Prospectus
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
A FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY
issued by
SECURITY LIFE OF DENVER INSURANCE COMPANY
AND
SECURITY LIFE SEPARATE ACCOUNT L1
Consider carefully the policy charges, deductions, and refunds beginning on page
45 in this prospectus.
You should read this prospectus and keep it for future reference. A prospectus
for each underlying investment portfolio must accompany and should be read
together with this prospectus.
This policy is not available in all jurisdictions. This policy is not offered in
any jurisdiction where this type of offering is not legal. Depending on the
state where it is issued, policy features may vary. You should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with information that is different.
Replacing your existing life insurance policy(ies) with this policy may not be
beneficial to you.
Your Policy
o is a flexible premium variable universal life insurance policy;
o is issued by Security Life of Denver Insurance Company;
o is designed primarily for use on a multi-life basis when the
insured people share a common employment or business
relationship;
o is guaranteed not to lapse during the first three policy years if
you meet certain requirements; and
o is returnable by you during the free look period if you are not
satisfied.
YOUR PREMIUM PAYMENTS
o are flexible, so the premium amount and frequency may vary;
o are allocated to variable investment options and the guaranteed
interest division, based on your instructions;
o are invested in shares of the underlying investment portfolios
under each variable investment option; and
o can be invested in as many as eighteen investment options
over the policy's lifetime.
YOUR ACCOUNT VALUE
o is the sum of your holdings in the variable division, the
guaranteed interest division and the loan division;
o has no guaranteed minimum value under the variable division.
The value varies with the value of the underlying investment
portfolio;
o has a minimum guaranteed rate of return for amounts in the
guaranteed interest division; and
o is subject to specified expenses and charges.
DEATH PROCEEDS
o are paid if the policy is in force when the insured person dies;
o are equal to the death benefit minus an outstanding policy loan,
accrued loan interest and unpaid charges incurred before the insured
person dies;
o are calculated under your choice of options;
* Option 1- a fixed minimum death benefit;
* Option 2- a stated death benefit plus your account value;
* Option 3- a stated death benefit plus the sum of the premiums we
receive minus partial withdrawals you have taken for policies
delivered on or before December 31, 1997; and
o are generally not federally income taxed if your policy continues to
meet the federal income tax definition of life insurance.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS LIFE INSURANCE POLICY IS NOT A BANK DEPOSIT OR OBLIGATION, FEDERALLY
INSURED OR BACKED BY ANY BANK OR GOVERNMENT AGENCY.
DATE OF PROSPECTUS MAY 1, 2000
<PAGE>
ISSUED BY: Security Life of Denver UNDERWRITTEN BY: ING America Equities, Inc.
Insurance Company 1290 Broadway
ING Security Life Center Denver, CO 80203-5699
1290 Broadway (303) 860-2000
Denver, CO 80203-5699
(800) 525-9852
THROUGH ITS: Security Life Separate Account L1
ADMINISTERED BY: Customer Service Center
P.O. Box 173888
Denver, CO 80217-3888
(800) 848-6362
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Strategic Advantage 2
<PAGE>
TABLE OF CONTENTS
POLICY SUMMARY.................................................................4
Your Policy...............................................................4
Free Look Period..........................................................4
Premium Payments..........................................................4
Charges, Deductions and Refunds...........................................4
Variable Division.........................................................6
Fees and Expenses of the Investment Portfolios............................6
Guaranteed Interest Division..............................................8
Policy Values.............................................................8
Transfers of Account Value................................................8
Special Policy Features...................................................8
Policy Modification, Termination and Continuation
Features..............................................................9
Death Benefits...........................................................10
Tax Considerations.......................................................10
SECURITY LIFE, THE SEPARATE ACCOUNT
AND THE INVESTMENT OPTIONS...............................................12
Security Life of Denver Insurance Company................................12
Security Life Separate Account L1........................................12
Investment Portfolio Objectives..........................................13
Guaranteed Interest Division.............................................18
Maximum Number of Investment Options.....................................18
DETAILED INFORMATION ABOUT THE
POLICY...................................................................18
Applying for a Policy....................................................18
Temporary Insurance......................................................19
Policy Issuance..........................................................19
Premiums.................................................................19
Premium Payments Affect Your Coverage....................................21
Death Benefits...........................................................22
Riders...................................................................28
Special Features.........................................................30
Policy Values............................................................31
Transfers of Account Value...............................................32
Dollar Cost Averaging....................................................33
Automatic Rebalancing....................................................34
Policy Loans.............................................................35
Partial Withdrawals......................................................36
Lapse....................................................................37
Reinstatement............................................................38
Surrender................................................................39
General Policy Provisions................................................39
Free Look Period.....................................................39
Your Policy..........................................................39
Guaranteed Issue.....................................................39
Age ................................................................40
Ownership............................................................40
Beneficiary(ies).....................................................40
Collateral Assignment................................................40
Incontestability.....................................................40
Misstatements of Age or Gender.......................................41
Suicide..............................................................41
Transaction Processing...............................................41
Notification and Claims Procedures...................................41
Telephone Privileges.................................................42
Non-participation....................................................42
Distribution of the Policies.........................................42
Advertising Practices and Sales Literature...........................43
Settlement Provisions................................................43
Administrative Information About the Policy..............................43
CHARGES, DEDUCTIONS AND REFUNDS...............................................45
Deductions from Premiums.................................................45
Daily Deductions from the Separate Account...............................46
Monthly Deductions from Account Value....................................46
Policy Transaction Fees..................................................47
Persistency Refund.......................................................48
Refund of Sales Charges..................................................48
Group or Sponsored Arrangements, or Corporate
Purchasers...........................................................49
TAX CONSIDERATIONS............................................................49
Tax Status of the Policy.................................................49
Diversification Requirements.............................................50
Tax Treatment of Policy Death Benefits...................................51
Modified Endowment Contracts.............................................51
Multiple Policies........................................................51
Distributions Other than Death Benefits from
Modified Endowment Contracts.........................................51
Distributions Other than Death Benefits from
Policies That Are Not Modified Endowment
Contracts............................................................52
Investment in the Policy.................................................52
Policy Loans.............................................................52
Section 1035 Exchanges...................................................52
Tax-exempt Policy Owners.................................................52
Possible Tax Law Changes.................................................52
Changes to Comply with the Law...........................................52
Other....................................................................53
ILLUSTRATIONS.................................................................54
ADDITIONAL INFORMATION........................................................62
Directors and Officers...................................................62
Regulation...............................................................63
Legal Matters............................................................63
Legal Proceedings........................................................63
Experts..................................................................63
Registration Statement...................................................63
INDEX OF SPECIAL TERMS........................................................64
FINANCIAL STATEMENTS..........................................................65
APPENDIX A...................................................................168
APPENDIX B...................................................................176
APPENDIX C...................................................................177
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Strategic Advantage 3
<PAGE>
POLICY SUMMARY
YOUR POLICY
Your policy provides life insurance protection on the insured person. The policy
includes the basic policy, applications and riders or endorsements. As long as
the policy remains in force, we pay a death benefit at the death of the insured
person. While your policy is in force, you may access a portion of your policy
value by taking loans or partial withdrawals. You may surrender your policy for
its net cash surrender value. At the policy anniversary nearest the insured
person's 100th birthday, if the insured person is still alive you may surrender
your policy or continue it under the continuation of coverage option. SEE
CONTINUATION OF COVERAGE, PAGE 30 AND POLICY MATURITY, PAGE 30.
We designed Strategic Advantage primarily for use on a multi-life basis where
the insured people 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.
Life insurance is not a short-term investment. You should evaluate your need for
life insurance coverage and this policy's long-term investment potential and
risks before purchasing a policy.
FREE LOOK PERIOD
Within limits as specified by law, you have the right to examine your policy and
return it for a refund of all premium payments we have received or the account
value, if you are not satisfied for any reason. The policy is then void. SEE
FREE LOOK PERIOD, PAGE 39.
PREMIUM PAYMENTS
The policy is a flexible premium policy because the amount and frequency of the
premium payments you make may vary within limits. You must make premium
payments:
o for us to issue your policy;
o sufficient to keep your policy in force; and
o as necessary to continue certain benefits.
Depending on the amount of premium you choose to pay, it may not be enough to
keep your policy or certain riders in force. SEE PREMIUMS, PAGE 19.
ALLOCATION OF NET PREMIUMS
This policy has premium-based charges which are subtracted from your payments.
We add the balance, or net premium, to your policy based on your investment
instructions. You may allocate the net premium among one or more variable
investment options and the guaranteed interest division. SEE ALLOCATION OF NET
PREMIUMS, PAGE 21.
CHARGES, DEDUCTIONS AND REFUNDS
All charges presented here are current unless stated otherwise.
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This summary highlights some important points about your policy. The policy is
more fully described in the attached, complete prospectus. Please read it
carefully. "We," "us," "our" and the "company" refer to Security Life of Denver
Insurance Company. "You" and "your" refer to the policy owner. The owner is the
individual, entity, partnership, representative or party who may exercise all
rights over the policy and receive the policy benefits during the insured
person's lifetime.
State variations are covered in a special policy form used in that state. This
prospectus provides a general description of the policy. Your actual policy and
any riders are the controlling documents. If you would like to review a copy of
the policy and riders, contact our customer service center or your
agent/registered representative.
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Strategic Advantage 4
<PAGE>
CHARGES
Other Than Investment Portfolio Annual Expenses
(SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 45)
<TABLE>
<S> <C> <C>
CHARGE WHEN CHARGE IS DEDUCTED AMOUNT DEDUCTED
Tax Charges Each premium payment received 2.5% for state and local taxes; 1.5%
for estimated federal income tax
treatment of deferred acquisition
costs.
Sales Charge Each premium payment received Percentage of policy or segment
premium up to target premium and
above target premium: year 1-5 up to
target 8%, above target 3%, year 6 +
3% of all premium received.
Mortality & Expense Risk Daily, included in unit value 0.002055% daily (0.75% annually)
Charge
Policy Charge Monthly from account value $10 per month for first five policy
years.
Monthly Administrative Charge Monthly from account value $5 per month plus $0.0125 per $1,000
of stated death benefit or target death
benefit, if greater. $15 current
monthly maximum.
Cost of Insurance Charge Monthly from account value Varies based on current cost of
insurance rates and net amount at risk.
Guaranteed Minimum Death Monthly from account value Currently, $0.005 per $1,000 of the
Benefit Charge stated death benefit during guarantee
period. $0.01 per $1,000 stated death
benefit guaranteed maximum.
Rider Charges Monthly from account value Varies depending on the rider benefits
you choose.
Partial Withdrawal Fee Transaction date from account Up to $25.
value
Transfer Fee Transaction date from account Twelve free transfers per policy year,
value then $25 per transfer.
Illustration Fee Transaction date from account One free illustration per policy year,
value then a $25 fee may apply.
Premium Allocation Change Transaction date from account Twelve free premium allocation
value changes per policy year, then $25 per
change.
Continuation of Coverage Policy anniversary nearest insured One-time $200 administrative fee.
person's 100th birthday from
account value
</TABLE>
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Strategic Advantage 5
<PAGE>
VARIABLE DIVISION
If you invest in the variable investment options, you may make or lose money
depending on market conditions. The variable investment options are described in
the prospectuses for the underlying investment portfolios. Each investment
portfolio has its own investment objective. SEE INVESTMENT PORTFOLIO OBJECTIVES,
PAGE 13.
FEES AND EXPENSES OF THE INVESTMENT PORTFOLIOS
The separate account purchases shares of the underlying investment portfolios,
at net asset value. This price reflects investment management fees and other
direct expenses deducted from the portfolio assets. This table describes these
fees and expenses in gross amounts and net amounts after waiver or reimbursement
of fees or expenses by the investment portfolio advisers. Waivers or
reimbursements are voluntary and subject to change. The portfolio expense
information was provided to us by the portfolios and we have not independently
verified this information.
These expenses are not direct charges against variable division assets or
reductions from contract values; rather these expenses are included in computing
each underlying portfolio's net asset value, which is the share price used to
calculate the unit values of the variable investment options. For a more
complete description of the portfolios' costs and expenses, see the prospectuses
for the portfolios.
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Strategic Advantage 6
<PAGE>
INVESTMENT PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET
ASSETS)
<TABLE>
<S> <C> <C> <C> <C> <C>
Fees and
Investment Total Expenses Total Net
Management Other Portfolio Waived or Portfolio
Portfolio Fees Expenses Expenses Reimbursed Expenses
--------- ---- -------- -------- ---------- --------
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Capital Appreciation Fund 0.62% 0.11% 0.73% NA 0.73%
AIM V.I. Government Securities Fund 0.50% 0.40%/1/ 0.90% NA 0.90%
THE ALGER AMERICAN FUND
Alger American Growth Portfolio 0.75% 0.04% 0.79% NA 0.79%
Alger American Leveraged AllCap Portfolio 0.85% 0.08%/2/ 0.93% NA 0.93%
Alger American MidCap Growth Portfolio 0.80% 0.05% 0.85% NA 0.85%
Alger American Small Capitalization Portfolio 0.85% 0.05% 0.90% NA 0.90%
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP Growth Portfolio 0.58% 0.08% 0.66% NA 0.66%/3/
VIP Money Market Portfolio 0.18% 0.09% 0.27% NA 0.27%
VIP Overseas Portfolio 0.73% 0.18% 0.91% NA 0.91%/3/
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II Asset Manager Portfolio 0.53% 0.10% 0.63% NA 0.63%/3/
VIP II Index 500 Portfolio 0.24% 0.10% 0.34% 0.06% 0.28%
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF-Equity Income Fund /4/ 0.75% 0.44% 1.19% 0.02% 1.17%
INVESCO VIF-High Yield Fund /5/ 0.60% 0.48% 1.08% 0.01% 1.07%
INVESCO VIF-Small Company Growth Fund /6/ 0.75% 3.35% 4.10% 2.39% 1.71%
INVESCO VIF-Total Return Fund /7/ 0.75% 0.55% 1.30% 0.13% 1.17%
INVESCO VIF-Utilities Fund /8/ 0.60% 1.08% 1.68% 0.47% 1.21%
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
Growth Portfolio 0.84% 0.08% 0.92% NA 0.92%
Limited Maturity Bond Portfolio 0.65% 0.11% 0.76% NA 0.76%
Partners Portfolio 0.80% 0.07% 0.87% NA 0.87%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund 1.00% 0.22% 1.22% NA 1.22%
Worldwide Emerging Markets Fund 1.00% 0.54% 1.54% 0.20%/9/ 1.34%
Worldwide Hard Assets Fund 1.00% 0.26% 1.26% NA 1.26%
Worldwide Real Estate Fund 1.00% 2.23% 3.23% 1.79%/10/ 1.44%
</TABLE>
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/1/ Included in AIM V.I. Government Securities Fund's "Other Expenses" is 0.10%
of interest expense.
/2/ Included in Alger American Leveraged AllCap portfolio's "Other Expenses" is
0.01% of interest expense.
/3/ Fidelity absorbed a portion of the portfolio and custodian expenses for
some portfolios with part of the brokerage commissions and un-invested cash
balances. After this absorption, "Total Portfolio Expenses" are 0.65% for
Growth portfolio, 0.87% for Overseas portfolio and 0.62% for Asset Manager
portfolio.
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Strategic Advantage 7
<PAGE>
/4/ INVESCO absorbed a portion of VIF-Equity Income Fund's "Other Expenses" and
"Total Portfolio Expenses." After this absorption, these expenses are 0.42%
and 1.17% respectively.
/5/ INVESCO absorbed a portion of VIF-High Yield Fund's "Other Expenses" and
"Total Portfolio Expenses." After this absorption, these expenses are 0.47%
and 1.07% respectively.
/6/ INVESCO absorbed a portion of VIF-Small Company Growth Fund's "Other
Expenses" and "Total Portfolio Expenses." After this absorption, these
expenses are 0.96% and 1.71%, respectively.
/7/ INVESCO absorbed a portion of VIF-Total Return Fund's "Other Expenses" and
"Total Portfolio Expenses." After this absorption, these expenses are 0.42%
and 1.17%, respectively.
/8/ INVESCO absorbed a portion of VIF-Utilities Fund's "Other Expenses" and
"Total Portfolio Expenses." After this absorption, these expenses are 0.61%
and 1.21%, respectively.
/9/ Van Eck Associates Corporation absorbed expenses exceeding 1.30% of the
Fund's average daily assets, effective May 13, 1999.
/10/ Van Eck Associates Corporation absorbed certain expenses exceeding 1.50%.
The fund's expenses were also reduced by a fee arrangement based on cash
balances left on deposit with the custodian and a directed brokerage
arrangement where the fund directs certain portfolio trades to a broker
that, in turn, pays a potion of the fund's expenses.
GUARANTEED INTEREST DIVISION
The guaranteed interest division guarantees principal and is part of our general
account. Any amount you direct into the guaranteed interest division is credited
with interest at a fixed rate. SEE GUARANTEED INTEREST DIVISION, PAGE 18.
POLICY VALUES
Your policy account value is the amount you have in the guaranteed interest
division, plus the amount you have in each variable investment option. If you
have an outstanding policy loan, your account value includes the amount in the
loan division. SEE POLICY VALUES, PAGE 31 AND PARTIAL WITHDRAWALS, PAGE 36.
YOUR ACCOUNT VALUE IN THE VARIABLE DIVISION
Accumulation units are the way we measure value in the variable division.
Accumulation unit value is the value of one unit of a variable investment option
on a valuation date. Each variable investment option has a different
accumulation unit value. SEE DETERMINING VALUES IN THE VARIABLE DIVISION, PAGE
31.
The accumulation unit value for each variable investment option reflects the
investment performance of the underlying investment portfolio during the
valuation period. Each accumulation unit value reflects asset-based charges
under the policy and the expenses of the investment portfolios. SEE DETERMINING
VALUES IN THE VARIABLE DIVISION, PAGE 31 AND HOW WE CALCULATE ACCUMULATION UNIT
VALUES, PAGE 32.
TRANSFERS OF ACCOUNT VALUE
With some limitations, you may make twelve free transfers among the variable
investment options or to the guaranteed interest division each policy year. We
charge $25 for each transfer over twelve in a policy year. There are
restrictions on transfers from the guaranteed interest division. SEE TRANSFERS
OF ACCOUNT VALUE, PAGE 32 AND POLICY TRANSACTION FEES, PAGE 47.
SPECIAL POLICY FEATURES
DESIGNATED DEDUCTION INVESTMENT OPTION
You may designate one investment option from which we will deduct all of your
monthly deductions. SEE DESIGNATED DEDUCTION INVESTMENT OPTION, PAGE 30.
RIDERS
You may attach additional benefits to your policy by rider. In most cases, we
deduct a monthly charge from your account value for these benefits. SEE RIDERS,
PAGE 28.
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Strategic Advantage 8
<PAGE>
DOLLAR COST AVERAGING
Dollar cost averaging is a systematic plan of transferring account values to
selected investment options. It is intended to protect your policy's value from
short-term price fluctuations. However, dollar cost averaging does not assure a
profit, nor does it protect against a loss in a declining market. Dollar cost
averaging is free. SEE DOLLAR COST AVERAGING, PAGE 33.
AUTOMATIC REBALANCING
Automatic rebalancing periodically reallocates your net account value among your
selected investment options to maintain your specified distribution of account
value among those investment options. Automatic rebalancing is free. SEE
AUTOMATIC REBALANCING, PAGE 34.
LOANS
You may take loans against your policy's net account value. We charge an annual
loan interest rate of 3.75%. We credit an annual interest rate of 3% on amounts
held in the loan division as collateral for your loan. Beginning in your
eleventh policy year, where permitted by law, we may include amounts in the loan
division for calculation of your policy's persistency refund. SEE POLICY LOANS,
PAGE 35.
Loans may have tax consequences. SEE TAX CONSIDERATIONS, PAGE 49.
PARTIAL WITHDRAWALS
You may withdraw part of your net account value any time after your first policy
anniversary. You may make only one partial withdrawal per policy year. Partial
withdrawals may reduce your policy's death benefit and will reduce your account
value. SEE PARTIAL WITHDRAWALS, PAGE 36.
Partial withdrawals may have tax consequences. SEE TAX CONSIDERATIONS, PAGE 49.
PERSISTENCY REFUND
After your tenth policy anniversary, where permitted by law, we add a
persistency refund to your account value. SEE PERSISTENCY REFUND, PAGE 48.
REFUND OF SALES CHARGE
If you surrender your policy within the first two policy years and the policy
has not lapsed, we will refund a portion of the sales charges we previously
deducted from the premiums we have received in the first policy year. SEE REFUND
OF SALES CHARGES, PAGE 48.
POLICY MODIFICATION, TERMINATION AND CONTINUATION FEATURES
RIGHT TO EXCHANGE POLICY
For 24 months after the policy date you may exchange your policy for a
guaranteed policy, unless law requires differently. There is no charge for this
exchange. SEE RIGHT TO EXCHANGE POLICY, PAGE 30.
SURRENDER
You may surrender your policy for its net cash surrender value at any time
before the death of the insured person. All insurance coverage ends on the date
we receive your request. SEE SURRENDER, PAGE 39.
LAPSE
In general, insurance coverage continues as long as your net account value is
enough to pay the monthly deductions. However, your policy and its riders are
guaranteed not to lapse during the first three years of your policy if the
conditions of the special continuation period have been met. SEE LAPSE, PAGE 37
AND SPECIAL CONTINUATION PERIOD, PAGE 21.
REINSTATEMENT
You may reinstate your policy and its riders within five years of its lapse if
you still own the policy and the insured person meets our underwriting
requirements.
You will need to give proof of insurability as at policy issue. You will also
need to pay required reinstatement premiums.
If the guaranteed minimum death benefit lapses and you do not correct it, this
feature terminates. Once it terminates, you cannot reinstate this feature.
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Strategic Advantage 9
<PAGE>
If you had a policy loan existing when coverage ended, we will reinstate it with
accrued loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 38.
