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As filed with the Securities and Exchange Commission on April 30, 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. 2
_________________
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)
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Copy to:
GARY W. WAGGONER, ESQ. DIANE E. AMBLER, ESQ.
Security Life of Denver Insurance Mayer, Brown & Platt
Company 2000 Pennsylvania Avenue, N.W.
1290 Broadway Washington, D.C. 20006-1882
Denver, Colorado 80203-5699 (202) 778-0641
(Name and Address of Agent for Service)
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________________
It is proposed that this filing will become effective:
___ on (date) pursuant to paragraph (a) of Rule 485
___ 60 days after filing pursuant to paragraph (a) of Rule 485
X on May 1, 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.
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SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 33-88148)
Cross-Reference Table
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Form N-8B-2 Item No. Caption in Prospectus
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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
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(ii)
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Form N-8B-2 Item No. Caption in Prospectus
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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
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(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. A Guaranteed Interest Division, which guarantees
a minimum fixed rate of interest, is also available. Purchasers may utilize both
the Divisions of the Variable Account and the Guaranteed Interest Division
simultaneously. The Loan Division represents amounts we set aside as collateral
for any Policy Loans taken.
We will pay the Death Proceeds when the Insured dies if the Policy is still in
force. The Death Proceeds will equal the death benefit, reduced by any
outstanding Policy Loan, accrued loan interest, and any charges due during the
grace period. The death benefit consists of two elements: the Base Death Benefit
and any amount added by Rider. The Policy will remain in force as long as the
Net Account Value remains positive. If at all times during the first three
Policy years, the sum of premiums paid minus Partial Withdrawals taken and any
Policy Loan and accrued loan interest is greater than or equal to one twelfth of
the Minimum Annual Premium times the number of completed months this Policy has
been in effect, the Policy will not lapse regardless of the amount of the Net
Account Value. If the Guaranteed Minimum Death Benefit provision is purchased,
the Stated Death Benefit portion of the Policy will remain in force for the
Guarantee Period. To continue the Guarantee Period, the required premiums must
be paid and the Net Account Value must remain diversified.
The Policy permits the Owner to choose from three death benefit options which
may increase the Base Death Benefit above the Stated Death Benefit: Option 1, a
fixed benefit that equals the Stated Death Benefit; Option 2, a benefit that
equals the Stated Death Benefit plus the Account Value; or Option 3, a benefit
that equals the Stated Death Benefit plus the sum of premiums paid minus Partial
Withdrawals taken to date. The Base Death Benefit in force as of any Valuation
Date will not be less than the amount necessary to qualify the Policy as a life
insurance contract under the Internal Revenue Code in existence at the time the
Policy is issued.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
A PROSPECTUS FOR THE PORTFOLIO OR PORTFOLIOS BEING CONSIDERED
MUST ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ IN CONJUNCTION HEREWITH.
DATE OF PROSPECTUS: MAY 1, 1997
<PAGE>
When applying for the Policy, the Owner will irrevocably choose which of two
tests for compliance with the Federal income tax law definition of life
insurance we will apply to the Policy. These tests are the Cash Value
Accumulation Test and the Guideline Premium/Cash Value Corridor Test. If the
Guideline Premium/Cash Value Corridor Test is chosen, premium amounts will be
limited based on the death benefit of the Policy. See Life Insurance
Definition, page .
We will not allocate funds to the Policy until we receive at least one quarter
of the Minimum Annual Premium, and we have approved the Policy for issue.
Thereafter, the timing and amount of premium payments may vary, within specified
limits. A higher premium level may be required to keep the Guaranteed Minimum
Death Benefit in force. After certain deductions have been made, Net Premiums
may be allocated to one or more of the Divisions of the Variable Account and to
the Guaranteed Interest Division. A Policy may be returned according to the
terms of the Right to Examine Policy Period (also called the Free Look Period),
during which time Net Premiums allocated to the Variable Account will be held in
the Division investing in the Fidelity VIP Money Market Portfolio of the
Variable Account. The assets of the Divisions of the Variable Account will be
used to purchase, at net asset value, shares of designated Portfolios of various
investment companies. The Policy Account Value is the sum of the amounts in the
Divisions of the Variable Account plus the amount in the Guaranteed Interest
Division and the amount in the Loan Division. The value of the amounts allocated
to the Divisions of the Variable Account will vary with the investment
experience of the corresponding Portfolios; there is no minimum guaranteed cash
value for amounts allocated to the Divisions of the Variable Account. The value
of amounts allocated to the Guaranteed Interest Division will depend on the
interest rates we declare. The Account Value will also reflect deductions for
the cost of insurance c. 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
Insurance Company
Security Life Center
1290 Broadway
Denver, CO 80203-5699
(800) 525-9852
BROKER DEALER: ING America Equities, Inc.
1290 Broadway,
Attn: Variable
Denver, CO 80203-5699
(303) 860-2000
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: May 1, 1997
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TABLE OF CONTENTS
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DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS........................... 7
POLICY SUMMARY................................................................10
General Information...........................................................10
Death Benefits................................................................10
Benefits at Maturity..........................................................11
Additional Benefits...........................................................11
Premiums......................................................................11
Allocation of Net Premiums....................................................12
Policy Values.................................................................12
Determining the Value in the Divisions of the Variable Account................12
How We Calculate Accumulation Unit Values for Each Division...................12
Transfers of Account Values...................................................12
Dollar Cost Averaging.........................................................13
Automatic Rebalancing.........................................................13
Loans.........................................................................13
Partial Withdrawals...........................................................14
Surrender.....................................................................14
Right to Exchange Policy......................................................14
Lapse.........................................................................14
Reinstatement.................................................................14
Charges and Deductions........................................................14
Persistency Refund............................................................15
Refund of Sales Charges.......................................................15
Tax Considerations............................................................15
INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS
AND THE GUARANTEED INTEREST DIVISION..........................................16
Security Life of Denver Insurance Company.....................................16
Security Life Separate Account L1.............................................16
Investment Objectives of the Portfolios.......................................17
The Guaranteed Interest Division..............................................20
DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE
VARIABLE UNIVERSAL LIFE POLICY................................................20
Applying for a Policy.........................................................20
Premiums......................................................................21
Scheduled Premiums.......................................................21
Unscheduled Premium Payments.............................................21
Minimum Annual Premium...................................................21
Premium Payments Affect The Continuation of Coverage.....................22
Choice of Definitional Tests.............................................22
Choice of Guaranteed Minimum Death Benefit Provisions....................22
Modified Endowment Contracts.............................................22
Allocation of Net Premiums....................................................22
Death Benefits................................................................23
Death Benefit Options....................................................23
Changes In Death Benefit Option..........................................23
Guaranteed Minimum Death Benefit Provision...............................24
Requirements to Maintain the Guarantee Period............................25
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Changes In Death Benefit Amounts........................................25
Benefits at Maturity.........................................................26
Additional Benefits..........................................................26
Accidental Death Benefit Rider..........................................26
Adjustable Term Insurance Rider.........................................26
Additional Insured Rider................................................27
Guaranteed Insurability Rider...........................................27
Right to Exchange Rider.................................................27
Waiver of Cost of Insurance Rider.......................................27
Waiver of Specified Premium Rider.......................................28
Policy Values................................................................28
Account Value...........................................................28
Cash Surrender Value....................................................28
Net Cash Surrender Value................................................28
Net Account Value.......................................................28
Determining the Value of Amounts in the Divisions of the Variable Account....28
How We Calculate Accumulation Unit Values for Each Division..................28
Transfers of Account Values..................................................29
Dollar Cost Averaging........................................................29
Automatic Rebalancing........................................................30
Policy Loans.................................................................31
Partial Withdrawals..........................................................32
Surrender....................................................................33
Right to Exchange Policy.....................................................33
Lapse........................................................................33
If Guaranteed Minimum Death Benefit Provision Is Not in Effect..........33
If the Guaranteed Minimum Death Benefit Provision Is in Effect..........33
Grace Period.................................................................34
Reinstatement................................................................34
CHARGES, DEDUCTIONS AND REFUNDS..............................................34
Deductions from Premiums.....................................................34
Tax Charges.............................................................34
Sales Charges...........................................................35
Daily Deductions from the Variable Account...................................35
Mortality and Expense Risk Charge.......................................35
Monthly Deductions from the Account Value....................................35
Initial Policy Charge...................................................35
Monthly Administrative Charge...........................................35
Cost Of Insurance Charges...............................................36
Charges For Additional Benefits.........................................36
Guaranteed Minimum Death Benefit Charge.................................36
Changes In Monthly Charges..............................................37
Policy Transaction Fees......................................................37
Partial Withdrawal......................................................37
Transfers...............................................................37
Premium Allocation Charges..............................................37
Illustrations...........................................................37
Persistency Refund...........................................................37
Refund of Sales Charges......................................................38
Charges from Portfolios......................................................38
Group or Sponsored Arrangements..............................................40
Other Charges................................................................40
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Strategic Advantage
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TAX CONSIDERATIONS.......................................................... 40
Life Insurance Definition................................................... 40
Diversification Requirements................................................ 41
Modified Endowment Contracts................................................ 41
Tax Treatment of Premiums................................................... 42
Loans, Lapses, Surrenders and Withdrawals................................... 42
If the Policy is Not a Modified Endowment Contract..................... 42
If the Policy is a Modified Endowment Contract......................... 42
Alternative Minimum Tax..................................................... 43
Section 1035 Exchanges...................................................... 43
Tax-exempt Policy Owners.................................................... 43
Changes to Comply with Law.................................................. 43
Other....................................................................... 44
ADDITIONAL INFORMATION ABOUT THE POLICY..................................... 44
Voting Privileges........................................................... 44
Right to Change Operations.................................................. 45
Reports to Owners........................................................... 45
OTHER GENERAL POLICY PROVISIONS............................................. 45
Free Look Period............................................................ 45
The Policy.................................................................. 46
Age......................................................................... 46
Ownership................................................................... 46
Beneficiary................................................................. 46
Collateral Assignment....................................................... 46
Incontestability............................................................ 46
Misstatements of Age or Sex................................................. 47
Suicide..................................................................... 47
Payment..................................................................... 47
Notification and Claims Procedures.......................................... 47
Telephone Privileges........................................................ 48
Non-Participating........................................................... 48
Distribution of the Policies................................................ 48
Settlement Provisions....................................................... 48
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND
ACCUMULATED PREMIUMS........................................................ 50
ADDITIONAL INFORMATION...................................................... 58
Directors and Officers...................................................... 58
State Regulation............................................................ 61
Legal Matters............................................................... 61
Legal Proceedings........................................................... 61
Experts..................................................................... 61
Registration Statement...................................................... 61
FINANCIAL STATEMENTS........................................................ 62
APPENDIX A..................................................................136
APPENDIX B..................................................................144
APPENDIX C..................................................................145
Performance Information.....................................................145
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Strategic Advantage
<PAGE>
IN THIS PROSPECTUS "WE," "US" AND "OUR" REFER TO
SECURITY LIFE OF DENVER INSURANCE COMPANY.
THIS POLICY IS NOT AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATION REGARDING THE
OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR ANY ATTACHED SUPPLEMENT HERETO.
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Strategic Advantage
<PAGE>
DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS
AS USED IN THIS PROSPECTUS, THE FOLLOWING TERMS HAVE THE INDICATED MEANINGS.
THERE ARE OTHER CAPITALIZED TERMS WHICH ARE EXPLAINED OR DEFINED IN OTHER PARTS
OF THIS PROSPECTUS.
ACCOUNT VALUE -- The sum of the amounts allocated to the Divisions of the
Variable Account and to the Guaranteed Interest Division, as well as any
amount set aside in the Loan Division to secure a Policy Loan.
ACCUMULATION UNIT -- A unit of measurement which we use to calculate the Account
Value in each Division of the Variable Account.
ACCUMULATION UNIT VALUE -- The value of the Accumulation Units of each Division
of the Variable Account. The Accumulation Unit Value is determined as of
each Valuation Date.
ADJUSTABLE TERM INSURANCE RIDER -- The Adjustable Term Insurance Rider is
available to add death benefit coverage to the Policy. The Adjustable Term
Insurance Rider allows the Owner to schedule the pattern of death benefits
appropriate for future needs. The Adjustable Term Insurance Rider is not
guaranteed under the Guaranteed Minimum Death Benefit provision.
AGE -- The 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 2, the Base Death Benefit fluctuates with the amount of the Account
Value, but will never be less than the Stated Death Benefit. Under Option
3, the Base Death Benefit equals the Stated Death Benefit of the Policy
plus the sum of all premiums paid minus Partial Withdrawals taken under the
Policy. Under Option 3, the Base Death Benefit generally will increase as
premiums are paid and decrease as Partial Withdrawals are taken. In no
event will the Base Death Benefit be less than the Stated Death Benefit.
The Base Death Benefit may be increased from the amount described to comply
with the Federal income tax law definition of life insurance, regardless of
death benefit option selected.
BENEFICIARY(IES) -- The person or persons designated to receive the Death
Proceeds in the case of the death of the Insured.
CASH SURRENDER VALUE -- The amount of the Account Value plus any refund of sales
charges due.
CUSTOMER SERVICE CENTER -- Our administrative office at P.O. Box 173763, Denver,
CO 80217-3763.
DEATH PROCEEDS -- The amount payable on the death of the Insured. It equals the
Base Death Benefit plus any Rider, if applicable, reduced by any
outstanding Policy Loan and accrued loan interest. If death occurs after
the Policy has entered the grace period, Death Proceeds will be further
reduced by any Policy charges incurred but not yet deducted.
DIVISION(S) -- The investment options available: The Divisions of the Variable
Account, each of which invests in shares of one of the Portfolios; the
Guaranteed Interest Division; and the Loan Division.
FREE LOOK PERIOD -- The period of time within which the Owner may examine the
Policy and return it for a refund. This is also called the Right to Examine
Policy Period.
GENERAL ACCOUNT -- The account which contains all of our assets other than those
held in the Variable Account or our other separate accounts.
GUARANTEED INTEREST DIVISION -- Part of our General Account to which a portion
of the Account Value may be allocated and which provides guarantees of
principal and interest. See The Guaranteed Interest Division, page 20.
GUARANTEED MINIMUM DEATH BENEFIT -- The provision in the Policy which guarantees
that the Stated Death Benefit will remain in force for the Guarantee Period
regardless of the amount of the Net Account Value, provided certain
conditions are met. See Guaranteed Minimum Death Benefit, page 24.
GUARANTEE PERIOD -- The period during which the Stated Death Benefit is
guaranteed under the Guaranteed Minimum Death Benefit provision. The two
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7
Strategic Advantage
<PAGE>
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 required premiums have not been paid or on any Monthly Processing Date
that the Net Account Value is not diversified according to our
requirements. See Guaranteed Minimum Death Benefit, page 24.
Insured -- The person on whose life this Policy is issued and upon whose death
the Death Proceeds are payable.
Investment Date -- The date on which the initial Net Premium we receive will be
allocated to the Policy. We will not allocate funds to the Policy until all
issue requirements are satisfied, we receive at least one quarter of the
Minimum Annual Premium as shown in the Schedule attached to the Policy and
we have approved the Policy for issue.
Loan Division -- Part of our General Account in which funds are set aside to
secure any outstanding Policy Loan and accrued loan interest when due.
Maturity Date -- The date the Policy matures. This is the Policy anniversary on
which the Insured's Age is nearest 100.
