
The Company had net income tax payments (receipts) of $(61,467,000) during 1996,
$25,875,000 during 1995, and $41,278,000 during 1994 for current income tax
payments and settlements of prior year returns.
The Policyholder's Surplus Account is an accumulation of certain special
deductions for income tax purposes and a portion of the "gains from operations"
which were not subject to current taxation under the Life Insurance Tax Act of
1959. At December 31, 1984, the balance in this account for tax return purposes
was approximately $70,800,000. The Tax Reform Act of 1984 provides that no
further accumulations will be made in this account. If amounts accumulated in
the Policyholder's Surplus Account exceed certain limits, or if distributions to
the shareholder exceed amounts in the Shareholder's Surplus Account, to the
extent of such excess amount or excess distributions, as determined for income
tax purposes, amounts in the Policyholder's Surplus Account would become subject
to income tax at rates in effect at that time. Should this occur, the maximum
tax which would be paid at the current tax rate is $24,780,000. The Company
does not anticipate any such action or foresee any events which would result in
such tax; accordingly, a deferred tax liability has not been established.
11. LONG-TERM DEBT
Long-term indebtedness to related parties for $75,000,000 represents the
cumulative cash draws on a $100,000,000 commitment from ING America Insurance
Holdings, Inc. through December 31, 1996. Additional draws may be made by the
Company at its option through December 1, 2004. This subordinated note bears
interest at a variable rate equal to the prevailing rate for 10 year U.S.
Treasury Bonds plus 1/4% adjusted annually.
________________________________________________________________________________
100
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. LONG-TERM DEBT (CONTINUED)
The repayment of this note requires approval of the Commissioner of Insurance of
the State of Colorado and is payable only out of surplus funds of the Company
and only at such time as the surplus of the Company, after payment is made, does
not fall below the prescribed level.
The principal and interest is scheduled to be repaid in five annual installments
beginning December 31, 1999 and continuing through December 31, 2003, with the
option of prepaying any outstanding principal and accrued interest. As of
December 31, 1996, the Company accrued interest of $3,700,000. No payments of
principal or interest were made in 1996.
Future minimum payments, assuming a current effective interest rate of 6.55%,
are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL
YEAR PAYMENTS
-----------------------------------------
<S> <C>
1999 $ 21,518
2000 21,518
Subsequent years 64,552
----------
Total 107,588
Less imputed interest (32,588)
----------
Present value of payments $ 75,000
==========
</TABLE>
12. STATUTORY ACCOUNTING INFORMATION AND PRACTICES
Security Life and its insurance subsidiaries prepare their statutory basis
financial statements in accordance with accounting practices prescribed or
permitted by their state of domicile. "Prescribed" statutory accounting
practices include state laws, regulations and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, from company to company within the state, and may change in the
future. The NAIC is currently in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1998, will likely change, to some extent, prescribed
________________________________________________________________________________
101
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED)
statutory accounting practices, and may result in changes to the accounting
practices that insurance companies use to prepare their statutory financial
statements.
Prescribed statutory reserve methodology does not fully encompass universal
life-type products. The NAIC, however, has promulgated a Model Regulation
regarding Universal Life Reserves. The Colorado Division of Insurance has not
adopted the regulation, but requires that reserves be held which are at least as
great as those required by Colorado Statutes. The NAIC UL Model Regulation is
used by the Company to provide reserves consistent with the principles of this
article. Because the reserves satisfy the requirements prescribed by the State
of Colorado for the valuation of universal life insurance, the Company is
permitted to compute reserves in accordance with this model regulation.
The NAIC prescribes Risk-Based Capital (RBC) requirements for life/health
insurance companies. At December 31, 1996, the Company exceeded all minimum RBC
requirements.
Combined capital and surplus, determined in accordance with statutory accounting
practices (SAP), was $366,451,000 and $333,686,000 at December 31, 1996 and
1995, respectively. Combined net income, determined in accordance with SAP, was
$9,141,000, $11,771,000, and $9,383,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
Security Life is required to maintain a minimum total statutory capital and
surplus in the state of domicile of $1,500,000. Midwestern United is required
to maintain minimum statutory capital of $200,000 and surplus of $250,000 in the
state of domicile. First ING is required to maintain minimum statutory capital
of $1,000,000 and paid-in surplus of at least 50% of paid-in capital in the
state of domicile. Each Company exceeded its respective minimum statutory
capital and surplus requirements at December 31, 1996. Additionally, the amount
of dividends which can be paid by each company to its stockholder without prior
approval of the various state insurance departments is generally limited to the
greater of 10% of statutory surplus or the statutory net gain from
operations.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
________________________________________________________________________________
102
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company. Life insurance liabilities that contain
mortality risk and all nonfinancial instruments are excluded from disclosure
requirements. However, the fair values of liabilities under all insurance
contracts are taken into consideration in the Company's overall management of
interest rate risk, such that the Company's exposure to changing interest rates
is minimized through the matching of investment maturities with amounts due
under insurance contracts.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1996 and 1995 are summarized below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------------ --------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities (Note 3) $2,875,084 $2,875,084 $2,470,944 $2,470,944
Equity securities (Note 3) 5,345 5,345 8,369 8,369
Commercial mortgages 445,073 461,777 276,552 304,442
Residential mortgages 7,722 7,589 8,992 9,172
Policy loans 795,311 795,311 754,240 754,240
Short-term investments 7,019 7,019 10,946 10,946
LIABILITIES
Guaranteed investment
contracts, net of reinsurance $ 50,070 $ 50,070 $ - $ -
Supplemental contracts
without life contingencies 3,023 3,023 3,033 3,033
Other policyholder funds left
on deposit 98,824 98,824 92,893 92,893
Individual and group
annuities, net of reinsurance 45,576 45,228 49,020 48,457
</TABLE>
________________________________________________________________________________
103
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values of all other financial instruments approximate their fair
value.
The following methods and assumptions were used by the Company in estimating the
"fair value" disclosures for financial instruments:
FIXED MATURITIES AND EQUITY SECURITIES: The fair values for fixed
--------------------------------------
maturities (including redeemable preferred stocks) are based on quoted market
prices, where available. For fixed maturities not actively traded, fair
values are estimated using values obtained from independent pricing services
or, in the case of private placements and collateralized mortgage obligations
and other mortgage derivative investments, are estimated by discounting
expected future cash flows. The discount rates used vary as a function of
factors such as yield, credit quality and maturity which fall within a range
between 2% - 12% over the total portfolio. The fair values of equity
securities are based on quoted market prices.
MORTGAGE LOANS: Estimated market values for commercial real estate loans
--------------
are generated using a discounted cash flow approach. Loans in good standing
are discounted using interest rates determined by U.S. Treasury yields on
December 31 and spreads implied by independent published surveys. The same is
applied on new loans with similar characteristics. The amortizing features of
all loans are incorporated in the valuation. Where data on option features is
available, option values are determined using a binomial valuation method,
and are incorporated into the mortgage valuation. Restructured loans are
valued in the same manner; however, these are discounted at a greater spread
to reflect increased risk.
All residential loans are valued at their outstanding principal balances,
which approximate their fair values.
POLICY LOANS: The carrying amounts reported in the balance sheets for these
------------
financial instruments approximate their fair values.
DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet
--------------------------------
derivative financial instruments (caps and floors) and off-balance-sheet
derivative financial instruments (swaps) are based on broker/dealer
valuations or on internal discounted cash flow pricing models taking into
account current cash flow assumptions and the counterparties' credit
standing.
________________________________________________________________________________
104
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
GUARANTEED INVESTMENT CONTRACTS: The fair values of the Company's guaranteed
-------------------------------
investment contracts are estimated using discounted cash flow calculations,
based on interest rates currently being offered for similar contracts with
maturities consistent with those remaining for the contracts being
valued.
OTHER INVESTMENT-TYPE INSURANCE CONTRACTS: The fair values of the Company's
-----------------------------------------
deferred annuity contracts are estimated based on the cash surrender value.
The carrying values of other liabilities, including immediate annuities,
dividend accumulations, supplementary contracts without life contingencies
and premium deposits, approximate their fair values.
OFF-BALANCE-SHEET INSTRUMENTS: The Company had synthetic guaranteed
-----------------------------
investment contract sales in the amounts of $55,780,000 and $10,358,000 in
1996 and 1995, respectively, to trustees of 401(k) plans. Pursuant to the
terms of these contracts, the trustees own and retain the assets related to
these contracts. Such assets had a value of $637,151,000 and $695,288,000 at
December 31, 1996 and 1995, respectively. Under synthetic guaranteed
investment contracts, the synthetic issuer may assume interest rate risk on
individual plan participant initiated withdrawals from stable value options
of 401(k) plans. Approximately 85% of the synthetic guaranteed investment
contract book values are on a participating basis and have a credited
interest rate reset mechanism which passes such interest rate risk to plan
participants.
LETTERS OF CREDIT
-----------------
The Company is the beneficiary of letters of credit totaling $93,252,000
which have a market value to the Company of $0 and two lines of credit
totaling $205,274,000 which have a market value to the Company of $0 (see
Note 15).
14. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to pending or threatened lawsuits arising from the normal
conduct of its business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include substantial additional
claims, consequential damages, punitive damages and other similar types of
relief. While it is not possible to forecast the outcome of such litigation, it
is the opinion of management that the disposition of such lawsuits will not have
a material adverse effect on the Company's financial position or interfere with
its operations.
________________________________________________________________________________
105
Strategic Advantage
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. FINANCING ARRANGEMENTS
The Company has a $105,274,000 line of credit issued by the Company's parent to
provide short-term liquidity. The Company has an additional non-affiliated line
of credit of $100,000,000 also to provide short-term liquidity which expires
June 30, 1997. The amount of funds available under this line is reduced by
borrowings of certain affiliates also party to the agreement. There were no
outstanding borrowings under either of these agreements at December 31, 1996 or
1995. The average balance of short-term debt was $23.4 million during 1996.
The weighted average interest rate paid on this debt during 1996 was 5.46%.
The Company is the beneficiary of letters of credit totaling $93,252,000 that
were established in accordance with the terms of reinsurance agreements. The
terms of the letters of credit provide for automatic renewal for the following
year at December 31, unless otherwise cancelled or terminated by either party to
the financing. The letters were unused during both 1996 and 1995.
________________________________________________________________________________
106
Strategic Advantage
<PAGE>
Financial Statements
Security Life Separate Account L1
Year ended December 31, 1996
with Report of Independent Auditors
________________________________________________________________________________
Strategic Advantage 107
<PAGE>
Report of Independent Auditors
Policyholders
Security Life Separate Account L1 of
Security Life of Denver Insurance Company
We have audited the accompanying statement of net assets of Security Life
Separate Account L1 (comprising, respectively, the Neuberger & Berman Advisers
Management Trust (comprising the Limited Maturity Bond, Growth, Government
Income and Partners Portfolios) ("N&B"), the Alger American Fund (comprising the
American Small Capitalization, American MidCap Growth, American Growth and
American Leveraged AllCap Portfolios) ("Alger"), the Fidelity Variable Insurance
Products Fund and Variable Insurance Products Fund II (comprising the Asset
Manager, Growth, Overseas, Money Market and Index 500 Portfolios) ("Fidelity"),
the INVESCO Variable Investment Funds, Inc. (comprising the Total Return,
Industrial Income, High Yield and Utilities Portfolios) ("INVESCO") and Van Eck
Worldwide Trust (comprising the Worldwide Balanced and Gold and Natural
Resources Portfolios) ("Van Eck") Divisions) as of December 31, 1996, and the
related statements of operations for the year then ended and changes in net
assets for each of the two years in the period then ended. These financial
statements are the responsibility of the Separate Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of December 31, 1996, by
correspondence with the transfer agent. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Security Life Separate Account
L1 at December 31, 1996, and the results of its operations for the year then
ended and changes in its net assets for each of the two years in the period then
ended, in conformity with generally accepted accounting principles.
/s/
ERNST & YOUNG LLP
Denver, Colorado
April 9, 1997
________________________________________________________________________________
108
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Net Assets
December 31, 1996
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value; combined cost
$54,275,545 (See Note C) $57,137,579 $10,501,407 $11,470,216 $30,788,682 $3,783,021 $594,253
---------------------------------------------------------------------------------
Total assets 57,137,579 10,501,407 11,470,216 30,788,682 3,783,021 594,253
---------------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (1,613,713) (35,546) (35,976) (1,508,299) 35,750 1,858
Due to (from) other divisions 894,465 (2,393) 150,103 897,366 148,975 (1,636)
---------------------------------------------------------------------------------
Total liabilities (719,248) (37,939) 114,127 610,933 184,725 222
---------------------------------------------------------------------------------
Net assets $57,856,827 $10,539,346 $11,356,089 $31,399,615 $3,967,746 $594,031
=================================================================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $57,856,827 $10,539,346 $11,356,089 $31,399,615 $3,967,746 $594,031
---------------------------------------------------------------------------------
TOTAL CONTRACT OWNER RESERVES $57,856,827 $10,539,346 $11,356,089 $31,399,615 $3,967,746 $594,031
=================================================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
109
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1996
<TABLE>
<CAPTION>
N & B
-----------------------------------------------------------------------
TOTAL LIMITED GOVERNMENT
N&B MATURITY BOND GROWTH INCOME PARTNERS
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $10,501,407 $ 2,493,707 $ 1,797,629 $ 1,549,039 $ 4,661,032
-----------------------------------------------------------------------
Total assets 10,501,407 2,493,707 1,797,629 1,549,039 4,661,032
-----------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (35,546) 1,631 (36,173) 1,096 (2,100)
Due to (from) other divisions (2,393) - (1,912) (371) (110)
-----------------------------------------------------------------------
Total liabilities (37,939) 1,631 (38,085) 725 (2,210)
-----------------------------------------------------------------------
Net assets $10,539,346 $ 2,492,076 $ 1,835,714 $ 1,548,314 $ 4,663,242
=======================================================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $10,539,346 $ 2,492,076 $ 1,835,714 $ 1,548,314 $ 4,663,242
-----------------------------------------------------------------------
TOTAL CONTRACT OWNER RESERVES $10,539,346 $ 2,492,076 $ 1,835,714 $ 1,548,314 $ 4,663,242
=======================================================================
Number of division units outstanding
(See Note G) 218,725.891 133,567.983 142,773.403 275,892.457
============================================================
Value per divisional unit $ 11.39 $ 13.74 $ 10.84 $ 16.90
============================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
110
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1996
<TABLE>
<CAPTION>
ALGER
------------------------------------------------------------------------
AMERICAN AMERICAN AMERICAN
TOTAL SMALL MIDCAP AMERICAN LEVERAGED
ALGER CAPITALIZATION GROWTH GROWTH ALLCAP
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $11,470,216 $ 4,480,399 $ 2,308,724 $ 3,808,543 $ 872,550
------------------------------------------------------------------------
Total assets 11,470,216 4,480,399 2,308,724 3,808,543 872,550
------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (35,976) (4,356) (25,479) (4,982) (1,159)
Due to (from) other divisions 150,103 152,647 (852) (653) (1,039)
------------------------------------------------------------------------
Total liabilities 114,127 148,291 (26,331) (5,635) (2,198)
------------------------------------------------------------------------
Net assets $11,356,089 $ 4,332,108 $ 2,335,055 $ 3,814,178 $ 874,748
========================================================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $11,356,089 $ 4,332,108 $ 2,335,055 $ 3,814,178 $ 874,748
------------------------------------------------------------------------
TOTAL CONTRACT OWNER RESERVES $11,356,089 $ 4,332,108 $ 2,335,055 $ 3,814,178 $ 874,748
========================================================================
Number of division units outstanding
(See Note G) 297,073.322 150,480.473 282,175.287 53,044.470
=============================================================
Value per divisional unit $ 14.58 $ 15.52 $ 13.52 $ 16.49
=============================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
111
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1996
<TABLE>
<CAPTION>
FIDELITY
----------------------------------------------------------------------------------------
TOTAL ASSET MONEY
FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $30,788,682 $ 1,513,317 $ 6,998,086 $ 4,266,432 $ 7,785,143 $ 10,225,704
----------------------------------------------------------------------------------------
Total assets 30,788,682 1,513,317 6,998,086 4,266,432 7,785,143 10,225,704
----------------------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (1,508,299) (32,020) (29,464) (7,782) (1,438,819) (214)
Due to (from) other divisions 897,366 - (21,869) (915) 928,296 (8,146)
----------------------------------------------------------------------------------------
Total liabilities (610,933) (32,020) (51,333) (8,697) (510,523) (8,360)
----------------------------------------------------------------------------------------
Net assets $31,399,615 $ 1,545,337 $ 7,049,419 $ 4,275,129 $ 8,295,666 $ 10,234,064
========================================================================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $31,399,615 $ 1,545,337 $ 7,049,419 $ 4,275,129 $ 8,295,666 $ 10,234,064
----------------------------------------------------------------------------------------
TOTAL CONTRACT OWNER RESERVES $31,399,615 $ 1,545,337 $ 7,049,419 $ 4,275,129 $ 8,295,666 $ 10,234,064
========================================================================================
Number of division units outstanding
(See Note G) 123,908.168 470,285.667 367,948.109 753,707.969 640,890.650
===========================================================================
Value per divisional unit $ 12.47 $ 14.99 $ 11.62 $ 11.01 $ 15.97
===========================================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
112
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1996
<TABLE>
<CAPTION>
INVESCO
-------------------------------------------------------------------
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $3,783,021 $ 841,651 $ 1,371,266 $ 1,351,726 $ 218,378
-------------------------------------------------------------------
Total assets 3,783,021 841,651 1,371,266 1,351,726 218,378
-------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (35,750) (38,816) 2,037 879 150
Due to (from) other divisions (148,975) 6,000 (388) (154,554) (33)
-------------------------------------------------------------------
Total liabilities (184,725) (32,816) 1,649 (153,675) 117
-------------------------------------------------------------------
Net assets $3,967,746 $ 874,467 $ 1,369,617 $ 1,505,401 $ 218,261
===================================================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $3,967,746 $ 874,467 $ 1,369,617 $ 1,505,401 $ 218,261
===================================================================
TOTAL CONTRACT OWNER RESERVES $3,967,746 $ 874,467 $ 1,369,617 $ 1,505,401 $ 218,261
===================================================================
Number of division units outstanding
(See Note G) 64,490.483 87,035.356 108,999.107 18,008.490
=========================================================
Value per divisional unit $ 13.56 $ 15.74 $ 13.81 $ 12.12
=========================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
113
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1996
<TABLE>
<CAPTION>
VAN ECK
------------------------------------
GOLD AND
TOTAL WORLDWIDE NATURAL
VAN ECK BALANCED RESOURCES
------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $594,253 $ 327,886 $ 266,367
------------------------------------
Total assets 594,253 327,886 266,367
------------------------------------
LIABILITIES
Due to (from) Security Life of Denver 1,858 1,181 677
Due to (from) other divisions (1,636) (1,100) (536)
------------------------------------
Total liabilities 222 81 141
------------------------------------
Net assets
$594,031 $ 327,805 $ 266,226
====================================
CONTRACT OWNER RESERVES
Reserves for redeemable annuity
contracts (See Note B) $594,031 $ 327,805 $ 266,226
------------------------------------
TOTAL CONTRACT OWNER RESERVES $594,031 $ 327,805 $ 266,226
====================================
Number of division units outstanding
(See Note G) 29,808.787 21,966.093
============================
Value per divisional unit $ 11.00 $ 12.12
============================
See accompanying notes.
</TABLE>
________________________________________________________________________________
114
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Operations
Year Ended December 31, 1996
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK
INVESTMENT INCOME
<S> <C> <C> <C> <C> <C> <C>
Dividends from mutual funds $1,183,779 $292,143 $ 56,842 $593,973 $238,653 $ 2,168
Less: Valuation period deductions
(See Note B) 241,127 50,116 44,898 128,637 14,752 2,724
------------------------------------------------------------------------
Net investment income (loss) 942,652 242,027 11,944 465,336 223,901 (556)
------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 401,852 86,478 62,058 97,833 143,358 12,125
Net unrealized gains (losses) on
investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035
------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 3,077,159 643,752 458,973 1,834,000 100,274 40,160
------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $4,019,811 $885,779 $470,917 $2,299,336 $324,175 $39,604
========================================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
115
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
N & B
TOTAL LIMITED GOVERNMENT
N&B MATURITY BOND GROWTH INCOME PARTNERS
INVESTMENT INCOME
<S> <C> <C> <C> <C> <C>
Dividends from mutual funds $292,143 $127,305 $ 76,287 $35,420 $ 53,131
Less: Valuation period deductions
(See Note B) 50,116 13,218 9,400 8,882 18,616
-----------------------------------------------------------
Net investment income (loss) 242,027 114,087 66,887 26,538 34,515
-----------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 86,478 (16,561) (22,601) 3,867 121,773
Net unrealized gains (losses) on
investments 557,274 (29,330) 65,061 443 521,100
-----------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 643,752 (45,891) 42,460 4,310 642,873
-----------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $885,779 $ 68,196 $109,347 $30,848 $677,388
===========================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
116
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
ALGER
AMERICAN AMERICAN AMERICAN
TOTAL SMALL MIDCAP AMERICAN LEVERAGED
ALGER CAPITALIZATION GROWTH GROWTH ALLCAP
INVESTMENT INCOME
<S> <C> <C> <C> <C> <C>
Dividends from mutual funds $ 56,842 $ 7,668 $ 10,435 $ 37,109 $ 1,630
Less: Valuation period deductions
(See Note B) 44,898 18,457 7,398 16,087 2,956
----------------------------------------------------------
Net investment income (loss) 11,944 (10,789) 3,037 21,022 (1,326)
----------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 62,058 8,187 9,936 22,907 21,028
Net unrealized gains (losses) on
investments 396,915 58,340 89,398 227,107 22,070
----------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 458,973 66,527 99,334 250,014 43,098
----------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $470,917 $ 55,738 $102,371 $271,036 $41,772
==========================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
117
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
FIDELITY
---------------------------------------------------------------
TOTAL ASSET MONEY
FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500
INVESTMENT INCOME
<S> <C> <C> <C> <C> <C> <C>
Dividends from mutual funds $ 593,973 $ 9,800 $109,786 $ 27,966 $246,349 $ 200,072
Less: Valuation period deductions
(See Note B) 128,637 3,818 25,455 16,972 35,006 47,386
---------------------------------------------------------------
Net investment income (loss) 465,336 5,982 84,331 10,994 211,343 152,686
---------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 97,833 7,905 9,661 34,235 - 46,032
Net unrealized gains (losses) on
investments 1,736,167 63,068 273,435 238,529 - 1,161,135
---------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 1,834,000 70,973 283,096 272,764 - 1,207,167
---------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $2,299,336 $76,955 $367,427 $283,758 $211,343 $1,359,853
===============================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
118
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
INVESCO
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
INVESTMENT INCOME
<S> <C> <C> <C> <C> <C>
Dividends from mutual funds $238,653 $25,285 $ 93,816 $114,676 $ 4,876
Less: Valuation period deductions
(See Note B) 14,752 3,402 4,272 6,357 721
---------------------------------------------------------
Net investment income (loss) 223,901 21,883 89,544 108,319 4,155
---------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 143,358 28,264 30,929 82,830 1,335
Net unrealized gains (losses) on
investments (43,084) 10,956 (7,082) (53,402) 6,444
---------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 100,274 39,220 23,847 29,428 7,779
---------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $324,175 $61,103 $113,391 $137,747 $11,934
=========================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
119
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
VAN ECK
GOLD AND
TOTAL WORLDWIDE NATURAL
VAN ECK BALANCED RESOURCES
INVESTMENT INCOME
<S> <C> <C> <C>
Dividends from mutual funds $ 2,168 $ 169 $ 1,999
Less: Valuation period deductions
(See Note B) 2,724 1,304 1,420
--------------------------------
Net investment income (loss) (556) (1,135) 579
--------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 12,125 2,984 9,141
Net unrealized gains (losses) on
investments 28,035 19,343 8,692
--------------------------------
Net realized and unrealized gains
(losses) on investments 40,160 22,327 17,833
--------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $39,604 $21,192 $18,412
=================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
120
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets
Year Ended December 31, 1996
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK
INCREASE IN NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 942,652 $ 242,027 $ 11,944 $ 465,336 $ 222,901 $ (556)
Net realized gains (losses) on
investments 401,852 86,478 62,058 97,833 143,358 12,125
Net unrealized gains (losses) on
investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035
------------------------------------------------------------------------------------
Increase in net assets from
operations 4,019,811 885,779 470,917 2,229,336 324,175 39,604
------------------------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 44,534,972 2,246,849 2,646,310 38,833,137 609,861 198,815
Cost of insurance and administrative
expenses (2,843,666) (378,501) (531,589) (1,733,703) (158,637) (41,236)
Benefit payments (9,641) - (9,457) (184) - -
Surrenders (139,851) (10,863) (32,300) (89,374) (5,730) (1,584)
Net transfers among divisions
(including the guaranteed interest
division in the general account) (905,917) 3,446,134 6,535,350 (13,409,127) 2,217,943 303,783
Other (25,415) 4,193 (1,186) (29,113) 1,108 (417)
------------------------------------------------------------------------------------
Increase from principal
transactions 40,610,482 5,307,812 8,607,128 23,571,636 2,664,545 459,361
------------------------------------------------------------------------------------
Total increase in net assets 44,630,293 6,193,591 9,078,045 25,870,972 2,988,720 498,965
Net assets at beginning of year 13,226,534 4,345,755 2,278,044 5,528,643 979,026 95,066
------------------------------------------------------------------------------------
Net assets at end of year $57,856,827 $10,539,346 $11,356,089 $31,399,615 $3,967,746 $594,031
===================================================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
121
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
N & B
TOTAL LIMITED GOVERNMENT
N&B MATURITY BOND GROWTH INCOME PARTNERS
INCREASE IN NET ASSETS
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 242,027 $ 114,087 $ 66,887 $ 26,538 $ 34,515
Net realized gains (losses) on
investments 86,478 (16,561) (22,601) 3,867 121,773
Net unrealized gains (losses) on
investments 557,274 (29,330) 65,061 443 521,100
-----------------------------------------------------------------------
Increase in net assets from
operations 885,779 68,196 109,347 30,848 677,388
-----------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 2,246,849 317,539 634,087 372,680 922,543
Cost of insurance and administrative
expenses (378,501) (74,422) (101,596) (56,065) (146,418)
Benefit payments - - - - -
Surrenders (10,863) (1,157) (2,385) (48) (7,273)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 3,446,134 398,684 433,683 368,389 2,245,378
Other 4,193 (272) (579) 41 5,003
-----------------------------------------------------------------------
Increase from principal
transactions 5,307,812 640,372 963,210 684,997 3,019,233
-----------------------------------------------------------------------
Total increase in net assets 6,193,591 708,568 1,072,557 715,845 3,696,621
Net assets at beginning of year 4,345,755 1,783,508 763,157 832,469 966,621
-----------------------------------------------------------------------
Net assets at end of year $10,539,346 $2,492,076 $1,835,714 $1,548,314 $4,663,242
===================================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
122
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
ALGER
AMERICAN AMERICAN AMERICAN
TOTAL SMALL MIDCAP AMERICAN LEVERAGED
ALGER CAPITALIZATION GROWTH GROWTH ALLCAP
INCREASE IN NET ASSETS
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 11,944 $ (10,789) $ 3,037 $ 21,022 $ (1,326)
Net realized gains (losses) on
investments 62,058 8,187 9,936 22,907 21,028
Net unrealized gains (losses) on
investments 396,915 58,340 89,398 227,107 22,070
---------------------------------------------------------------------
Increase in net assets from
operations 470,917 55,738 102,371 271,036 41,772
---------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 2,646,310 792,375 410,528 1,189,559 253,848
Cost of insurance and administrative
expenses (531,589) (209,010) (92,306) (193,812) (36,461)
Benefit payments (9,457) (4,658) - - (4,799)
Surrenders (32,300) (7,839) (10,926) (9,795) (3,740)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 6,535,350 2,581,122 1,649,714 1,717,965 586,549
Other (1,186) (3,605) 587 1,213 619
---------------------------------------------------------------------
Increase from principal
transactions 8,607,128 3,148,385 1,957,597 2,705,130 796,016
---------------------------------------------------------------------
Total increase in net assets 9,078,045 3,204,123 2,059,968 2,976,166 837,788
Net assets at beginning of year 2,278,044 1,127,985 275,087 838,012 36,960
---------------------------------------------------------------------
Net assets at end of year $11,356,089 $4,332,108 $2,335,055 $3,814,178 $874,748
=====================================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
123
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
FIDELITY
----------------------------------------------------------------------------------
TOTAL ASSET MONEY
FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500
INCREASE IN NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 465,336 $ 5,982 $ 84,331 $ 10,994 $ 211,343 $ 152,686
Net realized gains (losses) on
investments 97,833 7,905 9,661 34,235 - 46,032
Net unrealized gains (losses) on
investments 1,736,167 63,068 273,435 238,529 - 1,161,135
-----------------------------------------------------------------------------------
Increase in net assets from
operations 2,299,336 76,955 367,427 283,758 211,343 1,359,853
-----------------------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 38,833,137 202,285 1,158,382 537,007 36,012,540 922,923
Cost of insurance and administrative
expenses (1,733,703) (59,703) (298,466) (145,781) (938,219) (291,534)
Benefit payments (184) - - - - (184)
Surrenders (89,374) (973) (9,215) (8,511) (56,983) (13,692)
Net transfers among divisions
(including the guaranteed interest
division in the general account) (13,409,127) 1,199,005 4,485,230 2,637,971 (28,785,556) 7,054,223
Other (29,113) 277 (47) (13) (27,783) (1,547)
-----------------------------------------------------------------------------------
Increase from principal
transactions 23,571,636 1,340,891 5,335,884 3,020,673 6,203,999 7,670,189
-----------------------------------------------------------------------------------
Total increase in net assets 25,870,972 1,417,846 5,703,311 3,304,431 6,415,342 9,030,042
Net assets at beginning of year 5,528,643 127,491 1,346,108 970,698 1,880,324 1,204,022
----------------------------------------------------------------------------------
Net assets at end of year $ 31,399,615 $1,545,337 $7,049,419 $4,275,129 $ 8,295,666 $10,234,064
==================================================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
124
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
INVESCO
----------------------------------------------------------------
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 223,901 $ 21,883 $ 89,544 $ 108,319 $ 4,155
Net realized gains (losses) on
investments 143,358 28,264 30,929 82,830 1,335
Net unrealized gains (losses) on
investments (43,084) 10,956 (7,082) (53,402) 6,444
Increase in net assets from
----------------------------------------------------------------
operations 324,175 61,103 113,391 137,747 11,934
----------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 609,861 199,674 243,848 121,818 44,521
Cost of insurance and administrative
expenses (158,637) (45,283) (55,233) (48,934) (9,187)
Benefit payments - - - - -
Surrenders (5,730) (2,038) (2,171) (1,386) (135)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 2,217,943 506,505 810,269 750,404 150,765
Other 1,108 943 (126) 277 14
----------------------------------------------------------------
Increase from principal
transactions 2,664,545 659,801 996,587 822,179 185,978
----------------------------------------------------------------
Total increase in net assets 2,988,720 720,904 1,109,978 959,926 197,912
Net assets at beginning of year 979,026 153,563 259,639 545,475 20,349
----------------------------------------------------------------
Net assets at end of year $3,967,746 $874,467 $1,369,617 $1,505,401 $218,261
================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
125
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
VAN ECK
------------------------------------
GOLD AND
TOTAL WORLDWIDE NATURAL
VAN ECK BALANCED RESOURCES
------------------------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (556) $ (1,135) $ 579
Net realized gains (losses) on
investments 12,125 2,984 9,141
Net unrealized gains (losses) on
investments 28,035 19,343 8,692
------------------------------------
Increase in net assets from
operations 39,604 21,192 18,412
------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 198,815 135,181 63,634
Cost of insurance and administrative
expenses (41,236) (29,480) (11,756)
Benefit payments - - -
Surrenders (1,584) (1,584) -
Net transfers among divisions
(including the guaranteed interest
division in the general account) 303,783 126,152 177,631
Other (417) (468) 51
------------------------------------
Increase from principal
transactions 459,361 229,801 229,560
------------------------------------
Total increase in net assets 498,965 250,993 247,972
Net assets at beginning of year 95,066 76,812 18,254
------------------------------------
Net assets at end of year $594,031 $327,805 $266,226
====================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
126
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets
Year Ended December 31, 1995
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
- - ----------------------
OPERATIONS
Net investment income (loss) $ 97,403 $ (11,173) (5,428) $ 60,063 $ 53,712 $ 229
Net realized gains (losses) on
investments 76,547 25,418 17,143 28,840 4,788 358
Net unrealized gains (losses) on
investments 186,727 144,429 (54,571) 102,924 (6,574) 519
----------------------------------------------------------------------
Increase (decrease) in net assets
from operations 360,677 158,674 (42,856) 191,827 51,926 1,106
----------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 13,329,581 39,552 255,704 12,996,026 28,034 10,265
Cost of insurance and administrative
expenses (515,616) (94,109) (72,491) (327,795) (17,857) (3,364)
Net transfers among divisions
(including the guaranteed interest
division in the general account) - 4,235,249 2,130,456 (7,368,518) 915,744 87,069
Other 19,851 6,389 7,231 5,062 1,179 (10)
----------------------------------------------------------------------
Increase from principal
transactions 12,833,816 4,187,081 2,320,900 5,304,775 927,100 93,960
----------------------------------------------------------------------
Total increase in net assets 13,194,493 4,345,755 2,278,044 5,496,602 979,026 95,066
Net assets at beginning of year 32,041 - - 32,041 - -
----------------------------------------------------------------------
Net assets at end of year $13,226,534 $4,345,755 2,278,044 $5,528,643 $979,026 $95,066
======================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
127
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
N & B
---------------------------------------------------------------------
TOTAL LIMITED GOVERNMENT
N&B MATURITY BOND GROWTH INCOME PARTNERS
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (11,173) $ (4,559) $ (1,683) $ (2,366) $ (2,565)
Net realized gains (losses) on
investments 25,418 8,399 4,077 2,729 10,213
Net unrealized gains (losses) on
investments 144,429 54,564 (1,928) 33,629 58,164
---------------------------------------------------------------------
Increase (decrease) in net assets from
from operations 158,674 58,404 466 33,992 65,812
---------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 39,552 4,133 13,771 12,086 9,562
Cost of insurance and administrative
expenses (94,109) (25,947) (23,846) (15,635) (28,681)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 4,235,249 1,745,908 770,482 801,675 917,184
Other 6,389 1,010 2,284 351 2,744
---------------------------------------------------------------------
Increase from principal
transactions 4,187,081 1,725,104 762,691 798,477 900,809
---------------------------------------------------------------------
Total increase in net assets 4,345,755 1,783,508 763,157 832,469 966,621
Net assets at beginning of year - - - - -
---------------------------------------------------------------------
Net assets at end of year $4,345,755 $1,783,508 $763,157 $832,469 $966,621
=====================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
128
Strategic Advantages
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
ALGER
------------------------------------------------------------------
AMERICAN AMERICAN AMERICAN
TOTAL SMALL MIDCAP AMERICAN LEVERAGED
ALGER CAPITALIZATION GROWTH GROWTH ALLCAP
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ (5,428) $ (2,496) $ (548) $ (2,242) $ (142)
Net realized gains (losses) on
investments 17,143 19,457 3,402 1,513 (7,229)
Net unrealized gains (losses) on
investments (54,571) (57,427) 3,400 (1,664) 1,120
------------------------------------------------------------------
Increase (decrease) in net assets from
operations (42,856) (40,466) 6,254 (2,393) (6,251)
------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 255,704 224,681 18,375 9,493 3,155
Cost of insurance and administrative
expenses (72,491) (24,235) (8,062) (38,073) (2,121)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 2,130,456 963,613 257,593 866,852 42,398
Other 7,231 4,392 927 2,133 (221)
------------------------------------------------------------------
Increase from principal
transactions 2,320,900 1,168,451 268,833 840,405 43,211
------------------------------------------------------------------
Total increase in net assets 2,278,044 1,127,985 275,087 838,012 36,960
Net assets at beginning of year - - - - -
------------------------------------------------------------------
Net assets at end of year $2,278,044 $1,127,985 $275,087 $838,012 $36,960
==================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
129
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
FIDELITY
----------------------------------------------------------------------------
TOTAL ASSET MONEY
FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 60,063 $ (257) $ (3,373) $ (2,080) $ 68,179 $ (2,406)
Net realized gains (losses) on
investments 28,840 632 13,932 2,684 - 11,592
Net unrealized gains (losses) on
investments 102,924 6,607 (11,822) 28,250 - 79,889
----------------------------------------------------------------------------
Increase (decrease) in net assets from
operations 191,827 6,982 (1,263) 28,854 68,179 89,075
----------------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 12,996,026 18,939 37,113 24,037 12,848,110 67,827
Cost of insurance and administrative
expenses (327,795) (5,716) (45,365) (17,969) (242,041) (16,704)
Net transfers among divisions
(including the guaranteed interest
division in the general account) (7,368,518) 107,141 1,355,450 935,792 (10,830,183) 1,063,282
Other 5,062 145 173 (16) 4,218 542
----------------------------------------------------------------------------
Increase from principal
transactions 5,304,775 120,509 1,347,371 941,844 1,780,104 1,114,947
----------------------------------------------------------------------------
Total increase in net assets 5,496,602 127,491 1,346,108 970,698 1,848,283 1,204,022
Net assets at beginning of year 32,041 - - - 32,041 -
----------------------------------------------------------------------------
Net assets at end of year $ 5,528,643 $127,491 $1,346,108 $970,698 $ 1,880,324 $1,204,022
============================================================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
130
Strategic Advantages
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
INVESCO
---------------------------------------------------------------
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 53,712 $ 2,850 $ 8,653 $ 42,118 $ 91
Net realized gains (losses) on
investments 4,788 2,380 1,156 1,237 15
Net unrealized gains (losses) on
investments (6,574) 2,264 12,495 (22,224) 891
---------------------------------------------------------------
Increase (decrease) in net assets from
operations 51,926 7,494 22,304 21,131 997
---------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 28,034 3,844 12,548 8,941 2,701
Cost of insurance and administrative
expenses (17,857) (4,401) (5,390) (6,776) (1,290)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 915,744 145,676 230,040 522,094 17,934
Other 1,179 950 137 85 7
---------------------------------------------------------------
Increase from principal
transactions 927,100 146,069 237,335 524,344 19,352
---------------------------------------------------------------
Total increase in net assets 979,026 153,563 259,639 545,475 20,349
Net assets at beginning of year - - - - -
---------------------------------------------------------------
Net assets at end of year $979,026 $153,563 $259,639 $545,475 $20,349
===============================================================
See accompanying notes.