POLICY MATURITY
If the insured person is still living on the maturity date or the policy
anniversary nearest the insured person's 100th birthday and you do not choose to
let the continuation of coverage feature become effective, you must surrender
your policy. We will pay the net account value. Your policy then ends. SEE
POLICY MATURITY, PAGE 30.
CONTINUATION OF COVERAGE
At the policy anniversary nearest the insured person's 100th birthday, you may
choose to let the continuation of coverage feature become effective. If you do
so, we will deduct a one-time administrative fee of $200 and keep your policy in
force. SEE CONTINUATION OF COVERAGE, PAGE 30.
DEATH BENEFITS
After the death of the insured person, we pay death proceeds to the
beneficiary(ies) if your policy is still in force. Based on the death benefit
option you have chosen, the base death benefit varies.
We generally require a minimum stated death benefit of $50,000 to issue your
policy. However, we may lower this minimum for group or sponsored arrangements,
or corporate purchasers. SEE DEATH BENEFITS, PAGE 22.
You may change your death benefit amount while your policy is in force, subject
to certain restrictions. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 26.
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. We believe it is
reasonable to conclude that the policy will qualify as a life insurance
contract. SEE TAX STATUS OF THE POLICY, PAGE 49.
Assuming the policy qualifies as a life insurance contract under current federal
income tax law, your account value earnings are generally not subject to income
tax as long as they remain within your policy. However depending on
circumstances, the following events may cause taxable consequences for you:
o partial withdrawals;
o surrender; or
o lapse.
In addition, if your policy is a modified endowment contract, a loan against or
secured by the policy may cause income taxation. A penalty tax may be imposed on
a distribution from a modified endowment contract as well. SEE MODIFIED
ENDOWMENT CONTRACTS, PAGE 51.
In recent years, Congress has adopted new rules relating to life insurance owned
by businesses. Any business contemplating the purchase of a new policy or a
change in an existing policy should consult a tax adviser.
You should consult a qualified legal or tax adviser before you purchase your
policy.
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Strategic Advantage 10
<PAGE>
How the Policy Works
<TABLE>
<S> <C> <C>
YOUR PREMIUM Premium Deductions
You make a premium ---------------------------->
payment
o sales charge
o tax charges
<----------------------------
NET PREMIUM
We allocate the net
premium to the investment
options you choose
|
|
-----------------------------------------
| |
\/ \/
GUARANTEED VARIABLE INVESTMENT INVESTMENT PORTFOLIOS The investment
INTEREST DIVISION OPTIONS The variable investment manager deducts
Amounts you allocate Amounts you allocate are <-- options invest in investment
are held in our general account held in our separate account --> investment portfolios ------> management fees
| | and other
----------------------------------------- portfolio expenses
|
|
o persistency refund Refunds |
------------>| Monthly Deductions o policy charge
| ---------------------> o cost of insurance
| | charge
| | o monthly administrative
\/ | charge
ACCUMULATED VALUE | o rider charges
The total value of your --|
policy |
| | Separate Account
| | Deductions
| |---------------------> o mortality and expense
\/ | risk charge
LOAN DIVISION |
Amount set aside to |
secure a policy loan |
|
| Transaction Fees o partial withdrawal fee
---------------------> o transfer fee
o illustration fee
o premium allocation
change charge
o continuation of
coverage administrative fee
</TABLE>
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Strategic Advantage 11
<PAGE>
SECURITY LIFE, THE SEPARATE ACCOUNT AND THE INVESTMENT OPTIONS
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. At the close of 1999, the company and its consolidated subsidiaries had
over $184.2 billion of life insurance in force. As of December 31, 1999 our
total assets were over $11.3 billion and our shareholder's equity was over $899
million.
We have a complete line of life insurance products, including:
o annuities;
o individual life;
o group life;
o pension products; and
o market life reinsurance.
Security Life is a wholly owned indirect subsidiary of ING Groep, N.V. ("ING").
ING is one of the world's three largest diversified financial services
organizations. ING is headquartered in Amsterdam, The Netherlands. It has
consolidated assets over $495.0 billion on a Dutch (modified U.S.) generally
accepted accounting principles basis, as of December 31, 1999.
The principal underwriter and distributor for our policies is ING America
Equities, Inc. ING America Equities is a stock corporation organized under the
laws of the State of Colorado in 1993. It is a wholly owned subsidiary of
Security Life and is registered as a broker-dealer with the SEC and the NASD.
ING America Equities, Inc. is located at 1290 Broadway, Denver, Colorado
80203-5699.
SECURITY LIFE SEPARATE ACCOUNT L1
SEPARATE ACCOUNT STRUCTURE
We established Security Life Separate Account L1 (the separate account) on
November 3, 1993, under Colorado's insurance law. It is a unit investment trust,
registered with the SEC under the Investment Company Act of 1940. The SEC does
not supervise our management of the separate account or Security Life.
The separate account is used to support our variable life insurance policies and
for other purposes allowed by law and regulation. We keep the separate account
assets separate from our general account and other separate accounts. We may
offer other variable life insurance contracts with different benefits and
charges that invest in the separate account. We do not discuss these contracts
in this prospectus. The separate account may invest in other securities not
available for the policy described in this prospectus.
The company owns all the assets in the separate account. We credit gains to or
charge losses against the separate account without regard to performance of
other investment accounts.
ORDER OF SEPARATE ACCOUNT LIABILITIES
Law provides that we may not charge general account liabilities against separate
account assets equal to its reserves and other liabilities. This means that if
we ever become insolvent, the separate account assets will be used first to pay
separate account policy claims. Only if separate account assets remain after
these claims have been satisfied can these assets be used to pay other policy
owners and creditors.
The separate account may have liabilities from assets credited to other variable
life policies offered by the separate account. If the assets of the separate
account are greater than required reserves and policy liabilities, we may
transfer the excess to our general account.
INVESTMENT OPTIONS
Investment options include the variable and the guaranteed interest divisions,
but not the loan division. The separate account has several variable investment
options which invest in shares of underlying investment portfolios. This means
that the investment performance of a policy depends on
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Strategic Advantage 12
<PAGE>
the performance of the investment portfolios you choose. Each investment
portfolio has its own investment objective. These investment portfolios are not
available directly to individual investors. They are available only as
underlying investments for variable annuity and variable life insurance
contracts and certain pension accounts.
INVESTMENT PORTFOLIOS
Each of the investment portfolios is a separate series of an open-end management
investment company. The investment company receives investment advice from a
registered investment adviser who is not associated with us.
The investment portfolios sell shares to separate accounts of insurance
companies. These insurance companies may or may not be affiliated with us. This
is known as "shared funding." Investment portfolios may sell shares as the
underlying investment for both variable annuity and variable life insurance
contracts. This process is known as "mixed funding."
The investment portfolios may sell shares to certain qualified pension and
retirement plans that qualify under Section 401 of the Internal Revenue Code
("IRC"). As a result, a material conflict of interest may arise between
insurance companies, owners of different types of contracts and retirement plans
or their participants.
If there is a material conflict, we will consider what should be done, including
removing the investment portfolio from the separate account. There are certain
risks with mixed and shared funding, and with selling shares to qualified
pension and retirement plans. See the investment portfolios' prospectuses.
INVESTMENT PORTFOLIO OBJECTIVES
Each investment portfolio has a different investment objective that it tries to
achieve by following its own investment strategy. The objectives and policies of
each investment portfolio affect its return and its risks. With this prospectus,
you must receive the current prospectus for each investment portfolio. We
summarize the investment objectives for each investment portfolio here. You
should read each investment portfolio prospectus.
Certain investment portfolios offered under this policy have investment
objectives and policies similar to other funds managed by the portfolio's
investment adviser. The investment results of a portfolio may be higher or lower
than those of other funds managed by the same adviser. There is no assurance and
no representation is made that the investment results of any investment
portfolio will be comparable to those of another fund managed by the same
investment adviser.
Some investment portfolio advisers (or their affiliates) may pay us compensation
for servicing, administration or other expenses. The amount of compensation is
usually based on the aggregate assets of the investment portfolio from contracts
that we issue or administer. Some advisers may pay us more or less than others
and our affiliates may pay us significantly more.
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Strategic Advantage 13
<PAGE>
INVESTMENT PORTFOLIO OBJECTIVES
<TABLE>
<S> <C> <C>
Variable Investment Option Investment Company/ Adviser/ Investment Objective
Manager/ Sub-Adviser
AIM V.I. Capital Appreciation Fund Investment Company: Seeks growth of capital through investment in common
AIM Variable Insurance Funds stocks.
Investment Adviser:
A I M Advisors, Inc.
AIM V.I. Government Securities Fund Investment Company: Seeks to achieve high current income consistent with
AIM Variable Insurance Funds reasonable concern for safety of principal.
Investment Adviser:
A I M Advisors, Inc.
Alger American Growth Portfolio Investment Company: Seeks long-term capital appreciation by focusing on
The Alger American Fund growing companies that generally have broad product
Investment Adviser: lines, markets, financial resources and depth of
Fred Alger Management, Inc. management. Under normal circumstances, the portfolio
invests primarily in the equity securities of large
companies. The portfolio considers a large company to
have a market capitalization of $1 billion or greater.
Alger American Leveraged AllCap Investment Company: Seeks long-term capital appreciation by investing,
Portfolio The Alger American Fund under normal circumstances, in the equity securities
Investment Adviser: of companies of any size which demonstrate promising
Fred Alger Management, Inc. growth potential. The portfolio can leverage, that
is, borrow money, up to one-third of its total assets
to buy additional securities. By borrowing money, the
portfolio has the potential to increase its returns if
the increase in the value of the securities purchased
exceeds the cost of borrowing, including interest paid
on the money borrowed.
Alger American MidCap Growth Investment Company: Seeks long-term capital appreciation by focusing on
Portfolio The Alger American Fund midsize companies with promising growth potential.
Investment Adviser: Under normal circumstances, the portfolio invests
Fred Alger Management, Inc. primarily in the equity securities of companies having
a market capitalization within the range of companies
in the S&P MidCap 400 Index.
Alger American Small Seeks long-term capital appreciation by focusing on
Capitalization Portfolio Investment Company: small, fast-growing companies that offer innovative
The Alger American Fund products, services or technologies to a rapidly
Investment Adviser: expanding marketplace. Under normal circumstances,
Fred Alger Management, Inc. the portfolio invests primarily in the equity
securities of small capitalization companies. A small
capitalization company is one that has a market
capitalization within the range of the Russell 2000
Growth Index or the S&P SmallCap 600 Index.
</TABLE>
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Strategic Advantage 14
<PAGE>
INVESTMENT PORTFOLIO OBJECTIVES
<TABLE>
<S> <C> <C>
Variable Investment Option Investment Company/ Adviser/ Investment Objective
Manager/ Sub-Adviser
VIP Growth Portfolio Investment Company: Fidelity Seeks capital appreciation by investing in common
Variable Insurance Products stocks of companies that it believes have
Fund above-average growth potential, either domestic or
Investment Manager: foreign issuers.
Fidelity Management &
Research Company
VIP Money Market Portfolio Investment Company: Fidelity Seeks as high a level of current income as is
Variable Insurance Products consistent with the preservation of capital and
Fund liquidity by investing in U.S. dollar-denominated
Investment Manager: money market securities, including U.S. Government
Fidelity Management & securities and repurchase agreements, and entering
Research Company into reverse repurchase agreements.
VIP Overseas Portfolio Investment Company: Fidelity Seeks long-term growth of capital by investing at
Variable Insurance Products least 65% of total assets in foreign securities.
Fund
Investment Manager:
Fidelity Management &
Research Company
VIP II Asset Manager Portfolio Investment Company: Fidelity Seeks high total return with reduced risk over the
Variable Insurance Products long term by allocating its assets among stocks,
Fund II bonds, and short-term instruments.
Investment Manager:
Fidelity Management &
Research Company
VIP II Index 500 Portfolio Investment Company: Fidelity Seeks investment results that correspond to the total
Variable Insurance Products return of common stocks publicly traded in the United
Fund II States as represented by the S&P/R/ 500.
Investment Manager:
Fidelity Management &
Research Company
Sub-Adviser:
Bankers Trust Company
VIF-Equity Income Fund Investment Company: INVESCO Seeks high current income, with growth of capital as a
Variable Investment Funds, secondary objective by investing at least 65% of its
Inc. assets in dividend-paying common and preferred
Investment Adviser: stocks. The rest of the fund's assets are invested in
INVESCO Funds Group, Inc. debt securities, and lower-grade debt securities.
Sub-Adviser:
INVESCO Capital Management,
Inc.
</TABLE>
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Strategic Advantage 15
<PAGE>
INVESTMENT PORTFOLIO OBJECTIVES
<TABLE>
<S> <C> <C>
Variable Investment Option Investment Company/ Adviser/ Investment Objective
Manager/ Sub-Adviser
VIF-High Yield Fund Investment Company: INVESCO Seeks to provide a high level of current income by
Variable Investment Funds, investing substantially all of its assets in
Inc. lower-rated debt securities and preferred stock,
Investment Adviser: including securities issued by foreign companies.
INVESCO Funds Group, Inc.
Sub-Adviser:
INVESCO Capital Management,
Inc.
VIF-Small Company Growth Fund Investment Company: INVESCO Seeks long-term capital growth by investing at least
Variable Investment Funds, 65% of its assets in equity securities of companies
Inc. with market capitalizations of $2 billion or less.
Investment Adviser: The remainder of the fund's assets can be invested in
INVESCO Funds Group, Inc. a wide range of securities that may or may not be
Sub-Adviser: issued by small companies.
INVESCO Capital Management,
Inc.
VIF-Total Return Fund Investment Company: INVESCO Seeks to provide high total return through both growth
Variable Investment Funds, and current income by investing at least 30% of its
Inc. assets in common stocks of companies with a strong
Investment Adviser: history of paying regular dividends and 30% of its
INVESCO Funds Group, Inc. assets in debt securities. The remaining 40% of the
Sub-Adviser: fund is allocated among these and other investments at
INVESCO Capital Management, INVESCO's discretion, based upon current business,
Inc. economic and market conditions.
VIF-Utilities Fund Investment Company: INVESCO Seeks capital appreciation and income by investing at
Variable Investment Funds, least 80% of its assets in companies doing business in
Inc. the utilities economic sector. The remainder of the
Investment Adviser: fund's assets are not required to be invested in the
INVESCO Funds Group, Inc. utilities economic sector.
Sub-Adviser:
INVESCO Capital Management,
Inc.
Growth Portfolio Investment Company: Seeks growth of capital by investing mainly in common
Neuberger Berman Advisers stock mid-capitalization companies.
Management Trust
Investment Adviser:
Neuberger Berman Management
Inc.
Sub-Adviser:
Neuberger Berman, LLC
</TABLE>
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Strategic Advantage 16
<PAGE>
INVESTMENT PORTFOLIO OBJECTIVES
<TABLE>
<S> <C> <C>
Variable Investment Option Investment Company/ Adviser/ Investment Objective
Manager/ Sub-Adviser
Limited Maturity Bond Portfolio Investment Company: Seeks the highest available current income consistent
Neuberger Berman Advisers with liquidity and low risk to principal by investing
Management Trust mainly in investment-grade bonds and other debt
Investment Adviser: securities from U.S. Government and corporate issuers.
Neuberger Berman Management
Inc.
Sub-Adviser:
Neuberger Berman, LLC
Partners Portfolio Investment Company: Seeks growth of capital by investing mainly in common
Neuberger Berman Advisers stock of mid- to large-capitalization companies.
Management Trust
Investment Adviser:
Neuberger Berman Management
Inc.
Sub-Adviser:
Neuberger Berman, LLC
Worldwide Bond Fund Investment Company: Seeks high total return-income plus capital
Van Eck Worldwide Insurance appreciation-by investing globally, primarily in a
Trust variety of debt securities.
Investment Adviser and
Manager:
Van Eck Associates
Corporation
Worldwide Emerging Markets Fund Investment Company: Seeks long-term capital appreciation by investing in
Van Eck Worldwide Insurance equity securities in emerging markets around the world.
Trust
Investment Adviser and
Manager:
Van Eck Associates
Corporation
Worldwide Hard Assets Fund Investment Company: Seeks long-term capital appreciation by investing
Van Eck Worldwide Insurance primarily in "hard asset securities." Hard assets
Trust include precious metals, natural resources, real
Investment Adviser and estate and commodities. Income is a secondary
Manager: consideration.
Van Eck Associates
Corporation
Worldwide Real Estate Fund Investment Company: Seeks high total return by investing in equity
Van Eck Worldwide Insurance securities of companies that own significant real
Trust estate or that principally do business in real estate.
Investment Adviser and
Manager:
Van Eck Associates
Corporation
</TABLE>
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Strategic Advantage 17
<PAGE>
GUARANTEED INTEREST DIVISION
You may allocate all or a part of your net premium and transfer your net account
value into the guaranteed interest division. The guaranteed interest division
guarantees principal and is part of our general account. It pays interest at a
fixed rate that we declare.
The general account contains all of our assets other than those held in the
separate account (variable investment options) or other separate accounts.
The general account supports our non-variable insurance and annuity obligations.
We have not registered interests in the guaranteed interest division under the
Securities Act of 1933. Also, we have not registered the guaranteed interest
division or the general account as an investment company under the Investment
Company Act of 1940 (because of exemptive and exclusionary provisions). This
means that the general account, the guaranteed interest division and its
interests are generally not subject to regulation under these Acts.
The SEC staff has not reviewed the disclosures in this prospectus relating to
the general account and the guaranteed interest division. These disclosures,
however, may be subject to certain requirements of the federal securities law
regarding accuracy and completeness of statements made.
The amount you have in the guaranteed interest division is all of the net
premium you allocate to that division, plus transfers you make to the guaranteed
interest division plus interest earned.
Amounts you transfer out of or withdraw from the guaranteed interest division
reduce this amount. It is also reduced by deductions for charges from your
account value allocated to the guaranteed interest division.
We declare the interest rate that applies to all amounts in the guaranteed
interest division. This interest rate is never less than the minimum guaranteed
interest rate of 3% and will be in effect for at least twelve months. Interest
compounds daily at an effective annual rate that equals the declared rate. We
credit interest to the guaranteed interest division on a daily basis. We pay
interest regardless of the actual investment performance of our account. We bear
all of the investment risk for the guaranteed interest division.
MAXIMUM NUMBER OF INVESTMENT OPTIONS
There are three divisions: the variable division, the guaranteed interest
division and the loan division. Under the variable division, there are numerous
variable investment options. SEE SECURITY LIFE SEPARATE ACCOUNT L1, PAGE 12 AND
INVESTMENT PORTFOLIO OBJECTIVES, PAGE 13.
You may invest in a total of eighteen investment options over the life of your
policy. Investment options include the variable and the guaranteed interest
divisions, but not the loan division.
As an example, if you have had funds in seventeen variable investment options
and the guaranteed interest division, these are the only investment options to
which you may later add or transfer funds. However, you could still take a
policy loan and access the loan division.
You may want to use fewer investment options in the early years of your policy,
so that you can invest in others in the future. If you invest in eighteen
variable investment options, you will not be able to invest in the guaranteed
interest division.
DETAILED INFORMATION ABOUT THE POLICY
This prospectus describes our standard Strategic Advantage variable universal
life insurance policy. There may be differences in the policy because of state
requirements where we issue your policy. We will describe any such differences
in your policy.
The illustrations beginning on page 54 show how the policies work.
APPLYING FOR A POLICY
You purchase this variable universal life policy by submitting an application to
us. The policy is issued on a guaranteed and fully-underwritten basis. On the
policy date, the insured person must be no less than age 15. For a
fully-underwritten policy, the insured person must be no more than age 85. For a
guaranteed issued policy, the insured person must be no more than age 70. The
insured person is the person on whose life we issue the policy. You may
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Strategic Advantage 18
<PAGE>
request that we back-date the policy up to six months to allow the insured
person to give proof of a younger age for the purposes of your policy. SEE AGE,
PAGE 40.
We may reduce the minimum death benefit for group or sponsored arrangements, or
corporate purchasers. Our underwriting and reinsurance procedures in effect at
the time you apply limit the maximum death benefit.
TEMPORARY INSURANCE
If you apply and qualify, we may issue temporary insurance in an amount equal to
the face amount of the permanent insurance for which you applied. The maximum
amount of temporary insurance for binding limited life insurance coverage is $3
million, which includes any other in-force coverage you have with us.
Temporary coverage begins when:
1. you have completed and signed our binding limited life insurance
coverage form;
2. we receive and accept a premium payment of at least your scheduled
premium (selected on your application); and
3. part I of the application is complete.
Temporary life insurance coverage ends on the earliest of:
o the date we return your premium payments;
o five days after we mail notice of termination to the address on your
application;
o the date your policy coverage starts;
o the date we refuse to issue a policy based on your application; or
o 90 days after you sign our binding limited life insurance coverage
form.
There is no death benefit under the temporary insurance agreement if:
o there is a material misrepresentation in your answers on the binding
limited life insurance coverage form;
o there is a material misrepresentation in statements on your
application;
o the person intended to be the insured person dies by suicide or
self-inflicted injury; or
o the bank does not honor your premium check.
POLICY ISSUANCE
Before we issue a policy, we require satisfactory evidence of insurability of
the insured person and payment of your initial premium. This evidence may
include a medical examination and completion of all underwriting and issue
requirements.
The policy date shown on your policy schedule determines:
o monthly processing dates;
o policy months;
o policy years; and
o policy anniversaries.
The policy date is not affected by when you receive the policy. We charge
monthly deductions from the policy date unless your policy specifies otherwise.
The policy date is determined one of three ways:
1. the date you designate on your application, subject to our approval;
2. the back-date of the policy to save age, subject to our approval and
law; or
3. if there is no designated date or back-date, the policy date is:
o the date all underwriting and administrative requirements have
been met if we receive your initial premium before we issue your
policy; or
o the date we receive your initial premium if it is after we approve
your policy for issue.
