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STRATEGIC ADVANTAGE II 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 II, 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"). Twenty-three 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 or transferred into the Policy.
The Owner may utilize a maximum of 18 Divisions for investment over the lifetime
of the Policy until current administrative systems are enhanced. The Divisions
include the Divisions of the Variable Account and the Guaranteed Interest
Division, but exclude the Loan Division. For example, if the Owner has allocated
or transferred funds to 17 Divisions of the Variable Account and to the
Guaranteed Interest Division (or to 18 Divisions of the Variable Account), those
will be the only Divisions to which the Owner can subsequently allocate or
transfer funds. Therefore, Owners may prefer to utilize fewer Divisions in the
early years of the Policy so as to leave open the option to invest in other
Divisions in the future. An Owner who has used 18 Variable Divisions will no
longer have the Guaranteed Interest Division available for future use.
We will pay the Death Proceeds when the Insured dies if the Policy is still in
force. The Death Proceeds will equal the death benefit, reduced by any
outstanding Policy Loan, accrued loan interest, and any charges incurred prior
to the date of the Insured's death but not yet deducted. The death benefit
consists of two elements: the Base Death Benefit and any amount added by Rider.
The Policy will remain in force as long as the Net Account Value remains
positive.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. A PROSPECTUS
FOR THE PORTFOLIO OR PORTFOLIOS BEING CONSIDERED MUST ACCOMPANY THIS PROSPECTUS
AND SHOULD BE READ IN CONJUNCTION HEREWITH. IN THIS PROSPECTUS "WE," "US" AND
"OUR" REFER TO SECURITY LIFE OF DENVER INSURANCE COMPANY.
THIS POLICY IS NOT AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE. THE FEATURES OF ANY POLICY ISSUED MAY VARY DEPENDING ON THE STATE
IN WHICH THE CONTRACT IS ISSUED. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS OR ANY ATTACHED SUPPLEMENT HERETO.
DATE OF PROSPECTUS: MAY 1, 1998
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The policy is guaranteed not to lapse during the first three Policy years,
regardless of its Net Account Value if, on each Monthly Processing Date during
the first three Policy years, the sum of premiums paid, less the sum of Partial
Withdrawals and Policy Loans taken including accrued loan interest, is greater
than or equal to the sum of the applicable minimum monthly premiums for each
Policy Month starting with the first Policy Month to and including the Policy
Month which begins on the current Monthly Processing Date. The minimum monthly
premium is equal to one twelfth of the Minimum Annual Premium. If the Guaranteed
Minimum Death Benefit is effective, the Stated Death Benefit portion of the
Policy will remain in force for the Guarantee Period. To continue the Guarantee
Period, the required premiums must be paid and the Net Account Value must remain
diversified.
The Policy permits the Owner to choose from two death benefit options: Option 1,
a fixed benefit that equals the Stated Death Benefit, and Option 2, a benefit
that equals the Stated Death Benefit plus the Account Value. The Base Death
Benefit in force as of any Valuation Date will not be less than the amount
necessary to qualify the Policy as a life insurance contract under the Internal
Revenue Code in existence at the time the Policy is issued.
When applying for the Policy, the Owner irrevocably chooses which of two tests
for compliance with the Federal income tax law definition of life insurance we
will apply to the Policy. These tests are the Cash Value Accumulation Test and
the Guideline Premium/Cash Value Corridor Test. If the Guideline Premium/Cash
Value Corridor Test is chosen, premium amounts will be limited based on the
death benefit of the Policy.
We will not allocate funds to the Policy until we receive the Initial Premium
and we have approved the Policy for issue. Thereafter, the timing and amount of
premium payments may vary, within specified limits. A higher premium level may
be required to keep the Guaranteed Minimum Death Benefit in force. After certain
deductions have been made, Net Premiums may be allocated to one or more of the
Divisions of the Variable Account and to the Guaranteed Interest Division. 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. A
Policy may be returned according to the terms of the Right to Examine Policy
Period (also called the Free Look Period). Net Premiums allocated to the
Variable Account will be held in the Division investing in the Fidelity VIP
Money Market Portfolio of the Variable Account during the Delivery and Free Look
Periods.
The Policy Account Value is the sum of the amounts in the Divisions of the
Variable Account plus the amount in the Guaranteed Interest Division and the
amount in the Loan Division. The value of the amounts allocated to the Divisions
of the Variable Account will vary with the investment experience of the
corresponding Portfolios; there is no minimum guaranteed cash value for amounts
allocated to the Divisions of the Variable Account. The value of amounts
allocated to the Guaranteed Interest Division will depend on the interest rates
we declare. The Account Value will also reflect deductions for the cost of
insurance and expenses, as well as increases for additional Net Premiums.
Replacing existing insurance coverage with the Policy described in this
prospectus may not be advantageous.
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ISSUED BY: Security Life of Denver BROKER DEALER: ING America Equities, Inc.
<C> <S> <C> <C>
Insurance Company 1290 Broadway
Security Life Center Attn: Variable
1290 Broadway Denver, CO 80203-5699
Denver, CO 80203-5699 (303) 860-2000
(800) 525-9852
THROUGH ITS: Security Life Separate Account L1
ADMINISTERED AT: Customer Service Center
P.O. Box 173888
Denver, CO 80217-3888
(800) 848-6362
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PROSPECTUS DATED: May 1, 1998
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Strategic Advantage II 2
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TABLE OF CONTENTS
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DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS............................... 6
POLICY SUMMARY.................................................................... 9
General Information............................................................... 9
Death Benefits.................................................................... 9
Continuation of Coverage.......................................................... 9
Additional Benefits............................................................... 9
Premiums.......................................................................... 9
Allocation of Net Premiums........................................................ 10
Maximum Number of Investment Divisions............................................ 10
Policy Values..................................................................... 10
Determining the Value in the Divisions of the Variable Account.................... 10
How We Calculate Accumulation Unit Values for Each Division....................... 10
Transfers of Account Values....................................................... 10
Dollar Cost Averaging............................................................. 10
Automatic Rebalancing............................................................. 11
Loans............................................................................. 11
Partial Withdrawals............................................................... 11
Surrender......................................................................... 11
Right to Exchange Policy.......................................................... 11
Lapse............................................................................. 11
Reinstatement..................................................................... 11
Charges and Deductions............................................................ 11
Persistency Refund................................................................ 12
Refund of Sales Charges........................................................... 12
Tax Considerations................................................................ 12
INFORMATION ABOUT SECURITY LIFE, THE VARIABLE
ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION............. 13
Security Life of Denver Insurance Company......................................... 13
Security Life Separate Account L1................................................. 13
Maximum Number of Investment Divisions............................................ 14
Investment Objectives of the Portfolios........................................... 14
The Guaranteed Interest Division.................................................. 17
DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE
POLICY........................................................................... 17
Applying for a Policy............................................................. 17
Temporary Insurance............................................................... 18
Premiums.......................................................................... 18
Scheduled Premiums.............................................................. 18
Unscheduled Premium Payments.................................................... 18
Minimum Annual Premium.......................................................... 18
Special Continuation Period..................................................... 19
Premium Payments Affect the Coverage............................................ 19
Choice of Definitional Tests.................................................... 19
Modified Endowment Contracts.................................................... 19
Allocation of Net Premiums........................................................ 19
Death Benefits.................................................................... 20
Death Benefit Options........................................................... 20
Changes in Death Benefit Option................................................. 21
Changes in Death Benefit Amounts................................................ 21
Guaranteed Minimum Death Benefit.................................................. 22
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Strategic Advantage II 3
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Requirements to Maintain the Guarantee Period..................................... 22
Additional Benefits............................................................... 23
Adjustable Term Insurance Rider................................................. 23
Right to Change Insured Rider................................................... 23
Waiver of Cost of Insurance Rider............................................... 24
Waiver of Specified Premium Rider............................................... 24
Benefits at Maturity.............................................................. 24
Continuation of Coverage........................................................ 24
Policy Values..................................................................... 24
Account Value................................................................... 24
Cash Surrender Value............................................................ 24
Net Cash Surrender Value........................................................ 24
Net Account Value............................................................... 25
Determining the Value of Amounts in the Divisions of the Variable Account......... 25
How We Calculate Accumulation Unit Values for Each Division....................... 25
Transfers of Account Values....................................................... 25
Dollar Cost Averaging............................................................. 26
Automatic Rebalancing............................................................. 27
Policy Loans...................................................................... 27
Partial Withdrawals............................................................... 28
Surrender......................................................................... 29
Right to Exchange Policy.......................................................... 29
Lapse............................................................................. 29
If the Guaranteed Minimum Death Benefit Is Not in Effect........................ 29
If the Guaranteed Minimum Death Benefit Is in Effect............................ 30
Grace Period...................................................................... 30
Reinstatement..................................................................... 30
CHARGES, DEDUCTIONS AND REFUNDS................................................... 30
Deductions from Premiums.......................................................... 30
Tax Charges..................................................................... 31
Sales Charges................................................................... 31
Daily Deductions from the Variable Account........................................ 31
Mortality and Expense Risk Charge............................................... 31
Monthly Deductions from the Account Value......................................... 31
Initial Policy Charge........................................................... 32
Monthly Administrative Charge................................................... 32
Cost of Insurance Charges....................................................... 32
Charges for Additional Benefits................................................. 32
Changes in Monthly Charges...................................................... 33
Policy Transaction Fees........................................................... 33
Partial Withdrawal.............................................................. 33
Transfers....................................................................... 33
Allocation Changes.............................................................. 33
Illustrations................................................................... 33
Continuation of Coverage Administrative Fee..................................... 33
Persistency Refund................................................................ 33
Refund of Sales Charges........................................................... 34
Charges from Portfolios........................................................... 34
Portfolio Annual Expenses....................................................... 35
Group or Sponsored Arrangements................................................... 37
Other Charges..................................................................... 37
TAX CONSIDERATIONS................................................................ 37
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Strategic Advantage II 4
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Life Insurance Definition......................................................... 37
Diversification Requirements...................................................... 38
Modified Endowment Contracts...................................................... 38
Tax Treatment of Premiums......................................................... 39
Loans, Lapses, Surrenders and Withdrawals......................................... 39
If the Policy Is Not a Modified Endowment Contract.............................. 39
If the Policy Is a Modified Endowment Contract.................................. 39
Alternative Minimum Tax........................................................... 40
Section 1035 Exchanges............................................................ 40
Tax-exempt Policy Owners.......................................................... 40
Changes to Comply with Law........................................................ 40
Other............................................................................. 40
ADDITIONAL INFORMATION ABOUT THE POLICY........................................... 41
Voting Privileges................................................................. 41
Right to Change Operations........................................................ 42
Reports to Owners................................................................. 42
OTHER GENERAL POLICY PROVISIONS................................................... 42
Free Look Period.................................................................. 42
The Policy........................................................................ 42
Age............................................................................... 43
Ownership......................................................................... 43
Beneficiary....................................................................... 43
Collateral Assignment............................................................. 43
Incontestability.................................................................. 43
Misstatements of Age or Sex....................................................... 43
Suicide........................................................................... 44
Payment........................................................................... 44
Notification and Claims Procedures................................................ 44
Telephone Privileges.............................................................. 44
Non-participating................................................................. 45
Distribution of the Policies...................................................... 45
Settlement Provisions............................................................. 45
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES,
AND ACCUMULATED PREMIUMS......................................................... 46
ADDITIONAL INFORMATION............................................................ 54
Directors and Officers............................................................ 54
State Regulation.................................................................. 57
Legal Matters..................................................................... 57
Legal Proceedings................................................................. 57
Experts........................................................................... 57
Registration Statement............................................................ 57
Year 2000 Preparedness............................................................ 57
FINANCIAL STATEMENTS.............................................................. 58
APPENDIX A........................................................................ 62
APPENDIX B........................................................................ 65
APPENDIX C........................................................................ 66
PERFORMANCE INFORMATION........................................................... 66
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Strategic Advantage II 5
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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 total of the amounts allocated to the Divisions of the
Variable Account and to the Guaranteed Interest Division, plus any amount
set aside in the Loan Division to secure a Policy Loan.
ACCUMULATION UNIT -- A unit of measurement used to calculate the Account
Value in each Division of the Variable Account.
ACCUMULATION UNIT VALUE -- The value of an Accumulation Unit of each
Division of the Variable Account. The Accumulation Unit Value is
determined 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.
AGE -- The Insured's Age at any time is his or her age on the birthday
nearest the Policy Date plus the number of full Policy years since the
Policy Date.
AGE 100 -- The Policy anniversary on which the Insured's Age is 100.
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. The Base Death Benefit may be increased to satisfy the
Federal income tax law definition of life insurance.
BENEFICIARY(IES) -- The person or persons designated to receive the Death
Proceeds upon the death of the Insured.
CASH SURRENDER VALUE -- The amount of the Account Value plus any refund of
sales charges due.
CONTINUATION OF COVERAGE -- A Policy feature which permits the insurance
coverage to continue in force beyond Policy age 100.
CUSTOMER SERVICE CENTER -- Our administrative office: P.O. Box 173888,
Denver, CO 80217-3888.
DEATH PROCEEDS -- The amount payable upon the death of the Insured. It
equals the Base Death Benefit plus any Rider benefits, if applicable, minus
any outstanding Policy Loan and accrued loan interest, minus any Policy
charges incurred prior to the date of the insured's death, but not yet
deducted.
DELIVERY PERIOD -- The period which begins on the date the Policy is issued
and ends on the earlier of:
(a) the date the Policy was delivered so long as we receive written notice
of the actual delivery date signed by the Policy Owner, at our Customer
Service Center before the date in (b) or,
(b) the date the Policy is mailed from our Customer Service Center plus the
deemed mailing time. The deemed mailing time is five days, unless required
otherwise by the state in which the Policy is issued.
DIVISION(S) -- The Loan Division, the Guaranteed Interest Division and the
Divisions of the Variable Account, which invest in shares of the
Portfolios.
FREE LOOK PERIOD -- The period of time within which the Owner may examine
the Policy and return it for a refund. This is also called the Right to
Examine Policy Period.
GENERAL ACCOUNT -- The account which contains all of our assets other than
those held in the Variable Account or our other separate accounts.
GUARANTEE PERIOD -- The period during which the Stated Death Benefit is
guaranteed under the Guaranteed Minimum Death Benefit provision. The
Guarantee Period is to the Insured's Age 65 or 10 years from the Policy
Date, whichever is later. The Guarantee Period will end sooner if the
Guarantee Period Annual Premium has not been paid or if on any Monthly
Processing Date the Net Account Value is not diversified according to the
Policy requirements.
GUARANTEE PERIOD ANNUAL PREMIUM -- The premium payment level required to
maintain the Guarantee Period.
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Strategic Advantage II 6
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GUARANTEED INTEREST DIVISION -- Part of our General Account to which a
portion of the Account Value may be allocated and which guarantees
principal and interest.
GUARANTEED MINIMUM DEATH BENEFIT -- The Policy provision which guarantees
that the Stated Death Benefit will remain in force for the Guarantee Period
regardless of the amount of the Net Account Value, provided certain
conditions are met.
INITIAL PREMIUM -- The premium which is required to be paid and received by
our Customer Service Center for coverage to begin. Initial Premium is
equal to the sum of the scheduled modal premiums which fall due from the
policy effective date through the Investment Date.
INSURED -- The person on whose life this Policy is issued and upon whose
death the Death Proceeds are payable.
INVESTMENT DATE -- The date we allocate funds to the Policy. We will
allocate the initial Net Premium to the Policy on the next Valuation Date
following the date:
(a) we have received the Initial Premium, and
(b) we have approved the Policy for issue, and
(c) all issue requirements have been met and received in our Customer
Service Center.
LOAN DIVISION -- Part of our General Account in which funds are set aside
to secure outstanding Policy Loans and accrued loan interest when due.
MINIMUM ANNUAL PREMIUM -- The premium which must be paid during the first
three Policy years to meet the requirements of the Special Continuation
Period.
MONTHLY PROCESSING DATE -- The date each month on which deductions from the
Account Value are due. The first Monthly Processing Date will be the later
of the Policy Date or the Investment Date. Subsequent Monthly Processing
Dates will be the same date as the Policy Date unless this is not a
Valuation Date, in which case the Monthly Processing Date is the next
Valuation Date.
NASD -- National Association of Securities Dealers, Inc.
NET ACCOUNT VALUE -- The Account Value minus Policy Loans and accrued loan
interest.
NET AMOUNT AT RISK -- (for the Base Death Benefit) 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. It is equal to the Cash Surrender Value minus Policy Loans and
accrued loan interest.
NET PREMIUM -- Premium amounts paid minus 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 part of the Net Account Value from
the Policy. A Partial Withdrawal may reduce the amount of Base Death
Benefit and Target Death Benefit in force.
POLICY -- The basic Policy, applications, and any Riders or endorsements.
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.
POLICY LOAN -- The total amounts borrowed from the Policy, plus any Policy
Loan interest capitalized when due, minus any Policy Loan repayments.
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 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 II 7
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SCHEDULED PREMIUM -- The premium amount specified by the Owner on the
application as the amount intended to be paid at fixed intervals over a
specified period of time. Premiums may be paid on a monthly, quarterly,
semiannual, or annual basis. The Scheduled Premium need not be paid and it
may be changed at any time. Also, within limits, the Owner may pay more or
less than the Scheduled Premium.
SEC -- The United States Securities and Exchange Commission.
SEGMENT -- The Stated Death Benefit on the Policy Date is the initial
Segment, or Segment 1. Each increase in the Stated Death Benefit (other
than an option change) is a new Segment. The first year for a Segment
begins on the effective date of the Segment and ends one year later. Each
subsequent year begins at the end of the prior Segment year. Each new
Segment may be subject to a new Minimum Annual Premium, new sales charge,
new cost of insurance charges, and new incontestability and suicide
exclusion periods.
SPECIAL CONTINUATION PERIOD -- A three-year period beginning on the Policy
Date, during which payment of the Minimum Annual Premium will guarantee the
policy against lapse.
STATED DEATH BENEFIT -- The sum of the Segments under the Policy. The
Stated Death Benefit changes when there is an increase, a decrease, or when
a transaction on the Policy causes it to change.
TARGET DEATH BENEFIT -- When an Adjustable Term Insurance Rider is added to
the Policy, the Owner specifies the Target Death Benefit and Stated Death
Benefit in the Policy application; the Adjustable Term Insurance Rider
Death Benefit is the difference between the Target Death Benefit and the
Base Death Benefit. 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 and to keep the Target Death Benefit at the desired amount. The
Target Death Benefit for each year is 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.
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, 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 the unit values of the Divisions are determined.
Valuation Dates currently occur on each day on which the New York Stock
Exchange and Security Life's Customer Service Center are open for business
or as may be required by law, except for days that a Division's
corresponding Portfolio does not value its shares.
VALUATION PERIOD -- The period which begins at 4:00 p.m. Eastern Time on a
Valuation Date and ends at 4:00 p.m. Eastern Time on the next Valuation
Date.
VARIABLE ACCOUNT -- Security Life Separate Account L1 segregates 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 II 8
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POLICY SUMMARY
THIS POLICY SUMMARY PROVIDES 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 VARY FROM THOSE DESCRIBED IN THIS PROSPECTUS BASED ON
PARTICULAR CIRCUMSTANCES. THE DESCRIPTION OF THE POLICY 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 ON REQUEST.
GENERAL INFORMATION
The Policy provides life insurance protection on the life of the Insured. As
long as the Policy remains in force, we will pay a death benefit when the
Insured dies. At the Insured's Age 100 the Owner may surrender the Policy or
allow Continuation of Coverage to become effective. If Continuation of Coverage
is effective, we will deduct a one-time administrative fee and the policy will
remain in force. See Continuation of Coverage, page 24.
Strategic Advantage II is designed primarily for use on a multi-life basis where
the Insureds share common employment or a 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, 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 by Rider, reduced by the amount of any
outstanding Policy Loans and any accrued loan interest. See Death Benefits,
page 20.
Normally, when we issue the Policy, the death benefit is equal to the Stated
Death Benefit plus any amount added by Adjustable Term Insurance Rider. The
death benefit at issue may vary from the Stated Death Benefit plus term coverage
for some 1035 exchanges. The minimum Stated Death Benefit for which we will
issue a Policy is $50,000; however, we may lower the minimum Stated Death
Benefit for certain group or sponsored arrangements or corporate purchasers.
Generally, the Policy will remain in force only as long as the Net Account Value
is sufficient to pay 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 29) then the Policy and its Riders are guaranteed not to lapse, regardless
of the amount of the Net Account Value.
The Stated Death Benefit of the Policy may also remain in force after the
Special Continuation Period even if the Net Account Value is insufficient to pay
the monthly deductions if the Guaranteed Minimum Death Benefit provision is in
effect and the requirements have been met. See Guaranteed Minimum Death Benefit
Provision, page 22.
CONTINUATION OF COVERAGE
If the Insured is still living at Age 100 and the Continuation of Coverage
feature is in effect, we will deduct a one-time administrative fee and the
policy will remain in force. See Continuation of Coverage, page 24.
ADDITIONAL BENEFITS
A variety of additional benefits may be attached to the Policy by Rider. The
charge for these benefits is deducted monthly from the Account Value. See
Additional Benefits, page 23.
PREMIUMS
The Policy is a flexible premium policy, so the amount and frequency of the
premiums may vary, within limits. There are no required premium payments other
than those required to keep the Policy in force or payments required to maintain
certain benefits as described below.
The Initial Premium must be paid in order for us to issue the Policy. The
Minimum Annual Premium must be paid in order to meet the requirements for the
three year Special Continuation Period. The Guarantee Period Annual Premium
must be paid to maintain the Guaranteed Minimum Death Benefit.
The Scheduled Premium is selected by the Owner and specified when application is
made for the Policy. The Scheduled Premium may not be sufficient to maintain
the Guarantee Period for the Guaranteed Minimum Death Benefit provision or to
keep the Policy in force.
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 Coverage, page 19.
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Strategic Advantage II 9
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ALLOCATION OF NET PREMIUMS
After certain premium-based charges are deducted from each premium, the balance
(Net Premium) is added to the Account Value based on the premium allocation
instructions. Net Premiums may be allocated to one or more Divisions of the
Variable Account, or to the Guaranteed Interest Division, or both. However,
amounts can be allocated to no more than 18 Divisions over the life of the
Policy.
On or after the investment Date, amounts allocated to the Guaranteed Interest
Division will be allocated to that Division upon receipt. Amounts allocated to
the Divisions of the Variable Account will be held in the Division investing in
the Fidelity VIP Money Market Portfolio. At the end of the Delivery plus Free
Look Periods, the amounts allocated to the Guaranteed Interest Division will
remain in that Division; and, the funds held in the Fidelity VIP Money Market
Division will be reallocated to other Divisions of the Variable Account
according to the most recent premium allocation instructions. Thereafter, Net
Premiums will be allocated upon receipt according to the most recent premium
allocation instructions. Allocation percentages must be in whole numbers, with
the sum equaling 100%. No premium will be allocated before the Investment Date.
See Allocation of Net Premiums, page 19.
MAXIMUM NUMBER OF INVESTMENT DIVISIONS
The Owner may utilize a maximum of 18 Divisions for investment over the lifetime
of the Policy until current administrative systems are enhanced. See Maximum
Number of Investment Divisions, page 14.
POLICY VALUES
The Policy Account Value is equal to the sum of the amounts in the Guaranteed
Interest Division and in the Divisions of the Variable Account. It also
includes any amount we set aside in the Loan Division as collateral for any
outstanding Policy Loan. The Account Value reflects Net Premiums paid, as well
as deductions for charges. It also will 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 Withdrawals and service fees will be deducted from the Account
Value.
The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value
less the amount of any outstanding Policy Loans and accrued loan interest.
The Cash Surrender Value of the Policy is equal to the Account Value plus any
refund of sales charges due.
The Net Account Value of the Policy is equal to the Account Value less the
amount of any outstanding Policy Loan and accrued loan interest.
DETERMINING THE VALUE IN THE DIVISIONS OF THE VARIABLE ACCOUNT
The amounts included in the Divisions of the Variable Account are measured in
terms of Accumulation Units and Accumulation Unit Values. On any given day, the
value of the amount in a Division of the Variable Account is equal to the
Accumulation Unit Value times the number of Accumulation Units credited to that
Division. 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 25.
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. Each Accumulation Unit Value reflects the Division's 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 25.
TRANSFERS OF ACCOUNT VALUES
After the Free Look Period, up to 12 transfers among Divisions of the Variable
Account or to the Guaranteed Interest Division may be made in each Policy year
without charge. There will be a $25 charge for each transfer over 12 in a
Policy year. Transfers resulting from Automatic Rebalancing or Dollar Cost
Averaging are not included in the 12 transfers without a charge. The minimum
amount we will transfer is $100 or the balance in the division if less than
$100.
Once during the first 30 days of each Policy year, the Owner may transfer
amounts from the Guaranteed Interest Division. Transfers to the Guaranteed
Interest Division are not limited to this 30-day period. See Transfers of
Account Values, page 25.
DOLLAR COST AVERAGING
Dollar Cost Averaging is available by electing this feature at application or at
any other time by completing the appropriate form. We offer Dollar Cost
Averaging to Owners who have
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Strategic Advantage II 10
<PAGE>
at least $10,000 in the Divisions investing in either of the Fidelity VIP Money
Market Portfolio or the Neuberger & Berman AMT Limited Maturity Bond Portfolio.
There is no charge for this feature. See Dollar Cost Averaging, page 26.
AUTOMATIC REBALANCING
Automatic Rebalancing is available by electing this feature at application or by
completing the appropriate form. Automatic Rebalancing allows the Owner to
match Account Value allocations over time to specified allocation percentages.
We will charge a fee of $25 each time the automatic rebalancing allocation is
changed in excess of five times per Policy year; otherwise, there is no charge
for this feature. See Automatic Rebalancing, page 27.
LOANS
Loans may be taken against the Policy's Account Value. Unless otherwise
required by state law, the loan must be at least $100. Loan interest accrues at
an annual rate of 4.75%. The Loan Division earns a guaranteed rate of interest
equal to 4% on an annual basis. See Policy Loans, page 27.
PARTIAL WITHDRAWALS
A Partial Withdrawal of Net Account Value may be requested any time after the
first Policy year, within limits. One Partial Withdrawal is allowed each Policy
year. See Partial Withdrawals, page 28.
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 amounts 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. All
insurance coverage will end on that date. See Surrender, page 29.
RIGHT TO EXCHANGE POLICY
At any time during the first 24 months following the Policy Date, the Owner may
exercise the right to exchange the Policy from one in which the Account Value is
not guaranteed into a guaranteed Policy unless required differently by state
law. See Right to Exchange Policy, page 29.
LAPSE
Insurance coverage will continue as long as the Net Account Value of the Policy
is sufficient to pay all deductions that are taken out of the Account Value each
month.
In addition, during the first three Policy years if the conditions of the
Special Continuation Period have been met, the Policy and all attached Riders
are guaranteed not to lapse, regardless of the Net Account Value.
Also, if the requirements to maintain the Guarantee Period for the Guaranteed
Minimum Death Benefit provision have been met, the Stated Death Benefit portion
of the Policy will remain in effect after the three-year Special Continuation
Period regardless of the Net Account Value. However, if the requirements to
maintain the Guarantee Period have not been met, the Guaranteed Minimum Death
Benefit provision will lapse. See Lapse, page 29.
REINSTATEMENT
A lapsed Policy and its Riders may be reinstated within five years of its lapse
if it has not been surrendered and the Insured is still living. New evidence of
insurability and payment of certain reinstatement premiums will be required.
The Guaranteed Minimum Death Benefit cannot be reinstated after the Policy has
lapsed. We also will reinstate any Policy Loans which existed when coverage
ended, with accrued loan interest to the date of lapse. See Reinstatement, page
30.
CHARGES AND DEDUCTIONS
Deductions From Premiums: The following charges are deducted from each premium
before it is applied to the Account Value:
(i) Tax Charges-- A charge currently equal to 2.5% of premiums is deducted
for state and local premium taxes. A charge currently equal to 1.5% of
each premium is deducted to cover our estimated cost of the Federal
income tax treatment of deferred acquisition costs. We reserve the right
to increase or decrease the premium expense charges for taxes due to any
change in tax law. We further reserve the right to increase or decrease
the premium expense charge for the Federal deferred acquisition cost due
to any change in the cost to us.