</TABLE>
________________________________________________________________________________
131
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
VAN ECK
--------------------------------------
GOLD AND
TOTAL WORLDWIDE NATURAL
VAN ECK BALANCED RESOURCES
--------------------------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 229 $ 245 $ (16)
Net realized gains (losses) on
investments 358 (5) 363
Net unrealized gains (losses) on
investments 519 (62) 581
--------------------------------------
Increase (decrease) in net assets from
operations 1,106 178 928
--------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 10,265 6,352 3,913
Cost of insurance and administrative
expenses (3,364) (2,360) (1,004)
Net transfers among divisions
(including the guaranteed interest
division in the general account) 87,069 72,661 14,408
Other (10) (19) 9
--------------------------------------
Increase from principal
transactions 93,960 76,634 17,326
--------------------------------------
Total increase in net assets 95,066 76,812 18,254
Net assets at beginning of year - - -
--------------------------------------
Net assets at end of year $95,066 $76,812 $18,254
======================================
</TABLE>
See accompanying notes.
________________________________________________________________________________
132
strategic Advantage
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements
December 31, 1996
NOTE A. ORGANIZATION
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 is organized
as a unit investment trust registered with the Securities and Exchange
Commission under the Investment Company Act of 1940.
The Separate Account supports the operations of the FirstLine and Strategic
Advantage Variable Universal Life ("FirstLine and Strategic Advantage") 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 (N&B)
Neuberger & Berman Limited Maturity Bond Portfolio
Neuberger & Berman Growth Portfolio
Neuberger & Berman Government Income Portfolio
Neuberger & Berman Partners Portfolio
________________________________________________________________________________
133
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE A. ORGANIZATION (CONTINUED)
Fred Alger Management, Inc. (Alger)
Alger American Small Capitalization Portfolio
Alger American MidCap Growth Portfolio
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Fidelity Management & Research Company (Fidelity)
Fidelity Investments VIP II Asset Manager Portfolio
Fidelity Investments VIP Growth Portfolio
Fidelity Investments VIP Overseas Portfolio
Fidelity Investments VIP Money Market Portfolio
Fidelity Investments VIP II Index 500 Portfolio
INVESCO Funds Group, Inc. (INVESCO)
INVESCO VIF Total Return Portfolio
INVESCO VIF Industrial Income Portfolio
INVESCO VIF High Yield Portfolio
INVESCO VIF Utilities Portfolio
Van Eck Investment Trust (Van Eck)
Van Eck Worldwide Balanced Portfolio
Van Eck Gold and Natural Resources Portfolio
The FirstLine and Strategic Advantage 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 and Strategic
Advantage products also provide the policyholders the option to allocate their
net premiums, or to transfer their account values, to a Guaranteed Interest
Division (GID) in the Company's general account. The GID guarantees a rate of
interest to the policyholder, and it is not variable in nature. Therefore, it is
not included in these Separate Account statements.
Effective May 1, 1997, the Divisions of the Separate Account investing in the
Neuberger & Berman Government Income Portfolio and the Van Eck Worldwide
Balanced Fund will no longer be accepting new investments.
________________________________________________________________________________
134
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of the Separate Account have been prepared
on the basis of generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The accounting principles followed by the Separate Account and the methods of
applying those principles are presented below or in the footnotes which
follow:
INVESTMENT VALUATION--The investments in shares of the Funds are valued at the
closing net asset value (market value) per share as determined by the Funds on
the day of measurement.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--The investments in shares
of the Funds are accounted for on the date the order to buy or sell is
confirmed. Dividend income and distributions of capital gains are recorded on
the ex-dividend date. Realized gains and losses from security transactions are
reported using the first-in-first-out (FIFO) method of accounting for cost. The
difference between cost and current market value of investments owned on the day
of measurement is recorded as unrealized gain or loss on investment.
VALUATION PERIOD DEDUCTIONS--Charges are made directly against the assets of the
Separate Account divisions and are reflected daily in the computation of the
unit values of the divisions.
For FirstLine and Strategic Advantage 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,
1996 were $241,127.
________________________________________________________________________________
135
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and administrative charges. The cost
of insurance and administrative charges were $2,843,666 for the year ended
December 31, 1996. Distributions made by the Funds are reinvested in the
Funds.
________________________________________________________________________________
136
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE C. INVESTMENTS (CONTINUED)
The following is a summary of fund shares owned as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER NET VALUE
OF ASSET OF SHARES COST OF
FUND SHARES VALUE AT MARKET SHARES
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Neuberger & Berman:
Limited Maturity Bond 177,488.06 $14.05 $ 2,493,707 $ 2,468,473
Growth 69,729.59 25.78 1,797,629 1,734,496
Government Income 145,723.35 10.63 1,549,039 1,514,968
Partners 282,829.62 16.48 4,661,032 4,081,769
Fred Alger Management, Inc.:
American Small Capitalization 109,518.40 40.91 4,480,399 4,479,487
American MidCap Growth 108,136.97 21.35 2,308,724 2,215,923
American Growth 110,939.21 34.33 3,808,543 3,583,100
American Leveraged AllCap 45,069.71 19.36 872,550 849,359
Fidelity Management & Research Co.:
Asset Manager 89,386.84 16.93 1,513,317 1,443,642
Growth 224,729.85 31.14 6,998,086 6,736,473
Overseas 226,456.08 18.84 4,266,432 3,999,654
Money Market 7,785,142.70 1.00 7,785,143 7,785,143
Index 500 114,727.97 89.13 10,225,704 8,984,680
INVESCO Funds Group, Inc.:
Total Return 63,713.18 13.21 841,651 828,431
Industrial Income 95,691.99 14.33 1,371,266 1,365,853
High Yield 114,747.49 11.78 1,351,726 1,427,352
Utilities 18,274.30 11.95 218,378 211,043
Van Eck Investment Trust:
Worldwide Balanced 29,433.17 11.14 327,886 308,605
Gold and Natural Resources 15,931.07 16.72 266,367 257,094
Total $57,137,579 $54,275,545
==========================
</TABLE>
For the year ended December 31, 1996, the aggregate cost of purchases (plus
reinvested dividends) and the proceeds from sales of investments were
$71,906,031 and $31,000,056, respectively.
________________________________________________________________________________
137
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE D. OTHER POLICY DEDUCTIONS
The FirstLine and Strategic Advantage products provide for certain deductions
for sales and tax loads from premium payments received from the policyholders
and for surrender charges and taxes from amounts paid to policyholders. Such
deductions are taken 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 and Strategic Advantage policies allow the policyholders to borrow
against their policies by using them as collateral for a loan. At the time they
borrow against their policies, an amount equal to the loan amount is transferred
from the Separate Account 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.
________________________________________________________________________________
138
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE G. SUMMARY OF CHANGES IN UNITS
The following schedule summarizes the changes in divisional units for the year
ended December 31, 1996;
<TABLE>
<CAPTION>
(DECREASE)
FOR COI
INCREASE AND
OUTSTANDING INCREASE (DECREASE) ADMINISTRATIVE OUTSTANDING
AT BEGINNING FOR PAYMENTS FOR DIVISIONAL CHARGES AND AT END
DIVISION OF YEAR RECEIVED TRANSFERS SURRENDERS OF YEAR
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Neuberger & Berman:
Limited Maturity Bond 162,009.578 22,341.563 34,959.370 (584.620) 218,725.891
Growth 60,162.107 40,992.586 33,140.220 (726.930) 133,567.893
Government Income 77,187.706 30,340.987 35,590.000 (345.290) 142,773.403
Partners 73,535.288 52,840.719 150,615.480 (1,099.030) 275,892.457
Fred Alger Management, Inc.:
American Small Capitalization 80,027.266 41.830.466 176,940.020 (1,724.430) 297,073.322
American MidCap Growth 19,692.860 21,703.253 110,111.630 (1,027.270) 150,480.473
American Growth 69,805.233 79,036.444 135,021.170 (1,687.560) 282,175.287
American Leveraged AllCap 2,494.731 14,117,529 37,093.470 (661.260) 53,044.470
Fidelity Management & Research Co:
Asset Manager 11,627.088 11,928.100 100,648.740 (295.760) 123,908.168
Growth 102,248.988 60,000.429 309,854.870 (1,818.620) 470,285.667
Overseas 93,906.733 36,170.266 239,414.430 (1,543.320) 367,948.109
Money Market 178,653.159 3,714,656.740 (2,593,671.600) (5,930.330) 753,707.969
Index 500 91,903.027 43,453,963 507,578.000 (2,044.340) 640,890.650
INVESCO Funds Group, Inc.:
Total Return 12,602.644 11,847.269 40,812.090 (771.540) 64,490.483
Industrial Income 20,026.102 12,961.494 54,377.610 (329.850) 87,035.356
High Yield 45,708.358 5,929.679 57,717.210 (356.140) 108,999.107
Utilities 1,879.859 3,104.181 13,093.330 (68.880) 18,008.490
Van Eck Investment Trust:
Worldwide Balanced 7,739.274 10,375.993 12,036.370 (342.850) 29,808.787
Gold and Natural Resources 1,765.913 4,573.270 15,683.750 (56.840) 21,966.093
</TABLE>
________________________________________________________________________________
139
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED)
The following schedule summarizes the changes in divisional units for the year
ended December 31, 1995:
<TABLE>
<CAPTION>
(DECREASE)
INCREASE FOR COI
OUTSTANDING INCREASE (DECREASE) AND OUTSTANDING
AT BEGINNING FOR PAYMENTS FOR DIVISIONAL ADMINISTRATIVE 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 Capitalization 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 and Natural Resources 0.000 384.059 1,482.141 (100.287) 1,765.913
</TABLE>
________________________________________________________________________________
140
Strategic Advantage
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE H. NET ASSETS
Net assets at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
ACCUMULATED NET
ACCUMULATED NET REALIZED UNREALIZED
INVESTMENT GAINS GAINS
PRINCIPAL INCOME (LOSSES) ON (LOSSES) ON
DIVISION TRANSACTIONS (LOSS) INVESTMENTS INVESTMENTS NET ASSETS
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Neuberger & Berman:
Limited Maturity Bond $ 2,365,476 $ 109,528 $ (8,162) $ 25,234 $ 2,492,076
Growth 1,725,901 65,204 (18,524) 63,133 1,835,714
Government Income 1,483,474 24,172 6,596 34,072 1,548,314
Partners 3,920,042 31,950 131,986 579,264 4,663,242
Fred Alger Management, Inc.:
American Small Capitalization 4,316,836 (13,285) 27,644 913 4,332,108
American MidCap Growth 2,226,430 2,489 13,338 92,798 2,335,055
American Growth 3,545,535 18,780 24,420 225,443 3,814,178
American Leveraged AllCap 839,227 (1,468) 13,799 23,190 874,748
Fidelity Management & Research Co:
Asset Manager 1,461,400 5,725 8,537 69,675 1,545,337
Growth 6,683,255 80,958 23,593 261,613 7,049,419
Overseas 3,962,517 8,914 36,919 266,779 4,275,129
Money Market 8,016,110 279,556 - - 8,295,666
Index 500 8,785,136 150,280 57,624 1,241,024 10,234,064
INVESCO Funds Group, Inc.:
Total Return 805,870 24,733 30,644 13,220 874,467
Industrial Income 1,233,922 98,197 32,085 5,413 1,369,617
High Yield 1,346,523 150,437 84,067 (75,626) 1,505,401
Utilities 205,330 4,246 1,350 7,335 218,261
Van Eck Investment Trust:
Worldwide Balanced 306,435 (890) 2,979 19,281 327,805
Gold and Natural Resources 246,886 563 9,504 9,273 266,226
----------------------------------------------------------------------
Total $53,476,305 $1,040,089 $478,399 $2,862,034 $57,856,827
======================================================================
</TABLE>
________________________________________________________________________________
141
Strategic Advantage
<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>
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.
________________________________________________________________________________
142
Strategic Advantage
<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.
________________________________________________________________________________
143
Strategic Advantage
<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.
________________________________________________________________________________
144
Strategic Advantage
<PAGE>
APPENDIX A (CONT.)
Factors for the
Cash Vcalue 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.
_______________________________________________________________________________
145
Strategic Advantage
<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.
________________________________________________________________________________
146
Strategic Advantage
<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.
________________________________________________________________________________
147
Strategic Advantage
<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.
________________________________________________________________________________
148
Strategic Advantage
<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.
________________________________________________________________________________
149
Strategic Advantage
<PAGE>
APPENDIX B
Factors for the
Guideline Premium/Cash Value Corridor Test
For a Life Insurance Policy
<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.
________________________________________________________________________________
150
Strategic Advantage
<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 is based
on the total return calculated for each fiscal year. These Annual Total Return
figures reflect the Portfolio's management fees and other operating expenses but
do not reflect the Policy level or Variable Account asset based charges and
deductions, which if reflected, would result in lower total return figures than
those shown.
The illustrations are based on the payment of a $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 32. 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
144.
________________________________________________________________________________
151
Strategic Advantage
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
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
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/87 2.89% 4,700 4,412 300,000
12/31/88 7.17% 9,212 9,068 300,000
12/31/89 10.77% 14,313 14,313 300,000
12/31/90 8.32% 19,538 19,538 300,000
12/31/91 11.34% 25,876 25,876 300,000
12/31/92 5.18% 31,452 31,452 300,000
12/31/93 6.63% 37,795 37,795 300,000
12/31/94 (0.15)% 41,610 41,610 300,000
12/31/95 10.94% 50,437 50,437 300,000
12/31/96 4.31% 56,480 56,480 300,000
NEUBERGER & BERMAN AMT GOVERNMENT INCOME PORTFOLIO/1/
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 11.76% 5,111 4,823 300,000
12/31/96 1.32% 9,106 8,962 300,000
NEUBERGER & BERMAN AMT GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/87 (4.89)% 4,340 4,052 300,000
12/31/88 25.97% 10,436 10,293 300,000
12/31/89 29.47% 18,407 18,407 300,000
12/31/90 (8.19)% 20,213 20,213 300,000
12/31/91 29.73% 31,130 31,130 300,000
12/31/92 9.54% 38,513 38,513 300,000
12/31/93 6.79% 45,367 45,367 300,000
12/31/94 (4.99)% 46,732 46,732 300,000
12/31/95 31.73% 66,747 66,747 300,000
12/31/96 9.14% 76,879 76,879 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 144.
* 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 152
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
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 PARTNERS PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 36.47% 6,260 5,972 300,000
12/31/96 29.57% 13,219 13,076 300,000
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/89 64.48% 7,567 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
12/31/96 4.18% 71,267 71,267 300,000
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
12/31/96 11.90% 17,843 17,843 300,000
ALGER AMERICAN GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 4.14% 4,757 4,470 300,000
12/31/91 40.39% 12,256 12,112 300,000
12/31/92 12.38% 17,936 15,058 300,000
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
12/31/96 13.35% 58,279 58,279 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 144.
* 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 153
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $ 5,750
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALGER AMERICAN LEVERAGED ALL CAP
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/96 12.04% 5,123 4,836 300,000
FIDELITY VIP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/87 3.66% 4,735 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
12/31/96 14.71% 99,683 99,683 300,000
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 9.74% 47,117 47,117 300,000
12/31/96 13.15% 57,667 57,667 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 144.
* 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 154
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $ 5,750
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY VIP MONEY MARKET PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/87 6.44% 4,864 4,576 300,000
12/31/88 7.39% 9,407 9,263 300,000
12/31/89 9.12% 14,303 14,303 300,000
12/31/90 8.04% 19,476 19,476 300,000
12/31/91 6.09% 24,560 24,560 300,000
12/31/92 3.90% 29,700 29,700 300,000
12/31/93 3.23% 34,770 34,770 300,000
12/31/94 4.25% 40,327 40,327 300,000
12/31/95 5.87% 46,748 46,748 300,000
12/31/96 5.41% 53,205 53,205 300,000
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
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
12/31/96 14.60% 45,081 45,081 300,000
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
12/31/96 22.82% 26,210 26,210 300,000
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
12/31/96 12.18% 10,688 10,544 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 144.
* 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 155
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $ 5,750
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESCO VIF INDUSTRIAL INCOME PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 29.25% 5,923 5,636 300,000
12/31/96 22.28% 12,047 11,903 300,000
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
12/31/96 16.59% 10,958 10,814 300,000
INVESCO VIF UTILITIES PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 9.08% 4,986 4,986 300,000
12/31/96 12.76% 10,031 9,887 300,000
VAN ECK WORLDWIDE BOND PORTFOLIO/2/
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 11.25% 5,097 4,779 300,000
12/31/91 18.39% 10,668 10,524 300,000
12/31/92 (5.25)% 13,536 13,536 300,000
12/31/93 7.79% 18,605 18,605 300,000
12/31/94 (1.32)% 21,946 21,946 300,000
12/31/95 17.30% 30,551 30,551 300,000
12/31/96 2.53% 35,399 35,399 300,000
VAN ECK WORLDWIDE HARD ASSETS FUND (FORMERLY GOLD AND NATURAL RESOURCES FUND)
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/91 (2.93)% 4,430 4,143 300,000
12/31/92 (4.09)% 7,954 7,810 300,000
12/31/93 64.83 % 19,533 19,533 300,000
12/31/94 (4.78)% 22,054 22,054 300,000
12/31/95 10.99 % 28,574 28,574 300,000
12/31/96 18.04 % 38,542 38,542 300,000
</TABLE>
________________________________________________________________________________
Strategic Advantage 156
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $ 5,750
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VAN ECK WORLDWIDE BALANCED FUND/1/
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 (0.10)% 4,561 4,274 300,000
12/31/96 11.63% 9,455 9,311 300,000
</TABLE>
<TABLE>
<CAPTION>
AIM VI GOVERNMENT SECURITIES PORTFOLIO/2/
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/94 (3.73)% 4,394 4,106 300,000
12/31/95 15.56% 9,607 9,463 300,000
12/31/96 2.29% 13,576 13,576 300,000
AIM VI CAPITAL APPRECIATION PORTFOLIO/2/
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/94 2.50% 4,682 4,394 300,000
12/31/95 35.69% 11,731 11,597 300,000
12/31/96 17.58% 18,177 18,177 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 144.
* 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.
/1/ No longer available for new investors.
/2/ Will be available on or before May 1, 1998.
________________________________________________________________________________
Strategic Advantage 157
<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).
UNDERTAKING REQUIRED BY SECTION 26(e)(2)(A) OF THE INVESTMENT
COMPANY ACT OF 1940, AS AMENDED
Security Life of Denver Insurance Company represents that the fees and charges
deducted under the Policy, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred and the risks assumed by
the Company.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-Reference table.
The prospectus.
The undertaking to file reports.
The undertaking regarding indemnification.
The undertaking required by Section 26(e)2(A) of the Investment Company
Act of 1940, as amended.
The signatures.
Written consents of the following persons:
Shirley A. Knarr (See Exhibits 6(a)).
Ernst & Young LLP (See Exhibit 7(a)).
Mayer, Brown & Platt (See Exhibit 7(b)).
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/
(i) Broker/Dealer Supervisory and Selling Agreement for Variable
Contracts with Paine Webber Incorporated. /7/
(c) Commission Schedule for Policies. /1/
(4) Not Applicable.
(5) (a) Specimen Variable Universal Life Insurance Policy (Form No. 1197
(VUL). /7/
(i) Specimen Variable Universal Life Policy Issued in
Massachusetts (Form No. 1195 (VUL)-MA-5/97)./ 7/
(ii) Specimen Variable Universal Life Policy Issued in Maryland.
(Form No. 1195 (VUL)-MA-5/97). /7/
(iii) Specimen Variable Universal Life Policy Issued in Texas. (Form
No. 1195 (VUL)-MA-5/97)./7/
(iv) Specimen Variable Universal Life Insurance Policy (Form No.
2501 (VUL)-7/97). /8/
(b) Adjustable Term Insurance Rider (Form No. R2000-3/96). /7/
(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/
(i) Bylaws of Security Life of Denver Insurance Company (Restated
with Amendments through September 30, 1997).
(7) Not Applicable.
(8) (a) Participation Agreements /3/ and Addendum to Sales Agreement. /1/
(i) Specimen Participation Agreement by and among AIM Variable
Insurance Funds, Inc., Life Insurance Company, on Behalf of Itself
and its Separate Accounts and Name of Underwriter of Variable
Contracts and Policies.
(b) Amendments to Participation Agreements. /1/
(i) Specimen Amendment to Fund Participation Agreement between
Security Life of Denver, Van Eck Investment Trust and Van Eck
Associates Corporation.
(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.
________________________________________________________________________________
Strategic Advantage II-2
<PAGE>
(10) (a) Specimen Flexible Premium Variable Life Insurance Application (Form
No. Q-1155). /1/
(i) Variable Life Insurance Application (Form No. Q-2006-9/97). /8/
(ii) Variable Life Insurance Application (Form No. Q-1155-98)./9/
(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. /5/
4. Not Applicable.
5. Not Applicable.
6. Opinion and Consent of Shirley A. Knarr.
7. (a) Consent of Ernst & Young LLP.
(b) Consent of Mayer, Brown and Platt.
8. Not Applicable.
9. 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).
/4/ Incorporated herein by reference 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 December
3, 1993 (File No. 33-72564).
/5/ Incorporated herein by reference to the 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).
_______________________________________________________________________________
Strategic Advantage II-3
<PAGE>
/7/ Incorporated herein by reference to Post-Effective Amendment No. 4 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 April 30, 1997 (File No.33-88148).
/8/ To be used on or before May 1, 1998.
/9/ To be used on or before May 1, 1998, where Exhibit 1.A(10)(a)(i) has not
been approved.
________________________________________________________________________________
Strategic Advantage II-4
<PAGE>
SIGNATURES
Pursuant to Rule 485(a) under the Securities Act of 1933, Security Life of
Denver Insurance Company and the Registrant, Security Life Separate Account L1
have duly caused this Post-Effective Amendment No. 3 to the Registration
Statement to be signed on their behalf by the undersigned, hereunto 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 29th day of October,
1997.
SECURITY LIFE OF DENVER INSURANCE COMPANY
(Depositor)
BY: /s/ Stephen M. Christopher
--------------------------
Stephen M. Christopher
President and Chief Operating Officer
(Seal)
ATTEST:
/s/ Gary W. Waggoner
- - --------------------
Gary W. Waggoner
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/ Gary W. Waggoner
- - --------------------
Gary W. Waggoner
_______________________________________________________________________________
Strategic Advantage II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 3 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/ R. Glenn Hilliard
- - ---------------------
R. Glenn Hilliard
Chief Executive Officer
/s/ Stephen M. Christopher
- - --------------------------
Stephen M. Christopher
President and Chief Operating Officer
PRINCIPAL FINANCIAL OFFICER
/s/ Stephen J. Yarina
- - ---------------------
Stephen J. Yarina
Vice President, Treasurer and
Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER
/s/ Stephen J. Yarina
- - ---------------------
Stephen J. Yarina
Vice President, Treasurer and
Chief Financial Officer
DIRECTORS:
/s/ R. Glenn Hilliard (Chairman)
- - --------------------------------
R. Glenn Hilliard
/s/ Thomas F. Conroy
- - --------------------
Thomas F. Conroy
/s/ Michael W. Cunningham
- - -------------------------
Michael W. Cunningham
/s/ Linda B. Emory
- - ------------------
Linda B. Emory
/s/ Stephen M. Christopher
- - --------------------------
Stephen M. Christopher
_______________________________________________________________________________
Strategic Advantage II-6
<PAGE>
________________________________________________________________________________
Strategic Advantage II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- - ----------- ----------------------
<S> <C>
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/
1.A(2) Not Applicable.
1.A(3)(a) Security Life of Denver Distribution Agreement. /2/
1.A(3)(b) Specimen Broker/Dealer Supervisory and Selling Agreement for
Variable Contracts /3/, and Compensation Schedule. /1/
1.A(3)(b)(i) Broker/Dealer Supervisory and Selling Agreement for Variable
Contracts with Paine Webber Incorporated. /7/
1.A(3)(c) Commission Schedule for Policies. /1/
1.A(4) Not Applicable.
1.A(5)(a) Specimen Variable Universal Life Insurance Policy (Form No.
1197)(VUL)-5/97). /7/
1.A(5)(a)(i) Specimen Variable Universal Life Insurance Policy issued in
Maryland (Form No. 1197(VUL)-MD-5/97). /7/
1.A(5)(a)(ii) Specimen Variable Universal Life Insurance Policy issued in
Massachusetts (Form No. 1197(VUL)-MA-5/97). /7/
1.A(5)(a)(iii) Specimen Variable Universal Life Insurance Policy issued in
Texas (Form No. 1197(VUL)-TX-5/97). /7/
1.A(5)(a)(iv) Specimen Variable Universal Life Insurance Policy (Form No.
2501 (VUL)-7/97). /8/
1.A(5)(b) Adjustable Term Insurance Rider (Form No. R2000-3/96). /7/
1.A(6)(a) Security Life of Denver's Restated Articles of
Incorporation. /1/
1.A(6)(b-g) Amendments to Articles of Incorporation through June 12,
1987. /4/
1.A(6)(h) Security Life of Denver's By-Laws. /1/
1.A(6)(h)(i) Bylaws of Security Life of Denver Insurance Company
(Restated with Amendments through September 30, 1997).
1.A(7) Not Applicable.
1.A(8)(a) Participation Agreements /3/ and Addendum to Sales
Agreement. /1/
</TABLE>
______________________________________________________________________________
Strategic Advantage II-8
<PAGE>
<TABLE>
<S> <C>
1.A(8)(a)(i) Specimen Participation Agreement by and among AIM Variable
Insurance Funds, Inc., Life Insurance Company, on Behalf of
Itself and its Separate Accounts and Name of Underwriter of
Variable Contracts and Policies.
1.A(8)(b) Amendments to Participation Agreements. /1/
I.A(8)(b)(i) Specimen Amendment to Fund Participation Agreement between
Security Life of Denver, Van Eck Investment Trust and
Van Eck Associates Corporation.
1.A(8)(c) Service Agreement. /1/
1.A(8)(d) Administrative Services Agreement between Security Life of
Denver and Financial Administrative Services Corporation./2/
1.A(8)(e) Amendments to Administrative Services Agreement between
Security Life of Denver and Financial Administrative
Services Corporation. /5/
1.A(9) Not Applicable.
1.A(10)(a) Specimen Flexible Premium Variable Life Insurance
Application (Form No. Q-1155). /1/
1.A(10)(a)(i) Variable Life Insurance Application (Form No. Q-2006). /8/
1.A(10)(a)(ii) Variable Life Insurance Application (Form No. Q-1155-98).
/9/
1.A(10)(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. Opinion and Consent of Shirley A. Knarr.
7.(a) Consent of Ernst & Young LLP.
7.(b) Consent of Mayer, Brown and Platt.
8. Not Applicable.
9. Financial Data Schedule (Exhibit 27 for purposes for
electronic filing).
</TABLE>
___________________
________________________________________________________________________________
Strategic Advantage II-9
<PAGE>
1 Incorporated herein by reference to Pre-Effective Amendment No. 1 of
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 the Pre-Effective Amendment No. 1 of
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 of
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).
/4/ Incorporated herein by reference 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 December
3, 1993 (File No. 33-72564).
/5/ Incorporated herein by reference to the 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).
/7/ Incorporated herein by reference to Post-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 April 30, 1997 (File No. 33-88148).
/8/ To be used on or before May 1, 1998.
/9/ To be used on or before May 1, 1998, where Exhibit 1.A(10)(a)(i) has not
been approved.
________________________________________________________________________________
Strategic Advantage II-10
<PAGE>
EXHIBIT 1.A(5)(a)(iv)
Security Life of Denver
Insurance Company
INSURED: JOHN DOE
POLICY DATE: January 1, 1998
POLICY NUMBER: 65000001
INITIAL STATED DEATH BENEFIT: $100,000.00
WE AGREE TO PAY the death benefit to the beneficiary upon the death of the
insured while this policy is in force.
WE AGREE TO PAY your Net Account Value to you as of the Maturity Date if the
insured is living on that date.
WE ALSO AGREE to provide the other rights and benefits of the policy. These
agreements are subject to the provisions of the policy.
RIGHT TO EXAMINE PERIOD. You have the right to examine and return this policy
within 10 days after receipt.
The policy may be returned by delivering or mailing it to us at our Customer
Service Center. Immediately upon return it will be deemed void as of the policy
date. Upon return of the policy to us, we will refund all premiums paid.
In this policy "you" and "your" refer to the owner of the policy. "We", "us"
and "our" refer to Security Life of Denver Insurance Company.
[ILLEGIBLE SIGNATURE APPEARS HERE] [ILLEGIBLE SIGNATURE APPEARS HERE]
Secretary President
This policy is a FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.
Death benefits and other values provided by this contract, when based on the
investment experience of a separate account, are variable. These values may
increase or decrease based on investment experience and are not guaranteed as to
fixed dollar amount. Death benefits are payable by us upon the death of the
insured prior to the Maturity Date. Your Net Account Value, if any, is payable
by us if the insured is living as of the Maturity Date. Flexible premiums are
payable by you during the lifetime of the insured until the Maturity Date.
SECURITY LIFE OF DENVER INSURANCE COMPANY
A Stock Company
Customer Service Center
1290 Broadway; Denver, Colorado 80203
Toll Free Number: 1(800)448-9839
FORM NO. 2501 (VUL)-7/97
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SCHEDULE ......................................................................5
DEFINITION OF TERMS ...........................................................6
INSURANCE COVERAGE PROVISIONS .................................................7
EFFECTIVE DATE OF COVERAGE ..................................................7
BASE DEATH BENEFIT ..........................................................7
CHANGE IN REQUESTED INSURANCE COVERAGE ......................................7
Requested Increases in Coverage ............................................8
Requested Decreases in Coverage ............................................8
Death Benefit Option Changes ...............................................8
PAYOUT OF PROCEEDS ..........................................................8
PREMIUM PROVISIONS ............................................................9
INITIAL PREMIUM ALLOCATION ..................................................9
SUBSEQUENT PREMIUM ALLOCATIONS ..............................................9
CHANGES TO PREMIUM ALLOCATIONS ..............................................9
SCHEDULED PREMIUMS .........................................................10
UNSCHEDULED PREMIUMS .......................................................10
NET PREMIUM ................................................................10
PREMIUM LIMITATION .........................................................10
VARIABLE ACCOUNT PROVISION ...................................................10
THE VARIABLE ACCOUNT .......................................................10
VARIABLE ACCOUNT DIVISIONS .................................................11
CHANGES WITHIN THE VARIABLE ACCOUNT ........................................11
GENERAL ACCOUNT PROVISIONS ...................................................12
THE GENERAL ACCOUNT ........................................................12
GUARANTEED INTEREST DIVISION ...............................................12
LOAN DIVISION ..............................................................12
</TABLE>
Page 2
<PAGE>
<TABLE>
<S> <C>
TRANSFER PROVISIONS ..........................................................12
ACCOUNT VALUE PROVISIONS .....................................................12
ACCOUNT VALUES ON THE INVESTMENT DATE ......................................12
ACCUMULATION UNIT VALUE ....................................................13
ACCUMULATION EXPERIENCE FACTOR .............................................13
ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT .....................13
ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION ..........................14
ACCOUNT VALUE OF THE LOAN DIVISION .........................................14
MONTHLY DEDUCTION AND REFUND .................................................14
MONTHLY DEDUCTION ..........................................................14
COST OF INSURANCE ..........................................................15
PERSISTENCY REFUND .........................................................15
LOAN PROVISIONS ..............................................................15
POLICY LOANS ...............................................................15
LOAN INTEREST ..............................................................16
LOAN DIVISION ..............................................................16
PARTIAL WITHDRAWAL PROVISIONS ................................................16
SURRENDER PROVISIONS .........................................................17
SURRENDER VALUE ............................................................17
BASIS OF COMPUTATIONS ......................................................17
FULL SURRENDERS ............................................................17
GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS .......................18
GRACE PERIOD ...............................................................18
THREE YEAR CONTINUATION PERIOD .............................................18
GUARANTEE PERIOD ...........................................................18
TERMINATION ................................................................19
REINSTATEMENT ..............................................................19
DEFERRAL OF PAYMENT ........................................................20
</TABLE>
Page 3
<PAGE>
<TABLE>
<S> <C>
GENERAL POLICY PROVISIONS ....................................................20
THE POLICY .................................................................20
AGE ........................................................................20
PROCEDURES .................................................................20
OWNERSHIP ..................................................................21
BENEFICIARIES ..............................................................21
EXCHANGE RIGHT .............................................................21
COLLATERAL ASSIGNMENT ......................................................21
INCONTESTABILITY ...........................................................21
MISSTATEMENT OF AGE OR SEX .................................................22
SUICIDE EXCLUSION ..........................................................22
PERIODIC REPORTS ...........................................................22
ILLUSTRATION OF BENEFITS AND VALUES ........................................22
NONPARTICIPATING ...........................................................22
CUSTOMER SERVICE CENTER ....................................................22
PAYOUTS OTHER THAN AS ONE SUM ................................................23
ELECTION ...................................................................23
PAYOUT OPTIONS .............................................................23
CHANGE AND WITHDRAWAL ......................................................23
EXCESS INTEREST ............................................................24
MINIMUM AMOUNTS ............................................................24
SUPPLEMENTARY POLICY .......................................................24
INCOME PROTECTION ..........................................................24
DEATH OF PRIMARY PAYEE .....................................................24
PAYMENTS OTHER THAN MONTHLY ................................................24
SETTLEMENT OPTION TABLES .....................................................25
</TABLE>
Additional benefits or riders, if any, will be listed in the schedule. The
additional provisions will be inserted in the policy.
Page 4
<PAGE>
SCHEDULE
(Effective Date: January 1, 1998)
POLICY INFORMATION
<TABLE>
<S> <C> <C> <C>
Policy Number 65000001 Initial Stated Death Benefit $100,000.00
Adjustable Term Rider Amount $
Initial Target Death Benefit $
Insured JOHN DOE
Death Benefit Option OPTION 1
Age And Sex 35, Male Minimum Annual Premium $597.12
Premium Class Non-Smoker
Policy Date January 1, 1998 Initial Scheduled Premium $1,300.00, Annually
Maturity Date January 1, 2063
Definition of Life Insurance Test Guideline Premium/Cash Value Corridor Test
[Guarantee Period Annual Premium Guarantee Period Expiration Date ]
CUSTOMER SERVICE CENTER: 1290 Broadway, Denver, Colorado 80203
</TABLE>
Coverage will expire prior to the Maturity Date if premiums are insufficient to
continue coverage and the Guarantee Period has expired. Coverage will also be
affected by Partial Withdrawals, Policy Loans, changes in the current cost of
insurance rates, the actual credited interest rate for the Guaranteed Interest
division and the investment experience of the Variable Account.
Page 5
<PAGE>
SCHEDULE (Continued)
BENEFIT PROFILE
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
SEGMENT AGE AT GUIDELINE SEGMENT
BENEFIT ISSUE MATURITY EFFECTIVE ANNUAL TARGET
DESCRIPTION AMOUNT AGE DATE DATE PREMIUM PREMIUM
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATED DEATH BENEFIT (SEGMENT #1) $100,000.00 35 100 JANUARY 1, 1998 $1,335.36 $3,680.00
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 5A
<PAGE>
SCHEDULE (Continued)
EXPENSE CHARGES
A. Premium Expense Charges (As a Percent of all premiums) - Premium expense
charges will equal the sum of the following:
1. Sales Load:
<TABLE>
<CAPTION>
Premiums Paid Premiums Paid in
Up to Segment Target Premium Excess of Segment Target Premium
<S> <C> <C>
Years 1-5 8% 3%
Years 6+ 3% 3%
</TABLE>
2. State and Local Taxes: 2.5%
3. Federal Deferred Acquisition Cost Tax: 1.5%
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 charges for federal deferred
acquisition cost taxes due to any change in the cost to us.
B. Monthly Expense Charges - Monthly expense charges will equal the sum of the
following:
Initial Policy Charge: $10 per month for the first 5 policy
years
Monthly Administrative Charge: $5 per month plus $0.0125 per thousand
of Stated Death Benefit (or
Target Death Benefit, if
greater), for all years. The per
thousand charge is limited to
$15.00 per policy month.
[GUARANTEED MINIMUM DEATH BENEFIT CHARGE]
[$0.01 per thousand dollars of Stated Death Benefit per policy month
during the guarantee period, subject to the conditions set forth in the
policy.]
ANNUAL MORTALITY AND EXPENSE RISK CHARGE (Based on the percentage of assets in
each Variable Account Division)
Mortality And Expense Risk Charge: 0.75%
Page 5B
<PAGE>
SCHEDULE (Continued)
POLICYHOLDER TRANSACTION CHARGES
Requests for Sales Illustrations: First illustration each year is free of
charge; thereafter $25 for each illustration
requested.
Premium Allocation Changes: First five changes each policy year are free
of charge; thereafter $25 for each change.
Partial Withdrawal Service Fee: See below
Other Policy Transaction Charges: The charges for transfers between divisions
of the Variable Account or between the
Guaranteed Interest Division and the
Variable Account Divisions; and charges for
other Variable Account management functions
are governed by the Prospectus in effect at
the time of the transaction.
POLICY LOANS
Policy Loan Interest Rate: 3.75% per year
Guaranteed Interest Rate Credited to Loan Division: 3.00% per year
Minimum Loan Amount: $100
Maximum Loan Amount: Refer to the Loan
Provisions section
PARTIAL WITHDRAWALS
Minimum Partial Withdrawal Amount: $100
Maximum Partial Withdrawal Amount: Amount which will leave
$500 as the Net Account
Value
Partial Withdrawal Service Fee: The lesser of $25 or 2% of
the amount withdrawn
Limit on Partial Withdrawals: One per policy year
GUARANTEED INTEREST DIVISION
Guaranteed Interest Rate For Guaranteed Interest Division: 3.00% per year
Page 5C
<PAGE>
SCHEDULE (Continued)
To comply with the Definition of Life Insurance Test you have elected 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.