DEFINITION OF LIFE INSURANCE CHOICE
At policy issue, you may choose one of two tests for the federal income tax
definition of life insurance. You cannot change your choice later. The tests are
the cash value accumulation test and the guideline premium/cash value corridor
test. If you choose the guideline premium/cash value corridor test, we may limit
premium payments relative to your policy death benefit under this test. SEE TAX
STATUS OF THE POLICY, PAGE 49.
PREMIUMS
You may choose the amount and frequency of premium payments, within limits. You
cannot make premium payments after the death of the insured
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Strategic Advantage 19
<PAGE>
person or after the continuation of coverage period begins. SEE CONTINUATION OF
COVERAGE, PAGE 30.
We consider payments we receive to be premium if you do not have an outstanding
loan and your policy is not in the continuation of coverage period. After we
deduct certain charges from your premium payment, we add the remaining net
premium to your policy.
SCHEDULED PREMIUMS
Your premiums are flexible. You may select your scheduled premium (within our
limits) when you apply for your policy. The scheduled premium, shown in your
policy and schedule, is the amount you choose to pay over a stated time period.
THIS AMOUNT MAY OR MAY NOT BE ENOUGH TO KEEP YOUR POLICY IN FORCE. You may
receive premium reminder notices for the scheduled premium on a quarterly,
semi-annual or annual basis. You are not required to pay the scheduled premium.
You may choose to pay your premium by electronic funds transfer each month. This
option is not available for your initial premium. The financial institution that
makes your electronic funds transfer may charge for this service.
You can change the amount of your scheduled premium within our minimum and
maximum limits at any time. If you fail to pay your scheduled premium or if you
change the amount of your scheduled premium, your policy performance will be
affected. During the special continuation period, your scheduled premium should
not be less than the minimum annual premium shown in your policy.
If you want the guaranteed minimum death benefit, your scheduled premium should
not be less than the guarantee period annual premium shown in your policy. SEE
GUARANTEED MINIMUM DEATH BENEFIT, PAGE 26.
UNSCHEDULED PREMIUM PAYMENTS
Generally speaking, you may make unscheduled premium payments at any time,
however:
1. We may limit the amount of your unscheduled premium payments that would
result in an increase in the base death benefit amount required by the
federal income tax law definition of life insurance. We may require
satisfactory evidence that the insured person is insurable at the time
that you make the unscheduled premium payment if the death benefit is
increased due to your unscheduled premium payments;
2. We may require proof that the insured person is insurable if your
unscheduled premium payment will cause the net amount at risk to
increase; and
3. We will return premium payments which are greater than the "seven-pay"
limit for your policy if your payment would cause your policy to become
a modified endowment contract, unless you have acknowledged in writing
the new modified endowment contract status for your policy.
SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 51 AND CHANGES TO COMPLY WITH THE LAW,
PAGE 52.
If you have an outstanding policy loan and you make an unscheduled payment, we
will consider it a loan repayment, unless you tell us otherwise. If your payment
is a loan repayment, we do not take tax or sales charges which apply to premium
payments.
TARGET PREMIUM
Target premium is not based on your scheduled premium. Target premium is
actuarially determined based on the age, gender and premium class of the insured
person. The target premium is used in determining your initial sales charge and
the distribution allowance we pay. It may or may not be enough to keep your
policy in force. You are not required to pay the target premium and there is no
penalty for paying more or less. The target premium for your policy and
additional segments are listed in the policy schedule we provide to you. SEE
PREMIUMS, PAGE 19.
MINIMUM ANNUAL PREMIUM
To qualify for the special continuation period, you must pay a minimum annual
premium during each of your first three policy years.
Your minimum annual premium is based on:
o the insured person's age, gender and premium class;
o the stated death benefit of your policy; and
o riders on your policy.
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Strategic Advantage 20
<PAGE>
Your minimum annual premium is shown in the schedule pages of your policy. We
may reduce the minimum annual premium for group or sponsored arrangements, or
for corporate purchasers.
SPECIAL CONTINUATION PERIOD
The special continuation period is the first three policy years. Under the
special continuation period, we guarantee that your policy will not lapse,
regardless of its net account value, if on a monthly processing date:
o the sum of all premiums you have paid, minus partial withdrawals that
you have taken, minus policy loans that you have taken, including
accrued loan interest is greater than or equal to;
o the minimum monthly premiums for each policy month from the first month
of your policy through the current policy monthly processing date.
The minimum monthly premium is one-twelfth of the minimum annual premium.
During the first three years of your policy if there is not enough net account
value to pay the monthly deductions and you have satisfied our requirements, we
do not allow your policy to lapse. We do not permanently waive policy charges.
Instead, we continue to deduct these charges which may result in a negative net
account value, unless you pay enough premium to prevent this. The negative
balance is your unpaid monthly deductions owing. At the end of the special
continuation period to avoid lapse of your policy you must pay enough premium to
bring the net account value to zero plus the amount that covers your estimated
monthly deductions for the following two months. SEE LAPSE, PAGE 37.
INVESTMENT DATE AND ALLOCATION OF NET PREMIUMS
The net premium is the balance remaining after we deduct tax and sales charges
from your premium payment.
Insurance coverage does not begin until we receive your initial premium. It must
be at least equal to the sum of the scheduled premiums which are due from your
policy date through your investment date.
The investment date is the first date we apply the net premium we have received
to your policy. If we receive your initial premium after we approve your policy
for issue, the investment date is the date we receive your initial premium.
We apply the initial net premium to your policy after:
a) we receive the required amount of premium;
b) all issue requirements have been received by our customer service
center; and
c) we approve your policy for issue.
Amounts you designate for the guaranteed interest division will be allocated to
that division on the investment date. If your state requires the return of your
premium during the free look period, we initially invest amounts you have
designated for the variable division in the Fidelity VIP Money Market Portfolio.
We later transfer these amounts from the Money Market Portfolio to your selected
variable investment options, based on your most recent premium allocation
instructions, at the earlier of the following dates:
o five days after we mailed your policy plus your state free look period
has ended; or
o we have received your delivery receipt plus your state free look period
has ended.
If your state provides for return of account value during the free look period
or no free look period, we invest amounts you designated for the variable
division directly into your selected variable investment options.
We allocate all later premium payments to your policy on the valuation date of
receipt. We use your most recent premium allocation instructions specified in
whole numbers totaling 100% and using up to eighteen investment options over the
life of your policy. SEE MAXIMUM NUMBER OF INVESTMENT OPTIONS, PAGE 18.
You may make twelve free premium allocation changes per year, after which a $25
transaction fee applies. If you change your designated deduction investment
option from which monthly deductions are taken, we consider this a premium
allocation change for which there may be a charge. SEE DESIGNATED DEDUCTION
INVESTMENT OPTION, PAGE 30 AND POLICY TRANSACTION FEES, PAGE 47.
PREMIUM PAYMENTS AFFECT YOUR COVERAGE
Unless you have the guaranteed minimum death benefit feature or your policy is
in the special continuation period, your coverage lasts only as long as your net
account value is enough to pay the monthly charges and your account value is
more than your outstanding policy loan plus accrued loan
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Strategic Advantage 21
<PAGE>
interest. If you do not meet these conditions, your policy will enter the 61-day
grace period and you must make a premium payment to avoid lapse. SEE LAPSE, PAGE
37 AND GRACE PERIOD, PAGE 37.
If you pay your minimum premium each year during the first three policy years
and take no policy loan, we guarantee your policy and riders will not lapse
during the special continuation period, regardless of your net account value.
SEE SPECIAL CONTINUATION PERIOD, PAGE 21.
Under the guaranteed minimum death benefit, the base death benefit portion of
your policy remains effective until the end of the guarantee period. The
guaranteed minimum death benefit feature does not apply to riders which can
lapse and terminate during the guarantee period. You must meet all conditions of
the guarantee. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 26.
MODIFIED ENDOWMENT CONTRACTS
There are special federal income tax rules for distributions from life insurance
policies which are modified endowment contracts. These rules apply to policy
loans, surrenders and partial withdrawals. Whether or not these rules apply
depends upon whether or not the premiums we receive are greater than the
"seven-pay" limit.
If we find that your scheduled premium causes your policy to be a modified
endowment contract on your policy date, we will require you to acknowledge that
you know the policy is a modified endowment contract. We will issue your policy
based on the scheduled premium you selected. If you do not want your policy to
be issued as a modified endowment contract, you may reduce your scheduled
premium to a level which does not cause your policy to be a modified endowment
contract. We will then issue your policy based on the revised scheduled premium.
SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 51.
DEATH BENEFITS
You can decide the amount of insurance you need, now and in the future. You can
combine the long- term advantages of permanent life insurance (base coverage)
with the flexibility and short-term advantages of term life insurance. Both
permanent and term life insurance are available with your one policy. The stated
death benefit is the permanent element of your policy. The adjustable term
insurance rider is the term insurance element of your policy. SEE ADJUSTABLE
TERM INSURANCE RIDER, PAGE 28.
Generally we require a minimum stated death benefit of $50,000 to issue a
policy.
It may be to your economic advantage to include part of your insurance coverage
under the adjustable term insurance rider. Both the cost of insurance under the
adjustable term insurance rider and the cost of insurance for the base death
benefit are deducted monthly from your account value and generally increase with
the age of the insured person. Use of the adjustable term insurance rider may
reduce the distribution allowance, but may increase the monthly cost of
insurance. SEE ADJUSTABLE TERM INSURANCE RIDER, PAGE 28.
Your death benefit is calculated as of the date of death of the insured person.
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Strategic Advantage 22
<PAGE>
DEATH BENEFIT SUMMARY
THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES AND NO REQUESTED OR SCHEDULED
INCREASES OR DECREASES IN STATED OR TARGET DEATH BENEFIT AND THAT PARTIAL
WITHDRAWALS ARE LESS THAN THE PREMIUM WE RECEIVE.
<TABLE>
<CAPTION>
Option 1 Option 2 Option 3
<S> <C> <C> <C>
Stated Death Benefit The amount of policy death The amount of policy death The amount of policy death benefit at
benefit at issue, not including benefit at issue, not issue, not including rider coverage.
rider coverage. This amount including rider coverage. This amount stays level throughout
stays level throughout the life This amount stays level the life of the policy.
of the policy. throughout the life of the
policy.
Base Death Benefit The greater of the stated death The greater of the stated The greater of the stated death
benefit or the account value death benefit plus the account benefit plus the sum of all premiums
multiplied by the appropriate value or the account value we receive minus partial withdrawals
factor from the definition of multiplied by the appropriate you have taken or the account value
life insurance factors. factor from the definition of multiplied by the appropriate factor
life insurance factors. from the definition of life insurance
factors.
Target Death Benefit Stated death benefit plus Stated death benefit plus Stated death benefit plus adjustable
adjustable term insurance rider adjustable term insurance term insurance rider benefit. This
benefit. This amount remains rider benefit. This amount amount remains level throughout the
level throughout the life of the remains level throughout the life of the policy.
policy. life of the policy.
Total Death Benefit It is the greater of the target It is the greater of the It is the greater of the target death
death benefit or the base death target death benefit plus the benefit plus the sum of all premiums
benefit. account value or the base we receive minus partial withdrawals
death benefit. you have taken or the base death
benefit.
Adjustable Term The adjustable term insurance The adjustable term insurance The adjustable term insurance rider
Insurance Rider rider benefit is the total death rider benefit is the total benefit is the total death benefit
Benefit benefit minus base death benefit, death benefit minus the base minus the base death benefit, but it
but it will not be less than death benefit, but it will not will not be less than zero. If the
zero. If the account value be less than zero. If the account value multiplied by the death
multiplied by the death benefit account value multiplied by benefit corridor factor is greater
corridor factor is greater than the death benefit corridor than the stated death benefit plus
the stated death benefit, the factor is greater than the the sum of all premiums we receive
adjustable term insurance benefit stated death benefit plus the minus partial withdrawals you have
will be decreased. It will be account value, the adjustable taken, the adjustable term insurance
decreased so that the sum of the term insurance rider benefit rider benefit will be decreased. It
base death benefit and the will be decreased. It will be will be decreased so that the sum of
adjustable term insurance rider decreased so that the sum of the base death benefit and the
benefit is not greater than the the base death benefit and the adjustable term insurance rider
target death benefit. If the adjustable term insurance benefit is not greater than the
base death benefit becomes rider benefit is not greater target death benefit plus the sum of
greater than the target death than the target death benefit all premiums we receive minus partial
benefit, then the adjustable term plus the account value. If withdrawals you have taken. If the
insurance rider benefit is zero. the base death benefit becomes base death benefit becomes greater
greater than the target death than the target death benefit plus
benefit plus the account the sum of all premiums we receive
value, then the adjustable minus partial withdrawals you have
term insurance rider benefit taken, then the adjustable term
is zero. insurance rider benefit is zero.
</TABLE>
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Strategic Advantage 23
<PAGE>
BASE DEATH BENEFIT
Your base death benefit can be different from your stated death benefit as a
result of:
o your choice of death benefit option;
o increases or decreases in the stated death benefit; or
o a change in your death benefit option.
Federal income tax law requires that your death benefit be at least as much as
your account value multiplied by a factor defined by law. This factor is based
on:
o the insured person's age;
o the insured person's gender.
o the cash value accumulation test for the federal income tax law
definition of life insurance. SEE APPENDIX A, PAGE 168.
As long as your policy is in force, we will pay the death proceeds to your
beneficiary(ies) calculated at the death of the insured person. The
beneficiary(ies) is(are) the person (people) you name to receive the death
proceeds from your policy. The death proceeds are:
o your base death benefit; plus
o rider benefits; minus
o your outstanding policy loan with accrued loan interest; minus
o outstanding policy charges incurred before the death of the insured
person.
There could be outstanding policy charges if the insured person dies while your
policy is in the grace period or in the three-year special continuation period.
DEATH BENEFIT OPTIONS
You have a choice of three death benefit options if your policy was delivered on
or before December 31, 1997: option 1, option 2 or option 3 (described below).
If your policy was delivered after December 31, 1997, you have a choice of two
death benefit options: option 1 or option 2. Your choice may result in a base
death benefit greater than your stated death benefit.
Under death benefit option 1, your base death benefit is the greater of:
1. your stated death benefit on the date of the insured person's death; or
2. your account value on the date of the insured person's death multiplied
by the appropriate factor from the definition of life insurance factors
shown in Appendix A or B.
With option 1, positive investment performance generally reduces your net amount
at risk, which lowers your policy's cost of insurance charge. Option 1 offers
insurance coverage that is a set amount with potentially lower cost of insurance
charges over time.
Under death benefit option 2, your base death benefit is the greater of:
1. your stated death benefit plus your account value on the date of the
insured person's death; or
2. your account value on the date of the insured person's death multiplied
by the appropriate factor from the definition of life insurance factors
shown in Appendix A or B.
With option 2, investment performance is reflected in your insurance coverage.
If your policy was delivered on or before December 31, 1997, you may choose
death benefit option 3.
Under death benefit option 3, the base death benefit is the greater of:
1. your stated death benefit plus the sum of all premiums we have received
minus partial withdrawals you have taken under your policy; or
2. your account value on the date of the insured person's death multiplied
by the appropriate factor from the definition of life insurance factors
shown in Appendix A or B.
With option 3, the base death benefit generally will increase as we receive
premiums and decrease if you take partial withdrawals. In no event will your
base death benefit be less than your stated death benefit.
Death benefit options 2 and 3 are not available during the continuation of
coverage period. If you select option 2 or 3 on your policy, it automatically
converts to death benefit option 1 when the continuation of coverage period
begins. SEE CONTINUATION OF COVERAGE, PAGE 30.
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Strategic Advantage 24
<PAGE>
CHANGES IN DEATH BENEFIT OPTIONS
You may request a change in your death benefit option at any time on or after
your first monthly processing date and before the continuation of coverage
period. A death benefit option change applies to your entire stated or base
death benefit. Changing your death benefit options may reduce or increase your
target death benefit, as well as your stated death benefit.
We may not approve a death benefit option change if it reduces the target or
stated death benefit below the minimum we require to issue your policy.
Your death benefit option change is effective on your next monthly processing
date after we approve your request, so long as at least one day remains before
your monthly processing date. If less than one day remains before your monthly
processing date, your change will be effective on your second following monthly
processing date.
You may change from death benefit option 1 to option 2 or 3, from option 2 to
option 1 or 3, or from option 3 to option 1. You may not change from option 3 to
option 2. For you to change from death benefit option 1 to option 2 or from
option 1 to option 3, we may require proof that the insured person is insurable
under our normal rules of underwriting.
After we approve your request, we send a new policy schedule page to you. You
should attach it to your policy. We may ask you to return your policy to our
customer service center so that we can make this change for you.
On the effective date of your option change, your stated death benefit changes
as follows:
Change Change Stated Death Benefit
From To Following Change:
---- -- ----------------
Option 1 Option 2 your stated death benefit
before the change minus
your account value as of the
effective date of the change.
Option 2 Option 1 your stated death benefit
before the change plus your
account value as of the
effective date of the change.
Change Change Stated Death Benefit
From To Following Change:
---- -- ----------------
Option 1 Option 3 your stated death benefit before
the change minus the sum of the
premiums we have received,
plus partial withdrawals you
have taken as of the effective
date of the change.
Option 3 Option 1 your stated death benefit before
the change plus the sum of the
premiums we have received,
minus partial withdrawals you
have taken as of the effective
date of the change.
Option 2 Option 3 your stated death benefit before
the change plus your account
value as of the effective date of
the change, minus the sum of
the premiums we have received
minus partial withdrawals you
have taken as of the effective
date of the change.
Option 3 Option 2 your stated death benefit before
the change plus the sum of the
premiums you have paid minus
partial withdrawals you have
taken as of the effective date of
the change, minus your account
value as of the effective date of
the change.
We increase or decrease your stated death benefit on the date of your death
benefit option change to keep the net amount at risk the same. There is no
change to the amount of term insurance if you have an adjustable term insurance
rider. SEE COST OF INSURANCE CHARGE, PAGE 46.
If you change your death benefit option, we adjust the stated death benefit for
each of your segments by allocating your account value to each benefit segment.
For example, if you change from death benefit option 1 to option 2, your stated
death benefit is decreased by the amount of your account value allocation to
that segment. If you change from death benefit option 2 to option 1, your stated
death benefit is increased by the amount allocated to that segment.
Changing your death benefit option may have tax consequences. You should consult
a tax adviser before making changes.
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Strategic Advantage 25
<PAGE>
CHANGES IN DEATH BENEFIT AMOUNTS
Contact your agent/registered representative or our customer service center to
request a change in your policy's death benefit. The request is effective on the
next monthly processing date after we receive and approve your request. There
may be underwriting or other requirements which must be met before your request
can be approved. Your requested change must be for at least $1,000.
After we make your requested change, we will send you a new schedule page. Keep
it with your policy. We may ask you to send your policy to us so that we can
make the change for you.
We may not approve a requested change if it will disqualify your policy as life
insurance under federal income tax law. If we disapprove a change for any
reason, we provide you with a notice of our decision. SEE TAX CONSIDERATIONS,
PAGE 49.
You may request a decrease in the stated death benefit only after your first
policy anniversary.
If you decrease your death benefit, you may not decrease your target death
benefit below the minimum we require to issue your policy.
If you decrease your death benefit, you may not decrease the stated death
benefit below the minimum we require to issue your policy.
Requested reductions in the death benefit will first decrease the target death
benefit. We decrease your stated death benefit only after your adjustable term
insurance rider coverage is reduced to zero. If you have more than one segment,
we divide decreases in stated death benefit among your benefit segments pro rata
unless law requires differently.
You may change the target death benefit once in a policy year.
You may increase your policy's target or stated death benefit on or after your
first monthly processing date and before the policy anniversary when the insured
person turns age 86.
You must provide satisfactory evidence that the insured person is still
insurable to increase your death benefit amount. You should consult a tax
adviser before changing your death benefit amount. Unless you tell us
differently, we assume your request for an increase in your target death benefit
is also a request for an increase to your stated death benefit. Thus, the amount
of your adjustable term insurance rider will not change.
The initial death benefit segment, or first segment, is the stated death benefit
on your policy's effective date. A requested increase in stated death benefit
will cause a new segment to be created. Once we create a new segment, it is
permanent unless law requires differently. The segment year runs from the
segment effective date to its anniversary.
Each new segment may have:
o a new minimum annual premium during the special continuation period;
o a new sales charge;
o new cost of insurance charges, guaranteed and current;
o a new incontestability period;
o a new suicide exclusion period; and
o a new target premium.
There may be tax consequences as a result of a change in your death benefit
amount, as well as a possible surrender charge. You should consult a tax adviser
before changing your death benefit amount. SEE TAX STATUS OF THE POLICY, PAGE 49
AND MODIFIED ENDOWMENT CONTRACTS, PAGE 51.
GUARANTEED MINIMUM DEATH BENEFIT
Usually, your coverage lasts only as long as your net account value is enough to
pay the monthly charges and your account value is more than your outstanding
policy loan plus accrued loan interest. Your account value depends on:
1. timing and amount of any premium payments;
2. the investment performance of the variable investment options;
3. the interest you earn in the guaranteed interest division;
4. the amount of your monthly charges;
5. partial withdrawals you take; and
6. loan activity you may have.
If you choose one of two available guaranteed minimum death benefit options you
must choose at policy issue. This option extends the time that your
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Strategic Advantage 26
<PAGE>
policy's stated death benefit remains in effect even if the variable investment
options perform poorly. See your policy to determine how your benefits are
affected.
The two guaranteed minimum death benefit options vary primarily by the length of
time they each cover for the guarantee period:
1. the later of ten policy years or until the insured person is age 65; or
2. the lifetime of the insured person or to the maturity date.