(ii) Sales Charge -- A charge equal to a percentage of each premium is
deducted to cover a portion of our expenses in issuing this Policy. This
charge 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 ten Policy years,
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Strategic Advantage II 11
<PAGE>
this charge is equal to 12% of premiums paid up to the Target Premium and
3% of premiums paid in excess of the Target Premium. In the eleventh Policy
year and thereafter, the sales charge is equal to 3% of all premiums paid.
See Deductions from Premiums, page 30.
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 this charge to compensate us for
mortality and expense risks under the Policies. See Daily Deductions from the
Variable Account, page 31.
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 three Policy
years.
(ii) Monthly Administrative Charge -- $3 per month plus $0.025 per thousand
of Stated Death Benefit (or Target Death Benefit if greater). Currently
the per thousand charge is limited to $30 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
the Base Death Benefit, any Adjustable Term Insurance Rider, and for
multiple Segments.
(iv) Charges for Additional Benefits -- The cost of any additional benefits
added by Rider, other than the Adjustable Term Insurance Rider.
See Monthly Deductions from the Account Value, page 31.
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.
(i) Partial Withdrawal fee -- $25
(ii) Transfer fee -- twelve transfers per Policy year are permitted without
fees; for each transfer thereafter, a $25 fee is charged.
(iii) Allocation Changes -- five premium and five automatic rebalancing
allocation changes are permitted each Policy year without fees; for
each change thereafter, a $25 fee is charged.
(iv) Illustrations -- one illustration per Policy year is available without
a fee, for each illustration thereafter, a $25 fee may be charged.
(v) Continuation of Coverage -- a one-time $200 administrative fee will be
charged at Age 100 to activate coverage.
See Policy Transaction Fees, page 33.
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 34.
PERSISTENCY REFUND
The Account Value will be credited with a Persistency Refund each Monthly
Processing Date after the tenth Policy anniversary. See Persistency Refund,
page 33.
REFUND OF SALES CHARGES
If the Policy has not lapsed, we will, upon full surrender of the Policy within
the first two Policy years, return a portion of the sales charges previously
deducted from premiums paid in the first policy year. See Refund of Sales
Charges, page 34.
TAX CONSIDERATIONS
Under current Federal income tax law, death benefits of life insurance policies
generally are not subject to income tax. In order for this treatment to apply,
the Policy must qualify as a life insurance contract. The tax code provides for
two tests to qualify a Policy as a life insurance contract. The Owner
irrevocably selects which of these tests will apply to the Policy in the
application. After the Policy Date, the Policy will reflect the test chosen.
See Life Insurance Definition, page 37.
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 19.
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Strategic Advantage II 12
<PAGE>
INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS
AND THE GUARANTEED INTEREST DIVISION SECURITY LIFE OF DENVER INSURANCE COMPANY
Security Life of Denver Insurance Company ("Security Life") is a stock life
insurance company organized under the laws of the State of Colorado in 1929.
Our headquarters are located at 1290 Broadway, Denver, Colorado 80203-5699. We
are admitted to do business in the District of Columbia and all states except
New York. As of the end of 1997, Security Life and its consolidated
subsidiaries had over $120.2 billion of life insurance in force. Our total
assets exceeded $8.5 billion and our shareholder's equity exceeded $870 million,
on a generally accepted accounting principles basis as of December 31, 1997. We
offer a complete line of life insurance and retirement products, including
annuities, individual and group life, pension products, and market life
reinsurance.
Security Life actively manages its General Account investment portfolio to meet
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, The Netherlands, and has consolidated assets
exceeding $307.6 billion on a Dutch (modified U.S.) generally accepted
accounting principles basis as of December 31, 1997.
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") was established on
November 3, 1993, under the Insurance Law of the State of Colorado. It is a
unit investment trust registered with the SEC under the Investment Company Act
of 1940. Such registration does not involve any supervision by the SEC of the
management of the Variable Account or Security Life.
The Variable Account is a separate investment account of
Security Life used to support our variable life insurance policies and for other
purposes as permitted by applicable laws and regulations. The assets of the
Variable Account are kept separate from our General Account and any other
separate accounts we may have. We may offer other variable life insurance
contracts that will invest in the Variable Account which are not discussed in
this prospectus. The Variable Account may also invest in other securities which
are not available to the Policy described in this prospectus.
We own all the assets in the Variable Account. Income and realized and
unrealized gains or losses from assets in the Variable Account are credited to
or charged against the Variable Account without regard to other income, gains or
losses in our other investment accounts. In accordance with and under the
provisions of Section 10-3-501(2) of the Colorado Revised Statutes, that portion
of the assets of the Variable Account which is equal to the reserves and other
Policy liabilities with respect to the Variable Account is not chargeable with
liabilities arising out of any other business we conduct. This means that in
the event Security Life were ever to become insolvent, the assets of the
Variable Account are to be used first to pay Variable Account policy claims.
Only if assets remain in the Variable Account after those claims have been
satisfied can those assets be used to pay other Policy Owners and creditors of
Security Life.
The Variable Account, however, may be subject to liabilities arising from
Divisions of the Variable Account whose assets are attributable to other
variable life policies offered by the Variable Account. If the assets exceed
the required reserves and other policy liabilities, we may transfer the excess
to our General Account. If the assets in the Variable Account are insufficient
to satisfy Variable Account Policy Owner claims, Section 10-3-541 provides that
under certain circumstances the amount of those claims which are not satisfied
are to be treated as Policy Owner claims against the general account assets of
the insurance company.
The Variable Account has several Divisions, each of which invests in shares of a
corresponding Portfolio of a mutual fund. Therefore, the investment experience
of a Policy depends on the experience of the Portfolios designated. These
Portfolios are available only to serve as the underlying investment for variable
annuity and variable life insurance contracts issued through separate accounts
of Security Life as well as other life insurance companies and may be available
to certain pension accounts. They are not available directly to
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Strategic Advantage II 13
<PAGE>
individual investors.
Each of the Portfolios is a separate series of an open-end management investment
company which receives investment advice from a registered investment adviser
not otherwise affiliated with Security Life. The Neuberger & Berman Advisers
Management Trust has organized its Portfolio to a master feeder structure. See
the prospectus for the Neuberger & Berman Advisers Management Trust for more
details.
The Portfolios as well as their investment objectives are described below.
Shares of these Portfolios are sold to separate accounts of insurance companies,
which may or may not be affiliated with Security Life or each other, a practice
known as "shared funding." They may also sell shares to separate accounts to
serve as the underlying investment for both variable annuity and variable life
insurance contracts, 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
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.
MAXIMUM NUMBER OF INVESTMENT DIVISIONS
The Owner may utilize a maximum of 18 Divisions for investment over the lifetime
of the Policy until current administrative systems are enhanced. The Divisions
include the Divisions of the Variable Account and the Guaranteed Interest
Division, but exclude the Loan Division. For example, if the Owner has
allocated or transferred funds to 17 Divisions of the Variable Account and to
the Guaranteed Interest Division (or to 18 Divisions of the Variable Account),
those will be the only Divisions to which the Owner can subsequently allocate or
transfer funds. Therefore, Owners may prefer to utilize fewer Divisions in the
early years of the Policy so as to leave open the option to transfer to other
Divisions in the future. An Owner who has used 18 Variable Divisions will no
longer have the Guaranteed Interest Division available for future use.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS
Each Portfolio has a different investment objective that it tries to achieve by
following its investment strategy. The objectives and policies of each Portfolio
will affect its return and its 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 which must accompany
this prospectus and should be read in conjunction with it.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Neuberger & Berman Advisers Management Trust (the "Trust") is a registered,
open-end management investment company organized as a Delaware business trust
pursuant to a Trust Instrument dated May 23, 1994. The Trust is comprised of
separate Portfolios, each of which invests all of its net investable assets in a
corresponding series of Advisers Managers Trust ("Managers Trust"), a
diversified, open-end management investment company organized as of May 24,
1994, as a New York common law trust. This master feeder structure is different
from that of many other investment companies which directly acquire and manage
their own portfolios of securities. Neuberger & Berman Management Incorporated
acts as investment manager to Managers Trust and Neuberger & Berman, L.L.C. as
sub-adviser.
Limited Maturity Bond Portfolio -- seeks the highest current
income consistent with low risk to principal and liquidity. As a
secondary objective, it also seeks to enhance its total return. The
Limited Maturity Bond Portfolio pursues its investment objectives by
investing in a diversified portfolio of U.S. Government and Agency
securities and investment grade debt securities issued by financial
institutions, corporations and others. The Limited Maturity Bond
Portfolio may invest up to 10% of its net assets, measured at the time of
investment, in fixed income securities rated below investment grade or in
comparable unrated securities. The Limited Maturity Bond Portfolio's
dollar weighted average portfolio duration may range up to four years
although the series may invest in securities of any duration.
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 managers currently intend to focus primarily
on the securities of medium-capitalization companies. The portfolio is
managed using a growth-oriented investment approach. A growth-oriented
approach seeks stocks of companies that are projected to grow at above-
average rates.
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Strategic Advantage II 14
<PAGE>
Partners Portfolio -- seeks capital growth through an investment approach that
is designed to increase capital with reasonable risk. Its investment
program seeks securities believed to be undervalued based on strong
fundamentals such as low price to earnings ratio, consistent cash flow,
and the company's track record through all points of the market cycle. Up
to 15% of the series' net assets, measured at the time of investment, may
be invested in corporate debt securities rated below investment grade or
comparable unrated securities.
THE ALGER AMERICAN FUND
The Alger American Fund is a registered investment company organized on April 6,
1988, as a multi-series Massachusetts business trust. The Fund's investment
manager is Fred Alger Management, Inc., which has been in the business of
providing investment advisory services since 1964.
Alger American Small Capitalization Portfolio -- seeks to obtain long term
capital appreciation. Except during temporary defensive periods, the
Portfolio invests at least 65% of its total assets in equity securities of
companies that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the Russell 2000
Growth Index ("Russell Index") or the S&P SmallCap 600 Index ("S&P Index"),
updated quarterly. Both indexes are broad indexes of small capitalization
stocks. As of December 31, 1997, the range of market capitalization of the
companies in the Russell Index was $20 million to $2.97 billion; the range of
market capitalization of the companies in the S&P Index at that date was $21
million to $2.934 billion. The combined range was $20 million to $2.97
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 December 31, 1997, the
range of market capitalization of these companies was $213 million to $13.737
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. It may
enter into futures contracts on securities indexes as well as purchase and
sell call and put options on these futures. The Portfolio may borrow money for
the purchase of additional securities, but only from banks. It may not borrow
in excess of one third of the market value of its assets, less liabilities
other than such borrowing. Except during temporary defensive periods, the
Portfolio will invest 85% of its net assets in equity securities of companies
of any size.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND
II
Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund
II are open-end, diversified, management investment companies organized as
Massachusetts business trusts on November 13, 1981, and March 21, 1988,
respectively. The funds are managed by Fidelity Management & Research Company
("FMR") which handles the Funds' business affairs, with the exception of the VIP
II Index 500 Portfolio which is sub-advised by BankersTrust Company. FMR is the
management arm of Fidelity Investments, which was established in 1946 and is now
America's largest mutual fund manager.
VIP Growth Portfolio -- seeks capital appreciation by investing in common
stocks, although the Portfolio is not limited to any one type of security.
VIP Overseas Portfolio -- seeks long term growth of capital primarily through
investments in foreign securities. The Overseas Portfolio provides a means for
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.
VIP Money Market Portfolio -- seeks as high a level of current income as is
consistent with preserving capital and providing liquidity. The Portfolio will
invest only in high quality U.S. dollar-denominated money market securities of
domestic and foreign issuers.
VIP II Asset Manager Portfolio -- seeks high total return with reduced risk over
the long term by allocating its assets among domestic and foreign stocks,
bonds, and short term, money market instruments.
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Strategic Advantage II 15
<PAGE>
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 the ten diversified investment Portfolios,
five of which are described below. INVESCO Funds Group, Inc., the Funds'
investment adviser, is primarily responsible for providing the Portfolios with
investment management and various administrative services and supervising the
Fund's daily business affairs. INVESCO Distributors, Inc. ("IDI") provides
distribution services for the INVESCO Variable Investment Funds, Inc. 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. The fund pursues its investment objective
through investment in a variety of long-term, intermediate-term, and short-
term bonds. Potential capital appreciation is a factor in the selection of
investments, but is secondary to the Portfolio's primary objective. This
Portfolio may not be appropriate for all Owners due to the higher risk of
lower-rated bonds commonly known as "junk bonds." See the prospectus for the
INVESCO VIF High Yield Portfolio for more information concerning these
risks.
INVESCO VIF Utilities Portfolio -- seeks capital appreciation and income through
investments primarily in equity securities of companies principally engaged in
the public utilities business.
INVESCO VIF Small Company Growth Fund -- seeks long term capital growth by
investing in equity securities of companies with market capitalization of $1
billion or less at the time of purchase ("small-cap companies"). The balance
of the Fund's assets may be invested in the equity securities of companies
with market capitalizations in excess of $1 billion, debt securities and
short-term investments.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment company
organized as a "business trust" under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as
investment adviser and manager to the Worldwide Hard Assets Fund, Worldwide Real
Estate Fund, Worldwide Emerging Markets Fund, and Worldwide Bond Fund.
Van Eck Worldwide Hard Assets Fund -- seeks long term capital appreciation by
investing globally, primarily in "Hard Assets Securities." Hard Assets are
tangible, finite assets, such as real estate, energy, timber, and industrial
and precious metals. Income is a secondary consideration.
Van Eck Worldwide Real Estate Fund -- seeks to maximize total return by
investing primarily in equity securities of domestic and foreign companies
which are principally engaged in the real estate industry or which own
significant real estate assets.
Van Eck Worldwide Bond Fund -- seeks high total return through a flexible policy
of investing globally, primarily in debt securities.
Van Eck Worldwide Emerging Markets Fund -- seeks long term capital appreciation
by investing primarily in equity securities in emerging markets around the
world.
AIM VARIABLE INSURANCE FUNDS, INC.
AIM Variable Insurance Funds, Inc. is a registered, open-end,
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Strategic Advantage II 16
<PAGE>
series, management investment company. AIM Advisors, Inc., ("AIM") manages each
Fund's assets pursuant to a master investment advisory agreement dated February
28, 1997. AIM was organized in 1976 and is a wholly owned subsidiary of AIM
Management Group, Inc., an indirect subsidiary of AMVESCAP plc, (formerly
INVESCO plc).
AIM VI Capital Appreciation Portfolio -- seeks to provide capital
appreciation through investments in common stocks, with emphasis on medium-
sized and smaller emerging growth companies. AIM will be particularly
interested in companies that are likely to benefit from new or innovative
products, services or processes that should enhance such companies' prospects
for future growth in earnings.
AIM VI Government Securities Portfolio -- seeks to achieve a high level of
current income consistent with reasonable concern for safety of principal by
investing in debt securities issued, guaranteed or otherwise backed by the
U.S. Government.
THE GUARANTEED INTEREST DIVISION
All or a portion of Net Premiums and transfers of Net Account Value may be made
to the Guaranteed Interest Division. The Guaranteed Interest Division is part
of our General Account and 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,
the General Account, the Guaranteed Interest Division and any interests therein
are not 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 in the Guaranteed Interest
Division, and (iv) repaying a Policy Loan to release amounts from the Loan
Division.
From time to time, we declare the interest rate that will apply to all amounts
in the Guaranteed Interest Division. These interest rates will never be less
than the minimum guaranteed interest rate of 4% and will be in effect for at
least 12 months. The interest is credited as of each Valuation Date on 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 II VARIABLE UNIVERSAL LIFE
POLICY
This prospectus describes our standard Strategic Advantage II Variable Universal
Life Policy. There may be differences in the Policy because of state
requirements where the Policy is issued. Any such differences will be defined
in the Policy.
The illustrations beginning on page 46 are intended to provide an idea of how
the key financial elements of Strategic Advantage II work. The illustrations
show Premiums, Account Values, Cash Surrender Values and Death Benefits.
APPLYING FOR A POLICY
A Strategic Advantage II Policy may be purchased by submitting an application to
us. On the Policy Date, the Insured must be no older than Age 85. Before
issuing a Policy or applying Net Premium to the Variable Account or the
Guaranteed Interest Division, we require satisfactory evidence of insurability.
This evidence may include a medical examination, completion of all underwriting
requirements, and satisfaction of issue requirements.
The Policy Date is the date upon which the Policy is effective. The Policy Date
is 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
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Strategic Advantage II 17
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deductions from the Policy Date.
The Investment Date is the date we allocate funds to the Policy. We will
allocate the initial Net Premium to the Policy on the next Valuation Date
following the date: (i) we receive the Initial Premium and, (ii) approve the
Policy for issue, and (iii) all issue requirements have been met and received in
our Customer Service Center.
The Policy is generally available with a minimum Stated Death Benefit of
$50,000; however, we may reduce this amount for certain group or sponsored
arrangements if the average Stated Death Benefit at issuance for the group or
sponsored arrangement is at least $50,000. The maximum Stated Death Benefit
will be limited by our underwriting and reinsurance procedures in effect at the
time of application.
TEMPORARY INSURANCE
If a premium payment in an amount not less than the Scheduled Premium is
received with the application and there has been no material misrepresentation
in the application, temporary insurance equal to the applied-for face amount, up
to a maximum amount as described in the binding limited life insurance coverage
form, will be in force so long as the Insured meets all other requirements
described in the binding limited life insurance coverage form. 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; (ii) five days after notice of
termination is mailed to the Owner's address on the application; (iii) coverage
starts under the Policy resulting from the application; (iv) a policy resulting
from the application is refused by us; or (v) 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: (i) in the answers in the
binding limited life insurance coverage form or in the application, (ii) a
proposed Insured dies by suicide or intentional self-inflicted injury, or (iii)
the premium check is not honored.
PREMIUMS
The amount and frequency of premium payments are flexible, within the limits
described below.
SCHEDULED PREMIUMS
Even though premium amounts are flexible, the Schedule pages of the Policy will
show a "Scheduled Premium." The Scheduled Premium may be chosen by the Owner,
within our limits, when application for the Policy is made. The Scheduled
Premium is the amount which is to be paid over a specified period of time and
may not be sufficient to keep the Policy in force. The Owner may receive premium
reminder notices for the Scheduled Premium on a quarterly, semiannual, or annual
basis. Alternatively, the premiums, other than the first one, may be paid via
Electronic Funds 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 minimum and maximum limits we set. If the Guaranteed
Minimum Death Benefit provision described below is desired by the Owner, the
Scheduled Premium should not be less than the amount required to maintain the
Guarantee Period.
UNSCHEDULED PREMIUM PAYMENTS
Generally, unscheduled premium payments may be made at any time. We reserve the
right to limit the amount of unscheduled premiums if the payment would result in
an increase in the amount of the Base Death Benefit required by the Federal
income tax law definition of life insurance, or to require suitable evidence of
the insurability of the Insured at the time of the unscheduled premium payment.
Evidence of insurability may also be required if the net amount at risk is
increased as a result of an unscheduled premium payment. Premiums may also be
limited if the Guideline Premium/Cash Value Corridor Test is chosen to comply
with the Federal income tax law definition of life insurance. We will return
premium payments which exceed the "seven-pay" limit for the Policy if we
determine the payment would cause the Policy to immediately become a Modified
Endowment Contract. After the Owner has signed a form acknowledging that the
Owner understands the Policy will be a Modified Endowment Contract, we will
accept the excess premium payments. See Modified Endowment Contracts, page 38
and Changes to Comply with Law, page 40.
If a Policy Loan is outstanding, any payment which is not a Scheduled Premium
payment received before Age 100 is considered a loan repayment, unless otherwise
indicated. Applicable tax and sales charges which are deducted from any premium
payment are not deducted from a loan repayment.
MINIMUM ANNUAL PREMIUM
The Minimum Annual Premium must be paid during the first three Policy years to
meet the requirements for the three-year Special Continuation Period. We
determine the Minimum
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Strategic Advantage II 18
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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 is shown in the Schedule pages of the Policy.
SPECIAL CONTINUATION PERIOD
The Policy is guaranteed not to lapse, regardless of its Net Account Value if,
on each Monthly Processing Date during the first three Policy years, all
premiums paid, less the sum of Partial Withdrawals and Policy Loans taken,
including accrued loan interest, is greater than or equal to the sum of the
applicable minimum monthly premiums for each Policy month, starting with the
first Policy month, through and including the Policy month which begins on the
current Monthly Processing Date. The minimum monthly premium is equal to one
twelfth of the Minimum Annual Premium. See Lapse, page 29.
If during the first three Policy years, any charges are not deducted so as to
keep the Policy from lapsing under the Special Continuation Period, these
charges are not permanently waived. At the end of the Special Continuation
Period, the aggregate amount of the charges previously not deducted will be due
and will be deducted at the beginning of Policy year four.
PREMIUM PAYMENTS AFFECT THE 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. At that time, the Policy will
lapse. See Lapse, page 29. If the Minimum Annual Premium requirements are
satisfied, the Policy is guaranteed not to lapse during the first three Policy
years, regardless of its Net Account Value. See Special Continuation Period,
page 19. Under the Guaranteed Minimum Death Benefit provision, the Stated Death
Benefit portion of the Policy will remain in effect until the end of the
Guarantee Period as long as the conditions of the guarantee are met. See
Guaranteed Minimum Death Benefit Provision, page 22.
CHOICE OF DEFINITIONAL TESTS
When applying for the Policy, the Owner will irrevocably choose which of the two
tests for compliance with the Federal income tax law definition of life
insurance will apply to the Policy. These tests are the Cash Value Accumulation
Test and the Guideline Premium/Cash Value Corridor Test. See Life Insurance
Definition, page 37. If the Guideline Premium/Cash Value Corridor Test is
chosen, the allowable premium payments relative to the Policy death benefit will
be limited.
GUARANTEED MINIMUM DEATH BENEFIT PROVISION
The Owner will have the opportunity to choose whether to place and keep the
Guaranteed Minimum Death Benefit provision in effect. This provision 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. This
provision requires a premium payment level (the Guarantee Period Annual Premium)
which is higher than the Minimum Annual Premium. In addition, the Net Account
Value of the Policy must be diversified according to our requirements. See
Guaranteed Minimum Death Benefit provision, page 22.
The Guarantee Period Annual Premium depends on the Stated Death Benefit of the
Policy, the Insured's Age, sex, and Premium Class, the death benefit option
chosen, and additional Rider coverage. Adding additional benefits to the Policy
will increase the Guarantee Period Annual Premium above this level.
Policy Owners should consider the Guaranteed Minimum Death Benefit provision
when setting the Scheduled Premium.
MODIFIED ENDOWMENT CONTRACTS
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 38.
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
The balance after certain premium-based charges are deducted from each premium
is called the Net Premium. No allocation will be made prior to the Investment
Date. After
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Strategic Advantage II 19
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the Investment Date, the Net Premium is added to the Account Value
according to the Owner's instructions. Net Premium amounts allocated to the
Guaranteed Interest Division will be allocated to that Division upon receipt.
During the Delivery and Free Look Periods, Net Premiums allocated to the
Divisions of the Variable Account will be allocated to the Division investing in
the Fidelity VIP Money Market Portfolio. At the end of the Delivery and Free
Look Periods, this portion of the Account Value will automatically be allocated
according to the most recent premium allocation instructions.
Thereafter, Net Premiums received will be allocated upon receipt according to
the allocation instructions stated in 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. More than five Premium allocation changes in a Policy year
will be subject to a $25 charge for each additional change.
The Owner may utilize a maximum of 18 Divisions for investment over the lifetime
of the Policy until current administrative systems are enhanced. The Divisions
include the Divisions of the Variable Account and the Guaranteed Interest
Division, but exclude the Loan Division. See Maximum Number of Investment
Divisions, page 14.
DEATH BENEFITS
Strategic Advantage II 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
II.
When a Policy is issued, an initial amount of insurance coverage is determined
according to the application instructions. 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.
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 and thus no sales charge applies. The cost
of this Rider is included in the monthly cost of insurance charges discussed
below. See Adjustable Term Insurance Rider, page 23.
As described below, the Base Death Benefit may vary from the Stated Death
Benefit. This may result from choice of death benefit option, increases to
comply with the Federal income tax law definition of life insurance, changes in
the death benefit option, partial withdrawals, requested increases and
decreases, or when a transaction on the Policy causes the Base Death Benefit to
change.
As long as the Policy remains in force, we will pay an amount equal to the Death
Proceeds to the Beneficiary of this Policy when the Insured dies. The Death
Proceeds will consist of the Base Death Benefit as of the date of the Insured's
death, reduced by any outstanding Policy Loans and accrued loan interest and, if
in the grace period or three-year Special Continuation Period, further reduced
by any unpaid charges incurred prior to the date of the Insured's death. The
Death Proceeds will include any amount provided by Rider on the Insured.
DEATH BENEFIT OPTIONS
The Owner may choose from two death benefit options (Option 1 or Option 2).
These options may result in a Base Death Benefit under the Policy which exceeds
the Stated Death Benefit. The death benefit option may be changed on any policy
anniversary. See Changes In Death Benefit Option, page 21.
Under Option 1, the Base Death Benefit is the greater of:
(a) the Stated Death Benefit on the date of the Insured's death; or
(b) the Account Value on the date of the Insured's death multiplied by the
appropriate factor from the Definition of Life Insurance Factors shown in
Appendix A or B.
Under Option 2, the Base Death Benefit is the greater of:
(a) the Stated Death Benefit plus the Account Value on the date of the
Insured's death; or
(b) the Account Value on the date of the Insured's death multiplied by the
appropriate factor from the Definition of Life Insurance Factors shown in
Appendix A or B.
Owners who prefer to have insurance coverage that does not vary in amount and
lower cost of insurance charges, should choose Option 1. Owners who prefer to
have any favorable investment experience reflected as increased insurance
coverage should choose Option 2.
Federal income tax law requires the death benefit to be at
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Strategic Advantage II 20
<PAGE>
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 sex, at
any point in time as well as by the test for compliance selected in the original
Policy application. See Life Insurance Definition, page 37.
If necessary, we will adjust the Policy to continue to qualify as life insurance
under the applicable provisions of the Federal income tax laws in existence at
the time the Policy was issued.
CHANGES IN DEATH BENEFIT OPTION
A change in death benefit option may be requested at least 30 days prior to a
Policy anniversary. A change 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. After the request is approved, we will send a new
policy Schedule page which should be attached to the Policy. We may ask that
the Policy be returned to our Customer Service Center so that we can note the
change in the Schedule. 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, evidence that the Insured is insurable according to our normal rules of
underwriting for that class of policy must be submitted to us. We may not allow
a change that would reduce the Stated Death Benefit below the minimum we require
to issue this Policy. After the effective date of the change, the Stated Death
Benefit will be changed according to the following table:
OPTION CHANGE STATED DEATH BENEFIT
FROM TO FOLLOWING CHANGE
EQUALS:
Option 1 Option 2 Stated Death Benefit prior to change minus the Account
Value as of the effective date of the change.
Option 2 Option 1 Stated Death Benefit prior to change plus the Account Value
as of the effective date of the change.
For purposes of a death benefit option change, the Account Value will be
allocated to each Segment in the same proportion that the Segment bears to the
Stated Death Benefit. See Changes In Death Benefit Amounts, page 21.
We do not adjust the Target Premium when this type of change is made. See Sales
Charges, page 31. These increases and decreases in Stated Death Benefit are
made so that the amount of the Base Death Benefit remains the same on the date
of the change. When the Base Death Benefit remains the same, there is no
immediate change in the Net Amount at Risk, which is the amount on which our
cost of insurance charges are based. See Cost Of Insurance Charges, page 32.
In addition, there will be no change to the amount of term insurance if an
Adjustable Term Insurance Rider has been added.
Death Benefit Option 2 will not be available after Age 100.
CHANGES IN DEATH BENEFIT AMOUNTS
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 after the first
Policy anniversary.
An increase or a decrease in the death benefit of the Policy may be requested by
the Owner. This request will be effective as of the next monthly processing
date after the request is received by our Customer Service Center unless there
are underwriting or other requirements. A change in coverage may not be for an
amount less than $1,000.
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 ask that the Policy be returned
to our Customer Service Center so that we can note the change in the Schedule.
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 37.
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 37, and
Modified Endowment Contracts, page 38.