DEFINITION OF LIFE INSURANCE DEATH BENEFIT FACTORS BASED ON
GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------
ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR
AGE AGE AGE AGE
- - ----------------------------------------------------------------------------------------
<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>
Page 5D
<PAGE>
SCHEDULE (Continued)
TABLE OF GUARANTEED RATES
Guaranteed Maximum Cost of Insurance Rates Per $1000
(Basic)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Attained Monthly Cost of Attained Monthly Cost of Attained Monthly Cost of Attained Monthly Cost of
Age Insurance Rate Age Insurance Rate Age Insurance Rate Age Insurance Rate
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 0.34900 25 0.12675 50 0.41009 75 5.03724
-----------------------------------------------------------------------------------------------------------------------------
1 0.08921 26 0.12342 51 0.44693 76 5.59039
-----------------------------------------------------------------------------------------------------------------------------
2 0.08254 27 0.12175 52 0.48965 77 6.17549
-----------------------------------------------------------------------------------------------------------------------------
3 0.08170 28 0.12008 53 0.53742 78 6.78686
-----------------------------------------------------------------------------------------------------------------------------
4 0.07920 29 0.12008 54 0.59276 79 7.44038
-----------------------------------------------------------------------------------------------------------------------------
5 0.07503 30 0.12008 55 0.65401 80 8.16249
-----------------------------------------------------------------------------------------------------------------------------
6 0.07169 31 0.12258 56 0.72203 81 8.97320
-----------------------------------------------------------------------------------------------------------------------------
7 0.06669 32 0.12509 57 0.79429 82 9.89813
-----------------------------------------------------------------------------------------------------------------------------
8 0.06336 33 0.12926 58 0.87251 83 10.95204
-----------------------------------------------------------------------------------------------------------------------------
9 0.06169 34 0.13427 59 0.96090 84 12.11846
-----------------------------------------------------------------------------------------------------------------------------
10 0.06085 35 0.14094 60 1.05949 85 13.37460
-----------------------------------------------------------------------------------------------------------------------------
11 0.06419 36 0.14762 61 1.16916 86 14.69860
-----------------------------------------------------------------------------------------------------------------------------
12 0.07086 37 0.15680 62 1.29417 87 16.08129
-----------------------------------------------------------------------------------------------------------------------------
13 0.08254 38 0.16682 63 1.43714 88 17.49682
-----------------------------------------------------------------------------------------------------------------------------
14 0.09588 39 0.17851 64 1.59899 89 18.96601
-----------------------------------------------------------------------------------------------------------------------------
15 0.10756 40 0.19103 65 1.77812 90 20.51212
-----------------------------------------------------------------------------------------------------------------------------
16 0.11924 41 0.20607 66 1.97123 91 22.16549
-----------------------------------------------------------------------------------------------------------------------------
17 0.12842 42 0.22110 67 2.18097 92 23.98724
-----------------------------------------------------------------------------------------------------------------------------
18 0.13343 43 0.23865 68 2.40660 93 26.06643
-----------------------------------------------------------------------------------------------------------------------------
19 0.13844 44 0.25619 69 2.65338 94 28.78427
-----------------------------------------------------------------------------------------------------------------------------
20 0.14011 45 0.27709 70 2.93268 95 32.81758
-----------------------------------------------------------------------------------------------------------------------------
21 0.13927 46 0.29966 71 3.30181 96 39.64294
-----------------------------------------------------------------------------------------------------------------------------
22 0.13677 47 0.32391 72 3.61779 97 53.06605
-----------------------------------------------------------------------------------------------------------------------------
23 0.13427 48 0.34984 73 4.04199 98 83.33333
-----------------------------------------------------------------------------------------------------------------------------
24 0.13093 49 0.37912 74 4.52073 99 83.33333
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The rates shown are for a standard rate class. If the policy is based on a
special rate class (other than standard), the maximum cost of insurance rates
will be adjusted using the rating factor shown in the Benefit Profile of the
Schedule for the special class. If the special rate class is a stated
percentage increase, the maximum cost of insurance rates will be determined by
multiplying the rates for a standard rate class shown above by the rating factor
shown in the Benefit Profile of the Schedule. If the special rate class is a
flat amount per $1,000, the maximum cost of insurance rates will be determined
by adding the flat amount per $1,000 shown in the Benefit Profile of the
Schedule to the rate per $1,000 for the standard rate class shown above. The
rates shown above are based on the 1980 Commissioners' Standard Ordinary
Mortality Table, age nearest birthday.
Page 5E
<PAGE>
DEFINITION OF TERMS
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 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.
Base Death Benefit - Initially, this is the Stated Death Benefit under the
policy. The Base Death Benefit may be greater than the Stated Death Benefit
depending on which death benefit option and which test for the Internal Revenue
Code definition of life insurance you choose.
Cash Surrender Value - The amount of your Account Value plus any refund of sales
load due.
Customer Service Center - Our administrative office at 1290 Broadway; Denver, CO
80203.
Division(s) of the Variable Account - The investment options available, each of
which invests in shares of one of the portfolios.
General Account - The account which contains all of our assets other than those
held in the variable account or our other separate accounts.
General 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.
Guideline Annual Premium - The premium used to calculate how Net Premium is
allocated to each segment of Stated Death Benefit and to determine any
persistency refund.
Initial Period - The Initial Period ends on the earlier of: a) the date this
policy was delivered to you plus the Right to Examine Period, so long as we
receive notice of the delivery date at our Customer Service Center before the
date defined in (b), or (b) the date this policy is mailed from our Customer
Service Center plus the deemed mailing time and the Right to Examine Period. The
deemed mailing time is five days.
Investment Date - The date we allocate funds to your policy. We will allocate
the initial Net Premium to your policy on the Valuation Date immediately
following the latest of the date we receive at least one quarter of the Minimum
annual premium as shown in the Schedule attached to your policy, we have
approved the policy for issue, and all issue requirements have been met and
received in our Customer Service Center.
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 100.
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.
Net Account Value - The amount of the Account Value minus any Policy Loan and
accrued loan interest.
Net Cash Surrender Value - The amount of the Cash Surrender Value minus any
Policy Loan and accrued loan interest.
Net Premium - The Net Premium equals the premium paid minus the premium expense
charges shown in the Schedule. These charges are deducted from the premiums
before the premium is applied to your Account Value.
Page 6
<PAGE>
Partial Withdrawal - The withdrawal of a portion of your Net Account Value from
the policy. The Partial Withdrawal may reduce the amount of Base Death Benefit
in force.
Policy Loan - The sum of amounts you have borrowed from your policy, increased
by any Policy Loan interest capitalized when due, and reduced by any Policy Loan
repayments.
Right to Examine Period - The period of time within which the owner may examine
the policy and return it for a refund.
Scheduled Premium - The premium amount which you specify on the application as
the amount you intend to pay at fixed intervals over a specified period of time.
premiums may be paid on a quarterly, semiannual, or annual basis, as you
determine; you need not pay the Scheduled Premium, and you may change it at any
time. Also, within limits, you may pay less or more than the Scheduled Premium.
Segment - The Stated Death Benefit shown on the Benefit Profile of the Schedule
is the initial Segment, or Segment 1. Each increase in the Stated Death Benefit
(other than an option change) is a new Segment. Each new Segment will be shown
separately on the Benefit Profile of the Schedule. The first year for a Segment
begins on the effective date of the Segment and ends one year later. Each
subsequent year begins at the end of the prior Segment year. Each new Segment
may be subject to new expense charges, guaranteed minimum death benefit charges,
cost of insurance charges and incontestability and suicide exclusion periods.
Stated Death Benefit - The sum of the Segments under the policy. The Stated
Death Benefit changes when there is an increase or a decrease or when a
transaction on the policy causes it to change (for example, a partial withdrawal
under an Option 1 Base Death Benefit may cause the Stated Death Benefit to
change).
Target Death Benefit - The Target Death Benefit for your policy is defined in
the Adjustable Term Rider, if any, attached to the policy.
Valuation Date - A Valuation Date is any day:
(a) The New York Stock Exchange ("NYSE") is open for trading and on which
Security Life's Customer Service Center is open for business; or
(b) as may be required by law.
Valuation Period - The period which begins at 4:00 p.m. Eastern Time on
Valuation Date and ends at 4:00 p.m. Eastern Time on the next succeeding
Valuation Date.
Page 6a
<PAGE>
INSURANCE COVERAGE PROVISIONS
EFFECTIVE DATE OF COVERAGE
The policy date shown in the Schedule is the effective date for all coverage
provided in the original application. The effective date is subject to the
payment of at least one quarter of the minimum annual premium and the acceptance
of the policy by you during the continued insurability of all persons insured by
this policy and any riders attached. The policy date is the date from which we
measure policy years and determine the Monthly Processing Date. The first
Monthly Processing Date is the Investment Date. Future Monthly Processing Dates
are the same calendar day of each month as the policy date unless this is not a
Valuation Date in which case the Monthly Processing Date occurs on the next
Valuation Date. A policy anniversary occurs each year on the same month and day
as the policy date unless this is not a Valuation Date in which case the policy
anniversary occurs on the next Valuation Date. If the policy date is February
29th, the policy anniversary will be February 28th in years in which there is
not a February 29th. The effective date for new Segments and additional benefits
is shown in the Schedule.
BASE DEATH BENEFIT
The Base Death Benefit will be, at any time, determined as follows:
Option 1: Under Option 1, the Base Death Benefit is the greater of:
(a) the Stated Death Benefit; or
(b) your Account Value multiplied by the appropriate factor from
the Definition of Life Insurance Factors shown in the
schedule.
Option 2: Under Option 2, the Base Death benefit is the greater of:
(a) the Stated Death Benefit plus the Account Value, or
(b) your Account Value multiplied by the appropriate factor from
the Definition of Life Insurance Factors shown in the
schedule.
The Stated Death Benefit and the death benefit option are shown in the Schedule
pages.
This policy is designed to qualify as a life insurance contract under the
Internal Revenue Code. All terms and provisions of the policy shall be construed
in a manner consistent with that design. The Base Death Benefit in force at any
time shall not be less than the amount of insurance necessary to achieve such
qualification under the applicable provisions of the Internal Revenue Code in
existence at the time the policy is issued. We reserve the right to amend the
policy or adjust the amount of insurance when required. We will send you a copy
of any policy amendment.
CHANGE IN REQUESTED INSURANCE COVERAGE
You may request that the insurance coverage be increased or decreased. Decreases
are not allowed before the first policy anniversary. The change in coverage may
not be for an amount less than $1,000. The effective date of the change will be
the monthly anniversary immediately following the date your written application
is approved by us. After any change to the Stated Death Benefit, you will
receive an amended Schedule reflecting the change, the benefit under any riders,
if applicable, the guaranteed cost of insurance rates, the Guideline Annual
Premium, and the new target premium.
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Requested Increases in Coverage
Subject to our limits, you may request an increase in the Stated Death Benefit.
An increase will become effective as of the monthly anniversary after we have
approved your application for increase. You must provide evidence satisfactory
to us that the insured is insurable according to our normal rules of
underwriting for this type of policy. This evidence will include an application
and may include required medical information. An increase will consist of a new
Segment of Stated Death Benefit. Each new Segment will result in a new sales
load which will be deducted from the premium allocated to the new Segment. The
new Segment may also be subject to new monthly expense charges, guaranteed
minimum death benefit charges, cost of insurance charges and incontestability
and suicide exclusion periods.
Requested Decreases in Coverage
After the first policy anniversary, you may request a decrease in the Stated
Death Benefit. A decrease will be effective as of the monthly anniversary
immediately following the date your written application is approved by us. A
decrease will first reduce Adjustable Term Insurance Rider coverage, if any is
attached to your policy, and will then reduce each of the Stated Death Benefit
Segments in the same proportion as the Stated Death Benefit is reduced.
The Stated Death Benefit after any change may not be less than $50,000.
Death Benefit Option Changes
At least 30 days prior to a policy anniversary, you may request a change to the
death benefit option. This change will be effective as of the policy
anniversary. A death benefit option change applies to the entire Stated Death
Benefit. For us to approve a change to the death benefit option from Option 1 to
Option 2, you must submit evidence to us that the insured is insurable according
to our normal rules of underwriting for this type of policy. This evidence will
include an application and may include required medical information. We may not
allow any change if it would reduce the Stated Death Benefit below the minimum
we require to issue this policy at the time of reduction. After the effective
date of the change, the Stated Death Benefit will be changed according to the
following table:
OPTION CHANGE
FROM TO STATED DEATH BENEFIT FOLLOWING CHANGE EQUALS:
Option 1 Option 2 Stated Death Benefit prior to such change
minus your Account Value as of the
effective date of the change.
Option 2 Option 1 Stated Death Benefit prior to such change
plus your Account Value as of the effective
date of the change.
For purposes of death benefit option changes, your Account Value will be
allocated to each Segment in the same proportion that the Segment bears to the
Stated Death Benefit as of the effective date of the change.
PAYOUT OF PROCEEDS
The proceeds is the amount we will pay:
a) as of the Maturity Date,
b) upon surrender of the policy before the Maturity Date, or
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c) upon the death of the insured before the Maturity Date.
The proceeds as of the Maturity Date will be your Net Account Value. The
proceeds upon surrender of this policy prior to the Maturity Date will be the
Net Cash Surrender Value. The Maturity Date is the policy anniversary on which
the insured's age is 100. The insured's age is the age listed in the Schedule
increased by the number of completed policy years since the policy date. The
amount of proceeds payable upon the death of the insured will be the Base Death
Benefit in effect on the date of the insured's death; plus any amounts payable
from any additional benefits provided by rider; minus any outstanding Policy
Loan including accrued but unpaid interest; minus any unpaid monthly deductions
incurred prior to the date of the insured's death, plus any premiums received
after the date of the insured's death. The calculation of the death benefit will
be computed as of the date of the insured's death.
We will determine the amount of proceeds payable upon the death of the insured
when we have received due proof of death and any other information which is
necessary to process the claim. Any proceeds we pay are subject to adjustments
as provided in the Misstatement of Age or Sex, Suicide Exclusion and
Incontestability provisions.
We will pay proceeds in one sum unless you request an alternate form of payment.
There are many possible methods of payment. The available payout options are
described in the Payouts Other Than As One Sum provision. Contact us or your
registered representative for additional information. Interest will be paid on
the one sum death proceeds from the date of the insured's death to the date of
payment, or until a payout option is selected. Interest will be at the rate we
declare, or at any higher rate required by law.
PREMIUM PROVISIONS
INITIAL PREMIUM ALLOCATION
If the Initial Period has not ended on the Investment Date, Net Premium amounts
designated for allocation to divisions of the Variable Account will be allocated
to the Fidelity Investments Money Market Division and any Net Premium amount
designated for allocation to the Guaranteed Interest Division will be allocated
to that division. On the Valuation Date immediately following the end of the
Initial Period, the balance of the Fidelity Investments Money Market Division
will be transferred to the other divisions of the Variable Account according to
the allocations shown in your latest instructions received at our Customer
Service Center. The amounts allocated to the Guaranteed Interest Division will
remain in that division.
If the Initial Period has ended on the Investment Date, Net Premium amounts will
be allocated to divisions of the Variable Account and/or Guaranteed Interest
Division in accordance with the allocation shown in your latest instructions
received at our Customer Service Center.
SUBSEQUENT PREMIUM ALLOCATIONS
After the initial premium allocation, all future scheduled and unscheduled
premiums will be allocated to the Investment Divisions in accordance with the
allocation shown in the latest instructions received at our Customer Service
Center (unless you otherwise specify in writing) on the Valuation date
immediately following our receipt of the premium at our Customer Service Center.
CHANGES TO PREMIUM ALLOCATIONS
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Your original allocation instructions are in your application. You may change
the allocation for subsequent premium in accordance with the instructions
included in your annual policy prospectus. If you change your premium allocation
more than 5 times per policy year, we will deduct a charge from the divisions of
the Variable Account and the Guaranteed Interest Division in the same proportion
that your Account Value of each Division bears to your Net Account Value. The
amount of this charge is shown in the Schedule.
SCHEDULED PREMIUMS
The Scheduled Premium as shown in the Schedule may be paid while this policy is
in force during the insured's lifetime. You may increase or decrease the amount
of the Scheduled Premium, subject to limits we may set and provisions in the
Premium Limitation Section. Under conditions provided in the Grace Period
provision and the guarantee period, you may be required to make premium payments
to keep the policy in force. You may pay premiums on a monthly basis through an
automated payment facility. All payment modes are subject to our minimum
requirements for the payment mode selected.
UNSCHEDULED PREMIUMS
You may make unscheduled premium payments at any time the policy is in force
during the insured's lifetime, subject to the Premium Limitation section. Unless
you tell us otherwise, these premium payments will first be applied to reduce or
pay off any existing Policy Loan and, as such, premium expense charges will not
be deducted. We may limit the amount of such unscheduled premium payments if the
payment would result in an increase in the Base Death Benefit. If the net amount
at risk is increased as a result of an unscheduled premium, we may require
evidence of insurability satisfactory to us that the insured is insurable
according to our normal rules of underwriting for this type of policy. This
evidence will include an application and may include required medical
information. The net amount at risk is the difference between the Base Death
Benefit and your Account Value.
NET PREMIUM
The Net Premium equals the premium paid minus the premium expense charges shown
in the Schedule. Premiums allocated to a new Segment will be subject to a new
sales load. Premiums are allocated in the same proportion that the Guideline
Annual Premium of each Segment bears to the sum of the Guideline Annual Premiums
of all Segments. The Guideline Annual Premium for each Segment is shown in the
Schedule. The target premium for each Segment is also shown in the Schedule.
PREMIUM LIMITATION
If the Definition of Life Insurance test used for your policy is the Guideline
Premium/Cash Value Corridor Test, we will not accept any premium that causes
your policy not to qualify as a life insurance policy under the Internal Revenue
Code.
VARIABLE ACCOUNT PROVISION
THE VARIABLE ACCOUNT
The Variable Account is an account established by us, pursuant to the laws of
the State of Colorado, to separate the assets funding the benefits for the class
of policies to which this policy belongs from the other assets of Security Life
of Denver Insurance Company.
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The Variable Account is registered as a unit investment trust under the
Investment Company Act of 1940. All income, gains and losses, whether or not
realized, from assets allocated to the Variable Account are credited to or
charged against the Variable Account without regard to income, gains or losses
of our General Account. The assets of the Variable Account are our property but
are separate from our General Account and our other Variable 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 subject to
creditor claims against us.
VARIABLE ACCOUNT DIVISIONS
The Variable Account is divided into divisions, each of which invests in a
series fund portfolio designed to meet the objectives of the division. The
current eligible divisions are shown in your annual policy prospectus. We may,
from time to time, add additional divisions. If we do, you may be permitted to
select from these other divisions subject to the terms and conditions we may
impose on those allocations.
We reserve the right to limit the number of divisions in which you may invest
over the life of the policy. This limit, if any, will be listed in the updated
policy prospectus provided to you each year.
CHANGES WITHIN THE VARIABLE ACCOUNT
When permitted by law, and subject to any required notice to you and approval of
the Securities and Exchange Commission ("SEC"), state regulatory authorities or
policy owners, we may from time to time make the following changes to the
Variable Account:
. Make additional divisions available. These divisions will invest in
investment portfolios we find suitable for the policy.
. Eliminate divisions from the Variable Account, combine 2 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 happen due to a change in laws or regulations, or a change in a
portfolio's investment objectives or restrictions. This may also happen
if the portfolio is no longer available for investment, or for some
other reason, such as a declining asset base.
. Transfer assets of the Variable Account, which we determine to be
associated with the class of policies to which your policy belongs, to
another Variable Account.
. Withdraw the Variable Account from registration under the Investment
Company Act of 1940.
. Operate the Variable Account as a management investment company under
the Investment Company Act of 1940.
. Cause one or more divisions to invest in a mutual fund other than or in
addition to the portfolios.
. Discontinue the sale of policies.
. Terminate any employer or plan trustee agreement with us pursuant to
its terms.
. Restrict or eliminate any voting rights as to the Variable Account.
. Make any changes required by the Investment Company Act of 1940 or the
rules or regulations thereunder.
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GENERAL ACCOUNT PROVISIONS
THE GENERAL ACCOUNT
The General Account holds all of our assets other than those held in the
Variable Account or our other separate accounts. The Guaranteed Interest
Division is a part of our General Account.
GUARANTEED INTEREST DIVISION
The Guaranteed Interest Division is another division to which you may allocate
premium or make transfers. The Account Value of the Guaranteed Interest Division
is equal to the Net Premium allocated to this division plus any earned interest
minus deductions taken from this division. Interest is credited at the
guaranteed rate shown in the schedule or may be credited at a higher rate. Any
higher rate is guaranteed to be in effect for at least 12 months.
LOAN DIVISION
The Loan Division is the account which is set aside to secure the Policy Loan,
if any. See the Loan Provision section for information.
TRANSFER PROVISIONS
After the Right to Examine Period, your Account Value in each division may be
transferred to any other division of the Variable Account or to the Guaranteed
Interest Division upon your request. One transfer from the Guaranteed Interest
division into the Variable divisions may be made during the first 30 days of
each policy year. Additional limitations, requirements and charges for transfers
will be listed in and governed by your annual policy prospectus in effect at the
time of the transfer. We reserve the right to modify these limitations,
requirements, and charges from time to time.
ACCOUNT VALUE PROVISIONS
The Account Value is the sum of the current amounts allocated to the divisions
of the divisions of the Variable Account and to the Guaranteed Interest Division
plus your balance in the Loan Division.
The Account Value is based on the amount and number of premiums paid, policy and
rider charges assessed, loans and withdrawals taken, monthly deductions, premium
expense charges, transaction charges, and the investment experience or credited
interest of the division to which your Account Value is allocated.
Your Net Account Value is equal to your Account Value minus any Policy Loan and
accrued but unpaid loan interest.
ACCOUNT VALUES ON THE INVESTMENT DATE
The Account Value of each division of the Variable Account and the Guaranteed
Interest Division as of the Investment Date is equal to:
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a) The allocation to that division of the first Net Premium paid (as
determined by you); minus
b) The portion of any monthly deductions due on the Investment Date
allocated to that division.
ACCUMULATION UNIT VALUE
The investment experience of a division of the Variable Account is determined as
of each Valuation Date. We use an Accumulation Unit Value to measure the
experience of each of the Variable Account Divisions during a Valuation Period.
We set the Accumulation Unit Value at $10 on the Valuation Date when the first
investments in each division of the Variable Account are made. The Accumulation
Unit Value for a Valuation Period equals the Accumulation Unit Value for the
preceding Valuation Period multiplied by the Accumulation Experience Factor
defined below for the Valuation Period.
The number of units for a given transaction related to a division of the
Variable Account as of a Valuation Date is determined by dividing the dollar
value of that transaction by that division's Accumulation Unit Value for that
date.
ACCUMULATION EXPERIENCE FACTOR
For each division of the Variable Account, the Accumulation Experience Factor
reflects the investment experience of the portfolio in which that division
invests and the charges assessed against that division for a Valuation Period.
The Accumulation Experience Factor is calculated as follows:
a) The net asset value of the portfolio in which that division invests
as of the end of the current Valuation Period; plus
b) The amount of any dividend or capital gains distribution declared and
reinvested in the portfolio in which that division invests during the
current Valuation Period; minus
c) A charge for taxes, if any.
d) The result of (a), (b) and (c) divided by the net asset value of the
portfolio in which that division invests as of the end of the
preceding Valuation Period; minus
e) The daily equivalent of the annual mortality and expense risk charge
shown in the Schedule for each day in the current Valuation Period.
ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT
On subsequent Valuation Dates after the Investment Date, your Account Value of
each division of the Variable Account is calculated as follows:
a) The number of Accumulation Units in that division as of the beginning
of the current Valuation Period multiplied by that division's
Accumulation Unit Value for the current Valuation Period; plus
b) Any additional Net Premiums allocated to that division during the
current Valuation Period; plus
c) Any Account Value transferred to or minus any Account Value
transferred from the Variable Division during the current Valuation
Period (including the applicable portion of any transfer fee); minus
d) Any Partial Withdrawals allocated to that division and any applicable
withdrawal service fees which are allocated to the Variable division
during the current Valuation Period; plus
e) Any amounts released from the Loan Division as a result of a loan or
loan interest payment, or minus amounts transferred to the Loan
Division as a result of any loans which are allocated to the Variable
Division during the current Valuation Period; minus
f) The portion of the monthly deduction allocated to the Variable
Division, if a Monthly Processing Date occurs during the current
Valuation Period.
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ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION
On Valuation Dates after the Investment Date, your Account Value of the
Guaranteed Interest Division is calculated as follows:
a) The Account Value of the Guaranteed Interest Division at the end of
the preceding Valuation Period plus interest at the declared rate
credited during the current Valuation Period; plus
b) Any additional Net Premiums allocated to the Guaranteed Interest
Division plus interest credited to these premiums during the current
Valuation Period; plus
c) Any account Value transferred to or minus any Account Value
transferred from the Guaranteed Interest Division during the current
Valuation Period (including the applicable portion of any transfer
fee); minus
d) Any Partial Withdrawals taken and any applicable withdrawal service
fees which are allocated to the Guaranteed Interest Division during
the current Valuation Period; plus
e) Any amounts released from the Loan Division as a result of a loan or
loan interest payment, or minus amounts transferred to the Loan
division as a result of any loans which are allocated to the
Guaranteed Interest Division during the current Valuation Period;
minus
f) The portion of the monthly deduction allocated to the division, if a
Monthly Processing Date occurs during the current Valuation Period.
ACCOUNT VALUE OF THE LOAN DIVISION
On Valuation Dates after the Investment Date, your Account Value of the Loan
Division is equal to:
a) The Account Value of the Loan Division on the prior Valuation Date;
plus
b) Any interest credited to the Loan Division during the Valuation
Period; plus
c) An amount equal to any additional loans since the prior Valuation
Date; minus
d) Any loan repayments, including payment of loan interest in cash;
plus
e) The amount of accrued loan interest if the Valuation Date is a
policy anniversary; minus
f) The amount of interest credited to the Loan Division during the year
if the Valuation Date is a policy anniversary.
On policy anniversaries, any amount of interest credited to the Loan Division
during the year is transferred from the Loan Division to the Variable Account
and Guaranteed Interest Divisions according to your premium allocation then in
effect.
MONTHLY DEDUCTION AND REFUND
MONTHLY DEDUCTION
The monthly deduction is equal to:
a) the cost of insurance charges for this policy; plus
b) the monthly charges for any other additional benefits provided by
rider; plus
c) the monthly expense charges shown in the Schedule.
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The monthly deductions are allocated to the divisions of the Variable Account
and Guaranteed Interest Division in the same proportion that your Account Value
in the division bears to your Net Account Value as of the Monthly Processing
Date. This deduction is taken from your Account Value as of the Monthly
Processing Date.
COST OF INSURANCE
The cost of insurance is determined on a monthly basis for each Segment. Such
cost is the monthly cost of insurance rate for the insured's premium class for
each Segment multiplied by the net amount at risk. The net amount at risk is
(a) minus (b) where:
a) is the Base Death Benefit for all Segments as of the Monthly
Processing Date after the monthly deductions (other than cost of
insurance charges for the Base Death Benefit, any Adjustable Term
Insurance Rider and any Waiver of Monthly Deductions Rider), divided
by 1 plus the monthly equivalent of the guaranteed interest rate for
the Guaranteed Interest Division as shown in the Schedule; and
b) is your Account Value as of the Monthly Processing Date after the
monthly deductions (other than the cost of insurance for the Base
Death Benefit, any Adjustable Term Insurance Rider and any Waiver of
Monthly Deduction Rider).
The cost of insurance rates will be determined by us from time to time. They
will be based on the sex and age as of the effective date of coverage, the
duration since the coverage began and the premium class. Any change in rates
will apply to all individuals of the same premium class and whose policies have
been in effect for the same length of time. The rates will never exceed those
rates shown in the Table of Guaranteed Rates in the Schedule as adjusted for any
special premium class.
Each time there is a new Segment, the net amount at risk will be allocated to
each Segment in the same proportion that Segment bears to the Stated Death
Benefit. Different rates will apply to each Segment depending upon the premium
class, the age as of the effective date of the increase and the duration since
the effective date of the increase.
PERSISTENCY REFUND
Each month your policy or a Segment of Stated Death Benefit remains in force
after its tenth policy anniversary, we will credit your Account Value with a
refund equivalent to 0.5% of your Account Value on an annual basis for that
Segment. The percentage of Account Value which is eligible for this refund is
based on the Guideline Annual Premium for each Segment and the number of years
each Segment has been in force.
The persistency refund will be added to the divisions of the Variable Account
and the Guaranteed Interest Division in the same proportion that your Account
Value in each division bears to your Net Account Value as of the Monthly
Processing Date.
LOAN PROVISIONS
POLICY LOANS
You may obtain a policy loan after the first policy anniversary. The maximum
amount you may borrow at any time equals the Net Account Value on the date of
the loan request less all monthly deductions to the next policy anniversary. The
policy loan is a first lien on your policy. The minimum amount you may borrow
is shown in the Schedule. The outstanding policy loan amount is equal to the
loan amount as of the beginning of the policy year plus new loans and minus loan
repayments, plus accrued interest.
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LOAN INTEREST
The annual policy loan interest rate is shown in the Schedule. If a loan is
made, interest is due and payable at the end of the policy year. Thereafter,
interest on the loan amount is due annually at the end of each policy year until
the loan is repaid. If interest is not paid when due, it is added to the Policy
Loan.
If the Policy Loan amount plus any accrued interest equals or exceeds the
Account Value, a premium sufficient to keep this policy in force must be paid as
provided in the Grace Period provision.
LOAN DIVISION
When a Policy Loan is taken or when interest is not paid in cash when due, an
amount equal to the loan (or unpaid loan interest, respectively) is transferred
from the divisions of the Variable Account and the Guaranteed Interest Division
to the Loan Division to secure the loan. This amount will be deducted from the
divisions of the Variable Account and the Guaranteed Interest Division in the
same proportion that your Account Value in each division bears to your Net
Account Value as of the date the transfer is effective unless otherwise
specified in your instructions to us. Your Account Value in the Loan Division
will be credited with interest at the interest rate for the Loan Division shown
in the Schedule.
When a loan repayment is made an amount equal to the repayment is transferred
from the Loan Division to the Guaranteed Interest Division and the divisions of
the Variable Account in the same proportion as your current premium allocation
unless you request a different allocation.
PARTIAL WITHDRAWAL PROVISIONS
You may apply for a partial withdrawal of your Account Value on any Monthly
Processing Date after the first policy anniversary by writing to us at our
Customer Service Center. The minimum and maximum partial withdrawal amounts are
shown in the Schedule. When a partial withdrawal is made, the amount of the
withdrawal plus a service fee is deducted from your Account Value. The amount
of the service fee is shown in the Schedule. We limit the number of partial
withdrawals in a policy year and this number is shown in the Schedule.
The Stated Death Benefit is not reduced by a partial withdrawal taken when the
Base Death Benefit has been increased to qualify your policy as life insurance
under the Internal Revenue Code and the amount withdrawn is no greater than that
which reduces your Account Value to the level which no longer requires the Base
Death Benefit to be increased for Internal Revenue Code 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 15 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 your
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 your Stated Death
Benefit by that additional amount.
For a policy under an Option 2 death benefit, a partial withdrawal does not
reduce your Stated Death Benefit.
Any reduction in death benefit or Account Value will occur as of the date the
partial withdrawal occurs. No partial withdrawal will be allowed if the Stated
Death Benefit remaining in force after any such partial withdrawal would be
reduced below the minimum Stated Death Benefit shown in the Schedule.
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For a policy under an Option 2 death benefit, a partial withdrawal generally
reduces the Base Death Benefit by the amount of the withdrawal. Under any death
benefit option, if the Base Death Benefit has been increased in order to qualify
your policy as a life insurance contract under the Internal Revenue Code, the
partial withdrawal reduces the Base Death Benefit by an amount greater than the
withdrawal.
You may specify how much of the withdrawal you wish taken from each division of
the Variable Account or from the Guaranteed Interest Division. You may not
withdraw from the Guaranteed Interest division more than the total withdrawal
times the ratio of your Account Value in the Guaranteed Interest Division to
your Net Account Value immediately prior to the withdrawal. Unless you indicate
otherwise, we will make the withdrawal from the amounts in the Guaranteed
Interest Division and the divisions of the Variable Account in the same
proportion that your Account Value in each division bears to your Net Account
Value immediately prior to the withdrawal. The withdrawal service fee is
deducted from each Variable Division and the Guaranteed Interest Division in the
same proportion that your Account Value of each division bears to your Net
Account Value immediately after the withdrawal.
We may send you a new Schedule to reflect the effect of the withdrawal if there
is any change to the Stated Death Benefit. We may ask you to return your policy
to our Customer Service Center to make this change. The withdrawal and the
reductions in death benefits will be effective as of the Valuation Date after we
received your request.
SURRENDER PROVISIONS
SURRENDER VALUE
The Net Cash Surrender Value on any date will be your Account Value plus any
refund of sales load due and minus any Policy Loan including accrued but unpaid
loan interest.
BASIS OF COMPUTATIONS
The Cash Surrender Value under the policy is not less than the minimum required
as of the policy date by the state in which your policy was delivered. A
detailed statement of the method of computation of policy values under the
policy has been filed with the insurance department of the state in which the
policy was delivered, if required.
FULL SURRENDERS
You may surrender your policy after the Right to Examine Period or at any time
during the lifetime of the insured and receive the net Cash Surrender Value. We
will compute the Net Cash Surrender Value as of the next Valuation Date after we
receive both your request and the policy at our Customer Service Center. This
policy will be canceled as of the date we receive your request, and there will
be no further benefits under this policy.
If you surrender your policy within the first two policy years but after the
Right to Examine Policy Period has ended, the Net Cash Surrender Value will
include a refund of a portion of the sales load which was previously deducted
from your premiums paid. In the first policy year, the refund is equal to 5% of
the premium paid. In the second year, the refund is equal to 2.5% of the
premium paid in the first policy year.
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GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS
GRACE PERIOD
If the following three conditions occur on a Monthly Processing Date, the policy
will enter into the 61 day grace period:
a) The Net Account Value is zero or less; and
b) The three year continuation period described below has expired or the
required premium for the three year continuation period has not been paid;
and
c) The guarantee period shown in the Schedule and described below has expired
or been terminated
We will give you a 61 day grace period from this Monthly Processing Date to make
the required premium payment. The required premium payment then due must be
paid to keep the policy in force. If this amount is not received in full by the
end of the grace period, the policy will lapse without value. The required
premium payment will be equal to past due charges plus an amount we expect to be
sufficient to keep the policy and any riders in force for 2 months following the
receipt of the required premium payment. If we receive at least the required
premium payment during the grace period we will make deductions from the Net
Premium payment for the past due amounts and apply any remaining amount as
premium to the policy.
Notice of the amount of the required premium payment will be mailed to you or
any assignee at the last known address at least 30 days before the end of the
grace period. If the insured dies during the grace period, we will deduct any
overdue monthly deductions from the death proceeds of the policy.
THREE YEAR CONTINUATION PERIOD
Your policy will remain in force regardless of the Net Account Value, if, at any
time during the first 3 policy years, the sum of your premiums paid minus the
sum of your partial withdrawals, policy loans and accrued but unpaid policy loan
interest is not less than the sum of the applicable minimum monthly premiums for
each policy month starting with the first policy month to and including the
policy month which begins on the current Monthly Processing Date. Each minimum
monthly premium equals 1/12 of the minimum annual premium. The minimum annual
premium is shown in the Schedule. We use this premium for each policy month
until the effective date of a change in the Stated Death Benefit. If there is a
change, the new Schedule will show the applicable minimum annual premium for
subsequent policy years.
GUARANTEE PERIOD
The policy will not terminate during the guarantee period even if the Net
Account Value is zero except as provided below.
The guarantee period will expire on the date shown in the Schedule. Each
monthly guarantee premium equals 1/12 of the guarantee premium. The guarantee
annual premium is shown in the Schedule. We use this premium for each policy
year until the effective date of a change in the Stated Death Benefit. If there
is a change, a new Schedule will show the applicable minimum guarantee annual
premium for subsequent policy years.
The guarantee period will terminate prior to the guarantee period expiration
date if, on any Monthly Processing Date:
a) the actual premiums paid, minus the amount of any partial withdrawals and
any policy loan including accrued but unpaid interest are less than
Page 18
<PAGE>
b) the sum of the guarantee monthly premiums for each policy month starting
with the first policy month to and including the policy month that begins on
the current Monthly Processing Date.
The guarantee period will also terminate if your Account Value on any Monthly
Processing Date is not diversified according to the following rules:
a) No more than 35% of your Net Account Value may be invested in any one
division; and
b) Your Net Account Value must be invested in at least 5 divisions.
You will satisfy these diversification requirements if: (i) you are
participating in the automatic rebalancing feature defined in and governed by
the policy prospectus in effect at the time you elect the guarantee period and
your automatic rebalancing allocations comply with the diversifications
specified above; or (ii) you elect dollar cost averaging and direct the
resulting transfers into at least four other divisions with no more than 35% of
any transfer being to any one division.
TERMINATION
All coverage provided by this policy will end as of the earliest of:
a) The date the policy is surrendered;
b) The date of death of the insured;
c) The Maturity Date of the policy; or
d) The date the grace period ends without payment of the required
premium.
REINSTATEMENT
The policy may be reinstated within five years after the beginning of the grace
period. The reinstatement will be effective as of the Monthly Processing Date
on or next following the date we approve your written application.
We will reinstate the policy and any riders if the following conditions are met:
a) You have not surrendered the policy for its Net Cash Surrender
Value;
b) You submit evidence satisfactory to us that the insured and those
insured under any riders are still insurable according to our normal
rules of underwriting for this type of policy; and
c) We receive payment of the amount of premium sufficient to keep the
policy and any riders in force from the beginning of the grace
period to the end of the expired grace period and for 2 months after
the date of reinstatement. We will let you know, at the time you
request reinstatement, the amount of premium needed for this
purpose.
We will reinstate any policy loan, with accrued loan interest to the end of the
grace period, which existed when coverage ended.
Upon reinstatement, the Net Premium received minus past due amounts will be
allocated to the Divisions of the Variable Account and the Guaranteed Interest
Division according to the premium allocation percentages in effect at the start
of the grace period or as directed by you in writing at the time of
reinstatement.
Page 19
<PAGE>
DEFERRAL OF PAYMENT
Requests for transfers, withdrawals, payment of proceeds on the Maturity Date or
a full surrender will be processed within 7 days of receipt of the request in a
form acceptable to us. However, we may postpone the processing of any such
Variable Account transactions for any of the following reasons:
a) The NYSE is closed, other than customary weekend and holiday
closings.
b) Trading on the NYSE is restricted by the SEC.
c) The SEC declares that an emergency exists as a result of which
disposal of securities in the Variable Account is not reasonably
practicable to determine your Account Value in the divisions.
d) A governmental body having jurisdiction over the Variable Account by
order permits such suspension.
Rules and regulations of the SEC, if any, are applicable and will govern as to
whether conditions described in (b), (c), or (d) exist.
Death proceeds will be paid within 7 days of determination of the proceeds and
are not subject to deferment. We may defer for up to 6 months payment of any
surrender proceeds, withdrawal or loan amounts from the Guaranteed Interest
Division.