Minimum Annual Premium -- Twenty-five percent of this premium must be paid
before we will issue the Policy. If on each Monthly Processing Date during
the first three Policy years, the sum of premiums paid, less the sum of
Partial Withdrawals and Policy Loan taken and accrued loan interest, is
greater than or equal to one twelfth of the Minimum Annual Premium times
the number of completed Policy months, the Policy is guaranteed not to
lapse, regardless of its Net Account Value. See Minimum Annual Premium,
page 21.
Monthly Processing Date -- The date each month on which the monthly deductions
from the Account Value are due. The first Monthly Processing Date will be
the Policy Date or the Investment Date, if later. Subsequent Monthly
Processing Dates will be the same date as the Policy Date each month
thereafter unless this is not a Valuation Date, in which case the Monthly
Processing Date occurs on the next Valuation Date.
NASD -- The National Association of Securities Dealers, Inc.
Net Account Value -- The amount of the Account Value minus any Policy Loan and
accrued loan interest.
Net Amount at Risk -- The difference between the current Base Death Benefit and
the amount of the Account Value.
Net Cash Surrender Value -- The amount available if the Policy is surrendered,
which is equal to the Cash Surrender Value minus any Policy Loan and
accrued loan interest.
Net Premium -- Premium amounts paid less the sales and tax charges. These
charges are deducted from the premiums before the premium is applied to the
Account Value.
Owner -- The individual, entity, partnership, representative or party who can
exercise all rights over and receive the benefits of the Policy during the
Insured's lifetime.
Partial Withdrawal -- The withdrawal of a portion of the Net Cash Surrender
Value from the Policy. The Partial Withdrawal may reduce the amount of Base
Death Benefit and Target Death Benefit in force. See Partial Withdrawals,
page 32.
Policy -- The Policy consisting of the basic Policy, any applications and any
Riders or endorsements.
Policy Loan -- The sum of amounts borrowed from the Policy, increased by any
Policy Loan interest capitalized when due, and reduced by any Policy Loan
repayments.
Policy Date -- The date upon which the Policy becomes effective. The Policy Date
is used to determine the Monthly Processing Date, Policy months, Policy
years, and Policy monthly, quarterly, semi-annual and annual anniversaries.
Unless otherwise indicated, the term "Policy anniversary" refers to the
annual anniversary of the Policy.
Portfolios -- The investment options available to the Divisions of the
Variable Account. Each Portfolio has a defined investment objective.
Premium Class -- The underwriting class into which the Insured is categorized.
This includes factors such as 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.
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Strategic Advantage 8
<PAGE>
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 can be paid on a quarterly,
semiannual, or annual basis, as specified; the Scheduled Premium need not
be paid, and it may be changed at any time. Also, within limits, the Owner
may pay less or more than the Scheduled Premium. See Schedule Premiums,
page 21.
SEC -- The United States Securities and Exchange Commission.
STATED DEATH BENEFIT -- The initial amount of Base Death Benefit under the
Policy. The Stated Death Benefit amount will not vary unless changed by the
Owner or as a result of a transaction, e.g., a partial withdrawal.
TARGET DEATH BENEFIT -- When Adjustable Term Insurance Rider is added to the
Policy, the Owner specifies the Target Death Benefit and Stated Death
Benefit in the application for the Policy; the Adjustable Term Insurance
Rider Death Benefit is the difference between the Target Death Benefit and
the Base Death Benefit provided by the Policy. In no event will the
Adjustable Term Insurance Rider Death Benefit be less than zero. The
Adjustable Term Insurance Rider automatically adjusts over time for changes
in the Base Death Benefit due to the Federal income tax law definition of
life insurance to keep the Target Death Benefit at the desired amount. The
Target Death Benefit for each year will be shown in the Schedule when an
Adjustable Term Insurance Rider exists on the Policy.
TARGET PREMIUM -- The premium on which the sales charge is calculated. See Sales
Charges, page 35.
TRANSACTION DATE -- The date we receive a premium or an acceptable written or
telephone request at our Customer Service Center. If a premium or request
reaches our Customer Service Center on a day which is not a Valuation Date,
or after the close of business on a Valuation Date (that is, after 4:00
p.m. Eastern Time), the Transaction Date will be the next succeeding
Valuation Date.
VALUATION DATE -- Each date as of which the net asset value of the shares of the
Portfolios and unit values of the Divisions are determined. Valuation Dates
currently occur on each day on which the New York Stock Exchange and
Security Life's Customer Service Center are open for business, except for
days that a Division's corresponding Portfolio does not value its shares.
VALUATION PERIOD -- The period which begins at 4:00 p.m. Eastern Time on a
Valuation Date and ends at 4:00 p.m. Eastern Time on the next succeeding
Valuation Date.
VARIABLE ACCOUNT -- Security Life Separate Account L1 established by Security
Life to segregate the assets funding the Policy from the assets in our
General Account. The Variable Account is divided into Divisions, each of
which invests in shares of one of the Portfolios.
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Strategic Advantage
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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 Benefit, page 23. If the Policy is in the grace period, the
Death Proceeds will be paid but will be further reduced by any Policy charges
incurred but not deducted. The Death Proceeds may be paid in one sum or under a
variety of settlement options. See Settlement Provisions, page 48.
When we issue the Policy, the death benefit is equal to the Base Death Benefit
applied for plus any amount added by Adjustable Term Insurance Rider. The
minimum Stated Death Benefit for which we will issue a Policy is $50,000;
however, we may lower the minimum Stated Death Benefit for certain group or
sponsored arrangements.
The Base Death Benefit may vary from the Stated Death Benefit as a result of
choice of death benefit option, increases to keep the Base Death Benefit in
compliance with the Federal income tax law definition of life insurance, changes
in the death benefit option, or increases and decreases requested by the Owner.
The Owner may choose from three death benefit options, which may affect the
amount of the Base Death Benefit. See Death Benefit Options, page 23. The total
Stated Death Benefit is the sum of the Stated Death Benefits for all coverage
segments. The three death benefit options are:
Option 1: The Base Death Benefit equals the total Stated Death
Benefit.
Option 2: The Base Death Benefit equals the total Stated Death Benefit
plus the Account Value. Under this option, the Base Death
Benefit fluctuates daily with the amount of the Account
Value, but will never be less than the Stated Death Benefit.
Option 3: The Base Death Benefit equals the total Stated Death Benefit
plus the sum of premiums paid minus Partial Withdrawals
taken. In no event will the Base Death Benefit be less than
the Stated Death Benefit.
The Owner may request a change to the death benefit option on any Policy
anniversary. We may require evidence of insurability according to our normal
rules of underwriting for this type of Policy for a change in death benefit
option. See Changes in Death Benefit Option, page 23.
The Adjustable Term Insurance Rider is available to provide term insurance
coverage which adjusts automatically over time to fill the difference between
the Target Death Benefit chosen and the Base Death Benefit (which may change as
often as daily). The Adjustable Term Insurance Rider has no externally defined
premium; instead, a cost of insurance charge is deducted monthly from the
Account Value for the Adjustable Term
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Insurance Rider amount in effect. See Adjustable Term Insurance Rider, page 26.
Generally, the Policy will remain in force only as long as the Net Account
Value is sufficient to pay all the monthly deductions. However, if the 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 33) then the Policy and all Riders are guaranteed not to lapse, regardless
of the amount of the Net Account Value. See Guaranteed Minimum Death Benefit
Provision, page 24.
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 24.
At least 30 days prior to a Policy anniversary, the Owner may request that the
insurance coverage be increased or decreased. Increases in the death benefit
are not allowed after the Insured's Age 85. The death benefit may be changed
only once each Policy year on the Policy anniversary. The change in coverage
may not be for an amount less than $1,000. We may require evidence of
insurability according to our normal rules of underwriting for this type of
Policy for an increase to the Stated or Target Death Benefit. The Stated Death
Benefit may be decreased if the effective date of the decrease will occur after
the later of two years from the Policy Date or two years after the prior
increase is made. Decreases in the death benefit may not decrease the Stated
Death Benefit below the minimum we require to issue this Policy.
Unless otherwise indicated, any request for an increase to the Target Death
Benefit will be assumed to also be a request for an increase to the Stated Death
Benefit so that the amount of the Adjustable Term Insurance Rider at the time of
the increase will not change. In some cases, we may not approve a change if it
would disqualify the Policy as life insurance under applicable Federal income
tax law. See Life Insurance Definition, page 40, and Changes In Death Benefit
Option, page 23.
BENEFITS AT MATURITY
If the Insured is still living on the Maturity Date, we will pay the Net Account
Value. The Policy will then end. See Benefits at Maturity, page 26.
ADDITIONAL BENEFITS
Additional benefits may be included with the Policy, and are attached to the
Policy by Rider. The charge for these additional benefits is deducted monthly
from the Account Value. We offer a variety of additional benefits. See
Additional Benefits, page 26.
PREMIUMS
The Policy is a flexible premium Policy, so the amount and frequency of premium
payments may vary, within limits. Other than the Minimum Annual Premium, 25% of
which must be paid in order for coverage to begin, and any payments required to
keep the Policy in force, there are no required premium payments. The Scheduled
Premium is selected by the Owner, within our limits, when application for the
Policy is made. The Scheduled Premium may not necessarily be sufficient to
maintain the Guarantee Period for one of the Guaranteed Minimum Death Benefit
provisions or keep the Policy in force. Premium reminder notices for the
Scheduled Premiums will be sent on an annual, semi-annual, or quarterly basis.
Monthly payments may be made by Electronic Funds Transfer from a checking
account. The financial institution making the Electronic Funds Transfers may
impose a charge for this service. See Premiums, page 21.
When applying for the Policy, the Owner will irrevocably choose which of two
tests for compliance with the Federal income tax law definition of life
insurance we will apply to the Policy. These tests are the Cash Value
Accumulation Test and the Guideline Premium/Cash Value Corridor Test. These
tests may limit the amount of premiums that may be paid. See Choice of
Definitional Test, page 22, and Life Insurance Definition, page 40.
The Owner may also choose to purchase one of two Guaranteed Minimum Death
Benefit provisions. These provide a guarantee after the first three policy years
(special continuation period) that the Stated Death Benefit will remain in force
for the Guarantee Period regardless of the amount of the Policy's Net Account
Value. The provision allows a choice of the Guarantee Period: a) ten-year or to
the Insured's Age 65, whichever is later, or b) lifetime. Premium levels higher
than the Minimum Annual Premium will be required if one of the Guaranteed
Minimum Death Benefit provisions is chosen. An extra charge will be deducted
from the Account Value each month the Guaranteed Minimum Death Benefit is in
effect. In addition on all Monthly Processing Dates during the Guarantee Period,
the Net Account Value must remain diversified according to our requirements. The
Guaranteed Minimum Death Benefit provisions may not
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be available in all states. See Changes In Death Benefit Option, page 23.
We will notify the Policy Owner if the Scheduled Premium would cause the Policy
to immediately be a Modified Endowment Contract under Federal income tax law.
See Modified Endowment Contracts, page 22.
Generally, unscheduled premium payments may be made at any time so long as each
payment is at least $100. We reserve the right to limit unscheduled premiums if
the payment would result in an increase in the amount of Base Death Benefit
required by the Federal income tax law definition of life insurance. If a Policy
Loan is outstanding, any payment which is not a Scheduled Premium payment
received before the Maturity Date is considered a loan repayment, unless
otherwise indicated. See Unschedule Premium Payments, page 21.
Since this is a flexible premium life insurance Policy, the amount of premiums
paid will affect the length of time the Policy will stay in force. See Premium
Payments Affect The Continuation of Coverage, page 22.
ALLOCATION OF NET PREMIUMS
After certain premium-based charges are deducted from each premium, the balance,
called the Net Premium, is added to the Account Value based on the premium
allocation instructions. Net Premiums may be allocated to one or more of the
Divisions of the Variable Account, or to the Guaranteed Interest Division, or
both. Amounts allocated to the Divisions of the Variable Account will be held in
the Division investing in the Fidelity VIP Money Market Portfolio until the end
of the Free Look Period. At the end of the Free Look Period, this portion of the
Account Value will be reallocated according to the most recent premium
allocation instructions.
Net Premiums received after the Free Look Period will be allocated upon receipt
according to the most recent written premium allocation instructions. Allocation
percentages must be in whole numbers, with the sum equaling 100%. See Allocation
of Net Premiums, page 22.
POLICY VALUES
The Policy Account Value is equal to the sum of the amounts in the Guaranteed
Interest Division and in the Divisions of the Variable Account. It also includes
any amount we set aside in the Loan Division as collateral for any outstanding
Policy Loan. The Account Value reflects Net Premiums paid, as well as deductions
for charges. It will also reflect the investment experience of amounts allocated
to the Divisions of the Variable Account, and interest earned on amounts
allocated to the Guaranteed Interest Division and the Loan Division. Any Partial
Withdrawal, and any service fee, will be deducted from the Account Value.
The Cash Surrender Value of the Policy is equal to the Account Value plus any
refund of sales charges due.
The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value
less the amount of any outstanding Policy Loan and accrued loan interest.
The Net Account Value of the Policy is equal to the Account Value less the
amount of any outstanding Policy Loan and accrued loan interest.
DETERMINING THE VALUE IN THE DIVISIONS OF THE VARIABLE ACCOUNT
The amounts included in the Divisions of the Variable Account are measured in
terms of Accumulation Units and Accumulation Unit Values. On any given day, the
value of the amount in a Division of the Variable Account is equal to the
Accumulation Unit Value times the number of Accumulation Units credited in that
Division. The Accumulation Units of each Division of the Variable Account will
have different Accumulation Unit Values. See Determining the Value of Amounts in
the Divisions of the Variable Account, page 28.
HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION
We determine Accumulation Unit Values for each Division of the Variable Account
as of each Valuation Date. All Policy transactions are effective as of a
Valuation Date. The Accumulation Unit Value of each Division reflects the
investment experience of the underlying Portfolio for the Valuation Period as
well as asset based charges deducted in connection with the Policy and the
expenses of the Portfolio. See How We Calculate Accumulation Unit Values for
Each Division. page 28. 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
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<PAGE>
TRANSFERS OF ACCOUNT VALUES
transfers without a charge. The minimum amount we will transfer is $100.
Once during the first 30 days of each Policy year, transfers may be made from
the Guaranteed Interest Division. Transfer requests received within 30 days
prior to the Policy anniversary will be deemed to occur as of the Policy
anniversary. Transfer requests received on the Policy anniversary or within the
following 30 days will be processed. Transfer requests received at any other
time will not be processed. Transfers of the Account Value to the Guaranteed
Interest Division are not limited to this 30-day period.
Transfer amounts from the Guaranteed Interest Division to the Divisions of the
Variable Account are limited to the greatest of (i) 25% of the balance in the
Guaranteed Interest Division at the time of the first transfer or withdrawal in
a Policy year, (ii) the sum of any amounts transferred and withdrawn from the
Guaranteed Interest Division in the prior Policy year, or, (iii) $100. See
Transfers of Account Values, page 29.
DOLLAR COST AVERAGING
Dollar Cost Averaging is available by electing this feature on the application,
by completing the appropriate form or by telephone, if the proper telephone
authorization form is on file with us. We offer Dollar Cost Averaging to Owners
who have at least $10,000 either in the Division investing in the Fidelity VIP
Money Market Portfolio or the Division investing in the Neuberger & Berman AMT
Limited Maturity Bond Portfolio of the Variable Account. With Dollar Cost
Averaging, a designated dollar amount of Account Value in the selected Division
will be transferred automatically as of each Monthly Processing Date to one or
more other Divisions of the Variable Account. The monthly transfer under Dollar
Cost Averaging may be no less than $100 per month. Dollar Cost Averaging may
also be used to meet the diversification requirements of the Guaranteed Minimum
Death Benefit provisions. There is no charge for this feature.