Requested reductions in the death benefit or an option change that causes a
reduction will first be applied to reduce the Target Death Benefit. The Stated
Death Benefit will be decreased only after Adjustable Term Insurance Rider
coverage has been reduced to zero. If more than one Segment exists, any
subsequent reduction in Stated Death Benefit will be allocated among Segments in
the same proportion each segment bears to the total Stated Death Benefit prior
to the reduction unless required differently by state law.
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Strategic Advantage II 21
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Satisfactory evidence that the Insured is still insurable must be provided when
the death benefit is increased.
Unless otherwise indicated, any request for an increase to the Target Death
Benefit will be assumed to also be a request for an increase to the Stated Death
Benefit so that the amount of the Adjustable Term Insurance Rider, if it is
included with the Policy at the time of the increase, will not change. The
Target Death Benefit may be changed only once each year.
A requested increase in the Stated Death Benefit will create a new Segment.
Increases in Stated Death Benefit resulting from death benefit option changes do
not create new Segments, rather, they merely increase the size of the existing
Segment(s). As discussed below, once created, a new Segment can never be
eliminated unless required differently by state law.
If an increase creates a new Segment, premiums paid after the increase will be
allocated to the original and new Segments in the same proportion that the
guideline annual premiums defined by the Federal income tax laws for each
Segment bear to the sum of the guideline annual premiums for all Segments. The
guideline annual premiums will be shown in the Schedule for each coverage
segment. Net Amount at Risk will be allocated to each Segment in the same
proportion that the Segment bears to the total stated Death Benefit.
GUARANTEED MINIMUM DEATH BENEFIT
Generally, the length of time the Policy remains in force depends on the Net
Account Value of the Policy. Because the charges to 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
amounts in the Divisions of the Variable Account and the interest earned in the
Guaranteed Interest Division will affect the Account Value and, as a result, the
length of time the Policy remains in force without payment of additional
premiums.
A Guaranteed Minimum Death Benefit provision is available which may extend the
period that the Policy's Stated Death Benefit will remain in effect if the
Divisions of the Variable Account suffer adverse investment experience. This
provision has a Guarantee Period of ten Policy years or to the Insured's Age 65,
whichever is later. It protects the Stated Death Benefit of the Policy for a
limited number of Policy years.
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 provision; and any attached
Riders will lapse. See Lapse, page 29.
The Guaranteed Minimum Death Benefit provision is not available in some states.
REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD
The Guaranteed Minimum Death Benefit provision requires that the Net Account
Value must meet certain diversification requirements, and it requires a premium
payment level, the Guarantee Period Annual Premium, that is higher than the
Minimum Annual Premium.
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. The amount of premiums
paid, minus the total of Partial Withdrawals, Policy Loans and accrued loan
interest must equal or exceed the sum of the Guarantee Period Monthly Premiums.
This sum of Guarantee Period Monthly Premiums starts with the first Policy
Month and is through and including the Policy Month that begins on the current
Monthly Processing Date. 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 lapse.
The Guarantee Period Annual Premium will be listed in the Schedule of the
Policy. If the Policy benefits are increased, the Guarantee Period Annual
Premium also will increase. The Guarantee Period Monthly Premium is one twelfth
of the Guarantee Period Annual Premium.
The Guarantee Period also will lapse if the Net Account Value on any Monthly
Processing Date prior to Maturity Date is not diversified according to the
following rules:
i. No more than 35% of the Net Account Value may be invested in any one
Division, and
ii. The Net Account Value must be invested in at least five Divisions.
These diversification requirements will be satisfied if the Automatic
Rebalancing feature has been elected and conditions i) and ii) above are met.
The Policy will also be deemed to satisfy the requirements for diversification
if Dollar Cost Averaging is elected and the resulting transfers are directed
into at least four other Divisions with no more than 35% of any transfer
directed to any one Division. See Dollar Cost Averaging, page 26, and Automatic
Rebalancing, page 27.
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Strategic Advantage II 22
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If the Guaranteed Minimum Death Benefit lapses and is not corrected, this
feature will be terminated. Once terminated, the Guaranteed Minimum Death
Benefit provision cannot be reinstated.
There is no charge for the Guaranteed Minimum Death Benefit.
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 by the Owner at any
time. See Modified Endowment Contracts, page 38, 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.
ADJUSTABLE TERM INSURANCE RIDER
The Death Proceeds may be increased by adding the Adjustable Term Insurance
Rider on the life of the Insured. As the name suggests, the Adjustable Term
Insurance Rider adjusts over time.
At issue, a Schedule of death benefits called the Target Death Benefit is
specified at levels to meet the Owner's 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 Amounts, page 21. If at any time you cancel a scheduled change or ask
for an unscheduled decrease to your Target Death Benefit, we may deny any future
scheduled increases to the Target Death Benefit.
The amount of Adjustable Term Insurance Rider in force at any time is the amount
needed to fill the difference between the Target Death Benefit specified in the
Schedule and the Base Death Benefit in effect. The Adjustable Term Insurance
Rider is dynamic in that it adjusts daily for variations in the Base Death
Benefit resulting from compliance with the Federal income tax law definition of
life insurance test chosen.
For example, assume the Base Death Benefit increases due to the Federal income
tax law definition of life insurance. The Adjustable Term Insurance Rider will
adjust to provide Death Proceeds equal to the Target Death Benefit in each year:
Base Death Target Death Adjustable Term
Benefit Benefit Insurance Rider Amount
- ------------ ------------ ----------------------
201,500 250,000 48,500
202,500 250,000 47,500
202,250 250,000 47,750
Since the Adjustable Term Insurance Rider is dynamic, it is possible that the
Adjustable Term Insurance Rider amount may be eliminated entirely as a result of
increases in the Base Death Benefit due to the definition of life insurance
requirements. Using the example outlined above, if the Base Death Benefit under
the Policy grew to $250,000, the Adjustable Term Insurance Rider amount would be
reduced to zero. (It can never be reduced below zero.)
Even though the Adjustable Term Insurance Rider amount is reduced to zero, the
Rider will remain in effect until it is removed from the Policy. Therefore, if
the Base Death Benefit under the Policy is subsequently reduced below the Target
Death Benefit, the Adjustable Term Insurance Rider amount will reappear as
needed to maintain the Target Death Benefit at the requested level. Partial
Withdrawals and base decreases may reduce the amount of the Target Death
Benefit. See Partial Withdrawals, page 28.
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
externally defined premium and no tax or sales charges for this 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 32. Since there is no defined premium related to the
Adjustable Term Insurance Rider, there are no tax or sales charges associated
with this coverage and thus the total sales charge paid by the Owner may be less
if coverage is included as an Adjustable Term Insurance Rider rather than the
Base Death Benefit. However, since not all Policy features apply to the
Adjustable Term Insurance Rider, the Owner should consider these features as
well as cost when making his or her purchase decisions.
RIGHT TO CHANGE INSURED RIDER
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Strategic Advantage II 23
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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 a change of
Insured occurs, the cost of insurance charges in the future may change but the
Account Value will remain unchanged as of the change date. There is no charge
for this Rider.
WAIVER OF COST OF INSURANCE RIDER
This Rider provides that during the total disability of the Insured, while the
Policy remains in force, the monthly expense charges, cost of insurance charges
and Rider charges will be waived and therefore not deducted from the Account
Value. If this Rider is added to the Policy, Waiver of Specified Premium Rider
may not also be added.
WAIVER OF SPECIFIED PREMIUM RIDER
This Rider provides that during the total disability of the Insured, while the
Policy remains in force, a specified premium amount will be credited monthly to
the Policy. The amount of premium to be credited, 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 be added.
BENEFITS AT MATURITY
If the Insured is still living at Policy Age 100 and the Owner does not desire
to use the Continuation of Coverage feature, the Policy Owner may surrender the
Policy for the Net Account Value. Some portion of this payment may be taxable.
Consult with your tax adviser for advice. The Net Account Value is the Account
Value reduced by any outstanding Policy Loan and accrued loan interest. The
Policy will then end.
CONTINUATION OF COVERAGE
If the Insured is still living at Policy Age 100 and the Continuation of
Coverage feature is in effect, the Net Account Value (except amounts in the loan
division) will be transferred into the Guaranteed Interest Division. A one-time
administrative fee will be assessed against the Policy to cover future expenses.
The insurance coverage under the Policy will continue in force until the time of
the Insured's death unless the Policy lapses or is surrendered, but no further
cost of insurance charges will be assessed. See Continuation of Coverage
Administration Fee, page 33.
At Age 100, all Riders except the Adjustable Term Rider terminate. The coverage
provided under the Rider converts to base coverage and the Stated Death Benefit
is redefined. If there is no Rider coverage, the Stated Death Benefit is
unchanged. Any Policy with Death Benefit Option 2 will be converted to Death
Benefit Option 1 at Age 100 when the Continuation of Coverage feature becomes
effective. See Changes in Death Benefit Option page 21.
The Net Account Value funds may not be transferred into the Variable Divisions
after Age 100; thus related investment features such as Dollar Cost Averaging
and Automatic Rebalancing are discontinued.
If there is an outstanding loan on the Policy, loan interest will continue to
accrue. If no payments are made, it is possible that the loan interest may
reduce the account value and cause the Policy to lapse. To avoid this event, you
may make loan or loan interest payments after Age 100. However, no additional
premium payments will be accepted.
During the Continuation of Coverage period you may take policy loans or partial
withdrawals. If a persistency refund is being paid on the Guaranteed Interest
Division, policies in the Continuation of Coverage period will be credited with
the persistency refund as well. See Persistency Refund, page 33.
To discontinue the coverage once the Continuation of Coverage feature is in
effect, you may surrender the policy. All normal surrender consequences will
apply. See Surrender, page 29.
The availability of this feature is subject to state approval. Where approved,
it is an automatic feature and no election is required.
POLICY VALUES
ACCOUNT VALUE
The amount of the Account Value is the sum of the amounts in the Guaranteed
Interest Division, in the various Divisions of the Variable Account, and the
Loan Division. The Account Value therefore reflects all premiums paid, charges
made, Policy 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 which may be 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
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Strategic Advantage II 24
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Policy Loans and 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 Loans and 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 in that
Division to the Policy. 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 Policy transaction charges, if any.
The number of Accumulation Units purchased or redeemed in a Division of the
Variable Account as of any Valuation Date is calculated by dividing the dollar
amount of the transaction by the Division's Accumulation Unit Value calculated
after the close of business that day. The Accumulation Unit Value of each
Division fluctuates with the investment experience of the corresponding
Portfolio and reflects the investment income, realized and unrealized capital
gains and losses, and expenses of the Portfolio. The Accumulation Unit Values
also reflect the mortality and expense risk charges we make each day to the
Variable Account. See How We Calculate Accumulation Unit Values for Each
Division, page 25.
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, the Transaction Date will be the next succeeding
Valuation Date.
Monthly deductions against the Account Value are made as of the Monthly
Processing Date. Transaction charges are made as of the Transaction Date.
The value of any amount allocated to a Division of our Variable Account will go
up or down depending on the investment experience of that Division. For amounts
allocated to the Divisions of the Variable Account, there is no guaranteed
minimum cash value.
HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION
We determine Accumulation Unit Values for the Divisions of the Variable Account
as of each Valuation Date. All Policy transactions are performed as of a
Valuation Date.
The Accumulation Unit Value for each Division will generally be set at $10 on
the first Valuation Date that there are Policy transactions in that Division of
the Variable Account. After that, the Accumulation Unit Value as of any
Valuation Date is equal to the Accumulation Unit Value for the preceding
Valuation Date multiplied by the Accumulation Experience Factor for that
Division for the Valuation Period.
We calculate an Accumulation Experience Factor for each Division every Valuation
Date as follows:
1. We take the value of the shares belonging to the Division in the
corresponding Portfolio as of the close of business that Valuation Date
(before giving effect to any Policy transactions for that day, such as
premium payments or surrenders). For this purpose, we use the share value
reported to us by the managers of the Portfolio.
2. We add any dividends or capital gains distributions declared and
reinvested by the Portfolio during the Valuation Period. We subtract from
this amount a charge for taxes, if any.
3. We divide the resulting 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 new 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 result is the Accumulation Experience Factor for the Valuation Period.
TRANSFERS OF ACCOUNT VALUES
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Strategic Advantage II 25
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After the Free Look Period ends, up to 12 transfers among the 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 we 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 their ability to provide maximum investment return to all Owners.
Transfers from the Guaranteed Interest Division may be made only as follows.
Once during the first 30 days of each Policy year, the Owner may transfer
amounts from the Guaranteed Interest Division. Transfer requests received
within 30 days prior to the Policy anniversary will be deemed to occur as of the
Policy anniversary. Transfer requests received on the Policy anniversary or
within the following 30 days will be processed. Transfer requests received at
any other time will not be processed.
Transfer amounts from the Guaranteed Interest Division to the Divisions of the
Variable Account are limited to the greatest of (i) 25% of the balance in the
Guaranteed Interest Division at the time of the first transfer or withdrawal in
a Policy year, (ii) the sum of any amounts transferred and withdrawn from the
Guaranteed Interest Division in the prior Policy year or, (iii) $100.
The Owner may utilize a maximum of 18 Divisions for investment over the lifetime
of the Policy until current administrative systems are enhanced. See Maximum
Number of Investment Divisions, page 14.
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 44.
DOLLAR COST AVERAGING
We offer a feature called Dollar Cost Averaging to Owners who have at least
$10,000 of Account Value invested in either the Division investing in the
Fidelity VIP Money Market Portfolio or the Neuberger & Berman AMT Limited
Maturity Bond Portfolio. The main objective of Dollar Cost Averaging is to
protect Policy values from short-term price fluctuations. Since the same dollar
amount is transferred to other Divisions each period, more units are purchased
in a Division if the value per unit is low, and fewer units are purchased if the
value per unit is high. This plan of allocating Policy values reduces the risk
of investing too much when the price of a Portfolio's shares is high and too
little when the price of a Portfolio's shares is low. However, participation in
Dollar Cost Averaging does not assure a profit nor does it protect against a
loss in a declining market.
With Dollar Cost Averaging, a designated dollar amount or a percentage of the
Account Value of the Division investing in the Fidelity VIP Money Market
Portfolio or the Neuberger Berman AMT Limited Maturity Bond Portfolio will be
transferred automatically each period from the selected Division to one or more
other Divisions of the Variable Account. Dollar Cost Averaging transfers may
not be made to or from the Guaranteed Interest Division. Any transfers that are
a result of the Dollar Cost Averaging feature are not counted toward the limit
of 12 transfers that can be made each Policy year without a transfer charge.
There is no charge for this feature.
Dollar Cost Averaging allocations may be designated in dollar amounts or whole
percentages. The minimum percentage that may be transferred to any one Division
is 1% of the total amount transferred to all selected Divisions. The transfer
amount under Dollar Cost Averaging may be no less than $100.
The first Dollar Cost Averaging date must be at least five days after our
receipt of the request for Dollar Cost Averaging. In no event will Dollar Cost
Averaging begin before the end of the Delivery and Free Look Periods. Dollar
Cost Averaging may occur monthly, quarterly semi-annually, or annually on a date
requested by the Owner. Unless specified otherwise, Dollar Cost Averaging will
take place monthly, on the Monthly Processing Date.
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Strategic Advantage II 26
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If on any Dollar Cost Averaging date, the amount in the Division from which
transfers are to be made is equal to or less than the amount to be transferred,
the entire remaining amount will be transferred, and Dollar Cost Averaging will
end. Changes to the Dollar Cost Averaging program may be made once each Policy
year or Dollar Cost Averaging may be canceled completely by sending satisfactory
notice to our Customer Service Center at least five days before the next Dollar
Cost Averaging date. If telephone privileges are in effect, changes to the
Dollar Cost Averaging program can be made by telephoning our Customer Service
Center. See Telephone Privileges, page 44.
A date for Dollar Cost Averaging to terminate may be specified by the Owner.
Termination also may occur 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 a specified dollar amount.
A Dollar Cost Averaging Program and an Automatic Rebalancing Program may run at
the same time.
AUTOMATIC REBALANCING
The Automatic Rebalancing feature provides a method for maintaining a balanced
approach to investing Account Values and for simplifying the process of asset
allocation over time.
The Automatic Rebalancing feature may be elected with the application or at any
subsequent time by completing the appropriate form. Automatic Rebalancing
matches Account Value allocations over time to the allocation percentages set by
the Owner. During the operation of the Automatic Rebalancing feature, transfers
among the Divisions may occur monthly, quarterly, semi-annually, or annually on
a date specified by the Owner. Unless specified otherwise, Automatic
Rebalancing will take place on the last Valuation Date of each calendar quarter.
Automatic Rebalancing allocations may be specified for all or some of the
Divisions in which the Account Value is invested. If this feature is elected we
will transfer amounts among the Divisions so that, after the transfers, the
ratio of the Account Value in each Division to the total Account Value of all
Divisions included in Automatic Rebalancing matches the automatic rebalancing
allocation percentage for that Division. This will rebalance the amounts in
Divisions that do not match the allocation percentages, which could result, for
example, from Divisions which outperform the other Divisions for that time
period.
If Automatic Rebalancing is elected with the Policy application, the first
transfer will occur on the date specified by the Owner, following the end of the
Delivery and Free Look Periods. If this feature is elected after the Policy
Date, the first transfer will be processed as of the date requested by the Owner
which must be at least five days after receipt at our Customer Service Center,
or, if no date is specified, the last Valuation Date of the calendar quarter
after we receive notification at our Customer Service Center and the Delivery
and Free Look Periods have ended.
The allocation percentages for Automatic Rebalancing may be changed at any time
and the Account Value will be reallocated as of the Valuation Date that we
receive the allocation instructions at our Customer Service Center. Any
reduction in the allocation to the Guaranteed Interest Division, however, will
be considered a transfer from the Division and, therefore, must comply with the
maximum transfer amount and time limitations on transfers from the Guaranteed
Interest Division, as described in Transfers of Account Values on page 25. If we
receive an Automatic Rebalancing request which is in conflict with these
provisions, we will ask for revised instructions.
The Owner may terminate the Automatic Rebalancing feature at any time, as long
as we receive notice of the termination at least five days prior to the next
Automatic Rebalancing. If the Guarantee Period is in effect and the Automatic
Rebalancing feature is terminated, diversification of the Net Account Value
still must be maintained for the Guarantee Period to continue. If the Automatic
Rebalancing feature is active, the Guarantee Period is in effect, and a request
is received for an allocation which does not meet the diversification
requirements to maintain the Guarantee Period, we will notify the Owner that the
allocation must be changed. See Guaranteed Minimum Death Benefit, page 22
Any transfers that are a result of the Automatic Rebalancing feature are not
counted toward the limit of 12 transfers that can be made each Policy year
without a transfer charge.
We will charge a fee of $25 each time the Automatic Rebalancing allocation is
changed more than five times per Policy year; otherwise there is no charge for
this feature.
An Automatic Rebalancing program may be run simultaneously with a Dollar Cost
Averaging program.
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 the Net Account Value less monthly
deductions to the next Policy Anniversary. Maximum loan amounts may be
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Strategic Advantage II 27
<PAGE>
different if required by state law. A Policy Loan may be requested by
contacting our Customer Service Center. We may impose requirements relating to
Policy Loans as necessitated by our administrative system. For example, we may
require that loan requests specify a dollar amount rather than a percentage to
be taken from a specific division.
Loan interest charges on a Policy Loan accrue daily at a annual interest rate of
4.75%. 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 sufficient units of the Variable
Account Divisions are redeemed to cover the amount of the loan 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 unless otherwise
specified by the Owner. The amounts in each Division will be determined as of
the Valuation Date we receive the request for a loan. The Loan Division is
credited at an annual rate of 4.00%.
The amount of interest credited to the Loan Division for the Policy year will be
transferred from the Loan Division on Policy anniversaries. When a loan
repayment is made, an amount equal to the payment is transferred from the Loan
Division. Amounts transferred from the Loan Division will be allocated to the
Divisions of the Variable Account and the Guaranteed Interest Division based on
the current premium allocation instructions unless a different allocation is
requested.
A Loan against the Policy will have a permanent effect on the Account Value and,
therefore, on the benefits under this Policy, even if the Loan is repaid. When
borrowing against the Policy, an amount equal to the Policy Loan is transferred
to the Loan Division where it earns a guaranteed rate of interest. Premiums or
transfer amounts may not be allocated to the Loan Division other than by
borrowing additional amounts. If not repaid, the Policy Loan and accrued loan
interest will be deducted from the amount of the Death Proceeds paid, and the
Cash Surrender Value paid on surrender. It also may 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 Loan and
accrued loan interest is insufficient to cover the monthly deductions.
If telephone privileges have been elected, 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
44.
Loans may have adverse tax consequences. See Modified Endowment Contracts,
page 38.
PARTIAL WITHDRAWALS
A Partial Withdrawal may be requested on any Monthly Processing Date after the
first Policy anniversary by contacting our Customer Service Center. One Partial
Withdrawal is allowed each Policy year. We may impose requirements on Partial
Withdrawals as necessitated by our administrative system. For example, we may
require that requests be specified as a dollar amount rather than a
percentage.
The minimum Partial Withdrawal is $100. The maximum Partial Withdrawal is the
amount which will leave a Net Account Value of $500. 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. See Policy Transaction Fees, page
33.
The Stated Death Benefit is not reduced by a Partial Withdrawal taken when: (i)
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
37), and (ii) 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 15 years have elapsed since the Policy Date and the
Insured is not yet Age 81, a Partial Withdrawal of an amount up to 10% of the
Account Value or, if greater, 5% of the Stated Death Benefit calculated
immediately before the Partial Withdrawal is taken, will not reduce the Stated
Death Benefit. Any additional amount withdrawn does reduce the Stated Death
Benefit by that additional amount.
For a Policy under an Option 2 death benefit, a Partial
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Strategic Advantage II 28
<PAGE>
Withdrawal does not reduce the Stated Death Benefit.
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 37.
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 44.
Partial Withdrawals may have adverse tax consequences. See Modified Endowment
Contracts, page 38.
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 Policy Loan
and accrued loan interest amounts. Costs and expenses which have been deducted
from the net Account Value on the Monthly Processing Date preceding the
surrender will not be added or pro-rated at surrender. We will compute the Net
Cash Surrender Value as of the Valuation Date we receive the request and Policy
at our Customer Service Center. 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 38.
RIGHT TO EXCHANGE POLICY
During the first 24 months following the Policy Date, the Owner has the right to
exchange the Policy from one in which the investment experience is not
guaranteed for a guaranteed Policy, unless required differently by state law.
This is accomplished by transferring 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. When this right is
exercised, we will not allow the allocation of future premium payments or
transfers to the Divisions of the Variable Account.
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 assessed on
the transfer to exercise this exchange privilege. See The Guaranteed Interest
Division, page 17.
LAPSE
Insurance coverage will continue as long as the Net Account Value of the Policy
is sufficient to pay all the deductions each month. The Policy is guaranteed
not to lapse, regardless of its Net Account Value, if, on each Monthly
Processing Date during the first three Policy years, the sum of premiums paid
less the sum of Partial Withdrawals and Policy Loans and accrued loan interest
is greater than or equal to the sum of the applicable minimum monthly premiums
for each Policy month starting with the first Policy month through and including
the Policy month which begins on the current Monthly Processing Date. The
minimum monthly premium is equal to one twelfth of the Minimum Annual Premium.
IF THE GUARANTEED MINIMUM DEATH BENEFIT 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 30.
If we do not receive full payment of the requested amount within the 61 days,
the Policy and all Riders attached will lapse without value. We will withdraw
any remaining balance of the Account Value from the Divisions of the Variable
Account and Guaranteed Interest Division. We will
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Strategic Advantage II 29
<PAGE>
deduct any amount owed to us and 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 subject to reductions for Policy Loan amounts, accrued loan
interest and any monthly deductions due.
IF THE GUARANTEED MINIMUM DEATH BENEFIT IS IN EFFECT
After the Special Continuation Period, if the Guaranteed Minimum Death Benefit
provision is in effect, 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 22.
The benefits provided by Riders attached to the Policy and any amount by which
the Base Death Benefit exceeds the Stated Death Benefit are not protected by the
Guaranteed Minimum Death Benefit provision. Therefore, these 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 waived permanently.
The Guaranteed Minimum Death Benefit provision will be terminated if the Policy
does not meet the monthly premium or diversification tests as explained in
Guaranteed Minimum Death Benefit, page 22. If the Guaranteed Minimum Death
Benefit provision is terminated, the normal test for lapse will resume.
GRACE PERIOD
If the following conditions occur as of a Monthly Processing Date, the Policy
will enter into the 61-day Grace Period:
(i) The Net Account Value is zero or less; and
(ii) The three-year Special Continuation Period has expired or the
required premium has not been paid; and
(iii) The Guarantee Period has expired or been terminated.
We will, at least 30 days before the end of a grace period, notify the Owner or
any assignee in writing at the last known address on our records that the grace
period has begun. The notification will include the amount of premium payment
necessary to reinstate the Policy and all Riders attached. The premium required
to reinstate the Policy is generally the amount of past due charges plus the
amount that will cover estimated monthly deductions for the Policy and all
attached Riders for the following two months. If we receive payment of this
amount before the end of the grace period, we will use it to make the overdue
deductions. Any balance remaining will be applied to the Account Value in the
same manner as other premium payments.
REINSTATEMENT
If the Policy Owner fails to pay sufficient premiums prior to the end of the
Grace Period, the Policy and its Riders, other than the Guaranteed Minimum Death
Benefit provision, may be reinstated within five years after the Grace Period.
Unless otherwise required by state law, we will reinstate the Policy and any
Riders if:
(i) The Policy has not been surrendered for its Net Cash Surrender Value;
(ii) Satisfactory evidence is provided 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; and
(iii) We receive 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
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 also will 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
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Strategic Advantage II 30
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Unless a Policy Loan is outstanding (see Policy Loans, page 27), any payment
received before Age 100 is considered a premium. Certain expenses are deducted
from premium payments. The Net Premium is then added to the Account Value. The
expenses which are deducted from the premium include the tax and the sales
charges.
TAX CHARGES
Many states levy taxes on life insurance premium payments. The amount of these
taxes varies from state to state, and may vary from jurisdiction to jurisdiction
within a state. We currently deduct an amount equal to 2.5% of each premium to
pay applicable premium taxes. The 2.5% rate approximates the average tax rate
we expect to pay on premiums from all states.
A charge currently equal to 1.5% of each premium payment is deducted to cover
our estimated cost for the Federal income tax treatment of deferred acquisition
costs determined solely by the amount of life insurance premiums we receive.
This charge for deferred acquisition costs is reasonable in relation to Security
Life's increased Federal income tax burden resulting from the receipt of premium
payments, under Internal Revenue Code Section 848.
Except as limited by state law, we reserve the right to increase or decrease the
premium expense charge for taxes due to any change in tax law. We further
reserve the right to increase or decrease the premium expense charge for the
Federal income tax treatment of deferred acquisition costs due to any change in
the cost to us.
SALES CHARGES
A percentage of each premium is deducted to compensate us for a portion of the
cost of selling the Policy. The percentage deducted is based on the amount of
premium paid and the number of years since the Policy Date or the date of an
increase in coverage. For each of the first ten Policy years, this charge is
equal to 12% of premiums paid up to the Target Premium and 3% of premiums paid
in excess of the Target Premium. Thereafter, the sales charge is equal to 3% of
all premiums paid.
Target Premiums are not based on the Scheduled Premium. Target Premiums are
actuarially determined based on the Age, sex and Premium Class of the Insured.
See Premiums, page 18. The Target Premium for the Policy and any Segments added
since the Policy Date will be listed in the Schedule.
For a Policy with multiple Segments, premiums paid are allocated to the Segments
in the same proportion as the guideline annual premium (as defined by the
Federal income tax law) for each Segment bears to the total guideline annual
premium for the Stated Death Benefit.
The sales charge covers the cost of distribution, costs of preparing our sales
literature, 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 the mortality and expense risks we assume.
This charge is equal to 0.002055% per day of the amount in the Divisions of the
Variable Account, which is equivalent to an annual rate of 0.75% of the portion
of the Account Value allocated to the Variable Account.
We assess the mortality and expense risk charge to compensate us for assuming
mortality and expense risks under the Policies. The mortality risk we assume is
that Insureds, as a group, may live for a shorter period of time than estimated.