The guaranteed minimum death benefit coverage does not apply to riders,
including the adjustable term insurance rider. Therefore, if your net account
value is not enough to pay the deductions as they come due on your policy and if
your policy is no longer in the special continuation period, only the stated
death benefit portion of your coverage is guaranteed to stay in force. SEE
LAPSE, PAGE 37.
Charges for your guaranteed minimum death benefit and base coverage are deducted
each month to the extent that there is sufficient net account value to pay these
charges. If there is not sufficient net account value to pay a charge, it is not
permanently waived. Deduction of charges will resume once there is sufficient
net account value.
The guaranteed minimum death benefit feature is not available in some states.
REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD
To qualify for the guaranteed minimum death benefit you must pay an annual
premium higher than the minimum annual premium. During the guarantee period, we
will also deduct a monthly charge from your account value. This higher premium
is called the guarantee period annual premium. The guarantee period monthly
premium is one-twelfth of the guarantee period annual premium. Your net account
value must meet certain diversification requirements. SEE CHARGES, DEDUCTIONS
AND REFUNDS, PAGE 45.
Although the required guarantee period annual premium level is different for the
two guarantee period options, the guaranteed minimum death benefit operates
similarly for either option.
Your guarantee period annual premium depends on which of the two guarantee
periods you choose, as well as:
o your policy's stated death benefit;
o the insured person's age, gender, premium class and underwriting
characteristics;
o the death benefit option you chose;
o additional rider coverage on your policy; and
o other additional benefits on your policy.
If your policy has no rider coverage, the guarantee period annual premium for
the guarantee period for life will be equal to the guideline annual premium
determined under the federal income tax law definition of life insurance. The
guarantee period annual premium for the ten year or age 65 guarantee period will
be the greater of the target premium or the minimum annual premium for each
segment. The guarantee period annual premium for the guarantee period for life
will be greater than that required for the ten year or age 65 guarantee period.
At each monthly processing date we test to see if you have paid enough premium
to keep your guarantee in place. We calculate:
o actual premiums we receive; minus
o the amount of any partial withdrawals you make; minus
o policy loan amounts you take with accrued loan interest. This amount
must equal or exceed;
o the sum of the guarantee period monthly premium payments for each
policy month starting with your first policy month through the end of
the policy month that begins on the current monthly processing date.
You must continually meet the requirements of the guarantee period for this
feature to remain in effect. We show the guarantee period annual premium on your
policy schedule. If your policy benefits increase, the guarantee period annual
premium increases.
In addition, the guarantee period ends if your net account value on any monthly
processing date is not diversified as follows:
1. your net account value is invested in at least five investment options;
and
2. no more than 35% of your net account value is in any one investment
option.
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Strategic Advantage 27
<PAGE>
Your policy will continue to meet the diversification requirements if:
1. you have automatic rebalancing and you meet the two diversification
tests listed above; or
2. you have dollar cost averaging which results in transfers into at least
four investment options with no more than 35% of any transfer directed
to any one.
SEE DOLLAR COST AVERAGING, PAGE 33 AND AUTOMATIC REBALANCING, PAGE 34.
If you choose the guaranteed minimum death benefit, you must make sure your
policy satisfies the premium test and diversification test. If you fail to
satisfy either test and you do not correct it, this feature terminates. Once it
terminates, you cannot reinstate the guaranteed minimum death benefit feature.
The guarantee period annual premium then no longer applies to your policy.
RIDERS
Your policy may include benefits, attached by rider. A rider may add an
additional cost. You may cancel riders at any time.
Periodically we may offer other riders not listed here. Contact your
agent/registered representative for a complete list of riders available.
ADDING OR CANCELING RIDERS MAY HAVE TAX CONSEQUENCES. SEE MODIFIED ENDOWMENT
CONTRACTS, PAGE 51.
ADJUSTABLE TERM INSURANCE RIDER
You may increase your death proceeds by adding an adjustable term insurance
rider. This rider allows you to schedule the pattern of death benefits
appropriate for anticipated needs. As the name suggests, the adjustable term
insurance rider adjusts over time to maintain your desired level of coverage.
You specify a target death benefit when you apply for this rider. The target
death benefit can be level for the life of your policy or can be scheduled to
change at the beginning of a selected policy year(s). SEE DEATH BENEFITS, PAGE
22.
We generally require a minimum stated death benefit of $50,000 to issue a
policy. A separate cost of insurance applies to your base death benefit. If you
have an adjustable term insurance rider, we generally restrict your target death
benefit to not more than ten times your stated death benefit at issue. In other
words, if your stated death benefit is $100,000, then the maximum amount of
target death benefit we allow you is $1,000,000.
The adjustable term insurance rider death benefit is the difference between your
target death benefit and your base death benefit, but not less than zero. The
rider's death benefit automatically adjusts daily as your base death benefit
changes. Your death benefit depends on which death benefit option is in effect:
OPTION 1: If option 1 is in effect, the total death benefit is the greater
of:
a. the target death benefit; or
b. the account value multiplied by the appropriate factor from
the death benefit corridor factors in the policy.
OPTION 2: If option 2 is in effect, the total death benefit is the greater
of:
a. the target death benefit plus the account value; or
b. the account value multiplied by the appropriate factor from
the death benefit corridor factors in the policy.
OPTION 3: If option 3 is in effect, the total death benefit is the greater
of:
a. the target death benefit plus the sum of the premiums we
have received minus partial withdrawals you have taken; or
b. the account value multiplied by the appropriate factor from
the death benefit corridor factors in the policy.
For example, under option 1, assume your base death benefit changes as a result
of a change in your account value. The adjustable term insurance rider adjusts
to provide death benefits equal to your target death benefit in each year:
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Strategic Advantage 28
<PAGE>
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
It is possible that the amount of your adjustable term insurance may be zero if
your base death benefit increases enough. Using the same example, if the base
death benefit under your policy grew to $250,000 or more, the adjustable term
insurance would be zero.
Even when the adjustable term insurance is reduced to zero, your rider remains
in effect until you remove it from your policy. Therefore, if later the base
death benefit drops below your target death benefit, the adjustable term
insurance rider coverage reappears to maintain your target death benefit.
You may change the target death benefit schedule after it is issued, based on
our rules. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 26.
We may deny future, scheduled increases to your target death benefit if you
cancel a scheduled change or if you ask for an unscheduled decrease in your
target death benefit.
Partial withdrawals, changes from death benefit option 1 to option 2, changes
from death benefit option 1 to option 3 and base decreases may reduce your
target death benefit. SEE PARTIAL WITHDRAWALS, PAGE 36 AND CHANGES IN DEATH
BENEFIT OPTIONS, PAGE 25.
There is no defined premium for a given amount of adjustable term insurance
coverage. Instead, we deduct a separate monthly cost of insurance charge from
your account value. The cost of insurance for this rider is calculated as the
monthly cost of insurance rate for the rider coverage multiplied by the
adjustable term death benefit in effect at the monthly processing date. The cost
of insurance rates are determined by us from time to time. They are based on the
issue age, gender and premium class of the insured person, as well as the length
of time since your policy date.
If the target death benefit is increased by you after the adjustable term
insurance rider is issued, we use the same cost of insurance rate schedule for
the entire coverage for this rider. These rates are based on the original
premium class even though satisfactory new evidence of insurability is required
for the increased schedule. The monthly guaranteed maximum cost of insurance
rates for this rider will be stated in the policy. SEE COST OF INSURANCE CHARGE,
PAGE 46.
The only charge for this coverage is the cost of insurance charge. The total
charges you pay may be less if you have greater coverage under an adjustable
term insurance rider rather than as base death benefit. The monthly guaranteed
maximum cost of insurance rates for this rider are in your policy. SEE COST OF
INSURANCE CHARGE, PAGE 46
Not all policy features apply to the adjustable term insurance rider. The rider
does not contribute to the policy account value nor to surrender value. It does
not affect investment performance and cannot be used for a policy loan. The
adjustable term insurance rider provides benefits only at the insured person's
death.
ACCIDENTAL DEATH BENEFIT RIDER
This rider will pay the benefit amount selected if the insured person dies as a
result of an accident. The insured person must be at least age 10 and no more
than age 65. Minimum coverage is $5,000. Maximum coverage is the lesser of
$200,000 or two times the stated death benefit. The monthly charge for this
rider is $0.06 to $0.13 per $1,000 of rider coverage depending on the insured
person's age.
ADDITIONAL INSURED RIDER
This rider provides death benefits upon the death of a named immediate family
member. The insured person must be at least age 15 and no more than age 85. You
may add up to nine additional insured riders to your policy. We require proof of
insurability for each person. Minimum coverage for each person is $10,000.
Maximum coverage for all additional insured persons is five times your total
stated death benefit. The monthly charge for this rider is $0.06 to $0.13 per
$1,000 of rider coverage depending on the insured person's age. SEE COST OF
INSURANCE CHARGE, PAGE 46.
GUARANTEED INSURABILITY RIDER
This rider is not available for policies issued on or after May 1, 1998. This
rider allows you to increase your stated death benefit without providing
evidence of insurability. The insured person must be no more than age 60.
Increases are limited in amount and timing. The monthly charge for this rider is
$0.05 to
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Strategic Advantage 29
<PAGE>
$0.53 per $1,000 of coverage depending on the insured person's age. You may not
have both this rider and the guaranteed minimum death benefit rider.
WAIVER OF COST OF INSURANCE RIDER
If the insured person becomes totally disabled while your policy is in force,
this rider provides that we waive the monthly expense, cost of insurance and
rider charges during the disability. The insured person must be at least age 10
and no more than age 55. This rider is available only for fully underwritten
policies. If you add this rider to your policy, you may not add the waiver of
specified premium rider. The monthly charge for this rider is included as part
of your cost of insurance charge. SEE COST OF INSURANCE CHARGE, PAGE 46.
WAIVER OF SPECIFIED PREMIUM RIDER
If the insured person becomes totally disabled while your policy is in force,
this rider provides that after a waiting period, we credit a specified premium
amount monthly to your policy during the disability period. The insured person
must be no less than age 15 and no more than age 55. You select the amount of
premium we credit, subject to our limits. If you add this rider to your policy,
you may not add the waiver of cost of insurance rider. The monthly charge for
this rider is $0.017 to $0.020 per $1 of rider coverage depending on issue age.
If your policy was a guaranteed issue policy, the monthly charge for this rider
is $0.034 to $0.04 per $1 of coverage depending on issue age.
SPECIAL FEATURES
DESIGNATED DEDUCTION INVESTMENT OPTION
You may designate an investment option from which we will deduct your monthly
charges. You may make this designation at any time. You may not use the loan
division as your designated deduction option.
You may elect not to choose a designated deduction investment option or the
amount in your designated deduction investment option may not be enough to cover
the monthly deductions. If so, these charges are taken from the variable and
guaranteed interest divisions in the same proportion that your account value in
each has to your total net account value on the monthly processing date.
If you change your designated deduction investment option, we consider this a
premium allocation change for which there may be a charge. SEE POLICY
TRANSACTION FEES, PAGE 47.
RIGHT TO EXCHANGE POLICY
During the first 24 months after your policy date, you have the right to
exchange your policy for a guaranteed policy, unless law requires differently.
We transfer the amount you have in the variable division to the guaranteed
interest division. We allocate all of your future net premiums only to the
guaranteed interest division. We do not allow future payments or transfers to
the variable investment options after you exercise this right.
We will not charge you for this exchange. SEE GUARANTEED INTEREST DIVISION, PAGE
18.
POLICY MATURITY
You may surrender your policy at any time. At the policy anniversary nearest the
insured person's 100th birthday if you do not choose to let the continuation of
coverage feature become effective, the policy matures. You may then surrender
the policy for the net account value and end coverage. Part of this payment may
be taxable. You should consult your tax adviser.
CONTINUATION OF COVERAGE
The continuation of coverage feature allows your insurance coverage to continue
in force beyond policy maturity. If on the policy anniversary nearest the
insured person's 100th birthday you allow the continuation of coverage feature
to become effective, we:
o convert target death benefit to stated death benefit;
o convert death benefit option 2 and option 3 to death benefit option 1,
if applicable;
o terminate all riders;
o deduct a one-time $200 administrative fee to cover future expenses;
o transfer your net account value (excluding the amount in the loan
division) into the guaranteed interest division; and
o terminate dollar cost averaging and automatic rebalancing.
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Strategic Advantage 30
<PAGE>
Your insurance coverage continues in force until the death of the insured
person, unless the policy lapses or is surrendered. However:
o we accept no more premium payments;
o we deduct no further charges;
o your monthly deductions cease; and
o you may not make transfers into the variable division. SEE CONTINUATION
OF COVERAGE ADMINISTRATIVE FEE, PAGE 47.
During the continuation of coverage period, you may take policy loans or partial
withdrawals from your policy. If we pay a persistency refund on the guaranteed
interest division, it will be credited to your policy. SEE PERSISTENCY REFUND,
PAGE 48.
If you have an outstanding policy loan, interest continues to accrue. If you
fail to make sufficient loan or loan interest payments, it is possible that the
loan balance plus accrued interest may become greater than your account value
and cause your policy to lapse. To avoid this lapse, you may make loan and loan
interest payments during the continuation of coverage period.
If you wish to stop coverage during the continuation of coverage period, you may
surrender your policy and receive the net account value. All normal consequences
of surrender apply. SEE SURRENDER, PAGE 39.
The continuation of coverage feature may not be available in all states. If a
state has approved this feature, it is an automatic feature and you do not need
to take any action to activate it. Contact your agent/registered representative
or our customer service center to find out if this feature is available in your
state.
The tax consequences of coverage continuing beyond the insured person's 100th
birthday are uncertain. You should consult a tax adviser as to those
consequences.
POLICY VALUES
ACCOUNT VALUE
Your account value is the total amount you have in the guaranteed interest
division, the variable division and the loan division. Your account value
reflects:
o net premiums applied;
o charges deducted;
o partial withdrawals taken;
o investment performance of the variable investment options;
o interest earned on the guaranteed interest division; and
o interest earned on the loan division.
NET ACCOUNT VALUE
Your policy's net account value is your account value minus the amount of your
outstanding policy loan and accrued loan interest, if any.
CASH SURRENDER VALUE
Your cash surrender value is your account value plus any refund of sales charges
which may be due.
NET CASH SURRENDER VALUE
Your net cash surrender value is your cash surrender value minus the amount of
your outstanding policy loan and accrued loan interest, if any.
DETERMINING VALUES IN THE VARIABLE DIVISION
The amounts in the variable division are measured by accumulation units and
accumulation unit values. The value of each variable investment option is the
accumulation unit value for that option multiplied by the number of accumulation
units you own in that option. Each variable investment option has a different
accumulation unit value.
The accumulation unit value is the value of one accumulation unit determined on
each valuation date. The accumulation unit value of each variable investment
option varies with the investment performance of the underlying portfolio. It
reflects:
o investment income;
o realized and unrealized gains and losses;
o investment portfolio expenses; and
o daily mortality and expense risk charges we take from the separate
account.
You purchase accumulation units when you allocate premium or make transfers to a
variable investment option, including transfers from the loan division.
We redeem accumulation units:
o when amounts are transferred from a variable investment option
(including transfers to the loan division);
o for your policy's monthly deductions from your account value;
o for policy transaction charges;
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Strategic Advantage 31
<PAGE>
o when you take a partial withdrawal;
o when you surrender your policy; and
o to pay the death proceeds.
We calculate the number of accumulation units purchased or sold by:
1. dividing the dollar amount of your transaction by:
2. the accumulation unit value for that variable investment option
calculated at the close of business on the valuation date of the
transaction.
A valuation date is one on which the net asset value of the investment portfolio
shares and unit values of the variable investment options are determined. A
valuation date is each day the New York Stock Exchange and the company's
customer service center are open for business, except for days on which an
investment portfolio does not value its shares or any other day as required by
law. Each valuation date ends at 4:00 p.m. Eastern time.
SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES, PAGE 32.
The date of a transaction is the date we receive your premium or transaction
request at our customer service center, so long as the date of receipt is a
valuation date. We use the accumulation unit value which is next calculated
after we receive your premium or transaction request and we use the number of
accumulation units attributable to your policy on the date of receipt.
We take monthly deductions from your account value on the monthly processing
date. If your monthly processing date is not a valuation date, the monthly
deduction is processed on the next valuation date.
The value of amounts allocated to the variable investment options goes up or
down depending on investment performance of the underlying investment portfolio.
AMOUNTS IN THE VARIABLE INVESTMENT OPTIONS HAVE NO GUARANTEED MINIMUM VALUE.
HOW WE CALCULATE ACCUMULATION UNIT VALUES
We determine accumulation unit values on each valuation date.
We generally set the accumulation unit value for a variable investment option at
$10 when the investment option is first opened. After that first date, the
accumulation unit value on any valuation date is:
1. the accumulation unit value for the preceding valuation date multiplied
by
2. the variable investment option's accumulation experience factor for the
valuation period.
Every valuation period 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.
We calculate an accumulation experience factor for each variable investment
option every valuation date as follows:
1. We take the share value of the underlying portfolio shares as reported
to us by the investment portfolio managers as of the close of business
on that valuation date.
2. We add dividends or capital gain distributions declared per share and
reinvested by the investment portfolio on the date that the share value
is affected. If applicable, we subtract a charge for taxes.
3. We divide the resulting amount by the value of the shares in the
underlying investment portfolio at the close of business on the
previous valuation date.
4. We then subtract the mortality and expense risk charge under your
policy. The daily charge is .002055% (.75% annually) of the
accumulation unit value. If the previous day was not a valuation date,
the charge is multiplied by the number of days since the last valuation
date.
TRANSFERS OF ACCOUNT VALUE
You may make twelve free transfers among the variable investment options or the
guaranteed interest division in each policy year, with a $25 fee per transaction
after that. If your state requires a refund of premium during the free look
period, you may not make transfers until after your free look period ends.
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Strategic Advantage 32
<PAGE>
We do not limit the number of transfers you may make. Transfers for automatic
rebalancing or dollar cost averaging do not count toward your twelve free
transfers. You may not make transfers during the continuation of coverage
period. SEE POLICY TRANSACTION FEES, PAGE 47 AND CONTINUATION OF COVERAGE, PAGE
30.
You may make transfer requests in writing, or by telephone if you have telephone
privileges, to our customer service center. Your transfer takes effect on the
valuation date we receive your request. The minimum amount you may transfer is
$100. This minimum does not need to come from one investment option or be
transferred to one investment option as long as the total amount you transfer is
at least $100. However, if the amount remaining in an investment option is less
than $100 and you make a transfer request from that investment option, we
transfer the entire amount.
EXCESSIVE TRADING
Excessive trading activity can disrupt investment portfolio management
strategies and increase portfolio expenses through:
o increased trading and transaction costs;
o forced and unplanned portfolio turnover;
o lost opportunity costs; and
o large asset swings that decrease the investment portfolio's ability to
provide maximum investment return to all policyowners.
In response to excessive trading, we may place restrictions or refuse transfers
made by third-party agents acting on behalf of owners such as market timing
services. We will refuse or place restrictions on transfers when we determine,
in our sole discretion, that transfers are harmful to the investment portfolios
or to policyowners as a whole.
GUARANTEED INTEREST DIVISION TRANSFERS
Transfers into the guaranteed interest division are not restricted.
You may transfer amounts from the guaranteed interest division only in the first
30 days of each policy year. Transfer requests received within 30 days before
your policy anniversary will be processed on your policy anniversary. A request
received by us within 30 days after your policy anniversary is effective on the
valuation date we receive it. Transfer requests made at any other time will not
be processed.
Transfers from the guaranteed interest division in each policy year are limited
to the largest of:
o 25% of your guaranteed interest division balance at the time of your
first transfer or withdrawal out of it in that policy year;
o the sum of the amounts you have transferred and withdrawn from the
guaranteed interest division in the prior policy year; or
o $100.
DOLLAR COST AVERAGING
If your policy has at least $10,000 invested in either qualifying source
investment portfolio, you may elect dollar cost averaging. The qualifying source
investment portfolios are the Fidelity VIP Money Market Portfolio or the
Neuberger Berman AMT Limited Maturity Bond Portfolio. The main goal of dollar
cost averaging is to protect your policy values from short-term price changes.
DOLLAR COST AVERAGING DOES NOT ASSURE A PROFIT NOR DOES IT PROTECT YOU AGAINST A
LOSS IN A DECLINING MARKET.
This systematic plan of transferring account values is intended to reduce the
risk of investing too much when the price of an investment portfolio's shares is
high. It is intended to reduce the risk of investing too little when the price
of an investment portfolio's shares is low. Since you transfer the same dollar
amount to other investment options each period, you purchase more units in an
investment option when the unit value is low and you purchase fewer units if the
unit value is high.
We do not count dollar cost averaging transfers toward your twelve free
transfers per policy year. There is no charge for this feature.
You may add dollar cost averaging to your policy at any time. The first dollar
cost averaging date must be at least one day after we receive your dollar cost
averaging request. If your state requires refund of all premiums we receive
during the free look period, dollar cost averaging cannot begin until your free
look period has ended.
With dollar cost averaging, you designate either a dollar amount or a percentage
of your account value for automatic transfer from a qualifying source
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Strategic Advantage 33
<PAGE>
investment portfolio. Each period we automatically transfer the amount you
select from your chosen source investment portfolio to one or more other
variable investment options. You may not use the guaranteed interest division or
the loan division in dollar cost averaging.
The minimum percentage you may transfer to any one investment option is 1% of
the total amount you transfer. You must transfer at least $100 on each dollar
cost averaging transfer date.
Dollar cost averaging may occur on the same day of the month on a monthly,
quarterly, semi-annual or annual basis. Unless you tell us otherwise, dollar
cost averaging automatically takes place monthly on the monthly processing date.
You may have both dollar cost averaging and automatic rebalancing at the same
time. However, the dollar cost averaging source investment portfolio cannot be
included in your automatic rebalancing program.
CHANGING DOLLAR COST AVERAGING
You may change your dollar cost averaging program one time per policy year. If
you have telephone privileges, you may change the program by telephoning our
customer service center. SEE TELEPHONE PRIVILEGES, PAGE 42.