If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost
Averaging will occur first. As of the first Valuation Date of the next calendar
quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will
begin. When dollar cost averging terminates you will need to change your
premium allocation to your desired Automatic Rebalancing allocation. See Dollar
Cost Averaging, page 29.
AUTOMATIC REBALANCING
Automatic Rebalancing is available by electing this feature on the application,
by completing the appropriate form or by telephoning us, if the proper telephone
authorization form is on file with us. Automatic Rebalancing allows the Owner to
match Account Value allocations over time to the premium allocation percentages.
As of the first Valuation Date of each calendar quarter, we will automatically
rebalance the amounts in the Divisions to match the current premium allocation
percentages according to the most recent instructions. This will rebalance the
Account Values that may be out of line with those allocation percentages, which
may result, for example, from Divisions which underperform other Divisions in
certain quarters.
With Automatic Rebalancing, Account Values may be reallocated among any number
of Divisions, and those allocations may, within certain limits, be changed at
any time. Automatic Rebalancing may also be used to simplify the process of
meeting the diversification requirements of the Guaranteed Minimum Death Benefit
provisions.
Any transfers as a result of the operation of the Automatic Rebalancing feature
are not counted toward the limit of 12 transfers than can be made each Policy
year without a transfer charge. However, we will charge a fee of $25 each time
premium allocation is changed more often than five times per Policy year;
otherwise, there is no charge for this feature.
If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost
Averaging will occur first. As of the first Valuation Date of the next calendar
quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will
begin. See Automatic rebalancing, page 30.
LOANS
Loans may be taken against the Policy's Account Value as of the Valuation Date
the loan request is processed. Unless otherwise required by state law, the loan
must be at least $100. Loan interest accrues at an annualized rate of 3.75%. An
amount equal to the Policy Loan is withdrawn from the Divisions of the Variable
Account and from the Guaranteed Interest Division and is placed in our General
Account as collateral for the loan. We call this segregated amount the Loan
Division. The Loan Division earns a guaranteed rate of interest equal to 3% on
an annualized basis. Unless otherwise indicated, we will assume that any
payments, other than Scheduled
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<PAGE>
Premiums, constitute Policy Loan repayments and not premiums. See Policy Loans,
page 31.
PARTIAL WITHDRAWALS
A Partial Withdrawal of a portion of the Net Account Value may be requested any
time after the first Policy year, within limits.
One Partial Withdrawal is allowed each Policy year. The minimum Partial
Withdrawal is $100; the maximum Partial Withdrawal is the amount which will
leave $500 as the Net Account Value. We will process only the amount of the
Partial Withdrawal request which will leave $500 as the Net Account Value. If
more than this maximum is requested, we will require a full surrender of the
Policy. When a Partial Withdrawal is taken, the amount of the withdrawal plus a
service fee is deducted from the Account Value. Depending on the amount of the
withdrawal, the Death Proceeds payable under the Policy may also be reduced. No
Partial Withdrawal will be allowed if the Stated Death Benefit remaining in
force after the Partial Withdrawal would be less than the minimum we require to
Issue this Policy at the time of the reduction. See Partial Withdrawals, page
32.
SURRENDER
The Policy may be surrendered for its Net Cash Surrender Value at any time while
the Insured is living. The Net Cash Surrender Value of the Policy equals the
Cash Surrender Value minus any Policy Loan and accrued loan interest. We will
compute the Net Cash Surrender Value as of the Valuation Date we receive the
request for surrender and the Policy at our Customer Service Center, and all
insurance coverage will end on that date. See Surrender, page 33.
RIGHT TO EXCHANGE POLICY
At any time during the first 24 months following the Policy Date or a requested
increase to the Stated Death Benefit, the Owner may exercise the right to
exchange the Policy from one in which the Account Value is not guaranteed into a
guaranteed Policy 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, the allocation of all future premium payments
to the Guaranteed Interest Division and the removal of the right to allocate
future amounts to the Variable Account. See Surrender, page 33.
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 (the special
continuation period), if on each Monthly Processing Date the sum of the premiums
paid, less the sum of Partial Withdrawals, any outstanding Policy Loan and
accrued loan interest is greater than or equal to one twelfth of the Minimum
Annual Premium times the number of completed Policy months, then the Policy and
all attached Riders are guaranteed not to lapse, regardless of the amount of the
Net Account Value.
Also, if the Guaranteed Minimum Death Benefit provision has been elected and the
Guarantee Period has not ended, the Stated Death Benefit will remain in effect
after the first three policy years (special continuation period) regardless of
the amount of the Net Account Value. Any Policy charges during the Guarantee
Period which would reduce the Net Account Value below zero will be waived. The
Guarantee Period will end if the Policy does not meet the monthly premium test
or if on any Monthly Processing Date the Net Account Value is not diversified
according to our requirements as explained under Guaranteed Minimum Death
Benefit Provision, page 24. See Lapse, page 33.
REINSTATEMENT
A lapsed Policy and its Riders may be reinstated within five years of its lapse
if it has not been surrendered for its Net Cash Surrender Value. This will
require new evidence of insurability and payment of certain reinstatement
premiums. We will also reinstate any Policy Loan which existed when coverage
ended, with accrued loan interest to the date of lapse. See Reinstatement, page
14.
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
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<PAGE>
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 34.
DEDUCTIONS FROM THE VARIABLE ACCOUNT: A mortality and expense risk charge is
assessed against the Divisions of the Variable Account in the amount of 0.75%
per annum (0.002055% per day). We assess the mortality and expense risk charge
to compensate us for assuming mortality and expense risks under the Policies.
See Daily Deductions from the Variable Account, page 35.
MONTHLY DEDUCTIONS FROM THE ACCOUNT VALUE: The following charges are deducted
from the Account Value at the beginning of each Policy month:
(i) Initial Policy Charge -- $10 per month for the first five Policy
years.
(ii) Monthly Administrative Charge -- $5 per month plus $0.0125 per
thousand of Stated Death Benefit (or Target Death Benefit if
greater). 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 base coverage segments.
(iv) Charges for Additional Benefits -- The cost of any additional
benefits added by Rider, other than the Adjustable Term Insurance
Rider.
(v) Guaranteed Minimum Death Benefit Charge -- currently $0.005 per
thousand of the Stated Death Benefit during the Guarantee Period.
This charge is guaranteed to never be greater than $.01 per thousand
of the Stated Death Benefit.
See Monthly Deductions from the Account Value, page 35.
Policy Transaction Fees: Policy Transaction Fees are deducted from the Divisions
of the Variable Account and Guaranteed Interest Division in the same proportion
that the Account Value in each Division bears to the Net Account Value
immediately after the transaction for which the charge is made. See Policy
Transaction Fees, page 37.
Charges From Portfolios: Shares of the Portfolios are purchased at net asset
value, which reflects investment management and other direct expenses that have
already been deducted from the assets of the Portfolio. See Charges from
Portfolios, page 38.
PERSISTENCY REFUND
The Account Value will be credited with a Persistency Refund each Monthly
Processing Date after the 10th Policy anniversary. The refund is equivalent to
0.5% of the Account Value per year, adjusted for any coverage segment in force
for fewer than 10 years. See Persistency Refund, page 37.
REFUND OF SALES CHARGES
If the Policy has not lapsed, we will, upon full surrender of the Policy within
the first 2 Policy years, return a portion of the sales charges previously
deducted from premiums paid. See, Refund of Sales Charges, page 38.
TAX CONSIDERATIONS
Under current Federal income tax law, death benefits of life insurance policies
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 we will apply to
the Policy in the application. After the Policy Date, the Policy will reflect
the test chosen. See Life Insurance Definition, page 40.
Generally, under current Federal income tax law, Account Value earnings are not
subject to income tax as long as they remain within the Policy. Loans, Partial
Withdrawals, surrender, lapse or an exchange of Insured may result in
recognition of ordinary income for tax purposes and may result in penalties if
the Policy is considered a Modified Endowment Contract as explained in Modified
Endowment Contracts, page 22.
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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. That portion of the assets of the
Variable Account which is equal to the reserves and other Policy liabilities
with respect to the Variable Account is not chargeable with liabilities arising
out of any other business we conduct. The Variable Account may, however, be
subject to liabilities arising from Divisions of the Variable Account whose
assets are attributable to other variable life policies offered by the Variable
Account. If the assets exceed the required reserves and other policy
liabilities, we may transfer the excess to our General Account. Before making
any such transfer, Security Life will consider any possible adverse effect the
transfer might have on the Variable Account.
The Variable Account has several Divisions, each of which invests in shares of
a corresponding Portfolio of a mutual fund. Therefore, the investment experience
of a Policy depends on the experience of the Portfolios designated. 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
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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.
Unless restricted by a state, the Company reserves the right to limit the number
of Variable Account Divisions in which an Owner may invest.
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.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS
Each Portfolio has a different investment objective that it tries to achieve by
following its investment strategy. The objectives and policies of each Portfolio
will affect its return and its risks. A summary of the investment objectives is
contained in the description of each Portfolio below. More detailed information
may be found in the current prospectus for each Portfolio. A prospectus for the
Portfolios being considered must accompany this prospectus and should be read in
conjunction with this prospectus.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Neuberger & Berman Advisers Management Trust (the "Trust") is a registered,
open-end management investment company organized as a Delaware business trust
pursuant to a Trust Instrument dated May 23, 1994. The Trust is comprised of
separate Portfolios, each of which invests all of its net investable assets in a
corresponding series of Advisers Managers Trust ("Managers Trust"), a
diversified, open-end management investment company organized as of May 24, 1994
as a New York common law trust. This master feeder structure is different from
that of many other investment companies which directly acquire and manage their
own portfolios of securities. Neuberger & Berman Management Incorporated acts as
investment manager to Managers Trust and Neuberger & Berman, L.P. as
sub-adviser.
Limited Maturity Bond Portfolio --- seeks the highest 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
________________________________________________________________________________
17
Strategic Advantage
<PAGE>
mortgage backed securities (including U.S. Government mortgage backed
securities) and asset backed securities. The investment manager follows a
flexible investment strategy depending on market conditions and interest
rate trends.
Growth Portfolio -- seeks capital appreciation without regard to income and
invests in small, medium and large capitalization securities believed to
have maximum potential for long-term capital appreciation. The portfolio
utilizes a "growth at a reasonable price" strategy in selecting these
securities. This investment program involves greater risks and share price
volatility than programs that invest in more conservative securities.
Partners Portfolio -- seeks capital growth through an investment approach that
is designed to increase capital with reasonable risk. Its investment
program seeks securities believed to be undervalued based on strong
fundamentals such as low price to earnings ratio, consistent cash
flow, and support from asset values. Up to 15% of the series' net
assets, measured at the time of investment, may be invested in
corporate debt securities rated below investment grade.
The Alger American Fund
The Alger American Fund is a registered investment company organized on April 6,
1988 as a multi-series Massachusetts business trust. The Fund's investment
manager is Fred Alger Management, Inc., which has been in the business of
providing investment advisory services since 1964.
Alger American Small Capitalization Portfolio -- seeks to obtain long term
capital appreciation. Except during temporary defensive periods, the
Portfolio invests at least 65% of its total assets in equity securities of
companies that, at the time of purchase of the securities, have total
market capitalization within the range of companies included in the Russell
2000 Growth Index ("Russell Index") or the S&P SmallCap 600 Index ("S&P
Index"), updated quarterly. Both indexes are broad indexes of small
capitalization stocks. As of March 31, 1997, the range of market
capitalization of the companies in the Russell Index was $10 million to
$1.945 billion; the range of market capitalization of the companies in the
S&P Index at that date was $32 million to $2.579billion. The combined range
was $10 million to $ 2.579 billion.
Alger American MidCap Growth Portfolio -- seeks long-term capital appreciation.
Except during temporary defensive periods, the Portfolio invests at least
65% of its total assets in equity securities of companies that, at the time
of purchase of the securities, have total market capitalization within the
range of companies included in the S&P MidCap 400 Index, updated quarterly.
The S&P MidCap 400 Index is designed to track the performance of medium
capitalization companies. As of March 31, 1997, the range of market
capitalization of these companies was $120 million to $7.193 billion.
Alger American Growth Portfolio -- seeks to obtain long-term capital
appreciation. The Portfolio will invest its assets primarily in companies
whose securities are traded on domestic stock exchanges or in the over-the-
counter market. Except during temporary defensive periods, the Portfolio
will Invest at least 65% of its total assets in the securities of companies
that, at the time of purchase of the securities, have a total market
capitalization of $1 billion or greater.
Alger American Leveraged AllCap Portfolio -- seeks long-term capital
appreciation. The Portfolio may purchase put and call options and sell
(write) covered call and put options on securities and securities indexes
to increase gain and to hedge against the risk of unfavorable price
movements, and may enter into futures contracts on securities indexes and
purchase and sell call and put options on these futures contracts. The
Portfolio may also borrow money for the purchase of additional securities.
The Portfolio may borrow only from banks and may not borrow in excess of
one third of the market value of its assets, less liabilities other than
such borrowing. Except during temporary defensive periods, the Portfolio
will invest 85% of its net assets in equity securities of companies of any
size.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND
II
Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund
II are open-end, diversified, management investment companies organized as
Massachusetts business trusts on November 13, 1981 and March 21, 1988,
respectively. The funds are managed by Fidelity Management & Research Company
("FMR") which handles the Funds' business affairs. FMR is the management arm of
Fidelity Investments, which was established in 1946 and is now America's largest
mutual fund manager.
VIP Growth Portfolio -- seeks capital appreciation by investing in common
stocks, although the
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18
Strategic Advantage
<PAGE>
Portfolio is not limited to any one type of security.
VIP Overseas Portfolio -- seeks long term growth of capital primarily through
investments in foreign securities. The Overseas Portfolio provides a means
for investors to diversify their own portfolios by participating in
companies and economies outside of the United States.
VIP Money Market Portfolio -- seeks as high a level of current income as is
consistent with preserving capital and providing liquidity. The Portfolio
will invest only in high quality U.S. dollar-denominated money market
securities of domestic and foreign issuers.
VIP II Asset Manager Portfolio -- seeks high total return with reduced risk over
the long-term by allocating its assets among domestic and foreign stocks,
bonds, and short-term fixed-income instruments.
VIP II Index 500 Portfolio -- seeks to provide investment results that
correspond to the total return (i.e., the combination of capital changes
and income) of common stocks publicly traded in the United States. In
seeking this objective, the Portfolio attempts to duplicate the composition
and total return of the Standard & Poor's Composite Index of 500 Stocks
while keeping transaction costs and other expenses low. The Portfolio is
designed as a long-term investment option.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO Variable Investment Funds, Inc. is a registered, open-end management
investment company that was organized as a Maryland corporation on August 19,
1993, and is currently comprised of four diversified investment Portfolios,
described below. INVESCO Funds Group, Inc., the Fund's investment adviser, is
primarily responsible for providing the Portfolios with various administrative
services and supervising the Fund's daily business affairs. Portfolio management
is provided to each Portfolio by its sub-adviser. INVESCO Trust Company serves
as sub-adviser to the Industrial Income, High Yield and Utilities Portfolios.