The expense risk we assume is that other expenses we incur in issuing and
administering the Policies and operating the Variable Account will be greater
than the amount we estimated when setting the charges for these expenses. We
will realize a profit from this fee to the extent it is not needed to provide
benefits and pay expenses under the Policies. We may use this profit for other
purposes, including any distribution expenses not covered by the sales charge.
This charge is not assessed against the amount of Account Value which is
allocated to the Guaranteed Interest Division, nor to amounts in the Loan
Division. We credit the Account Value with a persistency refund equivalent to
0.6% per year for each Segment that has been in force for at least ten Policy
years, which effectively reduces the charge for mortality and expense risks.
See Persistency Refund, page 33.
MONTHLY DEDUCTIONS FROM THE ACCOUNT VALUE
The following charges are deducted from the Account Value on each Monthly
Processing Date. These deductions are
_______________________________________________________________________________
Strategic Advantage II 31
<PAGE>
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 three Policy years and
is guaranteed not to exceed this amount. This charge covers such costs 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 $3 per month plus a charge of
$0.025 per thousand of Stated Death Benefit or Target Death Benefit, if greater,
and is guaranteed never to exceed this amount. The per thousand charge
currently is limited to $30 per month. This charge is designed to cover the
ongoing costs of maintaining the Policy, such as premium billing and
collections, claim processing, Policy transactions, record keeping, reporting
and other communications with Owners, other expenses and overhead. This charge
is designed to reimburse us for expenses and we do not expect to gain from it.
COST OF INSURANCE CHARGES
The cost of insurance charges compensate us for providing insurance protection
under the Policy. The cost of insurance charges are calculated monthly, and
equal our current monthly cost of insurance rate times the Net Amount at Risk
for each portion of the death benefit. Net Amount at Risk for each portion of
the death benefit is calculated at the beginning of the Policy month.
The Net Amount at Risk for the Base Death Benefit is equal to the difference
between the current Base Death Benefit and the amount of the Account Value. For
this purpose, the amount of the Account Value is determined after deduction of
charges due on that date, other than cost of insurance charges for the Base
Death Benefit, any Adjustable Term Insurance Rider, and Waiver of Cost of
Insurance Rider.
The Net Amount at Risk for the Adjustable Term Insurance Rider is equal to the
amount of the benefit provided.
If the Base Death Benefit at the beginning of the month is increased due to the
requirements of Federal income tax law definition of life insurance, Net Amount
at Risk for the Base Death Benefit that month will also increase, but the Net
Amount at Risk for any Adjustable Term Insurance Rider may be 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 makeup of the death
benefit, and with the 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 Segment is added, as well as the
length of time the Policy or Segment has been in effect. Unisex rates are used
where appropriate under applicable law, including the state of Montana and
Policies purchased by employers and employee organizations in connection with
employment-related insurance or benefit programs. Net Amount at Risk is
allocated to Segments in the same proportion that each Segment bears to the
total Stated Death Benefit as of the Monthly Processing Date. Separate cost of
insurance rates apply to the Base Death Benefit, the Adjustable Term Insurance
Rider and any additional Segments. We may change these rates from time to time,
but they will never be more than the guaranteed maximum rates set forth in the
Policy. The guaranteed maximum rates for 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 minimal evidence of insurability. Policies issued on a
guaranteed issue basis may present different mortality costs to us compared to
underwritten Policies. We may charge different cost of insurance rates for
guaranteed issue Policies. The cost of insurance charges may depend on the
issue Age of the Insured, the size of the group, and the total premium to be
paid by the group. Under most guaranteed issue Policies, the overall charges
for insurance will be higher than under a comparable underwritten Policy issued
in the preferred nonsmoker, standard nonsmoker, or standard smoker class. This
means that an Insured may be able to obtain individual, underwritten insurance
coverage at a lower overall cost.
The maximum rates for the initial and any new Segment will be printed in the
Schedule which we will provide to you.
There are no cost of insurance charges after Age 100.
CHARGES FOR ADDITIONAL BENEFITS
The cost of additional benefits added by Rider will be deducted monthly on the
Monthly Processing Date. We may change these charges, but the Schedule contains
tables showing the guaranteed maximum rates. See Additional Benefits, page 23.
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Strategic Advantage II 32
<PAGE>
CHANGES IN MONTHLY CHARGES
Any changes in the cost of insurance charges or charges for additional benefits,
will be made by class of Insured and will be based on changes in future
expectations about such things as investment earnings, mortality, the length of
time policies will remain in effect, expenses and taxes. In no event will they
exceed the guaranteed maximum rates defined in the Policy.
POLICY TRANSACTION FEES
In addition to the deductions described above, we charge fees for certain Policy
transactions.
Transaction fees are taken from the Divisions of the Variable Account and the
Guaranteed Interest Division in the same proportion that the Account Value in
each Division bears to the Net Account Value immediately after the transaction
for which the fee is charged.
PARTIAL WITHDRAWAL
A service fee of $25 will be charged against the Account Value for each Partial
Withdrawal. See Partial Withdrawals, page 28.
TRANSFERS
We charge a fee of $25 for each additional transfer beyond the first 12 in a
Policy year. See Transfers of Account Values, page 25. 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 Right to Exchange provided by this
Policy. See Right to Exchange Policy, page 29.
ALLOCATION CHANGES
We charge a fee of $25 each time the premium or automatic rebalancing allocation
is changed more than five times each Policy year.
ILLUSTRATIONS
We reserve the right to charge a fee, not to exceed $25, for each Policy
illustration in excess of one per Policy year.
CONTINUATION OF COVERAGE ADMINISTRATIVE FEE
At Age 100, if the Continuation of Coverage feature is in effect, a one-time
administrative charge of $200 will be assessed to cover the costs expected to be
incurred to maintain and service the Policy for the remainder of the Insured's
lifetime. This charge is in lieu of the normal monthly administrative charge.
It is designed to reimburse us for expenses and we do not expect to gain from
it.
PERSISTENCY REFUND
Long-term Owners of Strategic Advantage II will receive a persistency refund if
permitted by state law.
Each month the Policy or a Segment remains in force after its tenth Policy
anniversary, we will credit the Account Value with a refund equivalent to 0.6%
of the Account Value on an annual basis for that Segment (0.05% monthly).
However, the persistency refund is not guaranteed to be paid on the Guaranteed
Interest Division. For purposes of this calculation, Account Value will be
allocated to each Segment based upon the number of completed Policy years that
Segment has been in force and the size of the guideline annual premium as
defined by the Federal income tax law definition of life insurance.
The persistency refund will be added to the Divisions of the Variable Account
and the Guaranteed Interest Division but not the loan 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 = .0005
Persistency refund = 10,000 x .0005 = $5.00
Before After
Persistency Persistency
Refund Refund
------ ------
Variable
Divisions $10,000.00 $10,005.00
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 = $6,000
Account Value in the Loan Division = $4,000
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Strategic Advantage II 33
<PAGE>
Monthly persistency refund Rate = .0005
Persistency refund = 10,000 x .0005 = $5.00
Before After
Persistency Persistency
Refund Refund
------ ------
Variable
Divisions $6,000.00 $6,005.00
Loan $4,000.00 $4,000.00
If a persistency refund is being paid on the Guaranteed Interest Division,
policies in the Continuation of Coverage period will be credited with the
persistency refund.
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 guaranteed to be at least 5% of the premiums paid. In the second Policy
year, the refund is guaranteed to be at least 2.5% of the premiums paid in the
first Policy year. After the second Policy anniversary, there is no refund of
sales charges.
CHARGES FROM PORTFOLIOS
The Variable Account purchases shares of the Portfolios at net
asset value. That price reflects investment management fees and other direct
expenses that have already been deducted from the assets of the Portfolio. The
following table describes these investment management fees and other direct
expenses of the Portfolios.
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Strategic Advantage II 34
<PAGE>
Portfolio Annual Expenses (As a Percentage of Portfolio Average Net Assets)/1/
<TABLE>
<CAPTION>
Investment Total Portfolio
Portfolio Management Fees Other Expenses Expenses
--------- --------------- -------------- --------
<S> <C> <C> <C>
AIM Variable Insurance Funds, Inc.
AIM VI - Capital Appreciation 0.63% 0.05% 0.68%
AIM VI - Government Securities 0.50% 0.37% 0.87%
The Alger American Fund
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Leveraged AllCap Portfolio 0.85% 0.15% 1.00%/3/
Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84%
Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89%
Fidelity Variable Insurance Products Fund
VIP Growth Portfolio 0.60% 0.09% 0.69%/4/
VIP Money Market Portfolio 0.21% 0.10% 0.31%
VIP Overseas Portfolio 0.75% 0.17% 0.92%/4/
Fidelity Variable Insurance Products Fund II
VIP II Asset Manager Portfolio 0.55% 0.10% 0.65%/4/
VIP II Index 500 Portfolio 0.24% 0.04% 0.28%/5/
INVESCO Variable Investment Funds, Inc.
INVESCO VIF - High Yield Portfolio 0.60% 0.23% 0.83%/6, 9/
INVESCO VIF - Industrial Income Portfolio 0.75% 0.16% 0.91%/6, 8/
INVESCO VIF - Small Company Growth Fund 0.75% 0.25% 1.00%/6, 11/
INVESCO VIF - Total Return Portfolio 0.75% 0.17% 0.92%/6, 7/
INVESCO VIF - Utilities Portfolio 0.60% 0.39% 0.99%/6, 10/
Neuberger & Berman Advisers Management Trust/2/
Growth Portfolio 0.83% 0.07% 0.90%
Limited Maturity Bond Portfolio 0.65% 0.12% 0.77%
Partners Portfolio 0.80% 0.06% 0.86%
Van Eck Worldwide Insurance Trust
Worldwide Bond Fund 1.00% 0.12% 1.12%
Worldwide Emerging Markets Fund 0.80% 0.00% 0.80%/14/
Worldwide Hard Assets Fund 1.00% 0.17% 1.17%/12/
Worldwide Real Estate Fund 0.00% 0.00% 0.00%/13/
</TABLE>
________________________________________________________________________________
Strategic Advantage II 35
<PAGE>
/1/ The preceding Portfolio expense information was provided to us by the
Portfolios, and we have not independently verified such information. These
Portfolio expenses are not direct charges against Division assets or reduction
from Contract values; rather these Portfolio expenses are taken into
consideration in computing each underlying Portfolio's net asset value, which
the share price used to calculate the unit values of the Divisions. For a more
complete description of the Portfolios' costs and expenses, see the prospectuses
for the Portfolios.
/2/ Neuberger & Berman Advisers Management Trust (the "Trust") is divided into
portfolios ("Portfolios"), each of which invests all of its net investable
assets in a corresponding series ("Series") of Advisers Managers Trust. The
figures reported under "Investment Management and Administration Fees" include
the aggregate of the administration fees paid by the Portfolio and the
management fees paid by its corresponding Series. Similarly, the "Other
Expenses" includes all other expenses of the Portfolio and its corresponding
series. See "Expenses" in the Trust's Prospectus. Expenses may 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
0.04% of interest expense.
/4/ A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into arrangements
with their custodian whereby credits realized, as a result of uninvested cash
balances were used to reduce custodian expenses. Including these reductions, the
total operating expenses presented in the table would have been 0.67% for Growth
Portfolio, 0.90% for Overseas Portfolio, and 0.64% 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 0.27%, 0.13% and 0.40% respectively.
/6/ The Portfolios' custodian fees were reduced under an expense offset
arrangement. In addition, certain expenses of the Portfolios' are being absorbed
voluntarily by INVESCO Funds Group, Inc. ("IFG"). The above ratios reflect total
expenses, less expenses absorbed by IFG, prior to any expense offset.
/7/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the
years ended December 31, 1997, 1996 and 1995. If such expenses had not been
voluntarily absorbed, the ratio of expenses to average net assets would have
been 1.10%, 1.30% and 2.51%, respectively, and the ratio of net investment
income to average net assets would have been 2.89%, 3.08% and 2.41%,
respectively.
/8/ Various expenses of the Portfolios were voluntarily absorbed by IFG for the
years ended December 31, 1997, 1996 and 1995. If such expenses had not been
voluntarily absorbed, the ratio of expenses to average net assets would have
been 0.97%, 1.19%, and 2.31%, respectively, and the ratio of net investment
income to average net assets would have been 2.12%, 2.63% and 2.22%,
respectively.
/9/ Various expenses of the Portfolios were voluntarily absorbed by IFG for the
years ended December 31, 1997, 1996 and 1995. If such expenses had not been
voluntarily absorbed, the ratio of expenses to average net assets would have
been 0.94%, 1.32% and 2.71%, respectively, and the ratio of net investment
income to average net assets would have been 8.56%, 8.74% and 7.05%,
respectively.
/10/ Various expenses of the Portfolios were voluntarily absorbed by IFG for the
years ended December 31, 1997, 1996 and 1995. If such expenses had not been
voluntarily absorbed, the ratio of expenses to average net assets would have
been 2.07%, 5.36% and 57.13%, respectively, and the ratio of net investment
income to average net assets would have been 1.84%, (1.28%) and (52.86%)
respectively.
/11/ Various expenses of the Portfolios were voluntarily absorbed by IFG for the
years ended December 31, 1997. If such expenses had not been voluntarily
absorbed, the ratio of expenses to average net assets would have been 35.99% and
the ratio of net investment income to average net assets would have been
(34.86%).
/12/ Various expenses of the Portfolio were voluntarily absorbed by the
Portfolio's investment manager. Absent such reimbursement, "Investment
Management Fees," "Other Expenses" and "Total Portfolio Expenses" would have
been 1.0%, 0.18%, and 1.18%, respectively.
/13/ Various expenses of the Portfolio were voluntarily absorbed by the
Portfolio's investment manager. Absent such reimbursement, "Investment
Management Fees," "Other Expenses" and "Total Portfolio Expenses" would have
been 1.0%, 3.92%, and 4.92%, respectively.
/14/ Various expenses of the Portfolio were voluntarily absorbed by the
Portfolio's investment manager. Absent such reimbursement, "Investment
Management Fees," "Other Expenses" and "Total Portfolio Expenses" would have
been 1.0%, 0.34%, and 1.34%, respectively.
________________________________________________________________________________
Strategic Advantage II 36
<PAGE>
GROUP OR SPONSORED ARRANGEMENTS
This Policy is available for purchase by individuals, corporations, or
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 also may allow Partial Withdrawals to be taken
without a charge. Group arrangements include those in which a trustee, an
employer, or an association either purchases Policies covering a group of
individuals on a group basis or endorses the Policy to a group of individuals.
Sponsored arrangements include those in which an employer or association allows
us to offer Policies to its employees or members on an individual basis.
Our costs for sales, administration and mortality generally vary with the size
and stability of the group, among other factors. We take all these factors into
account when reducing charges. To qualify for reduced charges, a group or
sponsored arrangement must meet certain requirements. We will make any
reductions according to our rules in effect when an application form for a
Policy is approved. We may change these rules from time to time. Any variation
in the sales charge, administrative charge or other charges, fees and privileges
will reflect differences in costs or services and will not be unfairly
discriminatory.
OTHER CHARGES
Under current law we pay no tax on investment income and capital gains reflected
in variable life insurance policy reserves (except to the extent the Federal
deferred acquisition cost may be considered such a tax). Consequently, no
charge is currently being made to any Division of our Variable Account for our
Federal income taxes. We reserve the right, however, to make such a charge in
the future if the tax law changes and we incur Federal income tax which is
attributable to the Variable Account.
We must pay state and local taxes (in addition to applicable taxes based on
premiums) in several states. At the present time, these taxes are not
substantial. However, if these taxes increase, we reserve the right to charge
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.
Strategic Advantage II is designed to qualify as a life insurance contract under
the Internal Revenue Code. All terms and provisions of the policy shall be
construed in a manner consistent with that design. The Base Death Benefit in
force at any time shall not be less than the amount of insurance necessary to
achieve such qualification under the applicable provisions of the Internal
Revenue Code in existence at the time the Policy is issued. We reserve the
right to amend the policy or adjust the amount of insurance when required. We
will send you a copy of any policy amendment.
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 have 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 is 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."
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Strategic Advantage II 37
<PAGE>
Under the Cash Value Accumulation Test, there is no limit to the amount that may
be paid in premiums as long as there is enough death benefit in relation to
Account Value at all times. The death benefit at all times must be at least
equal to an actuarially determined factor, depending on the Insured's Age, sex,
and Premium Class at any point in time, multiplied by the Account Value. See
Appendix A, page 62, 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 65, 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 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, as 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). The IRS has not given an official opinion on
policies that continue coverage past age 100. There are no clear guidelines on
how to keep these benefits within the definition of life insurance. However, we
believe our approach is appropriate and in keeping with the spirit of the
current law. See Benefits at Age 100, page 24.
Also, any interest payment accrued on Death Proceeds paid either as a lump sum
or other than in one lump sum may be subject to tax. See Settlement Provisions,
page 45.
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, exchanges and transfers, or death
benefits. Any such change could have a retroactive effect. Such concerns
should be addressed by your 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 assurances that they will meet the
applicable diversification standards.
In certain circumstances, Owners of variable life insurance contracts may be
considered the Owners, for Federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includable in the
variable contract Owner's gross income. The IRS has stated in published rulings
that a variable contract Owner will be considered the Owner of separate account
assets if the contract Owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The
Treasury also announced, in connection with the issuance of temporary
regulations concerning diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
policyowner), rather than the insurance company, to be treated as the owner of
the assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
Owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in certain
respects from, those described by the IRS in rulings in which it was determined
that Policy Owners 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
_______________________________________________________________________________
Strategic Advantage II 38
<PAGE>
contracts designated as "Modified Endowment Contracts", which applies to
Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified Endowment Contract
will depend on the individual circumstances of each Policy. In general, a
Policy will be a Modified Endowment Contract if the accumulated premiums paid at
any time during the first seven Policy years exceed 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 this summary. Therefore, a current or prospective Owner should
consult with a competent adviser to determine whether a Policy transaction will
cause the Policy to be treated as a Modified Endowment Contract. To the extent
possible, to keep the Policy from being treated as a "modified endowment
contract" for Federal tax purposes, the provisions of the Policy shall be
interpreted to prevent the Policy from being subject to such treatment. We
reserve the right to amend the Policy to reflect any clarifications that may be
needed or are appropriate, including any rider, to achieve this objective.
Security Life will 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 tax 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 Partial Withdrawal may or may not be taxable depending on
the Owner's particular circumstances. During the first 15 Policy years, the
proceeds from a Partial Withdrawal could be subject to Federal income tax to the
extent the Cash Surrender Value exceeds investment in the Policy. The portion
subject to tax will depend upon the ratio of the death benefit to Account Value
under the Policy and the Age of the Insured at the time of the withdrawal.
After the first 15 Policy years, the proceeds from a Partial Withdrawal will not
be subject to Federal income tax except to the extent such proceeds exceed
investment in the Policy.
IF THE POLICY IS A MODIFIED ENDOWMENT CONTRACT
If a Policy is a Modified Endowment Contract, any pre-death distribution from
the Policy will be taxed on an "income-first" basis, similar to the treatment of
annuities for individuals. Distributions for this purpose include a surrender,
Partial Withdrawal or Policy Loan, including any increase in a loan amount to
pay interest on an existing loan or an assignment or a pledge to secure a loan.
Any such distributions will be considered taxable income to the Owner to the
extent the Account Value exceeds investment in the Policy immediately before the
distribution. All Modified Endowment Contracts that are issued by Security Life
(and its affiliates) to the same Owner during any calendar year are treated as
one Modified Endowment Contract for purposes of determining the amount
includable in the gross income under Code Section 72(c).
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Strategic Advantage II 39
<PAGE>
A 10% penalty tax will also apply to the taxable portion of a distribution from
a Modified Endowment Contract, unless an exception applies. The penalty tax
will not apply to distributions (i) when the taxpayer is at least 59 1/2 years
of age, (ii) in the case of a disability (as defined in the Code), or
(iii) received as part of a series of substantially equal periodic payments,
made at least annually for the life (or life expectancy) of the taxpayer or the
joint lives (or joint life expectancies) of the taxpayer and his or her
beneficiary. Since these exclusions do not apply to corporations or other
business entities, the 10% penalty tax would always apply to these types of
Owners. If the Policy is surrendered, the excess, if any, of the Cash Surrender
Value over investment in the Policy will be subject to Federal income tax and,
unless one of the above exceptions applies, the 10% penalty tax.
If a Policy was not originally a Modified Endowment Contract but later becomes
one, distributions that occur during the Policy year it becomes a Modified
Endowment Contract and any subsequent Policy year will be taxed as described in
the two preceding paragraphs. In addition, any distributions from the Policy
made within two years before it becomes a Modified Endowment Contract will be
treated as having been made in anticipation of the change and will be subject to
tax in this manner. This means that a distribution made from a Policy that is
not a modified endowment could later become taxable as a distribution from a
Modified Endowment Contract. The Treasury has been authorized to prescribe
rules which would address this issue.
ALTERNATIVE MINIMUM TAX
For purposes of the alternative minimum tax adjusted current earnings
adjustment, special rules apply with respect to life insurance contracts. Under
these rules, death benefit proceeds are taken into account, increases in cash
value attributable to investment performance are taken into account currently
and the distribution tax rules apply in a modified form.
SECTION 1035 EXCHANGES
Section 1035 of the Internal Revenue Code generally provides that no gain or
loss shall be recognized on the exchange of one life insurance policy for
another life insurance policy or for an endowment or annuity contract. We
accept 1035 exchanges with outstanding loans. 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 also may make changes in the
Policy or its Riders, require additional premium payments, or make distributions
from the Policy to the extent we deem necessary to qualify the Policy as life
insurance for tax purposes. Any such change will apply uniformly to all
policies that are affected. The Policy Owner will be given advance notice of
such changes.
The tax law limits the allowable charges for mortality costs and other expenses
that may be used in making calculations to determine whether a Policy qualifies
as life insurance for Federal income tax purposes. These calculations must be
based upon reasonable mortality charges and other charges reasonably expected to
be paid. The Treasury has issued proposed regulations on the reasonableness
standards for mortality charges. Security Life believes that the charges used
for this purpose in the Policy should meet the current requirement for
reasonableness. Security Life reserves the right to make modifications to the
mortality charges if future regulations contain standards which make
modification necessary in order to continue qualification of the Policy as life
insurance for Federal income tax purposes.
In addition, assuming that the Policy is not intended by the Owner to be or
become a Modified Endowment Contract, we will include an endorsement to the
Policy whereby we reserve the right to amend the Policy, including any Rider, to
assure that the Policy continues to comply with the seven-pay test for Federal
income tax purposes. If at any time the premium paid under the Policy exceeds
the seven-pay limit, we reserve the right to remove such excess premium or make
any appropriate adjustments to the Policy's Account Value and death benefits.
Any death benefit increase will cause an increase in the cost of insurance
charges.
OTHER
The Policies may be used in various arrangements, including qualified plans,
non-qualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the
_______________________________________________________________________________
Strategic Advantage II 40
<PAGE>
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
apply 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 14.
We are the legal owner of the shares held in the Variable Account and, as such,
have the right to vote on certain matters. Among other things, we may vote on
any matters described in the Fund's current prospectus or requiring a vote by
shareholders under the Investment Company Act of 1940.
Even though we own the shares, to the extent required by the interpretations of
the SEC, we give Owners the opportunity to tell us how to vote the number of
shares that are attributable to their Policies. We will vote those shares at
meetings of Portfolio shareholders according to these instructions. We also
will vote any Portfolio shares that are not attributable to the Policies and
shares for which instructions from Owners were not received in the same
proportion that Owners vote. If the Federal securities laws or regulations or
interpretations of them change so that we are permitted to vote shares of a
Portfolio in our own right or to restrict Owner voting, we reserve the right to
do so.
Owners may participate in voting only on matters affecting the Portfolios in
which the Owner's assets have been invested. We determine the number of
Portfolio shares in each Division that are attributable to a Policy by dividing
the Account Value allocated to that Division by the net asset value of one share
of the corresponding Portfolio. The number of shares as to which an Owner may
give instructions will be determined as of the record date set by the
Portfolio's Board for the Portfolio's shareholders meeting. We count fractional
shares. Owners having a voting interest will be sent proxy material
and a form for giving us voting instructions.
All Portfolio shares are entitled to one vote. The votes of all Portfolios are
cast together on an aggregate basis, except on matters where the interests of
the Portfolios differ. In such cases, voting is on a portfolio-by-portfolio
basis. In these cases, the approval of the shareholders in one Portfolio is not
needed in order to make a decision in another Portfolio. Examples of matters
that would require a portfolio-by-portfolio vote are changes in the fundamental
investment policy of a particular Portfolio or approval of an investment
advisory agreement. Shareholders in a Portfolio not affected by a particular
matter generally would not be entitled to vote on it.
The Boards of the Portfolios and Security Life and any other insurance companies
participating in the Portfolios are required to monitor events to identify any
material conflicts that may arise from the use of the Portfolios for variable
life and variable annuity separate accounts. Conflict might arise as a result
of changes in state insurance law or Federal income tax law, changes in
investment management of any Portfolio, or differences in voting instructions
given by owners of variable life insurance policies and variable annuity
contracts. Shares of these Portfolios may also be sold to certain qualified
pension and retirement plans qualifying under Section 401 of the Code that
include cash or deferred arrangements under Section 401(k) of the Code. As a
result, there is a possibility that a material conflict may arise between the
interests of owners generally or certain classes of owners, and such retirement
plans or participants in such retirement plans. If there is a material
conflict, we will have an obligation to determine what action should be taken
including the removal of the affected Portfolios from eligibility for investment
by the Variable Account. We will consider taking other action to protect
Owners. However, there could be unavoidable delays or interruptions of
operations of the Variable Account that we may be unable to remedy.
In certain cases, when required by state insurance regulatory authorities, we
may disregard instructions relating to changes in the Portfolio's adviser or the
investment policies of the Portfolios. In the event we do disregard voting
instructions, we will include a summary of our actions and give our reasons in
the next semi-annual report to Owners.
Under the Investment Company Act of 1940, certain actions
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Strategic Advantage II 41
<PAGE>
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.
(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 change 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 also will send semi-annual reports to the Owner, which will include financial
information on the Portfolios, including a list of the investments held by each
Portfolio.
Confirmation notices will be sent to the Owner during the year for certain
Policy transactions.
OTHER GENERAL POLICY PROVISIONS
FREE LOOK PERIOD
Owners have the right to examine the Policy. If for any reason the Owner is not
satisfied with the Policy when issued, the Policy may be returned to us or the
Registered Representative within the time limit described below and it will be
deemed void as of the Policy Date. A request to cancel this Policy must be
postmarked no later than 10 days after it is received, or as otherwise specified
by state law. If a Policy is canceled under this provision, we will refund an
amount equal to the full amount of any premiums paid or as otherwise specified
by state law. Insurance coverage ends when the request is sent.
THE POLICY
This Policy is a contract between the Owner and us. The Policy, including a
copy of the original application and any
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Strategic Advantage II 42
<PAGE>
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 Age 100. This includes the right to change the Owner, Beneficiaries, and
methods for the payment of proceeds. All rights of the Owner are subject to the
rights of any assignee and any irrevocable Beneficiary.
An Owner may name a new Owner by giving us written notice. The effective date
of the change to the new Owner will be the date the notice is signed. The
change will not affect any payment made or action taken by us before recording
the change at our Customer Service Center. A change in ownership may cause
recognition of taxable income or gain, if any, to the old Owner.
BENEFICIARY
The Owner names the Beneficiary when applying for the Policy. The primary
Beneficiary surviving the Insured will receive any Death Proceeds which become
payable. Surviving contingent Beneficiaries are paid Death Proceeds only if no
primary Beneficiary has survived the Insured. If more than one Beneficiary
survives the Insured, they will share the Death Proceeds equally, unless the
designation provides otherwise. If there is no designated Beneficiary
surviving, Death Proceeds will be paid to the Owner or the Owner's estate.
The Beneficiary designation will be on file with us or at a location designated
by us. A new Beneficiary may be named during the Insured's lifetime. We will
pay the proceeds to the most recent Beneficiary designation on file. We will
not be subject to multiple payments.
COLLATERAL ASSIGNMENT
This Policy may be assigned as collateral security by sending written notice to
us. Once it is recorded with us, the rights of the Owner and the Beneficiary are
subject to the assignment, unless the Beneficiary was designated as an
irrevocable Beneficiary prior to the assignment. It is the Owner's
responsibility to make sure the assignment is valid.