TERMINATING DOLLAR COST AVERAGING
You may cancel dollar cost averaging by sending satisfactory notice to our
customer service center. We must receive it at least one day before the next
dollar cost averaging date.
Dollar cost averaging will terminate on the date:
1. you specify; or
2. your balance in the source investment portfolio reaches a dollar amount
you set; or
3. the amount in the source investment portfolio is equal to or less than
the amount to be transferred on a dollar cost averaging date. We will
transfer the remaining amount and dollar cost averaging ends.
AUTOMATIC REBALANCING
Automatic rebalancing is a method of maintaining a consistent approach to
investing account values over time and simplifying the process of asset
allocation among your chosen investment options.
Transfers made for automatic rebalancing do not count toward your twelve free
transfers per policy year. There is no charge for this feature.
If you choose this feature, on each rebalancing date we transfer amounts among
the investment options to match your pre-set automatic rebalancing allocation.
After the transfer the ratio of your account value in each investment option to
your total account value for all investment options included in automatic
rebalancing matches the automatic rebalancing allocation percentage you set for
that investment option. This action rebalances the amounts in the investment
options that do not match your set allocation. This mismatch can happen if an
investment option outperforms the other investment options for that time period.
You may choose the automatic rebalancing feature on your application or later by
completing our customer service form. Automatic rebalancing may occur on the
same day of the month on a monthly, quarterly, semi-annual or annual basis. If
you do not specify a frequency, automatic rebalancing will occur quarterly.
The first transfer occurs on the date you select (after your free look period
ends if your state requires return of premiums during the free look period). If
you do not request a date, processing is on the last valuation date of the
calendar quarter we receive your request.
When you choose automatic rebalancing allocations, you may choose up to eighteen
total investment options. SEE MAXIMUM NUMBER OF INVESTMENT OPTIONS, PAGE 18.
You may have both automatic rebalancing and dollar cost averaging at the same
time. However, the source investment portfolio for your dollar cost averaging
cannot be included in your automatic rebalancing program. You may not include
the loan division in your automatic rebalancing program.
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Strategic Advantage 34
<PAGE>
CHANGING AUTOMATIC REBALANCING
You may change your allocation percentages for automatic rebalancing at any
time. Your allocation change is effective on the valuation date that we receive
it at our customer service center. If you reduce the amount allocated to the
guaranteed interest division, it is considered a transfer from that division.
You must meet the requirements for the maximum transfer amount and time
limitations on transfers from the guaranteed interest division. SEE TRANSFERS OF
ACCOUNT VALUE, PAGE 32.
If you have automatic rebalancing and the guaranteed minimum death benefit and
you ask for an allocation which does not meet the guaranteed minimum death
benefit diversification requirements, we will notify you that the allocation
needs to be changed and ask you for revised instructions. SEE GUARANTEED MINIMUM
DEATH BENEFIT, PAGE 26.
TERMINATING AUTOMATIC REBALANCING
You may terminate automatic rebalancing at any time, as long as we receive your
notice of termination at least one day before the next automatic rebalancing
date.
If you have the guaranteed minimum death benefit and you terminate the automatic
rebalancing feature, you still must meet the diversification requirements of
your net account value for the guarantee period to continue. SEE GUARANTEED
MINIMUM DEATH BENEFIT, PAGE 26.
POLICY LOANS
The loan division is part of our general account specifically designed to hold
money used as collateral for loans and loan interest.
You may borrow from your policy at any time after the first monthly processing
date, by using your policy as security for a loan, or as otherwise required by
law. The amount you borrow is called a policy loan. Your policy loan is:
1. the total amount you borrow from your policy; plus
2. policy loan interest that is capitalized when due; minus
3. policy loan or interest repayments you make.
Unless law requires differently, a new policy loan must be at least $100. The
maximum amount you may borrow on any valuation date, unless required differently
by law, is your net account value minus the monthly deductions to your next
policy anniversary or 13 monthly deductions if you take a loan within thirty
days before your next policy anniversary.
Your request for a policy loan must be directed to our customer service center.
If you have telephone privileges, you may request a policy loan of less than
$25,000 by telephoning our customer service center. SEE TELEPHONE PRIVILEGES,
PAGE 42.
When you request a loan you may specify one investment option from which the
loan will be taken. If you do not specify one, the loan will be taken
proportionately from each active investment option you have, including the
guaranteed interest division.
Loan interest charges on your policy loan accrue daily at an annual interest
rate of 3.75%. Interest is due in arrears on each policy anniversary. If you do
not pay your interest when it is due, we add it to your policy loan balance.
When you take a policy loan, we transfer an amount equal to your policy loan to
the loan division. We follow this same process for loan interest due at your
policy anniversary. We credit the loan division with interest at an annual rate
of 3%.
If you request an additional loan, we add the new loan amount to your existing
policy loan. This way, there is only one loan outstanding on your policy at any
time.
LOAN REPAYMENT
You may repay your policy loan at any time while your policy is in force. We
assume that payments you make, other than scheduled premiums, are policy loan
repayments. You must tell us if you want payments to be premium payments.
When you make a loan repayment, we transfer an amount equal to your payment from
the loan division to the variable investment options and the guaranteed interest
division in the same proportion as your current premium allocation, unless you
tell us otherwise.
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Strategic Advantage 35
<PAGE>
EFFECTS OF A POLICY LOAN ON YOUR POLICY
Taking a loan decreases the amount you have in the investment options. Accruing
loan interest will change your net account value as compared to what it would
have been if you did not take a loan.
Even if you repay your loan, it has a permanent effect on your account value.
The benefits under your policy may be affected.
The loan is a first lien on your policy. If you do not repay your policy loan,
we deduct your outstanding policy loan and accrued loan interest from the death
proceeds payable or the cash surrender value payable on surrender.
Failure to repay your loan may affect the guaranteed minimum death benefit
feature and the length of time your policy remains in force. If you do not make
loan payments your policy could lapse. POLICY LOANS MAY CAUSE YOUR POLICY TO
LAPSE IF YOUR NET ACCOUNT VALUE MINUS POLICY LOAN AMOUNTS AND ACCRUED LOAN
INTEREST IS NOT ENOUGH TO PAY YOUR DEDUCTIONS EACH MONTH. SEE LAPSE, PAGE 37.
Policy loans may have tax consequences. If your policy lapses with a loan
outstanding, you may have further tax consequences. SEE DISTRIBUTIONS OTHER THAN
DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 51, AND DISTRIBUTIONS
OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT
CONTRACTS, PAGE 52.
If you use the continuation of coverage feature and you have a policy loan, loan
interest continues to accrue.
PARTIAL WITHDRAWALS
You may request a partial withdrawal to be processed on any valuation date after
your first policy anniversary by contacting our customer service center. You
make a partial withdrawal when you withdraw part of your net account value. If
your request is by telephone, it must be for less than $25,000 and may not cause
a decrease in your death benefit. Otherwise, your request must be in writing.
SEE TELEPHONE PRIVILEGES, PAGE 42.
You may take only one partial withdrawal per policy year. The minimum partial
withdrawal you may take is $100. The maximum partial withdrawal you may take is
the amount which leaves $500 as your net account value. If you request a
withdrawal of more than this maximum, we require you to surrender your policy or
reduce the withdrawal.
When you take a partial withdrawal, we deduct your withdrawal amount plus a
service fee from your account value. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE
45.
Unless you tell us otherwise, we will make a partial withdrawal from the
guaranteed interest division and the variable investment options in the same
proportion that each has to your net account value immediately before your
withdrawal. You may select one investment option from which your partial
withdrawal will be taken. If you select the guaranteed interest division,
however, the amount withdrawn from it may not be for more than your total
withdrawal multiplied by the ratio of your account value in the guaranteed
interest division to your total net account value immediately before the partial
withdrawal transaction.
Partial withdrawals may have adverse tax consequences. SEE DISTRIBUTIONS OTHER
THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 51; AND
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS, PAGE 52.
PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1
If you selected death benefit option 1, it is your first partial withdrawal of
the policy year, no more than fifteen years have passed since your policy date
and the insured person is not yet age 81, you may make a partial withdrawal of
up to the greater of 10% of your account value, or 5% of your stated death
benefit without decreasing your stated death benefit.
Otherwise, amounts you withdraw will reduce your stated death benefit by the
amount of the withdrawal unless your policy death benefit has been increased due
to the federal income tax definition of life insurance. If your policy death
benefit has been increased due to the federal income tax definition of life
insurance at the time of the partial withdrawal, then at least part of your
partial withdrawal may be made without reducing your stated death benefit.
PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 2
If you have selected death benefit option 2, a partial withdrawal does not
reduce your stated or target death benefit. However because your account value
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Strategic Advantage 36
<PAGE>
is reduced, we reduce the total death benefit by at least the partial withdrawal
amount.
PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 3
If you have selected death benefit option 3 and your partial withdrawal is less
than the total of premiums we have received minus the total of your partial
withdrawals, then your stated death benefit will not be reduced. However because
your account value is reduced, your total death benefit is reduced.
If your partial withdrawal is more than the amount of premiums we have received
minus the total of your prior partial withdrawals, a two step process is used:
1. Your withdrawal of the amount that makes premiums received minus all
partial withdrawals equal to zero is taken; then
2. The excess withdrawal amount you requested will reduce your stated
death benefit if:
o the excess amount is greater than 10% of your account value after
step "1" above; or
o the excess amount is greater than 5% of your stated death benefit.
STATED DEATH BENEFIT AND TARGET DEATH BENEFIT REDUCTIONS
Regardless of your chosen death benefit option, partial withdrawals do not
reduce your stated death benefit if:
o your base death benefit has been increased to qualify your policy as
life insurance under the federal income tax laws; and
o you withdraw an amount that is no greater than the amount that reduces
your account value to a level which no longer requires your base death
benefit to be increased to qualify as life insurance for federal income
tax law purposes. SEE TAX STATUS OF THE POLICY, PAGE 49.
We require a minimum stated death benefit and a minimum target death benefit to
issue your policy. You may not take a partial withdrawal if it reduces your
stated death benefit or target death benefit below this minimum. SEE POLICY
ISSUANCE, PAGE 19.
We will send a new policy schedule page for your policy showing the effect of
your withdrawal if there is any change to your stated death benefit or your
target death benefit.
In order to make this change, we may ask that you return the policy to our
customer service center. Your withdrawal and any reductions in the death
benefits are effective as of the valuation date on which we receive your
request. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT
CONTRACTS, PAGE 51, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES
THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 52.
LAPSE
Your insurance coverage continues as long as your net account value is enough to
pay your deductions each month. Lapse does not apply if either the guaranteed
minimum death benefit or the special continuation period is in effect and you
have met all requirements. SEE SPECIAL CONTINUATION PERIOD, PAGE 21 AND
GUARANTEED MINIMUM DEATH BENEFIT, PAGE 26.
If the continuation of coverage feature is active, your policy could still lapse
if there is an outstanding policy loan even though there are no further monthly
deductions.
GRACE PERIOD
Your policy enters a 61-day lapse grace period if, on a monthly processing date:
1. your net account value is zero (or less);
2. the three-year special continuation period has expired or you have not
paid the required special continuation period premium; and
3. you do not have the guaranteed minimum death benefit or it has expired
or terminated.
We notify you that your policy is in a grace period at least 30 days before it
ends. We send this notice to you (or a person to whom you have assigned your
policy) at your last known address in our records. We notify you of the premium
payment necessary to prevent your policy from lapsing. This amount is generally
the past due charges, plus your estimated monthly policy and rider deductions
for the next two months. If the death of the insured person occurs during the
grace period we do pay death proceeds to
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Strategic Advantage 37
<PAGE>
your beneficiary(ies), but with reductions for your policy loan balance, accrued
loan interest and monthly deductions owed. We will send you a lapse notice if
the guaranteed minimum death benefit is going to lapse.
If we receive payment of the required amount before the end of the grace period,
we apply it to your account value in the same manner as your other premium
payments, then we deduct the overdue amounts from your account balance.
If you do not pay the full amount within the 61-day grace period, your policy
and its riders lapse without value. We withdraw your remaining account balance
from the variable and guaranteed interest divisions. We deduct amounts you owe
us and inform you that your policy coverage has ended.
IF YOU HAVE THE GUARANTEED MINIMUM DEATH BENEFIT IN EFFECT
After the special continuation period has ended and if the guaranteed minimum
death benefit is in effect, your policy's stated death benefit will not lapse
during the guarantee period. This is true even if your net account value is not
enough to cover all of the deductions from your account value on any monthly
processing date. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 26.
LAPSE SUMMARY
<TABLE>
<CAPTION>
SPECIAL CONTINUATION PERIOD GUARANTEED MINIMUM DEATH BENEFIT
IF YOU MEET THE IF YOU DO NOT MEET THE IF YOU MEET THE IF YOU DO NOT MEET THE
REQUIREMENTS REQUIREMENTS OR IT IS NO REQUIREMENTS REQUIREMENTS OR IT IS NO
LONGER IN EFFECT LONGER IN EFFECT
<S> <C> <C> <C>
Your policy does not lapse Your policy enters the Your policy does not lapse Your policy enters the
if you do not have enough grace period if your net if you do not have enough grace period if your net
net account value to pay account value is not net account value to pay account value is not
the monthly charges. The enough to pay the monthly the monthly charges. enough to pay the monthly
charges are deducted and charges, or if your loan However, if you have any charges, or if your loan
may cause a negative plus accrued loan interest riders, they lapse after the plus accrued loan interest
account value until the is more than your account grace period and only your is more than your account
earlier of: 1) the date you value. If you do not pay base coverage remains in value. If you do not pay
have enough net account enough premium to cover force. Charges for your enough premium to cover
value, or 2) until the end the past due monthly base coverage are then the past due monthly
of the special continuation charges and interest due deducted each month to charges and interest due
period. plus the monthly charges the extent that there is plus the monthly charges
and interest due through sufficient net account and interest due through
the end of the grace value to pay these charges. the end of the grace
period, your policy lapses. If there is not sufficient period, your policy lapses.
net account value to pay a
charge, it is permanently
waived.
</TABLE>
REINSTATEMENT
If you do not pay enough premium before the end of the grace period, your policy
lapses. You may still reinstate your policy and its riders (other than the
guaranteed minimum death benefit) within five years of the end of the grace
period if you still own the policy and the insured person meets our underwriting
requirements.
Unless law requires differently, we will reinstate your policy and riders if:
1. you have not surrendered your policy;
2. you provide satisfactory evidence to us that the insured person (and
any people insured under your riders) is alive and still insurable
according to our normal rules of underwriting; and
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Strategic Advantage 38
<PAGE>
3. we receive enough premium from you to keep your policy and its riders
in force from the beginning to the end of the grace period and for two
months after the reinstatement date.
Reinstatement is effective on the monthly processing date following our approval
of your reinstatement application. If you had a policy loan when coverage ended,
we reinstate it with accrued loan interest to the date of lapse. The cost of
insurance charges at the time of reinstatement are adjusted to reflect the time
since the lapse.
We apply net premiums received after reinstatement according to your most recent
instructions which may be the premium allocation instructions in effect at the
start of the grace period.
SURRENDER
You may surrender your policy for its net cash surrender value any time before
the death of the insured person. You may take your net cash surrender value in
other than one payment. We compute your net cash surrender value as of the
valuation date we receive your written surrender request and policy at our
customer service center. All insurance coverage ends on the date we receive your
surrender request and policy. SEE POLICY VALUES, PAGE 31 AND SETTLEMENT
PROVISIONS, PAGE 43.
We do not pro-rate or add back charges or expenses which we deducted before your
surrender to your account value.
A surrender of your policy may have adverse tax consequences. SEE DISTRIBUTIONS
OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 51, AND
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS, PAGE 52.
GENERAL POLICY PROVISIONS
FREE LOOK PERIOD
You have the right to examine your policy. The right to examine your policy,
often called the free look period, starts on the date you receive your policy
and is a length of time specified by law. If for any reason you do not want it,
you may return your policy to us or your agent/registered representative within
the period shown on the policy's face page. If you return your policy to us
within that time period, we will consider it canceled as of your policy date.
If you cancel your policy during this free look period, you will receive a
refund as determined under law. Generally, there are two types of free look
refunds:
o some states require a return of all premiums we receive;
o other states require payment of account value plus a refund of all
charges deducted.
Your policy will specify what type of free look refund applies in your state.
The type of free look refund allowed in your state will affect when the net
premium we receive before the end of the free look period is invested into the
variable investment options. SEE ALLOCATION OF NET PREMIUMS, PAGE 21.
YOUR POLICY
The entire contract between you and us is the combination of:
o your policy;
o a copy of your original application and any applications for benefit
increases or decreases;
o all of your riders;
o endorsements;
o policy schedule pages; and
o reinstatement applications.
If you make a change to your coverage, we give you a copy of your changed
application and new policy schedules. If you send your policy to us, we attach
these items to your policy and return it to you. Otherwise, you need to attach
them to your policy.
Unless there is fraud, we consider all statements made in an application to be
representations and not guarantees. We use no statement to deny a claim, unless
it is in an application.
A president or an officer of our company and our secretary or assistant
secretary must sign all changes or amendments we make to your policy. No other
person may change the terms or conditions of your policy.
GUARANTEED ISSUE
We may offer policies on a guaranteed issue basis for certain group or sponsored
arrangements. When this happens, we issue these policies up to a preset face
amount with reduced evidence of insurability
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Strategic Advantage 39
<PAGE>
requirements. Guaranteed issue policies may carry a different mortality risk to
us compared with policies that are fully underwritten. So, we may charge
different cost of insurance rates for guaranteed issue policies. The cost of
insurance rates under these circumstances may depend on the:
o issue age of the insured people;
o risk class of the insured people;
o size of the group; and
o total premium the group pays.
Generally, most guaranteed issued policies have higher overall charges for
insurance than a similar underwritten policy issued in the standard nonsmoker or
standard smoker class. This means that the insured person in a group or
sponsored arrangement could get individually underwritten insurance coverage at
a lower overall cost.
AGE
The age stated in your policy schedule is the age of the insured person we use
to issue your policy. This is based on the insured person's age as of the
nearest birthday to the policy date.
The policy is issued on a guaranteed and fully- underwritten basis. On the
policy date, the insured person must be no less than age 15. For a fully-
underwritten policy, the insured person must be no more than age 85. For a
guaranteed issued policy, the insured person must be no more than age 70.
Generally, we use age to calculate rates, charges and values. We determine the
insured person's age at any time by adding the number of completed policy years
to the age calculated at issue.
The policy anniversary nearest the insured person's 100th birthday is the policy
maturity date for continuation of coverage.
OWNERSHIP
The original owner is the person named as the owner in the policy application.
The owner can exercise all rights and receive benefits during the insured
person's lifetime while the policy is still in force. This includes the right to
change the owner, beneficiary(ies) or the method designated to pay death
proceeds.
As a matter of law, all rights of ownership are limited by the rights of any
person who has been assigned rights under the policy and any irrevocable
beneficiary(ies).
You may name a new owner by giving us written notice. The effective date of the
change to the new owner is the date the prior owner signs the notice. However,
we will not be liable for any action we take before a change is recorded at our
customer service center. A change in ownership may cause the prior owner to
recognize taxable income on gain under the policy.
BENEFICIARY(IES)
You, as owner, name the beneficiary(ies) when you apply for your policy. The
primary beneficiary(ies) who survives the insured person receives the death
proceeds. Other surviving beneficiary(ies) receive death proceeds only if there
is no surviving primary beneficiary(ies). If more than one beneficiary(ies)
survives the insured person, they share the death proceeds equally, unless you
have told us otherwise. If none of your policy beneficiaries has survived the
insured person, we pay the death proceeds to you or to your estate, as owner.
Once you tell us who the beneficiary(ies) is/are, we keep this information on
file. You may name a new beneficiary(ies) any time before death of the insured
person. We pay the death proceeds to the beneficiary(ies) whom you have most
recently named according to our records. We do not make payments to multiple
sets of beneficiaries.
COLLATERAL ASSIGNMENT
You may assign your policy by sending written notice to us. After we record the
assignment, your rights as owner and the beneficiary's(ies') rights (unless the
beneficiary(ies) was made an irrevocable beneficiary(ies) under an earlier
assignment) are subject to the assignment. It is your responsibility to make
sure the assignment is valid.
INCONTESTABILITY
If your policy has been in force and the insured person is alive for two years
from your policy date, we will not question the validity of the statements in
your application. If your policy has been in force and the insured person is
alive for two years from the effective date of a new segment or from the
effective date of an increase in any other benefit, with respect to the insured
person (such as an increase in stated death benefit) we will not contest
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Strategic Advantage 40
<PAGE>
the statements in your application for the new segment or other increase.
If this policy has been in force and the insured person is alive for two years
from the effective date of reinstatement, we will not contest the statements in
your application for reinstatement.
MISSTATEMENTS OF AGE OR GENDER
If the insured person's age or gender has been misstated, we adjust the death
benefit to the amount which would have been purchased for the insured person's
correct age and gender. We base the adjusted death benefit on the cost of
insurance charges deducted from your account value on the last monthly
processing date before the death of the insured person, or as otherwise required
by law.
If unisex cost of insurance rates apply, we do not make any adjustments for a
misstatement of gender.
SUICIDE
If the insured person commits suicide (while that insured person is sane or
insane) within two years of your policy date, unless otherwise required by law,
we limit death proceeds payable in one sum to:
1. the total of all premiums we receive to the time of death; minus
2. outstanding policy loan amounts and accrued loan interest; minus
3. partial withdrawals you have taken.
We make a limited payment to the beneficiary(ies) for a new segment or other
increase if the death of that insured person is due to suicide (while the
insured person is sane or insane), within two years of the effective date of a
new segment or within two years of an increase in any other benefit, unless
otherwise required by law. The limited payment we make is equal to the cost of
insurance and monthly expense charges which were deducted for such increase.