INVESCO Capital Management, Inc. serves as sub-adviser to the Total Return
Portfolio.
INVESCO VIF Total Return Portfolio -- seeks a high total return on investment
through capital appreciation and current income. The Total Return Portfolio
seeks to achieve its investment objective by investing in a combination of
equity securities (consisting of common stocks and, to a lesser degree,
securities convertible into common stock) and fixed income securities.
INVESCO VIF Industrial Income Portfolio -- seeks the best possible current
income, while following sound investment practices. Capital growth
potential is an additional consideration in the selection of portfolio
securities. The Portfolio normally invests at least 65% of its total assets
in dividend-paying common stocks. Up to 10% of the Portfolio's total assets
may be invested in equity securities that do not pay regular dividends. The
remaining assets are invested in other income-producing securities, such as
corporate bonds. The Portfolio also has the flexibility to invest in other
types of securities.
INVESCO VIF High Yield Portfolio -- seeks a high level of current income by
investing substantially all of its assets in lower rated bonds and other
debt securities and in preferred stock. Under normal circumstances, at
least 65% of the Portfolio's total assets will be invested in debt
securities having maturities at the time of issuance of at least three
years. Potential capital appreciation is a factor in the selection of
investments, but is secondary to the Portfolio's primary objective. This
Portfolio may not be appropriate for all Owners due to the higher risk of
lower rated bonds commonly known as "junk bonds." See the prospectus for
the INVESCO VIF High Yield Portfolio for more information concerning these
risks.
INVESCO VIF Utilities Portfolio -- seeks capital appreciation and income through
investments primarily in equity securities of companies principally engaged
in the public utilities business.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is a open-end management investment company
organized as a "business trust" under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as
investment adviser and manager to the Worldwide Hard Assets 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.
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19
Strategic Advantage
<PAGE>
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 a long-term capital appreciation by
investing globally, primarily in "Hard Asset Securities." Hard assets are
tangible, finite assets, such as real estate, energy, timber, and
industrial and precious metals. Income is a secondary consideration.
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 all issue requirements are satisfied, we
receive and apply the first premium payment, in an amount not less than 25% of
the Minimum Annual Premium, and approve the policy for issue. 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
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20
Strategic Advantage
<PAGE>
underwriting and reinsurance procedures in effect at the time of application.
The Policy Date is the date upon which the Policy becomes effective. The Policy
Date is the date used to determine Policy years and Policy months regardless of
when the Policy is delivered. In the case of certain payroll deduction plans or
other automatic investment plans, the Policy Date may be different from the date
the first premium payment is received. If the Policy Date is prior to the
Investment Date, we will charge monthly deductions from the Policy Date.
If a premium payment in an amount not less than one-twelfth of the Minimum
Annual Premium is received with the application and there has been no material
misrepresentation in the application, temporary insurance equal to the face
amount applied for up to a maximum amount as described in the binding limited
life insurance coverage form will be in force. Coverage will begin when the
binding limited life insurance coverage form has been completed and signed, a
premium has been accepted by us and Part I of the application has been
completed. Binding limited life insurance coverage will end on the earliest of
the date: (i) premiums are returned five days after notice of termination is
mailed to the Owner's address on the application; (ii) coverage starts under the
Policy resulting from the application; (iii) a policy resulting from the
application is refused by us; or (iv) 90 days after the date the binding limited
life insurance coverage form is signed. In no event will a death benefit be
provided under the temporary insurance agreement if there was a material
misrepresentation in the answers to the questions in the binding limited life
insurance coverage form or any question or statement in the application, a
proposed Insured dies by suicide or intentional self-inflected injury, or the
premium check or authorized withdrawal is not honored.
PREMIUMS
The amount and frequency of premium payments are flexible, within the limits
described below.
SCHEDULED PREMIUMS
Even though premium amounts are flexible, the Schedule pages of the Policy will
show a "Scheduled Premium." The Scheduled Premium may be chosen by the Owner,
within our limits, when application for the Policy is made. The Scheduled
Premium is the amount which is to be paid over a specified period of time and
may not necessarily be sufficient to keep the Policy in force. Premiums can be
paid on a quarterly, semiannual, or annual basis. Alternatively, the premiums,
other than the first, may be paid via Electronic Fund Transfer each month. The
financial institution making the Electronic Funds Transfer may impose a charge
for this service. The Owner is not required to pay the Scheduled Premium, and
it may be changed at any time subject to the maximum and minimum limits we may
set. If one of the Guaranteed Minimum Death Benefit provisions described below
has been chosen, the Scheduled Premium should not be less than the amount
required to maintain the guarantee.
UNSCHEDULED PREMIUM PAYMENTS
Generally, unscheduled premium payments may be made at any time as long as each
payment is at least $100. Unless otherwise required by state law, we may change
this minimum if we give 90 days written notice of the change. We reserve the
right to limit the amount of unscheduled premiums if the payment would result in
an increase in the amount of the Base Death Benefit required by the Federal
income tax law definition of life insurance, or to require suitable evidence of
the insurability of the Insured at the time of the unscheduled premium payment.
Premiums may also be limited if the Guideline Premium/Cash Value Corridor Test
is chosen to comply with the Federal income tax law definition of life
insurance. We will return premium payments if we determine the payment would
cause the Policy to immediately become a Modified Endowment Contract. After the
Owner has signed a form acknowledging that the Owner understands the Policy will
be a Modified Endowment Contract, we will apply future premium payments. See
Modified Endowment Contracts, page 22 and Changes to Comply with Law, page
43.
If a Policy Loan is outstanding, any payment which is not a Scheduled Premium
payment received before the Maturity Date is considered a loan repayment, unless
otherwise indicated. Applicable tax and sales charges are not deducted from a
loan repayment but are deducted from any payment which constitutes a premium.
MINIMUM ANNUAL PREMIUM
At least 25% of the Minimum Annual Premium must be paid and received by our
Customer Service Center before the insurance will go into effect. We determine
the applicable Minimum Annual Premium based on the Age, sex and Premium Class of
the Insured, the Stated Death Benefit of the Policy and any additional benefits
selected. We may reduce the Minimum Annual Premium for certain group or
sponsored arrangements. The Minimum Annual Premium for the Policy is shown in
the Schedule pages of the Policy.
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21
Strategic Advantage
<PAGE>
If on each Monthly Processing Date during the first three Policy years, the sum
of premiums paid, less the sum of Partial Withdrawals and Policy Loans taken
including accrued loan interest, is greater than or equal to one twelfth of the
Minimum Annual Premium times the number of completed Policy months, the Policy
is guaranteed not to lapse, regardless of its Net Account Value. See Lapse, page
33.
PREMIUM PAYMENTS AFFECT THE CONTINUATION OF COVERAGE
If premium payments are discontinued, either temporarily or permanently, the
Policy will continue in effect until the Net Account Value can no longer cover
the monthly deductions for the benefits selected and the Policy will lapse. See
Lapse, page 33. If the Minimum Annual Premium requirements are satisfied, the
Policy is guaranteed not to lapse during the first three Policy years,
regardless of its Net Account Value. If one of the Guaranteed Minimum Death
Benefit provisions has been purchased, the Stated Death Benefit portion of the
Policy will remain in effect until the end of the Guarantee Period so long as
the conditions of the guarantee are met. See Guaranteed Minimum Death Benefit,
page 24.
CHOICE OF DEFINITIONAL TESTS
When application for the Policy is made, the Owner will irrevocably choose which
of the two tests for compliance with the Federal income tax law definition of
life insurance we will apply to the Policy. These tests are the Cash Value
Accumulation Test and the Guideline Premium/Cash Value Corridor Test. See Life
Insurance Definition, page 40. If the Guideline Premium/Cash Value Corridor Test
is chosen, the premium payments that may be made relative to the death benefit
of the Policy will be limited.
CHOICE OF GUARANTEED MINIMUM DEATH BENEFIT PROVISIONS
When applying for the Policy, the Owner will also have the opportunity to choose
from one of two Guaranteed Minimum Death Benefit provisions, which may extend
the period that the Stated Death Benefit of the Policy will remain in effect if
the Divisions of the Variable Account suffer adverse investment experience.
These provisions require premium payment levels which are higher than the
Minimum Annual Premium and an extra charge will be deducted from the Account
Value each month during the Guarantee Period. In addition, the Net Account Value
of the Policy must remain diversified according to our requirements. See
Guaranteed Minimum Death benefit, page 24.
The required premium levels depend on which of the two Guarantee Periods is
chosen, as well as the Stated Death Benefit of the Policy, the Insured's Age,
sex, and Premium Class, the death benefit option chosen, and Rider coverage. For
Policies with no other Rider coverage, the required premium level for the
Lifetime Guarantee Period will be equal to the guideline annual premium
determined in accordance with the Federal income tax law definition of life
insurance; the required premium level for the Ten Year/Age 65 Guarantee Period
will be less than the guideline annual premium. Adding additional benefits to
the Policy will increase the required premium levels above those indicated
above.
Policy Owners should consider the Guaranteed Minimum Death Benefit provision
when setting the Scheduled Premium.
MODIFIED ENDOWMENT CONTRACTS
Regardless of which test for compliance with the Federal income tax law
definition of life insurance is chosen, Federal income tax law provides special
rules for the income taxation of distributions from life insurance policies
which are defined as "Modified Endowment Contracts." These rules apply to
distributions such as Policy Loans, surrenders and Partial Withdrawals. The
application of these rules depends upon whether premiums have been paid which
exceed a defined "seven-pay" limit. See Modified Endowment Contracts, page 41.
If we determine that the Scheduled Premium will cause the Policy to be a
Modified Endowment Contract on the Policy Date, we will issue the Policy based
on the Scheduled Premium selected, but we will require the Owner to sign a form
acknowledging that the Policy is a Modified Endowment Contract. Alternatively,
the Scheduled Premium may be reduced to a level which will not cause the Policy
to become a Modified Endowment Contract, and we will issue the Policy based on
the revised Scheduled Premium.
ALLOCATION OF NET PREMIUMS
After certain premium-based charges are deducted from each premium, the balance,
called the Net Premium, is added to the Account Value based on the Owner's
instructions. Net Premium amounts allocated to the Guaranteed Interest Division
will be allocated to that Division upon receipt. During the Free Look Period,
Net Premiums allocated to the Divisions of the Variable Account will be
allocated to the Division investing in
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22
Strategic Advantage
<PAGE>
Fidelity VIP Money Market Portfolio of the Variable Account. At the end of the
Free Look Period, this portion of the Account Value will be automatically
allocated according to the most recent premium allocation instructions. See Free
Look Period, page 45.
Net Premiums received after the Free Look Period will be allocated upon receipt
according to the allocation instructions stated in the application for the
Policy or the most recent instructions. Allocation percentages must be in whole
numbers, with the sum for all Divisions equaling 100%. Premium allocation
instructions may be changed up to five times per Policy year without charge.
Premium allocation changes exceeding five in a Policy year will be subject to a
$25 charge for each additional change.
DEATH BENEFITS
Strategic Advantage offers the flexibility to determine the amount of insurance
coverage needed, both now and in the future. It does this by combining the long-
term advantages of permanent life insurance coverage with the flexibility and
short-term advantages of term life insurance. Both permanent and term life
insurance are available in this single Policy, Strategic Advantage.
When a Policy is issued, an initial amount of insurance coverage is determined
according to the instructions included in the application. The death benefit
initially consists of a Stated Death Benefit and, if desired, an additional
amount of insurance coverage which is added by Adjustable Term Insurance Rider.
The Stated Death Benefit is the long-term element of the Policy; the Adjustable
Term Insurance Rider is the term insurance element of the Policy.
As described below, the Base Death Benefit may vary from the Stated Death
Benefit. This may result from choice 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, or requested increases and
decreases.
The Adjustable Term Insurance Rider provides term insurance coverage which
adjusts automatically to fill the difference between the Target Death Benefit
chosen and the Base Death Benefit. The Adjustable Term Insurance Rider does not
have an externally defined premium; the cost is included in the monthly cost of
insurance charges discussed below. See Adjustable Term Insurance Rider,
page 26.
So long as the Policy remains in force, we will pay an amount equal to the Death
Proceeds to the Beneficiary of this Policy when the Insured dies. The Death
Proceeds will consist of the Base Death Benefit, reduced by any outstanding
Policy Loan and accrued loan interest (and, if in the grace period, further
reduced by any overdue charges).The Death Proceeds will also include any amount
provided by Rider on the primary Insured.
DEATH BENEFIT OPTIONS
The Owner may choose from three death benefit options: Option 1, Option 2 or
Option 3. These options may result in a Base Death Benefit under the Policy
which exceeds the Stated Death Benefit. The death benefit option may be changed
on any Policy anniversary. See Changes In Death Benefit Option, page 23.
Under Option 1, the Base Death Benefit equals the Stated Death Benefit of the
Policy.
Under Option 2, the Base Death Benefit equals the Stated Death Benefit of the
Policy plus the Account Value. Under Option 2, the Base Death Benefit fluctuates
daily with the amount of the Account Value, but will never be less than the
Stated Death Benefit.
Under Option 3, the Base Death Benefit equals the Stated Death Benefit of the
Policy plus the sum of all premiums paid minus Partial Withdrawals taken under
the Policy. Therefore, the Base Death Benefit generally will increase as
premiums are paid and decrease as Partial Withdrawals are taken. In no event
will the Base Death Benefit be less than the Stated Death Benefit.
Owners who prefer to have any favorable investment experience reflected in
increased insurance coverage should choose Option 2. Owners who prefer to have
insurance coverage that does not vary in amount, and lower cost of insurance
charges, should choose Option 1. Owners who wish to have their coverage
generally reflect their premium outlay should choose Option 3.
Federal income tax law requires the death benefit to be at least as great as the
Account Value times a factor which is defined in the law. The factors are
determined based upon the 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 40, page 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
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23
Strategic Advantage
<PAGE>
will be effective as of the Policy anniversary. The death benefit option change
applies to the entire Stated Death Benefit. For us to approve a change in the
death benefit option from Option 1 to Option 2, or from Option 1 to Option 3,
evidence that the Insured is insurable according to our normal rules of
underwriting for that class of policy must be submitted to us. We may not allow
a change that would reduce the Stated Death Benefit below the minimum were
require to issue this Policy. After the effective date of the change, the Stated
Death Benefit will be changed according to the following table:
<TABLE>
<CAPTION>
OPTION CHANGE STATED DEATH BENEFIT
FROM TO FOLLOWING CHANGE
EQUALS:
<S> <C> <C>
Option 1 Option 2 Stated Death Benefit prior to such change minus
the Account Value as of the effective date of the
change.
Option 2 Option 1 Stated Death Benefit prior to such change plus the
Account Value as of the effective date of the
change.
Option 1 Option 3 Stated Death Benefit prior to such change minus
(i) the sum of the premiums paid, plus (ii)
Partial Withdrawals taken as of the effective date
of the change.
Option 3 Option 1 Stated Death Benefit prior to such change plus (i)
the sum of the premiums paid, minus (ii) Partial
Withdrawals taken as of the effective date of the
change.
Option 2 Option 3 Stated Death Benefit prior to such change plus (i)
the Account Value as of the effective date of the
change, minus (ii) the sum of the premiums paid
minus Partial Withdrawals taken as of the
effective date of the change.
Option 3 Option 2 Stated Death Benefit prior to such change plus (i)
the sum of the premiums paid minus Partial
Withdrawals taken as of the effective date of the
change, minus (ii) the Account Value as of the
effective date of the change.