GENERAL POLICY PROVISIONS
THE POLICY
The policy, including the original application and applications for an increase,
riders, endorsements, any Schedule pages, and any reinstatement applications
make up the entire contract between you and us. A copy of the original
application will be attached to the policy at issue. A copy of any application
as well as a new Schedule will be attached or furnished to you 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 not
warranties. No statement will be used to deny a claim unless it is in an
application.
AGE
The policy is issued at the age shown in the Schedule. This is the insured's
age nearest birthday on the policy date. The insured's age at any time is the
age shown in the Schedule increased by the number of completed policy years.
PROCEDURES
We must receive any election, designation, assignment or any other change
request you make in writing, except those specified on the application. It must
be in a form acceptable to us. We may require a return of the policy for any
change or for a full surrender. We are not liable for any action we take before
we receive and record the written request at our Customer Service Center.
In the event of the death of the insured before the Maturity Date, please let us
or our agent know as soon as possible. Claim procedure instructions will be
sent to the beneficiary immediately. We may require proof of age and a
certified copy of the death certificate. We may require the beneficiary and
next of kin to sign authorizations as part of due proof. 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.
Page 20
<PAGE>
OWNERSHIP
The original owner is the person named as the owner in the application. You, as
the owner, can exercise all rights and receive the benefits during the insured's
life 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.
You may name a new owner by sending written notice to us. The effective date of
the change to the new owner will be the date you sign the notice. The change
will not affect any payment made or action taken by us before recording the
change at our Customer Service Center.
BENEFICIARIES
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 in a class survives the insured, they will share the death
proceeds equally, unless your designation provides otherwise. If there is no
designated beneficiary surviving, you or your estate will be paid the death
proceeds. The beneficiary designation will be on file with us or at a location
designated by us. While you are living, you may name a new beneficiary. The
effective date of the change will be the date the request was signed. We will
pay proceeds to the most recent beneficiary designation on file. We will not be
subject to multiple payments.
EXCHANGE RIGHT
If, for any reason within the first 2 policy years or within 2 years of the
effective date of an increase, you want to exchange this policy for a policy in
which values do not vary with the investment experience of the Variable Account,
we will exchange this policy. This transfer will not be subject to the excess
transfer charge. The exchange will be implemented by transferring your Account
Value in all the Divisions of the Variable Account to the Guaranteed Interest
Division and removing your future right to choose to allocate funds to the
divisions of the Variable Account. We will require a return of this policy
before this change will be processed.
COLLATERAL ASSIGNMENT
You may assign this policy as collateral security by written notice to us. Once
it is recorded with us, the rights of the owner and beneficiary are subject to
the assignment. It is your responsibility to make sure the assignment is valid.
INCONTESTABILITY
After this policy has been in force during the insured's life for 2 years from
the policy date, we will not contest the statements in the application attached
at issue.
Page 21
<PAGE>
After this policy has been in force during the insured's life for 2 years from
the effective date of any new Segment or of an increase in any other benefit
with respect to the insured, we will not contest the statements in the
application for the new Segment or other increase.
After this policy has been in force during the insured's life for 2 years from
the effective date of any reinstatement, we will not contest the statements in
the application for such reinstatement.
MISSTATEMENT 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 that which the cost of insurance which was
deducted from your Account Value on the last Monthly Processing Date prior to
the death of the insured would have purchased for the insured's correct age and
sex.
SUICIDE EXCLUSION
If the insured commits suicide, while sane or insane, within 2 years of the
policy date, we will make a limited payment to the beneficiary. We will pay in
one sum the amount of all premiums paid to us during that time, minus any
outstanding policy loan (including accrued but unpaid interest) and partial
withdrawals. If the insured commits suicide, while sane or insane, within 2
years of the effective date of a new Segment or of an increase in any other
benefit, we will make a limited payment to the beneficiary for the new Segment
or other increase. This payment will equal the cost of insurance and any
applicable monthly expense charges deducted for such increase.
PERIODIC REPORTS
We will send you at least once each year a report which shows the current
Account Value, Cash Surrender Value and premium paid since the last report. The
report will also show the allocation of your Account Value as of the date of the
report and the amounts added to or deducted from your Account Value of each
division since the last report. The report will include any other information
that may be currently required by the Insurance supervisory official of the
jurisdiction in which this policy is delivered.
ILLUSTRATION OF BENEFITS AND VALUES
We will send you, upon written request, a hypothetical illustration of future
death benefits and Account Values. This illustration will include the
information as required by the laws or regulations where this policy is
delivered. If you request more than one illustration during a policy year, we
will charge a reasonable fee for each additional illustration. The maximum
amount of this fee is shown in the Schedule.
NONPARTICIPATING
The policy does not participate in our surplus earnings.
CUSTOMER SERVICE CENTER
Our Customer Service Center is at the address shown in the Schedule. Unless you
are otherwise notified:
a) All requests and payments should be sent to us at our Customer Service
Center; and
b) All transactions are effective as of the Valuation Date the required
information is received at our Customer Service Center.
Page 22
<PAGE>
PAYOUTS OTHER THAN AS ONE SUM
ELECTION
During the insured's lifetime, you may elect that the beneficiary receive the
proceeds upon death of the insured other than in one sum. If you have not made
an election, the beneficiary may do so within 60 days after the insured's death.
You may also elect to take the Net Cash Surrender Value of the policy upon its
surrender other than in one sum. Satisfactory written request must be received
at our Customer Service Center before payment can be made. A payee that is not
a natural person may not be named without our consent. The various methods of
settlement are shown below.
PAYOUT OPTIONS
OPTION I. Payouts for a Designated Period. Payouts will be made in 1, 2, 4, or
12 installments per year as elected for a designated period, which may be 5 to
30 years. The installment dollar amounts will be equal except for any excess
interest as described below. The amount of the first monthly payout for each
$1,000 of Account Value applied is shown in Settlement Option Table I.
OPTION II. Life Income With Payouts for Designated Period. Payouts will be
made in 1, 2, 4, or 12 installments per year throughout the payee's 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, as described below.
The amount of the first monthly payout for each $1,000 of Account Value applied
is shown in Settlement Option Table II. This option is not available for ages
not shown in the 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.
OPTION V. Other. Settlement may be made in any other manner as agreed upon in
writing between you (or the beneficiary) and us.
CHANGE AND WITHDRAWAL
You may change an election at any time before the death of the insured or
maturity of the policy. If you have given the beneficiary the right to make
changes or withdrawals, or if the beneficiary has elected the option, the
beneficiary (as primary payee) may take the actions below.
a) Changes may be made from Payout Options I, III, and IV to another
option.
b) Full withdrawals may be made under Payout Option III or IV. Partial
Withdrawals of not less than $300 may be made under Payout Option
III.
c) Remaining installments under Payout Option I may be commuted at 3
1/2% interest and received in one sum.
d) Changes in any contingent payee designation may be made.
A written request must be sent to our Customer Service Center in writing to make
a change or withdrawal. We also may require that you send in the Supplemental
Policy. We may defer payment of commuted and withdrawable amounts for a period
up to 6 months.
Page 23
<PAGE>
EXCESS INTEREST
If we declare that payout options are to be credited with an interest rate above
that guaranteed, it will apply to Payout Options I, II, III, and IV. The
crediting of excess interest for one period does not guarantee the higher rate
for other periods. Any declared interest rate will be in effect for at least 12
months.
MINIMUM AMOUNTS
The minimum amount which may be applied under any option is $2,000. If the
payments to the payee are ever less than $20, we may change the frequency of
payments so as to result in payments of at least that amount.
SUPPLEMENTARY POLICY
When an option becomes effective, the policy will be surrendered in exchange for
a Supplementary Policy. It will provide for the manner of settlement and rights
of the payees. The Supplementary Policy's effective date will be the date of the
insured's death or the date of other settlement. The first payment under Options
I, II, and IV will be payable as of the effective date. The first interest
payment under Option III will be made as of the end of the interest payment
period elected. Subsequent payments will be made in accordance with the
frequency of payment elected. The Supplementary Policy may not be assigned or
payments made to another without our consent.
INCOME PROTECTION
Unless otherwise provided in the election, a payee does not have the right to
commute, transfer or encumber amounts held or installments to become payable. To
the extent provided by law, the proceeds, amount retained, and installments are
not subject to any payee's debts, policies, or engagements.
DEATH OF PRIMARY PAYEE
Upon the primary payee's death, any payments certain under Option I or II,
interest payments under Option III, or payments under Option IV will be
continued to the contingent payee. Or, amounts may be released in one sum if
permitted by the policy. The final payee will be the estate of the last to die
of the primary payee and any contingent payee.
PAYMENTS OTHER THAN MONTHLY
The tables which follow show monthly installments for Options I and II. To
arrive at annual, semiannual, or quarterly payments, multiply the appropriate
figures by 11.813, 5.957 or 2.991 respectively. Factors for other periods
certain or for other options which may be provided by mutual agreement will be
provided upon reasonable request.
Page 24
<PAGE>
SETTLEMENT OPTION TABLES
SETTLEMENT OPTION TABLE I
(Per $1,000 of Net Proceeds)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------
No. of Monthly No. of Monthly
Years Payable Installments Years Payable Installments
- - ----------------------------------------------------------------------------
<S> <C> <C> <C>
1 $84.65 16 6.76
- - ----------------------------------------------------------------------------
2 43.05 17 6.47
- - ----------------------------------------------------------------------------
3 29.19 18 6.20
- - ----------------------------------------------------------------------------
4 22.27 19 5.97
- - ----------------------------------------------------------------------------
5 18.12 20 5.75
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
6 15.35 21 5.56
- - ----------------------------------------------------------------------------
7 13.38 22 5.39
- - ----------------------------------------------------------------------------
8 11.90 23 5.24
- - ----------------------------------------------------------------------------
9 10.75 24 5.09
- - ----------------------------------------------------------------------------
10 9.83 25 4.96
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
11 9.09 26 4.84
- - ----------------------------------------------------------------------------
12 8.46 27 4.73
- - ----------------------------------------------------------------------------
13 7.94 28 4.63
- - ----------------------------------------------------------------------------
14 7.49 29 4.53
- - ----------------------------------------------------------------------------
15 7.10 30 4.45
- - ----------------------------------------------------------------------------
</TABLE>
Page 25
<PAGE>
SETTLEMENT OPTION TABLE II
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
(Per $1,000 of Net Proceeds)
- - ----------------------------------------------------------------------------------------------------------------
Age of Payee Nearest Monthly Age of Payee Nearest Monthly
Birthday When First Installment Birthday When First Installments
Installment is Payable Installment is Payable
- - ----------------------------------------------------------------------------------------------------------------
5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years
Male Female Certain Certain Certain Certain Male Female Certain Certain Certain Certain
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
15 20 3.31 3.31 3.31 3.31 33 38 3.77 3.77 3.75 3.74
- - ----------------------------------------------------------------------------------------------------------------
16 21 3.33 3.33 3.33 3.32 34 39 3.81 3.80 3.79 3.77
- - ----------------------------------------------------------------------------------------------------------------
17 22 3.35 3.35 3.34 3.34 35 40 3.85 3.84 3.83 3.81
- - ----------------------------------------------------------------------------------------------------------------
18 23 3.37 3.37 3.36 3.36 36 41 3.89 3.88 3.87 3.84
- - ----------------------------------------------------------------------------------------------------------------
19 24 3.39 3.38 3.38 3.38 37 42 3.94 3.93 3.91 3.88
- - ----------------------------------------------------------------------------------------------------------------
20 25 3.41 3.40 3.40 3.40 38 43 3.99 3.97 3.95 3.92
- - ----------------------------------------------------------------------------------------------------------------
21 26 3.43 3.43 3.42 3.42 39 44 4.03 4.02 4.00 3.96
- - ----------------------------------------------------------------------------------------------------------------
22 27 3.45 3.45 3.44 3.44 40 45 4.09 4.07 4.05 4.00
- - ----------------------------------------------------------------------------------------------------------------
23 28 3.47 3.47 3.47 3.46 41 46 4.14 4.13 4.09 4.05
- - ----------------------------------------------------------------------------------------------------------------
24 29 3.50 3.49 3.49 3.48 42 47 4.20 4.18 4.14 4.09
- - ----------------------------------------------------------------------------------------------------------------
25 30 3.52 3.52 3.57 3.51 43 48 4.26 4.24 4.20 4.14
- - ----------------------------------------------------------------------------------------------------------------
26 31 3.55 3.54 3.54 3.53 44 49 4.32 4.30 4.25 4.18
- - ----------------------------------------------------------------------------------------------------------------
27 32 3.58 3.57 3.57 3.56 45 50 4.39 4.36 4.31 4.23
- - ----------------------------------------------------------------------------------------------------------------
28 33 3.60 3.60 3.59 3.58 46 51 4.46 4.43 4.37 4.28
- - ----------------------------------------------------------------------------------------------------------------
29 34 3.64 3.63 3.60 3.61 47 52 4.53 4.49 4.43 4.34
- - ----------------------------------------------------------------------------------------------------------------
30 35 3.67 3.66 3.65 3.64 48 53 4.61 4.56 4.49 4.39
- - ----------------------------------------------------------------------------------------------------------------
31 36 3.70 3.70 3.69 3.67 49 54 4.69 4.64 4.55 4.44
- - ----------------------------------------------------------------------------------------------------------------
32 37 3.74 3.73 3.72 3.70 50 55 4.77 4.71 4.62 4.50
- - ----------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
Page 26
<PAGE>
SETTLEMENT OPTION TABLE II
(Continued)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
(Per $1,000 of Net Proceeds)
- - ----------------------------------------------------------------------------------------------------------------
Age of Payee Nearest Monthly Age of Payee Nearest Monthly
Birthday When First Installment Birthday When First Installment
Installment is Payable Installment is Payable
- - ----------------------------------------------------------------------------------------------------------------
5-Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years
Male Female Certain Certain Certain Certain Male Female Certain Certain Certain Certain
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
51 56 4.85 4.79 4.69 4.55 69 74 7.52 7.00 6.29 5.56
- - ----------------------------------------------------------------------------------------------------------------
52 57 4.94 4.87 4.76 4.61 70 75 7.77 7.17 6.38 5.60
- - ----------------------------------------------------------------------------------------------------------------
53 58 5.04 4.96 4.84 4.67 71 76 8.04 7.35 6.47 5.63
- - ----------------------------------------------------------------------------------------------------------------
54 59 5.14 5.05 4.91 4.73 72 77 8.32 7.53 6.55 5.66
- - ----------------------------------------------------------------------------------------------------------------
55 60 5.24 5.14 4.99 4.79 73 78 8.62 7.71 6.63 5.68
- - ----------------------------------------------------------------------------------------------------------------
56 61 5.35 5.24 5.07 4.85 74 79 8.94 7.89 6.71 5.70
- - ----------------------------------------------------------------------------------------------------------------
57 62 5.47 5.34 5.15 4.91 75 80 9.28 8.07 6.78 5.72
- - ----------------------------------------------------------------------------------------------------------------
58 63 5.59 5.45 5.24 4.97 76 81 9.63 8.25 6.84 5.73
- - ----------------------------------------------------------------------------------------------------------------
59 64 5.71 5.56 5.33 5.03 77 82 10.00 8.43 6.89 5.74
- - ----------------------------------------------------------------------------------------------------------------
60 65 5.85 5.68 5.42 5.10 78 83 10.39 8.60 6.94 5.74
- - ----------------------------------------------------------------------------------------------------------------
61 66 5.99 5.80 5.51 5.16 79 84 10.80 8.77 6.98 5.75
- - ----------------------------------------------------------------------------------------------------------------
62 67 6.15 5.93 5.61 5.21 80 85 11.22 8.93 7.01 5.75
- - ----------------------------------------------------------------------------------------------------------------
63 68 6.31 6.07 5.70 5.27 81 11.66 9.08 7.04 5.75
- - ----------------------------------------------------------------------------------------------------------------
64 69 6.48 6.21 5.80 5.33 82 12.12 9.21 7.06 5.75
- - ----------------------------------------------------------------------------------------------------------------
65 70 6.66 6.35 5.90 5.38 83 12.60 9.34 7.07 5.75
- - ----------------------------------------------------------------------------------------------------------------
66 71 6.86 6.50 6.00 5.43 84 13.09 9.44 7.08 5.75
- - ----------------------------------------------------------------------------------------------------------------
67 72 7.07 6.66 6.10 5.48 85 13.59 9.54 7.09 5.75
- - ----------------------------------------------------------------------------------------------------------------
68 73 7.29 6.83 6.19 5.52
- - ----------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
Page 27
<PAGE>
This policy is a FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
Death benefits and other values provided by this contract, when based on the
investment experience of a separate account, are variable. These values may
increase or decrease based on investment experience and are not guaranteed as to
fixed dollar amount. Death benefits are payable by us upon the death of the
insured prior to the Maturity Date. Your Net Account Value, if any, is payable
by us if the insured is living as of the Maturity Date. Flexible premiums are
payable by you during the lifetime of the insured until the Maturity Date.
SECURITY LIFE OF DENVER INSURANCE COMPANY
A Stock Company
Customer Service Center
1290 Broadway Denver, Colorado 80203
Toll Free Number: 1(800)448-9839
<PAGE>
BYLAWS OF EXHIBIT 1.A(6)(h)(i)
SECURITY LIFE OF DENVER
INSURANCE COMPANY
(Restated with Amendments through September 30, 1997)
ARTICLE I
Name, Principal Place of Business
---------------------------------
Section 1.1. Name. The name of the Corporation is Security Life of
----
Denver Insurance Company.
Section 1.2. Place of Business. The principal business and operation
-----------------
of the Corporation shall be conducted and carried on in the City and County of
Denver, State of Colorado. The Corporation shall have the right to conduct its
business, carry on its operations, and have offices in any state, territory,
district, or possession of the United States, or any foreign country.
ARTICLE I
Shareholders
------------
Section 2.1. Annual Meetings. An annual meeting of shareholders
---------------
shall be held each year at such date, time and place as may be designated by
the Board of Directors from time to time. At such annual meeting, the
shareholders shall elect Directors and may elect a Chairman of the Board and a
Vice Chairman to serve until the next annual meeting and until their successors
shall be elected and qualified. In addition, any other proper business may be
transacted at the annual meeting. Annual meetings may be called by the Board of
Directors or by any officer instructed by the Board of Directors to call the
meeting.
Section 2.2. Special Meetings. Special meetings of shareholders may
----------------
be called at any time by the Chairman, the President, or the Board of
Directors. Such meetings shall be held at the offices of the Corporation or at
such other place as may be selected by the Board of Directors.
Section 2.3. Notice of Meetings. Notices of time and place of all
------------------
annual and special meetings of shareholders shall be mailed by the Secretary or
Assistant Secretary to each shareholder not less than ten (10) nor more than
sixty (60) days before the date thereof. Notice of a special meeting must
include a description of the purpose or purposes for which it was called.
Section 2.4. Presiding Officer. The Chairman of the Board shall
-----------------
preside at all meetings of the shareholders. If the Chairman is unable to
preside, the shareholders present at such meeting who represent the voting stock
of the Corporation shall elect a presiding officer. The Secretary shall take
the minutes of the meeting, but in his or her absence the presiding officer may
appoint any person as acting secretary of the meeting.
Section 2.5. Quorum. A quorum for the transaction of business at any
------
such meeting
-1-
<PAGE>
shall consist of a number of shareholders representing a majority of the shares
of the voting stock outstanding. The vote of a majority of the shareholders
present at a meeting at which quorum is present shall be the act of the
shareholders. Shareholders present at a meeting with less than a quorum may
adjourn the meeting until such time that a quorum is present.
Section 2.6. Voting. At every meeting of the shareholders, each
------
shareholder shall be entitled to cast one vote for each share of voting stock
held in his or her name, which vote shall be cast by the shareholder either in
person or by proxy. Any shareholder may execute a proxy authorizing and
entitling the holder to exercise the power as shareholder unless such proxy
shall be revoked in writing prior to such meeting or said shareholder be
personally present. All proxies shall be in writing and duly signed by the
shareholder executing the same and shall be filed with the Secretary and
recorded as a part of the minutes of the shareholders' meeting.
Section 2.7. Consent of Shareholders in Lieu of Meeting. Any action
------------------------------------------
required or permitted by law to be taken at any annual or special meeting of
shareholders may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by all of the holders of outstanding stock who are entitled to vote on
such action. Such consents may be signed in counterparts each of which shall
be considered an original and all of which together shall constitute one
original.
ARTICLE III
Board of Directors
------------------
Section 3.1. Powers; Number; Qualifications. The business and
------------------------------
affairs of the Corporation shall be managed by or under the direction of the
Board of Directors, except as may be otherwise provided by law or in the
certificate of incorporation. The Board of Directors shall consist of not less
than five (5) nor more than twelve (12) members. Directors need not be
shareholders.
Section 3.2. Election; Term of Office. Each director shall hold
------------------------
office until the next annual meeting of the shareholders and until his or her
successor is elected and qualified or until his or her earlier resignation or
removal.
Section 3.3. Resignation. Any director may resign at any time upon
------------
written notice to the Board of Directors, or to the President, or to the
Secretary of the Corporation. Such resignation shall take effect at the time
specified therein, and unless otherwise specified therein no acceptance of such
resignation shall be necessary to make it effective.
Section 3.4. Removal. The shareholders shall have the power to
-------
remove from the Board any director with or without cause.
Section 3.5. Retirement. Mandatory retirement of any Director from
----------
the Board will occur at the first annual meeting of shareholders following the
Director's attainment of age 70.
Section 3.6. Vacancies. Unless otherwise provided in the certificate
---------
of incorporation
-2-
<PAGE>
or these by-laws, vacancies and newly created directorships resulting from any
increase in the authorized number of directors or from any other cause may be
filled by a vote of the shareholders, or a majority of the directors then in
office, although less than a quorum, or by the sole remaining director.
Section 3.7. Regular Meetings. Regular meetings of the Board of
----------------
Directors may be held at such places and at such times as the Board of
Directors may from time to time determine, and if so determined notice thereof
need not be given.
Section 3.8. Special Meetings. Special meetings of the Board of
----------------
Directors may be held at any time or place whenever called by the Chairman of
the Board, by the President, or by any two directors. Special meetings may
also be called by an affirmative vote of the shareholders representing a
majority of the shares of voting stock outstanding. Notice of the date, time,
and place of such meeting shall be given at least two (2) days prior to the
meeting.
Section 3.9. Meetings by Electronic Media Permitted. Members of the
--------------------------------------
Board of Directors may participate in a meeting of the Board by means of
conference telephone or other communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this by-law shall constitute presence in person at such
meeting.
Section 3.10. Quorum; Vote Required for Action. At all meetings of
--------------------------------
the Board of Directors, a majority of the entire Board shall constitute a quorum
for the transaction of business. The vote of a majority of the directors
present at a meeting at which quorum is present shall be the act of the Board.
In case at any meeting of the Board of Directors a quorum shall not be present,
the members of the Board of Directors present may adjourn the meeting from time
to time until a quorum shall attend.
Section 3.11. Action by Directors Without a Meeting. Unless
-------------------------------------
otherwise restricted by the certificate of incorporation or these by-laws, any
action required or permitted to be taken at any meeting of the Board of
Directors may be taken without a meeting if all members of the Board consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of the Board. Such consents may be signed in counterparts each
of which shall be considered an original and all of which together shall
constitute one original.
ARTICLE IV
Committees
----------
Section 4.1. Executive Committee. Either the Board of Directors or
-------------------
the shareholders may designate an Executive Committee consisting of one or more
members, and may designate a Chairman from among the members so appointed to the
Committee. The Executive Committee shall have and may exercise all the
authority of the Board of Directors in the management of the business and
affairs of the Corporation to the extent permitted by law, and may authorize the
seal of the Corporation to be affixed to all papers which may require it.
Unless otherwise permitted by law, the
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Executive Committee shall not have the power to (a) authorize distributions; (b)
approve or propose to shareholders actions that are required by law to be
approved by shareholders; (c) fill vacancies on the Board of Directors or any of
its committees; (d) amend articles of incorporation; (e) adopt, amend, or repeal
bylaws; (f) approve a plan of merger not requiring shareholder approval; (g)
authorize or approve reacquisition of shares, except according to a formula or
method prescribed by the Board of Directors; or (h) authorize or approve the
issuance or sale of shares, or a contract for the sale of shares, or determine
the designation and relative rights, preferences, and limitations of a class or
series of shares, unless done within limits specifically prescribed by the Board
of Directors.
Section 4.2. Other Committees. The Board of Directors or the
-----------------
shareholders may elect from among its members such other committee or
committees, each consisting of one or more Directors, each of which shall have
such duties, powers and authority as may be provided in such resolution.
Section 4.3. Committee Rules and Operation. Unless the Board of
-----------------------------
Directors otherwise provides, each committee designated by the Board may adopt,
amend and repeal rules for the conduct of its business. In the absence of a
provision by the Board or a provision in the rules of such committee to the
contrary, a majority of the entire authorized number of members of such
committee shall constitute a quorum for the transaction of business, the vote of
a majority of the members present at a meeting at the time of such vote if a
quorum is then present shall be the act of such committee, and in other respects
each committee shall conduct its business in the same manner as the Board
conducts its business pursuant to Article II of these by-laws. Each committee
designated by the Board shall keep a written record of its proceedings and, upon
request by the Board of Directors, shall submit a report of its activities to
the Board of Directors of the Corporation.
Section 4.4. Action Without a Meeting. Unless otherwise restricted
------------------------
by the certificate of incorporation or these by-laws, any action required or
permitted to be taken at any meeting of any committee of the Board of Directors
may be taken without a meeting if all members of the committee consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the committee.
Section 4.5. Meetings by Electronic Media Permitted. Members of any
--------------------------------------
committee of the Board of Directors may participate in a meeting of the
committee by means of conference telephone or other communications equipment by
means of which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this by-law shall constitute presence in
person at such meeting.
Section 4.6. Alternate Committee Members. The Chairman may
---------------------------
designate one or more directors as alternate members of any committee, who will
act in the place of any absent or disqualified committee member, or fill any
vacancy occurring on a committee as a result of death, resignation, removal or
otherwise. In the case of an absent or disqualified committee member, the
alternate shall serve as a member of the committee so long as the incumbent
member remains absent or disqualified from voting. In the case of a vacancy,
the alternate shall serve for the remainder of the unexpired term of the
vacating member, or until a new member is selected, qualified and elected by the
Board of Directors or Shareholders. If a committee member is absent from or
disqualified
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<PAGE>
from voting at a committee meeting and no alternate member has been designated
by the Chairman, the remaining member or members of the committee present at the
meeting, whether or not he or she or they constitute a quorum, may unanimously
select from the Board a director to act at the meeting in place of the absent or
disqualified committee member.
ARTICLE V
Officers
--------
Section 5.1. Officers; Election. The Board of Directors may elect a
------------------
Chief Executive Officer, a President, and a Treasurer. The Board of Directors
may also, from time to time, elect or, by resolution, delegate to the President
or Chief Executive Officer, the authority to appoint, one or more Executive Vice
Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a
Secretary and one or more Assistant Secretaries, and may elect other officers as
the Board or Chief Executive Officer deems necessary, and may give any of them
such further designations or alternate titles as it considers desirable. The
Board of Directors may also elect or, by resolution, delegate to the Chief
Executive Officer, the authority to appoint from time to time, one or more
Presidents to act as the chief operating officers of the various business units
of the Corporation. Any number of offices may be held by the same person. The
delegation of such authority to the President or Chief Executive Officer shall
in no way affect, diminish or replace the authority of the Board of Directors to
elect officers.
Section 5.2. Chairman of the Board. The Chairman of the Board shall
---------------------
preside at meetings of the shareholders and of the Board of Directors. In
addition, the Chairman of the Board shall have such powers and perform such
duties as the Board of Directors may from time to time determine.
Section 5.3. President. The President shall be the chief operations
---------
executive of the Corporation. Subject to the authority of the Board of
Directors, the President shall have general supervision of the business and
affairs of the Corporation and shall report thereon to the Board of Directors as
the Board of Directors may require. In the absence or incapacity of the Chairman
of the Board and the Vice Chairman, the President shall have the powers and
perform the duties of the Chairman of the Board. Presidents of the business
units of the Corporation shall be the chief operations executives for and shall
have supervisory authority over the business units for which they are appointed.
Section 5.4. Executive Vice Presidents, Senior Vice Presidents, and
------------------------------------------------------
Vice Presidents. The Executive Vice Presidents, Senior Vice Presidents, and
- - ----------------
Vice Presidents shall have such powers and duties as may be delegated to them
from time to time by the Chief Executive Officer, the President, the Board of
Directors, or the Executive Committee, and generally shall consult and advise
with the President and aid the President in the discharge of his or her duties.
In the absence or incapacity of the President to perform his or her duties, and
except as may otherwise be provided by resolution of the Board of Directors in
specific instances, the duties of the President shall devolve upon one or more
Executive Vice Presidents as determined by the Chairman of the Board.
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<PAGE>
Section 5.5. Secretary. The Secretary and Assistant Secretaries
---------
shall have such powers and duties as may be given to them from time to time by
the President, the Board of Directors, or the Executive Committee. The
Secretary shall keep the minutes of the Shareholders, Board of Directors, the
Executive Committee, and other committees. The Secretary shall have the
custody of the corporate seal with authority to affix it to instruments,
documents, and contracts. The Secretary shall perform the duties usually
incidental to the office of Secretary and such other duties of that nature that
may be assigned to him or her from time to time by the Board of Directors.
Section 5.6. Treasurer. The Treasurer shall have charge of, and be
---------
responsible for, all funds and securities of the corporation. The Treasurer
shall, from time to time, render a statement of the condition of the finances of
the corporation at the request of the Board of Directors. The Treasurer shall
receive, and give receipt for, monies due and payable to the corporation from
any source whatsoever, and, in general, perform all the duties incident to the
office of Treasurer and such other duties as, from time to time, may be assigned
to him or her by the Board of Directors, the Chairman of the Board, or the
President.
Section 5.7. Term of Office;. Except as otherwise provided in the
---------------
resolution of the Board of Directors electing any officer, each officer shall
hold office until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
Section 5.8. Resignation. Any officer may resign at any time upon
-----------
written notice to the Board or to the President, Chief Executive Officer, or the
Secretary of the Corporation. Such resignation shall take effect at the time
specified therein, and unless otherwise specified therein no acceptance of such
resignation shall be necessary to make it effective.
Section 5.9. Removal. The Board of Directors may remove any officer
-------
with or without cause.
Section 5.10. Vacancies. Any vacancy occurring in any office of the
---------
Corporation by death, resignation, removal or otherwise may be filled by the
Board of Directors at any regular or special meeting.
Section 5.11. Powers and Duties. The officers of the Corporation
-----------------
shall have such powers and duties in the management of the Corporation as shall
be stated in these by-laws or in a resolution of the Board of Directors which is
not inconsistent with these by-laws and, to the extent not so stated, as
generally pertain to their respective offices, subject to the control of the
Board of Directors. The Board of Directors may require any officer, agent or
employee to give security for the faithful performance of his or her duties.
ARTICLE VI
Stock
-----
Section 6.1. Certificates. Every holder of stock in the Corporation
------------
shall be entitled to have a certificate signed by or in the name of the
Corporation by the Chairman of the Board of
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<PAGE>
Directors, or the President or a Vice President, and by the Treasurer, or the
Secretary or an Assistant Secretary, of the Corporation, certifying the number
of shares owned by him or her in the Corporation. If such certificate is
manually signed by one officer or manually countersigned by a transfer agent or
by a registrar, any other signature on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
Section 6.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of
---------------------------------------------------------
New Certificates. The Corporation may issue a new certificate of stock in the
- - ----------------
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or his or her legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
ARTICLE VII
Indemnification of Directors,
-----------------------------
Officers and Other Personnel
----------------------------
Section 7.1. Definitions. As used in this article, the term:
-----------
(a) "Corporation" includes any domestic or foreign entity that is a
predecessor of this Corporation by reason of merger or other transaction in
which the predecessor's existence ceased upon consummation of the transaction.
(b) "Director" means an individual who is or was a director of the
Corporation or an individual who, while a director of the Corporation is or was
serving at the Corporation's request as a director, officer, employee, attorney-
in-fact, agent, fiduciary, manager, member, partner, or trustee of, or to hold
any similar position with, another domestic or foreign corporation, partnership,
limited liability company, joint venture, employee benefit plan, or other
entity. A director is considered to be serving an employee benefit plan at the
Corporation's request if the director's duties to the Corporation also impose
duties on, or otherwise involve services by, the director to the plan or to
participants in or beneficiaries of the plan. "Director" includes, unless the
context requires otherwise, the estate or personal representative of a director.
(c) "Expenses" includes counsel fees
(d) "Liability" means the obligation incurred with respect to a
proceeding to pay a judgment, settlement, penalty, fine, including an excise tax
assessed with respect to an employee benefit plan, or reasonable expenses..
(e) "Official capacity" means, when used with respect to a director,
the office of
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<PAGE>
director in the Corporation and, when used with respect to a person other than a
director as contemplated in Section 7.7, the office in the Corporation held by
the officer or the employment or fiduciary relationship undertaken by the
employee or fiduciary on behalf of the Corporation. "Official capacity" does
not include service for any other domestic or foreign corporation, partnership,
limited liability company, joint venture, employee benefit plan, or other
entity.
(f) "Officer" means an individual who is or was an officer of the
Corporation or an individual who, while an officer of the Corporation, is or was
serving at the Corporation's request as a director, officer, employee, attorney-
in-fact, agent, fiduciary, manager, member, partner, or trustee of, or to hold
any similar position with, another domestic or foreign corporation, partnership,
limited liability company, joint venture, employee benefit plan, or other
entity. An officer is considered to be serving an employee benefit plan at the
Corporation's request if his duties to the corporation also impose duties on, or
otherwise involve services by, him to the plan or to participants in or
beneficiaries of the plan. "Officer" includes, unless the context requires
otherwise, the estate or personal representative of an officer.
(g) "Party" includes a person who was, is, or is threatened to be made
a named defendant or respondent in a proceeding.
(h) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
and whether formal or informal.
Section 7.2. Authority to Indemnify Directors.
--------------------------------
(a) Except as provided in subsection 7.2(d) below, the Corporation
shall indemnify a person made a party to a proceeding because such person is or
was a director against liability incurred in the proceeding if (i) the person
conducted himself or herself in good faith; and (ii) the person reasonably
believed: (1) in the case of conduct in an official capacity with the
Corporation, that his or her conduct was in the Corporation's best interests;
and, (2) in all other cases, that his or her conduct was at least not opposed to
the Corporation's best interests; and (iii) in the case of any criminal
proceeding, the person had no reasonable cause to believe his or her conduct was
unlawful.
(b) A director's conduct with respect to an employee benefit plan for
a purpose the director reasonably believed to be in the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of subsection 7.2(a)(ii)(2). A director's conduct with respect to
an employee benefit plan for a purpose that the director did not reasonably
believe to be in the interests of the participants in or the beneficiaries of
the plan shall be deemed not to satisfy the requirements of subsection
7.2(a)(i).
(c) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
---- ----------
itself, determinative that the director did not meet the standard of conduct set
forth in this Section 7.2.
(d) The Corporation may not indemnify a director under this Article
VII in connection with (i) a proceeding by or in the right of the Corporation in
which such person was
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<PAGE>
adjudged liable to the Corporation, or (ii) any other proceeding charging that
the director derived an improper personal benefit, whether or not involving
action in an official capacity, in which proceeding the director was adjudged
liable on the basis that he or she derived an improper personal benefit.
(e) Indemnification permitted under this Article in connection with a
proceeding by or in the right of the Corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Section 7.3. Mandatory Indemnification. The Corporation shall
-------------------------
indemnify a person who was wholly successful on the merits or otherwise, in the
defense of any proceeding to which the person was a party because the person is
or was a director, against reasonable expenses incurred by him or her in
connection with the proceeding.
Section 7.4. Advances for Expenses.
---------------------
(a) The Corporation shall pay for or reimburse the reasonable expenses
incurred by a director who is a party to a proceeding in advance of final
disposition of the proceeding if: (i) the director furnishes to the Corporation
a written affirmation of the director's good faith belief that he or she has met
the standard of conduct set forth in Section 7.2 above; (ii) the director
furnishes to the Corporation a written undertaking, executed personally or on
the director's behalf, to repay the advance if it is ultimately determined that
he or she did not meet the standard of conduct; and (iii) a determination is
made that the facts then known to those making the determination would not
preclude indemnification under this Article VII.
(b) The undertaking required by subsection 7.4(a)(ii) above shall be
an unlimited general obligation of the director or officer but need not be
secured and may be accepted without reference to financial ability to make
repayment.
(c) Determinations and authorizations of payments under this Section
shall be made in the manner specified in Section 7.6, below.
Section 7.5. Court-Ordered Indemnification and Advances for Expenses.
-------------------------------------------------------
A director who is or was a party to a proceeding may apply for indemnification
to the court conducting the proceeding or to another court of competent
jurisdiction. On receipt of an application, the court, after giving any notice
the court considers necessary, may order indemnification in the following
manner:
(a) If it determines that the director is entitled to mandatory
indemnification under Section 7.4, above, the Corporation shall pay the
director's reasonable expenses incurred to obtain court-ordered indemnification;
(b) If it determines that the director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances, whether
or not the director met the standard of conduct set forth in subsection 7.2(a)
above or was adjudged liable as described in subsection 7.2(d) above; except
that the indemnification with respect to any proceeding in which liability shall
have been adjudged in the circumstances described in subsection 7.2(d) is
limited to reasonable
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<PAGE>
expenses incurred in connection with the proceeding and reasonable expenses
incurred to obtain court-ordered indemnification.
Section 7.6. Determination and Authorization of Indemnification of
-----------------------------------------------------
Directors.
- - ---------
(a) The Corporation acknowledges that any indemnification of a
director under Section 7.2 has been pre-authorized by the Corporation in the
manner described in subsection 7.6(b) below. Nevertheless, the Corporation shall
not indemnify a director under Section 7.2 unless authorized in the specific
case after a determination has been made that indemnification of the director is
permissible in the circumstances because the director has met the standard of
conduct set forth in Section 7.2. The Corporation shall not advance expenses to
a director under Section 7.4 unless authorized in the specific case after the
written affirmation and undertaking required by subsections 7.4(a) & (b) are
received and the determination required by subsection 7.4(a) has been made.
(b) The determination required by subsection 7.6(a) shall be made: (i)
by the Board of Directors by majority vote of those present at a meeting at
which a quorum is present, and only those directors not parties to the
proceeding shall be counted in satisfying the quorum; or (ii) if a quorum cannot
be obtained, by a majority vote of a committee of the Board of Directors
designated by the Board of Directors, which committee shall consist of two or
more directors not parties to the proceeding; except that directors who are
parties to the proceeding may participate in the designation of directors for
the committee.