INCONTESTABILITY
We can challenge the validity of the insurance Policy if it appears that there
have been material misstatements in the application. However, there are limits
as to how and when we can challenge the Policy:
. We will not contest the statements in the application attached at
issue after the Policy has been in effect, during the Insured's
lifetime, for two years from the Policy Date or the date specified
by state law.
. We will not contest the statements in the application for any
reinstatement after the reinstatement has been in effect, during the
Insured's lifetime, for two years from the effective date of such
reinstatement.
. We will not contest the statements in the application for any
coverage change that creates a new Segment or increases any benefit
with respect to the Insured (such as an increase in Stated Death
Benefit) after the change has been in effect, during the Insured's
lifetime, for two years from the effective date of the new Segment
or increase.
We have the right to rescind this Policy if we issued or reinstated the Policy
based on a statement in an application, including a reinstatement application,
that was false or misleading.
MISSTATEMENTS OF AGE OR SEX
If the Age or sex of the Insured has been misstated, the death benefit will be
adjusted. The death benefit will be adjusted to the amount which would have
been purchased for the Insured's correct Age and sex based on the cost of
insurance charges which were deducted from the Account Value on the last Monthly
Processing Date prior to the Insured's death or as otherwise required by state
law. If unisex cost of insurance rates apply, we will not make an adjustment
for a misstatement of sex.
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Strategic Advantage II 43
<PAGE>
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 partial withdrawals, unless
otherwise required by law. If the Insured has been changed and the new Insured
dies by suicide within two years of the change date, the death benefit will be
limited to the Net Account Value as of the change date, plus the premiums paid
since that date, less the sum of any increases in Policy Loan, accrued loan
interest and any Partial Withdrawals since the change date. If the Insured
commits suicide, while sane or insane, within two years of the effective date of
a new Segment or of an increase in any other benefit, we will make a limited
payment to the beneficiary for the new Segment or other increase. This payment
will equal the cost of insurance and any applicable monthly expense charges
deducted for such increase.
PAYMENT
We will pay the Death Proceeds, Net Cash Surrender Value upon surrender, Partial
Withdrawals, and loan proceeds within seven days after we receive the
information required to process the payment. We also will execute a transfer
among Divisions of the Variable Account as of the Valuation Date on or next
following our receipt of a request at our Customer Service Center. Transfers
from the Guaranteed Interest Division to the Divisions of the Variable Account
will be made only within the time periods indicated in this prospectus. See
Transfers of Account Values, page 25.
We may, however, postpone the processing of any such transactions at any of the
following times:
. 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 date of death of the Insured. The Death
Proceeds will not be affected by changes in the values of the Divisions of the
Variable Account subsequent to the date of death of the Insured. We will pay
interest at the rate declared by us or at any higher rate required by law from
the date of death of the Insured to the date of payment.
Death Proceeds are not subject to deferment. However, we may defer for up to
six months payment of any surrender proceeds, withdrawal amounts, or loan
amounts from our Guaranteed Interest Division, unless otherwise required by law.
We will pay interest at the rate declared by us or at any
higher rate required by law from the date we receive a request if we delay
payment more than 30 days.
NOTIFICATION AND CLAIMS PROCEDURES
We must receive in writing any election, designation, change, assignment, or
request made. It must be on a form acceptable to us. We are not liable for any
action we take before we receive and record the written notice. We may require
that the Policy be returned for any Policy change or upon its surrender.
We, or the Registered Representative, should be informed as soon as possible
following an Insured's death while the Policy is in force. Claim procedure
instructions will be sent immediately. As due proof of death, we may require
proof of Age and a certified copy of a death certificate. We may also require
the Beneficiary and the Insured's next of kin to sign authorization forms 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 or a Policy Loan 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.
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Strategic Advantage II 44
<PAGE>
NON-PARTICIPATING
The Policy does not participate in Security Life's surplus earnings.
DISTRIBUTION OF THE POLICIES
The principal underwriter and distributor for the policies is ING America
Equities, a wholly owned subsidiary of Security Life. ING America Equities is
registered as a broker-dealer with the SEC and is a member of the NASD. We pay
ING America Equities for acting as the principal underwriter under a
Distribution Agreement.
We sell our Policies through Registered Representatives of other broker-dealers,
including VESTAX Securities Corporation, a subsidiary of ING America Insurance
Holdings, Inc., and Locust Street Securities, Inc., an affiliate of Security
Life of Denver Insurance Company, which have entered into selling agreements
with us. These Registered Representatives are also licensed by state insurance
officials to sell our variable life policies. Each of the broker-dealers with
which we enter into selling agreements 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 two through ten, the
distribution allowance may equal an amount up to 12% of Target Premium and 3% of
premiums paid in excess of the Target Premium. For subsequent Policy years the
distribution allowance may equal 3% of premiums paid. Broker-dealers may also
receive annual renewal compensation of up to 0.15% of the Net Account Value
beginning in the sixth Policy year. Compensation arrangements may vary among
broker-dealers and depend on particular circumstances. In addition, we also may
pay override payments, expense allowances, bonuses, special marketing fees,
wholesaler fees, and training allowances. Registered Representatives who meet
specified production levels may qualify, under our sales incentive programs, to
receive non-cash compensation such as expense-paid trips, expense-paid
educational seminars and merchandise.
We pay the distribution allowance from our own resources (including any sales
charges deducted from premiums).
SETTLEMENT PROVISIONS
During the Insured's lifetime, the Owner may elect that the Beneficiary receive
the Death Proceeds other than in one sum. If this election has not been made,
the Beneficiary may do so within 60 days after the Insured's death. The Owner
may 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 be subject to our rules at the time of
selection. Currently, these alternate payment options are available only if the
proceeds applied are $2000 or more and any periodic payment will be at least
$20.
The following payment options are available:
Option I: Payouts for a Designated Period: Payouts will be made in 1, 2, 4
or 12 installments per year as elected for a designated period,
which may be 5 to 30 years. The installment dollar amounts will be
equal except for any excess interest. The amount of the first
monthly payout for each $1,000 of Account Value applied is shown
in Settlement Option Table I in the Policy.
Option II: Life Income with Payouts Guaranteed for a Designated Period:
Payouts will be made in 1, 2, 4 or 12 installments per year
throughout the payee's lifetime, or if longer, for a period of 5,
10, 15, or 20 years as elected. The installment dollar amounts
will be equal except for any excess interest. The amount of the
first monthly payout for each $1,000 of Account Value applied is
shown in Settlement Option Table II in the Policy. This option is
available only for ages 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.
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Strategic Advantage II 45
<PAGE>
The Beneficiary or other person who is entitled to receive payment may name a
successor to receive any amount that we would otherwise pay to that person's
estate if that person died. The person who is entitled to receive payment may
change the successor at any time.
We must approve any arrangements that involve a payee who is not a natural
person (for example, a corporation), or a payee who is a fiduciary. Also, the
details of all arrangements will be subject to our rules at the time the
arrangements take effect. This includes rules on the minimum amount we will pay
under an option, minimum amounts for installment payments, withdrawal or
commutation rights (i.e., the rights to receive payments over time, for which we
may offer a lump sum payment), the naming of people who are entitled to receive
payment and their successors, and the ways of proving Age and survival.
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND
ACCUMULATED PREMIUMS
The following tables illustrate how the key financial elements of the Policy
work, specifically, how the death benefits, Account Values and Cash Surrender
Values could vary over an extended period of time. In addition, each table
compares these values with premiums paid accumulated with interest. The
Policies illustrated include the following:
<TABLE>
<CAPTION>
Definition
Death of Life Stated Target
Smoker Benefit Insurance Death Death
Sex Age Status Option Test Benefit Premium Benefit Page
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Male 45 Nonsmoker 1 CVAT 300,000 $5,750 300,000 48
Preferred
Male 45 Nonsmoker 1 CVAT 150,000 $5,750 300,000 50
Preferred
Male 45 Nonsmoker 1 GP 300,000 $5,750 300,000 52
Preferred
</TABLE>
The tables show how death benefits, Account Values and Cash Surrender Values of
a hypothetical Policy could vary over an extended period of time if the
Divisions of the Variable Account had constant hypothetical gross annual
investment returns of 0%, 6% or 12% over the periods indicated in each table.
The values will differ from those shown in the tables if the annual investment
returns are not absolutely constant. That is, the death benefits, Account
Values and Cash Surrender Values will be different if the returns averaged 0%,
6% or 12% over a period of years but went above or below those figures in
individual Policy years. These illustrations assume that no Policy Loan has
been taken. The amounts shown would differ if female or unisex rates were used.
The third column of each table shows what would happen if an amount equal to the
premiums were invested to earn interest, after taxes, of 5% compounded annually.
All premium payments are illustrated as if they were made at the beginning of
the year.
The amounts shown for death benefits, Account Values and Cash Surrender Values
sections reflect the fact that the net investment return on the Policy is lower
than the gross investment return on the Divisions of the Variable Account. This
results from the charges levied against the Divisions of the Variable Account
(i.e., the mortality and expense risk charge) as well as the premium loads,
administrative charges and Surrender Charges. The difference between the
Account Value and the Cash Surrender Value in the first two years is the Refund
of Sales Charge.
The tables illustrate cost of insurance and expense charges at both our current
rates (which are described under Monthly Deductions from the Account Value, page
31) 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 0.6% of the Account Value annually beginning
after the 10th Policy anniversary.
_______________________________________________________________________________
Strategic Advantage II 46
<PAGE>
The tables also reflect a daily investment advisory fee equivalent to an annual
rate of .6635% of the aggregate average daily net assets of the Portfolios.
This hypothetical rate is a simple average of the maximum investment
advisory fee applicable to the Divisions of the Variable Account. Other
expenses of the Portfolios are assumed at the rate of .1274% 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 .7909% 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 (1.54)%, on 6% it would be 4.42%, and on 12% it would be 10.37%.
The tables assume the deduction of charges including administrative and sales
charges. The tables reflect the fact that we do not currently make any charge
against the Variable Account for state or Federal taxes. If such a charge is
made in the future, it will take a higher gross rate of return than the rates
shown to produce death benefits, Account Values, and Cash Surrender Values
shown.
We will furnish, upon request, a comparable illustration based on the Age and
sex of the proposed Insured, standard Premium Class assumptions and an initial
Stated Death Benefit, death benefit option and Scheduled Premiums chosen and
consistent with the Policy form. If the Owner purchases a Policy, we will
deliver an individualized illustration reflecting the Scheduled Premium chosen
and the Insured's actual risk class. After issuance we will provide upon
request an illustration of future Policy benefits based on both guaranteed and
current cost factor assumptions and actual Account Value.
_______________________________________________________________________________
Strategic Advantage II 47
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
PREFERRED
SECURITY LIFE
STRATEGIC ADVANTAGE II 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 3181 3468 300000 3656 3943 300000 3418 3705 300000
2 5750 12377 6219 6363 300000 7596 7739 300000 6892 7036 300000
3 5750 19033 9111 9111 300000 11844 11844 300000 10420 10420 300000
4 5750 26022 11974 11974 300000 16560 16560 300000 14124 14124 300000
5 5750 33361 14677 14677 300000 21657 21657 300000 17879 17879 300000
6 5750 41067 17215 17215 300000 27174 27174 300000 21682 21682 300000
7 5750 49157 19567 19567 300000 33138 33138 300000 25514 25514 300000
8 5750 57653 21719 21719 300000 39587 39587 300000 29363 29363 300000
9 5750 66573 23651 23651 300000 46561 46561 300000 33209 33209 300000
10 5750 75939 25339 25339 300000 54103 54103 300000 37031 37031 300000
15 5750 130281 33191 33191 300000 109809 109809 300000 60211 60211 300000
20 5750 199636 32084 32084 300000 202300 202300 350383 82855 82855 300000
25 5750 288152 15264 15264 300000 345132 345132 534955 101202 101202 300000
30 5750 401124 - - 300000 556060 556060 781820 108094 108094 300000
AGE 65 5750 215655 30242 30242 300000 226441 226441 383139 87000 87000 300000
</TABLE>
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE
WHICH WERE USED TO CALCULATE THE ABOVE VALUES.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF
THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT
EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE
HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN
A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
________________________________________________________________________________
Strategic Advantage II 48
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
PREFERRED
SECURITY LIFE
STRATEGIC ADVANTAGE II 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 4332 4907 300000 4881 5456 300000 4606 5181 300000
2 5750 12377 8480 8882 300000 10143 10545 300000 9295 9697 300000
3 5750 19033 12483 12483 300000 15867 15867 300000 14108 14108 300000
4 5750 26022 16480 16480 300000 22249 22249 300000 19193 19193 300000
5 5750 33361 20370 20370 300000 29249 29249 300000 24458 24458 300000
6 5750 41067 24153 24153 300000 36935 36935 300000 29911 29911 300000
7 5750 49157 27835 27835 300000 45384 45384 300000 35566 35566 300000
8 5750 57653 31418 31418 300000 54681 54681 300000 41433 41433 300000
9 5750 66573 34903 34903 300000 64917 64917 300000 47523 47523 300000
10 5750 75939 38300 38300 300000 76205 76205 300000 53857 53857 300000
15 5750 130281 57263 57263 300000 160344 160344 314595 94483 94483 300000
20 5750 199636 71969 71969 300000 298553 298553 517095 144160 144160 300000
25 5750 288152 81439 81439 300000 521665 521665 808581 206537 206537 320132
30 5750 401124 83903 83903 300000 880067 880067 1237375 283047 283047 397964
AGE 65 5750 215655 74307 74307 300000 335080 335080 566955 155463 155463 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 INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN
A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
________________________________________________________________________________
Strategic Advantage II 49
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
PREFERRED
SECURITY LIFE
STRATEGIC ADVANTAGE II 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 3178 3466 300000 3653 3941 300000 3415 3703 300000
2 5750 12377 6215 6358 300000 7590 7734 300000 6887 7031 300000
3 5750 19033 9104 9104 300000 11836 11836 300000 10412 10412 300000
4 5750 26022 11964 11964 300000 16548 16548 300000 14113 14113 300000
5 5750 33361 14664 14664 300000 21640 21640 300000 17864 17864 300000
6 5750 41067 17199 17199 300000 27152 27152 300000 21663 21663 300000
7 5750 49157 19548 19548 300000 33110 33110 300000 25491 25491 300000
8 5750 57653 21696 21696 300000 39551 39551 300000 29334 29334 300000
9 5750 66573 23624 23624 300000 46516 46516 300000 33174 33174 300000
10 5750 75939 25307 25307 300000 54048 54048 300000 36990 36990 300000
15 5750 130281 33128 33128 300000 109676 109676 300000 60119 60119 300000
20 5750 199636 31969 31969 300000 202054 202054 349958 82669 82669 300000
25 5750 288152 15056 15056 300000 344755 344755 534370 100836 100836 300000
30 5750 401124 - - 300000 555489 555489 781018 107353 107353 300000
AGE 65 5750 215655 30112 30112 300000 226174 226174 382686 86786 86786 300000
</TABLE>
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE
WHICH WERE USED TO CALCULATE THE ABOVE VALUES.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF
THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT
EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE
HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN
A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
________________________________________________________________________________
Strategic Advantage II 50
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
PREFERRED
SECURITY LIFE
STRATEGIC ADVANTAGE II 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 4352 4927 300000 4902 5477 300000 4627 5202 300000
2 5750 12377 8550 8953 300000 10220 10622 300000 9368 9771 300000
3 5750 19033 12613 12613 300000 16018 16018 300000 14248 14248 300000
4 5750 26022 16677 16677 300000 22487 22487 300000 19410 19410 300000
5 5750 33361 20633 20633 300000 29587 29587 300000 24757 24757 300000
6 5750 41067 24484 24484 300000 37384 37384 300000 30297 30297 300000
7 5750 49157 28227 28227 300000 45951 45951 300000 36037 36037 300000
8 5750 57653 31861 31861 300000 55367 55367 300000 41984 41984 300000
9 5750 66573 35381 35381 300000 65721 65721 300000 48143 48143 300000
10 5750 75939 38796 38796 300000 77117 77117 300000 54530 54530 300000
15 5750 130281 57736 57736 300000 161902 161902 317652 95351 95351 300000
20 5750 199636 72419 72419 300000 301110 301110 521522 145300 145300 300000
25 5750 288152 81866 81866 300000 525829 525829 815035 208033 208033 322452
30 5750 401124 84303 84303 300000 886812 886812 1246858 284883 284883 400546
AGE 65 5750 215655 74753 74753 300000 337900 337900 571726 156672 156672 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 INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN
A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
________________________________________________________________________________
Strategic Advantage II 51
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
PREFERRED
SECURITY LIFE
STRATEGIC ADVANTAGE II 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
YEAR PREMIUMS ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
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 3181 3468 300000 3656 3943 300000 3418 3705 300000
2 5750 12377 6219 6363 300000 7596 7739 300000 6892 7036 300000
3 5750 19033 9111 9111 300000 11844 11844 300000 10420 10420 300000
4 5750 26022 11974 11974 300000 16560 16560 300000 14124 14124 300000
5 5750 33361 14677 14677 300000 21657 21657 300000 17879 17879 300000
6 5750 41067 17215 17215 300000 27174 27174 300000 21682 21682 300000
7 5750 49157 19567 19567 300000 33138 33138 300000 25514 25514 300000
8 5750 57653 21719 21719 300000 39587 39587 300000 29363 29363 300000
9 5750 66573 23651 23651 300000 46561 46561 300000 33209 33209 300000
10 5750 75939 25339 25339 300000 54103 54103 300000 37031 37031 300000
15 5750 130281 33191 33191 300000 109809 109809 300000 60211 60211 300000
20 5750 199636 32084 32084 300000 203296 203296 300000 82855 82855 300000
25 5750 288152 15264 15264 300000 367807 367807 426656 101202 101202 300000
30 5750 401124 - - 300000 641349 641349 686244 108094 108094 300000
AGE 65 5750 215655 30242 30242 300000 229358 229358 300000 87000 87000 300000
</TABLE>
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE
WHICH WERE USED TO CALCULATE THE ABOVE VALUES.
THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD
NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A
NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF
THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT
EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE
HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN
A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
________________________________________________________________________________
Strategic Advantage II 52
<PAGE>
PROSPECT: INSURED'S NAME:
MALE 45 NON-SMOKER PRESENTED BY:
PREFERRED
SECURITY LIFE
STRATEGIC ADVANTAGE II 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 4332 4907 300000 4881 5456 300000 4606 5181 300000
2 5750 12377 8480 8882 300000 10143 10545 300000 9295 9697 300000
3 5750 19033 12483 12483 300000 15867 15867 300000 14108 14108 300000
4 5750 26022 16480 16480 300000 22249 22249 300000 19193 19193 300000
5 5750 33361 20370 20370 300000 29249 29249 300000 24458 24458 300000
6 5750 41067 24153 24153 300000 36935 36935 300000 29911 29911 300000
7 5750 49157 27835 27835 300000 45384 45384 300000 35566 35566 300000
8 5750 57653 31418 31418 300000 54681 54681 300000 41433 41433 300000
9 5750 66573 34903 34903 300000 64917 64917 300000 47523 47523 300000
10 5750 75939 38300 38300 300000 76205 76205 300000 53847 53847 300000
15 5750 130281 57263 57263 300000 160359 160359 300000 94483 94483 300000
20 5750 199636 71969 71969 300000 303091 303091 369683 144160 144160 300000
25 5750 288152 81439 81439 300000 542281 542281 629046 206741 206741 300000
30 5750 401124 83903 83903 300000 942840 942840 1008839 289652 289652 309927
AGE 65 5750 215655 74307 74307 300000 341630 341630 409956 155463 155463 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 INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED
0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT
AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN
A DIFFERENT FREQUENCY THAN SHOWN. THE ABOVE VALUES ASSUME NO LOANS OR
WITHDRAWALS ARE TAKEN.
________________________________________________________________________________
Strategic Advantage II 53
<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 one or two
asterisks (*/**), is Security Life Center, 1290 Broadway, Denver, Colorado
80203-5699. The business address of each person denoted with one asterisk (*)
is ING North America Insurance Corporation, 5780 Powers Ferry Road, Atlanta,
Georgia 30327-4390. The business address of each person denoted with two
asterisks (**) is Security Life of Denver Insurance Company, 9140 Arrowpoint
Blvd., Suite 400, Charlotte, North Carolina 28273.
<TABLE>
<CAPTION>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- -------------------- -------------------------------------------------
<C> <S>
Fred S. Hubbell Chairman and Chief Executive Officer
909 Locust St.
Des Moines, IA 50309
Stephen M. Christopher Director, President and Chief
Operating Officer
Thomas F. Conroy Director and President, Security Life Reinsurance
Michael W. Cunningham* Director, Executive Vice President
Linda B. Emory* Director, Vice President and Appointed Actuary
Catherine T. Fitzgerald* Executive Vice President
James L. Livingston, Jr. Executive Vice President, Operations
Jeffrey R. Messner Executive Vice President and Chief Marketing Officer
Jess A. Skriletz President, ING Institutional Markets
John R. Barmeyer Senior Vice President and Chief Legal Officer
Wayne D. Bidelman Senior Vice President, New Business Development
Eugene L. Copeland Senior Vice President and General Counsel, Security Life
Reinsurance and ING Institutional Markets
Michael Fisher Senior Vice President, Litigation
Carol D. Hard Senior Vice President, Variable
Philip R. Kruse Senior Vice President, Sales & Marketing
Charles LeDoyen** Senior Vice President, Structured Settlements
</TABLE>
_______________________________________________________________________________
Strategic Advantage II 54
<PAGE>
<TABLE>
<CAPTION>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- -------------------- -------------------------------------------------
<S> <C>
Timothy P. McCarthy Senior Vice President, Marketing Services
Jeffery W. Seel* Senior Vice President and Chief Investment Officer
Lawrence D. Taylor Senior Vice President and Chief Actuary
Louis N. Trapolino Senior Vice President, Distribution
William D. Tyler Senior Vice President and Chief Information Officer
William H. Alexander Vice President and Medical Director
Katherine Anderson Vice President, Chief Product Actuary, Security Life Reinsurance
Carole A. Baumbusch Vice President, Reinsurance Operations
Evelyn A. Bentz Vice President, M Financial Sales
Thomas Kirby Brown Vice President, Institutional Markets
Daniel S. Clements Vice President and Chief Underwriter
Linda Elliott Vice President, Information Technology
Larry D. Erb Vice President, Information Technology
Martha K. Evans Vice President, Variable Operations
Deborah B. Holden Vice President, Human Resources
Brian Holland Vice President, Sales and International Risk Management
Kenneth Kiefer** Vice President, Operations, Structured Settlements
Richard D. King Vice President and Medical Director
Greg McGreevey Vice President, Marketing, ING Institutional Markets
C. Lynn McPherson* Vice President, Medical Risk Solutions
Sue A. Miskie Vice President, Corporate Services
Donna T. Mosely Vice President, Valuation
</TABLE>
_______________________________________________________________________________
Strategic Advantage II 55
<PAGE>
<TABLE>
<CAPTION>
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- -------------------- -------------------------------------------------
<S> <C>
David S. Pendergrass* Vice President and Treasury Officer
Steve Pryde Vice President, Administration
Christiaan M. Rutten Vice President, Structured Reinsurance
Casey J. Scott Vice President, Sales Operations
Alan C. Singer Vice President, Customer Relations and Regulatory Compliance
Mark A. Smith Vice President, Insurance Services
Jerome M. Strop Vice President, Strategic Marketing
Gary W. Waggoner Vice President, General Counsel and Secretary
William Wojciechowski Vice President, Business Consulting and Financial Markets
Stephen J. Yarina Vice President, Treasurer and Chief Financial Officer
Relda A. Fleshman Deputy General Counsel
Eric Banta Assistant Secretary
Roger O. Beebe Actuarial Officer
John B. Dickinson Actuarial Officer
Shirley A. Knarr Actuarial Officer
Glen E. Stark Actuarial Officer
William J. Wagner Actuarial Officer
Marsha K. Crest Agency Administration Officer
Amy L. Winsor Tax and Finance Officer
</TABLE>
_______________________________________________________________________________
Strategic Advantage II 56
<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, of
our operations and finances to the Insurance Departments of the various
jurisdictions in which we do business to determine solvency and compliance with
state insurance laws and regulations.
We are also subject to various Federal securities laws and regulations.
LEGAL MATTERS
The legal matters in connection with the Policy described in this prospectus
have been passed on by the General Counsel of Security Life and Mayer, Brown and
Platt.
LEGAL PROCEEDINGS
Security Life, as an insurance company, is ordinarily involved in litigation.
We do not believe that any current litigation is material to Security Life's
ability to meet its obligations under the Policy or to the Variable Account, and
we do not expect to incur significant losses from such actions. ING America
Equities, Inc., the principal underwriter and distributor of the Policy, is not
engaged in any litigation of any material nature.
EXPERTS
The consolidated financial statements of Security Life of Denver Insurance
Company and Subsidiaries at December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, and the financial statements
of the Separate Account L1 at December 31, 1997, and for each of the three years
in the period ended December 31, 1997, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
Actuarial matters in this prospectus have been examined by Lawrence D. Taylor,
F.S.A., M.A.A.A., who is the Senior Vice President and Chief Actuary. His
opinion on actuarial matters is filed as an exhibit to the Registration
Statement we filed with the SEC.
REGISTRATION STATEMENT
We have filed a Registration Statement relating to the Variable Account and the
variable life insurance policy described in this prospectus with the SEC. The
Registration Statement, which is required by the Securities Act of 1933,
includes additional information that is not required in this prospectus under
the rules and regulations of the SEC. The additional information may be
obtained from the SEC's principal office in Washington, DC. You will have to
pay a fee for the material.
YEAR 2000 PREPAREDNESS
Security Life is aware of potential computer system challenges associated with
the year 2000. We plan to upgrade our current variable life administration
system by early 1999. It is expected that this upgrade will make our system
year 2000 compatible. We do not anticipate delays or problems in processing or
administering variable life products in the year 2000 or beyond.
_______________________________________________________________________________
Strategic Advantage II 57
<PAGE>
FINANCIAL STATEMENTS
The consolidated financial statements of Security Life of Denver Insurance
Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1997
and 1996, and for each of the three years in the period ended December 31, 1997
are prepared in accordance with generally accepted accounting principles and
start on page 59.
The financial statements included for the Security Life Separate Account L1 at
December 31, 1997 and for each of the three years in the period ended December
31, 1997, 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, as well
as the financial statements included for the Security Life Separate Account L1,
referred to above have been audited by Ernst & Young LLP. The consolidated
financial statements of Security Life and Subsidiaries should be distinguished
from the financial statements of the Security Life Separate Account L1 and
should be considered only as bearing upon the ability of Security Life and
Subsidiaries to meet its obligations under the Policies. They should not be
considered as bearing upon the investment experience of the Divisions of
Security Life Separate Account L1.
The most current financial statements are those as of the end of the most recent
fiscal year. The Company does not prepare financial statements more often than
annually and believes that any incremental benefit to prospective policy holders
that may result from preparing and delivering more current financial statements,
though unaudited, does not justify the additional cost that would be incurred.
In addition, the Company represents that there have been no significant adverse
changes in the financial condition or operations of the Company between the end
of the most current fiscal year and the date of this prospectus.