TRANSACTION PROCESSING
Generally, within seven days of when we receive all information required to
process a payment, we pay:
o death proceeds;
o net cash surrender value upon surrender;
o partial withdrawals; and
o loan proceeds.
We may delay processing these transactions if:
o the NYSE is closed for trading;
o trading on the NYSE is restricted by the SEC;
o there is an emergency so that it is not reasonably possible to sell
securities in the variable investment options or to determine the value
of a variable investment option's assets; or
o a governmental body with jurisdiction over the separate account allows
suspension by its order.
SEC rules and regulations determine whether or not these conditions exist.
We execute transfers among the variable investment options as of the valuation
date of our receipt of your request at our customer service center.
We determine the death benefit as of the date of the death of the insured
person. The death proceeds are not affected by changes in the value of the
variable investment options after that date.
We may delay payment from our guaranteed interest division for up to six months,
unless state law requires otherwise, of surrender proceeds, withdrawal amounts
or loan amounts. If we delay payment more than 30 days, we pay interest at our
declared rate (or at a higher rate if required by law) from the date we receive
your complete request.
NOTIFICATION AND CLAIMS PROCEDURES
Except for certain authorized telephone requests, we must receive in writing any
election, designation, change, assignment or request made by the owner.
You must use a form acceptable to us. We are not liable for actions taken before
we receive and record the written notice. We may require you to return your
policy for policy changes and at the time of surrender.
If the insured person dies while your policy is in force, please let us or your
agent/registered representative know as soon as possible. We will immediately
send you instructions on how to make a claim at the insured person's death. As
proof of the insured person's death, we may require you to provide proof of the
deceased insured person's age and a certified copy of the death certificate.
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<PAGE>
The beneficiary(ies) and the deceased insured person's next of kin may need to
sign authorization forms. These forms allow us to get information about the
deceased insured person. This information may include medical records of doctors
and hospitals used by the deceased insured person.
TELEPHONE PRIVILEGES
If your policy was delivered on or after May 1, 1999, telephone privileges are
automatically provided to you and your agent/registered representative, unless
you decline it on the application or contact our customer service center. If
your policy was delivered before May 1, 1999, you may choose telephone
privileges by completing our customer service form and returning it to our
customer service center. Telephone privileges allow you or your agent/registered
representative, if applicable, to call our customer service center to:
o make transfers;
o change premium allocations;
o change features in your dollar cost averaging and automatic rebalancing
programs;
o request partial withdrawals; or
o request a policy loan.
Our customer service center uses reasonable procedures to make sure that
instructions received by telephone are genuine. These procedures may include:
1. requiring some form of personal identification;
2. providing written confirmation of any transactions; and
3. tape recording telephone calls.
By accepting automatic telephone privileges, you authorize us to record your
telephone calls with us. If we use reasonable procedures to confirm
instructions, we are not liable for losses due to unauthorized or fraudulent
instructions. We may discontinue this privilege at any time.
NON-PARTICIPATION
Your policy does not participate in the surplus earnings of Security Life.
DISTRIBUTION OF THE POLICIES
The principal underwriter (distributor) for our policies is ING America
Equities, Inc., a wholly owned subsidiary of Security Life. It is registered as
a broker-dealer with the SEC and the NASD. We pay ING America Equities, Inc. for
acting as the principal underwriter under a distribution agreement.
We sell our policies through licensed insurance agents who are registered
representatives of other broker-dealers including, but not limited to:
1. VESTAX Securities Corporation, an indirect affiliate of Security Life
of Denver Insurance Company;
2. Locust Street Securities, Inc., an indirect affiliate of Security Life
of Denver Insurance Company;
3. Multi-Financial Securities Corp., an indirect affiliate of Security
Life of Denver Insurance Company; and
4. IFG Network Securities, Inc., an indirect affiliate of Security Life of
Denver Insurance Company.
All broker-dealers who sell this policy have entered into selling agreements
with us. Under these selling agreements, we pay a distribution allowance to
broker-dealers, who pay commissions to their agents/registered representatives
who sell this policy.
During the first policy year, the distribution allowance is 15% of premium we
receive up to target premium and 3% of premium we receive in excess of target.
For policy years two through five, the distribution allowance is 10% of target
premium we receive up to target premium and 3% of premium we receive in excess
of target. For policy years after the fifth, the distribution allowance is 3% of
all premium we receive.
Broker-dealers receive annual renewal payments (trails) of 0.10% of the average
net account value beginning in the sixth policy year.
In addition to the distribution allowance, we may pay wholesaler fees or
marketing and training allowances. We pay all allowances from our resources
which include sales charges deducted from premiums.
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Strategic Advantage 42
<PAGE>
ADVERTISING PRACTICES AND SALES LITERATURE
We may use advertisements and sales literature to promote this product,
including:
o articles on variable life insurance and other information published in
business or financial publications;
o indices or rankings of investment securities; and
o comparisons with other investment vehicles, including tax
considerations.
We may use information regarding the past performance of the variable investment
options. However, past performance is not indicative of future performance of
the investment options or the policies and is not reflective of the actual
investment experience of policyowners.
We may feature certain investment options and their managers, as well as
describe asset levels and sales volumes. We may refer to past, current, or
prospective economic trends, investment performance or other information we
believe may be of interest to our customers.
SETTLEMENT PROVISIONS
You may elect to have the beneficiary(ies) receive the death proceeds other than
in one payment. If you make this election, you must do so before the death of
the insured person. If you have not made this election, the beneficiary(ies) may
do so within 60 days after we receive proof of the death of the insured person.
You may take your net cash surrender value in other than one payment.
The investment performance of the variable investment options does not affect
payments under these settlement options. Instead, interest accrues at a fixed
rate based on the option you choose. Payment options are subject to our rules at
the time you make your selection. Currently, a periodic payment must be at least
$20 and the total proceeds are $2,000 or more.
OPTION I: PAYOUTS FOR A DESIGNATED PERIOD
OPTION II: LIFE INCOME WITH PAYOUTS GUARANTEED FOR A DESIGNATED PERIOD
OPTION III: HOLD AT INTEREST
OPTION IV: PAYOUTS OF A DESIGNATED AMOUNT
OPTION V: OTHER OPTIONS WE OFFER AT THE TIME WE PAY THE BENEFIT
ADMINISTRATIVE INFORMATION ABOUT THE POLICY
VOTING PRIVILEGES
We invest the variable investment options' assets in shares of investment
portfolios. We are the legal owner of the shares held in the separate account
and we have the right to vote on certain issues. Among other things, we may vote
on issues described in the fund's current prospectus or issues requiring a vote
by shareholders under the Investment Company Act of 1940.
Even though we own the shares, we give you the opportunity to tell us how to
vote the number of shares attributable to your policy.
We count fractional shares. If you have a voting interest, we send you proxy
material and a form on which to give us your voting instructions.
Each investment portfolio share has the right to one vote. The votes of all
shares are cast together on a collective basis, except on issues for which the
interests of the portfolios differ. In these cases, voting is done on a
portfolio-by-portfolio basis.
Examples of issues that require a portfolio-by- portfolio vote are:
1. changes in the fundamental investment policy of a particular investment
portfolio; or
2. approval of an investment advisory agreement.
We vote the shares in accordance with your instructions at meetings of
investment portfolio shareholders. We vote any investment portfolio shares that
are not attributable to policies and any investment portfolio shares for which
the owner does not give us instructions, the same way we vote as if we did
receive owner instructions.
We reserve the right to vote investment portfolio shares without getting
instructions from policy owners if the federal securities laws, regulations or
their interpretations change to allow this.
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<PAGE>
You may instruct us only on matters relating to the investment portfolios
corresponding to variable investment options in which you have invested assets
as of the record date set by the investment portfolio's board for the
portfolio's shareholders meeting. We determine the number of investment
portfolio shares in each variable investment option that we attribute to your
policy by dividing your account value allocated to that variable investment
option by the net asset value of one share of the matching investment portfolio.
MATERIAL CONFLICTS
We are required to track events to identify any material conflicts arising from
using investment portfolios for both variable life and variable annuity separate
accounts. The boards of the investment portfolios, Security Life and other
insurance companies participating in the investment portfolios, have this same
duty. There may be a material conflict if:
o state insurance law or federal income tax law changes;
o investment management of an investment portfolio changes; or
o voting instructions given by owners of variable life insurance policies
and variable annuity contracts differ.
The investment portfolios may sell shares to certain qualified pension and
retirement plans qualifying under Code Section 401. These include cash or
deferred arrangements under Code Section 401(k). Therefore, there is a
possibility that a material conflict may arise between the interests of owners
in general or between certain classes of owners and these retirement plans or
participants in these retirement plans.
If there is a material conflict, we have the duty to determine appropriate
action including removing the portfolios involved from our variable investment
options. We may take other action to protect policy owners. This could mean
delays or interruptions of the variable operations.
When state insurance regulatory authorities require it, we may ignore voting
instructions relating to changes in an investment portfolio's adviser or its
investment policies. If we do ignore voting instructions, we give you a summary
of our actions in our next semi- annual report to owners.
Under the Investment Company Act of 1940, we must get your approval for certain
actions involving our separate account. In this case, you have one vote for
every $100 of value you have in the variable investment options. We cast votes
credited to amounts in the variable investment options, but not credited to
policies in the same proportion as votes cast by owners.
RIGHT TO CHANGE OPERATIONS
Subject to state limitations, we may from time to time make any of the following
changes to our separate account:
1. Change the investment objective.
2. Offer additional variable investment options which will invest in
portfolios we find appropriate for policies we issue.
3. Eliminate variable investment options.
4. Combine two or more variable investment options.
5. Substitute a new investment portfolio for a portfolio in which the
division currently invests. A substitution may become necessary if, in
our judgment:
o a portfolio no longer suits the purposes of your policy;
o there is a change in laws or regulations;
o there is a change in a portfolio's investment objectives or
restrictions;
o the portfolio is no longer available for investment; or
o another reason we deem a substitution is appropriate.
6. Transfer assets related to your policy class to another separate
account.
7. Withdraw the separate account from registration under the 1940 Act.
8. Operate the separate account as a management investment company under
the 1940 Act.
9. Cause one or more variable investment options to invest in a mutual
fund other than, or in addition to, the investment portfolios.
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<PAGE>
10. Stop selling these policies.
11. End any employer or plan trustee agreement with us under the
agreement's terms.
12. Limit or eliminate any voting rights for the separate account.
13. Make any changes required by the 1940 Act or its rules or regulations.
We will not make a change until it is effective with the SEC and approved by the
appropriate state insurance departments, if necessary. We will notify you of
changes. If you wish to transfer the amount you have in the affected investment
option to another variable investment option or to the guaranteed interest
division, you may do so free of charge. Just notify us at our customer service
center.
REPORTS TO OWNERS
At the end of each policy year we send a report to you that shows:
o your total net policy death benefit (your stated death benefit plus
adjustable term insurance rider death benefit, if any);
o your account value;
o your policy loan, if any, plus accrued interest;
o your net cash surrender value;
o information about the variable investment options; and
o your account transactions during the policy year showing net premiums,
transfers, deductions, loan amounts or withdrawals.
We also send semi-annual reports with financial information on the investment
portfolios, including a list of the investment holdings of each portfolio to
you.
We send confirmation notices to you throughout the year for certain policy
transactions.
CHARGES, DEDUCTIONS AND REFUNDS
The amount of a charge may not correspond to the cost incurred by us to provide
the service or benefit. For example, the sales charge may not cover all of our
sales and distribution expenses. Some proceeds from other charges, including the
mortality and expense risk charge or cost of insurance charges, may be used to
cover such expenses.
DEDUCTIONS FROM PREMIUMS
We treat payments we receive as premium payments if you do not have an
outstanding loan and your policy is not in the continuation of coverage period.
After we deduct certain charges from your payment, we add the remaining net
premium to your policy.
SALES CHARGE
We deduct a percentage from each premium payment to compensate us for the costs
we incur in selling the policies. The sales charge helps cover the costs of
distribution, preparing our sales literature, promotional expenses and other
direct and indirect expenses.
We base the percentage on the length of time since your policy or a segment
becomes effective:
Sales Charge Percentage
-----------------------
Policy or Up To Policy or Above Policy or
Segment Segment Segment
Year Target Premium Target Premium
---- -------------- --------------
1 - 5 8% 3%
6 + 3% 3%
These premium deductions are a part of the total sales charge. To determine your
applicable sales charge, premiums we receive after an increase in stated death
benefit are allocated to your policy segments in the same proportion as the
guideline annual premium (defined by federal income tax law) for each segment
bears to the total guideline annual premium for your stated death benefit.
We may reduce or waive the sales charge for certain group or sponsored
arrangements, or for corporate purchasers. SEE GROUP OR SPONSORED ARRANGEMENTS,
OR CORPORATE PURCHASERS, PAGE 49.
TAX CHARGES
We pay state and local taxes in almost all states. These taxes vary in amount
from state to state and may vary from jurisdiction to jurisdiction within a
state. Currently, state and local taxes range from 0.5% to 5% with some states
not imposing these types of taxes. We deduct 2.5% of each premium payment to
cover these taxes. This rate approximates the average tax rate we expect to pay
in all states.
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Strategic Advantage 45
<PAGE>
We also deduct 1.5% of each premium payment to cover our estimated costs for the
federal income tax treatment of deferred acquisition costs. This cost is
determined solely by the amount of life insurance premiums we receive.
We reserve the right to increase or decrease your premium expense charge for
taxes as a result of changes in the tax law, within limits set by law. We also
reserve the right to increase or decrease your premium expense charge for the
federal income tax treatment of deferred acquisition costs based on any change
in that cost to us.
DAILY DEDUCTIONS FROM THE SEPARATE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE
We deduct 0.002055% per day (0.75% annually) of the amount you have in the
variable investment options for the mortality and expense risks we assume. This
charge is deducted as part of the calculation of the daily unit values for the
variable investment options and does not appear as a separate charge on your
statement or confirmation.
The mortality risk is that insured people, as a group, may live less time than
we estimated. The expense risk is that the costs of issuing and administering
the policies and in operating the variable division are greater than the amount
we estimated.
The mortality and expense risk charge does not apply to your account value in
the guaranteed interest division or the loan division.
MONTHLY DEDUCTIONS FROM ACCOUNT VALUE
We deduct charges from your account value on each monthly processing date until
the maturity date or until the continuation of coverage period begins.
POLICY CHARGE
The policy charge is $10 per month for the first five years of your policy.
This charge compensates us for such costs as:
o application processing;
o medical examinations ;
o establishment of policy records; and
o insurance underwriting costs.
MONTHLY ADMINISTRATIVE CHARGE
We charge a per month administrative charge of $5 plus $0.0125 per $1,000 for
the greater of the stated death benefit or the target death benefit. We limit
this charge to $15 per month.
This charge is designed to compensate us for ongoing costs such as:
o premium billing and collections;
o claim processing;
o policy transactions;
o record keeping;
o reporting and communications with policy owners; and
o other expenses and overhead.
COST OF INSURANCE CHARGE
The cost of insurance charge compensates us for the ongoing costs of providing
insurance coverage under the policy, including the expected cost of paying death
proceeds that may be more than your account value at the insured person's death.
The cost of insurance charge is equal to our current monthly cost of insurance
rate multiplied by the net amount at risk for each portion of your death
benefit. We calculate the net amount at risk monthly, at the beginning of each
policy month. For the base death benefit, the net amount at risk is calculated
using the difference between the current base death benefit and your account
value. We determine your account value after we deduct your policy and rider
charges due on that date other than cost of insurance charges for the base death
benefit, adjustable term insurance and waiver of cost of insurance riders.
If your base death benefit at the beginning of a month increases (due to
requirements of the federal income tax law definition of life insurance), the
net amount at risk for your base death benefit for that month also increases.
Similarly, the net amount at risk for your adjustable term insurance rider
decreases. This means that your cost of insurance charge varies from month to
month with changes in your net amount at risk, changes in the death benefit and
with the increasing age of the insured person. We allocate the net amount at
risk to segments in the same proportion that each segment has to the total
stated death benefit for all coverage segments as of the monthly processing
date.
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Strategic Advantage 46
<PAGE>
We base your current cost of insurance rates on the insured person's age, gender
and premium class on the policy and each segment date.
We apply unisex rates where appropriate under the law. This currently includes
the state of Montana and policies purchased by employers and employee
organizations in connection with employment-related insurance or benefit
programs.
Separate cost of insurance rates apply to:
o each segment of the base death benefit;
o your adjustable term insurance rider; and
o your waiver of cost of insurance rider.
We may make changes in the cost of insurance or rider charges for a class of
insured persons. We base the new charge on changes in expectations about:
o investment earnings;
o mortality;
o the time policies remain in effect;
o expenses; and
o taxes.
These rates are never more than the guaranteed maximum rates shown in your
policy. The guaranteed maximum rates are based on the 1980 Commissioner's
Standard Ordinary Sex Distinct Mortality Table.
The maximum rates for the initial and each new segment will be printed in your
policy schedule pages.
RIDER CHARGES
On each monthly processing date, we deduct the cost of benefits under your
riders. Rider charges do not include the adjustable term insurance and waiver of
cost of insurance riders. SEE RIDERS, PAGE 28.
GUARANTEED MINIMUM DEATH BENEFIT CHARGE
If you choose the guaranteed minimum death benefit we currently charge $0.005
per $1,000 of stated death benefit each month during the guarantee period. This
charge's guaranteed maximum is $0.01 per $1,000 of stated death benefit each
month.
POLICY TRANSACTION FEES
We charge fees for certain transactions under your policy. We deduct these fees
from the variable and guaranteed interest divisions pro rata to the account
value in each.
PARTIAL WITHDRAWALS
We deduct the lesser of a $25 service fee or 2% of the requested partial
withdrawal from your account value for each partial withdrawal you take to cover
our costs. We may also deduct a surrender charge from your account value. SEE
PARTIAL WITHDRAWALS, PAGE 36.
TRANSFERS
There is a $25 fee to cover our costs for each transfer over twelve free
transfers per policy year. If you include multiple transfers in one transfer
request, it counts as one transfer. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 32.
ILLUSTRATIONS
The first policy illustration you request in a policy year is free. After that,
we may charge a fee of up to $25 for each additional policy illustration.
PREMIUM ALLOCATION CHANGE
You may make twelve free premium allocation changes per policy year. After the
twelve free changes, we charge $25 for each additional premium allocation change
in that policy year. If you change your designated deduction investment option,
we consider it a premium allocation change. SEE MONTHLY DEDUCTIONS FROM ACCOUNT
VALUE, PAGE 46.
CONTINUATION OF COVERAGE ADMINISTRATIVE FEE
At the policy anniversary nearest the insured person's 100th birthday, if your
policy has not been surrendered, the continuation of coverage period begins.
We charge a one-time administrative fee of $200. This charge compensates us for
maintaining and servicing your policy until the death of the insured person. We
then no longer charge monthly charges.
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Strategic Advantage 47
<PAGE>
DIVISIONS FROM WHICH WE DEDUCT CHARGES,
LOANS AND PARTIAL WITHDRAWALS
<TABLE>
<CAPTION>
MONTHLY CHARGES: COST OF
INSURANCE CHARGES, RIDER TRANSACTION FEES LOANS AND
CHARGES, ADMINISTRATIVE FEES PARTIAL WITHDRAWALS
<S> <C> <C> <C>
Proportionally among May choose any investment
Choice May choose a designated deduction variable and guaranteed option or combination of
investment option, including interest divisions investment options
guaranteed interest division
Default Proportionally among variable and Proportionally among Proportionally among variable
guaranteed interest divisions variable and guaranteed and guaranteed interest divisions
interest divisions
</TABLE>
PERSISTENCY REFUND
Where law allows us, we pay long-term policy owners a persistency refund. Each
month your policy remains in force after your tenth policy anniversary, we
credit your account value with a refund of 0.04167% of account value. This
refund is 0.5% of your account value on an annual basis.
We do not guarantee that we will pay a persistency refund on the guaranteed
interest division. If we pay a persistency refund on the guaranteed interest
division, we will pay it even if your policy is in the continuation of coverage
period.
If applicable, we add the persistency refund to the variable and guaranteed
interest divisions, but not the loan division, in the same proportion that your
account value in each investment option has to your net account value as of the
monthly processing date.
Here are two examples of how the persistency refund may affect your account
value:
EXAMPLE 1: YOUR POLICY HAS NO LOAN:
o account value = $10,000 (all in the variable division)
o monthly persistency refund rate = .0004167
o persistency refund = 10,000 x .0004167 = $4.17
Value Before Value After
Persistency Persistency
Refund Refund
Variable
Division $10,000.00 $10,004.17
EXAMPLE 2: YOUR POLICY DOES HAVE A LOAN:
o account value = $10,000
o account value in the variable division = $6,000
o account value in the loan division = $4,000
o monthly persistency refund rate = .0004167
o persistency refund = 10,000 x .0004167 = $4.17
Value Before Value After
Persistency Persistency
Refund Refund
Variable
Division $6,000.00 $6,004.17
Loan $4,000.00 $4,000.00
REFUND OF SALES CHARGES
If you surrender your policy within the first two policy years and your policy
has not lapsed, we will refund a portion of the sales charges we previously
deducted from the premiums we received. In the first policy year, the amount of
the refund is guaranteed to be at least 5% of the premiums we receive. In the
second policy year, the refund is guaranteed to be at
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Strategic Advantage 48
<PAGE>
least 2.5% of the premiums we receive in the first policy year. The refund of
sales charge is guaranteed only for the first two policy years. THE REFUND OF
SALES CHARGE IS NOT AVAILABLE IF YOUR POLICY WAS PURCHASED WITH THE PROCEEDS OF
A POLICY ISSUED BY US OR ONE OF OUR AFFILIATES.
OTHER CHARGES
Under current law, we pay no tax on investment income and capital gains included
in variable life insurance policy reserves. This means that no charge is
currently made to any variable investment option for our federal income taxes.