</TABLE>
For purposes of a death benefit option change, the Account Value will be
allocated to each coverage segment in the same proportion that the Stated Death
Benefit of that segment bears to the sum of all Stated Death Benefit segments.
See Changes In Death Benefit Amounts, page 23.
We do not adjust the Target Premium when this type of change is made. See Sales
Charges, page 35. These increases and decreases in Stated Death Benefit are made
so that the amount of teh 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 . 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, which we call 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
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Strategic Advantage
<PAGE>
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 24.
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 33.
The Guaranteed Minimum Death Benefit provisions may not be available in all
states.
REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD
The Guaranteed Minimum Death Benefit provisions require premium payment levels
referred to as the "Guarantee Period Annual Premium" that are higher than the
Minimum Annual Premium. Although the required Guarantee Period Annual Premium
levels are different for the two Guarantee Periods, the mechanics of the
Guaranteed Minimum Death Benefit provisions are similar. As of each Monthly
Processing Date we will perform a test to see if sufficient premiums have been
paid to keep the guarantee in place. If (i) the actual premiums paid, minus the
amount of any Partial Withdrawals and any Policy Loan and accrued loan interest,
equals or exceeds (ii) one twelfth of the Guarantee Period Annual Premium for
the option chosen times the number of complete months the Policy has been in
force, the Guarantee Period will remain in effect regardless of the investment
experience of the Divisions of the Variable Account. If the Policy fails to meet
this test on any Monthly Processing Date, the Guarantee Period and therefore the
Guaranteed Minimum Death Benefit provision will terminate. The required
premiums for the Guarantee Period chosen will be listed in the Schedule of the
Policy. If the Policy benefits are increased, the Guarantee Period Annual
Premium will also be increased. In order to determine the required premium to
maintain the Guarantee Period, one twelfth of each Guarantee Period Annual
Premium is multiplied by the number of months this amount was in effect. Each
of these resulting amounts is summed and the total is used in (ii) above.
The Guarantee Period will also be terminated if the Net Account Value on any
Monthly Processing Date is not diversified according to the following rules:
a) No more than 35% of the Net Account Value may be invested in any one
Division, and
b) The Net Account Value must be invested in at least five Divisions.
The Automatic Rebalancing feature may be utilized to assist in meeting these
diversification requirements. Also, the Policy will be deemed to satisfy our
requirements for diversification if Dollar Cost Averaging is being utilized and
the resulting transfers are being directed into at least four other Divisions
with no more than 35% of any transfer being to any one Division. See Dollar cost
Averaging, page 29, and Automatic Rebalancing, page 13.
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 24. This charge will end at the conclusion of
the Ten Year/Age 65 Guarantee Period if that option has been chosen, and it will
end for either option if the Policy fails the monthly premium test or the
diversification test.
Please refer to the Policy for additional information on the Guaranteed Minimum
Death Benefit provisions or ask a Registered Representative for a personalized
illustration of these options.
CHANGES IN DEATH BENEFIT AMOUNTS
An increase or a decrease in the death benefit of the Policy may be requested
by the Owner. This request must be received by our Customer Service Center at
least 30 days prior to the Policy anniversary. Any change in coverage may not be
for an amount less than $1,000.
Any changes in the death benefit of the Policy will go into effect as of the
Policy anniversary on or following the date we approve the request for the
change. After the request is approved, we will send a new Schedule which will
include the Stated Death Benefit, the benefit under any Riders, if applicable,
the guaranteed cost of insurance rates, and the new guideline annual premium.
This notice should be attached to the Policy. We may also ask that the Policy be
returned to our Customer Service Center so that we can note the change in the
Schedule.
While the Policy is in force, its Target or Stated Death Benefit may be
increased prior to the Policy anniversary on which the Insured is Age 86. The
Stated Death Benefit may be decreased if the request occurs at least two years
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<PAGE>
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 40, and Modified Endowment Contract, page 41.
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.
A requested increase in the Stated Death Benefit will create a new coverage
segment for which cost of insurance and other charges will be computed
separately. See CHARGES, DEDUCTIONS AND REFUNDS, page 34. Increases in Stated
Death Benefit resulting from death benefit option changes do not create new
coverage segments, rather, they merely increase the size of the existing
segment(s) of Stated Death Benefit. As discussed below, once created, a new
coverage segment of Stated Death Benefit can never be entirely eliminated unless
required differently by state law.
If an increase creates a new coverage segment of Stated Death Benefit, premiums
paid after the increase will be allocated to the original and the new coverage
segments in the same proportion that the guideline annual premiums defined by
the Federal income tax laws for each segment bear to the sum of the guideline
annual premiums for all base segments. The guideline annual premiums will be
shown in the Schedule for each coverage segment. Net Amount at Risk will be
allocated to each coverage segment in the same proportion that the Stated Death
Benefit for that segment bears to the sum of the Stated Death Benefit for all
segments.
Requested reductions in the death benefit 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 coverage segment of Stated Death Benefit exists, any subsequent reduction in
Stated Death Benefit will be allocated between coverage segments in the same
proportion that the Stated Death Benefit of each segment bears to the total
Stated Death Benefit prior to the reduction unless required differently by state
law.
In some cases, we may not approve a requested change because it would disqualify
the Policy as life insurance under applicable 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 40.
An increase in death benefit may be canceled by the Owner within 10 days after
receipt of a new Schedule showing the increase or as otherwise specified by law.
If an increase is canceled, we will refund any charges attributable to the
increase. If you cancel a scheduled change or ask for an unscheduled decrease
to your Target Death Benefit, we may eliminate any future scheduled increases to
the Target Death Benefit.
BENEFITS AT MATURITY
If the Insured is still living on the Maturity Date, we will pay the Net Account
Value to the Policy Owner. The Net Account Value is the Account Value reduced by
any outstanding Policy Loan and accrued loan interest. The Policy will then end.
The Maturity Date is the Policy anniversary nearest the date on which the
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 22, 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.
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<PAGE>
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.
The amount of Adjustable Term Insurance Rider in force at any time is the amount
needed to fill the difference between the Target Death Benefit specified in the
Schedule and the Base Death Benefit in effect. The Adjustable Term Insurance
Rider is dynamic in that it adjusts daily for variations in the Base Death
Benefit resulting from the Federal income tax law definition of life insurance
test chosen.
For example, assume the Base Death Benefit increases due to the Federal income
tax law definition of life insurance. The Adjustable Term Insurance Rider will
adjust to provide Death Proceeds equal to the Target Death Benefit in each year:
<TABLE>
<CAPTION>
Base Death Target Death Adjustable Term
Benefit Benefit Insurance Rider Amount
- ------- ------- ----------------------
<S> <C> <C>
201,500 250,000 48,500
202,500 250,000 47,500
202,250 250,000 47,750
</TABLE>
Since the Adjustable Term Insurance Rider is dynamic, it is possible that the
Adjustable Term Insurance Rider amount may be eliminated entirely as a result of
increases in the Base Death Benefit due to the definition of life insurance
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
Withdrawal, page 32.
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 36. Since
there is no defined premium related to the Adjustable Term Insurance Rider,
there are no tax or sales charges associated with this coverage. See Changes In
Death benefit Amount, page 25.
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.
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Strategic Advantage
<PAGE>
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 specifiedpremium will be credited monthly to the
Policy. The amount of premium to be waived, within limits, is the amount
specified in the application. If this Rider is added to the Policy, the Waiver
of Cost of Insurance Rider may not also be added.
POLICY VALUES
ACCOUNT VALUE
The amount of the Account Value is the sum of the amounts in the Guaranteed
Interest Division and in the various Divisions of our Variable Account. It also
includes any amount we have set aside in the Loan Division to secure any
outstanding Policy Loan. The Account Value therefore reflects all premiums paid,
charges made, Loans and Partial Withdrawals taken, investment experience of the
Variable Account and earnings accrued in the Guaranteed Interest and Loan
Divisions.
CASH SURRENDER VALUE
The Cash Surrender Value of the Policy equals the Account Value plus any refund
of sales charges due.
NET CASH SURRENDER VALUE
The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value
less the amount of any outstanding Policy Loan and any accrued loan interest.
NET ACCOUNT VALUE
The Net Account Value of the Policy is equal to the Account Value less the
amount of any outstanding Policy Loan and any accrued loan interest.
DETERMINING THE VALUE OF AMOUNTS IN THE DIVISIONS OF THE VARIABLE ACCOUNT
The amounts included in the Divisions of the Variable Account are measured in
terms of Accumulation Units and Accumulation Unit Values. On any given day, the
value of the amount in a Division of the Variable Account is equal to the
Accumulation Unit Value times the number of Accumulation Units credited to the
Policy in that Division. The Accumulation Units of each Division of the Variable
Account will have different Accumulation Unit Values.
Accumulation Units of a Division are purchased whenever premiums or transfer
amounts are allocated to that Division (including transfers from the Loan
Division). Accumulation Units are redeemed when Partial Withdrawals are taken or
amounts are transferred from a Division of the Variable Account (including
transfers to the Loan Division) and to pay the death benefit when the Insured
dies. We also redeem Accumulation Units for the monthly deductions from the
Account Value and for Policy transaction charges, if any.
The number of Accumulation Units purchased or redeemedin 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 28.
Transactions are processed as of the Transaction Date. The Transaction Date is
the date we receive a premium or an acceptable written or telephone request at
our Customer Service Center. If the premium or request reaches our Customer
Service Center on a day which is not a Valuation Date, or after the close of
business on a Valuation Date (that is, after 4:00 p.m. Eastern Time), the
Transaction Date will be the next succeeding Valuation Date.
Monthly deductions against the Account Value are made as of the Monthly
Processing Date. Transaction charges are made as of the Transaction Date.
The value of any amount allocated to a Division of our Variable Account will go
up or down depending on the investment experience of that Division. For amounts
allocated to the Divisions of the Variable Account, there is no guaranteed
minimum cash value.
HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION
We determine Accumulation Unit Values for the Divisions of the Variable Account
as of each Valuation Date. All Policy transactions are performed as of a
Valuation Date.
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Strategic Advantage
<PAGE>
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 thePortfolio during the Valuation Period. We subtract
from this amount a charge for taxes, if any.
3. We divide this amount by the value of the shares belonging to the
Division in the corresponding Portfolio as of the close of business on
the preceding Valuation Date. This amount represents the gross
experience factor per Accumulation Unit, before reduction for the
expenses of the Variable Account.
4. We subtract a charge for the mortality and expense risk assumed by us
under the Policy. The daily charge is .002055% of the Accumulation
Unit Value, which is equivalent to an annual rate of .75% of the
Accumulation Unit Value. If the previous day was not a Valuation Date,
then the charge is adjusted for the additional days between
valuations.
The resulting amount is the Accumulation Experience Factor for the Valuation
Period.
TRANSFERS OF ACCOUNT VALUES
After the Free Look Period, up to 12 transfers between Divisions of the Variable
Account or to the Guaranteed Interest Division may be made in each Policy year
without charge. There is no limit on the number of transfers that may be made,
but we charge a fee of $25 for each additional transfer beyond the first 12.
Transfers due to the operation of Automatic Rebalancing or Dollar Cost Averaging
are not included in determining the limit on transfers without a charge.
Transfer requests should be made in writing to our Customer Service Center. The
transfer will take effect as of the Valuation Date we receive the request. The
minimum amount we will transfer on any date is $100. This minimum need not come
from any one Division or be transferred to any one Division as long as the total
amount requested to be transferred equals at least the minimum. However, we will
transfer the entire amount in any Division of the Variable Account from which a
transfer is requested, if the amount remaining in that Division is less than
$100.
We reserve the right to limit excessive trading activity, which can disrupt
Portfolio management strategy and increase Portfolio expenses. For example, we
may refuse to accept or may place certain restrictions on transfers made by
third-party agents acting on behalf of multiple Owners or made pursuant to
market timing services when we determine, at our sole discretion, that such
transfers will be detrimental to the Portfolios and the Owners as a whole. Such
transfers may cause increased trading and transaction costs, disruption of
planned investment strategies, forced and unplanned portfolio turnover, and lost
opportunity costs, and may subject the Portfolios to large asset swings that
diminish the Portfolios' ability to provide maximum investment return to all
Owners.
Transfers from the Guaranteed Interest Division may only be made as described
below. Once during the first 30 days of each Policy year, the Owner may transfer
amounts from the Guaranteed Interest Division. Transfer requests received within
30 days prior to the Policy anniversary will be deemed to occur as of the Policy
anniversary. Transfer requests received on the Policy anniversary or within the
following 30 days will be processed. Transfer requests received at any other
time will not be processed. Transfer amounts from the Guaranteed Interest
Division to the Divisions of the Variable Account are limited to the greatest of
(i) 25% of the balance in the Guaranteed Interest Division at the time of the
first transfer or withdrawal in a Policy year, (ii) the sum of any amounts
transferred and withdrawn from the Guaranteed Interest Division in the prior
Policy year or, (iii) $100.
If telephone privileges have been elected in an application or written notice
has been sent to our Customer Service Center requesting this privilege,
transfers may be made by telephoning our Customer Service Center. See Telephone
Privileges, page 48.
DOLLAR COST AVERAGING
We offer a feature called Dollar Cost Averaging to Owners who have at least
$10,000 of Account Value
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29
Strategic Advantage
<PAGE>
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 month, more units are purchased in a
Division if the value per unit that month is low, and fewer units are purchased
if the value per unit that month is high. This plan of allocating Policy values
reduces the risk of investing too much when the price of a Portfolio's shares is
high and too little when the price of a Portfolio's shares is low.
With Dollar Cost Averaging, a designated dollar amount of Account Value will be
transferred automatically each month from the selected Division to one or more
other Divisions of the Variable Account. Dollar Cost Averaging transfers may not
be made to the Guaranteed Interest Division. Percentage allocations of the
transfer amount must be designated as whole number percentages; no specific
dollar designation may be made to the Divisions of the Variable Account. If the
Owner elects to transfer to a particular Division, the minimum percentage that
may be transferred to that Division is 1% of the total amount transferred. A
date for Dollar Cost Averaging to terminate may be specified. A dollar amount
may be specified so that when the balance remaining in either the Division
investing in the Fidelity VIP Money Market Portfolio or the Neuberger & Berman
AMT Limited Maturity Bond Portfolio reaches this dollar amount, Dollar Cost
Averaging will terminate.
The monthly transfer under Dollar Cost Averaging may beno less than $100 per
month and may be no more than one twelfth of the Account Value at the time
Dollar Cost Averaging is elected in the Division from which the Dollar Cost
Averaging transfers are to be made. Each automatic monthly transfer will take
place on the Monthly Processing Date beginning with the first Monthly Processing
Date which is at least 30 days after our receipt of the request for Dollar Cost
Averaging. However, in no event will Dollar Cost Averaging begin before the
Monthly Processing Date following the end of the Free Look Period. If on any
Monthly Processing Date, the amount in the Division from which transfers are to
be made is equal to or less than the amount to be transferred, the entire
remaining amount will be transferred, and Dollar Cost Averaging will end. The
amount to be transferred or the Divisions to which transfers are to be made may
be changed once each Policy year, and Dollar Cost Averaging may be canceled
completely by sending satisfactory notice to our Customer Service Center at
least seven days before the next transfer date.
If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost
Averaging will take place first. As of the first Valuation Date of the next
calendar quarter after Dollar Cost Averaging has terminated, Automatic
Rebalancing will begin. Dollar Cost Averaging is available without charge.