_______________________________________________________________________________
Strategic Advantage II 58
<PAGE>
Consolidated Financial Statements
SECURITY LIFE OF DENVER
INSURANCE COMPANY
AND SUBSIDIARIES
Years ended December 31, 1997, 1996 and 1995
with Report of Independent Auditors
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors................................ 64
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................... 65
Consolidated Statements of Income............................. 67
Consolidated Statements of Stockholder's Equity............... 68
Consolidated Statements of Cash Flows......................... 69
Notes to Consolidated Financial Statements.................... 71
</TABLE>
63
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Denver, Colorado
April 10, 1998 /s/
ERNST & YOUNG LLP
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------------
<S> <C> <C>
Assets
Investments (Note 2):
Fixed maturities, at fair value (amortized cost:
1997--$3,007,012; 1996--$2,765,488) $3,152,355 $2,875,084
Equity securities, at fair value (cost:
1997--$6,754;
1996--$4,899) 8,019 5,345
Mortgage loans on real estate 576,620 452,795
Investment real estate, at cost, less accumulated
depreciation (1997--$667; 1996--$628) 1,767 1,769
Policy loans 875,405 795,311
Other long-term investments 14,307 11,063
----------------------------------
Total investments 4,628,473 4,141,367
Cash and cash equivalents 77,765 20,840
Accrued investment income 49,726 45,426
Reinsurance recoverable:
Paid benefits 11,170 10,188
Unpaid benefits 14,988 19,703
Prepaid reinsurance premiums (Note 8) 2,721,515 1,951,012
Deferred policy acquisition costs (DPAC) 682,905 673,560
Property and equipment, at cost, less accumulated
depreciation (1997--$22,925; 1996--$21,407) 37,943 38,848
Federal income tax recoverable (Note 9) 5,722 -
Indebtedness of related parties 2,443 5,383
Other assets 87,298 109,751
Separate account assets (Note 6) 263,035 124,986
------------------------------------
Total assets $8,582,983 $7,141,064
====================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Life and annuity reserves $4,305,229 $3,834,140
Guaranteed investment contracts 2,634,654 1,911,201
Policyholders' funds 82,291 81,273
Advance premiums 365 236
Accrued dividends and dividends on deposit 21,129 20,338
Unpaid claims 103,525 88,074
Funds held under reinsurance treaties - 18,967
------------------------------------
Total future policy benefits 7,147,193 5,954,229
Accounts payable and accrued expenses 99,335 85,858
Indebtedness to related parties 7,704 5,427
Long-term debt to related parties (Note 10) 75,000 75,000
Accrued interest on long-term debt to related
parties (Note 10) 5,128 3,700
Other liabilities 61,424 53,311
Federal income taxes payable (Note 9) - 11,883
Deferred federal income taxes (Note 9) 53,829 48,541
Separate account liabilities (Note 6) 263,035 124,986
------------------------------------
Total liabilities 7,712,648 6,362,935
Commitments and contingent liabilities
(Notes 8 and 13)
Stockholder's equity (Note 11):
Common stock, $20,000 par value:
Authorized 149 shares
Issued and outstanding 144 shares 2,880 2,880
Additional paid-in capital 315,722 302,722
Net unrealized gains on investments 50,938 58,718
Retained earnings 500,795 413,809
------------------------------------
Total stockholder's equity 870,335 778,129
------------------------------------
Total liabilities and stockholder's equity $8,582,983 $7,141,064
====================================
</TABLE>
See accompanying notes.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Income
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Traditional life insurance premiums $ 122,429 $ 118,200 $ 124,619
Universal life and investment product charges 217,108 202,081 202,908
Reinsurance premiums assumed 446,434 339,335 326,315
--------------------------------------------------------
785,971 659,616 653,842
Reinsurance premiums ceded (124,815) (117,880) (117,061)
--------------------------------------------------------
661,156 541,736 536,781
Net investment income 340,898 312,121 256,065
Net realized gains on investments 28,645 4,770 6,564
Miscellaneous income 6,743 526 1,941
--------------------------------------------------------
1,037,442 859,153 801,351
Benefits and expenses:
Benefits:
Traditional life insurance:
Death benefits 299,305 235,828 217,136
Other benefits 79,849 71,939 88,326
Universal life and investment contracts:
Interest credited to account balances 217,614 186,908 164,536
Death benefits incurred in excess of account
balances 73,260 54,004 63,672
Increase in policy reserves and other funds 72,685 121,946 23,895
Reinsurance recoveries (98,376) (80,276) (74,305)
Product conversions 7,014 16,379 74,291
--------------------------------------------------------
651,351 606,728 557,551
Expenses:
Commissions 46,516 25,846 51,189
Insurance operating expenses 89,075 69,580 52,414
Amortization of deferred policy acquisition costs 116,495 94,685 71,450
--------------------------------------------------------
903,437 796,839 732,604
--------------------------------------------------------
Income before federal income taxes 134,005 62,314 68,747
Federal income taxes (Note 9) 47,019 21,876 24,296
--------------------------------------------------------
Net income $ 86,986 $ 40,438 $ 44,451
========================================================
</TABLE>
See accompanying notes.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------
Common stock:
<S> <C> <C> <C>
Balance at beginning and end of year $ 2,880 $ 2,880 $ 2,880
==================================================
Additional paid-in capital:
Balance at beginning of year $302,722 $297,422 $150,792
Capital contributions 13,000 5,300 146,630
--------------------------------------------------
Balance at end of year $315,722 $302,722 $297,422
==================================================
Net unrealized gains on investments:
Balance at beginning of year $ 58,718 $ 72,973 $ 6,862
Net change in unrealized gains (losses),
net of tax 23,766 (27,716) 118,654
Effect on DPAC of unrealized gains and
losses on fixed maturities, net of tax (31,546) 13,461 (52,543)
--------------------------------------------------
Balance at end of year $ 50,938 $ 58,718 $ 72,973
==================================================
Retained earnings:
Balance at beginning of year $413,809 $373,371 $329,640
Net income 86,986 40,438 44,451
Dividends paid to stockholder (720)
--------------------------------------------------
Balance at end of year $500,795 $413,809 $373,371
==================================================
Total stockholder's equity $870,335 $778,129 $746,646
==================================================
</TABLE>
See accompanying notes.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 86,986 $ 40,438 $ 44,451
Adjustments to reconcile net income to net cash
and
cash equivalents provided by operating
activities:
Increase in future policy benefits 972,284 585,581 471,331
Net decrease (increase) in federal income (12,317) 78,668 33,232
taxes
Increase (decrease) in accounts payable and
accrued expenses 21,033 (1,361) 31,334
Increase in accrued interest on long-term debt 1,428 3,676 24
Increase in accrued investment income (4,300) (7,294) (5,739)
(Increase) decrease in reinsurance recoverable 3,733 (5,214) (24)
Increase in prepaid reinsurance premiums (770,503) (336,053) (253,968)
Net realized investment gains (28,645) (4,770) (6,564)
Depreciation and amortization expense 3,630 3,857 4,036
Policy acquisition costs deferred (174,374) (152,299) (127,069)
Amortization of deferred policy acquisition
costs 116,495 94,685 71,450
Increase in accrual for postretirement 557 484 623
benefits
Other, net 43,538 (15,524) (20,553)
------------------------------------------------------------
Net cash and cash equivalents provided by
operating activities 259,545 284,874 242,564
INVESTING ACTIVITIES
Securities available-for-sale:
Sales:
Fixed maturities 2,279,598 334,482 357,059
Equity securities 648 4,198 4,730
Maturities--fixed maturities 410,632 727,937 280,581
Purchases:
Fixed maturities (2,919,145) (1,522,369) (935,210)
Equity securities (2,561) (428) (1,300)
Securities held-to-maturity:
Maturities--fixed maturities - - 14,156
Sale, maturity or repayment of investments:
Mortgage loans on real estate 38,756 18,102 16,061
Investment real estate - 1,354 215
Other long-term investments 2,002 - 1,064
</TABLE>
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
INVESTING ACTIVITIES (continued)
Purchase or issuance of investments:
Mortgage loans on real estate $(163,528) $(186,228) $(136,218)
Investment real estate (35) - 14
Policy loans, net (80,094) (41,071) (63,746)
Other long-term investments (5,248) 809 (2,169)
Additions to property and equipment (2,687) (4,482) (1,812)
Disposals of property and equipment 145 2,389 79
---------------------------------------------------------
Net cash and cash equivalents used by
investing activities (441,517) (665,307) (466,496)
---------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in indebtedness to related 5,217 42,206 (17,011)
parties
Cash contributions from parent 13,000 5,300 -
Receipts from interest sensitive products
credited to policyholder account balances 555,223 434,726 387,904
Return of policyholder account balances on
interest sensitive policies (334,543) (123,949) (128,948)
Dividends paid to stockholder (720)
---------------------------------------------------------
Net cash and cash equivalents provided by
financing activities 238,897 358,283 241,225
---------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 56,925 (22,150) 17,293
Cash and cash equivalents at beginning of year 20,840 42,990 25,697
---------------------------------------------------------
Cash and cash equivalents at end of year $ 77,765 $ 20,840 $ 42,990
=========================================================
</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 was presented as indebtedness of related
parties. The cash was received by the Company in January 1996.
See accompanying notes.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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 (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 offers financial security to clients through a mix of total
risk management and traditional life insurance services.
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.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
During June 1996, the Financial Accounting Standards Board (FASB) issued
Statement No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. This Statement was effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996. Also in 1996, the FASB issued Statement No. 127, which
delayed certain provisions of FAS 125 dealing with transactions such as
securities lending, repurchase and dollar repurchase agreements until 1998. The
portion of FAS 125 that became effective in 1997 requires the entity to
recognize 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 application of
the new rules did not have a material impact on the financial statements of the
Company. The portion of FAS 125 deferred by FAS 127 is not expected to impact
the Company.
Beginning in 1995, the Company adopted FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan, and Statement No. 118, which amended
Statement 114. Under the amended statement, the 1997 and 1996 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.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The Company does not hold any securities classified as held-to-maturity or
trading securities.
Debt securities 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 policy acquisition cost
adjustments, reported in a separate component of stockholder's equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in net investment income
as earned.
Mortgage loans are carried at the unpaid balances less an allowance for credit
losses. Investment real estate is carried at cost, less accumulated
depreciation. Policy loans are carried at unpaid balances. 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 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,
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
using assumptions consistent with those used in computing policy benefit
reserves. The period of amortization is normally over the premium-paying period.
In the case of policies with no first year premium, the period of amortization
includes the first year, in addition to the premium-paying period. 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.
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.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 7.81% during 1997, 4.60% to 7.45% during 1996, and 4.60% to 8.10%
during 1995.
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.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Impairment losses are recorded when indicators of impairment are present and the
estimated undiscounted cash flows are less than the assets' carrying value.
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 $6,074,000 and $6,211,000 at
December 31, 1997 and 1996, respectively. Participating business approximates
.3% 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
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $3,377,000, $3,307,000,
and $2,964,000 were incurred in 1997, 1996, and 1995, 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 and cash equivalents includes cash on hand, demand deposits and short-term
fixed maturity instruments (with a maturity of less than one year at date of
purchase). Included as a component of operating activities is interest paid of
$10,110,000, $1,016,000, and $4,861,000 for 1997, 1996, and 1995, respectively.
GUARANTY FUND ASSESSMENTS
Insurance companies are assessed the costs of funding the insolvencies of other
insurance companies by the various state guaranty associations generally based
on the amount of premium companies collect in that state. The Company accrues
the cost of future guaranty fund assessments based on estimates of insurance
company insolvencies provided by the National Organization of Life and Health
Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in
each state. The Company reduces the accrual by credits allowed in some states to
reduce future premium taxes by a portion of assessments in that state.
PENDING ACCOUNTING STANDARDS
During 1998, the FASB issued Statement No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which standardizes the disclosure
requirements for pension and other postretirement benefits. Neither the
measurement nor recognition of pension and other postretirement benefits will
change as a result of
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Statement No. 132. The Company will apply the new disclosure requirements
beginning in 1998. Based on current guidance, the Company believes the
application of the new standard will not have a financial impact on the
financial statements.
During 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income,
which requires an entity to divide comprehensive income into net income and
other comprehensive income in the period which they are recognized. The Company
will need to classify items of other comprehensive income by their nature in the
financial statements and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. This statement will only affect the
presentation of the financial statements, with no change in the valuation of
total stockholder's equity. The implementation of this Statement is required in
fiscal years beginning after December 15, 1997. The Company plans to implement
these new rules in 1998 and will present prior year information in a comparative
format.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform to the 1997 presentation.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS
The amortized cost and fair value of investments in fixed maturities and equity
securities are as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------------
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 $ 51,387 $ 1,629 $ 39 $ 52,977
States, municipalities and political
subdivisions 43,185 1,023 128 44,080
Public utilities securities 151,642 5,030 1,216 155,456
Debt securities issued by foreign
governments 3,272 3,272
Corporate securities 1,147,380 48,001 6,539 1,188,842
Mortgage-backed securities 1,165,376 89,539 6,661 1,248,254
Other asset-backed securities 443,473 13,285 584 456,174
Derivatives hedging fixed maturities
(Note 3) 1,297 3,118 1,115 3,300
------------------------------------------------------------------------
Total fixed maturities 3,007,012 161,625 16,282 3,152,355
Preferred stocks (nonredeemable) 3,368 67 122 3,313
Common stocks 3,386 1,446 126 4,706
------------------------------------------------------------------------
Total equity securities 6,754 1,513 248 8,019
------------------------------------------------------------------------
Total $3,013,766 $163,138 $16,530 $3,160,374
========================================================================
</TABLE>
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
<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 3) 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 equity securities 4,899 822 376 5,345
-------------------------------------------------------------------
Total $2,770,387 $140,911 $30,869 $2,880,429
===================================================================
</TABLE>
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
The amortized cost and fair value of investments in fixed maturities at December
31, 1997, 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 $ 35,748 $ 35,665
Due after one year through five years 313,045 320,825
Due after five years through ten years 486,875 503,629
Due after ten years 561,198 584,508
---------------------------
1,396,866 1,444,627
Mortgage-backed securities 1,165,376 1,248,254
Other asset-backed securities 443,473 456,174
Derivatives 1,297 3,300
---------------------------
Total available-for-sale $3,007,012 $3,152,355
===========================
</TABLE>
Changes in unrealized gains (losses) on investments in available-for-sale
securities for the years ended December 31, 1997, 1996 and 1995 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
FIXED EQUITY TOTAL
----------------------------------------------
<S> <C> <C> <C>
Gross unrealized gains $161,625 $1,513 $163,138
Gross unrealized losses 16,282 248 16,530
----------------------------------------------
Net unrealized gains (losses) 145,343 1,265 146,608
Deferred income tax (expense)
benefit (50,873) (443) (51,316)
----------------------------------------------
Net unrealized gains (losses) after
taxes 94,470 822 95,292
Less:
Balance at beginning of year 71,237 289 71,526
----------------------------------------------
Change in net unrealized gains
(losses) $ 23,233 $ 533 $23,766
===============================================
</TABLE>
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
<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)
==============================================
<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>
As part of its overall investment management strategy, the Company has entered
into agreements to purchase $9,595,943 in fixed maturity securities and
$27,910,000 in mortgage loans as of December 31, 1997. These agreements were
settled during 1998. The Company had no agreements to sell securities at
December 31, 1997.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
Major categories of investment income for the years ended December 31 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Fixed maturities $259,936 $240,931 $190,327
Mortgage loans on real estate 40,908 29,143 16,601
Policy loans 56,087 52,205 55,438
Other investments 3,159 2,197 4,360
-------------------------------------------
360,090 324,476 266,726
Investment expenses (19,192) (12,355) (10,661)
-------------------------------------------
Net investment income $340,898 $312,121 $256,065
===========================================
</TABLE>
Net realized gains on investments for the years ended December 31 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Fixed maturities $27,717 $4,540 $6,538
Equity securities (57) 79 5
Real estate and other 985 151 21
-------------------------------------------
Net realized gains on
investments $28,645 $4,770 $6,564
===========================================
</TABLE>
During 1997, 1996 and 1995, debt and marketable equity securities available-for-
sale were sold with fair values at the date of sale of $2,281,886,000,
$334,482,000 and $306,219,000, respectively. Gross gains of $41,017,000,
$7,248,000 and $9,691,000 and gross losses of $13,357,000, $2,629,000 and
$3,148,000 were realized on those sales in 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, bonds with an amortized cost of $28,434,000 and
$26,140,000, respectively, were on deposit with various state insurance
departments to meet regulatory requirements.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company enters into interest rate and currency 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, exchange rates 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. Currency swap agreements generally involve the
exchange of local and foreign currency payments over the life of the agreements
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.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
(CONTINUED)
The table below summarizes the Company's interest rate contracts at December 31,
1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts:
Swaps $ 913,630 $ (185) $ (625) $ (625)
Swaps-affiliates 879,745 185 1,429 1,429
---------------------------------------------------------------
Total swaps 1,793,375 - 804 804
Caps owned 760,000 986 766 766
---------------------------------------------------------------
Total caps owned 760,000 986 766 766
---------------------------------------------------------------
Floors owned 354,000 311 1,730 1,730
---------------------------------------------------------------
Total floors owned 354,000 311 1,730 1,730
Options owned 384,300 6,192 4,312 4,312
---------------------------------------------------------------
Options owned-affiliates 384,300 (6,192) (4,312) (4,312)
---------------------------------------------------------------
Total options owned 768,600 - - -
---------------------------------------------------------------
Total derivatives $3,675,975 $ 1,297 $ 3,300 $ 3,300
===============================================================
</TABLE>
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------
NOTIONAL AMORTIZED FAIR BALANCE
AMOUNT COST VALUE SHEET
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts:
Swaps $794,520 $ - $(1,452) $(1,452)
Swaps-affiliates 774,520 - 1,272 1,272
---------------------------------------------------------------
Total caps owned 1,569,040 - (180) (180)
---------------------------------------------------------------
Caps owned 400,000 2,073 592 592
---------------------------------------------------------------
Total caps owned 400,000 2,073 592 592
---------------------------------------------------------------
Floors owned 100,000 25 5 5
---------------------------------------------------------------
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>
4. CONCENTRATIONS OF CREDIT RISK
At December 31, 1997, the Company held less-than-investment-grade bonds
classified as available-for-sale with a carrying value and market value of
$186,614,000. These holdings amounted to 6% of the Company's investments in
fixed maturity securities and 2% 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, 1997, the Company's commercial mortgages involved a
concentration of properties located in Florida (17%), Texas (10%), and Georgia
(9%). The remaining commercial mortgages relate to properties located in 29
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 $10,911,000.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a qualified noncontributory defined benefit retirement plan
covering substantially all employees. In addition, the Company maintains a non-
qualified unfunded Supplemental Employees Retirement Plan (SERP). The benefits
of both plans 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
1997 1996
-----------------------------------------------------------------------------
QUALIFIED QUALIFIED
PLAN SERP PLAN SERP
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated
benefit obligation:
Vested $(31,338) $(7,903) $(26,058) $(6,725)
Nonvested (805) (285) (733) (132)
-----------------------------------------------------------------------------
(32,143) (8,188) (26,791) (6,857)
Effect of projected future compensation (5,658) (966) (5,479) (951)
-----------------------------------------------------------------------------
Projected benefit obligation (37,801) (9,154) (32,270) (7,808)
Less plan assets at fair value 40,150 - 33,682 -
-----------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 2,349 (9,154) 1,412 (7,808)
Unrecognized net asset (1,032) - (1,316) -
Unrecognized prior service benefit cost (84) 206 (97) 236
Unrecognized net loss 89 4,813 1,930 4,622
-----------------------------------------------------------------------------
Net pension asset (liability) $ 1,322 $(4,135) $ 1,929 $(2,950)
=============================================================================
</TABLE>
As of December 31, 1997 and 1996, the Company recognized an additional liability
on the SERP of $3,848,000 and $3,671,000, respectively, as this plan is unfunded
and the actuarial present value of accumulated benefit obligation exceeds the
net pension liability.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
The net periodic pension cost for the defined benefit plans includes the
following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------
QUALIFIED QUALIFIED QUALIFIED
PLAN SERP PLAN SERP PLAN SERP
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1,420 $ 524 $ 1,320 $ 388 $ 1,147 $ 285
Interest cost 2,613 639 2,262 463 1,856 517
Return on plan assets (7,279) - (4,075) - (3,497) -
Net amortization and
deferral 3,853 339 883 258 553 239
-----------------------------------------------------------------------------------------
Net periodic pension
expense $ 607 $1,502 $ 390 $1,109 $ 59 $1,041
=========================================================================================
</TABLE>
Assumptions used in accounting for the defined benefit plans as of December 31,
1997, 1996, and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.25% 7.50% 7.25%
Rate of increase in compensation level 4.25% 4.50% 4.25%
Expected long-term rate of return on assets 9.50% 9.50% 9.50%
</TABLE>
Plan assets of the defined benefit plans at December 31, 1997 are invested
primarily in U.S. government securities, corporate bonds, mutual funds, mortgage
loans, money market funds and common stock.
401(K) PLAN
The Security Life of Denver Insurance Company Savings Incentive Plan (the
Savings Plan) is a defined contribution plan which is available to substantially
all home office employees, who work 1,000 hours or more in a plan year, to
provide a savings program for additional retirement benefits. Participants may
make contributions to the plan through salary reductions up to a maximum of
$9,500 in 1997 and 1996 and $9,240 in 1995. 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 maximum matching percentage of 4 1/2%
of the individual's salary. Company matching contributions were $1,211,000 for
1997, $1,143,000 for 1996, and $1,071,000 for 1995.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
Plan assets of the Savings Plan at December 31, 1997 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
$26.6 million and $25.5 million at December 31, 1997 and 1996, 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
1997 1996
-------------------------------------------------------------------------------------
LIFE LIFE
MEDICAL INSURANCE MEDICAL INSURANCE
PLAN PLAN TOTAL PLAN PLAN TOTAL
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees $(1,032) $(1,228) $ (2,260) $(1,315) $(1,226) $ (2,541)
Fully eligible active plan
participants (665) (526) (1,191) (409) (392) (801)
Other active plan participants (2,881) (1,258) (4,139) (2,038) (1,220) (3,258)
------------------------------------------------------------------------------------
(4,578) (3,012) (7,590) (3,762) (2,838) (6,600)
Plan assets at fair value - - - - - -
------------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan (4,578) (3,012) (7,590) (3,762) (2,838) (6,600)
assets
Unrecognized prior service cost 248 22 270 355 32 387
Unrecognized net gains (losses) (5,179) 1,130 (4,049) (5,870) 1,271 (4,599)
------------------------------------------------------------------------------------
Accrued postretirement benefit cost $(9,509) $(1,860) $(11,369) $(9,277) $(1,535) $(10,812)
=====================================================================================
</TABLE>
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes the
following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------------
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 $ 287 $126 $ 413 $ 236 $151 $ 387 $ 359 $175 $ 534
Interest cost 313 205 518 268 200 468 291 112 403
Net amortization and deferral (238) 62 (176) (275) 89 (186) (209) 65 (144)
------------------------------------------------------------------------------------------------
Net periodic postretirement benefit
cost $ 362 $393 $ 755 $ 229 $440 $ 669 $ 441 $352 $ 793
================================================================================================
</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 10.25% graded to 5%
over 10.5 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, 1997 by $784,000 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1997 by $112,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 1997 and 7.50% at
December 31, 1996.
6. 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.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LEASES
The Company terminated a significant operating lease agreement relating to
electronic data processing equipment due to outsourcing of computer operations.
The Company incurred $4,819,000 in lease expense in 1997 related to that
agreement prior to termination. The Company does not have any other significant
lease obligations. Total rental expense for all equipment leases was
approximately $4,993,000, $6,151,000 and $5,620,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
8. 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, 1997, 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.
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. As of December
31, 1997, $2.2 billion of an affiliate's invested assets were held in trust
pursuant to these agreements.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. REINSURANCE (CONTINUED)
These transactions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------
PREMIUMS RESERVES PREMIUMS RESERVES
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct (nonaffiliated) $ 1,673,471 $ 2,527,957 $ 767,312 $ 1,785,689
Assumed from Life Insurance Company of
Georgia 35,000 106,698 50,000 125,512
-----------------------------------------------------------------------
1,708,471 2,634,655 817,312 1,911,201
Ceded to Columbine Life Insurance Company (1,479,371) (2,231,118) (484,512) (1,425,545)
Ceded to Life Insurance Company of Georgia (116,100) (403,537) (282,800) (435,586)
-----------------------------------------------------------------------
Net $ 113,000 $ - $ 50,000 $ 50,070
=======================================================================
</TABLE>
Ceded GIC reserves totaling $2,635 and $1,861 million as of December 31, 1997
and 1996, respectively, are classified as part of prepaid reinsurance premiums.
GIC reserves are reflected at their gross value of $2,635 and $1,911 million as
of December 31, 1997 and 1996, respectively.
During 1997 and 1996, the Company had 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. As of December 31, 1997, all surplus relief reinsurance contracts
had been recaptured.
9. 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 payable or receivable that the member would have had for the
period had it filed a separate return.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. 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
1997 1996
-----------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $(239,678) $(236,445)
Unrealized gains/losses (51,312) (38,516)
-----------------------------------
Total deferred tax liabilities (290,990) (274,961)
Deferred tax assets:
Benefit reserves and surplus relief 111,610 123,410
Tax-basis deferred policy acquisition costs 71,241 60,727
Investment income 13,459 11,037
Unearned investment income 9,208 8,705
Nonqualified deferred compensation 14,129 10,649
Postretirement employee benefits 3,979 3,784
Separate accounts 8,571 4,138
Other, net 4,964 3,970
-----------------------------------
Total deferred tax assets 237,161 226,420
-----------------------------------
Net deferred tax liabilities $ (53,829) $ (48,541)
===================================
</TABLE>
The components of federal income tax expense consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Current $37,542 $10,340 $(48,136)
Deferred 9,477 11,536 72,870
Current year change in valuation
allowance - - (438)
---------------------------------------------------
Federal income tax expense $47,019 $21,876 $ 24,296
===================================================
</TABLE>
The Company's effective income tax rate did not vary significantly from the
statutory federal income tax rate.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
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 policy 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 $55,468,000 during 1997,
$(61,467,000) during 1996, and $25,875,000 during 1995 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 stockholder exceed amounts in the Stockholder'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.
10. 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, 1997. 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.
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.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. LONG-TERM DEBT (CONTINUED)
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, 1997, the Company accrued interest of $5,100,000. Upon receiving
approval from the Commissioner of Insurance of the State of Colorado, the
Company made a $3,668,000 payment for accrued interest during 1997.
Future minimum payments, assuming a current effective interest rate of 6.40%,
are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL
YEAR PAYMENTS
-----------------------------------------------------
<S> <C>
1999 $ 20,456
2000 20,456
2001 20,456
Subsequent years 40,911
------------
Total 102,279
Less imputed interest (27,279)
------------
Present value of payments $ 75,000
============
</TABLE>
11. 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 in the process of codifying statutory accounting practices
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that Security Life uses to prepare its statutory-basis financial
statements. Codification, which was approved by the NAIC in March 1998, will
require adoption by the various states before it becomes the prescribed
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED)
statutory basis of accounting for insurance companies domiciled within
those states. Accordingly, before Codification becomes effective for Security
Life, the State of Colorado must adopt Codification as the prescribed basis of
accounting on which domestic insurers must report their statutory-basis
results to the Insurance Department. At this time it is unclear whether the
State of Colorado will adopt Codification.
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, 1997, the Company exceeded all minimum RBC
requirements.
Combined capital and surplus, determined in accordance with statutory accounting
practices (SAP), was $403,239,000 and $366,451,000 at December 31, 1997 and
1996, respectively. Combined net income, determined in accordance with SAP, was
$22,261,000, $9,141,000, and $11,771,000 for the years ended December 31, 1997,
1996, and 1995, 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, 1997. 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.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company. Life insurance liabilities that contain
mortality risk and all nonfinancial instruments are excluded from disclosure
requirements. However, the fair values of liabilities under all insurance
contracts are taken into consideration in the Company's overall management of
interest rate risk, such that the Company's exposure to changing interest rates
is minimized through the matching of investment maturities with amounts due
under insurance contracts.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1997 and 1996 are summarized below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------- -------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------------------------- -------------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities (Note 2) $3,152,355 $3,152,355 $2,875,084 $2,875,084
Equity securities (Note 2) 8,019 8,019 5,345 5,345
Commercial mortgages 568,591 621,861 445,073 461,777
Residential mortgages 8,029 8,158 7,722 7,589
Policy loans 875,405 875,405 795,311 795,311
LIABILITIES
Guaranteed investment
contracts, net of reinsurance $ - $ - $ 50,070 $ 50,070
Supplemental contracts
without life contingencies 4,240 4,240 3,023 3,023
Other policyholder funds left
on deposit 99,545 99,545 98,824 98,824
Individual and group
annuities, net of reinsurance 43,313 43,077 45,576 45,228
</TABLE>
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values of all other financial instruments approximate their fair
values.
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.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. 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 $1,000,000 and $55,780,000 in 1997 and 1996,
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 $493,757,000 and $637,151,000 at December 31, 1997
and 1996, 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
80% 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 $175,367,000 which
have a market value to the Company of $0 and two lines of credit totaling
$225,484,000 which have a market value to the Company of $0 (see Note 14).