If the tax law changes and we have federal income tax chargeable to the variable
investment options, we may make such a charge in the future.
GROUP OR SPONSORED ARRANGEMENTS, OR CORPORATE PURCHASERS
Individuals, corporations or other institutions may purchase this policy. For
group or sponsored arrangements (including employees and certain family members
of employees of Security Life, its affiliates and appointed sales agents),
corporate purchasers or special exchange programs which we may offer from time
to time, we may reduce or waive the:
o administrative charge;
o minimum stated death benefit;
o minimum target death benefit;
o minimum annual premium;
o target premium;
o sales charges;
o cost of insurance charges; or
o other charges normally assessed.
We reduce or waive these items based on expected economies under a group or
sponsored arrangement or with a corporate purchaser. Our sales, administration
and mortality costs generally vary with the size and stability of the group,
among other factors. We take all these factors into account when we reduce
charges. A group or sponsored arrangement must meet certain requirements to
qualify for reduced charges. We make reductions to charges based on our rules in
effect when we approve a policy application. We may change these rules from time
to time.
Group arrangements include those in which there is a trustee, an employer or an
association. The group may purchase multiple policies covering a group of
individuals on a group basis or endorse a 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.
Each sponsored arrangement or corporation may have different group premium
payments and premium requirements.
We will not unfairly discriminate in any variation in the surrender charge,
administrative charge, or other charges, fees and privileges. These variations
are based on differences in costs or services.
TAX CONSIDERATIONS
The following summary provides a general description of the federal income tax
considerations associated with the policy and does not purport to be complete or
to cover all tax situations. This discussion is not intended as tax advice.
Counsel or other competent tax advisers should be consulted for more complete
information. This discussion is based upon our understanding of the present
federal income tax laws. No representation is made as to the likelihood of
continuation of the present federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service.
TAX STATUS OF THE POLICY
This policy is designed to qualify as a life insurance contract under the
Internal Revenue Code. All terms and provisions of the policy shall be construed
in a manner which is consistent with that design. In order to qualify as a life
insurance contract for federal income tax purposes and to receive the tax
treatment normally accorded life insurance contracts under federal tax law, a
policy must satisfy certain requirements which are set forth in Internal Revenue
Code Section 7702. While there is little guidance as to how these requirements
are applied, we believe it is reasonable to conclude that our policies satisfy
the applicable requirements. If it is subsequently determined that a policy does
not satisfy the applicable requirements, we will take appropriate and reasonable
steps to bring the policy into compliance with such requirements and we reserve
the right to restrict policy transactions or modify your policy in order to do
so.
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Strategic Advantage 49
<PAGE>
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."
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 person's
age, sex and premium class at any point in time, multiplied by the account
value. SEE APPENDIX A, PAGE 168, 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 176, 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. SEE TAX
TREATMENT OF POLICY DEATH BENEFITS, PAGE 51.
DIVERSIFICATION REQUIREMENTS
In addition to meeting the Code Section 7702 tests, Code Section 817(h) requires
separate account investments, such as our separate account, to be adequately
diversified. The Treasury has issued regulations which set the standards for
measuring the adequacy of any diversification. To be adequately diversified,
each variable investment option must meet certain tests. If your variable life
policy is not adequately diversified under these regulations, it is not treated
as life insurance under Code Section 7702. You would then be subject to federal
income tax on your policy income as you earn it. Our variable investment
options' investment portfolios have promised they will meet the diversification
standards that apply to your policy.
In certain circumstances, you, as owner of a variable life insurance contract,
may be considered the owner for federal income tax purposes of the separate
account assets used to support your contract. Any income and gains from the
separate account assets are includable in the gross income from your policy
under these circumstances. The IRS has stated in published rulings that a
variable contract owner is considered the owner of separate account assets if
the contract owner has "indicia of ownership" in those assets. "Indicia of
ownership" includes the ability to exercise investment control over the assets.
Your ownership rights under your policy are similar to, but different in some
ways from those described by the IRS in rulings in which it determined that
policy owners are not owners of separate account assets. For example, you have
flexibility in allocating your premium payments and in your policy values. These
differences could result in the IRS treating you as the owner of a pro rata
share of the separate account assets. We do not know what standards will be set
forth in the future, if any, in Treasury regulations or rulings. We reserve the
right to modify your policy, as necessary, to try to prevent you from being
considered the owner of a pro rata share of the separate account assets or to
otherwise qualify your policy for favorable tax treatment.
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. SEE TAX TREATMENT OF POLICY DEATH BENEFITS, PAGE 51.
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
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Strategic Advantage 50
<PAGE>
TAX TREATMENT OF POLICY DEATH BENEFITS
We believe that the death benefit under a policy is generally excludable from
the gross income of the beneficiary(ies) under section 101(a)(1) of the Code.
However, there are exceptions to this general rule. Additionally, federal and
local transfer, estate inheritance and other tax consequences of ownership or
receipt of policy proceeds depend on the circumstances of each policy owner or
beneficiary(ies). A tax adviser should be consulted about these consequences.
Generally, the policy owner will not be taxed on any of the policy account value
until there is a distribution. When distributions from a policy occur, or when
loan amounts are taken from or secured by a policy, the tax consequences depend
on whether or not the policy is a "modified endowment contract."
Special rules also apply if you are subject to the alternative minimum tax. You
should consult a tax adviser if you are subject to the alternative minimum tax.
MODIFIED ENDOWMENT CONTRACTS
Under the Internal Revenue Code, certain life insurance contracts are classified
as "modified endowment contracts" and are given less favorable tax treatment
than other life insurance contracts. Due to the flexibility of the policies as
to premiums and benefits, the individual circumstances of each policy will
determine whether or not it is classified as a modified endowment contract. The
rules are too complex to be summarized here, but generally depend on the amount
of premiums we receive during the first seven policy years. Certain changes in a
policy after it is issued could also cause it to be classified as a modified
endowment contract. A current or prospective policy owner should consult with a
competent adviser to determine whether or not a policy transaction will cause
the policy to be classified as a modified endowment contract.
If a policy becomes a modified endowment contract, distributions that occur
during the policy year will be taxed as distributions from a modified endowment
contract. In addition, distributions for a policy within two years before it
becomes a modified endowment contract will be taxed in this manner. This means
that a distribution made from a policy that is not a modified endowment contract
could later become taxable as a distribution from a modified endowment contract.
MULTIPLE POLICIES
All modified endowment contracts that are issued by us (or our affiliates) to
the same policy owner during any calendar year are treated as one modified
endowment contract for purposes of determining the amount includable in the
policy owner's income when a taxable distribution occurs.
If a policy becomes a modified endowment contract, distributions that occur
during the policy year will be taxed as distributions from a modified endowment
contract. In addition, distributions from a policy within two years before it
becomes a modified endowment contract will be taxed in this manner. This means
that a distribution made from a policy that is not a modified endowment contract
could later become taxable as a distribution from a modified endowment contract.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS
Once a policy is classified as a modified endowment contract, the following tax
rules apply both prospectively and to any distributions made in the prior two
years:
1. All distributions other than death benefits, including distributions
upon surrender and withdrawals, from a modified endowment contact will
be treated first as distributions of gain taxable as ordinary income
and as tax-free recovery of the policy owner's investment in the policy
only after all gain has been distributed.
2. Loan amounts taken from or secured by a policy classified as a modified
endowment contract are treated as distributions and taxed first as
distributions of gain taxable as ordinary income and as tax-free
recovery of the policy owner's investment in the policy only after all
gain has been distributed.
3. A 10% additional income tax penalty may be imposed on the distribution
amount
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Strategic Advantage 51
<PAGE>
subject to income tax. Consult a tax adviser to determine whether or
not you may be subject to this penalty tax.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS
Distributions other than death benefits from a policy that is not classified as
a modified endowment contract are generally treated first as a recovery of the
policy owner's investment in the policy. Only after the recovery of all
investment in the policy, is there taxable income. However, certain
distributions which must be made in order to enable the policy to continue to
qualify as a life insurance contract for federal income tax purposes, if policy
benefits are reduced during the first fifteen policy years, may be treated in
whole or in part as ordinary income subject to tax.
Loan amounts from or secured by a policy that is not a modified endowment
contract are generally not treated as distributions. Finally, neither
distributions from, nor loan amounts from or secured by, a policy that is not a
modified endowment contract are subject to the 10% additional income tax.
INVESTMENT IN THE POLICY
Your investment in the policy is generally the total of your aggregate premiums.
When a distribution is taken from the policy, your investment in the policy is
reduced by the amount of the distribution that is tax free.
POLICY LOANS
In general, interest on a policy loan will not be deductible. Before taking out
a policy loan, you should consult a tax adviser as to the tax consequences.
If a loan from a policy is outstanding when the policy is canceled or lapses,
then the amount of the outstanding indebtedness will be added to the amount
treated as a distribution from the policy and will be taxed accordingly.
SECTION 1035 EXCHANGES
Code Section 1035 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 exchanges. If you wish
to take advantage of Section 1035, you should consult your tax adviser.
TAX-EXEMPT POLICY OWNERS
Special rules may apply to a policy that is owned by a tax-exempt entity.
Tax-exempt entities should consult their tax adviser regarding the consequences
of purchasing and owning a policy. These consequences could include an effect on
the tax- exempt status of the entity and the possibility of the unrelated
business income tax.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative action is uncertain, there is always the
possibility that the tax treatment of the policy could be changed by legislation
or otherwise. You should consult a tax adviser with respect to legislative
developments and their effect on the policy.
CHANGES TO COMPLY WITH THE LAW
So that your policy continues to qualify as life insurance under the Code, we
reserve the right to refuse to accept all or part of your premium payments or to
change your death benefit. We may refuse to allow you to make partial
withdrawals that would cause your policy to fail to qualify as life insurance.
We also may:
o make changes to your policy or its riders; or
o take distributions from your policy to the degree that we deem
necessary to qualify your policy as life insurance for tax purposes.
If we make any change of this type, it applies the same way to all affected
policies.
The tax law limits the amount we can charge for mortality costs and other
expenses used to calculate whether your policy qualifies as life insurance for
- --------------------------------------------------------------------------------
Strategic Advantage 52
<PAGE>
federal income tax purposes. We must base these calculations on reasonable
mortality charges and as permitted, other charges reasonably expected to be
paid. The Treasury issued proposed regulations on what it considers reasonable
mortality charges. We believe that the charges used for your policy should meet
the Treasury's current requirement for "reasonableness." We reserve the right to
make changes to the mortality charges if future regulations have standards which
make changes necessary in order to continue to qualify your policy as life
insurance for federal income tax purposes.
Additionally, assuming that you do not want your policy to be or to become a
modified endowment contract, we include a policy endorsement under which we have
the right to amend your policy, including riders. We do this to attempt to
enable your policy to continue to meet the seven-pay test for federal income tax
purposes. If the policy premium you pay is more than the seven-pay limit, we
have the right to remove any excess premium or to make any appropriate
adjustments to your policy's account value and death benefit. It is not clear,
however, whether we can take effective action pursuant to this endorsement under
all possible circumstances to prevent a policy that has exceeded the premium
limitation from being classified as a modified endowment contract.
Any increase in your death benefit will cause an increase in your cost of
insurance charges.
OTHER
Policy owners may use our policies in various arrangements, including:
o qualified plans;
o non-qualified deferred compensation or salary continuance plans;
o split dollar insurance plans;
o executive bonus plans;
o retiree medical benefit plans; and
o other plans.
The tax consequences of these plans may vary depending on the particular facts
and circumstances of each arrangement. If you want to use any of your policies
in this type of arrangement, you should consult a qualified tax adviser
regarding the tax issues of your particular arrangement.
In recent years, Congress has adopted new rules relating to life insurance owned
by businesses. Any business contemplating the purchase of a new policy or a
change in an existing policy should consult a tax adviser.
The IRS requires us to withhold income taxes from any portion of the amounts
individuals receive in a taxable transaction. We do not withhold income taxes if
you elect in writing not to have withholding apply. If the amount withheld for
you is insufficient to cover income taxes, you may have to pay income taxes and
possibly penalties later.
The transfer of the policy or designation of a beneficiary may have federal,
state and/or local transfer and inheritance tax consequences, including the
imposition of gift, estate and generation-skipping transfer taxes. For example
the transfer of the policy to or the designation as a beneficiary of or the
payment of proceeds to a person who is assigned to a generation which is two or
more generations below the generation assignment of the policy owner may have
generation skipping transfer tax consequences under federal tax law. The
individual situation of each policy owner or beneficiary will determine the
extent, if any, to which federal, state and local transfer and inheritance taxes
may be imposed and how ownership or receipt of policy proceeds will be treated
for purposes of federal, state and local estate, inheritance, generation
skipping and other taxes.
YOU SHOULD CONSULT QUALIFIED LEGAL OR TAX ADVISERS FOR COMPLETE INFORMATION ON
FEDERAL, STATE, LOCAL AND OTHER TAX CONSIDERATIONS.
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Strategic Advantage 53
<PAGE>
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, CASH SURRENDER VALUES AND
ACCUMULATED PREMIUMS
The following tables are intended to show how the policy works, including how
benefits and values can vary over time. Each table compares these values with
total premiums we receive with interest. The policy illustrated uses the
following assumptions:
Definition
Death of Life Stated Target
Smoker* Benefit Insurance Death Death
Gender Age Status Option Test Benefit Premium Benefit
- ------ --- ------ ------ ---- ------- ------- -------
Male 45 Non-smoker 1 CVAT 300,000 $5,750 300,000
Male 45 Non-smoker 1 CVAT 150,000 $5,750 300,000
Male 45 Non-smoker 1 GP 300,000 $5,750 300,000
- -------------------
* "Smoker" includes the use of cigarettes, cigars, pipes, chewing tobacco,
nicotine chewing gum or patch, snuff or any other tobacco or nicotine-based
product.
The tables show how death benefits, account values and net cash surrender values
of a hypothetical policy could vary over an extended period of time, assuming
the variable division had constant hypothetical gross annual investment returns
of 0%, 12%, or 6% over the periods indicated in each table. Values would differ
from those shown in the tables if the annual investment returns were not
constant. The amounts shown would differ if we had used female or unisex rates.
These illustrations assume there is no policy loan.
We illustrate premium payments as if they were made at the beginning of the
year. The third column of each table shows what would happen if an amount equal
to the assumed premiums earned interest, after taxes, of 5% compounded annually.
The net investment return on your policy is lower than the gross investment
return on the variable investment options as a result of the mortality and
expense risk charge, the portfolio management fees and portfolio expenses. We
show the effect of the net investment return in the amounts for death benefits,
account values and cash surrender values.
The tables reflect annual investment management fees of 0.66% of the portfolios'
aggregate average daily net assets. This hypothetical rate is a simple average
of the investment advisory fees applying to the investment portfolios for the
year ending December 31, 1999. We assume other portfolio expenses at the rate of
0.31% of the portfolios' average daily net assets. This is an average of all the
portfolios' other expenses for the year ending December 31, 1999 after any
expense reimbursements or waivers by investment portfolio managers has been
made. The average of all portfolios' total expenses is 0.97%.
Actual fees vary by portfolio. The portfolio fees and expenses used in the
illustrations are the net amounts shown after absorption of fees and expenses by
the portfolio's investment manager. Absent such expense reimbursements or
waivers, the total average investment management fees, average other portfolio
expenses and the average of all portfolios' total expenses used in the
illustrations would have been higher (0.71%, 0.47% and 1.18%, respectively). The
tables assume that the current expense reimbursement arrangements will continue.
However, they may not continue through 2000.
- --------------------------------------------------------------------------------
Strategic Advantage 54
<PAGE>
The effect of these portfolio charges and expenses, and mortality and expense
risk charges result in a net rate of return of:
o (1.71)% on a 0% gross rate of return;
o 4.25% on a 6% gross rate of return; and
o 10.20 % on a 12% gross rate of return.
The tables assume that charges have been deducted including deductions for
premiums, cost of insurance rider charges, monthly deductions, mortality and
expense risk charge, administrative and sales charges. The tables show charges
at our current rates which includes a persistency refund. The tables also show
charges at the maximum rates we guarantee in our policies. SEE MONTHLY
DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 46. The tables reflect that we do not
currently charge against the separate account for state or federal taxes. If we
charge for the taxes in the future, it will take a higher gross rate of return
than the rates shown to produce the same death benefits, account values and cash
surrender values.
If we are asked to do so, we will give you a comparable personal illustration
based on:
o the insured person's age and gender;
o standard premium class assumptions;
o initial stated death benefit;
o the chosen death benefit option;
o scheduled premiums consistent with your policy form; and
o special features elected on your policy.
At issue, we deliver an individualized illustration showing the scheduled
premium you chose and the insured person's actual risk class. After we issue the
policy, if you ask us to, we will give you an illustration of future policy
benefits. We base these hypothetical future benefits on both guaranteed and
current cost factor assumptions and actual account value.