(c) If a quorum cannot be obtained as contemplated in subsection
7.6(b)(i) and a committee cannot be established under subsection 7.6(b)(ii), or,
even if a quorum is obtained or a committee is designated, if a majority of the
directors constituting such quorum or such committee so directs, the
determination required to be made by subsection 7.6(a) shall be made:
(i) by independent legal counsel selected by a vote of the Board
of Directors or the committee in the manner specified in subsections 7.6(b)(i)
or (ii), or, if a quorum of the full board cannot be obtained and a committee
cannot be established, by independent legal counsel selected by a majority of
the full Board of Directors; or
(ii) by the shareholders.
(d) Authorization of indemnification and advance of expenses shall be
made in the same manner as the determination that indemnification or advance of
expenses is permissible; except that, if the determination that indemnification
or advance of expenses is permissible is made by independent legal counsel,
authorization of indemnification and advance of expenses shall be made by the
body that selected such counsel.
Section 7.7. Indemnification of Officers and Employees. A person
-----------------------------------------
made a party to a proceeding because such person is or was an officer is
entitled to mandatory indemnification under Section 7.3 and is entitled to apply
for court-ordered indemnification under Section 7.5, in each case to the same
extent as a director. The Corporation shall indemnify and advance expenses under
this Article to an officer, or employee of the Corporation to the maximum extent
allowed by law.
Section 7.8. Exclusions. Except as may be otherwise authorized by
----------
the Board of
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<PAGE>
Directors, no indemnification is provided under this Article VII for unsalaried
persons under contract with the corporation in sales capacities such as General
Agents, Agents and Brokers, or for persons performing services to the
corporation as independent contractors.
Section 7.9. Insurance. The Corporation may purchase and maintain
---------
insurance on behalf of a person who is or was a director, officer, employee,
fiduciary, partner, trustee, or agent of the Corporation or who, while a
director, officer, employee, fiduciary, partner, trustee, or agent of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, limited liability company, joint venture, employee
benefit plan, or other entity against liability asserted against or incurred by
the person in that capacity or arising from his or her status as a director,
officer, employee, fiduciary, partner, trustee, or agent, whether or not the
Corporation would have power to indemnify the person against the same liability
under Sections 7.2, 7.3, or 7.7 above.
Section 7.10. Report to Shareholders. If the Corporation indemnifies
----------------------
or advances expenses to a director under this Article VII in connection with a
proceeding by or in the right of the Corporation, the Corporation shall give
written notice of the indemnification or advance to the shareholders with or
before the notice of the next shareholders' meeting. If the next shareholder
action is taken without a meeting at the instigation of the Board of Directors,
such notice shall be given to the shareholders at or before the time the first
shareholder signs a writing consenting to such action.
Section 7.11. Non-Exclusivity. The indemnification provided by this
---------------
Article VII shall not be deemed exclusive of any other rights to which any
person indemnified may be entitled under the Articles of Incorporation, any
agreement, insurance policy, vote of the shareholders or disinterested
directors, or otherwise, and any procedure provided for by any of the foregoing,
both as to action in his or her official capacity and as to action in another
capacity while holding such office. This Article VII does not limit the
Corporation's power to pay or reimburse expenses incurred by a director,
officer, employee, or agent in connection with the person's appearance as a
witness in a proceeding at a time when the person has not been made a named
defendant or respondent to the proceeding.
Section 7.12. Continuance. The indemnification and advancement of
-----------
expenses provided by, or granted pursuant to, this Article VII shall continue as
to a person who has ceased to be a director, officer or employee of the
corporation with regard to acts or omissions of such person occurring or alleged
to have occurred while the person was so engaged, and shall inure to the benefit
of heirs, executors, and administrators of such a person.
Section 7.13. Application of this Article. The provisions of this
---------------------------
Article VII shall apply to all actions, suits or proceedings described in
Section 7.2 arising or alleged to arise out of any acts or omissions on the part
of any person referred to in Section 7.2 or Section 7.7, occurring or alleged to
occur prior to the adoption of this Article VII or at any time while it remains
in force. By this Article VII, it is intended that the Corporation provide the
maximum indemnification allowed by law to directors, officers and employees of
the Corporation. If any portion of this Article VII is invalid under any
applicable statute or rule of law, it shall not affect the remainder of this
Article VII,
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<PAGE>
which shall remain valid and binding.
ARTICLE VIII
Miscellaneous
-------------
Section 8.1. Fiscal Year. The fiscal year of the Corporation shall
-----------
be determined by the Board of Directors.
Section 8.2. Seal. The Corporation may have a corporate seal which
----
shall have the name of the Corporation inscribed thereon and shall be in such
form as may be approved from time to time by the Board of Directors. The
corporate seal may be used by causing it or a facsimile thereof to be impressed
or affixed or in any other manner reproduced.
Section 8.3. Waiver of Notice of Meetings of Shareholders, Directors
-------------------------------------------------------
and Committees. Whenever notice is required to be given by law or under any
- - --------------
provision of the certificate of incorporation or these by-laws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the shareholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these by-laws.
Section 8.4. Interested Directors; Quorum. No contract or
----------------------------
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely because his or
her or their votes are counted for such purpose, if:
(a) the material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the Board or the
committee, and the Board or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(b) the material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the shareholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the shareholders; or
(c) the contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified, by the Board, a committee
thereof or the shareholders.
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<PAGE>
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board or of a committee which authorizes the contract
or transaction if so determined by a majority of the disinterested directors
present at such meeting.
Section 8.5. Form of Records. Any records maintained by the
---------------
Corporation in the regular course of its business, including its stock ledger,
books of account and minute books, may be kept on, or be in the form of
electronic or magnetic media, photographs, microphotographs or any other
information storage device, provided that the records so kept can be converted
into clearly legible form within a reasonable time. The Corporation shall so
convert any records so kept upon the request of any person entitled to inspect
the same.
Section 8.6. Amendment of By-Laws. These by-laws may be amended or
--------------------
repealed, and new by-laws adopted, by the Board of Directors, or by a majority
vote of those shareholders entitled to vote.
Date: 9/30/97 /s/
----------------------------- -----------------------------
Secretary
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<PAGE>
EXHIBIT 1.A(8)(a)(i)
PARTICIPATION AGREEMENT
BY AND AMONG
AIM VARIABLE INSURANCE FUNDS, INC.,
LIFE INSURANCE COMPANY,
ON BEHALF OF ITSELF AND
ITS SEPARATE ACCOUNTS
AND
NAME OF UNDERWRITER OF VARIABLE CONTRACTS AND POLICIES
<PAGE>
TABLE OF CONTENTS
Description Page
Section 1. Available Funds.....................................................2
1.1 Availability......................................................2
1.2 Addition, Deletion or Modification of Funds.......................2
1.3 No Sales to the General Public....................................2
Section 2. Processing Transactions.............................................2
2.1 Timely Pricing and Orders.........................................2
2.2 Timely Payments...................................................3
2.3 Applicable Price..................................................3
2.4 Dividends and Distributions.......................................4
2.5 Book Entry........................................................4
Section 3. Costs and Expenses..................................................4
3.1 General...........................................................4
3.2 Registration......................................................4
3.3 Other (Non-Sales-Related)`........................................5
3.4 Other (Sales-Related)`............................................5
3.5 Parties to Cooperate..............................................5
Section 4. Legal Compliance....................................................5
4.1 Tax Laws..........................................................5
4.2 Insurance and Certain Other Laws..................................8
4.3 Securities Laws...................................................8
4.4 Notice of Certain Proceedings and Other Circumstances.............9
4.5 Life Co. To Provide Documents; Information about AVIF............10
4.6 AVIF To Provide Documents' Information about Life Co.............11
Section 5. Mixed and Shared Funding...........................................12
5.1 General..........................................................12
5.2 Disinterested Directors..........................................12
5.3 Monitoring for Material Irreconcilable Conflicts.................13
5.4 Conflict Remedies................................................15
5.5 Notice to Life Co................................................15
5.6 Information Requested by Board of Directors......................15
5.7 Compliance with SEC Rules........................................15
5.8 Other Requirements...............................................15
i
<PAGE>
Description Page
Section 6. Termination........................................................15
6.1 Events of Termination............................................15
6.2 Notice Requirement for Termination...............................16
6.3 Funds to Remain Available........................................17
6.4 Survival of Warranties and Indemnifications......................17
6.5 Continuance of Agreement for Certain Purposes....................17
Section 7. Parties to Cooperate Respecting Termination........................17
Section 8. Assignment.........................................................18
Section 9. Notices............................................................18
Section 10. Voting Procedures.................................................19
Section 11. Foreign Tax Credits...............................................19
Section 12. Indemnification...................................................20
12.1 Of AVIF by Life Co. and Underwriter..............................20
12.2 Of Life Co. and Underwriter by AVIF..............................22
12.2 Effect of Notice.................................................24
12.3 Successors.......................................................24
Section 13. Applicable Law....................................................24
Section 14. Execution in Counterparts.........................................25
Section 15. Severability......................................................25
Section 16. Rights Cumulative.................................................25
Section 17. Headings..........................................................25
Section 18. Confidentiality...................................................25
Section 19. Trademarks and Fund Names.........................................26
Section 20. Parties to Cooperate..............................................27
ii
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of the _____ day of
___________, 1996 ("Agreement"), by and among AIM Variable Insurance Funds,
Inc., a Maryland corporation ("AVIF'); ___________________ Life Insurance
Company, a [STATE] life insurance company ("LIFE COMPANY"), on behalf of itself
and each of its segregated asset accounts listed in Schedule A hereto, as the
parties hereto may amend from time to time (each, an "Account," and
collectively, the "Accounts"); and [NAME OF SEPARATE ACCOUNT UNDERWRITER], an
affiliate of LIFE COMPANY and the principal underwriter of the Contracts
(collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, AVIF is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, AVIF currently consists of nine separate series ("Series"),
shares ("Shares") of each of which are registered under the Securities Act of
1933, as amended (the " 1933 Act") and are currently sold to one or more
separate accounts of life insurance companies to fund benefits under variable
annuity contracts and variable life insurance contracts; and
WHEREAS, AVIF will make Shares of each Series listed on Schedule A
hereto as the Parties hereto may amend from time to time (each a "Fund";
reference herein to "AVIF" includes reference to each Fund, to the extent the
context requires) available for purchase by the Accounts; and
WHEREAS, LIFE COMPANY will be the issuer of certain variable annuity
contracts and variable life insurance contracts ("Contracts") as set forth on
Schedule A hereto, as the Parties hereto may amend from time to time, which
Contracts (hereinafter collectively, the "Contracts"), if required by applicable
law, will be registered under the 1933 Act; and
WHEREAS, LIFE COMPANY will fund the Contracts through the Accounts,
each of which may be divided into two or more subaccounts ("Subaccounts";
reference herein to an "Account" includes reference to each Subaccount thereof
to the extent the context requires); and
WHEREAS, LIFE COMPANY will serve as the depositor of the Accounts,
each of which is registered as a unit investment trust investment company under
the 1940 Act (or exempt therefrom), and the security interests deemed to be
issued by the Accounts under the Contracts will be registered as securities
under the 1933 Act (or exempt therefrom); and
1
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase Shares in one or more of the Funds
on behalf of the Accounts to fund the Contracts; and
WHEREAS, UNDERWRITER is a broker-dealer registered with the SEC under
the Securities Exchange Act of 1934 (111934 Act") and a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD");
NOW, THEREFORE, in consideration of the mutual benefits and promises
contained herein, the Parties hereto agree as follows:
Section 1. Available Funds
--------------------------
1.1 Availability.
-------------
AVIF will make Shares of each Fund available to LIFE COMPANY for
purchase and redemption at net asset value and with no sales charges, subject to
the terms and conditions of this Agreement. The Board of Directors of AVIF may
refuse to sell Shares of any Fund to any person, or suspend or terminate the
offering of Shares of any Fund if such action is required by law or by
regulatory authorities having jurisdiction or if, in the sole discretion of the
Directors acting in good faith and in light of their fiduciary duties under
federal and any applicable state laws, such action is deemed in the best
interests of the shareholders of such Fund.
1.2 Addition, Deletion or Modification of Funds.
--------------------------------------------
The Parties hereto may agree, from time to time, to add other Funds to
provide additional funding media for the Contracts, or to delete, combine, or
modify existing Funds, by amending Schedule A hereto. Upon such amendment to
Schedule A, any applicable reference to a Fund, AVIF, or its Shares herein shall
include a reference to any such additional Fund. Schedule A, as amended from
time to time, is incorporated herein by reference and is a part hereof.
1.3 No Sales to the General Public.
-------------------------------
AVIF represents and warrants that no Shares of any Fund have been or
win be sold to the general public.
2
<PAGE>
Section 2. Processing Transactions
----------------------------------
2.1 Timely Pricing and Orders.
--------------------------
(a) AVIF or its designated agent will use its best efforts to provide
LIFE COMPANY with the net asset value per Share for each Fund by 5:30 p.m.
Central Time on each Business Day. As used herein, "Business Day" shall mean any
day on which (i) the New York Stock Exchange is open for regular trading, (ii)
AVIF calculates the Fund's net asset value, and (iii) LIFE COMPANY is open for
business.
(b) LIFE COMPANY will use the data provided by AVIF each Business Day
pursuant to paragraph (a) immediately above to the Account unit values and to
process transactions that receive that same Business Day's Account unit values.
LIFE COMPANY will perform such Account processing the same Business Day, and
will place corresponding orders to purchase or redeem Shares with AVIF by 9:00
a.m. Central Time the following Business Day; provided, however, that AVIF shall
provide additional time to LIFE COMPANY in the event that AVIF is unable to meet
the 5:30 p.m. time stated in paragraph (a) immediately above. Such additional
time shall be equal to the additional time that AVIF takes to make the net asset
values available to LIFE COMPANY.
(c) With respect to payment of the purchase price by LIFE COMPANY and
of redemption proceeds by AVIF, LIFE COMPANY and AVIF shall net purchase and
redemption orders with respect to each Fund and shall transmit one net payment
per Fund in accordance with Section 2.2, below.
(d) If AVIF provides materially incorrect Share net asset value
information (as determined under SEC guidelines), LIFE COMPANY shall be entitled
to an adjustment to the number of Shares purchased or redeemed to reflect the
correct net asset value per Share. Any-material error in the calculation or
reporting of net asset value per Share, dividend or capital gain information
shall be reported promptly upon discovery to LIFE COMPANY.
2.2 Timely Payments.
---------------
LIFE COMPANY will wire payment for net purchases to a custodial
account designated by AVIF by 1:00 p.m. Central Time on the same day as the
order for Shares is placed, to the extent practicable. AVIF will wire payment
for net redemptions to an account designated by LIFE COMPANY by 1:00 p.m.
Central Time on the same day as the Order is placed, to the extent practicable,
but in any event within five (5) calendar days after the date the order is
placed in order to enable LIFE COMPANY to pay redemption proceeds within the
time specified in Section 22(e) of the 1940 Act or such shorter period of time
as may be required by law.
3
<PAGE>
2.3 Applicable Price.
-----------------
(a) Share purchase payments and redemption orders that result from
purchase payments, premium payments, surrenders and other transactions under
Contracts (collectively, "Contract transactions") and that LIFE COMPANY receives
prior to the close of regular trading on the New York Stock Exchange on a
Business Day will be executed at the net asset values of the appropriate Funds
next computed after receipt by AVIF or its designated agent of the orders. For
purposes of this Section 2.3(a), LIFE COMPANY shall be the designated agent of
AVIF for receipt of orders relating to Contract transactions on each Business
Day and receipt by such designated agent shall constitute receipt by AVIF;
provided that AVIF receives notice of such orders by 9:00 a.m. Central Time on
the next following Business Day or such later time as computed in accordance
with Section 2.1(b) hereof.
(b) All other Share purchases and redemptions by LIFE COMPANY will be
effected at the net asset values of the appropriate Funds next computed after
receipt by AVIF or its designated agent of the order therefor and such orders
will be irrevocable.
2.4 Dividends and Distributions.
---------------------------
AVIF will furnish notice by wire or telephone (followed by written
confirmation) on or prior to the payment date to LIFE COMPANY of any income
dividends or capital gain distributions payable on the Shares of any Fund. LIFE
COMPANY hereby elects to reinvest all dividends and capital gains distributions
in additional Shares of the corresponding Fund at the ex-dividend date net asset
values until LIFE COMPANY otherwise notifies AVIF in writing, it being agreed by
the Parties that the ex-dividend date and the payment date with respect to any
dividend or distribution will be the same Business Day. LIFE COMPANY reserves
the right to revoke this election and to receive all such income dividends and
capital gain distributions in cash.
2.5 Book Entry.
----------
Issuance and transfer of AVIF Shares will be by book entry only. Stock
certificates will not be issued to LIFE COMPANY. Shares ordered from AVIF will
be recorded in an appropriate title for LIFE COMPANY, on behalf of its Account.
Section 3. Costs and Expenses
-----------------------------
3.1 General.
--------
Except as otherwise specifically provided herein, each Party will bear
all expenses incident to its performance under this Agreement.
4
<PAGE>
3.2 Registration.
-------------
(a) AVIF will bear the cost of its registering as a management
investment company under the 1940 Act and registering its Shares under the 1933
Act, and keeping such registrations current and effective; including, without
limitation, the preparation of and filing with the SEC of Forms N-SAR
and Rule 24f-2 Notices with respect to AVIF and its Shares and payment of all
applicable registration or filing fees with respect to any of the foregoing.
(b) LIFE COMPANY will bear the cost of registering, to the extent
required, each Account as a unit investment trust under the 1940 Act and
registering units of interest under the Contracts under the 1933 Act and keeping
such registrations current and effective; including, without limitation, the
preparation and filing with the SEC of Forms N-SAR and Rule 24f-2 Notices with
respect to each Account and its units of interest and payment of all applicable
registration or filing fees with respect to any of the foregoing.
3.3 Other (Sales-Related)
---------------------
(a) AVIF will bear, or arrange for others to bear, the costs of
preparing, filing with the SEC and setting for printing AVIF's prospectus,
statement of additional information and any amendments or supplements thereto
(collectively, the "AVIF Prospectus"), periodic reports to shareholders, AVIF
proxy material and other shareholder communications.
(b) IDS Life of New York will bear the costs of preparing, filing
with the SEC and setting for printing each Account's prospectus, statement of
additional information and any amendments or supplements thereto (collectively,
the "Account Prospectus"), any periodic reports to Contract owners, annuitants,
insureds or participants (as appropriate) under the Contracts (collectively,
"Participants"), voting instruction solicitation material, and other Participant
communications.
(c) LIFE COMPANY will print in quantity and deliver to existing
Participants the documents described in Section 3.3(b) above and the prospectus
provided by AVIF in camera ready or computer diskette form. AVIF will print the
AVIF statement of additional information, proxy materials relating to AVIF and
periodic reports of AVIF.
3.4 Other (Sales-Related).
----------------------
LIFE COMPANY will bear the expenses of distribution. These expenses
would include by way of illustration, but are not limited to, the costs of
distributing to Participants the following documents, whether they relate to the
Account or AVIF: prospectuses, statements of additional information, proxy
materials and periodic reports. These costs would also include the costs of
preparing, printing, and distributing sales literature and advertising relating
to the Funds, as well as filing such materials with, and obtaining approval
from, the SEC, NASD, any state insurance regulatory authority, and any other
appropriate regulatory authority, to the extent required.
5
<PAGE>
3.5 Parties To Cooperate.
---------------------
Each Party agrees to cooperate with the others, as applicable, in
arranging to print, mail and/or deliver, in a timely manner, combined or
coordinated prospectuses or other materials of AVIF and the Accounts.
Section 4. Legal Compliance
---------------------------
4.1 Tax Laws.
---------
(a) AVIF represents and warrants that each Fund is currently
qualified as a regulated investment company ("RIC") under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), and represents that it
will use its best efforts to qualify and to maintain qualification of each Fund
as a RIC. AVIF will notify LIFE COMPANY immediately upon having a reasonable
basis for believing that a Fund has ceased to so qualify or that it might not so
qualify in the future.
(b) AVIF represents that it will use its best efforts to comply and
to maintain each Fund compliance with the diversification requirements set forth
in Section 817(h) of the Code and Section 1.817-5(b) of the regulations under
the Code. AVIF will notify LIFE COMPANY immediately upon having a reasonable
basis for believing that a Fund has ceased to so comply or that a Fund might not
so comply in the future. In the event of a breach of this Section 4.1(b) by
AVIF, it will take all reasonable to adequately diversify the Fund so as to
achieve compliance within the grace period afforded by Section 1.817-5 of the
regulations under the Code.
(c) LIFE COMPANY agrees that if the Internal Revenue Service ("IRS")
asserts in writing in connection with any governmental audit or review of LIFE
COMPANY or, to LIFE COMPANY's knowledge, of any Participant, that any Fund has
failed to comply with the diversification requirements of Section 817(h) of the
Code or LIFE COMPANY otherwise becomes aware of any facts that could give rise
to any claim against AVIF or its affiliates as a result of such a failure or
alleged failure:
(i) LIFE COMPANY shall promptly notify AVIF of such assertion
or potential claim (subject to the Confidentiality
provisions of Section 18 as to any Participant);
(ii) LIFE COMPANY shall consult with AVIF as to how to
minimize any liability that may arise as a result of such
failure or alleged failure;
6
<PAGE>
(iii) LIFE COMPANY shall use its best efforts to minimize any liability of AVIF
or its affiliates resulting - from such failure, including, without
limitation, demonstrating, pursuant to Treasury Regulations Section
1.817-5(a)(2), to the Commissioner of the IRS that such failure was
inadvertent;
(iv) LIFE COMPANY shall permit AVIF, its affiliates and their legal and
accounting advisors to participate in any conferences, settlement
discussions or other administrative or judicial proceeding or contests
(including judicial appeals thereof) with the IRS, any Participant or any
other claimant regarding any claims that could give rise to liability to
AVIF or its affiliates as a result of such a failure or alleged failure;
provided, however, that LIFE COMPANY will retain control of the conduct
of such conferences discussions, proceedings, contests or appeals;
(v) any written materials to be submitted by LIFE COMPANY to the IRS, any
Participant or any other claimant in connection with any of the foregoing
Proceedings or contests (including, without limitation, any such
materials to be submitted to the IRS pursuant to Treasury Regulations
Section 1.817-5(a)(2)), (a) shall be provided by LIFE COMPANY to AVIF
(together with any supporting information or analysis); subject to the
confidentiality provisions of Section 18, at least ten (10) business days
or such shorter period to which the Parties hereto agree prior to the day
on which such proposed materials are to be submitted, and (b) shall not
be submitted by LIFE COMPANY to any such person without the express
written consent of AVIF which shall not be unreasonably withheld;
(vi) LIFE COMPANY shall provide AVIF or its affiliates and their accounting
and legal advisors with such cooperation as AVIF shall reasonably request
(including, without limitation, by permitting AVIF, and its accounting
and legal advisors to review the relevant books and records of LIFE
COMPANY) in order to facilitate review by AVIF or its advisors of any
written submissions provided to it pursuant to the preceding clause or
its assessment of the validity or amount of any claim against its arising
from such a failure or alleged failure;
(vii) LIFE COMPANY shall not with respect to any claim of the IRS or any
Participant that would give rise to a claim against AVIF or its
affiliates (a) compromise or settle any claim, (b) accept any adjustment
on audit, or (c) forego any allowable administrative or judicial appeals,
without the express written consent of AVIF or its affiliates, which
shall not be unreasonably withheld, provided that LIFE COMPANY shall not
be required, after exhausting all administrative penalties, to appeal any
adverse judicial decision unless AVIF or its affiliates shall have
provided an opinion of independent
7
<PAGE>
counsel to the effect that a reasonable basis exists for
taking such appeal; and provided further that the costs
of any such appeal shall be borne equally by the Parties
hereto; and
(viii) AVIF and its affiliates shall have no liability as a
result of such failure or alleged failure if LIFE
COMPANY fails to comply with any of the foregoing
clauses (i) through (vii), and such failure could be
shown to have materially contributed to the liability.
Should AVIF or any of its affiliates refuse to give its written
consent to any compromise or settlement of any claim or liability hereunder,
LIFE COMPANY may, in its discretion, authorize AVIF or its affiliates to act in
the name of LIFE COMPANY in, and to control the conduct of, such conferences,
discussions, proceedings, contests or appeals and all administrative or judicial
appeals thereof, and in that event AVIF or its affiliates shall bear the fees
and expenses associated with the conduct of the proceedings that it is so
authorized to control; provided, that in no event shall LIFE COMPANY have any
liability resulting from AVIF's refusal to accept the proposed settlement or
compromise with respect to any failure caused by AVIF. As used in this
Agreement, the term "affiliates" shall have the same meaning as "affiliated
person" as defined in Section 2(a)(3) of the 1940 Act.
(d) LIFE COMPANY represents and warrants that the Contracts currently
are and will be treated as annuity contracts or life insurance contracts under
applicable provisions of the Code and that it will use its best efforts to
maintain such treatment; LIFE COMPANY will notify AVIF immediately upon having a
reasonable basis for believing that any of the Contracts have ceased to be so
treated or that they might not be so treated in the future.
(e) LIFE COMPANY represents and warrants that each Account is a
"segregated asset account" and that interests in each Account are offered
exclusively through the purchase of or transfer into a "variable contact,"
within the meaning of such terms under Section 817 of the Code and the
regulations thereunder. LIFE COMPANY will use its best efforts to continue to
meet such definitional requirements, and it will notify AVIF immediately upon
having a reasonable basis for believing that such requirements have ceased to be
met or that they might not be met in the future.
4.2 Insurance and Certain Other Laws.
--------------------------------
(a) AVIF will use its best efforts to comply with any applicable state
insurance laws or regulations, to the extent specifically requested in writing
by LIFE COMPANY, including,: the furnishing of information not otherwise
available to LIFE COMPANY which is required by state insurance law to enable
LIFE COMPANY to obtain the authority needed to issue the Contracts in any
applicable state.
(b) LIFE COMPANY represents and warrants that (i) it is an insurance
company duly organized, validly existing and in good standing under the laws of
the State of New York and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its obligations
8
<PAGE>
under this Agreement, (ii) it has legally and validly established and maintains
each Account as a segregated asset account under Section 4240 of the New York
Insurance Law and the regulations thereunder, and (iii) the Contracts comply in
all material respects with all other applicable federal and state laws and
regulations.
(c) AVIF represents and warrants that it is a corporation duly
organized; validly existing, and in good standing under the laws of the State of
Maryland and has full power, authority, and legal right to execute, deliver and
perform its duties and comply with its obligations under this Agreement.
4.3 Securities Laws.
---------------
(a) LIFE COMPANY represents and warrants that (i) interests in each
Account pursuant to the Contracts will be registered under the 1933 Act to the
extent required by the 1933 Act, (ii) the Contracts will be duly authorized for
issuance and sold in compliance with all applicable federal and state laws,
including, without limitation, the 1933 Act, the 1934 Act, the 1940 Act and New
York law, (iii) each Account is and will remain registered under the 1940 Act,
to the extent required by the 1940 Act, (iv) each Account does and will comply,
in all material respects with the requirements of the 1940 Act and the rules
thereunder, to the extent required, (v) each Account's 1933 Act registration
statement relating to the Contracts, together with any amendments thereto, will
at all times comply in all material respects with the requirements of the 1933
Act and the rules thereunder, (vi) LIFE COMPANY will amend the registration
statement for its Contracts under the 1933 Act and for its Accounts under the
1940 Act from time to time as required in order to effect the continuous
offering of its Contracts or as may otherwise be required by applicable law, and
(vii) each Account Prospectus will at all times comply in all material respects
with the requirements of the 1933 Act and the rules thereunder.
(b) AVIF represents and warrants that (i) Shares sold pursuant to
this Agreement will be registered under the 1933 Act to the extent required by
the 1933 Act and duly authorized for issuance and sold in compliance with
Maryland law, (ii) AVIF is and will remain registered under the 1940 Act to the
extent required by the 1940 Act, (iii) AVIF will amend the registration
statement for its Shares under the 1933 Act and itself under the 1940 Act from
time to time as required in order to effect the continuous offering of its
Shares, (iv) AVIF does and will comply in all material respects with the
requirements of the 1940 Act and the rules thereunder, (v) AVIF's 1933 Act
registration statement, together with any amendments thereto, will at all times
comply, in all material respects with the requirements of the 1933 Act and rules
thereunder, and (vi) AVIF"S Prospectus will at all times comply in all material
respects with the requirements of the 1933 Act and the rules thereunder.
(c) AVIF will at its expense register and qualify its Shares for sale
in accordance with the laws of any state or other jurisdiction if and to the
extent reasonably deemed advisable by AVIF.
(d) AVIF currently does not intend to make any payments to
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it reserves the right to make such payments in the future. To the
extent that it decides to finance distribution expenses pursuant to Rule 12b-1,
AVIF undertakes to have its Board of Directors, a majority of whom are not
"interested" persons of the Fund, formulate and approve any plan under Rule 12b-
1 to finance distribution expenses.
9
<PAGE>
(e) AVIF represents and warrants that all of its trustees, officers,
employees, investment advisers, and other individuals/entities having access to
the funds and/or securities of the Fund are and continue to be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of the
Fund in an amount not less than the minimal coverage as required currently by
Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from
time to time. The aforesaid bond includes coverage for larceny and embezzlement
and is issued by a reputable bonding company.
4.4 Notice of Certain Proceedings and Other Circumstances.
------------------------------------------------------
(a) AVIF will immediately notify LIFE COMPANY of (i) the issuance by
any court or regulatory body of any stop order, cease and desist order, or other
similar order with respect to AVIF's registration statement under the 1933 Act
or AVIF Prospectus, (fl) any request by the SEC for any amendment to such
registration statement or AVIF Prospectus that may affect the offering of Shares
of AVIF, (iii) the initiation of any proceedings for that purpose or for any
other purpose relating to the registration or offering of AVIF's Shares, or (iv)
any other action or circumstances that may prevent the lawful offer or sale of
Shares of any Fund in any state or jurisdiction, including, without limitation,
any circumstances in which (a) such Shares are not registered and, in all
material respects, issued and sold in accordance with applicable state and
federal law, or (b) such law precludes the use of such Shares as an underlying
investment medium of the Contracts issued or to be issued by LIFE COMPANY. AVIF
will make every reasonable effort to prevent the issuance, with respect to any
Fund, of any such stop order, cease and desist order or similar order and, if
any such order is issued, to obtain the lifting thereof at the earliest possible
time.
(b) LIFE COMPANY will immediately notify AVIF of (i) the issuance by
any court or regulatory body of any stop order, cease and desist order, or other
similar order with respect to each Account's registration statement under the
1933 Act relating to the Contracts or each Account Prospectus, (ii) any request
by the SEC for any amendment to such registration statement or Account
Prospectus that may affect the offering of Shares of AVIF, (iii) the initiation
of any proceedings for that purpose or for any other purpose relating to the
registration or offering of each Account's interests pursuant to the Contracts,
or (iv) any other action or circumstances that may prevent the lawful offer or
sale of said interests in any state or jurisdiction, including, without Stations
any circumstances in which said interests are not registered and, in all
material respects, issued and sold in accordance with applicable state and
federal law. LIFE COMPANY will make every reasonable effort to prevent the
issuance-of any such stop order, cease and desist order or similar order and, if
any such order is issued, to obtain the lifting thereof at the earliest possible
time.
4.5 LIFE COMPANY To Provide Documents; Information About AVIF.
---------------------------------------------------------
(a) LIFE COMPANY will provide to AVIF or its designated agent at
least one (1) complete copy of all SEC registration statements, Account
Prospectuses, reports, any preliminary and final voting instruction solicitation
material, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to each Account or the Contracts,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
(b) LIFE COMPANY will provide to AVIF or its designated agent at
least one (1) complete copy of each piece of sales literature or other
promotional material in which AVIF or any of its affiliates is named, at least
five (5) Business Days prior to its use or such shorter period as the
10
<PAGE>
Parties hereto may, from time to time, agree upon. No such material shall be
used if AVIF or its designated agent objects to such use within five (5)
Business Days after receipt of such material or such shorter period as the
Parties hereto may, from time to time, agree upon. AVIF hereby designates AIM as
the entity to receive such sales literature, until such time as AVIF appoints
another designated agent by giving notice to LIFE COMPANY in the manner required
by Section 9 hereof.
(c) Neither LIFE COMPANY nor any of its affiliates, will give any
information or make any representations or statements on behalf of or concerning
AVIF or its affiliates in connection with the sale of the Contracts other than
(i) the information or representations contained in the registration statement,
including the AVIF Prospectus contained therein, relating to Shares, as such
registration statement and AVIF Prospectus may be amended from time to time; or
(ii) in reports or proxy materials for AVIF; or (iii) in published reports for
AVIF that are in the public domain and approved by AVIF for distribution; or
(iv) in sales literature or other promotional material approved by AVIF, except
with the express written permission of AVIF.
(d) LIFE COMPANY shall adopt and implement procedures reasonably
designed to ensure that information concerning AVIF and its affiliates that is
intended for use only by brokers or agents selling the Contracts (i.e.,
information that is not intended for distribution to Participants) ("broker only
materials") is so used, and neither AVIF nor any of its affiliates shall be
liable for any losses, damages or expenses relating to the improper use of such
broker only materials.
(e) For the purposes of this Section 4.5, the phrase "sales
literature or other promotional material" includes, but is not limited to,
advertisements (such as material published, or designed for use in, a newspaper,
magazine, or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public media,
(e.g., on-line networks such as the Internet or other electronic messages),
sales literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
materials or other communications distributed or made generally available to
some or all agents or employees, registration statements, prospects statements
of additional information, shareholder reports, and proxy materials and any
other material constituting sales literature or advertising under the NASD
rules, the 1933 Act or the 1940 Act.
4.6 AVIF To Provide Documents; Information About LIFE COMPANY,
----------------------------------------------------------
(a) AVIF will provide to LIFE COMPANY at least one (1) complete copy
of all SEC registration statements, AVIF Prospectuses, reports, any preliminary
and final proxy material, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to AVIF or the
Shares of a Fund, contemporaneously with the filing of such document with the
SEC or other regulatory authorities.
(b) AVIF will provide to LIFE COMPANY camera ready or computer
diskette copies of all AVIF prospectuses and printed copies, in an amount
specified by LIFE COMPANY, of AVIF statements of additional information, proxy
materials, periodic reports to shareholders and other materials required by law
to be sent to Participants who have allocated any Contract value to a Fund. AVIF
will provide such copies to LIFE COMPANY in a timely manner so as to enable LIFE
11
<PAGE>
COMPANY, as the case may be, to print and distribute such materials within the
time required by law to be furnished to Participants.
(c) AVIF will provide to LIFE COMPANY or its designated agent at
least one (1) complete copy of each piece of sales literature or other
promotional material in which LIFE COMPANY, or any of its respective affiliates
is named, or that refers to the Contracts, at least five (5) Business Days prior
to its use or such shorter period as the Parties hereto may, from time to time,
agree upon. No such material shall be used if LIFE COMPANY or its designated
agent objects to such use within five (5) Business Days after receipt of such
material or such shorter period as the Parties hereto may, from time to time,
agree upon. LIFE COMPANY shall receive all such sales literature until such time
as it appoints a designated agent by giving notice to AVIF in the manner
required by Section 9 hereof.
(d) Neither AVIF nor any of its affiliates will give any information
or make any representations or statements on behalf of or concerning LIFE
COMPANY, each Account, or the Contracts other than (i) the information or
representations contained in the registration statement, including each Account
Prospectus contained therein, relating to the Contracts, as such registration
statement and Account Prospectus may be amended from time to time; or (ii) in
published reports for the Account or the Contracts that are in the public domain
and approved by LIFE COMPANY for distribution; or (iii) in sales literature or
other promotional material approved by LIFE COMPANY or its affiliates, except
with the express written permission of LIFE COMPANY.
(e) AVIF shall cause its principal underwriter to adopt and implement
procedures reasonably designed to ensure that information concerning LIFE
COMPANY, and its respective affiliates that is intended for use only by brokers
or agents selling the Contracts (i. e., information that is not intended for
distribution to Participants) ("broker only materials") is so used, and neither
LIFE COMPANY, nor any of its respective affiliates shall be liable for any
losses, damages or expenses relating to the improper use of such broker only
materials.
(f) For purposes of this Section 4.6, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media, (e.g., on-
line networks such as the Internet or other electronic messages), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials and any other material constituting sales literature or
advertising under the NASD rules, the 1933 Act or the 1940 Act.
12
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Section 5. Mixed and Shared Funding
-----------------------------------
5.1 General.
-------
The SEC has granted an order to AVIF exempting it from certain
provisions of the 1940 Act and rules thereunder so that AVIF may be available
for investment by certain other entities, including, without limitation,
separate accounts funding variable annuity contracts or variable life insurance
contracts, separate accounts of insurance companies unaffiliated with LIFE
COMPANY, and trustees of qualified pension and retirement plans (collectively,
"Mixed and Shared Funding"). The Parties recognize that the SEC has imposed
terms and conditions for such orders that are substantially identical to many of
the provisions of this Section 5. Sections 5.2 through 5.8 below shall apply
pursuant to such an exemptive order granted to AVIF. AVIF hereby notifies LIFE
COMPANY that, in the event that AVIF implements Mixed and Shared Funding, it may
be appropriate to include in the prospectus pursuant to which a Contract is
offered disclosure regarding the potential risks of Mixed and Shared Funding.
5.2 Disinterested Directors.
------------------------
AVIF agrees that its Board of Directors shall at all times consist of
directors a majority of whom (the "Disinterested Directors") are not interested
persons of AVIF within the meaning of Section 2(a)(19) of the 1940 Act and the
Rules thereunder and as modified by any applicable orders of the SEC, except
that if this condition is not met by reason of the death, disqualification, or
bona fide resignation of any director, then the operation of this condition
shall be suspended (a) for a period of forty-five (45) days if the vacancy or
vacancies may be filed by the Board; (b) for a period of sixty (60) days if a
vote of shareholders is required to fill the vacancy or vacancies; or (c) for
such longer period as the SEC may prescribe by order upon application.