If telephone privileges have been elected in an application or if written notice
has been sent to our Customer Service Center requesting this privilege, changes
to your Dollar Cost Averaging options can be made by telephoning our Customer
Service Center. See Telephone Priveleges, page 48.
AUTOMATIC REBALANCING
The Automatic Rebalancing feature provides a method for maintaining a balanced
approach to investing Account Values and for simplifying the process of asset
allocation over time. There is no charge for this feature and any transfers as a
result of the operation of this feature are not counted toward the limit of 12
transfers per Policy year without an additional transfer charge. During the
operation of the Automatic Rebalancing feature, transfers among the Divisions
may be accomplished only by changing premium allocation percentages.
The Automatic Rebalancing feature may be elected by designation on the
application or at any subsequent time by completing the appropriate form.
Automatic Rebalancing matches Account Value allocations over time to the
allocation percentages for new premiums. As of the first Valuation Date of each
calendar quarter, we will automatically rebalance the amounts in each of the
Divisions to match the current premium allocation percentages. This will
rebalance the amounts in Divisions that may be out of line with the allocation
percentages, which may result, for example, from Divisions which underperform
the other Divisions in certain quarters.
If this feature is elected, as of the first Valuation Date of the next calendar
quarter we will transfer amounts among the Division so that the ratio of the
Accumulation Value in each Division to the total Account Value matches the
selected allocation percentage for that Division.
If Automatic Rebalancing is elected with the Policy application, the first
transfer will occur as of the first Valuation Date of the next calendar quarter
following the end of the Free Look Period. If this feature is elected after the
Policy Date, the first transfer will be processed as of the first Valuation Date
of the next calendar quarter after we receive notification at our Customer
Service Center and the Free Look Period has ended.
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Strategic Advantage
<PAGE>
The allocation percentages for Automatic Rebalancing may be changed at any time
and the Account Value will be reallocated as of the Valuation Date that we
receive the allocation instructions at our Customer Service Center. Any
reduction in the allocation to the Guaranteed Interest Division, however, will
be considered a transfer from the Division and, therefore, must comply with the
maximum transfer amount and time limitations on transfers from the Guaranteed
Interest Division, as described in Transfers of Account Values on page 29. We
will not process an Automatic Rebalancing request which is in conflict with
these provisions.
The Automatic Rebalancing feature may be terminated at any time, so long as we
receive notice of the termination at least seven days prior to the first
Valuation Date of the next calendar quarter. If the Guarantee Period is in
effect and the Automatic Rebalancing feature is terminated, diversification of
the Net Account Value must be maintained for the guarantee to continue. See
Guaranteed Minimun Death Benefit, page 24. If the Automatic Rebalancing feature
is active on a Policy and a request for an allocation which does not meet the
requirements is made, we will notify the Owner that the allocation must be
changed.
Any transfers as a result of the operation of the Automatic Rebalancing feature
are not counted toward the limit of 12 transfers that can be made each Policy
year without a transfer charge. However, we will charge a fee of $25 each time
premium allocation is changed more often than five times per Policy year;
otherwise, there is no charge for this feature.
If both Dollar Cost Averaging and Automatic Rebalancing have been elected,
Dollar Cost Averaging will take place first. As of the first Valuation Date of
the calendar quarter after Dollar Cost Averaging has terminated, Automatic
Rebalancing will begin.
If telephone privileges have been elected in an application or if written notice
has been sent to our Customer Service Center requesting this privilege, changes
to the Automatic Rebalancing options can be made by telephoning our Customer
Service Center. See Telephone Privileges, page 48.
POLICY LOANS
At any time after the first Policy anniversary or as otherwise required by law,
the Owner may borrow against the Policy by using it as security for a loan. The
amount borrowed is called a Policy Loan. 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 (a) minus (b) where (a) is equal to 1.)
Account Value minus 12 times the current monthly deduction; 2.) multiplied by
1.03; 3.) divided by 1.0375; and where (b) is equal to any outstanding Policy
Loan and accrued loan interest. 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. The amounts in
each Division will be determined as of the Valuation Date we receive the request
for a loan. The Loan Division is credited as of each Valuation Date with
interest at a compound annual rate of 3% in all Policy years.
On Policy anniversaries, the amount of interest credited to the Loan Division
for the Policy year will be transferred from the Loan Division. When a loan
repayment is made, an amount equal to the payment is transferred from the Loan
Division. Amounts transferred from the Loan Division will be allocated to the
Divisions of the Variable Account and the Guaranteed Interest Division based on
the current premium allocation instructions unless a different allocation is
requested.
A Loan against the Policy will have a permanent effect on the Account Value and,
therefore, on the benefits under this Policy, even if the Loan is repaid. When
borrowing
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Strategic Advantage
<PAGE>
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 48.
PARTIAL WITHDRAWALS
A Partial Withdrawal may be requested on any Monthly Processing Date after the
first Policy anniversary by writing to us at our Customer Service Center. One
Partial Withdrawal is allowed each Policy year.
The minimum Partial Withdrawal is $100. The maximum Partial Withdrawal is the
amount which will leave $500 as the Net Account Value. If a withdrawal of more
than this maximum is requested, we will require a full surrender of the Policy.
When a Partial Withdrawal is taken, the amount of the withdrawal plus a service
fee is deducted from the Account Value.
The Stated Death Benefit is not reduced by a Partial Withdrawal taken when the
Base Death Benefit has been increased to qualify the Policy as life insurance
under the Federal income tax laws (see Life Insurance Definition page 40) and
the amount withdrawn is no greater than that amount which reduces the Account
Value to the level which no longer requires the Base Death Benefit to be
increased for Federal income tax law purposes.
For a Policy under an Option 1 death benefit, the Stated Death Benefit is not
reduced by a Partial Withdrawal in the circumstances described above. In
addition, if no more than 16 years have elapsed since the Policy Date and the
Insured is not yet Age 81, a Partial Withdrawal of an amount up to 10% of the
Account Value or, if greater, 5% of the Stated Death Benefit, calculated
immediately before the Partial Withdrawal is taken will not reduce the Stated
Death Benefit. Any additional amount withdrawn reduces the Stated Death Benefit
by that additional amount.
For a Policy under an Option 2 death benefit, a Partial Withdrawal does not
reduce the Stated Death Benefit.
For a Policy under an Option 3 death benefit, the Stated Death Benefit 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 23.
No Partial Withdrawal will be allowed if the Stated Death Benefit remaining in
force after the Partial Withdrawal would be reduced below the minimum we require
to issue this Policy at the time of the reduction. See Group or Sponsored
Arrangements, page 40.
Under any death benefit option, if the Base Death Benefit has been increased in
order to qualify the Policy as a life insurance contract under the Federal
income tax laws, the Partial Withdrawal reduces the Base Death Benefit by an
amount greater than the withdrawal, but in no event less than the Stated Death
Benefit after the Partial Withdrawal.
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 48.
Partial Withdrawals may have adverse tax consequences. See Modified Endowment
Contracts, page 41.
________________________________________________________________________________
32
Strategic Advantage
<PAGE>
SURRENDER
The Policy may be surrendered for its Net Cash Surrender Value at any time while
the Insured is living. In order to surrender the Policy, a written request and
the Policy should be sent to our Customer Service Center. The Net Cash Surrender
Value of the Policy equals the Cash Surrender Value minus any Policy Loan and
accrued loaninterest. 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 41.
RIGHT TO EXCHANGE POLICY
During the first 24 months following the date we issue the Policy or add a
coverage segment, the Policy provides a right to exchange the Policy from one in
which the investment experience is not guaranteed into a guaranteed Policy
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 20.
When this right is exercised, we will not allow for the allocation of future
premium payments or transfers to the Divisions of the Variable Account.
LAPSE
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 (the special
continuation period), if on each Monthly Processing Date the sum of the premiums
paid, less the sum of Partial Withdrawals, any outstanding Policy Loan and
accrued loan interest is greater than or equal to one twelfth of the Minimum
Annual Premium times the number of completed Policy months, then the Policy and
all attached Riders are guaranteed not to lapse, regardless of the Net Account
Value.
IF GUARANTEED MINIMUM DEATH BENEFIT PROVISION IS NOT IN EFFECT
Unless the Guaranteed Minimum Death Benefit provision is in effect, or the
special continuation period is in effect and its requirements have been met, the
Policy including all attached Riders will lapse in its entirety on any Monthly
Processing Date that the Net Account Value of the Policy is not sufficient to
pay all the monthly deductions from the Account Value. A 61-day grace period
will begin on that Monthly Processing Date. See Grace Period, page 34.
If we do not receive payment of the requested amount in full within the 61 days,
the Policy and all Riders attached will lapse without value. We will withdraw
any remaining balance of the Account Value from the Divisions of the Variable
Account and Guaranteed Interest Division. Wewill 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, page 24.
The benefits provided by Riders attached to the Policy and any amount by which
the Base Death Benefit exceeds the Stated Death Benefit are not protected by the
Guaranteed Minimum Death Benefit provision. Therefore, these portions of the
Policy benefits will lapse if the Net Account Value is not sufficient to cover
all the deductions from the Account Value on any Monthly Processing Date (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.
________________________________________________________________________________
33
Strategic Advantage
<PAGE>
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, page 24. If the Guaranteed Minimum Death Benefit provision is
terminated the normal test for lapse will resume. See Lapse, page 33.
GRACE PERIOD
If the following conditions occur as of a Monthly Processing Date, the Policy
will enter into the 61 day Grace Period:
(i) The 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
amountthat will cover estimated monthly deductions for the Policy and all
attached Riders for the following two months. If we receive payment of this
amount before the end of the grace period, we will use the amount sent us to
make the overdue deductions. Any balance remaining will be applied to the
Account Value in the same manner as other premium payments.
REINSTATEMENT
The Policy and its Riders may be reinstated within five years after lapse for
failure to pay sufficient premiums prior to the end of the grace period. 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 31), any payment
received before the Maturity Date is considered a premium. Certain expenses are
deducted from premium payments. The remainder of each premium (the Net Premium)
is then added to the Account Value. The expenses which are deducted from the
premium include the tax charges and the sales charge.
TAX CHARGES
All states levy taxes on life insurance premium payments. The amount of these
taxes vary from state to state, and may vary from jurisdiction to jurisdiction
within a state. We currently deduct an amount equal to 2.5% of each premium to
pay applicable premium taxes. The 2.5% rate approximates the average tax rate we
expect to pay on premiums from all states.
A charge currently equal to 1.5% of each premium payment is deducted to cover
our estimated cost for the Federalincome 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.
________________________________________________________________________________
34
Strategic Advantage
<PAGE>
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 21. The Target
Premium for the Policy and any Stated Death Benefit coverage segments added
since the Policy Date will be listed in the Schedule.
For a Policy with multiple coverage segments of Stated Death Benefit, premiums
paid are allocated to the segments in the same proportion that the guideline
annual premium (as defined by the Federal income tax law) for each segment bears
to the total guideline annual premium for the Stated Death Benefit of the
Policy.
The sales charge covers the cost of distribution, costs of preparing our sales
literature, other promotional expenses, and other direct and indirect expenses.
The amount of this charge cannot be specifically related to sales expenses in a
particular year since we recover these costs over the period the Policies remain
in effect. We pay the sales expenses from our own resources, including this
sales charge and any profit we may earn on the other charges deducted under the
Policy. The sales charge may be reduced or waived for certain group or sponsored
arrangements.
DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE
Each day a charge is deducted for mortality and expense risks we assume. This
charge is equal to 0.002055% perday of the amount in the Divisions of the
Variable Account, which is equivalent to an annual rate of 0.75% of the portion
of the Account Value allocated to the Variable Account.
We assess the mortality and expense risk charge to compensate us for assuming
mortality and expense risks under the Policies. The mortality risk we assume is
that Insureds, as a group, may live for a shorter period of time than estimated.
The expense risk we assume is that other expenses we incur in issuing and
administering the Policies and operating the Variable Account will be greater
than the amount we estimated when setting the charges for these expenses. We
will realize a profit from this fee to the extent it is not needed to provide
benefits and pay expenses under the Policies. We may use this profit for other
purposes, including any distribution expenses not covered by the sales charge.
This charge is not assessed against the amount of Account Value which is
allocated to the Guaranteed Interest Division, nor to amounts in the Loan
Division. We credit the Account Value with a persistency refund equivalent to
0.5% per year for each coverage segment of Stated Death Benefit that has been in
force for at least 10 Policy years, which effectively reduces the charge for
mortality and expense risks. See Persistency Refund, page 37.
MONTHLY DEDUCTIONS FROM THE ACCOUNT VALUE
The following charges are deducted from the Account Value on each Monthly
Processing Date. These deductions are taken from the Divisions of the Variable
Account and the Guaranteed Interest Division in the same proportion that the
Account Value in each Division bears to the total Net Account Value as of the
Monthly Processing Date.
INITIAL POLICY CHARGE
The initial Policy charge is $10 per month for the first five Policy years and
is guaranteed never to exceed this amount. This charge covers the costs of
setting up the Policy, other than sales expenses, such as application
processing, medical examinations, establishment of Policy records and insurance
underwriting costs. This charge is designed to reimburse us for expenses and we
do not expect to gain from it.
MONTHLY ADMINISTRATIVE CHARGE
This charge is comprised of a per Policy charge of $5 per month plus a charge of
$0.0125 per thousand of Stated Death Benefit or Target Death Benefit, if
greater, and is guaranteed never to exceed this amount. 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, recordkeeping, reporting and other
communications with Owners, and other expenses andoverhead. This charge is
designed to
________________________________________________________________________________
35
Strategic Advantage
<PAGE>
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 reduced. Therefore, the amount of the
cost of insurance charges will vary from month to month with changes in the Net
Amount at Risk, changes in the relative makeup of the death benefit, and with
increasing Age of the Insured.
The cost of insurance rates are based on the Age, sex and Premium Class of the
Insured on the Policy Date or at the time a Base coverage segment is added, as
well as the length of time the Policy or coverage segment has been in effect.
Unisex rates are used where appropriate under applicable law, currently
including the state of Montana and any Policies purchased by employers and
employee organizations in connection with employment-related insurance or
benefit programs. Net Amount at Risk is allocated to Stated Death Benefit
coverage segments in the same proportion that the Stated Death Benefit of each
segment bears to the sum of the Stated Death Benefit for all coverage segments
as of the Monthly Processing Date. Separate cost of insurance rates apply to the
Base Death Benefit, the Adjustable Term Insurance Rider and any additional Base
coverage segments. We may change these rates from time to time, but they will
never be more than the guaranteed maximum rates set forth in the Policy. The
guaranteed maximum rates for fully underwritten policies are based on the 1980
Commissioners Standard Ordinary Mortality Table.
We may offer Policies on a guaranteed issue basis to certain group or sponsored
arrangements. If an eligible group or sponsored arrangement purchases Policies
on a guaranteed issue basis, the Policies will be issued up to a predetermined
face amount limit, with only minimalevidence of insurability. Because only
limited underwriting information is obtained, Policies issued on a guaranteed
issue basis may present additional mortality cost to us compared to underwritten
Policies. We will charge increased cost of insurance rates for guaranteed issue
Policies. The amount of the increased charges will depend on the issue Age of
the Insured, and may also depend on the size of the group and the total premium
to be paid by the group. Under guaranteed issue Policies, the overall charges
for insurance will be higher than under a comparable underwritten Policy issued
in the nonsmoker standard or smoker standard class. This means that an Insured
may be able to obtain individual, underwritten insurance coverage at a lower
overall cost.