13. 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.
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. OTHER FINANCING ARRANGEMENTS
The Company has a $125,484,000 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
July 31, 1998. 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, 1997 or
1996. The average balance of short-term debt was $26.5 million during 1997.
The weighted average interest rate paid on this debt during 1997 was 5.71% (see
Note 12).
The Company is the beneficiary of letters of credit totaling $175,367,000 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 1997 and 1996.
YEAR 2000 (UNAUDITED)
The Company has initiated a program to prepare the Company's computer systems
and applications for the year 2000. This program includes all systems utilized
by the Company as well as the systems of other companies that interface
with the Company. The Company has completed an assessment and is in the process
of modifying portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total Year
2000 project cost is estimated at approximately $8.5 million. To date the
Company has incurred approximately $1 million, primarily for assessment of the
Year 2000 issue and development of the modification plan. Accordingly, the
Company does not expect the amounts required for this project to have a material
effect on its financial position.
The project is estimated to be completed no later than June 1999, which is prior
to any anticipated impact on its operating systems. The Company believes that
with modifications to existing software, and conversions to new software, the
Year 2000 will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are
not completed in a timely manner, it could have a material impact on the
operations of the Company.
The Company has initiated formal communications and interface testing plans with
all of its suppliers and customers to determine the extent to which its
interface systems are vulnerable to those third parties' failure to have their
systems Year 2000 compatible and will act accordingly to prevent operational
disruptions.
<PAGE>
Financial Statements
SECURITY LIFE SEPARATE ACCOUNT L1
OF SECURITY LIFE OF DENVER
INSURANCE COMPANY
Year ended December 31, 1997
with Report of Independent Auditors
<PAGE>
Security Life Separate Account L1
Financial Statements
Year ended December 31, 1997
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors......................................... 102
Financial Statements
Statement of Net Assets................................................ 103
Statements of Operations............................................... 109
Statements of Changes in Net Assets.................................... 127
Notes to Financial Statements.......................................... 145
</TABLE>
<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 Divisions) ("N&B"), the Alger American Fund (comprising the
American Small Capitalization, American MidCap Growth, American Growth and
American Leveraged AllCap Divisions) ("Alger"), the Fidelity Variable Insurance
Products Fund and Variable Insurance Products Fund II (comprising the Asset
Manager, Growth, Overseas, Money Market and Index 500 Divisions) ("Fidelity"),
the INVESCO Variable Investment Funds, Inc. (comprising the Total Return,
Industrial Income, High Yield and Utilities Divisions) ("INVESCO") and Van Eck
Worldwide Trust (comprising the Worldwide Balanced and Worldwide Hard Assets
Divisions) ("Van Eck") Portfolios) as of December 31, 1997, and the related
statements of operations and changes in net assets for each of the three 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, 1997, 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, 1997, and the results of its operations and changes in its
net assets for each of the three years in the period then ended, in conformity
with generally accepted accounting principles.
Denver, Colorado
April 13, 1998
/s/
ERNST & YOUNG, LLP
1
<PAGE>
Security Life Separate Account L1
Statement of Net Assets
December 31, 1997
<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
$147,677,007 (See Note C) $161,182,191 $26,710,339 $28,827,945 $89,758,414 $14,586,803 $1,298,690
---------------------------------------------------------------------------------
Total assets 161,182,191 26,710,339 28,827,945 89,758,414 14,586,803 1,298,690
---------------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (1,303,829) (155,132) (78,097) (1,024,926) (46,534) 860
Due to (from) other divisions - (59,025) 805,434 147,171 (893,312) (268)
---------------------------------------------------------------------------------
Total liabilities (1,303,829) (214,157) 727,337 (877,755) (939,846) 592
---------------------------------------------------------------------------------
Net assets $162,486,020 $26,924,496 $28,100,608 $90,636,169 $15,526,649 $1,298,098
=================================================================================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (See Note B) $162,486,020 $26,924,496 $28,100,608 $90,636,169 $15,526,649 $1,298,098
---------------------------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $162,486,020 $26,924,496 $28,100,608 $90,636,169 $15,526,649 $1,298,098
=================================================================================
</TABLE>
See accompanying notes.
2
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1997
<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 $26,710,339 $ 6,674,552 $ 5,492,716 $ 894,319 $ 13,648,752
----------------------------------------------------------------------
Total assets 26,710,339 6,674,552 5,492,716 894,319 13,648,752
----------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (155,132) 3,700 (25,110) 642 (134,364)
Due to (from) other divisions (59,025) (4,314) (45,846) - (8,865)
----------------------------------------------------------------------
Total liabilities (214,157) (614) (70,956) 642 (143,229)
----------------------------------------------------------------------
Net assets $26,924,496 $ 6,675,166 $ 5,563,672 $ 893,677 $ 13,791,981
======================================================================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (See Note B) $26,924,496 $ 6,675,166 $ 5,563,672 $ 893,677 $ 13,791,981
----------------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $26,924,496 $ 6,675,166 $ 5,563,672 $ 893,677 $ 13,791,981
======================================================================
Number of division units outstanding
(See Note G) 552,985.394 316,146.084 75,811.559 626,285.721
=======================================================
Value per divisional unit $ 12.07 $ 17.60 $ 11.79 $ 22.02
=======================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1997
<TABLE>
<CAPTION>
ALGER
-------------------------------------------------------------------------
AMERICAN AMERICAN AMERICAN
TOTAL SMALL MIDCAP AMERICAN LEVERAGED
ALGER CAPITALIZATION GROWTH GROWTH ALLCAP
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $28,827,945 $ 11,275,478 $ 5,019,978 $ 9,621,704 $ 2,910,785
-------------------------------------------------------------------------
Total assets 28,827,945 11,275,478 5,019,978 9,621,704 2,910,785
-------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (78,097) (58,698) (28,582) 7,334 1,849
Due to (from) other divisions 805,434 875,064 (66,978) (1,809) (843)
-------------------------------------------------------------------------
Total liabilities 727,337 816,366 (95,560) 5,525 1,006
-------------------------------------------------------------------------
Net assets $28,100,608 $ 10,459,112 $ 5,115,538 $ 9,616,179 $ 2,909,779
=========================================================================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (See Note B) $28,100,608 $ 10,459,112 $ 5,115,538 $ 9,616,179 $ 2,909,779
-------------------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $28,100,608 $ 10,459,112 $ 5,115,538 $ 9,616,179 $ 2,909,779
=========================================================================
Number of division units outstanding
(See Note G) 648,733.740 288,809.482 569,990.309 148,542.639
===========================================================
Value per divisional unit $ 16.12 $ 17.71 $ 16.87 $ 19.59
===========================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1997
<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 $89,758,414 $ 6,058,206 $ 18,086,505 $ 12,199,260 $ 14,300,455 $ 39,113,988
------------------------------------------------------------------------------------------
Total assets 89,758,414 6,058,206 18,086,505 12,199,260 14,300,455 39,113,988
------------------------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (1,024,926) (6,196) 14,297 (18,336) (948,591) (66,100)
Due to (from) other divisions 147,171 (72,671) (2,714) (8,183) 235,787 (5,048)
------------------------------------------------------------------------------------------
Total liabilities (877,755) (78,867) 11,583 (26,519) (712,804) (71,148)
------------------------------------------------------------------------------------------
Net assets $90,636,169 $ 6,137,073 $ 18,074,922 $ 12,225,779 $ 15,013,259 $ 39,185,136
==========================================================================================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (See Note B) $90,636,169 $ 6,137,073 $ 18,074,922 $ 12,225,779 $ 15,013,259 $ 39,185,136
------------------------------------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $90,636,169 $ 6,137,073 $ 18,074,922 $ 12,225,779 $ 15,013,259 $ 39,185,136
==========================================================================================
Number of division units outstanding
(See Note G) 410,906.106 983,842.388 950,328.899 1,303,059.881 1,863,056.104
===============================================================================
Value per divisional unit $ 14.94 $ 18.37 $ 12.86 $ 11.52 $ 21.03
===============================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1997
<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 $14,586,803 $ 3,029,149 $ 5,932,858 $ 4,464,195 $ 1,160,601
----------------------------------------------------------------------
Total assets 14,586,803 3,029,149 5,932,858 4,464,195 1,160,601
----------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (46,534) (12,342) (23,188) (11,794) 790
Due to (from) other divisions (893,312) (3,119) (2,098) (888,095) -
----------------------------------------------------------------------
Total liabilities (939,846) (15,461) (25,286) (899,889) 790
----------------------------------------------------------------------
Net assets $15,526,649 $ 3,044,610 $ 5,958,144 $ 5,364,084 $ 1,159,811
======================================================================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (See Note B) $15,526,649 $ 3,044,610 $ 5,958,144 $ 5,364,084 $ 1,159,811
----------------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $15,526,649 $ 3,044,610 $ 5,958,144 $ 5,364,084 $ 1,159,811
======================================================================
Number of division units outstanding
(See Note G) 184,042.238 297,553.033 333,501.857 78,118.685
========================================================
Value per divisional unit $ 16.54 $ 20.02 $ 16.08 $ 14.85
========================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1997
<TABLE>
<CAPTION>
VAN ECK
-----------------------------------------------
WORLDWIDE
TOTAL WORLDWIDE HARD
VAN ECK BALANCED ASSETS
-----------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value $1,298,690 $ 387,596 $ 911,094
-----------------------------------------------
Total assets 1,298,690 387,596 911,094
-----------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver 860 248 612
Due to (from) other divisions (268) - (268)
-----------------------------------------------
Total liabilities 592 248 344
-----------------------------------------------
Net assets $1,298,098 $ 387,348 $ 910,750
===============================================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (See Note B) $1,298,098 $ 387,348 $ 910,750
-----------------------------------------------
TOTAL POLICYHOLDER RESERVES $1,298,098 $ 387,348 $ 910,750
===============================================
Number of division units outstanding
(See Note G) 32,139.282 77,046.773
===================================
Value per divisional unit $ 12.05 $ 11.82
===================================
</TABLE>
See accompanying notes.
7
<PAGE>
Security Life Separate Account L1
Statement of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 4,158,702 $ 678,740 $ 323,895 $2,094,346 $1,039,818 $ 21,903
Less: Valuation period deductions
(See Note B) 813,630 135,310 141,930 461,022 67,625 7,743
---------------------------------------------------------------------
Net investment income (loss) 3,345,072 543,430 181,965 1,633,324 972,193 14,160
---------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889
Net unrealized gains (losses) on
investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508)
---------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 13,842,525 2,679,881 2,542,807 7,796,838 822,618 381
---------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $17,187,597 $3,223,311 $2,724,772 $9,430,162 $1,794,811 $ 14,541
=====================================================================
</TABLE>
See accompanying notes.
8
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
N & B
------------------------------------------------------------
TOTAL LIMITED GOVERNMENT
N&B MATURITY BOND GROWTH INCOME PARTNERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 678,740 $156,667 $183,497 $ 72,086 $ 266,490
Less: Valuation period deductions
(See Note B) 135,310 33,725 24,959 10,366 66,260
------------------------------------------------------------
Net investment income (loss) 543,430 122,942 158,538 61,720 200,230
------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 406,286 (20,056) 14,997 25,762 385,583
Net unrealized gains (losses) on
investments 2,273,595 159,151 533,906 26,882 1,553,656
------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 2,679,881 139,095 548,903 52,644 1,939,239
------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $3,223,311 $262,037 $707,441 $114,364 $2,139,469
============================================================
</TABLE>
See accompanying notes.
9
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
ALGER
-----------------------------------------------------------
AMERICAN AMERICAN AMERICAN
TOTAL SMALL MIDCAP AMERICAN LEVERAGED
ALGER CAPITALIZATION GROWTH GROWTH ALLCAP
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 323,895 $218,789 $ 55,945 $ 49,161 $ -
Less: Valuation period deductions
(See Note B) 141,930 51,004 28,138 48,785 14,003
-----------------------------------------------------------
Net investment income (loss) 181,965 167,785 27,807 376 (14,003)
-----------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 894,818 114,651 228,363 237,727 314,077
Net unrealized gains (losses) on
investments 1,647,989 483,518 246,489 970,056 (52,074)
-----------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 2,542,807 598,169 474,852 1,207,783 262,003
-----------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $2,724,772 $765,954 $502,659 $1,208,159 $248,000
===========================================================
</TABLE>
See accompanying notes.
10
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
FIDELITY
------------------------------------------------------------------
TOTAL ASSET MONEY
FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $2,094,346 $204,696 $ 274,868 $ 451,874 $764,538 $ 398,370
Less: Valuation period deductions
(See Note B) 461,022 27,097 91,298 60,714 107,253 174,660
------------------------------------------------------------------
Net investment income (loss) 1,633,324 177,599 183,570 391,160 657,285 223,710
------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 1,320,426 33,000 662,436 332,544 - 292,446
Net unrealized gains (losses) on
investments 6,476,412 350,408 1,347,793 (305,456) - 5,083,667
------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 7,796,838 383,408 2,010,229 27,088 - 5,376,113
------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $9,430,162 $561,007 $2,193,799 $ 418,248 $657,285 $5,599,823
==================================================================
</TABLE>
See accompanying notes.
11
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
INVESCO
--------------------------------------------------------
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $1,039,818 $ 76,461 $417,376 $ 519,369 $ 26,612
Less: Valuation period deductions
(See Note B) 67,625 12,921 27,525 23,478 3,701
--------------------------------------------------------
Net investment income (loss) 972,193 63,540 389,851 495,891 22,911
--------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 523,956 46,241 116,951 269,799 90,965
Net unrealized gains (losses) on
investments 298,662 203,429 324,767 (253,231) 23,697
--------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 822,618 249,670 441,718 16,568 114,662
--------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $1,794,811 $313,210 $831,569 $ 512,459 $137,573
========================================================
</TABLE>
See accompanying notes.
12
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
VAN ECK
----------------------------------------------------
WORLDWIDE
TOTAL WORLDWIDE HARD
VAN ECK BALANCED ASSETS
----------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 21,903 $ 9,006 $ 12,897
Less: Valuation period deductions
(See Note B) 7,743 3,329 4,414
----------------------------------------------------
Net investment income (loss) 14,160 5,677 8,483
----------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 53,889 37,785 16,104
Net unrealized gains (losses) on
investments (53,508) 4,122 (57,630)
----------------------------------------------------
Net realized and unrealized gains
(losses) on investments 381 41,907 (41,526)
----------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 14,541 $47,584 $(33,043)
====================================================
</TABLE>
See accompanying notes.
13
<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
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
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
==============================================================
</TABLE>
See accompanying notes.
14
<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
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
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
=========================================================
</TABLE>
See accompanying notes.
15
<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
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
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
========================================================
</TABLE>
See accompanying notes.
16
<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
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
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
=============================================================
</TABLE>
See accompanying notes.
17
<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
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
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 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
=======================================================
</TABLE>
See accompanying notes.
18
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
VAN ECK
----------------------------------------------------
TOTAL WORLDWIDE WORLDWIDE
VAN ECK BALANCED HARD ASSETS
----------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
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
===================================================
</TABLE>
See accompanying notes.
19
<PAGE>
Security Life Separate Account L1
Statement of Operations
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>
INVESTMENT INCOME
Dividends from mutual funds $ 134,683 $ 104 $ 3 $ 78,541 $55,575 $ 460
Less: Valuation period deductions
(See Note B) 37,280 11,277 5,431 18,478 1,863 231
----------------------------------------------------------------
Net investment income (loss) 97,403 (11,173) (5,428) 60,063 53,712 229
----------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
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
----------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 263,274 169,847 (37,428) 131,764 (1,786) 877
----------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $ 360,677 $ 158,674 $(42,856) $ 191,827 $51,926 $1,106
================================================================
</TABLE>
See accompanying notes.
20
<PAGE>
Security Life Separate Account L1
Statement of Operations (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>
INVESTMENT INCOME
Dividends from mutual funds $ 104 $ 65 $ 34 $ - $ 5
Less: Valuation period deductions
(See Note B) 11,277 4,624 1,717 2,366 2,570
----------------------------------------------------------
Net investment income (loss) (11,173) (4,559) (1,683) (2,366) (2,565)
----------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
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
----------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 169,847 62,963 2,149 36,358 68,377
----------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $158,674 $58,404 $ 466 $33,992 $65,812
==========================================================
</TABLE>
See accompanying notes.
21
<PAGE>
Security Life Separate Account L1
Statement of Operations (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>
INVESTMENT INCOME
Dividends from mutual funds $ 3 $ - $ 3 $ - $ -
Less: Valuation period deductions
(See Note B) 5,431 2,496 551 2,242 142
-------------------------------------------------------------
Net investment income (loss) (5,428) (2,496) (548) (2,242) (142)
-------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on 17,143 19,457 3,402 1,513 (7,229)
investments
Net unrealized gains (losses) on
investments (54,571) (57,427) 3,400 (1,664) 1,120
-------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments (37,428) (37,970) 6,802 (151) (6,109)
-------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $(42,856) $(40,466) $6,254 $(2,393) $(6,251)
=============================================================
</TABLE>
See accompanying notes.
22
<PAGE>
Security Life Separate Account L1
Statement of Operations (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>
INVESTMENT INCOME
Dividends from mutual funds $ 78,541 $ - $ - $ - $78,541 $ -
Less: Valuation period deductions
(See Note B) 18,478 257 3,373 2,080 10,362 2,406
--------------------------------------------------------------
Net investment income (loss) 60,063 (257) (3,373) (2,080) 68,179 (2,406)
--------------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
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
--------------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 131,764 7,239 2,110 30,934 - 91,481
--------------------------------------------------------------
NET INCREASE (DECREASE)IN NET ASSETS
RESULTING FROM
OPERATIONS $191,827 $6,982 $ (1,263) $28,854 $68,179 $89,075
==============================================================
</TABLE>
See accompanying notes.
23
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
INVESCO
----------------------------------------------------
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $55,575 $3,093 $ 9,220 $ 43,135 $127
Less: Valuation period deductions
(See Note B) 1,863 243 567 1,017 36
----------------------------------------------------
Net investment income (loss) 53,712 2,850 8,653 42,118 91
----------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
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
----------------------------------------------------
Net realized and unrealized gains
(losses) on investments (1,786) 4,644 13,651 (20,987) 906
----------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $51,926 $7,494 $22,304 $ 21,131 $997
====================================================
</TABLE>
See accompanying notes.
24
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
VAN ECK
-----------------------------------------------------------
TOTAL WORLDWIDE WORLDWIDE
VAN ECK BALANCED HARD ASSETS
-----------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 460 $416 $ 44
Less: Valuation period deductions
(See Note B) 231 171 60
-----------------------------------------------------------
Net investment income (loss) 229 245 (16)
-----------------------------------------------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 358 (5) 363
Net unrealized gains (losses) on
investments 519 (62) 581
-----------------------------------------------------------
Net realized and unrealized gains
(losses) on investments 877 (67) 944
----------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $1,106 $178 $928
==========================================================
</TABLE>
See accompanying notes.
25
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets
Year Ended December 31, 1997
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 3,345,072 $ 543,430 $ 181,965 $ 1,633,324 $ 972,193 $ 14,160
Net realized gains (losses) on
investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889
Net unrealized gains (losses) on
investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508)
----------------------------------------------------------------------------------
Increase (decrease) in net assets
from operations 17,187,597 3,223,311 2,724,772 9,430,162 1,794,811 14,541
----------------------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 104,747,260 5,555,766 6,944,048 89,309,110 2,683,620 254,716
Cost of insurance and administrative
charges (8,284,944) (957,887) (1,466,664) (5,155,026) (614,145) (91,222)
Benefit payments (406,386) (20,591) (63,369) (322,263) (163) -
Surrenders (1,977,696) (146,698) (412,252) (1,294,484) (112,699) (11,563)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) (6,642,529) 8,721,432 9,006,938 (32,708,946) 7,796,299 541,748
Other 5,891 9,817 11,046 (21,999) 11,180 (4,153)
----------------------------------------------------------------------------------
Increase (decrease) from principal
transactions 87,441,596 13,161,839 14,019,747 49,806,392 9,764,092 689,526
----------------------------------------------------------------------------------
Total increase (decrease) in net assets 104,629,193 16,385,150 16,744,519 59,236,554 11,558,903 704,067
Net assets at beginning of year 57,856,827 10,539,346 11,356,089 31,399,615 3,967,746 594,031
----------------------------------------------------------------------------------
Net assets at end of year $162,486,020 $26,924,496 $28,100,608 $ 90,636,169 $15,526,649 $1,298,098
==================================================================================
</TABLE>
See accompanying notes.
26
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
N & B
--------------------------------------------------------------------
TOTAL LIMITED GOVERNMENT
N&B MATURITY BOND GROWTH INCOME PARTNERS
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 543,430 $ 122,942 $ 158,538 $ 61,720 $ 200,230
Net realized gains (losses) on
investments 406,286 (20,056) 14,997 25,762 385,583
Net unrealized gains (losses) on
investments 2,273,595 159,151 533,906 26,882 1,553,656
--------------------------------------------------------------------
Increase (decrease) in net assets
from operations 3,223,311 262,037 707,441 114,364 2,139,469
--------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 5,555,766 1,332,125 1,158,704 324,257 2,740,680
Cost of insurance and administrative
charges (957,887) (163,472) (219,117) (62,075) (513,223)
Benefit payments (20,591) - - - (20,591)
Surrenders (146,698) (3,761) (71,838) (792) (70,307)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 8,721,432 2,758,363 2,141,068 (1,023,987) 4,845,988
Other 9,817 (2,202) 11,700 (6,404) 6,723
--------------------------------------------------------------------
Increase (decrease) from principal
transactions 13,161,839 3,921,053 3,020,517 (769,001) 6,989,270
--------------------------------------------------------------------
Total increase (decrease) in net assets 16,385,150 4,183,090 3,727,958 (654,637) 9,128,739
Net assets at beginning of year 10,539,346 2,492,076 1,835,714 1,548,314 4,663,242
--------------------------------------------------------------------
Net assets at end of year $26,924,496 $6,675,166 $5,563,672 $ 893,677 $13,791,981
====================================================================
</TABLE>
See accompanying notes.
27
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
ALGER
-------------------------------------------------------------------
AMERICAN AMERICAN AMERICAN
TOTAL SMALL MIDCAP AMERICAN LEVERAGED
ALGER CAPITALIZATION GROWTH GROWTH ALLCAP
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 181,965 $ 167,785 $ 27,807 $ 376 $ (14,003)
Net realized gains (losses) on
investments 894,818 114,651 228,363 237,727 314,077
Net unrealized gains (losses) on
investments 1,647,989 483,518 246,489 970,056 (52,074)
-------------------------------------------------------------------
Increase (decrease) in net assets
from operations 2,724,772 765,954 502,659 1,208,159 248,000
-------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 6,944,048 2,630,863 1,276,492 2,334,377 702,316
Cost of insurance and administrative
charges (1,466,664) (526,742) (299,891) (479,902) (160,129)
Benefit payments (63,369) - (62,593) (776) -
Surrenders (412,252) (255,386) (74,317) (58,850) (23,699)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 9,006,938 3,518,384 1,419,061 2,796,911 1,272,582
Other 11,046 (6,069) 19,072 2,082 (4,039)
-------------------------------------------------------------------
Increase (decrease) from principal
transactions 14,019,747 5,361,050 2,277,824 4,593,842 1,787,031
-------------------------------------------------------------------
Total increase (decrease) in net assets 16,744,519 6,127,004 2,780,483 5,802,001 2,035,031
Net assets at beginning of year 11,356,089 4,332,108 2,335,055 3,814,178 874,748
-------------------------------------------------------------------
Net assets at end of year $28,100,608 $10,459,112 $5,115,538 $9,616,179 $2,909,779
===================================================================
</TABLE>
See accompanying notes.
28
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
FIDELITY
----------------------------------------------------------------------------------
TOTAL ASSET MONEY
FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 1,633,324 $ 177,599 $ 183,570 $ 391,160 $ 657,285 $ 223,710
Net realized gains (losses) on
investments 1,320,426 33,000 662,436 332,544 - 292,446
Net unrealized gains (losses) on
investments 6,476,412 350,408 1,347,793 (305,456) - 5,083,667
----------------------------------------------------------------------------------
Increase (decrease) in net assets
from operations 9,430,162 561,007 2,193,799 418,248 657,285 5,599,823
----------------------------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 89,309,110 2,162,759 4,558,270 2,410,373 73,366,740 6,810,968
Cost of insurance and administrative
charges (5,155,026) (242,289) (813,161) (525,615) (2,213,630) (1,360,331)
Benefit payments (322,263) (20,969) (548) (1,233) (257,371) (42,142)
Surrenders (1,294,484) (92,218) (135,829) (91,869) (870,621) (103,947)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) (32,708,946) 2,215,879 5,219,755 5,730,183 (63,929,591) 18,054,828
Other (21,999) 7,567 3,217 10,563 (35,219) (8,127)
----------------------------------------------------------------------------------
Increase (decrease) from principal
transactions 49,806,392 4,030,729 8,831,704 7,532,402 6,060,308 23,351,249
----------------------------------------------------------------------------------
Total increase (decrease) in net assets 59,236,554 4,591,736 11,025,503 7,950,650 6,717,593 28,951,072
Net assets at beginning of year 31,399,615 1,545,337 7,049,419 4,275,129 8,295,666 10,234,064
----------------------------------------------------------------------------------
Net assets at end of year $ 90,636,169 $6,137,073 $18,074,922 $12,225,779 $ 15,013,259 $39,185,136
==================================================================================
</TABLE>
See accompanying notes.
29
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
INVESCO
---------------------------------------------------------------
TOTAL TOTAL INDUSTRIAL
INVESCO RETURN INCOME HIGH YIELD UTILITIES
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 972,193 $ 63,540 $ 389,851 $ 495,891 $ 22,911
Net realized gains (losses) on
investments 523,956 46,241 116,951 269,799 90,965
Net unrealized gains (losses) on
investments 298,662 203,429 324,767 (253,231) 23,697
---------------------------------------------------------------
Increase (decrease) in net assets
from operations 1,794,811 313,210 831,569 512,459 137,573
---------------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 2,683,620 517,831 1,250,551 835,890 79,348
Cost of insurance and administrative
charges (614,145) (133,107) (266,208) (177,612) (37,218)
Benefit payments (163) - - (163) -
Surrenders (112,699) (28,672) (37,810) (9,783) (36,434)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 7,796,299 1,498,300 2,804,344 2,695,587 798,068
Other 11,180 2,581 6,081 2,305 213
---------------------------------------------------------------
Increase (decrease) from principal
transactions 9,764,092 1,856,933 3,756,958 3,346,224 803,977
---------------------------------------------------------------
Total increase (decrease) in net assets 11,558,903 2,170,143 4,588,527 3,858,683 941,550
Net assets at beginning of year 3,967,746 874,467 1,369,617 1,505,401 218,261
---------------------------------------------------------------
Net assets at end of year $15,526,649 $3,044,610 $5,958,144 $5,364,084 $1,159,811
===============================================================
</TABLE>
See accompanying notes.
30
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
VAN ECK
-----------------------------------------------------------
WORLDWIDE
TOTAL WORLDWIDE HARD
VAN ECK BALANCED ASSETS
-----------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 14,160 $ 5,677 $ 8,483
Net realized gains (losses) on
investments 53,889 37,785 16,104
Net unrealized gains (losses) on
investments (53,508) 4,122 (57,630)
------------------------------------------------------
Increase (decrease) in net assets
from operations 14,541 47,584 (33,043)
------------------------------------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 254,716 65,167 189,549
Cost of insurance and administrative
charges (91,222) (44,774) (46,448)
Benefit payments - - -
Surrenders (11,563) (7,995) (3,568)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 541,748 (120) 541,868
Other (4,153) (319) (3,834)
------------------------------------------------------
Increase (decrease) from principal
transactions 689,526 11,959 677,567
------------------------------------------------------
Total increase (decrease) in net 704,067 59,543 644,524
assets
Net assets at beginning of year 594,031 327,805 266,226
------------------------------------------------------
Net assets at end of year $1,298,098 $387,348 $910,750
======================================================
</TABLE>
See accompanying notes.
31
<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
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 942,652 $ 242,027 $ 11,944 $ 465,336 $ 223,901 $ (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 2,299,336 324,175 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
charges (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 loan division and
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
================================================================================
</TABLE>
See accompanying notes.