5.3 Monitoring for Material Irreconcilable Conflicts.
-------------------------------------------------
AVIF agrees that its Board of Directors will monitor for the existence
of any material irreconcilable conflict between the interests of the
Participants in all separate accounts of life insurance companies utilizing AVIF
("Participating Insurance Companies"), including each Account, and participants
in all qualified retirement and pension plans investing in AVIF ("Participating
Plans"). LIFE COMPANY agrees to inform the Board of Directors of AVIF of the
existence of or any potential for any such material irreconcilable conflict of
which it is aware. The concept of a "material irreconcilable conflict" is not
defined by the 1940 Act or the rules thereunder, but the Parties recognize that
such a conflict may arise for a variety of reasons, including, without
limitation:
(a) an action by any state insurance or other regulatory authority;
(b) a change in applicable federal or state insurance, tax or
securities laws or regulations, or a public ruling, private letter ruling, no-
action or interpretative letter, or any similar action by insurance, tax or
securities regulatory authorities;
(c) an administrative or judicial decision in any relevant
proceeding;
13
<PAGE>
(d) the manner in which the investments of any Fund are being
managed;
(e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract Participants or by Participants of
different Participating Insurance Companies;
(f) a decision by a Participating Insurance Company to disregard the
voting instructions of Participants; or
(g) a decision by a Participating Plan to disregard the voting
instructions of Plan participants.
Consistent with the SEC's requirements in connection with exemptive
orders of the type referred to in Section 5.1 hereof, LIFE COMPANY will assist
the Board of Directors in carrying out its responsibilities by providing the
Board of Directors with all information reasonably necessary for the Board of
Directors to consider any issue raised, including information as to a decision
by LIFE COMPANY to disregard voting instructions of Participants.
5.4 Conflict Remedies.
------------------
(a) It is agreed that if it is determined by a majority of the
members of the Board of Directors or a majority of the Disinterested Directors
that a material irreconcilable conflict exists, LIFE COMPANY will, if it is a
Participating Insurance Company for which a material irreconcilable conflict is
relevant, at its own expense and to the extent reasonably practicable (as
determined by a majority of the Disinterested Directors), take whatever steps
are necessary to remedy or eliminate the material irreconcilable conflict, which
steps may include, but are not limited to:
(i) withdrawing the assets allocable to some or all of the Accounts
from AVIF or any Fund and reinvesting such assets in a different
investment medium, including another Fund of AVIF, or submitting
the question whether such segregation should be implemented to a
vote of all affected Participants and, as appropriate,
segregating the assets of any particular group (e.g., annuity
Participants, life insurance Participants or all Participants)
that votes in favor of such segregation, or offering to the
affected Participants the option of making such a change; and
(ii) establishing a new registered investment company of the type
defined as a to "management company" in Section 4(3) of the 1940
Act or a new separate amount that is operated as a management
company.
(b) If the material irreconcilable conflict arises because of LIFE
COMPANY's decision to disregard Participant voting instructions and that
decision represents a minority position or would preclude a majority vote, LIFE
COMPANY may be required, at AVIF's election, to withdraw each Account's
investment in AVIF or any Fund. No charge or penalty will be imposed as a result
of such withdrawal. Any such withdrawal must take place within six (6) months
after AVIF gives notice to LIFE COMPANY that this provision is being
implemented, and until such withdrawal AVIF shall continue to accept and
implement orders by LIFE COMPANY for the purchase and redemption of Shares of
AVIF.
14
<PAGE>
(c) If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to LIFE COMPANY conflicts with
the majority of other state regulators, then LIFE COMPANY will withdraw each
Account's investment in AVIF within six (6) months after AVIF's Board of
Directors informs LIFE COMPANY that it has determined that such decision has
created a material irreconcilable conflict, and until such withdrawal AVIF shall
continue to accept and implement orders by LIFE COMPANY for the purchase and
redemption of Shares of AVIF. No charge or penalty will be imposed as a result
of such withdrawal.
(d) LIFE COMPANY agrees that any remedial action taken by it in
resolving any material irreconcilable conflict will be carried out at its
expense and with a view only to the interests of Participants.
(e) For purposes hereof, a majority of the Disinterested Directors
will determine whether or not any proposed action adequately remedies any
material irreconcilable conflict. In no event, however, will AVIF or any of its
affiliates be required to establish a new funding medium for any Contracts. LIFE
COMPANY will not be required by the terms hereof to establish a new funding
medium for any Contracts if an offer to do so has been declined by vote of a
majority of Participants materially adversely affected by the material
irreconcilable conflict.
5.5 Notice to LIFE COMPANY
----------------------
AVIF will promptly make known in writing to LIFE COMPANY the Board of
Directors of the existence of a material irreconcilable conflict, a description
of the facts that give rise to such conflict and the implications of such
conflict.
5.6 Information Requested by Board of Directors.
--------------------------------------------
LIFE COMPANY and AVIF (or its investment adviser) will at least
annually submit to the Board of Directors of AVIF such reports, materials or
data as the Board of Directors may reasonably request so that the Board of
Directors may fully carry out the obligations imposed upon it by the provisions
hereof or any exemptive order granted by the SEC to permit Mixed and Shared
Funding, and said reports, materials and data will be submitted at any
reasonable time deemed appropriate by the Board of Directors. All reports
received by the Board of Directors of potential or existing conflicts, and all
Board of Directors actions with regard to determining the existence of a
conflict, notifying Participating Insurance Companies and Participating Plans of
a conflict, and determining whether any proposed action adequately remedies a
conflict, will be properly recorded in the minutes of the Board of Directors or
other appropriate records, and such minutes or other records will be made
available to the SEC upon request.
5.7 Compliance with SEC Rules.
-------------------------
If, at any time during which AVIF is serving as an investment medium
for variable life insurance Contracts, 1940 Act Rules 6e-3(T) or, if applicable,
6e-2 are amended or Rule 6e-3 is adopted to provide exemptive relief with
respect to Mixed and Shared Funding, AVIF agrees that it will comply with the
terms and conditions thereof and that the terms of this Section 5 shall be
deemed modified if and only to the extent required in order also to comply with
the terms and conditions of such exemptive relief that is afforded by any of
said rules that are applicable.
15
<PAGE>
5.8 Other Requirements.
-------------------
AVIF will require that each Participating Insurance Company and
Participating Plan enter into an agreement with AVIF that contains in substance
the same provisions as are set forth in Sections 4.1(b), 4.1 (d), 4.3(a),
4.4(b), 4.5 (a), 5, and 10 of this Agreement.
Section 6. Termination
----------------------
6.1 Events of Termination.
----------------------
Subject to Section 6.4 below, this Agreement will terminate as to a
Fund:
(a) at the option of any party, with or without cause with respect to
the Fund, upon six (6) months advance written notice to the other parties, or,
if later, upon receipt of any required exemptive relief from the SEC, unless
otherwise agreed to in writing by the parties; or
(b) at the option of AVIF upon institution of formal proceedings
against LIFE COMPANY or its affiliates by the NASD, the SEC, any state insurance
regulator or any other regulatory body regarding LIFE COMPANY's obligations
under this Agreement or related to the sale of the Contracts, the operation of
each Account, or the purchase of Shares, if, in each case, AVIF reasons
determines that such proceedings, or the facts on which such proceedings would
be based, have a material likelihood of imposing material adverse consequences
on the Fund with respect to which the Agreement is to be determinated; or
(c) at the option of LIFE COMPANY upon institution of formal
proceedings against AVIF, its principal underwriter, or its investment adviser
by the NASD, the SEC, or any state insurance regulator or any other regulatory
body regarding AVIF's obligations under this Agreement or related to the
operation or management of AVIF or the purchase of AVIF Shares, if, in each
case, LIFE COMPANY reasonably determines that such proceedings, or the facts on
which such proceedings would be based, have a material likelihood of imposing
material adverse consequences on LIFE COMPANY, or the Subaccount corresponding
to the Fund with respect to which the Agreement is to be terminated; or
(d) at the option of any Party in the event that (i) the Fund's
Shares are not registered and, in all material respects, issued and sold in
accordance with any applicable federal or state law, or (ii) such law precludes
the use of such Shares as an underlying investment medium of the Contracts
issued or to be issued by LIFE COMPANY; or
(e) upon termination of the corresponding Subaccount's investment in
the Fund pursuant to Section 5 hereof; or
(f) at the option of LIFE COMPANY if the Fund ceases to qualify as a
RIC under Subchapter M of the Code or under successor or similar provisions, or
if LIFE COMPANY reasonably believes that the Fund may fail to so qualify; or
16
<PAGE>
(g) at the option of LIFE COMPANY if the Fund fails to comply with
Section 817(h) of the Code or with successor or similar provisions, or if LIFE
COMPANY reasonably believes that the Fund may fail to so comply; or
(h) at the option of AVIF if the Contracts issued by LIFE COMPANY
cease to qualify as annuity contracts or life insurance contracts under the Code
(other than by reason of the Fund's noncompliance with Section 817(h) or
Subchapter M of the Code) or if interests in an Account under the Contracts are
not registered, where required, and, in all material respects, are not issued or
sold in accordance with any applicable federal or state law; or
(i) upon another Party's material breach of any provision of this
Agreement.
6.2 Notice Requirement for Termination.
-----------------------------------
No termination of this Agreement will be effective unless and until
the Party terminating this Agreement gives prior written notice to the other
Party to this Agreement of its intent to terminate, and such notice shall set
forth the basis for such termination. Furthermore:
(a) in the event that any termination is based upon the provisions of
Sections 6. 1 (a) or 6.1 (e) hereof, such prior written notice shall be given at
least six (6) months in advance of the effective date of termination unless a
shorter time is agreed to by the Parties hereto;
(b) in the event that any termination is based upon the provisions of
Sections 6. 1 (b) or 6. 1 (c) hereof, such prior written notice shall be given
at least ninety (90) days in advance of the effective date of termination unless
a shorter time is agreed to by the Parties hereto; and
(c) in the event that any termination is based upon the provisions of
Sections 6. 1 (d), 6.1 (f), 6. 1 (g), 6. 1 (h) or 6. 1 (i) hereof, such prior
written notice shall be given as soon as possible within twenty-four (24) hours
after the terminating Party learns of the event causing termination to be
required.
6.3 Funds To Remain Available.
--------------------------
Notwithstanding any termination of this Agreement, AVIF will, at the
option of LIFE COMPANY, continue to make available additional shares of the Fund
pursuant to the terms and conditions of this Agreement, for all Contracts in
effect on the effective date of termination of this Agreement (hereinafter
referred to as "Existing Contracts."). Specifically, without limitation, the
owners of the Existing Contracts will be permitted to reallocate investments in
the Fund (as in effect on such date), redeem investments in the Fund and/or
invest in the Fund upon the making of additional purchase payments under the
Existing Contracts. The parties agree that this Section 6.3 will not apply to
any terminations under Section 5 and the effect of such terminations will be
governed by Section 5 of this Agreement.
17
<PAGE>
6.4 Survival of Warranties and Indemnifications.
--------------------------------------------
All warranties and indemnifications will survive the termination of
this Agreement.
6.5 Continuance of Agreement for Certain Purposes.
----------------------------------------------
If any Party terminates this Agreement with respect to any Fund pursuant to
Sections 6. 1 (b), 6. 1 (c), 6. 1 (d), 6. 1 (f), 6. 1 (g), 6. 1 (h) or 6. 1 (i)
hereof, Agreement shall nevertheless continue in effect as to any Shares of that
Fund that are outstanding as of the date of such termination (the "Initial
Termination Date"). This continuation shall extend to the earlier of the date as
of which an Account owns no Shares of the affected Fund or a date (the "Final
Termination Date") six (6) months following the Initial Termination Date, except
that LIFE COMPANY may, by written notice shorten said six (6) month period in
the case of a termination pursuant to Sections 6. 1 (d), 6. 1 (f), 6. 1 (g), 6.1
(h) or 6. 1 (i).
Section 7. Parties To Cooperate Respecting Termination
------------------------------------------------------
The Parties hereto agree to cooperate and give reasonable assistance
to one another in taking all necessary and appropriate steps for the purpose of
ensuring that an Account owns no Shares of a Fund after the Final Termination
Date with respect thereto, or, in the case of a termination pursuant to Section
6.1(a), the termination date specified in the notice of termination. Such steps
may include combining the affected Account with another Account, substituting
other mutual fund shares for those of the affected Fund, or otherwise
terminating participation by the Contracts in such Fund.
Section 8. Assignment
---------------------
This Agreement may not be assigned by any Party, except with the
written consent of each other Party.
Section 9. Notices
------------------
Notices and communications required or permitted by Section 9 hereof
will be given by means mutually acceptable to the Parties concerned. Each other
notice or communication required or permitted by this Agreement will be given to
the following persons at the following addresses and facsimile numbers, or such
other persons, addresses or facsimile numbers as the Party receiving such
notices or communications may subsequently direct in writing:
UNDERWRITER
LIFE COMPANY
Street Address
City, State Zip Code
Facsimile:
18
<PAGE>
Attn.: [NAME OF PERSON]
AIM Variable Insurance Funds, Inc.
11 Greenway Plaza, Suite 1919
Houston, TX 77046
Facsimile: 713-993-9185
Attn.: Nancy L. Martin, Esquire
Section 10. Voting Procedures
------------------------------
Subject to the cost allocation procedures set forth in Section 3
hereof, LIFE COMPANY will distribute all proxy material furnished by AVIF to
Participants to whom pass-through voting privileges are required to be extended
and will solicit voting instructions from Participants. LIFE COMPANY will vote
Shares in accordance with timely instructions received from Participants. LIFE
COMPANY will vote Shares that are (a) not attributable to Participants to whom
pass-through voting privileges are extended, or (b) attributable to
Participants, but for which no timely instructions have been received, in the
same proportion as Shares for which said instructions have been received from
Participants, so long as and to the extent that the SEC continues to interpret
the 1940 Act to require pass-through voting privileges for Participants. Neither
LIFE COMPANY nor any of its affiliates will in any way recommend action in
connection with or oppose or interfere with the solicitation of proxies for the
Shares held for such Participants. LIFE COMPANY reserves the right to vote
shares held in any Account in its own right, to the extent permitted by law.
LIFE COMPANY shall be responsible for assuring that each of its Accounts holding
Shares calculates voting privileges in a manner consistent with that of other
Participating Insurance Companies or in the manner required by the Mixed and
Shared Funding exemptive order obtained by AVIF. AVIF will notify LIFE COMPANY
of any changes of interpretations or amendments to Mixed and Shared Funding
exemptive, order it has obtained. AVIF with comply with all provisions of the
1940 Act requiring voting by shareholders, and in particular, AVIF either will
provide for annual meetings (except insofar as the SEC may interpret Section 16
of the 1940 Act not to require such meetings) or will comply with Section 16(c)
of the 1940 Act (although AVIF is not one of the trusts described in Section
16(c) of that Act) as well as with Sections 16(a) and, if and when applicable,
16(b). Further, AVIF will act in accordance with the SEC's interpretation of the
requirements of Section 16(a) with respect to periodic elections of directors
and with whatever rules the SEC may promulgate with respect thereto.
Section 11. Foreign Tax Credits
--------------------------------
AVIF agrees to consult in advance with LIFE COMPANY concerning any
decision to elect or not to elect pursuant to Section 853 of the Code to pass
through the benefit of any foreign tax credits to its shareholders.
19
<PAGE>
Section 12. Indemnification
----------------------------
12.1 Of AVIF by LIFE COMPANY and UNDERWRITER.
----------------------------------------
(a) Except to the extent provided in Sections 12.1(b) and 12.1(c),
below, LIFE COMPANY and UNDERWRITER agree to indemnify and hold harmless AVIF,
its affiliates, and each person, if any, who controls AVIF or its affiliates
within the meaning of Section 15 of the 1933 Act and each of their respective
directors and officers, (collectively, the "Indemnified Parties" for purposes of
this Section 12.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of LIFE COMPANY
and UNDERWRITER) or actions in respect thereof (including, to the extent
reasonable, legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise;
provided, the Account owns shares of the Fund and insofar as such losses,
claims, damages, liabilities or actions:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any
Account's 1933 Act registration statement, any Account
Prospectus, the Contracts, or sales literature or advertising
for the Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading; provided, that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with information
furnished to LIFE COMPANY or UNDERWRITER by or on behalf of
AVIF for use in any Account's 1933 Act registration statement,
any Account Prospectus, the Contracts, or sales literature or
advertising or otherwise for use in connection with the sale of
Contracts or Shares (or any amendment or supplement to any of
the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations
contained in AVIF's 1933 Act registration statement, AVIF
Prospectus, sales literature or advertising of AVIF, or any
amendment or supplement to any of the foregoing, not supplied
for use therein by or on behalf of LIFE COMPANY, UNDERWRITER or
their respective affiliates and on which such persons have
reasonably relied) or the negligent, illegal or fraudulent
conduct of LIFE COMPANY, UNDERWRITER or their respective
affiliates or persons under their control (including, without
limitation, their employees and "Associated Persons," as that
term is defined in paragraph (m) of Article I of the NASD's By-
Laws), in connection with the sale or distribution of the
Contracts or Shares; or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in AVIF's 1933
Act registration statement, AVIF Prospectus, sales literature
or advertising of AVIF, or any amendment or supplement to any
of the foregoing, or the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if such
a statement or omission was made in reliance upon and in
conformity with information furnished to AVIF or its affiliates
by or on behalf of
20
<PAGE>
LIFE COMPANY, UNDERWRITER or their respective affiliates for
use in AVIF's 1933 Act registration statement, AVIF Prospectus,
sales literature or advertising of AVIF, or any amendment or
supplement to any of the foregoing; or
(iv) arise as a result of any failure by LIFE COMPANY or UNDERWRITER
to perform the obligations, provide the services and furnish
the materials required of them under the terms of this
Agreement, or any material breach of any representation and/or
warranty made by LIFE COMPANY or UNDERWRITER in this Agreement
or arise out of or result from any other material breach of
this Agreement by LIFE COMPANY or UNDERWRITER; or
(v) arise as a result of failure by the Contracts issued by LIFE
COMPANY to qualify as annuity contracts or the insurance
contracts under the Code, otherwise than by reason of any
Fund's failure to comply with Subchapter M or Section 817(h) of
the Code.
(b) Neither LIFE COMPANY nor UNDERWRITER shall be liable under this
Section 12.1 with respect to any losses, claims, damages, liabilities or actions
to which an Indemnified Party would otherwise be subject by reason if willful
misfeasance, bad faith, or gross negligence in the performance by that
Indemnified Party of its duties or by reason of that Indemnified Party's
reckless disregard of obligations or duties (i) under this Agreement, or (ii) to
AVIF.
(c) Neither LIFE COMPANY nor UNDERWRITER shall be liable under this
Section 12.1 with respect to any action against an Indemnified Party unless AVIF
shall have notified LIFE COMPANY and UNDERWRITER in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the action shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify LIFE COMPANY and UNDERWRITER of any
such action shall not relieve LIFE COMPANY and UNDERWRITER from any liability
which they may have to the Indemnified Party against whom such action is brought
otherwise than on account of this Section 12.1. Except as otherwise provided
herein, in case any such action is brought against an Indemnified Party, LIFE
COMPANY and UNDERWRITER shall be entitled to participate, at their own expense,
in the defense of such action and also shall be entitled to assume the defense
thereof, with counsel approved by the Indemnified Party named in the action,
which approval shall not be unreasonably withheld. After notice from LIFE
COMPANY or UNDERWRITER to such Indemnified Party of LIFE COMPANY's or
UNDERWRITER's election to assume the defense thereof, the Indemnified Party will
cooperate fully with LIFE COMPANY and UNDERWRITER and shall bear the fees and
expenses of any additional counsel retained by it, and neither LIFE COMPANY nor
UNDERWRITER will be liable to such Indemnified Party under this Agreement for
any legal or other expenses subsequently incurred by such Indemnified Party
independently in connection with the defense thereof, other than reasonable
costs of investigation.
12.2 Of LIFE COMPANY and UNDERWRITER by AVIF -
---------------------------------------
(a) Except to the extent provided in Sections 12.2(c), 12.2(d) and
12.2(e), below, AVIF agrees to indemnify and hold harmless LIFE COMPANY,
UNDERWRITER, their respective affiliates, and each person, if any, who controls
LIFE COMPANY, UNDERWRITER or their respective affiliates within the meaning of
Section 15 of the 1933 Act and each of their respective
21
<PAGE>
directors and officers, (collectively, the "Indemnified Parties" for purposes of
this Section 12.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of AVIF ) or
actions in respect thereof (including, to the extent reasonable, legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law, or otherwise; provided, the Account owns
shares of the Fund and insofar as such losses, claims, damages, liabilities or
actions:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in AVIF's 1933
Act registration statement, AVIF Prospectus or sales literature
or advertising of AVIF (or any amendment or supplement to any
of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading; provided, that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with
information furnished to AVIF or its affiliates by or on behalf
of LIFE COMPANY, UNDERWRITER or their respective affiliates for
use in AVIF's 1933 Act registration statement, AVIF Prospectus,
or in sales literature or advertising or otherwise for use in
connection with the sale of Contracts or Shares (or any
amendment or supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations
contained in any Account's 1933 Act registration statement, any
Account Prospectus, sales literature or advertising for the
Contracts, or any amendment or supplement to any of the
foregoing, not supplied for use therein by or on behalf of AVIF
or its affiliates and on which such persons have reasonably
relied) or the negligent, illegal or fraudulent conduct of AVIF
or its affiliates or persons under its control (including,
without limitation, their employees and "Associated Persons" as
that Term is defined in Section (n) of Article 1 of the NASD
By-Laws), in connection with the sale or distribution of AVIF
Shares; or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any
Account's 1933 Act registration statement, any Account
Prospectus, sales literature or advertising covering the
Contracts, or any amendment or supplement to any of the
foregoing, or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein not misleading, if such statement
or omission was made in reliance upon and in conformity with
information furnished to LIFE COMPANY, UNDERWRITER or their
respective affiliates by or on behalf of AVIF for use in any
Accounts 1933 Act registration statement, any Account
Prospectus, sales literature or advertising covering the
Contracts, or any amendment or supplement to any of the
foregoing; or
22
<PAGE>
(iv) arise as a result of any failure by AVIF to perform the
obligations, provide the services and furnish the materials
required of it under the terms of this Agreement, or any
material breach of any representation and/or warranty made by
AVIF in this Agreement or arise out of or result from any other
material breach of this Agreement by AVIF.
(b) Except to the extent provided in Sections 12.2(c), 12.2(d) and 12.2(e)
hereof, AVIF agrees to indemnify and hold harmless the Indemnified Parties from
and against any and all losses, claims, damages, liabilities (including amounts
paid in settlement thereof with, the written consent of AVIF) or actions in
respect thereof (including, to the extent reasonable, legal and other expenses)
to which the Indemnified Parties may become subject directly or indirectly under
any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or actions directly or indirectly result from or arise out
of the failure of any Fund to operate as a regulated investment company in
compliance with (i) Subchapter M of the Code and regulations thereunder, or (ii)
Section 817(h) of the Code and regulations thereunder, including, without
limitation, any income taxes and related penalties, rescission charges,
liability under state law to Participants asserting liability against LIFE
COMPANY pursuant to the Contracts, the costs of any ruling and closing agreement
or other settlement with the IRS, and the cost of any substitution by LIFE
COMPANY of Shares of another investment company or portfolio for those of any
adversely affected Fund as a funding medium for each Account that LIFE COMPANY
reasonably deems necessary or appropriate as a result of the noncompliance.
(c) AVIF shall not be liable under this Section 12.2 with respect to any
losses, claims, damages, liabilities or actions to which an Indemnified Party
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance by that Indemnified Party of its duties or by
reason of such Indemnified Party's reckless disregard of its obligations and
duties (i) under this Agreement, or (ii) to LIFE COMPANY, UNDERWRITER, each
Account or Participants.
(d) AVIF shall not be liable under this Section 12.2 with respect to any
action against an Indemnified Party unless the Indemnified Party shall have
notified AVIF in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the action shall have
been served upon such Indemnified Party (or after such Indemnified Party shall
have received notice of such service on any designated agent), but failure to
notify AVIF of any such action shall not relieve AVIF from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this Section 12.2. Except as otherwise provided
herein, in case any such action is brought against an Indemnified Party, AVIF
will be entitled to participate, at its own expense, in the defense of such
action and also shall be entitled to assume the defense thereof (which shall
include, without limitation, the conduct of any ruling request and closing
agreement or other settlement proceeding with the IRS), with counsel approved by
the Indemnified Party named in the action, which approval shall not be
unreasonably withheld. After notice from AVIF to such Indemnified Party of
AVIF's election to assume the defense thereof, the Indemnified Party will
cooperate fully with AVIF and shall bear the fees and expenses of any additional
counsel retained by it, and AVIF will not be liable to such Indemnified Party
under this Agreement for any legal or other expenses subsequently by such
Indemnified Party independently in connection with the defense thereof, other
than reasonable costs of investigation.
23
<PAGE>
(e) In no event shall AVIF be liable under the indemnification provisions
contained in this Agreement to any individual or entity, including, without
limitation, LIFE COMPANY, UNDERWRITER or any other Participating Insurance
Company or any Participant, with respect to any losses, claims, damages,
liabilities or expenses that arise out of or result from (i) a breach of any
representation, warranty, and/or covenant made by LIFE COMPANY or UNDERWRITER
hereunder or by any Participating Insurance Company under an agreement
containing substantially similar representations, warranties and covenants; (ii)
the failure by LIFE COMPANY or any Participating Insurance Company to maintain
its segregated asset account (which invests in any Fund) as a legally and
validly established segregated asset account under applicable state law and as a
duly registered unit investment trust under the provisions of the 1940 Act
(unless exempt therefrom); or (iii) the failure by LIFE COMPANY or any
Participating Insurance Company to maintain its variable annuity or life
insurance contracts (with respect to which any Fund serves as an underlying
funding vehicle) as annuity contracts or life insurance contracts under
applicable provisions of the Code.
12.3 Effect of Notice.
----------------
Any notice given by the indemnifying Party to an Indemnified Party referred
to in Sections 12. 1(c) or 12.2(d) above of participation in or control of any
action by the indemnifying Party will in no event be deemed to be an admission
by the indemnifying Party of liability, culpability or responsibility, and the
in Party will remain free to contest liability with respect to the claim among
the Parties or otherwise.
12.4 Successors
----------
A successor by law of any Party shall be entitled to the benefits of the
indemnification contained in this Section 12.
Section 13. Applicable Law
---------------------------
This Agreement will be construed and the provisions hereof interpreted
under and in accordance with Maryland law, without regard for that state's
principles of conflict of laws.
Section 14. Execution in Counterparts
--------------------------------------
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together will constitute one and the same instrument.
Section 15. Severability
-------------------------
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement will not
be affected thereby.
24
<PAGE>
Section 16. Rights Cumulative
------------------------------
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, that the Parties are entitled to under federal and state
laws.
Section 17. Headings
---------------------
The Table of Contents and headings used in this Agreement are for
purposes of reference only and shall not limit or define the meaning of the
provisions of this Agreement.
Section 18. Confidentiality
----------------------------
AVIF acknowledges that the identities of the customers of LIFE COMPANY
or any of its affiliates (collectively, the "LIFE COMPANY Protected Parties" for
purposes of this Section 18), information maintained regarding those customers,
and all computer programs and procedures or other information developed by the
LIFE COMPANY Protected Parties or any of their employees or agents in connection
with LIFE COMPANY's performance of its duties under this Agreement are the
valuable property of the LIFE COMPANY Protected Parties. AVIF agrees that if it
comes into possession of any list or compilation of identities of or other
information about the LIFE COMPANY Protected Parties' customers, or any other
information or property of the LIFE COMPANY Protected Parties, other than such
information as may be independently developed or compiled by AVIF from
information supplied to it by the LIFE COMPANY Protected Parties' customers who
also maintain accounts directly with AVIF, AVIF withhold such information or
property in confidence and refrain from using, disclosing or distributing any of
such information or other property except: (a) with LIFE COMPANY's prior written
consent; or (b) as required by law or judicial process. LIFE COMPANY
acknowledges that the identities of the customers of AVIF or any of its
affiliates (collectively the "AVIF Protected Parties" for purposes of this
Section 18), information maintained regarding those customers, and all computer
programs and procedures or other information developed by the AVIF Protected
Parties or any of their employees or agents in connection with AVIF's
performance of its duties under this Agreement are the valuable property of the
AVIF Protected Parties. LIFE COMPANY agrees that if it comes into possession of
any list or compilation of the identities of or other information about the AVIF
Protected Parties' customers or any other information or property of the AVIF
Protected Parties, other than such information as may be independently developed
or compiled by LIFE COMPANY from information supplied to it by the AVIF
Protected Parties' customers who also maintain accounts directly with LIFE
COMPANY, LIFE COMPANY will hold such information or property in confidence and
refrain from using, disclosing or distributing any of such information or other
property. except: (a) with AVIF's prior written consent; or (b) as required by
law or judicial process. Each party acknowledges that any breach of the
agreements in this Section 18 would result in immediate and irreparable harm to
the other parties for which there would be no adequate remedy at law and agree
that in the event of such a breach, the other parties will be entitled to
equitable relief by way of temporary and permanent injunctions, as well as such
other relief as any court of competent jurisdiction deems appropriate.
25
<PAGE>
Section 19. Trademarks and Fund Names
--------------------------------------
(a) A I M Management Group Inc. ("AIM" or "licensor"), an affiliate
of AVIF, owns all right, title and interest in and to the name, trademark and
service mark "AIM" and such other trade names, trademarks and service marks as
may be set forth on Schedule B, as amended from time to time by written notice
from AIM to LIFE COMPANY (the "AIM licensed marks" or the "licensor's licensed
marks") and is authorized to use and to license other persons to use such marks.
LIFE COMPANY and its affiliates are hereby granted a non-exclusive license to
use the AIM licensed marks in connection with LIFE COMPANY's performance of the
services contemplated under this Agreement, subject to the terms and conditions
set forth in this Section 19.
(b) The grant of license to LIFE COMPANY and its affiliates ( the
"licensee") shall terminate automatically upon termination of this Agreement.
Upon automatic termination, the licensee shall cease to use the licensor's
licensed marks, except that LIFE COMPANY shall have the right to continue to
service any outstanding Contracts bearing any of the AIM licensed marks. Upon
AIM's elective termination of this license, LIFE COMPANY and its affiliates
shall immediately cease to issue any new activity or life insurance contracts
bearing any of the AIM licensed marks and shall likewise cease any activity
which suggests that it has any right under any of the AIM licensed marks or that
it has any association with AIM except that LIFE COMPANY shall have the right to
continue to service outstanding Contracts bearing any of the AIM licensed marks.
(c) The licensee shall obtain the prior written approval of the
licensor for the public release by such licensee of any materials bearing the
licensor's licensed marks. The licensor's approvals shall not be unreasonably
withheld.
(d) During the term of this grant of license, a licensor may request
that a licensee submit samples of any materials bearing any of the licensor's
licensed marks which were previously approved by the licensor but, due to
changed circumstances, the licensor may wish to reconsider. If, on
reconsideration, or on initial review, respectively, any such samples fail to
meet with the written approval of the licensor, then the licensee shall
immediately cease distributing such disapproved materials. The licensor's
approval shall not be unreasonably withheld, and the licensor, when requesting
reconsideration of a prior approval, shall assume the reasonable expenses of
withdrawing and replacing such disapproved materials. The licensee shall obtain
the prior written approval of the licensor for the use of any new materials
developed to replace the disapproved materials, in the manner set forth above.
(e) The licensee hereunder: (i) acknowledges and stipulates that, to
the best of the knowledge of the licensee, the licensor's licensed marks are
valid and enforceable trademarks and/or service marks and that such licensee
does not own the licensor's licensed marks and claims no rights therein other
than as a licensee under this Agreement; (ii) agrees never to contend otherwise
in legal proceedings or in other circumstances; and (iii) acknowledges and
agrees that the use of the licensor's licensed marks pursuant to this grant of
license shall inure to the benefit of the licensor.
26
<PAGE>
Section 20. Parties to Cooperate
---------------------------------
Each party to this Agreement will cooperate with each other party and
all appropriate governmental authorities (including, without limitation, the
SEC, the NASD and state insurance regulators) and will permit each other and
such authorities reasonable access to its books and records (including copies
thereof) in connection with any investigation or inquiry relating to this
Agreement or the transactions contemplated hereby.
-------------------------------------
27
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized officers
signing below.
AIM VARIABLE INSURANCE FUNDS, INC.
Attest: By:
---------------------------- ------------------------------------
Nancy L. Martin Name: Robert H. Graham
Assistant Secretary Title: President
LIFE INSURANCE COMPANY, on behalf of
itself and its separate accounts
Attest: By:
---------------------------- ---------------------------------
Name: Name:
---------------------------- ---------------------------------
Title: Title:
---------------------------- ---------------------------------
SEPARATE ACCOUNT UNDERWRITER
Attest: By:
---------------------------- ---------------------------------
Name: Name:
---------------------------- ---------------------------------
Title: Title:
---------------------------- ---------------------------------
28
<PAGE>
SCHEDULE A
FUNDS AVAILABLE UNDER THE CONTRACTS
- - -----------------------------------
. AIM VARIABLE INSURANCE FUNDS, INC.
[LIST APPLICABLE PORTFOLIOS]
SEPARATE ACCOUNTS UTILIZING THE FUNDS
- - -------------------------------------
CONTRACTS FUNDED BY THE SEPARATE ACCOUNTS
- - -----------------------------------------
.
29
<PAGE>
SCHEDULE B
. AIM VARIABLE INSURANCE FUNDS, INC.
AIM__________________Fund
. AIM and Design
30
<PAGE>
AMENDMENT TO FUND EXHIBIT 1.A(8)(b)(i)
PARTICIPATION AGREEMENT
-----------------------
The Fund Participation Agreement made by and among Security Life of Denver
("Insurance Company"), Van Eck Investment Trust ("Trust") and the Trust's
investment adviser, Van Eck Associates Corporation ("Adviser") is amended as
follows:
The Exhibit A (Amended) attached hereto is substituted for the original
Exhibit A.
SECURITY LIFE OF DENVER
By
- - ---------------------------- --------------------------------
Date
VAN ECK INVESTMENT TRUST
By
- - ---------------------------- --------------------------------
Date
VAN ECK ASSOCIATES CORPORATION
By
- - ---------------------------- --------------------------------
Date
<PAGE>
EXHIBIT A (Amended)
FUNDS
Worldwide Bond Fund
Worldwide Emerging Markets Fund
Worldwide Real Estate Fund
Worldwide Balanced Fund
Worldwide Hard Assets (previously known as Gold and Natural Resources)
<PAGE>
EXHIBIT 1.A(10)(a)(i)
Flexible
Premium
Variable
Life
Insurance
Application
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
[LOGO OF SECURITY LIFE
Q2006-9/97 APPEARS HERE]
<PAGE>
[LOGO OF SECURITY LIFE APPEARS HERE] Security Life of Denver Insurance Company
1290 Broadway
Denver, CO 80203
303-860-1290
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE APPLICATION
INSTRUCTIONS
- - --------------------------------------------------------------------------------
FOR ALL APPLICATIONS
. Use the application approved for the state in which the applicant owner will
sign the application.
. Use dark ink to complete the application.
. Print LEGIBLY to avoid issue errors.
. Attach a complete illustration and all schedules associated with this
application to expedite policy issue process and ensure that the policy is
issued accordingly.
. Incomplete applications may require an amendment to be signed upon delivery,
or may be returned, which will delay the issue process.
. The issue state and appropriate application form will be determined by the
state in which the application was signed by the owner-applicant.
- - --------------------------------------------------------------------------------
SIGNATURES REQUIRED, Page 10:
. The signature of all proposed insureds (parent or guardian of the proposed
insured if below age 15).
. The signature(s) of the owner. If a corporation is the owner, one officer,
other than the proposed insured, should sign and indicate name of
corporation and title of signing officer.
. The signature of all agent/registered representative(s) included in the
sale. (Page 10 and Registered Representative's Report.)
APPLICATION -- PART I
- - --------------------------------------------------------------------------------
SECTION A:
A-3: Exercise Right of Exchange Rider -- complete this box to identify policy
to be exchanged and return the policy along with the application and
medical information on the new proposed insured.
A-4: If the application is employer sponsored, and the policy will be corporate
owned, this question should be answered "No."
- - --------------------------------------------------------------------------------
SECTION B: Proposed Insured Information
B-1: The legal name of the insured will appear on the policy as indicated in
this space.
B-4 Insurance age is calculated as age nearest birthday.
- - --------------------------------------------------------------------------------
SECTION C AND SECTION D: Owner and Beneficiary Designations
. If you are designating more than one owner and/or beneficiary, use Special
Instructions, Section O, and indicate the second owner's name and/or
percentage of the beneficiary split. For example:
John Doe, Husband, 70%
Mary Doe, Mother, 30%
NOTE: The amount must be stated in percentages. A dollar amount may not be
specified.
. If you are designating a trust as the owner and/or beneficiary, include
the name of the Trustee, the name of the Trust and the date of the Trust.
For example:
John Doe, Trustee, of the Revocable Life Insurance Trust of
James Doe, dated November 1, 1991.
. When you are designating more than one owner, include the social security
number or tax identification number for each respective owner in Special
Instructions, Section O.
. If you have children as owners or beneficiaries, please refer to the
brochure entitled "Your Minor Child."
- - --------------------------------------------------------------------------------
SECTION F: Special Dating Requested
. This section provides an option for indicating a specific age and date on
which the policy applied for will be issued. This date is the POLICY DATE
only, and may differ from the INVESTMENT DATE.
- - --------------------------------------------------------------------------------
SECTION J: Premium Information
J-1: Consult your Service Guide for List Bill and EFT guidelines.
J-2: Electronic Funds Transfer (EFT) is a premium payment method which the
payor may elect. If selected, the scheduled premium will automatically be
drafted from the payor's checking account.
J-3: If any Authorized Withdrawal/EFT is collected with this application, the
required premium amount as outlined in the prospectus must be collected in
order to put the policy inforce.
- - --------------------------------------------------------------------------------
SECTION K: Suitability
. Must be completed or application will be returned.
. The prospectus date should reflect the date printed on the cover of the
prospectus provided at the time of solicitation.
- - --------------------------------------------------------------------------------
SECTION L: 1035 Exchange Information
L-4: For purposes of 1035 Exchanges, this information is required to carry over
the correct cost basis and loan amount.
- - --------------------------------------------------------------------------------
SECTION O: Special Instructions
. Used for any additional information (for example, billing and mailing
instructions) and continuing your answers for owner and beneficiary
designations.
. If you are requesting child rider(s) and need to request beneficiary(ies)
other than shown in Section D, please indicate here. Include name(s) of
beneficiary(ies) and relationship.
. May be used to continue answers to question L-12, if necessary.
. Payor, accepting rating on formal application only.
APPLICATION -- PART II
- - --------------------------------------------------------------------------------
Medical Information
This part of the application must be completed for each person proposed for
coverage unless the person is medically examined.
- - --------------------------------------------------------------------------------
<PAGE>
[LOGO OF SECURITY LIFE APPEARS HERE] Security Life of Denver Insurance Company
1290 Broadway
Denver, CO 80203
303-860-1290
Application for Flexible Premium Variable Life Insurance to Security Life of
Denver Insurance Company
PART I
Please Print All Information Using Dark Ink
================================================================================
SECTION A -- General Information (Complete for all cases)
A-1 [_] Check here if insurance is for PENSION or similar tax qualified ERISA
plan.