The guaranteed rates for guarantee issue policies are no greater than 135
percent of the maximum rates that could be charged based on the 1980
Commissioner's Standard Ordinary Mortality Table ("1980 CSO Table"). The
guaranteed rates are higher than 100 percent of the maximum rates in the 1980
CSO Table because we use simplified underwriting procedures whereby the Insured
may not be required to submit to a medical or paramedical examination. The
current cost of insurance rates after the 15th Policy Year are generally lower
than 100 percent of the 1980 CSO Table. Any change in the current cost of
insurance rates will apply to all persons of the same Age and rate class. The
maximum rates for the initial and any new coverage segment will be printed in
the Schedule which we will provide to you.
CHARGES FOR ADDITIONAL BENEFITS
The cost of any additional benefits added by Rider will be deducted monthly on
the Monthly Processing Date. We may change these charges, but the Schedule
contains tables showing the guaranteed maximum rates for all of these benefits.
See Additional Benefits, page 26.
GUARANTEED MINIMUM DEATH BENEFIT CHARGE
If the Guaranteed Minimum Death Benefit is purchased, we currently charge $0.005
per thousand of Stated Death Benefit each month during the Guarantee Period.
This charge is guaranteed never to exceed $0.01 per thousand of Stated Death
Benefit each month.
________________________________________________________________________________
36
Strategic Advantage
<PAGE>
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 total 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 32.
TRANSFERS
We charge a fee of $25 for each additional transfer beyond the first twelve in a
Policy year. See Transfers of Account Values, page 12. 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 33.
PREMIUM ALLOCATION CHARGES
We charge a fee of $25 each time the premium allocation is changed beyond five
times per Policy year.
ILLUSTRATIONS
We reserve the right to charge a fee, not to exceed $25, for Policy
illustrations in excess of one per Policy year.
PERSISTENCY REFUND
Long-term Owners of Strategic Advantage will receive a persistency refund.
Each month the Policy or a coverage segment of Stated Death Benefit remains in
force after its tenth Policy anniversary, we will credit the Account Value with
a refund equivalent to 0.5% of the Account Value on an annual basis for that
segment (0.04167% monthly). For purposes of this calculation, Account Value will
be allocated to each coverage segment based upon the number of completed Policy
years that segment has been in force and the size of the guideline annual
premium as defined by the Federal income tax law definition of life insurance.
The Persistency refund will be added to the Divisions of the Variable Account
and the Guaranteed Interest Division in the same proportion that the Account
Value in each Division bears to the Net Account Value as of the Monthly
Processing Date.
The following is an example of how the persistency refund affects the Account
Value each month if the policy has no loan:
Account Value = $10,000 (all in the Variable Divisions)
Monthly persistency refund Rate = .0004167
Persistency refund = 10,000 x .0004167 = $4.17
<TABLE>
<CAPTION>
Before After
Persistency Persistency
Refund Refund
------ ------
<S> <C> <C>
Variable $10,000.00 $10,004.17
Divisions
</TABLE>
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
- --------------------------------------------------------------------------------
37
Strategic Advantage
<PAGE>
<TABLE>
<CAPTION>
Before After
Persistency Persistency
Refund Refund
------ ------
<S> <C> <C>
Variable $ 5,000.00 $ 5,004.17
Divisions
Loan $ 5,000.00 $ 5,000.00
Division
</TABLE>
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 up to the target premium in that year. In
the second Policy year, the refund is equal to 2.5% of the premiums paid up to
the target premium 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.
________________________________________________________________________________
38
Strategic Advantage
<PAGE>
PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIOAVERAGE NET ASSETS)/1/
<TABLE>
<CAPTION>
OTHER TOTAL PORTFOLIO
PORTFOLIO MANAGEMENT FEES EXPENSES EXPENSES
--------- --------------- -------- --------
<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 0.00% 1.04% 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%/3/ 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/
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund (formerly Gold and Natural
Resources Fund) 1.00% 0.24% 1.24%
Worldwide Balanced Fund 0.00%/20/ 0.00%/11/ 0.00%/11/
</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 reductions
from Contract values; rather these Portfolio expenses are taken into
consideration in computing each underlying Portfolio's net asset value, which is
the share price used to calculate the unit values of the Divisions. For a more
complete description of the Portfolios' costs and expenses, see the prospectuses
for the Portfolios.
/2/ Neuberger & Berman Advisers Management Trust (the "Trust") is divided into
portfolios ("Portfolios"), each of which invests all of its net investable
assets in a corresponding series ("Series") of Advisers Managers Trust. Expenses
in the table reflect expenses of the Portfolios and include each Portfolio's pro
rata portion of the operating expenses of each Portfolio's corresponding Series.
The Portfolios pay Neuberger & Berman Management, Inc. ("NBMI"), an
administration fee based on the Portfolios' net asset value. Each Portfolio's
corresponding Series pays NBMI a management fee based on the Series' average
daily net assets. Accordingly, this table combines management fees at the Series
level and administration fees at the Portfolio level in a unified fee rate. See
"Expenses" in the Trust's Prospectus. Expenses reflect expense reimbursement.
NBMI has voluntarily undertaken to limit the Portfolios' compensation of NBMI
and excluding taxes, interest, extraordinary expense, brokerage commissions and
transaction costs, that exceed 1% of the Portfolios' average daily net asset
value. These expense reimbursement policies are subject to termination upon 60
days written notice to the Portfolios.
/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. Abseent such reimbursement, "Management Fees", "Other
Expenses" and "Total Portfolio Expenses" would have been 0.75%, 0.60% and 1.35%,
respectively. "Other Expenses" of 0.60% are based on a net asset estimation of
$30 million.
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Strategic Advantage
<PAGE>
GROUP OR SPONSORED ARRANGEMENTS
This Policy is available for purchase by individuals, corporations and other
institutions. For group or sponsored arrangements (including home office
employees of Security Life) and for special exchange programs which Security
Life may offer from time to time, we may reduce or eliminate the sales charge,
the length of time the sales charge applies, the administrative charge, the
minimum Stated Death Benefit, the maximum Target Death Benefit, the Minimum
Annual Premium, the Target Premium, cost of insurance charges, or other charges
normally assessed to reflect the expected economies resulting from a group or
sponsored arrangement. We may also allow Partial Withdrawals to be taken
without a charge. Group arrangements include those in which a trustee, an
employer or an association either purchases Policies covering a group of
individuals on a group basis or endorses the Policy to a group of individuals.
Sponsored arrangements include those in which an employer or association allows
us to offer Policies to its employees or members on an individual basis.
Our costs for sales, administration and mortality generally vary with the size
and stability of the group, among other factors. We take all these factors into
account when reducing charges. To qualify for reduced charges, a group or
sponsored arrangement must meet certain requirements. We will make any
reductions according to our rules in effect when an application form for a
Policy is approved. We may change these rules from time to time. Any variation
in the sales charge, administrative charge or other charges, fees and privileges
will reflect differences in costs or services and will not be unfairly
discriminatory.
OTHER CHARGES
Under current law we pay no tax on investment income and capital gains reflected
in variable life insurance policy reserves (except to the extent the Federal
deferred acquisition cost may be considered such a tax). Consequently, no charge
is currently being made to any Division of our Variable Account for our Federal
income taxes. We reserve the right, however, to make such a charge in the future
if the tax law changes and we incur Federal income tax which is attributable to
the Variable Account.
We must pay state and local taxes (in addition to applicable taxes based on
premiums) in several states. At the presenttime, 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
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<PAGE>
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 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 144, 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 26. Also, any
interest payment accrued on Death Proceeds paid either as a lump sum or other
than in one lump sum may be subject to tax. See Settlement Provisions, page 48.
The Federal government has in the past and may in the future consider new
legislation or regulations that, if enacted, could change the 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 ownerwill 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
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Strategic Advantage
<PAGE>
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 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 thissummary. 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 theextent
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,
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Strategic Advantage
<PAGE>
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 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 hasbeen 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 aslife
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.
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Strategic Advantage
<PAGE>
OTHER
The Policies may be used in various arrangements, including qualified plans,
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances of each individual arrangement. Therefore, if the Owner
is contemplating the use of the Policies in any arrangement the value of which
depends in part on its tax consequences, the Owner should be sure to consult a
qualified tax 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.
QUALIFIED LEGAL OR TAX ADVISERS SHOULD BE CONSULTED FOR COMPLETE INFORMATION ON
FEDERAL, STATE, LOCAL AND OTHER TAX CONSIDERATIONS.
ADDITIONAL INFORMATION ABOUT THE POLICY
VOTING PRIVILEGES
We invest the assets in the Divisions of the Variable Account in shares of the
corresponding Portfolios. See Investment Objectives of the Portfolios, page 17.
We are the legal owner of the shares held in the Variable Account and, as such,
have the right to vote on certain matters. Among other things, we may vote on
any matters described in the 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
advisery 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
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Strategic Advantage
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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, combine two or more
Divisions, or substitute a new Portfolio for the Portfolio in which a
Division invests. A substitution may become necessary if, in our
judgment, a Portfolio no longer suits the purposes of the Policy. This
may also happen due to a change in laws or regulations, or a change in a
Portfolio's investment objectives or restrictions, or because the
Portfolio is no longer available for investment, or for some other
reason, such as a declining asset base.
(iii) Transfer assets of the Variable Account, which we determine to be
associated with the class of policies to which an Owner's Policy belongs,
to another Variable Account.
(iv) Withdraw the Variable Account from registration under the 1940 Act.
(v) Operate the Variable Account as a management investment company under the
1940 Act.
(vi) Cause one or more Divisions to invest in a mutual fund other than or in
addition to the Portfolios.
(vii) Discontinue the sale of Policies and certificates.
(viii) Terminate any employer or plan trustee agreement
with us pursuant to its terms.
(ix) Restrict or eliminate any voting rights as to the Variable Account.
(x) Make any changes required by the 1940 Act or the rules or regulations
thereunder.
No such changes will be made 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
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Strategic Advantage
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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 our Customer Service Center. If a Policy is
canceled under this provision, we will refund an amount equal to the full amount
of any premiums paid or as otherwise specified by state law. Insurance coverage
ends when the request is sent.
Amounts allocated to the Divisions of the Variable Account will be held in the
Division investing in the Fidelity VIP Money Market Portfolio until the end of
the Free Look Period. At the end of the Free Look Period, this portion of the
Account Value will be reallocated according to the most recent premium
allocation instructions.
THE POLICY
This Policy is a contract between the Owner and us. The Policy, including a copy
of the original application and any applications for an increase, Riders,
endorsements, Schedule pages, and any reinstatement applications make up the
entire contract. A copy of any application as well as a new Schedule will be
attached or furnished to the Owner for attachment to the Policy at the time of
any change in coverage. In the absence of fraud, all statements made in any
application will be considered representations and are not warranties. No
statement will be used to deny a claim unless it is in an application.
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 willshare 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
________________________________________________________________________________
46
Strategic Advantage
<PAGE>
in effect, during the Insured's lifetime, for two years from the effective
date of such reinstatement.
. We will not contest the statements in the application for any coverage
change that increases any benefit with respect to the Insured (such as an
increase in Stated Death Benefit) after the change has been in effect,
during the Insured's lifetime, for two years from the effective date of
such increase.
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 otherwise required by a
state. 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 within two years after the effective date of an increase in the Stated
Death Benefit or the Target Death Benefit that was requested, we will pay the
death benefit which was in effect before the increase, plus a refund of the
amount of the monthly cost of insurance deductions related to the increased
death benefit, unless otherwise required by law.
PAYMENT
We will pay the Death Proceeds, Net Cash Surrender Value upon surrender, Partial
Withdrawals, and loan proceeds within seven days after we receive the
information required to process the payment. We will also execute a transfer
among Divisions of the Variable Account as of the Valuation Date on or next
following our receipt of a request at our Customer Service Center. Transfers
from the Guaranteed Interest Division to the Divisions of the Variable Account
will be made only within the time periods indicated in this prospectus. See
Transfer of Account Values, page 29.
We may, however, postpone the processing of any such transactions for any of the
following reasons:
. When the NYSE is closed for trading;
. When trading on the NYSE is restricted by the SEC;
. When an emergency exists such that it is not reasonably practical to
dispose of securities in the applicable Division of the Variable Account or
to determine the value of its assets; or
. When a governmental body having jurisdiction over the Variable Account
permits such suspension by order.
Rules and regulations of the SEC, if any, are applicable and will govern the
determination as to whether the above conditions exist.
Death Proceeds are determined as of the Valuation Date we receive due proof of
death of the Insured. Once we determine this amount, the Death Proceeds will not
be affected by subsequent changes in the values of the Divisions of the Variable
Account. We will pay interest at the rate declared by us or at any higher rate
required by lawfrom 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
________________________________________________________________________________
47
Strategic Advantage
<PAGE>
Policy is in force. Claim procedure instructions will be sent immediately. As
due proof of death, we may require proof of Age and a certified copy of a death
certificate. We may also require the Beneficiary and the Insured's next of kin
to sign authorizations as part of this process. These authorization forms allow
us to obtain information about the Insured, including but not limited to medical
records of physicians and hospitals used by the Insured.
TELEPHONE PRIVILEGES
If telephone privileges have been elected in a form required by us, transfers or
changes in your Dollar Cost Averaging and Automatic Rebalancing options, or
requests for Partial Withdrawals and Policy Loans may be made by telephoning our
Customer Service Center.
Our Customer Service Center will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may
include, among others, requiring some form of personal identification prior to
acting upon instructions received by telephone, providing written confirmation
of such transactions, and/or tape recording of telephone instructions. A request
for telephone privileges authorizes us to record telephone calls. If reasonable
procedures are not used in confirming instructions, we may be liable for any
losses due to unauthorized or fraudulent instructions. We reserve the right to
discontinue this privilege at any time.
NON-PARTICIPATING
The Policy does not participate in Security Life's surplus earnings.
DISTRIBUTION OF THE POLICIES
The principal underwriter and distributor for the policies is ING America
Equities, a wholly-owned subsidiary of Security Life. ING America Equities is
registered as a broker-dealer with the SEC and is a member of the NASD. We pay
ING America Equities for acting as the principal underwriter under a
Distribution Agreement.
We sell our Policies through Registered Representatives of other broker-dealers
which have entered into selling agreements with us. These Registered
Representatives are also licensed by state insurance officials to sell our
variable life policies. Each of the broker-dealers we enter into selling
agreements with are registered with the SEC and are members of the NASD.
Under these selling agreements, we pay a distribution allowance to the other
broker-dealers, which in turn pay commissions to the Registered Representative
who sells this Policy. During the first Policy year, the distribution allowance
may equal an amount up to 15% of the Target Premium paid and 3% of premiums paid
in excess of the Target Premium. For Policy years 2 through 5, the allowance may
equal an amount up to 10% of Target Premium and 3% of premiums paid in excess of
the Target Premium. For subsequent Policy years the distribution allowance may
equal 3% of premiums paid. Broker-dealers may also receive annual renewal
compensation of up to 0.15% of the Net Account Value beginning in the sixth
Policy year. Compensation arrangements may vary among broker-dealers. In
addition, we may also pay override payments, expense allowances, bonuses,
wholesaler fees, and training allowances. Registered Representatives who meet
specified production levels may qualify, under our sales incentive programs, to
receive non-cash compensation such as expense-paid trips, expense-paid
educational seminars and merchandise.