32
<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
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
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
charges (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 loan division and
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
====================================================================
</TABLE>
See accompanying notes.
33
<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
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
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
charges (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 loan division and
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
====================================================================
</TABLE>
See accompanying notes.
34
<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
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
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
charges (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 loan division and
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
==================================================================================
</TABLE>
See accompanying notes.
35
<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
charges (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 loan division and
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.
36
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
VAN ECK
-----------------------------------
WORLDWIDE
TOTAL WORLDWIDE HARD
VAN ECK BALANCED ASSETS
-----------------------------------
<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
charges (41,236) (29,480) (11,756)
Benefit payments - - -
Surrenders (1,584) (1,584) -
Net transfers among divisions
(including the loan division and
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.
37
<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
charges (515,616) (94,109) (72,491) (327,795) (17,857) (3,364)
Benefit payments - - - - - -
Surrenders - - - - - -
Net transfers among divisions
(including the loan division and
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.
38
<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 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
charges (94,109) (25,947) (23,846) (15,635) (28,681)
Benefit payments - - - - -
Surrenders - - - - -
Net transfers among divisions
(including the loan division and
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.
39
<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
charges (72,491) (24,235) (8,062) (38,073) (2,121)
Benefit payments - - - - -
Surrenders - - - - -
Net transfers among divisions
(including the loan division and
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.
40
<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
charges (327,795) (5,716) (45,365) (17,969) (242,041) (16,704)
Benefit payments - - - - - -
Surrenders - - - - - -
Net transfers among divisions
(including the loan division and
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.
41
<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
charges (17,857) (4,401) (5,390) (6,776) (1,290)
Benefit payments - - - - -
Surrenders - - - - -
Net transfers among divisions
(including the loan division and
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
=========================================================
</TABLE>
See accompanying notes.
42
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1995
<TABLE>
<CAPTION>
VAN ECK
--------------------------------------
TOTAL WORLDWIDE WORLDWIDE
VAN ECK BALANCED HARD ASSETS
--------------------------------------
<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
charges (3,364) (2,360) (1,004)
Benefit payments - - -
Surrenders - - -
Net transfers among divisions
(including the loan division and
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.
43
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements
December 31, 1997
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 charged with
liabilities arising out of any other operations of the Company.
As of December 31, 1997, the Separate Account offered seventeen investment
divisions to the policyholders, each of which invests in an independently
managed mutual fund portfolio ("Fund"). The Funds included:
PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS)
Neuberger & Berman Management Incorporated (N&B)
Neuberger & Berman Limited Maturity Bond Portfolio
Neuberger & Berman Growth Portfolio
Neuberger & Berman Partners Portfolio
Fred Alger Management, Inc. (Alger)
Alger American Small Capitalization Portfolio
Alger American MidCap Growth Portfolio
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
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
44
<PAGE>
Security Life Separate Account L1
Notes to Financial Statement (continued)
NOTE A. ORGANIZATION (CONTINUED)
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 Associates Corporation (Van Eck)
Van Eck Worldwide Hard Assets Portfolio (formerly known as "Van Eck Gold and
Natural Resources Portfolio")
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 stopped accepting new investments. The Company and the fund
managers intend to discontinue these divisions in 1998 pending approval by the
Securities and Exchange Commission.
Effective February 19, 1998, six new divisions became available to the
policyholders for investment in the following funds:
Van Eck Associates Corporation (Van Eck)
Van Eck Worldwide Real Estate Portfolio
Van Eck Wordlwide Emerging Markets Portfolio
Van Eck Worldwide Bond Portfolio
AIM Advisors, Inc. (AIM)
AIM VI--Capital Appreciation Portfolio
AIM VI--Government Securities Portfolio
INVESCO Funds Group, Inc. (INVESCO)
INVESCO VIP Small Company Growth Fund
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.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of the Separate Account have been prepared
on the basis of generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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.
45
<PAGE>
Security Life Separate Account L1
Notes to Financial Statement (continued
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The significant 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 sales 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.
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, 1997 were $813,630.
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 $8,284,944 for the year ended
December 31, 1997. Distributions made by the Funds are reinvested in the Funds.
46
<PAGE>
Security Life Separate Account L1
Note To Financial Statement (Continued)
NOTE C. INVESTMENTS (CONTINUED)
The following is a summary of fund shares owned as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER NET VALUE
OF ASSET OF SHARES COST OF
FUND SHARES VALUE AT MARKET SHARES
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Neuberger & Berman Management Incorporated:
Limited Maturity Bond 472,701.98 $ 14.12 $ 6,674,552 $ 6,490,167
Growth 179,853.19 30.54 5,492,716 4,895,677
Government Income 80,279.96 11.14 894,319 833,365
Partners 662,560.75 20.60 13,648,752 11,515,832
Fred Alger Management, Inc.:
American Small Capitalization 257,725.20 43.75 11,275,478 10,791,047
American MidCap Growth 207,608.67 24.18 5,019,978 4,680,691
American Growth 225,016.46 42.76 9,621,704 8,426,205
American Leveraged AllCap 125,627.34 23.17 2,910,785 2,939,669
Fidelity Management & Research Co.:
Asset Manager 336,380.12 18.01 6,058,206 5,638,123
Growth 487,506.87 37.10 18,086,505 16,477,099
Overseas 635,378.14 19.20 12,199,260 12,237,937
Money Market 14,300,454.76 1.00 14,300,455 14,300,455
Index 500 341,935.38 114.39 39,113,988 32,789,297
INVESCO Funds Group, Inc.:
Total Return 191,597.05 15.81 3,029,149 2,812,500
Industrial Income 348,172.42 17.04 5,932,858 5,602,678
High Yield 358,282.11 12.46 4,464,195 4,793,052
Utilities 80,597.26 14.40 1,160,601 1,129,569
Van Eck Associates Corporation:
Worldwide Balanced 32,219.15 12.03 387,596 364,193
Worldwide Hard Assets 57,957.64 15.72 911,094 959,451
----------------------------------
Total $161,182,191 $147,677,007
==================================
</TABLE>
For the year ended December 31, 1997, the aggregate cost of purchases (plus
reinvested dividends) and the proceeds from sales of investments were
$217,622,926 and $127,420,840, respectively.
47
<PAGE>
Security Life Separate Account L1
Note To Financial Statement (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.
48
<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, 1997:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
OUTSTANDING INCREASE (DECREASE) FOR BENEFITS OUTSTANDING
AT BEGINNING FOR PAYMENTS FOR DIVISIONAL SURRENDERS, AT END
DIVISION OF YEAR RECEIVED TRANSFERS AND CHARGES OF YEAR
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Neuberger & Berman Management Incorporated:
Limited Maturity Bond 218,725.891 113,561.726 221,010.356 (312.579) 552,985.394
Growth 133,567.983 72,014.748 115,419.209 (4,855.856) 316,146.084
Government Income 142,773.403 30,012.660 (96,910.921) (63.583) 75,811.559
Partners 275,892.457 132,546.949 221,612.103 (3,765.788) 626,285.721
Fred Alger Management, Inc.:
American Small Capitalization 297,073.322 169,734.967 198,924.378 (16,998.927) 648,733.740
American MidCap Growth 150,480.473 75,478.169 67,932.067 (5,081.227) 288,809.482
American Growth 282,175.287 148,033.913 143,986.035 (4,204.926) 569,990.309
American Leveraged AllCap 53,044.470 37,468.208 59,275.281 (1,245.320) 148,542.639
Fidelity Management & Research Co:
Asset Manager 123,908.168 153,704.775 140,410.567 (7,117.404) 410,906.106
Growth 470,285.667 266,903.356 255,537.409 (8,884.044) 983,842.388
Overseas 367,948.109 188,693.884 401,169.888 (7,482.982) 950,328.899
Money Market 753,707.969 6,017,484.702 (5,391,420.354) (76,712.436) 1,303,059.881
Index 500 640,890.650 344,372.391 883,047.870 (5,254.807) 1,863,056.104
INVESCO Funds Group, Inc.:
Total Return 64,490.483 34,892.581 86,543.479 (1,884.305) 184,042.238
Industrial Income 87,035.356 67,888.068 144,731.840 (2,102.231) 297,553.033
High Yield 108,999.107 54,880.757 170,263.533 (641.540) 333,501.857
Utilities 18,008.490 6,137.976 56,869.352 (2,897.133) 78,118.685
Van Eck Associates Corporation:
Worldwide Balanced 29,808.787 5,838.562 (2,850.258) (657.809) 32,139.282
Worldwide Hard Assets 21,966.093 15,549.154 39,774.054 (242.528) 77,046.773
</TABLE>
49
<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, 1996:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
OUTSTANDING INCREASE (DECREASE) FOR BENEFITS, OUTSTANDING
AT BEGINNING FOR PAYMENTS FOR DIVISIONAL SURRENDERS, AT END
DIVISION OF YEAR RECEIVED TRANSFERS AND CHARGES OF YEAR
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Neuberger & Berman Management Incorporated:
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) 133,567.983
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 3,174,656.740 (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 12,602.664 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 Associates Corporation:
Worldwide Balanced 7,739.274 10,375.993 12,036.370 (342.850) 29,808.787
Worldwide Hard Assets 1,765.913 4,573.270 15,683.750 (56.840) 21,966.093
</TABLE>
50
<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>
INCREASE (DECREASE)
OUTSTANDING INCREASE (DECREASE) FOR BENEFITS, OUTSTANDING
AT BEGINNING FOR PAYMENTS FOR DIVISIONAL SURRENDERS, AT END
DIVISION OF YEAR RECEIVED TRANSFERS AND CHARGES OF YEAR
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Neuberger & Berman Management Incorporated:
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 Associates Corporation:
Worldwide Balanced 0.000 639.571 7,336.953 (237.250) 7,739.274
Worldwide Hard Assets 0.000 384.059 1,482.141 (100.287) 1,765.913
</TABLE>
51
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE H. NET ASSETS
Net assets at December 31, 1997 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 Management Incorporated:
Limited Maturity Bond $ 6,286,529 $ 232,470 $ (28,218) $ 184,385 $ 6,675,166
Growth 4,746,418 223,742 (3,527) 597,039 5,563,672
Government Income 714,473 85,892 32,358 60,954 893,677
Partners 10,909,312 232,180 517,569 2,132,920 13,791,981
Fred Alger Management, Inc.:
American Small Capitalization 9,677,886 154,500 142,295 484,431 10,459,112
American MidCap Growth 4,504,254 30,296 241,701 339,287 5,115,538
American Growth 8,139,377 19,156 262,147 1,195,499 9,616,179
American Leveraged AllCap 2,626,258 (15,471) 327,876 (28,884) 2,909,779
Fidelity Management & Research Co:
Asset Manager 5,492,129 183,324 41,537 420,083 6,137,073
Growth 15,514,959 264,528 686,029 1,609,406 18,074,922
Overseas 11,494,919 400,074 369,463 (38,677) 12,225,779
Money Market 14,076,418 936,841 - - 15,013,259
Index 500 32,136,385 373,990 350,070 6,324,691 39,185,136
INVESCO Funds Group, Inc.:
Total Return 2,662,803 88,273 76,885 216,649 3,044,610
Industrial Income 4,990,880 488,048 149,036 330,180 5,958,144
High Yield 4,692,747 646,328 353,866 (328,857) 5,364,084
Utilities 1,009,307 27,157 92,315 31,032 1,159,811
Van Eck Associates Corporation:
Worldwide Balanced 318,394 4,787 40,764 23,403 387,348
Worldwide Hard Assets 924,453 9,046 25,608 (48,357) 910,750
---------------------------------------------------------------------
Total $140,917,901 $4,385,161 $3,677,774 $13,505,184 $162,486,020
=====================================================================
</TABLE>
52
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE I. YEAR 2000 (UNAUDITED)
The Company has initiated a program to prepare the Company's computer systems
and applications for the year 2000. This program includes all systems utilized
by the Company as well as the systems of other companies that interface with the
Company. The Company has completed an assessment and is in the process of
modifying portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. Accordingly, the
Company does not expect the amounts required for this project to have a material
effect on its financial position.
The project is estimated to be completed no later than June 1999, which is prior
to any anticipated impact on its operating systems. The Company believes that
with modifications to existing software, and conversions to new software, the
Year 2000 will not pose significant operational problems for its computer
software systems. However, if such modifications and conversions are not made,
or are not completed in a timely manner, it could have a material impact on the
operations of the Company.
The Company has initiated formal communications and interface testing plans with
all of its suppliers and customers to determine the extent to which its
interface systems are vulnerable to those third parties' failure to have their
systems Year 2000 compatible and will act accordingly to prevent operational
disruptions.
53
<PAGE>
APPENDIX A
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
<TABLE>
<CAPTION>
Attained
Age Male Female Unisex
-------- ------ ------ ------
<S> <C> <C> <C>
0 11.727 14.234 12.149
1 11.785 14.209 12.194
2 11.458 13.815 11.857
3 11.128 13.417 11.515
4 10.803 13.023 11.178
5 10.481 12.635 10.845
6 10.161 12.253 10.514
7 9.844 11.875 10.187
8 9.530 11.505 9.863
9 9.221 11.141 9.545
10 8.918 10.784 9.233
11 8.623 10.436 8.928
12 8.338 10.098 8.634
13 8.066 9.771 8.353
14 7.808 9.455 8.085
15 7.564 9.150 7.831
16 7.335 8.857 7.592
17 7.118 8.575 7.364
18 6.911 8.302 7.148
19 6.713 8.038 6.939
20 6.521 7.782 6.737
21 6.334 7.534 6.540
22 6.150 7.293 6.347
23 5.969 7.059 6.158
24 5.791 6.831 5.971
25 5.615 6.611 5.788
26 5.441 6.396 5.608
27 5.271 6.188 5.431
28 5.104 5.986 5.258
29 4.940 5.791 5.089
30 4.781 5.601 4.925
31 4.626 5.418 4.765
32 4.476 5.241 4.610
33 4.330 5.069 4.459
34 4.188 4.902 4.314
35 4.052 4.742 4.173
</TABLE>
_______________________________________________________________________________
Strategic Advantage II 59
<PAGE>
APPENDIX A (CONT.)
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
<TABLE>
<CAPTION>
Attained
Age Male Female Unisex
-------- ----- ------ ------
<S> <C> <C> <C>
36 3.920 4.586 4.037
37 3.793 4.437 3.906
38 3.670 4.293 3.780
39 3.553 4.154 3.658
40 3.439 4.021 3.541
41 3.330 3.894 3.429
42 3.226 3.771 3.322
43 3.125 3.654 3.218
44 3.028 3.541 3.119
45 2.936 3.432 3.023
46 2.846 3.328 2.931
47 2.761 3.227 2.843
48 2.678 3.129 2.758
49 2.599 3.035 2.676
50 2.522 2.945 2.597
51 2.449 2.858 2.522
52 2.378 2.774 2.449
53 2.311 2.693 2.379
54 2.246 2.615 2.312
55 2.184 2.540 2.248
56 2.125 2.468 2.187
57 2.068 2.398 2.128
58 2.014 2.330 2.071
59 1.962 2.265 2.017
60 1.912 2.201 1.965
61 1.864 2.139 1.915
62 1.818 2.079 1.867
63 1.774 2.022 1.821
64 1.732 1.967 1.777
65 1.692 1.914 1.735
66 1.654 1.863 1.695
67 1.617 1.815 1.657
68 1.583 1.769 1.620
69 1.550 1.724 1.585
</TABLE>
_______________________________________________________________________________
Strategic Advantage II 60
<PAGE>
APPENDIX A (CONT.)
Factors for the
Cash Value Accumulation Test
For a Life Insurance Policy
<TABLE>
<CAPTION>
Attained
Age Male Female Unisex
-------- ----- ------ ------
<S> <C> <C> <C>
70 1.518 1.681 1.552
71 1.488 1.639 1.520
72 1.459 1.599 1.489
73 1.432 1.560 1.460
74 1.406 1.524 1.433
75 1.382 1.490 1.407
76 1.359 1.457 1.383
77 1.338 1.427 1.360
78 1.318 1.398 1.338
79 1.299 1.371 1.318
80 1.281 1.345 1.298
81 1.264 1.321 1.280
82 1.248 1.298 1.262
83 1.233 1.277 1.245
84 1.218 1.257 1.230
85 1.205 1.238 1.215
86 1.193 1.221 1.202
87 1.181 1.205 1.189
88 1.171 1.190 1.177
89 1.160 1.176 1.166
90 1.151 1.163 1.155
91 1.141 1.150 1.144
92 1.131 1.137 1.133
93 1.120 1.125 1.122
94 1.109 1.112 1.110
95 1.097 1.098 1.097
96 1.083 1.084 1.084
97 1.069 1.069 1.069
98 1.054 1.054 1.054
99 1.040 1.040 1.040
100 1.000 1.000 1.000
</TABLE>
_______________________________________________________________________________
Strategic Advantage II 61
<PAGE>
APPENDIX B
Factors for the
Guideline Premium/Cash Value Corridor Test
For a Life Insurance Policy
<TABLE>
<CAPTION>
Attained Factor Attained Factor Attained Factor Attained Factor
Age Age Age Age
<S> <C> <C> <C> <C> <C> <C> <C>
0 2.50 25 2.50 50 1.85 75 1.05
1 2.50 26 2.50 51 1.78 76 1.05
2 2.50 27 2.50 52 1.71 77 1.05
3 2.50 28 2.50 53 1.64 78 1.05
4 2.50 29 2.50 54 1.57 79 1.05
5 2.50 30 2.50 55 1.50 80 1.05
6 2.50 31 2.50 56 1.46 81 1.05
7 2.50 32 2.50 57 1.42 82 1.05
8 2.50 33 2.50 58 1.38 83 1.05
9 2.50 34 2.50 59 1.34 84 1.05
10 2.50 35 2.50 60 1.30 85 1.05
11 2.50 36 2.50 61 1.28 86 1.05
12 2.50 37 2.50 62 1.26 87 1.05
13 2.50 38 2.50 63 1.24 88 1.05
14 2.50 39 2.50 64 1.22 89 1.05
15 2.50 40 2.50 65 1.20 90 1.05
16 2.50 41 2.43 66 1.19 91 1.04
17 2.50 42 2.36 67 1.18 92 1.03
18 2.50 43 2.29 68 1.17 93 1.02
19 2.50 44 2.22 69 1.16 94 1.01
20 2.50 45 2.15 70 1.15 95 1.00
21 2.50 46 2.09 71 1.13 96 1.00
22 2.50 47 2.03 72 1.11 97 1.00
23 2.50 48 1.97 73 1.09 98 1.00
24 2.50 49 1.91 74 1.07 99 1.00
100 1.00
</TABLE>
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE
ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE.
________________________________________________________________________________
Strategic Advantage II 62
<PAGE>
APPENDIX C
PERFORMANCE INFORMATION
POLICY PERFORMANCE
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. 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 Policy with a $300,000 face
amount, the Cash Value Accumulation Test, death benefit Option 1, issued to a
preferred, 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 30. This prospectus also contains
illustrations based on assumed rates of return. See Illustrations of Death
Benefits, Account Values, Surrender Values and Accumulated Premiums, page 46.
_______________________________________________________________________________
Strategic Advantage II 63
<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
<TABLE>
<CAPTION>
____________________________________________________________________________
NEUBERGER & BERMAN AMT LIMITED MATURITY BOND PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/88 7.17% 5,156 4,696 300,000
12/31/89 10.77% 10,128 9,898 300,000
12/31/90 8.32% 15,183 15,183 300,000
12/31/91 11.34% 21,519 21,519 300,000
12/31/92 5.18% 26,883 26,883 300,000
12/31/93 6.63% 32,892 32,892 300,000
12/31/94 (0.15)% 36,696 36,696 300,000
12/31/95 10.94% 44,959 44,959 300,000
12/31/96 4.31% 50,773 50,773 300,000
12/31/97 6.74 58,099 58,099 300,000
<CAPTION>
NEUBERGER & BERMAN AMT GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/88 25.97% 6,016 5,556 300,000
12/31/89 29.47% 12,951 12,721 300,000
12/31/90 (8.19)% 15,401 15,401 300,000
12/31/91 29.73% 25,402 25,402 300,000
12/31/92 9.54% 32,239 32,239 300,000
12/31/93 6.79% 38,630 38,630 300,000
12/31/94 (4.99)% 40,323 40,323 300,000
12/31/95 31.73% 58,213 58,213 300,000
12/31/96 9.14% 67,537 67,537 300,000
12/31/97 29.01% 91,841 91,841 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 66.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable Account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
________________________________________________________________________________
Strategic Advantage II 64
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
<TABLE>
<CAPTION>
_______________________________________________________________________________
NEUBERGER & BERMAN AMT PARTNERS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 36.47% 6,497 6,037 300,000
12/31/96 29.57% 13,581 13,351 300,000
12/31/97 31.25% 22,969 22,969 300,000
<CAPTION>
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/89 64.48% 7,783 7,323 300,000
12/31/90 8.71% 12,777 12,547 300,000
12/31/91 57.54% 26,378 26,378 300,000
12/31/92 3.55% 31,517 31,517 300,000
12/31/93 13.28% 40,239 40,239 300,000
12/31/94 (4.38)% 42,162 42,162 300,000
12/31/95 44.31% 66,510 66,510 300,000
12/31/96 4.18% 73,096 73,096 300,000
12/31/97 11.39% 85,434 85,434 300,000
<CAPTION>
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/94 (1.54)% 4,758 4,298 300,000
12/31/95 44.45% 12,651 12,421 300,000
12/31/96 11.90% 18,501 18,501 300,000
12/31/97 15.01% 26,031 26,031 300,000
<CAPTION>
ALGER AMERICAN GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/90 4.14% 5,017 4,557 300,000
12/31/91 40.39% 12,655 12,425 300,000
12/31/92 12.38% 18,587 18,587 300,000
12/31/93 22.47% 27,842 27,842 300,000
12/31/94 1.45% 32,298 32,298 300,000
12/31/95 36.37% 49,506 49,506 300,000
12/31/96 13.35% 60,439 60,439 300,000
12/31/97 25.75% 80,718 80,718 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 66.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable Account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
_______________________________________________________________________________
Strategic Advantage II 65
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
<TABLE>
<CAPTION>
ALGER AMERICAN LEVERAGED ALL CAP
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/96 12.04% 5,379 4,919 300,000
12/31/97 19.68% 11,211 10,981 300,000
<CAPTION>
FIDELITY VIP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/88 15.58% 5,540 5,080 300,000
12/31/89 31.51% 12,535 12,305 300,000
12/31/90 (11.73)% 14,430 14,430 300,000
12/31/91 45.51% 27,125 27,125 300,000
12/31/92 9.32% 34,047 34,047 300,000
12/31/93 19.37% 45,367 45,367 300,000
12/31/94 (0.02)% 49,151 49,151 300,000
12/31/95 35.36% 71,717 71,717 300,000
12/31/96 14.71% 86,420 86,420 300,000
12/31/97 23.48% 111,088 111,088 300,000
<CAPTION>
FIDELITY VIP OVERSEAS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/88 8.13% 5,199 4,740 300,000
12/31/89 26.28% 11,607 11,377 300,000
12/31/90 (1.67)% 15,201 15,201 300,000
12/31/91 8.00% 20,884 20,884 300,000
12/31/92 (10.72)% 22,210 22,210 300,000
12/31/93 37.35% 36,086 36,086 300,000
12/31/94 1.72% 40,622 40,622 300,000
12/31/95 9.74% 48,754 48,754 300,000
12/31/96 13.15% 59,384 59,384 300,000
12/31/97 11.56% 70,304 70,304 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 66.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable Account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
________________________________________________________________________________
Strategic Advantage II 66
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
<TABLE>
<CAPTION>
FIDELITY VIP MONEY MARKET PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/88 7.39% 5,166 4,706 300,000
12/31/89 9.12% 9,988 9,758 300,000
12/31/90 8.04% 14,993 14,993 300,000
12/31/91 6.09% 20,289 20,289 300,000
12/31/92 3.90% 25,282 25,282 300,000
12/31/93 3.23% 30,189 30,189 300,000
12/31/94 4.25% 35,526 35,526 300,000
12/31/95 5.87% 41,654 41,654 300,000
12/31/96 5.41% 47,846 47,846 300,000
12/31/97 5.51% 54,352 54,352 300,000
<CAPTION>
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/90 6.72% 5,135 4,675 300,000
12/31/91 22.56% 11,185 10,955 300,000
12/31/92 11.71% 16,842 16,842 300,000
12/31/93 21.23% 25,455 25,455 300,000
12/31/94 (6.09)% 27,646 27,646 300,000
12/31/95 16.96% 36,998 36,998 300,000
12/31/96 14.60% 46,851 46,851 300,000
12/31/97 20.65% 61,118 61,118 300,000
<CAPTION>
FIDELITY VIP II INDEX 500 PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/93 9.74% 5,273 4,813 300,000
12/31/94 1.04% 9,354 9,124 300,000
12/31/95 37.19% 18,259 18,259 300,000
12/31/96 22.82% 27,523 27,523 300,000
12/31/97 32.82% 41,961 41,961 300,000
<CAPTION>
INVESCO VIF TOTAL RETURN PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 22.79% 5,870 5,410 300,000
12/31/96 12.18% 11,054 10,824 300,000
12/31/97 22.91% 18,402 18,402 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 66.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable Account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
_______________________________________________________________________________
Strategic Advantage II 67
<PAGE>
HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
<TABLE>
<CAPTION>
_______________________________________________________________________
INVESCO VIF INDUSTRIAL INCOME PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 29.25% 6,166 5,706 300,000
12/31/96 22.28% 12,412 12,182 300,000
12/31/97 28.17% 20,933 20,933 300,000
<CAPTION>
INVESCO VIF HIGH YIELD PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 19.76% 5,732 5,272 300,000
12/31/96 16.59% 11,329 11,099 300,000
12/31/97 17.33% 17,873 17,873 300,000
<CAPTION>
INVESCO VIF UTILITIES PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/95 9.08% 5,243 4,783 300,000
12/31/96 12.76% 10,409 10,179 300,000
12/31/97 23.41% 17,686 17,686 300,000
<CAPTION>
VAN ECK WORLDWIDE BOND PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/90 11.25% 5,342 4,882 300,000
12/31/91 18.39% 11,047 10,817 300,000
12/31/92 (5.25)% 14,109 14,109 300,000
12/31/93 7.79% 19,673 19,673 300,000
12/31/94 (1.32)% 23,392 23,392 300,000
12/31/95 17.30% 32,144 32,144 300,000
12/31/96 2.53% 36,928 36,928 300,000
12/31/97 2.38% 41,696 41,696 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 66.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable Account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
________________________________________________________________________________
Strategic Advantage II 68
<PAGE>
<TABLE>
<CAPTION>
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
VAN ECK WORLDWIDE HARD ASSETS FUND
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/91 (2.93)% 4,695 4,235 300,000
12/31/92 (4.09)% 8,326 8,096 300,000
12/31/93 64.83% 20,324 20,324 300,000
12/31/94 (4.78)% 23,229 23,229 300,000
12/31/95 10.99% 30,272 30,272 300,000
12/31/96 18.04% 40,426 40,426 300,000
12/31/97 (1.67)% 43,502 43,502 300,000
<CAPTION>
VAN ECK WORLDWIDE EMERGING MARKETS FUND
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/96 26.82% 6,055 5,595 300,000
12/31/97 (11.61)% 8,867 8,637 300,000
<CAPTION>
AIM VI GOVERNMENT SECURITIES PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/94 (3.73)% 4,658 4,198 300,000
12/31/95 15.56% 9,996 9,766 300,000
12/31/96 2.29% 14,188 14,188 300,000
12/31/97 8.16% 19,825 19,825 300,000
<CAPTION>
AIM VI CAPITAL APPRECIATION PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended Return* Value Value Benefit
<S> <C> <C> <C> <C>
12/31/94 2.50% 4,942 4,483 300,000
12/31/95 35.69% 12,129 11,899 300,000
12/31/96 17.58% 18,846 18,846 300,000
12/31/97 13.51% 26,077 26,077 300,000
</TABLE>
The assumptions underlying these values are described in Performance
Information, page 66.
* These Annual Total Return figures reflect the Portfolio's management fees and
other operating expenses but do not reflect the Policy level or Variable Account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
________________________________________________________________________________
Strategic Advantage II 69