A-2 If above statement checked, list plan type [______________________________]
(Example: Profit-Sharing;
Defined Contribution; etc.)
A-3 [_] Exercise Right of Exchange Rider
Name of Insured under Policy to be Exchanged Policy Number
[__________________________________________] [___________]
A-4 Employer Sponsored Plans check one:
Employee Owned? [_] Yes [_] No
================================================================================
SECTION B -- Proposed Insured (Complete for all cases. To apply for additional
insureds complete Section G)
B-1 Name (Print full name, include suffix)
(First, Middle, Last, Suffix)
[_______________________________________________________________________]
B-2 Sex [_] Male [_] Female
Month Day Year
B-3 Birthdate [_][_] [_][_] [_][_][_][_]
(Age Nearest Birthday) (State)
B-4 Insurance Age [_][_] B-5 Birthplace [___________]
B-6 Social Security Number [_][_][_]-[_][_]-[_][_][_][_]
B-7 Telephone Number [_][_][_]-[_][_][_]-[_][_][_][_]
B-8 Height [___________] B-9 Weight [___________]
B-10 Address
(Street, Apt. No.)
[_________________________________________________________________________]
(City) (State)
[___________________________________________] [_______________________]
(Zip Code)
[_][_][_][_][_]-[_][_][_][_]
B-11 Occupation
[_______________________________________________]
B-12 Describe duties
[_______________________________________________]
B-13 Employer Name
[_____________________________________________________________]
Month Year
B-14 Employment date: [_][_] [_][_]
================================================================================
SECTION C -- Owner (Complete only if other than Proposed Insured)
C-1 Owner Name (Print full name, include suffix--if name to appear differently
on policy, indicate in Section O)
(First, Middle, Last, Suffix)
[_________________________________________________________________________]
C-2 Relationship to Proposed Insured
[______________________________________________]
C-3 Social Security Number or Tax I.D. No. (Include any hyphens)
[_][_][_][_][_][_][_][_][_][_][_]
C-4 Owner Address
(Street, Apt. No.)
[_________________________________________________________________________]
(City) (State)
[__________________________________________] [_______________________]
(Zip Code)
[_][_][_][_][_]-[_][_][_][_]
================================================================================
SECTION D -- Beneficiaries (Complete for all cases)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
D-1 Primary Beneficiary(ies) (Print Full Names) Relationship to Proposed Insured Birthdate
Contingent Beneficiary(ies) (Print Full Names) Relationship to Proposed Insured Birthdate
</TABLE>
1
<PAGE>
SECTION E -- Plan Information (Complete for all cases)
E-1 Flexible Premium Variable Life Insurance Policy
a. Product Name [__________________________________________________]
b. Stated Death Benefit $ [___________________]
c. Adjustable Term Rider [_] Yes [_] No
If Yes: Initial Target Death Benefit $ [______________]
(Attach Schedule from Illustration for subsequent Target
Death Benefit changes.)
d. Scheduled Periodic Premium $ [______________] (If premium varies from
year to year attach schedule)
e. [_] Option 1 (Stated Death Benefit. If no option selected, Option 1
will apply.)
[_] Option 2 (Stated Death Benefit plus Account Value.)
f. [_] Guideline Premium Cash Value Corridor Test
[_] Cash Value Accumulation Test
g. First Year Pour-In (if any) $ [____________]
h. Additional Riders
[_] Accidental Death $ [____________]
[_] Additional Insured $ [____________] (Complete section G)
[_] Right to Exchange
[_] Waiver of Cost of Insurance
[_] Waiver of Specified Premium $ [____________]
[_] Child's Insurance Rider (# of Units) [______] (Complete section H)
[_] Guaranteed Insurability Rider [_____________]
[_] Other [_________________________________________________________]
SECTION F -- Special Dating Requested
(If neither box checked below, policy will be issued at age nearest birthday as
of issue date.)
F-1 [_] Date to Save Age Specify Requested Age [______]
Mo Day Year
F-2 [_] Specific Date [_][_] [_][_] [_][_][_][_]
SECTION G -- Additional Insured Rider
G-1 Name of Proposed Additional Insured (If more than one additional insured,
specify details in special instructions, Section O)
(First, Middle, Last, Suffix)
[_________________________________________________________________________]
G-2 Relationship to proposed insured [________________________________________]
Month Day Year
G-3 Birthdate [_][_] [_][_] [_][_][_][_]
G-4 Social Security Number [_][_][_]-[_][_][_]-[_][_][_][_]
G-5 Height [______] G-6 Weight [______]
G-7 Insurance Age (Age nearest birthday) [_][_]
G-8 Show beneficiary for additional insured if different from beneficiary named
in Section D.
[Name:______________] [Relationship:____________] [Birthdate:___________]
SECTION H -- Child Rider
Birthdate Mo/Day/Yr Height Weight
H-1 Child / /
---------------------------------------------------------------------------
H-2 Child / /
---------------------------------------------------------------------------
H-3 Child / /
---------------------------------------------------------------------------
H-4 Child / /
2
<PAGE>
================================================================================
SECTION I -- Guaranteed Minimum Death Benefit Option
I-1 Guarantee Period (Select one, if option desired; otherwise there will be no
Guaranteed Period)
[_] Later of ten years or proposed insured's age 65
[_] Lifetime of proposed insured
Note: The Guarantee Period will terminate if:
1. You fail to pay the required Guarantee Period Annual premium defined
in your prospectus; or
2. Your Account Value on any Monthly Processing date is not diversified
according to the following rules:
a. No more than 35% of your Net Account Value may be invested in any
one division; and
b. Your Net Account Value must be invested in at least five
divisions.
You will satisfy these diversification requirements if: (i) you
participate in the Automatic Rebalancing feature defined in and
governed by the policy prospectus in effect at the time you elect the
Guarantee Period and your Automatic Rebalancing allocations comply
with the diversifications specified above; or (ii) you elect Dollar
Cost Averaging and direct the resulting transfers into at least four
other Divisions with no more than 35% of any transfer being to any one
division.
There may be other circumstances that will cause the Guarantee Period
to terminate before its scheduled expiration date. See your prospectus
for further information.
================================================================================
SECTION J -- Premium Information
J-1 Premium Mode (If no option selected--Premium mode will be quarterly)
[_] Annual
[_] Quarterly
[_] Semi-Annual
[_] Monthly (only available for List Bill and Authorized Withdrawal/EFT)
J-2 Payment Method (If no option selected--Payment Method will be Direct Bill
for Annual, Semi-Annual or Quarterly Premium Mode or EFT for Monthly Mode)
[_] Direct Bill (not available for monthly)
[_] Single Premium
[_] List Bill Existing List Bill Number _________________________
[_] Authorized Withdrawal (Complete AuthorizedWithdrawal/EFT Form)
J-3 Premium collected with application
The agent is not authorized to collect any premium before delivering a
policy unless the Binding Limited Life Insurance Coverage form has been
completed and signed by the agent, applicant and proposed insured and a
copy given to the applicant. There is no coverage before delivery of the
policy except as provided by that form.
<TABLE>
<CAPTION>
Yes No
<S> <C> <C>
[_] [_] a. Has agent collected any premium (including any Authorized Withdrawal/EFT Form) with this
application? If yes, total premium (including any pour-in) collected $ [__________]
[_] [_] b. If answer to (a) is "Yes," has agent complied with the Binding Limited Life Insurance
Coverage requirements?
[_] [_] c. Has the applicant signed and received a Binding Limited Life Insurance Coverage form in
connection with this application? Attach signed copy of Binding Limited Life
Insurance Coverage form.
</TABLE>
NOTE: If any Authorized Withdrawal/EFT is collected with this application,
the required premium amount as outlined in the prospectus must be collected
in order to put the policy inforce.
3
<PAGE>
================================================================================
SECTION J -- Premium Information (continued)
J-4 Initial Premium Allocation. Please allocate your Initial Premium to the
Guaranteed Interest Division and/or among the Variable Account Divisions.
Please use whole number percentages for each Division elected. You must
allocate at least 1% of your Premium Allocation to each Division in which
you elect to invest. The total must equal 100%.
_______% GUARANTEED INTEREST DIVISION
VARIABLE ACCOUNT DIVISIONS
AIM INVESCO
____% V.I. Government Securities ____% Industrial Income
____% V.I. Capital Appreciation ____% High Yield
____% Utilities
Alger American ____% Total Return
____% Small Capitalization ____% VIF Small Company Growth
____% MidCap Growth
____% Growth NEUBERGER & BERMAN
____% Leveraged Allcap ____% Limited Maturity Bond
____% Growth Portfolio
FIDELITY INVESTMENTS ____% Partners Portfolio
____% Asset Manager
____% Growth Portfolio
____% Overseas
____% Money Market
____% Index 500
VAN ECK
____% Worldwide Hard Assets
____% Worldwide Emerging Markets
____% Worldwide Bond
____% Worldwide Real Estate
================================================================================
SECTION K -- Suitability
a. Have you, the Proposed Insured, and the Owner, if other than the
Proposed Insured, received a current Prospectus dated
______________________ for the Variable Life Insurance policy applied
for and current prospectus for each of the Variable Account Divisions?
[_] Yes [_] No
b. Do you understand that under the policy applied for the amount or
duration of the death benefit may vary under specified conditions;
policy values may increase or decrease in accordance with the
investment experience of investment divisions in a Separate Account,
and may increase in accordance with the interest credited in the
Guaranteed Interest Division; and the amount payable at the Final
Policy Date is not guaranteed but is dependent on the amount then in
the Account Value? [_] Yes [_] No
c. Do you understand that any personalized illustrations received are
based on hypothetical interest assumptions which may not be indicative
of actual future investment experience of our Separate Account or of
actual interest credited in our Guaranteed Interest Division?
[_] Yes [_] No
d. With this in mind, is the policy in accord with your insurance
objectives and your anticipated financial needs? [_] Yes [_] No
4
<PAGE>
================================================================================
SECTION L -- Personal Information
L-1 List life insurance policies on all persons proposed for coverage (1) now
in force or (2) applied for within the last 12 months, or (3) pending now.
If NONE, Check this box [_]
<TABLE>
<CAPTION>
Name of Year A.D. Business or Indicate if Inforce,
Proposed Insured Company Issued Amount Amount Personal Applied for, or Pending
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
Yes No
L-2 Has any proposed insured ever been declined for insurance
(or reinstatement) or been offered insurance with
restricted benefits or at other than standard rates?
(If "Yes" give details in section L-12) [_] [_]
L-3 Is this insurance to replace, or will it cause any change
in, any insurance or annuity on any person proposed for
coverage? (If "Yes" submit a completed replacement form
with this application.) [_] [_]
L-4 a. Is this insurance intended to be a tax free exchange
1035 Exchange? (If "Yes" indicate Company in section
L-12) [_] [_]
b. If "Yes" will any policy loan be carried over? [_] [_]
L-5 Has any person proposed for coverage:
a. ever smoked cigarettes? (If "Yes," give name and
details in section L-12) [_] [_]
b. ever used tobacco in any form other than cigarettes?
(If "Yes" give name and details in section L-12) [_] [_]
c. ever stopped smoking cigarettes? (If "Yes" give name
and date last smoked in section L-12) [_] [_]
d. ever stopped using tobacco in any form other than
cigarettes. (If "Yes" give name, type and date
last used in section L-12) [_] [_]
L-6 Within the last 3 years or within the next 12 months,
has any person proposed for coverage:
a. flown (or planned to fly) other than as a passenger
on a regularly scheduled airline? (If "Yes" complete
Aviation Supplement.) [_] [_]
b. had a drivers license denied, revoked, or suspended;
had three or more moving violations; been convicted of
an alcohol or drug related driving offense; been
involved in two or more auto accidents? (If "Yes"
give details in section L-12) [_] [_]
c. participated in (or intend to participate in) vehicle
racing (on land or water), ballooning, bobsledding,
hang gliding, ultralight aviation, horse racing,
mountaineering, rodeo, scuba/skin diving, skydiving/
parachuting, or bungee cord jumping? (If "Yes"
complete Avocation Supplement) [_] [_]
L-7 List Driver's License No. [_][_][_][_][_][_][_][_][_][_][_][_]
State [______]
L-8 Does any person proposed for coverage contemplate traveling
or residing outside the U.S.A. or Canada within the next 12
months? (If "Yes" give details in section L-12) [_] [_]
L-9 Has any person proposed for coverage been convicted of a
felony within the last 5 years? (If "Yes" give details in
section L-12) [_] [_]
L-10 Has any person proposed for coverage:
a. ever had, or now have, any type of heart disease,
cancer, leukemia, or malignant tumor? (If "Yes"
give details in section L-12) [_] [_]
b. ever been diagnosed by a licensed member of the medical
profession as having Acquired Immune Deficiency Syndrome
(AIDS) or any immune deficiency or disorder? (Do Not
Answer This Question If You Reside In Nevada.) (If "Yes"
give details in section L-12) [_] [_]
L-11 Does any person proposed for coverage now participate in any
regular physical exercise program? [_] [_]
L-12 Details of "YES" Answers to Questions L-2 through L-11 [_] [_]
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
5
<PAGE>
================================================================================
SECTION M -- Medical Exam Certificate (Complete when submitting medical
examination of another insurance company.)
M-1 The attached examination is on the life of: [____________________________]
M-2 Name of insurance company for which examination was made and date of
examination:
--------------------------------------------------------------------------
Company Date of Examination
--------------------------------------------------------------------------
M-3 To the best of the proposed insured's knowledge and belief, are the
statements in the examination true as of today?
[_] Yes [_]No (If "No," explain in "REMARKS")
M-4 Has the proposed insured consulted a doctor or other practitioner or
received medical or surgical advice since the date of the examination?
[_] Yes [_]No (If "No," explain in "REMARKS")
--------------------------------------------------------------------------
Remarks to No. M-3 and M-4
--------------------------------------------------------------------------
================================================================================
SECTION N -- Financial Information Must be completed where the face amount
exceeds (1) $200,000 for business insurance, (2) $300,000 for an insured 65 and
under, or (3) $100,000 for an insured over 65.
N-1 What is the purpose of the insurance applied for? [______________________]
If the insurance applied for is personal, what is the proposed insured's:
Annual Earned Income $ [__________]
Annual Interest & Other Income $ [__________]
Total Assets $ [__________]
Total Liabilities $ [__________]
Total Net Worth $ [__________]
N-2 If Business Insurance:
a. Annual net profit (before taxes, past two years)
Last Year 2 Years Ago
$ [____________] $ [____________]
b. Business reason for insurance (check at least one box and furnish
details)
[_] Key Person [_] Stock Redemption/Buy and Sell [_] Other
c. If Key Person insurance:
(1) Are all partners or key people to be covered? [_] Yes [_] No
(If "No," explain)
-----------------------------------------------------------
-----------------------------------------------------------
(2) Does proposed insured have an ownership interest in the business?
[_] YES [_] NO
If "Yes," what is proposed insured's percent of ownership? [____%]
(3) What is proposed insured's annual income? $ [____________________]
6
<PAGE>
================================================================================
SECTION N -- Financial Information (Continued) Must be completed where the face
amount exceeds (1) $200,000 for business insurance, (2) $300,000 for an insured
65 and under, or (3) $100,000 for an insured over 65.
d. If to fund stock redemption, is there a written agreement?
[_] Yes [_] No
(1) What is the book value of the business? $ [____________]
(2) What is the market value of the business? $ [____________]
(3) How was the value determined? [__________________________________]
N-3 Is this insurance to guarantee a loan? [_] Yes [_] No
a. If "Yes," is the lender requiring this insurance? [_] Yes [_] No
b. Is the loan finalized? [_] Yes [_] No
c. What is the term of the loan? (Months) [_________]
d. Name of lender: [_____________________________________________________]
e. Amount of loan: [_____________________________________________________]
f. Purpose of loan:[_____________________________________________________]
g. Are others being insured for the same purpose? [_] Yes [_] No
If Yes, who and for what amount?
[____________________________________] Amount $ [____________________]
[____________________________________] Amount $ [____________________]
N-4 Additional remarks about purpose of the insurance and how the amount of
insurance was determined.
---------------------------------------------------------------------------
Remarks to Section N
---------------------------------------------------------------------------
================================================================================
SECTION O -- Special Instructions
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
7
<PAGE>
- - --------------------------------------------------------------------------------
PART II
- - --------------------------------------------------------------------------------
Please Print All Information Using Dark Ink
Part II must be completed for each person proposed for coverage unless the
person is medically examined.
================================================================================
SECTION A -- Personal Physicians
A-1 For each person proposed for coverage, give the name and address of the
personal physicians and the date and reason the physician was last seen.
If NONE, check here [_]
----
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Proposed Insured's Name Name and Address of Physician Date of Reason Last Seen
<S> <C> <C>
-------------------------------------------------------------------------------------------
-----------------------------------------------------------------
-----------------------------------------------------------------
-------------------------------------------------------------------------------------------
-----------------------------------------------------------------
-----------------------------------------------------------------
-------------------------------------------------------------------------------------------
-----------------------------------------------------------------
-----------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
================================================================================
SECTION B -- Medical Information (Complete for each person proposed for
coverage.) (For all of Section B, circle each specific condition and give
details of all "Yes" answers in the Details Section following question B-11.
Give name of disease, symptoms, etc.; the date of onset; the duration; number of
attacks; and name and addresses of medical professional or hospital providing
services.)
B-1 Has any person proposed for coverage ever been treated for, or been told by
a member of the medical profession that the person has:
Yes No
a. pain, pressure, or discomfort in the chest or arms; high
blood pressure; heart murmur; irregular heartbeat; or any
other disease or disorder of the heart? [_] [_]
b. anemia; leukemia; or any other disorder of the blood,
veins or arteries? [_] [_]
c. asthma; bronchitis; pneumonia; tuberculosis; emphysema;
shortness of breath; chronic cough,or any other disorder
of the lungs or respiratory system? [_] [_]
d. mental or emotional disorder, nervous breakdown;
epilepsy; convulsions; chronic fatigue; fainting spells;
paralysis; stroke; or any other disorder of the brain or
nervous system? [_] [_]
e. significant weight loss; ulcer; colitis; diverticulitis;
hepatitis; cirrhosis; persistent diarrhea; or other disease
of the liver, gall bladder, pancreas, stomach or intestines? [_] [_]
f. diabetes; thyroid; recurrent enlarged glands; or other
glandular disease or disorder? [_] [_]
g. arthritis; gout; or any bone, joint, muscle, or skin
disorder? [_] [_]
h. polyp, tumor, or cancer? [_] [_]
i. disorder of the urinary tract or kidneys; urethritis;
cystitis; sugar, albumin, or blood in the urine? [_] [_]
j. prostate or testicular disease; venereal disease; herpes;
or disease of the uterus, ovaries or breasts? [_] [_]
k. any disorder of the eyes; ears; nose; or throat? [_] [_]
l. any other health impairment or medically or surgically
treated condition within the last 5 years not mentioned
above? [_] [_]
8
<PAGE>
Yes No
B-2 Has any person proposed for coverage ever been treated for
or been told by a licensed member of the medical profession
that the person has Acquired Immune Deficiency Syndrome
(AIDS) or any disorder or deficiency of the Immune System?
(Do Not Answer This Question If You Reside In Nevada.) [_] [_]
B-3 Within the past 10 years, has any person proposed for
coverage:
a. tested positive in a test to detect antibodies to the
AIDS virus (Human T-Cell Lymphotrophic virus type III;
HTLV-III, Human Immunodeficiency Virus [HIV])? (Do Not
Answer This Question If You Reside in Connecticut or
Maine.) [_] [_]
b. had a blood transfusion? [_] [_]
B-4 Within the past 5 years, has any person proposed for coverage
been a patient in or had treatment at a hospital, clinic,
sanitarium or other medical facility? [_] [_]
B-5 Is any person proposed for coverage now under regular medical
observation by, or taking treatment from, a member of the
medical profession? [_] [_]
B-6 Other than as stated in the answers above, has any person
proposed for coverage, within the last 5 years:
a. had a checkup or consultation with a member of the
medical profession? [_] [_]
b. had an electrocardiogram, x-ray, blood test or other test? [_] [_]
c. been advised by a member of the medical profession to have
any diagnostic test, hospitalization, or surgery which was
not completed? [_] [_]
---
B-7 Does any person proposed for coverage have a deformity or an
amputation? [_] [_]
B-8 Does any person proposed for coverage now take any medicine
prescribed by a member of the medical profession? [_] [_]
B-9 Except as legally prescribed by a physician, has any person
proposed for coverage ever used narcotics, cocaine, marijuana,
or any hallucinatory or mind altering substances in the past
10 years? [_] [_]
B-10 In the last 5 years, has any person proposed for coverage
received treatment for or joined an organization because of
the alcoholism or drug addiction of that person? [_] [_]
B-11 Has any parent, brother, or sister of any person proposed for
coverage ever had cancer; diabetes; high blood pressure; heart
or kidney disease; nervous or mental disorder; tuberculosis;
or hereditary disorder? [_] [_]
Details of "Yes" answers to questions B-1 through B-11
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
Ques. Name of
No. Proposed Insured Complete Details (including, if any, name of physician noted in Section A-1)
<S> <C> <C>
- - -----------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
SECTION C -- Family History
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Living Deceased
Family Member Age State of Health Age at Death/Cause
<S> <C> <C> <C>
- - --------------------------------------------------------------------------------
Father
- - --------------------------------------------------------------------------------
Mother
- - --------------------------------------------------------------------------------
Brothers
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Sisters
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
AGREEMENTS
All statements and answers in this application (which includes Part I, Part II,
and supplements and amendments) are true and complete to the best of my
knowledge and belief. I also agree that:
1. The statements and answers in this application will be relied upon and form
the basis of any insurance.
2. No information will be considered as having been given to Security Life
unless it is written in this application. (This paragraph does not apply in
the states of Maine, Missouri, Oregon, South Carolina, and South Dakota.)
3. No agent or any other unauthorized person can make or change any insurance
contract or give up any of Security Life's rights or requirements. Any
change must be in writing and signed by an officer of Security Life.
4. Security Life may amend this application by an appropriate notation in the
space designated "Home Office Corrections" in order to correct errors or
omissions or to conform the application with any policy that may be issued.
The acceptance of the policy constitutes a ratification of such amendments.
In those states, including Maryland, where change in amount, classification,
plan, premium, or benefit requires the written consent of the applicant, no
change may be ratified except by a written acceptance. We reserve the right
to make any changes required by law.
5. Insurance Under Policy Applied For - Except as may be provided in any
Binding Limited Life Insurance Coverage, no policy of insurance will be in
force until (1) the first policy premium is paid and (2) the policy is
delivered while the facts and health condition of the proposed insured(s)
are as represented in this application. When these conditions are satisfied,
the policy as delivered will then take effect.
6. Binding Limited Life Insurance Coverage - Any pre-delivery insurance
coverage is provided in the Binding Limited Life Insurance Coverage form.
That coverage is available only if: a premium is accepted by the agent; the
agent has authority to accept premium as set out in that form; and the form
is completed and signed by the agent, applicant, and proposed insured.
7. If the contract applied for is for a pension, profit-sharing, HR10, or other
tax qualified plan, any policy issued shall not be transferable other than
to the Insurer, except as directed by the Plan Administrator. Other
applicable provisions may be added to the contract.
8. I certify, under penalty of perjury, that my social security/tax
identification number(s) is shown and is correct and that I am not subject
to back up withholding.
AUTHORIZATION TO OBTAIN AND DISCLOSE INFORMATION
Security Life of Denver Insurance Company ("Security Life") may obtain
information about me or my minor children from: any physicians; medical
practitioner; hospital, clinic or other medical facility; employer; other
insurance companies or institutions; consumer reporting agency; or Medical
Information Bureau, Inc. (MIB, Inc.). The purpose is to evaluate my application
for insurance or benefits. Security Life may obtain an investigative consumer
report and any records or other information available as to diagnosis, treatment
and prognosis of any physical or mental condition.
Security Life may obtain any drug, physical and mental health, and alcohol-
related information which may be protected by federal or state laws and
regulations. As it pertains to alcohol and drug information covered by federal
regulation, this authorization may be revoked at any time by written notice to
Security Life. But any action taken before my written revocation is received by
Security Life will not be affected.
Security Life may make a brief report about me or my children to MIB, Inc.
Security Life may disclose information to: its reinsurers; those who perform
services for Security Life on my application for insurance or benefits: or those
companies to which I have applied or may apply for life or health insurance or
benefits. Disclosure may be made when required or permitted by law.
This is valid for two and one-half years from the date below. An original or
copy may be used by Security Life or its authorized representatives to obtain
information. I have read and received a copy of this authorization. I also have
a copy of the Notice of Information Procedures. It includes the MIB, Inc. and
Fair Credit Reporting Notices.
NOTICE: Any person who knowingly and with intent to injure, defraud, or deceive
any insurance company, files an application, statement or claim containing any
false, incomplete, or misleading information may be guilty of insurance fraud.
Signature of
Proposed Insured [_____________________________________] Date [________________]
(If below age 15, signature of parent or guardian)
Signature of Owner
(If other than proposed insured) [_____________________________________________]
OR (If applicable) Corporate (If a firm or corporation is to be owner,
Owner Signature the signature and title of an officer
other than the proposed insured is
required.)
Signed by Owner at [State________]
Signature of Spouse [__________________________________________________]
Signature of Additional Insured(s)
(If proposed for coverage) [___________________________________________________]
Except for any medical exam form, I certify that I have asked and recorded
completely and accurately the answers to all questions on this application. I
know of nothing else affecting the risk.
Signature of Agent/
Registered Rep. [________________________________Reg. Rep. Number______________]
Signature of Agent/
Registered Rep. [________________________________Reg. Rep. Number______________]
Signature of Agent/
Registered Rep. [________________________________Reg. Rep. Number______________]
[___________________________________] [_______________________________________]
Name of Broker/Dealer/Branch/OSJ Address of Broker/Dealer/Branch/OSJ
- - --------------------------------------------------------------------------------
HOME OFFICE
CORRECTIONS
(FOR HOME OFFICE
USE ONLY)
(Not applicable in West Virginia)
- - --------------------------------------------------------------------------------
10
<PAGE>
Registered Representative's Report
(Must be completed and signed for every application)
Yes No
1) Do you have knowledge or reason to believe that replacement
of existing insurance or annuity may be involved? [_] [_]
If Yes, explain:_____________________________________________
2) How long have you known the proposed insured? ______ Years
Are you related? [_] [_]
If so, how? _________________________________________________
3) Does the proposed insured speak English? [_] [_]
Was the application interpreted for and understood by the
proposed insured? [_] [_]
Are all persons proposed for coverage U.S. citizens? [_] [_]
If not, how long in U.S.? _____Mos. _____Yrs.
4) Did proposed insured approach you for this insurance? [_] [_]
5) What is the amount of insurance in force on the spouse of
the proposed insured? $______________________________________
6) If any proposed insured is a minor, what is the amount of
insurance on:
Father $___________ Mother $__________
Brothers $___________ Sisters $__________
7) Will the applicant accept this policy if it is a "Modified
Endowment" at issue? [_] [_]
8) If a medical exam is required, has it been ordered? [_] [_]
9) What is the source of the first premium payment:
[_] Applicant check
[_] Other (specify):_________________________________________
================================================================================
10) Writing Registered Representative (Print) [________________________________]
Writing Registered Representative (Sign) [_________________________________]
Date [_________________] Registered Representative Number:[_][_][_][_][_][_]
Production Credit Split
Variable
Agent Number Percent
------------ -------
------------ -------
------------ -------
- - --------------------------------------------------------------------------------
11) What was the PRIMARY purpose of the insurance?
PERSONAL PLANNING
A [_] Estate/Death Tax
B [_] Family Protection
C [_] Mortgage Protection
D [_] College Funding
E [_] Gift/Charitable
F [_] Retirement Maximizer
G [_] IRP/PPP/PRO
H [_] Savings
I [_] Other ________________________
BUSINESS PLANNING
J [_] Executive Bonus
K [_] Qualified Plan
L [_] Deferred Compensation
M [_] Buy-Sell
N [_] Key Executive
O [_] Employee Benefit
P [_] Other ________________________
================================================================================
12) Who was the PRIMARY decision-maker involved?
PERSONAL PLANNING
A [_] Insured
B [_] Insured and Spouse
C [_] Parent
D [_] Grandparent
E [_] Child(ren)
F [_] Other ________________________
BUSINESS PLANNING
G [_] Businessowner
H [_] Attorney
I [_] Accountant
J [_] Board of Directors
K [_] Trustee
L [_] Other ________________________
================================================================================
13) Did the Home Office or Regional Staff assist you? [_] Yes [_] No (If yes,
check all that apply.)
A [_] Illustration
B [_] Case Design
C [_] Sample Documents
D [_] Template Design
E [_] Estate Analysis
F [_] Business Analysis
G [_] Family Asset Review
H [_] Competition Services
I [_] Legal Consultation
J [_] Other ________________________
11
<PAGE>
(Detach and give to Applicant)
AGREEMENTS
All statements and answers in this application (which includes Part I, Part II,
and supplements and amendments) are true and complete to the best of my
knowledge and belief. I also agree that:
1. The statements and answers in this application will be relied upon and form
the basis of any insurance.
2. No information will be considered as having been given to Security Life
unless it is written in this application. (This paragraph does not apply in
the states of Maine, Missouri, Oregon, South Carolina, and South Dakota.)
3. No agent or any other unauthorized person can make or change any insurance
contract or give up any of Security Life's rights or requirements. Any
change must be in writing and signed by an officer of Security Life.
4. Security Life may amend this application by an appropriate notation in the
space designated "Home Office Corrections" in order to correct errors or
omissions or to conform the application with any policy that may be issued.
The acceptance of the policy constitutes a ratification of such amendments.
In those states, including Maryland, where change in amount, classification,
plan, premium, or benefit requires the written consent of the applicant, no
change may be ratified except by a written acceptance. We reserve the right
to make any changes required by law.
5. Insurance Under Policy Applied For-Except as may be provided in any Binding
Limited Life Insurance Coverage, no policy of insurance will be in force
until (1) the first policy premium is paid and (2) the policy is delivered
while the facts and health condition of the proposed insured(s) are as
represented in this application. When these conditions are satisfied, the
policy as delivered will then take effect.
6. Binding Limited Life Insurance Coverage-Any pre-delivery insurance coverage
is provided in the Binding Limited Life Insurance Coverage form. That
coverage is available only if: a premium is accepted by the agent; the agent
has authority to accept premium as set out in that form; and the form is
completed and signed by the agent, applicant, and proposed insured.
7. If the contract applied for is for a pension, profit-sharing, HR10, or other
tax qualified plan, any policy issued shall not be transferable other than
to the Insurer, except as directed by the Plan Administrator. Other
applicable provisions may be added to the contract.
8. I certify, under penalty of perjury, that my social security/tax
identification number(s) is shown and is correct and that I am not subject
to back up withholding.
NOTICE OF INFORMATION PROCEDURES
OUR UNDERWRITING PROCESS
This process is an evaluation of information about you. It is to see if you
qualify for the insurance requested. The information we review may vary with the
insurance applied for. We look at information about you such as: your age;
occupation; health; mode of living; avocation; and other personal information.
Answers on the application are the principal source of information. We may
contact other people or institutions personally, by phone, or by letter. The
purpose is to confirm or add to information you have provided. For example, we
may obtain information from your doctor, clinic, hospital, or other insurers. In
some cases, your Security Life agent may obtain information on our behalf. A
medical examination or laboratory tests may be requested.
NOTICE
Any person who knowingly and with intent to injure, defraud, or deceive any
insurance company, files an application, statement or claim containing any
false, incomplete, or misleading information may be guilty of insurance fraud.
MIB, INC.
Medical Information Bureau, Inc. ("MIB, Inc.") may provide Security Life with a
brief report about you. This is a nonprofit organization of life insurance
companies which has an information exchange for its members. Information that is
sent to MIB, Inc. by one member may be given to their member companies who have
a business need for it.
Upon your written request, MIB, Inc. will arrange for disclosure of any
information it may have in your file. If you question the accuracy of MIB's
information, you may request a correction according to the procedures in the
Federal Fair Credit Reporting Act. MIB's address is: P.O. Box 105, Essex
Station, Boston, Massachusetts 02112, telephone 617/426-3660.
CONSUMER REPORTS
In some cases, a Security Life representative may prepare a consumer report or
investigative consumer report about you or, Security Life may ask an independent
agency to prepare a consumer report or an investigative consumer report about
you. These reports may include information on your character; general
reputation; personal characteristics such as health, finances, and job, and mode
of living except as may be related directly or indirectly to your sexual
orientation. Any information obtained by the agency may be kept in its file and
later given to others who have a business need for it.
If an investigative consumer report is ordered by Security Life, the report will
include information obtained through interviews with your neighbors, friends, or
others you know. You may request a personal interview. The agency will make a
reasonable attempt to talk to you. It will include that information in its
report. The Federal Fair Credit Reporting Act gives you the right to make a
written request within a reasonable period of time, to receive additional
information from Security Life about the nature and scope of an investigation,
if one is made. We will provide the name, address, and phone number of any
agency we ask to prepare such a report. You may contact the agency directly to
learn about the contents of the report.
DISCLOSURE OF INFORMATION
Information we obtain about you is confidential. As permitted by law, we may
disclose information without further authorization to others such as: consumer
reporting agencies hired to prepare investigative reports; insurance companies
to which you have applied for coverage or benefits; those providing services for
us; those conducting bona fide actuarial, marketing, or scientific studies or
audits; and your attending doctor.
Upon written request, we will give you more information about these procedures.
YOUR RIGHT TO REVIEW INFORMATION
These are procedures by which you can make a written request to review personal
information in our policy file. However, Security Life will not disclose
information to you that was prepared for any anticipated claim or any civil or
criminal proceeding. We also have procedures by which you may request
correction, amendment, or deletion of any information in our files which you
believe to be inaccurate or irrelevant. Upon written request, we will provide
you with further information about these procedures.
We hope this notice helps explain our underwriting process. If you have any
additional questions, discuss them with your agent or contact us directly.
Security Life of Denver Insurance Company
1290 Broadway
Denver, CO 80203
303-860-1290
<PAGE>
[LOGO OF SECURITY LIFE APPEARS HERE]
1290 Broadway
Denver, CO 80203
<PAGE>
EXHIBIT 1.A(10)(a)(ii)
Flexible
Premium
Variable
Life
Insurance
Application
-----------
-----------
-----------
-----------
-----------
-----------
-----------
-----------
-----------
-----------
-----------
-----------
Q 1155-98 [LOGO OF SECURITY
LIFE APPEARS HERE]
<PAGE>
[LOGO OF SECURITY LIFE APPEARS HERE] Security Life of Denver Insurance Company
P. O. Box 173763
Denver, CO 80217-3763
1-800-933-5858
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE APPLICATION
INSTRUCTIONS
- - --------------------------------------------------------------------------------
FOR ALL APPLICATIONS
. Use dark ink to complete the application.
. Print LEGIBLY to avoid issue errors.
. Attach a complete illustration and all schedules associated with this
application to expedite policy issue process and ensure that the policy is
issued accordingly.
. Incomplete applications may require an amendment to be signed upon delivery,
or may be returned, which will delay the issue process.
. The issue state will be determined by the state in which the application was
signed.
- - --------------------------------------------------------------------------------
SIGNATURES REQUIRED, Page 10:
. The signature of all proposed insureds (parent or guardian of the proposed
insured if below age 15).
. The signature(s) of the owner. If a corporation is the owner, one officer,
other than the proposed insured, should sign and indicate name of corporation
and title of signing officer.
. The signature of the agent/registered representative. (Page 10 and Registered
Representative's Report.)
APPLICATION -- PART I
- - --------------------------------------------------------------------------------
SECTION A:
A-3: Exercise Right of Exchange Rider -- complete this box to identify policy to
be exchanged and return the policy along with the application and medical
information on the new proposed insured.
A-4: If the application is employer sponsored, and the policy will be corporate
owned, this question should be answered "No".
- - --------------------------------------------------------------------------------
SECTION B: Proposed Insured Information
B-1: The legal name of the insured will appear on the policy as indicated in
this space.
B-4: Insurance age is calculated as age nearest birthday.
- - --------------------------------------------------------------------------------
SECTION C AND SECTION D: Owner and Beneficiary
Designations
. If you are designating more than one owner and/or beneficiary, use Special
Instructions, Section O, and indicate the second owner's name and/or
percentage of the beneficiary split. For example:
John Doe, Husband, 70%
Mary Doe, Mother, 30%
. If you are designating a trust as the owner and/or beneficiary, include the
name of the Trustee, the name of the Trust and the date of the Trust. For
example:
John Doe, Trustee, of the Revocable Life Insurance Trust of
James Doe, dated November 1, 1991.
. When you are designating more than one owner, include the social security
number or tax identification number for each respective owner in Special
Instructions, Section O.
. If you have children as owners or beneficiaries, please refer to the brochure
entitled "Your Minor Child."
- - --------------------------------------------------------------------------------
SECTION F: Special Dating Requested
. This section provides an option for indicating a specific age and date on
which the policy applied for will be issued. This date is the POLICY DATE
only, and may differ from the INVESTMENT DATE.
- - --------------------------------------------------------------------------------
SECTION I: Premium Information
I-1: Consult your Service Guide for List Bill and EFT guidelines.
I-2: Electronic Funds Transfer (EFT) is a premium payment method which the payor
may elect. If selected, the premium will automatically be drafted from the
payor's checking account.
I-3: If any Authorized Withdrawal/EFT is collected with this application, the
required premium amount as outlined in the prospectus must also be
collected along with the Binding Limited Life Insurance Coverage form in
order to bind coverage.
- - --------------------------------------------------------------------------------
SECTION J: Fund Transfers
J:1: You must have at least $10,000 of Accumulation Value in the Fidelity
Investments Money Market Division or the Neuberger & Berman Limited
Maturity Bond Division to exercise this option. The minimum transfer amount
each month is $100. The maximum transfer amount is equal to the
Accumulation Value in the Division from which the transfer originates when
the election is made, divided by 12.
- - --------------------------------------------------------------------------------
SECTION K: 1035 Exchange Information
K-4: For purposes of 1035 Exchanges, this information is required to carry over
the correct cost basis and loan amount.
- - --------------------------------------------------------------------------------
SECTION O: Special Instructions
. Used for any additional information (for example, billing and mailing
instructions) and continuing your answers for owner and beneficiary
designations.
. If you are requesting child rider(s) and need to request beneficiary(ies)
other than shown in Section D, please indicate here. Include name(s) of
beneficiary(ies) and relationship.
. May be used to continue answers to question K-12, if necessary.