We pay the distribution allowance from our own resources (including any sales
charges deducted from premiums).
SETTLEMENT PROVISIONS
During the Insured's lifetime, the Owner may elect that the Beneficiary receive
the Death Proceeds other than in one sum. If this election has not been made,
the Beneficiary may do so within 60 days after the Insured's death. The Owner
may also elect to take the Net Cash Surrender Value other than in one sum.
Payments under these options are not affected by the investment experience of
any Division of our Variable Account. Instead, interest accrues pursuant to the
options chosen. Payment options will also be subject to our rules at the time of
selection. Currently, these alternate payment options are only available if the
proceeds applied are $2000 or more and any periodic payment will be at least
$20.
The following payment options are available:
Option I: Payouts for a Designated Period: Payouts will be made in 1, 2, 4
or 12 installments per year as elected for a designated period,
which may be 5 to 30 years. The installment dollar amounts will
be equal except for any excess interest. The amount of the first
monthly payout for each $1,000 of Account Value applied is shown
in Settlement Option Table I in the Policy.
________________________________________________________________________________
48
Strategic Advantage
<PAGE>
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
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), thenaming of people who are entitled to receive
payment and their successors, and the ways of proving Age and survival.
________________________________________________________________________________
49
Strategic Advantage
<PAGE>
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND
ACCUMULATED PREMIUMS
The following tables illustrate how the key financial elements of the Policy
work, specifically, how the death benefits, Account Values and Cash Surrender
Values could vary over an extended period of time. In addition, each table
compares these values with premiums paid accumulated with interest.
The Policies illustrated include the following:
<TABLE>
<CAPTION>
Definition
Death of Life Stated Target
Smoker Benefit Insurance Death Death
Sex Age Status Option Test Benefit Premium Benefit Page
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Male 45 Non-Smoker 1 CVAT 300,000 $5,750 300,000 52
Male 45 Non-Smoker 1 CVAT 150,000 $5,750 300,000 54
Male 45 Non-Smoker 1 GP 300,000 $5,750 300,000 56
</TABLE>
The tables show how death benefits, Account Values and Cash Surrender Values of
a hypothetical Policy could vary over an extended period of time if the
Divisions of the Variable Account had constant hypothetical gross annual
investment returns of 0%, 6% or 12% over the periods indicated in each table.
The values will differ from those shown in the tables if the annual investment
returns are not absolutely constant. That is, the death benefits, Account Values
and Cash Surrender Values will be different if the returns averaged 0%, 6% or
12% over a period of years but went above or below those figures in individual
Policy years. These illustrations assume that no Policy Loan has been taken. The
amounts shown would differ if female or unisex rates were used or for a risk
classification other than non-smoker standard.
The third column of each table shows what would happen if an amount equal to the
premiums were invested to earn interest, after taxes, of 5% compounded annually.
All premium payments are illustrated as if they were made at the beginning of
the year.
The amounts shown for death benefits, Account Values and Cash Surrender Values
reflect the fact that the net investment return on the Policy is lower than the
gross investment return on the Divisions of the Variable Account. This results
from the charges levied against the Divisions of the Variable Account (i.e., the
mortality and expense risk charge) as well as the premium loads, and
administrative charges. The difference between the Account Value and the Cash
Surrender Value in the first 2 years is the refund of sales charges.
The tables illustrate cost of insurance and expense charges at both our current
rates (which are described under described under Cost Of Insurance Charges, page
36) and at the maximum rates we guarantee in the Policies. The amounts shown at
the end of each Policy year reflect a daily charge against the Variable Account
Divisions. This charge includes the charge against the Variable Account for
mortality and expense risks and the effect on each 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 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%.
________________________________________________________________________________
50
Strategic Advantage
<PAGE>
The tables assume the deduction of charges including administrative and sales
charges. The tables reflect the fact that we do not currently make any charge
against the Variable Account for state or Federal taxes. If such a charge is
made in the future, it will take a higher gross rate of return than the rates
shown to produce the death benefits, Account Values and Cash Surrender Values
shown.
We will furnish, upon request, a comparable illustration based on the Age and
sex of the proposed Insured, standard Premium Class assumptions and any initial
Stated Death Benefit, death benefit option and Scheduled Premiums requested and
consistent with the Policy form. If a Policy is purchased, we will deliver an
individualized illustration reflecting the Scheduled Premium chosen and the
Insured's actual risk class. After issuance we will provide upon request an
illustration of future Policy benefits based on both guaranteed and current cost
factor assumptions and actual Account Value.
________________________________________________________________________________
51
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $5750.00
CASH VALUE ACCUMULATION TEST
SUMMARY PAGE
ASSUMING GUARANTEED CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
----------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 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 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.
________________________________________________________________________________
52
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $ 5750.00
CASH VALUE ACCUMULATION TEST
SUMMARY PAGE
ASSUMING CURRENT CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
-----------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 61753 61753 300000 249622 249622 444577 130294 130294 300000
25 5750 288152 60394 60394 300000 390312 390312 616303 179265 179265 300000
30 5750 401124 39361 39361 300000 598898 598898 851633 236906 236906
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.
________________________________________________________________________________
53
Strategic Advantage
<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 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 4597 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.
________________________________________________________________________________
54
Strategic Advantage
<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.
________________________________________________________________________________
55
Strategic Advantage
<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.
________________________________________________________________________________
56
Strategic Advantage
<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.
________________________________________________________________________________
57
Strategic Advantage
<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.
<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, Reinsurance
and Institutional Markets
Michael W. Cunningham* Director
Linda B. Emory* Director, Vice President and Appointed
Actuary
John R. Barmeyer Senior Vice President and Chief Legal
Officer
Wayne D. Bidelman Sr. Vice President - New Business
Development
Eugene L. Copeland Sr. Vice President and General Counsel,
Reinsurance and Institutional Markets
Benjamin A. Currier Sr. Vice President, Operations
Carol D. Hard Senior Vice President, Variable Sales
Philip R. Kruse Senior Vice President, Sales & Marketing
James L. Livingston, Jr. Sr. Vice President and Chief Actuary
Timothy P. McCarthy Senior Vice President, Marketing Services
</TABLE>
________________________________________________________________________________
58
Strategic Advantage
<PAGE>
<TABLE>
<CAPTION>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- -------------------- -------------------------------------------------
<S> <C>
Jeffery W. Seel* Senior. Vice President and Chief
Investment Officer
Jess A. Skriletz Senior Vice President, Institutional
Markets
Louis N. Trapolino Senior Vice President, Marketing and Chief
Marketing Officer
William D. Tyler Senior Vice President and Chief
Information Officer
Stephen J. Yarina Senior Vice President, Treasurer and
Chief Financial Officer
William H. Alexander Vice President and Medical Director
Carole A. Baumbush Vice President, Reinsurance Operations
Evelyn A. Bentz Vice President, M Financial Sales
Daniel S. Clements Vice President and Chief Underwriter
Wesley A. Coleman Vice President, Variable Product Sales
Linda Elliott Vice President, Systems Development
Larry D. Erb Vice President, Information Technology
Martha K. Evans Vice President, Variable Operations
Deborah B. Holden Vice President, Human Resources
Development
Richard D. King Vice President and Medical Director
Charles Lynn McPherson* Vice President, Business Insurance
Operations
Sue A. Miskie Vice President, Corporate Services
Donna T. Mosely Vice President, Valuation
</TABLE>
________________________________________________________________________________
Strategic Advantage 59
<PAGE>
<TABLE>
<CAPTION>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- -------------------- -------------------------------------------------
<S> <C>
Daniel G. Patsey Vice President, Strategic Technology
David S. Pendergrass Vice President and Treasury Officer
Christian M. Rutten Vice President, Structured Reinsurance
Casey J. Scott Vice President, Agency Sales
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, General Counsel and
Secretary
Gary W. Waggoner Vice President, General Counsel and
Secretary
Roger O. Beebe Actuarial Officer
Irene M. Colorosa Assistant Secretary
Marsha K. Crest Agency Administration Officer
John B. Dickinson Actuarial Officer
Denise S. Dumont Computer Services Officer
Pamela C. Erbes New Market Development Officer
Shirley A. Knarr Actuarial Officer
Lisa K. Smith Denver Operations Management Officer
Glen E. Stark Actuarial Officer
William J. Wagner Actuarial Officer
Amy L. Winsor Finance and Tax Officer
</TABLE>
________________________________________________________________________________
Strategic Advantage 60
<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.
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.
________________________________________________________________________________
61
Strategic Advantage
<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 67.
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.
________________________________________________________________________________
62
Strategic Advantage
<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
________________________________________________________________________________
63
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>
________________________________________________________________________________
64
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.
ERNST & YOUNG LLP
Denver, Colorado
April 11, 1997
________________________________________________________________________________
65
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>
________________________________________________________________________________
66
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.
________________________________________________________________________________
67
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.
________________________________________________________________________________
68
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.
________________________________________________________________________________
69
Strategic Advantage
<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>
________________________________________________________________________________
70
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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.
________________________________________________________________________________
71
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.
________________________________________________________________________________
72
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.
________________________________________________________________________________
73
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.
________________________________________________________________________________
74
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.
________________________________________________________________________________
75
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.
________________________________________________________________________________
76
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.
________________________________________________________________________________
77
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.
________________________________________________________________________________
78
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>
________________________________________________________________________________
79
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>
________________________________________________________________________________
80
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>
________________________________________________________________________________
81
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.
________________________________________________________________________________
82
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.
________________________________________________________________________________
83
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.
________________________________________________________________________________
84
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>
________________________________________________________________________________
85
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.
________________________________________________________________________________
86
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.
________________________________________________________________________________
87
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
________________________________________________________________________________
88
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>
________________________________________________________________________________
89
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.
________________________________________________________________________________
90
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.
________________________________________________________________________________
91
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.
________________________________________________________________________________
92
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.
________________________________________________________________________________
93
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>
________________________________________________________________________________
94
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.
________________________________________________________________________________
95
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
________________________________________________________________________________
96
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
________________________________________________________________________________
97
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>
________________________________________________________________________________
98
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.
________________________________________________________________________________
99
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.
________________________________________________________________________________
100
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.
________________________________________________________________________________
101
Strategic Advantage
<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.
ERNST & YOUNG LLP
Denver, Colorado
April 9, 1997
________________________________________________________________________________
102
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>
________________________________________________________________________________
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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>
________________________________________________________________________________
104
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>
________________________________________________________________________________
105
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>
________________________________________________________________________________
106
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>
________________________________________________________________________________
107
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>
________________________________________________________________________________
108
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>
________________________________________________________________________________
109
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>
________________________________________________________________________________
110
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>
________________________________________________________________________________
111
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>
________________________________________________________________________________
112
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>
________________________________________________________________________________
113
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>
________________________________________________________________________________
114
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>
________________________________________________________________________________
115
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>
________________________________________________________________________________
116
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>
________________________________________________________________________________
117
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>
________________________________________________________________________________
118
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.
________________________________________________________________________________
119
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.
________________________________________________________________________________
120
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.
________________________________________________________________________________
121
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.
________________________________________________________________________________
122
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.
________________________________________________________________________________
123
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.
________________________________________________________________________________
124
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>
________________________________________________________________________________
125
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.
________________________________________________________________________________
126
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
________________________________________________________________________________
127
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.
________________________________________________________________________________
128
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.
________________________________________________________________________________
129
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.
________________________________________________________________________________
130
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.
________________________________________________________________________________
131
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.
________________________________________________________________________________
132
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>
________________________________________________________________________________
133
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>
________________________________________________________________________________
134
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>
________________________________________________________________________________
135
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.
________________________________________________________________________________
136
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.
________________________________________________________________________________
137
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.
________________________________________________________________________________
138
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.
_______________________________________________________________________________
139
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.
________________________________________________________________________________
140
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.
________________________________________________________________________________
141
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.
________________________________________________________________________________
142
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.
________________________________________________________________________________
143
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.
________________________________________________________________________________
144
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 34. This prospectus also contains
illustrations based on assumed rates of return. See ILLUSTRATIONS OF DEATH
BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND ACCUMULATED PREMIUMS, page
50.
________________________________________________________________________________
145
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
</TABLE>
NEUBERGER & BERMAN AMT GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 11.76% 5,111 4,823 300,000
12/31/96 1.32% 9,106 8,962 300,000
</TABLE>
NEUBERGER & BERMAN AMT GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Returns* Value Value Benefit
<S> <C> <C> <C> <C>
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 145.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable
Account asset based charges and deductions, which if reflected, would result
in lower total return figures than those shown.
________________________________________________________________________________
146
Strategic Advantage
<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
- ------------------------------------------------------------------------------------
</TABLE>
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------
</TABLE>
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------
</TABLE>
ALGER AMERICAN GROWTH PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
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 17,936 300,000
12/31/93 22.47% 26,593 26,593 300,000
12/31/94 1.45% 30,651 30,651 300,000
12/31/95 36.37% 47,446 47,446 300,000
12/31/96 13.35% 58,279 58,279 300,000
- ------------------------------------------------------------------------------------
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 145.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable
Account asset based charges and deductions, which if reflected, would result
in lower total return figures than those shown.
________________________________________________________________________________
147
Strategic Advantage
<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
- --------------------------------------------------------------------------------
ALGER AMERICAN LEVERAGED ALL CAP
<TABLE>
<CAPTION>
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
-------------------------------------------------------------------------------------
</TABLE>
FIDELITY VIP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------
</TABLE>
FIDELITY VIP OVERSEAS PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
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 145.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable
Account asset based charges and deductions, which if reflected, would result
in lower total return figures than those shown.
________________________________________________________________________________
148
Strategic Advantage
<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
FIDELITY VIP MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
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
</TABLE>
FIDELITY VIP II ASSET MANAGER PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/90 6.72% 4,877 4,589 300,000
12/31/91 22.56% 10,799 10,655 300,000
12/31/92 11.71% 16,205 16,205 300,000
12/31/93 21.23% 24,227 24,227 300,000
12/31/94 (6.09)% 26,115 26,115 300,000
12/31/95 16.96% 35,319 35,319 300,000
12/31/96 14.60% 45,081 45,081 300,000
- -------------------------------------------------------------------------------------
</TABLE>
FIDELITY VIP II INDEX 500 PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------
</TABLE>
INVESCO VIF TOTAL RETURN PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
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 145.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable
Account asset based charges and deductions, which if reflected, would result
in lower total return figures than those shown.
________________________________________________________________________________
149
Strategic Advantage
<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
- --------------------------------------------------------------------------------
INVESCO VIF INDUSTRIAL INCOME PORTFOLIO
<TABLE>
<CAPTION>
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
</TABLE>
INVESCO VIF HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 19.76% 5,482 5,194 300,000
12/31/96 16.59% 10,958 10,814 300,000
</TABLE>
INVESCO VIF UTILITIES PORTFOLIO
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/96 12.76% 10,031 9,887 300,000
</TABLE>
12/31/96 12.76% 10,031 9,887 300,000
VAN ECK WORLDWIDE HARD ASSETS FUND (FORMERLY GOLD AND NATURAL RESOURCES
FUND)
<TABLE>
<CAPTION>
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
<S> <C> <C> <C> <C>
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>
VAN ECK WORLDWIDE BALANCED FUND
<TABLE>
<CAPTION>
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>
The assumptions underlying these values are described in Performance
Information, page 145.
* The Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable
Account asset based charges and deductions, which if reflected, would result
in lower total return figures than those shown.
________________________________________________________________________________
150
Strategic Advantage