. Payor, accepting rating on formal application only.
APPLICATION -- PART II
- - --------------------------------------------------------------------------------
Medical Information
This part of the application must be completed for each person proposed for
coverage unless the person is medically examined.
- - --------------------------------------------------------------------------------
<PAGE>
[LOGO OF SECURITY LIFE APPEARS HERE]
Security Life of Denver Insurance Company
P. O. Box 173763
Denver, CO 80217-3763
1-800-933-5858
Application for Flexible Premium Variable Life Insurance to Security Life of
Denver Insurance Company
- - --------------------------------------------------------------------------------
PART I
- - --------------------------------------------------------------------------------
Please Print All Information Using Dark Ink
================================================================================
SECTION A -- General Information (Complete for all cases)
A-1 [_] Check here if insurance is for PENSION or similar tax qualified ERISA
plan.
A-2 If above statement checked, list plan type [______________________________]
(Example: Profit-Sharing;
Defined Contribution; etc.)
A-3 [_] Exercise Right of Exchange Rider
Name of Insured under Policy to be Exchanged Policy Number
[___________________________________________][____________________]
A-4 Employer Sponsored Plans check one:
Employee Owned? [_]Yes [_] No
================================================================================
SECTION B -- Proposed Insured (Complete for all cases. To apply for additional
insureds complete Section G)
B-1 Name (Print full name, include suffix)
(First, Middle, Last, Suffix)
[_________________________________________________________________________]
B-2 Sex
[_] Male
[_] Female
B-3 Birthdate
Month Day Year
[_][_] [_][_] [_][_][_][_]
B-4 Insurance Age
(Age Nearest Birthday)
[_][_]
B-5 Birthplace
(State)
[______________]
B-6 Social Security Number
[_][_][_]-[_][_]-[_][_][_][_]
B-7 Telephone Number
[_][_][_]-[_][_][_]-[_][_][_][_]
B-8 Height [_______________]
B-9 Weight [_______________]
B-10 Address
(Street, Apt. No.)
[_________________________________________________________________________]
(City) (State) (Zip Code)
[______________________________________][_____][_][_][_][_][_]-[_][_][_][_]
B-11 Occupation
[______________________________________]
B-12 Describe duties
[______________________________________]
B-13 Employer Name
[______________________________________]
Month Year
B-14 Employment date: [_][_] [_][_]
================================================================================
SECTION C -- Owner (Complete only if other than Proposed Insured)
C-1 Owner Name (Print full name, include suffix - if name to appear differently
on policy, indicate in Section O)
(First, Middle, Last, Suffix)
[_________________________________________________________________________]
C-2 Relationship to Proposed Insured
[__________________________________]
C-3 Social Security Number or Tax I.D. No. (Include any hyphens)
[_][_][_]-[_][_]-[_][_][_][_]
C-4 Owner Address
(Street, Apt. No.)
[_________________________________________________________________________]
(City) (State) (Zip Code)
[______________________________________][_____][_][_][_][_][_]-[_][_][_][_]
================================================================================
SECTION D -- Beneficiaries (Complete for all cases)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
D-1 Primary Beneficiary(ies) (Print Full Names) Relationship to Proposed Insured Birthdate
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
<CAPTION>
-------------------------------------------------------------------------------------------------------
Contingent Beneficiary(ies) (Print Full Names) Relationship to Proposed Insured Birthdate
<S> <C> <C>
-------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
================================================================================
SECTION E -- Plan Information (Complete for all cases)
E-1 Flexible Premium Variable Life Insurance Policy
a. Product Name
[______________________________________________]
b. Stated Death Benefit [____________________]
c. Scheduled Periodic Premium $[________________] (If premium varies from
year to year attach
schedule)
d. [_] Option 1 (Stated Death Benefit. If no option selected, Option 1 will
apply.)
[_] Option 2 (Stated Death Benefit plus Account Value.)
[_] Option 3 (Stated Death Benefit plus Premiums Paid, less partial
withdrawals.)
e. [_] Guideline Premium Test
[_] Cash Value Accumulation Test
f. First Year Pour-In (if any) $[____________________]
g. Riders
[_] Adjustable Term Rider $[__________________]
(Attach Schedule of Target Death Benefits)
[_] Additional Insured $[_____________________]
(Complete section G)
[_] Accidental Death $[____________________]
[_] Child's Insurance Rider (# of Units) [________________]
(Complete section H)
[_] Right to Exchange
[_] Waiver of Cost of Insurance
[_] Guaranteed Insurability Rider
[_] Waiver of Specified Premium [___________________________]
[_] Other [____________________________________________________________]
================================================================================
SECTION F -- Special Dating Requested (If neither box checked below, policy will
be issued at age nearest birthday as of
issue date.)
F-1 [_] Date to Save Age Specify Requested Age [__________]
Mo Day Year
F-2 [_] Specific Date [_][_] [_][_] [_][_][_][_]
================================================================================
SECTION G -- Additional Insured Rider
G-1 Name of Proposed Additional Insured (If more than one additional insured,
specify details in special
instructions, Section O)
(First, Middle, Last, Suffix)
[________________________________________________________________________]
G-2 Relationship to proposed insured [_______________________________________]
Month Day Year
G-3 Birthdate [_][_] [_][_] [_][_][_][_]
G-4 Social Security Number [_][_][_]-[_][_]-[_][_][_][_]
G-5 Height [___________] G-6 Weight [___________]
G-7 Insurance Age (Age nearest birthday) [_][_]
G-8 Show beneficiary for additional insured if different from beneficiary named
in Section D.
[Name:__________________________________] [Relationship___________________]
[Birthdate:_____________________________]
================================================================================
SECTION H -- Child Rider
Birthdate Mo/Day/Yr Height Weight
H-1 Child / /
---------------------------------------------------------------------------
H-2 Child / /
---------------------------------------------------------------------------
H-3 Child / /
---------------------------------------------------------------------------
H-4 Child / /
---------------------------------------------------------------------------
2
<PAGE>
================================================================================
SECTION I -- Premium Information
I-1 Premium Mode (If no option selected - Premium mode will be quarterly)
[_] Annual
[_] Quarterly
[_] Semi-Annual Number
[_] Monthly (only available for List Bill and Authorized Withdrawal/EFT)
I-2 Payment Method
[_] Direct Bill (not available for monthly)
[_] Single Premium
[_] List Bill Existing List Bill
[_] Authorized Withdrawal (Complete Authorized Withdrawal/EFT Form)
I-3 Premium collected with application
NOTE: The agent is not authorized to collect any premium before delivering
a policy unless the Binding Limited Life Insurance Coverage form has been
completed and signed by the agent, applicant and proposed insured and a
copy given to the applicant. There is no coverage before delivery of the
policy except as provided by that form.
Yes No
[_] [_] a. Has agent collected any premium (including any Authorized
Withdrawal/EFT Form) with this application? If any
Authorized Withdrawal/EFT is collected with this
application, the required premium amount as outlined in the
prospectus must be collected. If yes, total premium
(including any pour-in) collected $[__________]
[_] [_] b. If answer to (a) is "Yes," has agent complied with the
Binding Limited Life Insurance Coverage requirements?
[_] [_] c. Has the applicant signed and received a Binding Limited
Life Insurance Coverage form in connection with this
application? Attach signed copy of Binding Limited Life
Insurance Coverage form.
I-4 Guaranteed Minimum Death Benefit Option
Guarantee Period (Select one, if option desired)
[_] Later of ten years or age 65 [_] Lifetime
Note: The Guarantee Period will terminate if your Account Value on any
Monthly Processing date is not diversified according to the following
rules. No more than 35% of your unborrowed Account Value may be invested in
any one division, and your unborrowed Account Value must be invested in at
least five divisions.
You can satisfy these diversification requirements if you participate in
the Automatic Rebalancing feature. You can also satisfy our requirements
for diversification if you elect Dollar Cost Averaging and direct the
resulting transfers into at least four other Divisions with no more than
35% of any transfer being allocated to any one division.
I-5 Initial Premium Allocation. Please allocate your Initial Premium to the
Guaranteed Interest Division and/or among the Variable Account Divisions.
Please use whole number percentages for each Division elected. You must
allocate at least 1% of your Premium Allocation to each Division in which
you elect to invest, provided that the minimum allocation to each Division
is at least $100. The total must equal 100%.
____% GUARANTEED INTEREST DIVISION
VARIABLE ACCOUNT DIVISIONS
--------------------------
AIM
____% V.I. Government Securities
____% V.I. Capital Appreciation
Alger American
____% Small Capitalization
____% MidCap Growth
____% Growth
____% Leveraged AllCap
Fidelity Investments
____% Asset Manager
____% Growth Portfolio
____% Overseas
____% Money Market
____% Index 500
INVESCO
____% Industrial Income
____% High Yield
____% Utilities
____% Total Return
____% VIF Small Company Growth
Neuberger & Berman
____% Limited Maturity Bond
____% Growth Portfolio
____% Partners Portfolio
Van Eck
____% Worldwide Hard Assets
____% Worldwide Emerging Markets
____% Worldwide Bond
____% Worldwide Real Estate
3
<PAGE>
================================================================================
SECTION J -- Fund Transfers
J-1 Dollar Cost Averaging
Please transfer $[_________] from (check one only) my
[_] [Fidelity Investments Money Market Division]
[_] [Neuberger & Berman Limited Maturity Bond Division]
into the other Variable Account Division(s) selected below. (Note: Please
use whole number percentages for each Division selected.) You must allocate
a minimum of 1% to each Division in which you elect to invest, provided
that the minimum allocation to each Division is at least $100. The total
must equal 100%. You may specify a date for Dollar Cost Averaging to
terminate. You may also specify a dollar amount so that when the Account
Value reaches this dollar amount, Dollar Cost Averaging would terminate.
AIM
____% V.I. Government Securities
____% V.I. Capital Appreciation
Alger American
____% Small Capitalization
____% MidCap Growth
____% Growth
____% Leveraged AllCap
Fidelity Investments
____% Asset Manager
____% Growth Portfolio
____% Overseas
____% Money Market
____% Index 500
INVESCO
____% Industrial Income
____% High Yield
____% Utilities
____% Total Return
____% VIF Small Company Growth
Neuberger & Berman
____% Limited Maturity Bond
____% Growth Portfolio
____% Partners Portfolio
Van Eck
____% Worldwide Hard Assets
____% Worldwide Emerging Markets
____% Worldwide Bond
____% Worldwide Real Estate
J-2 Automatic Rebalancing
[_] Automatic Rebalancing
Note: If you elect this feature, each quarter we will transfer amounts
among the Variable Account Divisions and the Guaranteed Interest Division
so that the percentages of your unborrowed Account Value in each Division
match your most recent premium allocation. To qualify for this feature you
must allocate your premium to at least five Divisions with no more than 35%
of the premium allocated to any one Division.
J-3 Telephone Transfer
[_] Telephone Transfer (Check if you wish to select this option.)
I/We hereby authorize and direct the Customer Service Center of Security
Life of Denver Insurance Company to accept telephone instructions from
either the Owner or _____________________________ (insert name of your
Registered Representative if you wish the representative to have telephone
transfer authority) to reallocate my Accumulation Value among the Divisions
available or request a policy loan or partial withdrawal. I/We agree to
hold harmless and indemnify Security Life for any losses arising from such
instructions. I/We further authorize Security Life and its Customer Service
Center to record telephone conversations with me/us. (Initials of Owner
_______)
================================================================================
SECTION K -- Personal Information
K-1 List life insurance policies on all persons proposed for coverage (1) now
in force or (2) applied for within the last 12 months, or (3) pending now.
If NONE, Check this box [_]
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
Name of Year A.D. Business or Indicate if Inforce,
Proposed Insured Company Issued Amount Amount Personal Applied for, or Pending
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
Yes No
K-2 Has any proposed insured ever been declined for insurance
(or reinstatement) or been offered insurance with restricted
benefits or at other than standard rates? (If "Yes" give
details in Section K-12) [_] [_]
K-3 Is this insurance to replace, or will it cause any change in,
any insurance or annuity on any person proposed for coverage?
(If "Yes" submit a completed replacement form with this
application.) [_] [_]
K-4 a. Is this insurance intended to be a tax free exchange -
1035 Exchange? [_] [_]
b. If "Yes" will any policy loan be carried over? [_] [_]
4
<PAGE>
================================================================================
SECTION K -- Personal Information (Continued)
Yes No
K-5 Has any person proposed for coverage:
a. ever smoked cigarettes? (If "Yes," give name
and details in section K-12) [_] [_]
b. ever used tobacco in any form other than
cigarettes? (If "Yes" give name and details
in section K-12) [_] [_]
c. ever stopped smoking cigarettes? (If "Yes"
give name and date last smoked in section K-12) [_] [_]
d. ever stopped using tobacco in any form other
than cigarettes. (If "Yes" give name, type and
date last used in section K-12) [_] [_]
K-6 Within the last 3 years or within the next 12 months, has any person
proposed for coverage:
a. flown (or planned to fly) other than as a passenger
on a regularly scheduled airline? (If "Yes" complete
Aviation Supplement.) [_] [_]
b. had a drivers license denied, revoked, or suspended;
had three or more moving violations; been convicted
of an alcohol or drug related driving offense; been
involved in two or more auto accidents? (If "Yes"
give details in section K-12) [_] [_]
c. participated in (or intend to participate in)
vehicle racing (on land or water), ballooning,
bobsledding, hang gliding, ultralight aviation,
horse racing, mountaineering, rodeo, scuba/skin
diving, skydiving/parachuting, or bungee cord
jumping? (If "Yes" complete Avocation Supplement) [_] [_]
K-7 List Driver's License No. here [_][_][_][_][_][_][_][_][_][_][_][_]
State [____]
K-8 Does any person proposed for coverage contemplate
traveling or residing outside the U.S.A. or Canada
within the next 12 months? (If "Yes" give details
in section K-12) [_] [_]
K-9 Has any person proposed for coverage been convicted of
a felony within the last 5 years? (If "Yes" give
details in section K-12) [_] [_]
K-10 Has any person proposed for coverage:
a. ever had, or now have, any type of heart disease,
cancer, leukemia, or malignant tumor? (If "Yes"
give details in section K-12) [_] [_]
b. ever been diagnosed by a licensed member of the
medical profession as having Acquired Immune
Deficiency Syndrome (AIDS) or any immune
deficiency or disorder? (Do Not Answer This
Question If You Reside In Nevada.) (If "Yes"
give details in section K-12) [_] [_]
K-11 Does any person proposed for coverage now participate
in any regular physical exercise program? [_] [_]
K-12 Details of "YES" Answers to Questions K-2 through K-11
------------------------------------------------------------------------
------------------------------------------------------------------------
================================================================================
SECTION L -- Medical Exam Certificate (Complete when submitting medical
examination of another insurance company.)
L-1 The attached examination is on the life of: [____________________________]
L-2 Name of insurance company for which examination was made and date of
examination:
--------------------------------------------------------------------------
Company Date of Examination
--------------------------------------------------------------------------
Yes No
L-3 To the best of the proposed insured's knowledge and
belief, are the statements in the examination true as
of today? (If "No," explain in "REMARKS") [_] [_]
L-4 Has the proposed insured consulted a doctor or other
practitioner or received medical or surgical advice
since the date of the examination? (If "Yes," explain
in "REMARKS") [_] [_]
--------------------------------------------------------------------------
Remarks to No. L-3 and L-4
--------------------------------------------------------------------------
5
<PAGE>
================================================================================
SECTION M -- Financial Information (Must be completed where the face amount
exceeds [1] $200,000 for business insurance, [2] $300,000 for an insured 65 and
under, or [3] $100,000 for an insured over 65.)
M-1 What is the purpose of the insurance applied for? [________________________]
If the insurance applied for is personal, what is the proposed insured's:
Annual Earned Income $[___________]
Annual Interest & Other Income $[___________]
Total Assets $[___________]
Total Liabilities $[___________]
Total Net Worth $[___________]
Yes No
M-2 If Business Insurance:
a. Annual net profit (before taxes, past two years)
Last Year 2 Years Ago
$[______________] $[______________]
b. Business reason for insurance (check at least one box and furnish
details)
[_] Key Person [_] Stock Redemption/Buy and Sell
[_] Other [______________________________]
c. If Key Person insurance:
(1) Are all partners or key people to be covered? Yes No
(If "No," explain)
[_] [_]
----------------------------------------------------
----------------------------------------------------
(2) Does proposed insured have an ownership interest in the business?
[_] [_]
If "Yes," what is proposed insured's percent of ownership? [_______%]
(3) What is proposed insured's annual income? $[________________________]
d. If to fund stock redemption, is there a written agreement? [_] Yes [_] No
(1) What is the book value of the business? $[_______________________]
(2) What is the market value of the business? $[_______________________]
(3) How was the value determined? [_____________________________________]
Yes No
M-3 Is this insurance to guarantee a loan? [_] [_]
a. If "Yes," is the lender requiring this insurance? [_] [_]
b. Is the loan finalized? [_] [_]
c. What is the term of the loan? (Months) [______]
d. Name of lender: [____________________________________]
e. Amount of loan: [____________________________________]
f. Purpose of loan: [____________________________________]
g. Are others being insured for the same purpose? [_] [_]
If Yes, who and for what amount?
[____________________________________] Amount $ [__________________]
[____________________________________] Amount $ [__________________]
6
<PAGE>
================================================================================
SECTION M -- Financial Information (Continued) (Must be completed where the face
amount exceeds [1] $200,000 for business insurance, [2] $300,000 for an insured
65 and under, or [3] $100,000 for an insured over 65.)
M-4 Additional remarks about purpose of the insurance and how the amount of
insurance was determined.
-------------------------------------------------------------------------
Remarks to Section M
-------------------------------------------------------------------------
================================================================================
SECTION N -- Suitability
a. Have you, the Proposed Insured, and the Owner, if other than the Proposed
Insured, received a current Prospectus dated ______________________ for
the Variable Life Insurance policy applied for and current prospectus for
each of the Variable Account Divisions? [_] Yes [_] No
b. Do you understand that under the policy applied for the amount or
duration of the death benefit may vary under specified conditions; policy
values may increase or decrease in accordance with the investment
experience of investment divisions in a Separate Account, and may
increase in accordance with the interest credited in the Guaranteed
Interest Division; and the amount payable at the Final Policy Date is not
guaranteed but is dependent on the amount then in the Account Value?
[_] Yes [_] No
c. Do you understand that any personalized illustrations received are based
on hypothetical interest assumptions which may not be indicative of
actual future investment experience of our Separate Account or of actual
interest credited in our Guaranteed Interest Division? [_] Yes [_] No
d. With this in mind, is the policy in accord with your insurance objectives
and your anticipated financial needs? [_] Yes [_] No
================================================================================
SECTION O -- Special Instructions
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
7
<PAGE>
- - --------------------------------------------------------------------------------
PART II
- - --------------------------------------------------------------------------------
Please Print All Information Using Dark Ink
Part II must be completed for each person proposed for coverage unless the
person is medically examined.
================================================================================
SECTION A -- Personal Physicians
A-1 For each person proposed for coverage, give the name and address of the
personal physicians and the date and reason the physician was last seen.
If NONE, check here [_]
----
---------------------------------------------------------------------------
Name and Address Date and Reason
Proposed Insured's Name of Physician Last Seen
---------------------------------------------------------------------------
-------------------------------------------------
-------------------------------------------------
---------------------------------------------------------------------------
-------------------------------------------------
-------------------------------------------------
---------------------------------------------------------------------------
-------------------------------------------------
-------------------------------------------------
---------------------------------------------------------------------------
================================================================================
SECTION B -- Medical Information (Complete for each person proposed for
coverage.) (For all of Section B, circle each specific condition and give
details of all "Yes" answers in the Details Section following question B-11.
Give name of disease, symptoms, etc.; the date of onset; the duration; number of
attacks; and name and addresses of medical professional or hospital providing
services.)
B-1 Has any person proposed for coverage ever been treated for, or been told by
a member of the medical profession that the person has:
Yes No
a. pain, pressure, or discomfort in the chest or arms; high
blood pressure; heart murmur; irregular heartbeat; or any
other disease or disorder of the heart? [_] [_]
b. anemia; leukemia; or any other disorder of the blood,
veins or arteries? [_] [_]
c. asthma; bronchitis; pneumonia; tuberculosis; emphysema;
shortness of breath; chronic cough, or any other disorder
of the lungs or respiratory system? [_] [_]
d. mental or emotional disorder, nervous breakdown; epilepsy;
convulsions; chronic fatigue; fainting spells; paralysis;
stroke; or any other disorder of the brain or nervous system? [_] [_]
e. significant weight loss; ulcer; colitis; diverticulitis;
hepatitis; cirrhosis; persistent diarrhea; or other disease
of the liver, gall bladder, pancreas, stomach or intestines? [_] [_]
f. diabetes; thyroid; recurrent enlarged glands; or other
glandular disease or disorder? [_] [_]
g. arthritis; gout; or any bone, joint, muscle, or skin
disorder? [_] [_]
h. polyp, tumor, or cancer? [_] [_]
i. disorder of the urinary tract or kidneys; urethritis;
cystitis; sugar, albumin, or blood in the urine? [_] [_]
j. prostate or testicular disease; venereal disease; herpes; or
disease of the uterus, ovaries or breasts? [_] [_]
k. any disorder of the eyes; ears; nose; or throat? [_] [_]
l. any other health impairment or medically or surgically
treated condition within the last 5 years not mentioned
above? [_] [_]
8
<PAGE>
Yes No
B-2 Has any person proposed for coverage ever been treated for
or been told by a licensed member of the medical profession
that the person has Acquired Immune Deficiency Syndrome (AIDS)
or any disorder or deficiency of the Immune System? (Do Not
Answer This Question If You Reside In Nevada.) [_] [_]
B-3 Within the past 10 years, has any person proposed for coverage:
a. tested positive in a test to detect antibodies to the
AIDS virus (Human T-Cell Lymphotrophic virus type III;
HTLV-III, Human Immunodeficiency Virus [HIV])? (Do Not Answer
This Question If You Reside in Connecticut or Maine.) [_] [_]
b. had a blood transfusion? [_] [_]
B-4 Within the past 5 years, has any person proposed for coverage
been a patient in or had treatment at a hospital, clinic,
sanitarium or other medical facility? [_] [_]
B-5 Is any person proposed for coverage now under regular medical
observation by, or taking treatment from, a member of the
medical profession? [_] [_]
B-6 Other than as stated in the answers above, has any person
proposed for coverage, within the last 5 years:
a. had a checkup or consultation with a member of the medical
profession? [_] [_]
b. had an electrocardiogram, x-ray, blood test or other test? [_] [_]
c. been advised by a member of the medical profession to have
any diagnostic test, hospitalization, or surgery which was
not completed? [_] [_]
---
B-7 Does any person proposed for coverage have a deformity or an
amputation? [_] [_]
B-8 Does any person proposed for coverage now take any medicine
prescribed by a member of the medical profession? [_] [_]
B-9 Except as legally prescribed by a physician, has any person
proposed for coverage ever used narcotics, cocaine, marijuana,
or any hallucinatory or mind altering substances in the past
10 years? [_] [_]
B-10 In the last 5 years, has any person proposed for coverage
received treatment for or joined an organization because of
the alcoholism or drug addiction of that person? [_] [_]
B-11 Has any parent, brother, or sister of any person proposed
for coverage ever had cancer; diabetes; high blood pressure;
heart or kidney disease; nervous or mental disorder;
tuberculosis; or hereditary disorder? [_] [_]
Details of "Yes" answers to questions B-1 through B-11
- - --------------------------------------------------------------------------------
Ques. Name of
No. Proposed Insured Complete Details
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECTION C -- Family History
- - --------------------------------------------------------------------------------
Living Deceased
Family Member Age State of Health Age at Death/Cause
- - --------------------------------------------------------------------------------
Father
- - --------------------------------------------------------------------------------
Mother
- - --------------------------------------------------------------------------------
Brothers
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Sisters
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
9
<PAGE>
AGREEMENTS
All statements and answers in this application (which includes Part I, Part II,
and supplements and amendments) are true and complete to the best of my
knowledge and belief. I also agree that:
1. The statements and answers in this application will be relied upon and form
the basis of any insurance.
2. No information will be considered as having been given to Security Life
unless it is written in this application. (This paragraph does not apply in
the states of Maine, Missouri, Oregon, South Carolina, and South Dakota.)
3. No agent or any other unauthorized person can make or change any insurance
contract or give up any of Security Life's rights or requirements. Any change
must be in writing and signed by an officer of Security Life.
4. Security Life may amend this application by an appropriate notation in the
space designated "Home Office Corrections" in order to correct errors or
omissions or to conform the application with any policy that may be issued.
The acceptance of the policy constitutes a ratification of such amendments.
In those states, including Maryland, where change in amount, classification,
plan, premium, or benefit requires the written consent of the applicant, no
change may be ratified except by a written acceptance. We reserve the right
to make any changes required by law.
5. Insurance Under Policy Applied For - Except as may be provided in any Binding
Limited Life Insurance Coverage, no policy of insurance will be in force
until (1) the first policy premium is paid and (2) the policy is delivered
while the facts and health condition of the proposed insured(s) are as
represented in this application. When these conditions are satisfied, the
policy as delivered will then take effect.
6. Binding Limited Life Insurance Coverage - Any pre-delivery insurance coverage
is provided in the Binding Limited Life Insurance Coverage form. That
coverage is available only if: a premium is accepted by the agent; the agent
has authority to accept premium as set out in that form; and the form is
completed and signed by the agent, applicant, and proposed insured.
7. If the contract applied for is for a pension, profit-sharing, HR10, or other
tax qualified plan, any policy issued shall not be transferable other than to
the Insurer, except as directed by the Plan Administrator. Other applicable
provisions may be added to the contract.
8. I certify, under penalty of perjury, that my social security/tax
identification number(s) is shown and is correct and that I am not subject to
back up withholding.
AUTHORIZATION TO OBTAIN AND DISCLOSE INFORMATION
Security Life of Denver Insurance Company ("Security Life") may obtain
information about me or my minor children from: any physicians; medical
practitioner; hospital, clinic or other medical facility; employer; other
insurance companies or institutions; consumer reporting agency; or Medical
Information Bureau, Inc. (MIB, Inc.). The purpose is to evaluate my application
for insurance or benefits. Security Life may obtain an investigative consumer
report and any records or other information available as to diagnosis, treatment
and prognosis of any physical or mental condition.
Security Life may obtain any drug, physical and mental health, and alcohol-
related information which may be protected by federal or state laws and
regulations. As it pertains to alcohol and drug information covered by federal
regulation, this authorization may be revoked at any time by written notice to
Security Life. But any action taken before my written revocation is received by
Security Life will not be affected.
Security Life may make a brief report about me or my children to MIB, Inc.
Security Life may disclose information to: its reinsurers; those who perform
services for Security Life on my application for insurance or benefits: or those
companies to which I have applied or may apply for life or health insurance or
benefits. Disclosure may be made when required or permitted by law.
This is valid for two and one-half years from the date below. An original or
copy may be used by Security Life or its authorized representatives to obtain
information. I have read and received a copy of this authorization. I also have
a copy of the Notice of Information Procedures. It includes the MIB, Inc. and
Fair Credit Reporting Notices.
NOTICE: Any person who knowingly and with intent to injure, defraud, or deceive
any insurance company, files an application, statement or claim containing any
false, incomplete, or misleading information is guilty of insurance fraud.
Signature of
Proposed Insured [______________________________] Date [______________________]
(If below age 15, signature of parent or guardian)
Signed at [City_____________________________________________State_____________]
Signature of Spouse/ [____________________________]
Additional Insured(s) (If proposed for coverage) [____________________________]
Owner Signature (If other than proposed insured) [____________________________]
OR (If applicable) Corporate Owner Signature
(If a firm or corporation is
to be owner, the signature and
title of an officer other than
the proposed insured is
required.)
Except for any medical exam form, I certify that I have asked and recorded
completely and accurately the answers to all questions on this application. I
know of nothing else affecting the risk.
Signature of
Agent/Registered Rep. [______________________________Reg. Rep. Number__________]
[_________________________________] [________________________________________]
Name of Broker/Dealer/Branch Address of Broker/Dealer/Branch
- - --------------------------------------------------------------------------------
HOME OFFICE
CORRECTIONS
(FOR HOME OFFICE
USE ONLY)
(Not applicable in West Virginia)
- - --------------------------------------------------------------------------------
10
<PAGE>
Registered Representative's Report
(Must be completed and signed for every application)
Yes No
1) Do you have knowledge or reason to believe that replacement of
existing insurance or annuity may be involved? [_] [_]
If Yes, explain:______________________________________________
2) How long have you known the proposed insured? ______ Years
Are you related? [_] [_]
If so, how?___________________________________________________
3) Does the proposed insured speak English? [_] [_]
Was the application interpreted for and understood by the
proposed insured? [_] [_]
Are all persons proposed for coverage U.S. citizens? [_] [_]
If not, how long in U.S.? ____Mos. ____Yrs.
4) Did proposed insured approach you for this insurance? [_] [_]
5) What is the amount of insurance in force on the spouse of the
proposed insured? $___________________________________________
6) If any proposed insured is a minor, what is the amount of
insurance on:
Father $___________ Mother $__________
Brothers $___________ Sisters $__________
7) Will the applicant accept this policy if it is a "Modified
Endowment" at issue? [_] [_]
8) If a medical exam is required, has it been ordered? [_] [_]
9) What is the source of the first premium payment:
[_] Applicant check
[_] Other (specify):__________________
================================================================================
10) Writing Registered Representative (Print) [________________________________]
Writing Registered Representative (Sign) [_________________________________]
Date [__________________] Registered Representative Number: [______________]
Production Credit Split
Agent Number Percent
------------ -------
------------ -------
------------ -------
-------------------------------------------------------------------------------
11) What was the PRIMARY purpose of the insurance?
PERSONAL PLANNING
A [_] Estate/Death Tax
B [_] Family Protection
C [_] Mortgage Protection
D [_] College Funding
E [_] Gift/Charitable
F [_] Retirement Maximizer
G [_] IRP/PPP/PRO
H [_] Savings
I [_] Other_____________________________
BUSINESS PLANNING
J [_] Executive Bonus
K [_] Qualified Plan
L [_] Deferred Compensation
M [_] Buy-Sell
N [_] Key Executive
O [_] Employee Benefit
P [_] Other_____________________________
================================================================================
12) Who was the PRIMARY decision-maker involved?
PERSONAL PLANNING
A [_] Insured
B [_] Insured and Spouse
C [_] Parent
D [_] Grandparent
E [_] Child(ren)
F [_] Other_____________________________
BUSINESS PLANNING
G [_] Businessowner
H [_] Attorney
I [_] Accountant
J [_] Board of Directors
K [_] Trustee
L [_] Other_____________________________
================================================================================
13) Did the Home Office or Regional Staff assist you? [_] Yes [_] No (If yes,
check all that apply.)
A [_] Illustration
B [_] Case design
C [_] Sample Documents
D [_] Template design
E [_] Estate Analysis
F [_] Business Analysis
G [_] Family Asset Review
H [_] Competition Services
I [_] Legal Consultation
J [_] Other_______________________________
11
<PAGE>
(Detach and give to Applicant)
AGREEMENTS
All statements and answers in this application (which includes Part I, Part II,
and supplements and amendments) are true and complete to the best of my
knowledge and belief. I also agree that:
1. The statements and answers in this application will be relied upon and form
the basis of any insurance.
2. No information will be considered as having been given to Security Life
unless it is written in this application. (This paragraph does not apply in
the states of Maine, Missouri, Oregon, South Carolina, and South Dakota.)
3. No agent or any other unauthorized person can make or change any insurance
contract or give up any of Security Life's rights or requirements. Any change
must be in writing and signed by an officer of Security Life.
4. Security Life may amend this application by an appropriate notation in the
space designated "Home Office Corrections" in order to correct errors or
omissions or to conform the application with any policy that may be issued.
The acceptance of the policy constitutes a ratification of such amendments.
In those states, including Maryland, where change in amount, classification,
plan, premium, or benefit requires the written consent of the applicant, no
change may be ratified except by a written acceptance. We reserve the right
to make any changes required by law.
5. Insurance Under Policy Applied For - Except as may be provided in any Binding
Limited Life Insurance Coverage, no policy of insurance will be in force
until (1) the first policy premium is paid and (2) the policy is delivered
while the facts and health condition of the proposed insured(s) are as
represented in this application. When these conditions are satisfied, the
policy as delivered will then take effect.
6. Binding Limited Life Insurance Coverage - Any pre-delivery insurance coverage
is provided in the Binding Limited Life Insurance Coverage form. That
coverage is available only if: a premium is accepted by the agent; the agent
has authority to accept premium as set out in that form; and the form is
completed and signed by the agent, applicant, and proposed insured.
7. If the contract applied for is for a pension, profit-sharing, HR10, or other
tax qualified plan, any policy issued shall not be transferable other than to
the Insurer, except as directed by the Plan Administrator. Other applicable
provisions may be added to the contract.
8. I certify, under penalty of perjury, that my social security/tax
identification number(s) is shown and is correct and that I am not subject to
back up withholding.
NOTICE OF INFORMATION PROCEDURES
OUR UNDERWRITING PROCESS
This process is an evaluation of information about you. It is to see if you
qualify for the insurance requested. The information we review may vary with the
insurance applied for. We look at information about you such as: your age;
occupation; health; mode of living; avocation; and other personal information.
Answers on the application are the principal source of information. We may
contact other people or institutions personally, by phone, or by letter. The
purpose is to confirm or add to information you have provided. For example, we
may obtain information from your doctor, clinic, hospital, or other insurers. In
some cases, your Security Life agent may obtain information on our behalf. A
medical examination or laboratory tests may be requested.
NOTICE
Any person who knowingly and with intent to injure, defraud, or deceive any
insurance company, files an application, statement or claim containing any
false, incomplete, or misleading information is guilty of insurance fraud.
MIB, INC.
Medical Information Bureau, Inc. ("MIB, Inc.") may provide Security Life with a
brief report about you. This is a nonprofit organization of life insurance
companies which has an information exchange for its members. Information that is
sent to MIB, Inc. by one member may be given to their member companies who have
a business need for it.
Upon your written request, MIB, Inc. will arrange for disclosure of any
information it may have in your file. If you question the accuracy of MIB's
information, you may request a correction according to the procedures in the
Federal Fair Credit Reporting Act. MIB's address is: P.O. Box 105, Essex
Station, Boston, Massachusetts 02112, telephone 617/426-3660.
CONSUMER REPORTS
In some cases, a Security Life representative may prepare a consumer report or
investigative consumer report about you or, Security Life may ask an independent
agency to prepare a consumer report or an investigative consumer report about
you. These reports may include information on your character; general
reputation; personal characteristics such as health, finances, and job, and mode
of living except as may be related directly or indirectly to your sexual
orientation. Any information obtained by the agency may be kept in its file and
later given to others who have a business need for it.
If an investigative consumer report is ordered by Security Life, the report will
include information obtained through interviews with your neighbors, friends, or
others you know. You may request a personal interview. The agency will make a
reasonable attempt to talk to you. It will include that information in its
report. The Federal Fair Credit Reporting Act gives you the right to make a
written request within a reasonable period of time, to receive additional
information from Security Life about the nature and scope of an investigation,
if one is made. We will provide the name, address, and phone number of any
agency we ask to prepare such a report. You may contact the agency directly to
learn about the contents of the report.
DISCLOSURE OF INFORMATION
Information we obtain about you is confidential. As permitted by law, we may
disclose information without further authorization to others such as: consumer
reporting agencies hired to prepare investigative reports; insurance companies
to which you have applied for coverage or benefits; those providing services for
us; those conducting bona fide actuarial, marketing, or scientific studies or
audits; and your attending doctor.
Upon written request, we will give you more information about these procedures.
YOUR RIGHT TO REVIEW INFORMATION
These are procedures by which you can make a written request to review personal
information in our policy file. However, Security Life will not disclose
information to you that was prepared for any anticipated claim or any civil or
criminal proceeding. We also have procedures by which you may request
correction, amendment, or deletion of any information in our files which you
believe to be inaccurate or irrelevant. Upon written request, we will provide
you with further information about these procedures.
We hope this notice helps explain our underwriting process. If you have any
additional questions, discuss them with your agent or contact us directly.
Security Life of Denver Insurance Company
P. O. Box 173763
Denver, CO 80217-3763
1-800-933-5858
<PAGE>
[LOGO OF SECURITY LIFE APPEARS HERE]
P. O. Box 173763
Denver, CO 80217-3763
<PAGE>
EXHIBIT 6
[LOGO OF SECURITY LIFE APPEARS HERE]
October 16, 1997
Security Life of Denver Insurance Company
1290 Broadway
Denver, CO 80203-5699
Re: Security Life Separate Account L1
Post-Effective Amendment No. 3; 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. 3 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. 3 (the "Policy").
It is my professional opinion that
1. The aggregate fees and charges under the Policy are reasonable in relation
to the services rendered the expenses expected to be incurred and the risks
assumed by Security Life.
2. The illustrations of death benefits, account value, cash surrender value,
and total premiums paid plus interest at 5 percent 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
costs of insurance charges.
3. 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. 3 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
SK: bim
<PAGE>
Consent of Independent Auditors EXHIBIT 7(a)
We consent to the reference to our firm under the captions "Experts" and
"Financial Statements" and to the use of our reports dated April 9, 1997 (with
respect to the financial statements of Security Life Separate Account L1) and
April 11, 1997 (with respect to the financial statements of Security Life of
Denver Insurance Company), included in Post-Effective Amendment No. 3 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 October 29, 1997.
/s/ ERNST & YOUNG LLP
Denver, Colorado
October 29, 1997
<PAGE>
CONSENT OF EXHIBIT 7(b)
MAYER, BROWN & PLATT
We hereby consent to the reference to our firm under the caption "Legal
matters" in the Additional Information section comprising a part of Post-
Effective Amendment No. 3 to the Form S-6 Registration Statement of Security
Life Separate Account L1 with respect to Strategic Advantage Variable Universal
Life, File No. 33-88148.
/s/ MAYER, BROWN & PLATT
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 54,275,545
<INVESTMENTS-AT-VALUE> 57,137,579
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 57,137,579
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> (719,248)
<TOTAL-LIABILITIES> (719,248)
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
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<NET-ASSETS> 57,856,827
<DIVIDEND-INCOME> 1,183,779
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 241,127
<NET-INVESTMENT-INCOME> 942,652
<REALIZED-GAINS-CURRENT> 401,852
<APPREC-INCREASE-CURRENT> 2,675,307
<NET-CHANGE-FROM-OPS> 4,019,811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,742,883
<NUMBER-OF-SHARES-REDEEMED> 2,615,086
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 44,630,293
<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> 35,541,681
<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>