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Strategic Advantage 55
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $5750.00
CASH VALUE ACCUMULATION TEST
SUMMARY PAGE
ASSUMING GUARANTEED CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
----------0.00%---------- ---------12.00%--------- ----------6.00%----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5750 6038 3779 4067 300000 4306 4594 300000 4042 4330 300000
2 5750 12377 7428 7572 300000 8984 9128 300000 8190 8334 300000
3 5750 19033 10945 10945 300000 14071 14071 300000 12444 12444 300000
4 5750 26022 14327 14327 300000 19606 19606 300000 16805 16805 300000
5 5750 33361 17567 17567 300000 25629 25629 300000 21271 21271 300000
6 5750 41067 21067 21067 300000 32638 32638 300000 26268 26268 300000
7 5750 49157 24404 24404 300000 40277 40277 300000 31382 31382 300000
8 5750 57653 27564 27564 300000 48605 48605 300000 36603 36603 300000
9 5750 66573 30536 30536 300000 57688 57688 300000 41926 41926 300000
10 5750 75939 33301 33301 300000 67598 67598 300000 47340 47340 300000
15 5750 130281 44608 44608 300000 136430 136430 300000 77403 77403 300000
20 5750 199636 48173 48173 300000 246658 246658 439299 110126 110126 300000
25 5750 288152 38269 38269 300000 411604 411604 649923 144344 144344 300000
30 5750 401125 2337 2337 300000 651622 651622 926607 179357 179357 300000
AGE 65 5750 215655 47498 47498 300000 274665 274665 476818 116863 116863 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 are not a
representation of past or future investment results. Actual investment results
may be different from those shown and will depend on a number of factors,
including selected investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage 56
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $5750.00
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 6038 4234 4521 300000 4789 5077 300000 4511 4799 300000
2 5750 12377 8168 8312 300000 9828 9972 300000 8981 9125 300000
3 5750 19033 11849 11849 300000 15188 15188 300000 13451 13451 300000
4 5750 26022 15380 15380 300000 21011 21011 300000 18024 18024 300000
5 5750 33361 18844 18844 300000 27430 27430 300000 22790 22790 300000
6 5750 41067 22646 22646 300000 34958 34958 300000 28181 28181 300000
7 5750 49157 26422 26422 300000 43309 43309 300000 33848 33848 300000
8 5750 57653 30184 30184 300000 52583 52583 300000 39814 39814 300000
9 5750 66573 33916 33916 300000 62859 62859 300000 46076 46076 300000
10 5750 75939 37576 37576 300000 74202 74202 300000 52606 52606 300000
15 5750 130281 54931 54931 300000 154039 154039 313932 90730 90730 300000
20 5750 199636 67823 67823 300000 283147 283147 504284 136553 136553 300000
25 5750 288152 74946 74946 300000 487589 487589 769903 193025 193025 304786
30 5750 401125 72470 72470 300000 806913 806913 1147431 260774 260774 370820
AGE 65 5750 215655 69807 69807 300000 316963 316963 550249 146891 146891 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 are not a
representation of past or future investment results. Actual investment results
and policy charges may be different from those shown and will depend on a number
of factors, including the investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage 57
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $150000 DEATH BENEFIT OPTION 1
INITIAL ADJUSTABLE TERM RIDER: $150000 ANNUAL PREMIUM: $5750.00
CASH VALUE ACCUMULATION TEST
SUMMARY PAGE
ASSUMING GUARANTEED CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
----------0.00%---------- ---------12.00%--------- ----------6.00%----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5750 6038 3779 4066 300000 4306 4593 300000 4042 4329 300000
2 5750 12377 7427 7571 300000 8983 9127 300000 8189 8333 300000
3 5750 19033 10943 10943 300000 14069 14069 300000 12442 12442 300000
4 5750 26022 14325 14325 300000 19604 19604 300000 16803 16803 300000
5 5750 33361 17565 17565 300000 25627 25627 300000 21269 21269 300000
6 5750 41067 21065 21065 300000 32635 32635 300000 26266 26266 300000
7 5750 49157 24402 24402 300000 40274 40274 300000 31379 31379 300000
8 5750 57653 27562 27562 300000 48601 48601 300000 36600 36600 300000
9 5750 66573 30535 30535 300000 57685 57685 300000 41924 41924 300000
10 5750 75939 33301 33301 300000 67595 67595 300000 47339 47339 300000
15 5750 130281 44623 44623 300000 136434 136434 300000 77417 77417 300000
20 5750 199636 48246 48246 300000 246665 246665 439311 110197 110197 300000
25 5750 288152 38546 38546 300000 411615 411615 649940 144573 144573 300000
30 5750 401125 3304 3304 300000 651638 651638 926629 179983 179983 300000
AGE 65 5750 215655 47594 47594 300000 274672 274672 476831 116954 116954 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 are not a
representation of past or future investment results. Actual investment results
may be different from those shown and will depend on a number of factors,
including selected investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage 58
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $150000 DEATH BENEFIT OPTION 1
INITIAL ADJUSTABLE TERM RIDER: $150000 ANNUAL PREMIUM: $5750.00
CASH VALUE ACCUMULATION TEST
SUMMARY PAGE
ASSUMING CURRENT CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
----------0.00%---------- ---------12.00%--------- ----------6.00%----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5750 6038 4414 4702 300000 4981 5269 300000 4697 4985 300000
2 5750 12377 8602 8745 300000 10312 10456 300000 9440 9583 300000
3 5750 19033 12592 12592 300000 16059 16059 300000 14256 14256 300000
4 5750 26022 16446 16446 300000 22328 22328 300000 19210 19210 300000
5 5750 33361 20208 20208 300000 29221 29221 300000 24354 24354 300000
6 5750 41067 24312 24312 300000 37279 37279 300000 30149 30149 300000
7 5750 49157 28346 28346 300000 46175 46175 300000 36196 36196 300000
8 5750 57653 32319 32319 300000 56005 56005 300000 42515 42515 300000
9 5750 66573 36219 36219 300000 66845 66845 300000 49104 49104 300000
10 5750 75939 40013 40013 300000 78755 78755 300000 55946 55946 300000
15 5750 130281 57769 57769 300000 162038 162038 330234 95584 95584 300000
20 5750 199636 70589 70589 300000 296023 296023 527216 142922 142922 300000
25 5750 288152 77698 77698 300000 508169 508169 802399 201407 201407 318022
30 5750 401125 75312 75312 300000 839501 839501 1193771 270828 270828 385117
AGE 65 5750 215655 72564 72564 300000 331115 331115 574816 153634 153634 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 are not a
representation of past or future investment results. Actual investment results
and policy charges may be different from those shown and will depend on a number
of factors, including the investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage 59
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $5750.00
GUIDELINE PREMIUM TEST
SUMMARY PAGE
ASSUMING GUARANTEED CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
----------0.00%---------- ---------12.00%--------- ----------6.00%----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5750 6038 3779 4067 300000 4306 4594 300000 4042 4330 300000
2 5750 12377 7428 7572 300000 8984 9128 300000 8190 8334 300000
3 5750 19033 10945 10945 300000 14071 14071 300000 12444 12444 300000
4 5750 26022 14327 14327 300000 19606 19606 300000 16805 16805 300000
5 5750 33361 17567 17567 300000 25629 25629 300000 21271 21271 300000
6 5750 41067 21067 21067 300000 32638 32638 300000 26268 26268 300000
7 5750 49157 24404 24404 300000 40277 40277 300000 31382 31382 300000
8 5750 57653 27564 27564 300000 48605 48605 300000 36603 36603 300000
9 5750 66573 30536 30536 300000 57688 57688 300000 41926 41926 300000
10 5750 75939 33301 33301 300000 67598 67598 300000 47340 47340 300000
15 5750 130281 44608 44608 300000 136430 136430 300000 77403 77403 300000
20 5750 199636 48173 48173 300000 252405 252405 307934 110126 110126 300000
25 5750 288152 38269 38269 300000 446458 446458 517891 144344 144344 300000
30 5750 401125 2337 2337 300000 762726 762726 816117 179357 179357 300000
AGE 65 5750 215655 47498 47498 300000 284157 284157 340989 116863 116863 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 are not a
representation of past or future investment results. Actual investment results
may be different from those shown and will depend on a number of factors,
including selected investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage 60
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NON-SMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $5750.00
GUIDELINE PREMIUM TEST
SUMMARY PAGE
ASSUMING CURRENT CHARGES
Assuming Hypothetical Gross Investment Return of:
<TABLE>
<CAPTION>
----------0.00%---------- ---------12.00%--------- ----------6.00%----------
PREMIUM CASH CASH CASH
ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH
YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5750 6038 4234 4521 300000 4789 5077 300000 4511 4799 300000
2 5750 12377 8168 8312 300000 9828 9972 300000 8981 9125 300000
3 5750 19033 11849 11849 300000 15188 15188 300000 13451 13451 300000
4 5750 26022 15380 15380 300000 21011 21011 300000 18024 18024 300000
5 5750 33361 18844 18844 300000 27430 27430 300000 22790 22790 300000
6 5750 41067 22646 22646 300000 34958 34958 300000 28181 28181 300000
7 5750 49157 26422 26422 300000 43309 43309 300000 33848 33848 300000
8 5750 57653 30184 30184 300000 52583 52583 300000 39814 39814 300000
9 5750 66573 33916 33916 300000 62859 62859 300000 46076 46076 300000
10 5750 75939 37576 37576 300000 74202 74202 300000 52606 52606 300000
15 5750 130281 54931 54931 300000 154055 154055 300000 90730 90730 300000
20 5750 199636 67823 67823 300000 288101 288101 351484 136553 136553 300000
25 5750 288152 74946 74946 300000 510407 510407 592072 193039 193039 300000
30 5750 401125 72470 72470 300000 876832 876832 938211 265664 265664 300000
AGE 65 5750 215655 69807 69807 300000 324220 324220 389064 146891 146891 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 are not a
representation of past or future investment results. Actual investment results
and policy charges may be different from those shown and will depend on a number
of factors, including the investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage 61
<PAGE>
ADDITIONAL INFORMATION
DIRECTORS AND OFFICERS
Set forth below is information regarding the directors and principal officers of
Security Life of Denver Insurance Company. Security Life's address and the
business address of each person named, except as noted with 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.
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- --------------------
Stephen M. Christopher Chairman, President and Chief Executive Officer
Jess A. Skriletz Director, Chief Executive Officer and General
Manager, ING Reinsurance and ING Institutional
Markets
Michael W. Cunningham* Director, Executive Vice President
Mark A. Tullis* Director
P. Randall Lowery* Director
Thomas F. Conroy President, ING Reinsurance International
Gregory G. McGreevey President, ING Institutional Markets
Jerome J. Cwiok* Executive Vice President and Chief Operating Officer
James L. Livingston, Jr. Executive Vice President, CFO and Chief Actuary
Jeffrey R. Messner Executive Vice President and Chief Marketing Officer
John R. Barmeyer* Senior Vice President, ING US Legal Services
Peter Bell Senior Vice President, Risk Selection and Medical
Director, ING Reinsurance
Wayne D. Bidelman Senior Vice President, CCRC, ING Reinsurance
R. Thomas Daniel* Senior Vice President, Marketing
Arnold A. Dicke Senior Vice President and Chief Actuary, ING
Reinsurance
Charles E. LeDoyen** Senior Vice President, Structured Settlements
Terry L. Morrison Senior Vice President, New Business Operations
Derek J. Reynolds* Senior Vice President and Chief Information Officer
Jeffrey W. Seel* Senior Vice President, Chief Investment Officer
Mark A. Smith Senior Vice President, Insurance Services
Lawrence D. Taylor Senior Vice President, Product Management
Gretta Ytterbo Senior Vice President, ING US Legal Services
Gary W. Waggoner Vice President, General Counsel and Corporate
Secretary
- --------------------------------------------------------------------------------
Strategic Advantage 62
<PAGE>
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. Sutherland Asbill &
Brennan LLP has provided advice on certain matters relating to the federal
securities laws.
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 separate 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, 1999 and 1998, and for each of the
three years in the period ended December 31, 1999, and the financial statements
of the Security Life Separate Account L1 at December 31, 1999, and for each of
the three years in the period ended December 31, 1999, 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 on the authority of
such firm as experts in accounting and auditing.
Actuarial matters in this prospectus have been examined by James L. Livingston,
Jr., F.S.A., M.A.A.A., who is Executive Vice President, CFO and Chief Actuary of
Security Life. 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 separate 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. There is a charge for this
material.
- --------------------------------------------------------------------------------
Strategic Advantage 63
<PAGE>
INDEX OF SPECIAL TERMS
The following special terms are used in this prospectus. We explain each term on
the page(s) listed in the body of this prospectus and in the summary, if
applicable:
Account value.....................................8
Accumulation unit................................31
Accumulation unit value...........................8
Adjustable term insurance rider..................22
Base death benefit...............................24
Beneficiary(ies).................................10
Cash surrender value.............................31
Continuation of coverage.........................30
Death proceeds...................................24
Divisions........................................18
Free look period.................................39
General account..................................18
Guarantee period.................................27
Guarantee period annual premium..................27
Guaranteed interest division.....................18
Guaranteed minimum death benefit.................26
Initial premium..................................21
Insured person's 100th birthday..................30
Investment date..................................21
Investment options...............................12
Loan division.....................................8
Minimum annual premium...........................20
Net account value................................31
Net amount at risk...............................46
Net cash surrender value.........................31
Net premium.......................................4
Partial withdrawal...............................36
Policy............................................4
Policy date......................................19
Policy loan......................................35
Portfolios.......................................13
Scheduled premium................................20
Segment..........................................26
Special continuation period......................21
Stated death benefit.........................19, 22
Target death benefit.............................28
Target premium...................................20
Total death benefit..............................23
Transaction date.................................32
Valuation date....................................8
Valuation period..............................8, 32
Variable division................................18
Variable investment option.......................12
- --------------------------------------------------------------------------------
Strategic Advantage 64
<PAGE>
FINANCIAL STATEMENTS
The consolidated financial statements of Security Life of Denver Insurance
Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1999
and 1998, and for each of the three years in the period ended December 31, 1999,
are prepared in accordance with accounting principles generally accepted in the
United States and start on page 60.
The financial statements included for the Security Life Separate Account L1 at
December 31, 1999 and for each of the three years in the period ended December
31, 1999, are prepared in accordance with accounting principles generally
accepted in the United States 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.
- --------------------------------------------------------------------------------
Strategic Advantage 65
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
- --------------------------------------------------------------------------------
Strategic Advantage 66
<PAGE>
Consolidated Financial Statements
Security Life of Denver
Insurance Company
and Subsidiaries
Years ended December 31, 1999, 1998 and 1997
with Report of Independent Auditors
- --------------------------------------------------------------------------------
Strategic Advantage 67
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
CONTENTS
Report of Independent Auditors ...............................................69
Audited Consolidated Financial Statements
Consolidated Balance Sheets ..................................................70
Consolidated Statements of Income ............................................72
Consolidated Statements of Comprehensive Income...............................73
Consolidated Statements of Stockholder's Equity ..............................74
Consolidated Statements of Cash Flows ........................................75
Notes to Consolidated Financial Statements ...................................77
- --------------------------------------------------------------------------------
Strategic Advantage 68
<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, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
April 14, 2000
- --------------------------------------------------------------------------------
Strategic Advantage 69
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------ ---------------
<S> <C> <C>
ASSETS
Investments (Notes 2 and 3):
Fixed maturities, at fair value (amortized cost:
1999--$3,649,485; 1998--$3,383,582) $ 3,486,939 $ 3,503,530
Equity securities, at fair value (cost: 1999--$5,161;
1998--$6,761) 7,944 8,400
Mortgage loans on real estate 1,006,443 784,108
Investment real estate, at cost, less accumulated
depreciation (1999--$561; 1998--$706) 1,028 1,740
Policy loans 961,586 925,623
Other long-term investments 37,284 17,671
Short-term investments 186,917 747
------------ ---------------
Total investments 5,688,141 5,241,819
Cash 48,630 31,644
Accrued investment income 78,866 52,440
Reinsurance recoverable:
Paid benefits 19,738 11,364
Unpaid benefits 28,060 24,312
Prepaid reinsurance premiums (Note 8) 3,666,882 3,329,901
Deferred policy acquisition costs (DPAC) 982,713 778,126
Property and equipment, at cost, less accumulated
depreciation (1999--$28,522; 1998--$25,981) 34,704 36,141
Federal income tax recoverable (Note 9) 27,663 -
Indebtedness from related parties 33,220 4,339
Other assets 134,913 113,019
Separate account assets (Note 6) 644,975 423,474
------------ ---------------
Total assets $11,388,505 $10,046,579
============ ===============
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 70
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------- --------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Life and annuity reserves $ 5,313,006 $ 4,857,141
Guaranteed investment contracts 3,885,219 3,210,012
Policyholders' funds 79,648 81,064
Advance premiums 192 272
Accrued dividends and dividends on deposit 21,603 21,268
Policy and contract claims 155,679 130,100
-------------------- --------------------
Total future policy benefits 9,455,347 8,299,857
Accounts payable and accrued expenses 126,857 108,165
Indebtedness to related parties 34,231 13,755
Long-term debt to related parties (Note 10) 100,000 100,000
Accrued interest on long-term debt to related
parties (Note 10) 11,098 5,387
Other liabilities 98,225 109,593
Federal income taxes payable (Note 9) - 106
Deferred federal income taxes (Note 9) 18,679 60,062
Separate account liabilities (Note 6) 644,975 423,474
-------------------- --------------------
Total liabilities 10,489,412 9,120,399
Commitments and contingencies
(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 345,722 315,722
Retained earnings 614,785 563,553
Accumulated other comprehensive income (loss) (64,294) 44,025
-------------------- --------------------
Total stockholder's equity 899,093 926,180
-------------------- --------------------
Total liabilities and stockholder's equity $11,388,505 $10,046,579
==================== ====================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 71
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Income
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Traditional life insurance premiums $ 104,133 $ 120,675 $ 122,429
Universal life and investment product charges 247,066 229,226 217,108
Reinsurance premiums assumed 526,563 431,267 446,434
---------------- ---------------- ----------------
877,762 781,168 785,971
Reinsurance premiums ceded (147,068) (143,211) (124,815)
---------------- ---------------- ----------------
730,694 637,957 661,156
Net investment income 394,167 361,996 340,898
Net realized gains (losses) on investments (39,495) 10,818 28,645
Other revenues 18,304 11,771 6,743
---------------- ---------------- ----------------
1,103,670 1,022,542 1,037,442
Benefits and expenses:
Benefits:
Traditional life insurance:
Death benefits 357,472 239,921 299,305
Other benefits 72,286 77,209 79,849
Universal life and investment contracts:
Interest credited to account balances 258,167 236,136 217,614
Death benefits incurred in excess of account
balances 95,444 63,103 73,260
Increase in future policy benefits 95,511 102,875 72,685
Reinsurance recoveries (127,238) (84,506) (98,376)
Product conversions 3,701 10,578 7,014
---------------- ---------------- ----------------
755,343 645,316 651,351
Expenses:
Commissions 81,539 49,569 46,516
Insurance operating expenses 91,172 125,194 89,075
Amortization of deferred policy acquisition costs 98,051 105,639 116,495
---------------- ---------------- ----------------
1,026,105 925,718 903,437
---------------- ---------------- ----------------
Income before federal income taxes 77,565 96,824 134,005
Federal income taxes (Note 9) 26,333 34,066 47,019
---------------- ---------------- ----------------
Net income $ 51,232 $ 62,758 $ 86,986
================ ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 72
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net income $ 51,232 $ 62,758 $ 86,986
---------------- ---------------- ----------------
Other comprehensive income:
Unrealized gains (losses) on securities:
Net change in unrealized holding gains (losses), net of tax (150,423) (11,251) 28,367
Reclassification adjustment for realized gains
included in net income, net of tax (32,454) (5,010) (4,601)
Effect on DPAC of unrealized gains and
losses on fixed maturities, net of tax 82,098 7,236 (37,522)
Reclassification effect on DPAC of realized gains
and losses included in net income, net of tax (7,073) 3,075 5,976
Net change in pension liability, net of tax (467) (963) -
---------------- ---------------- ----------------
Total other comprehensive income (loss) (108,319) (6,913) (7,780)
---------------- ---------------- ----------------
Comprehensive income (loss) $ (57,087) $ 55,845 $ 79,206
================ ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 73
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
================== ================= ==================
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year $ 2,880 $ 2,880 $ 2,880
================== ================= ==================
Additional paid-in capital:
Balance at beginning of year $315,722 $315,722 $302,722
Capital contributions 30,000 - 13,000
------------------ ----------------- ------------------
Balance at end of year $345,722 $315,722 $315,722
================== ================= ==================
Accumulated other comprehensive income (loss):
Net unrealized gains on investments:
Balance at beginning of year $ 44,988 $ 50,938 $ 58,718
Unrealized gains (losses) on securities:
Change in unrealized gains (losses),
net of tax (182,877) (16,261) 23,766
Effect on DPAC of unrealized gains and
losses on fixed maturities, net of tax 75,025 10,311 (31,546)
------------------ ----------------- ------------------
Balance at end of year (62,864) 44,988 50,938
Accumulated net pension liability:
Balance at beginning of year (963) - -
Net change in pension liability, net of tax (467) (963) -
------------------ ----------------- ------------------
Balance at end of year (1,430) (963) -
------------------ ----------------- ------------------
Total accumulated other comprehensive
income (loss) $(64,294) $ 44,025 $ 50,938
================== ================= ==================
Retained earnings:
Balance at beginning of year $563,553 $500,795 $413,809
Net income 51,232 62,758 86,986
------------------ ----------------- ------------------
Balance at end of year $614,785 $563,553 $500,795
================== ================= ==================
Total stockholder's equity $899,093 $926,180 $870,335
================== ================= ==================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 74
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------- ------------------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 51,232 $ 62,758 $ 86,986
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in future policy benefits 624,769 874,765 995,632
Net (increase) decrease in federal income taxes (69,152) 12,061 (12,317)
Increase in accounts payable and accrued
expenses 6,088 55,361 21,033
Increase in accrued interest on long-term debt 5,711 259 1,428
Increase in accrued investment income (26,426) (2,714) (4,300)
(Increase) decrease in reinsurance recoverable (12,122) (9,518) 3,733
Increase in prepaid reinsurance premiums (336,981) (585,038) (793,851)
Net realized investment (gains) losses 39,495 (10,818) (28,645)
Depreciation and amortization expense 2,567 3,174 3,630
Policy acquisition costs deferred (187,214) (184,993) (174,374)
Amortization of deferred policy acquisition
costs 98,049 105,639 116,495
Increase in accrual for postretirement benefits 769 675 557
Other, net 51,980 (7,053) 43,538
----------------- ------------------- -------------------
Net cash provided by operating activities 248,765 314,558 259,545
INVESTING ACTIVITIES
Securities available-for-sale:
Sales:
Fixed maturities 2,300,734 5,015,989 2,279,598
Equity securities 2,053 2,251 648
Maturities--fixed maturities 193,664 274,463 410,632
Purchases:
Fixed maturities (2,816,711) (5,670,994) (2,919,145)
Equity securities - (2,089) (2,561)
Sale, maturity or repayment of investments:
Mortgage loans on real estate 47,851 51,235 38,756
Investment real estate 1,109 - -
Other long-term investments 70,790 10,678 2,002
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 75
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------- ------------------- -------------------
<S> <C> <C> <C>
Investing activities (continued)
Purchase or issuance of investments:
Mortgage loans on real estate $(271,686) $(259,945) $(163,528)
Investment real estate - (13) (35)
Policy loans, net (35,963) (50,218) (80,094)
Other long-term investments (88,661) (14,042) (5,248)
Short-term investments, net (186,174) 55,115 (48,447)
Additions to property and equipment (1,247) (1,418) (2,687)
Disposals of property and equipment 147 68 145
----------------- ------------------- -------------------
Net cash used by investing activities (784,094) (588,920) (489,964)
Financing activities
(Decrease) increase in indebtedness to related parties (8,406) 29,156 5,217
Cash contributions from parent 30,000 - 13,000
Receipts from interest-sensitive products
credited to policyholder account balances 829,493 505,728 555,223
Return of policyholder account balances on
interest-sensitive policies (298,772) (251,177) (334,543)
----------------- ------------------- -------------------
Net cash provided by financing activities 552,315 283,707 238,897
----------------- ------------------- -------------------
Net increase in cash 16,986 9,345 8,478
Cash at beginning of year 31,644 22,299 13,821
----------------- ------------------- -------------------
Cash at end of year $ 48,630 $ 31,644 $ 22,299
================= =================== ===================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 76
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
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;
Tailored Investment Notes Trust 1999-1 (Trust); and ING America 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 three markets, the advanced market, reinsurance to other
insurers, and the investment products market. 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 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.
In the investment products market, the Company offers guaranteed investment
contracts, funding agreements and Trust notes to institutional buyers.
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 accounting principles generally accepted in the United States
(U.S. 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 U.S. 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.
- --------------------------------------------------------------------------------
Strategic Advantage 77
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
During 1998, the Company adopted FASB Statement No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, which standardizes the
disclosure requirements for pension and other postretirement benefits. This
Statement is effective for years beginning after December 15, 1997, with the
restatement of disclosures for prior periods provided for comparative purposes,
unless prior period information is not readily available.
During 1998, the Company adopted FASB Statement No. 130, Reporting Comprehensive
Income, which requires an entity to divide comprehensive income into net income
and other comprehensive income in the period recognized. This Statement is
effective for fiscal years beginning after December 15, 1997, with the
restatement of prior period disclosures for comparative purposes. As a result of
implementing this Statement, the Company has classified items of other
comprehensive income by their nature in the statements of comprehensive income
and the accumulated balance of other comprehensive income in the equity section
of the balance sheet. This Statement affects the presentation of the financial
statements, with no effect on the valuation of total stockholder's equity.
During 1999, the Company adopted Statement of Position 97-3, Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments. This
Statement is effective for fiscal years beginning after December 31, 1998 and
requires a liability to be recognized for the 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
premiums written in each state. The Statement also requires that when it is
probable a paid or accrued assessment will result in an amount that is
recoverable from premium tax offsets or policy surcharges, an asset be
recognized at the time the liability is recorded. Additional disclosures are
also required, including the amount of the liability, the amount of the related
asset for premium tax offsets or policy surcharges, the periods over which the
assessments are expected to be paid, and the period over which the recorded
premium tax offsets or policy surcharges are expected to be realized. Prior
period financial statements presented for comparative purposes are not restated.
The adoption of this Statement had no effect on the valuation of total
stockholder's equity.
- --------------------------------------------------------------------------------
Strategic Advantage 78
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENDING ACCOUNTING STANDARDS
During 1998, the FASB issued Statement No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities, which establishes a new model for
accounting and reporting for derivatives and hedging activities. Statement 133
requires all derivatives to be recognized on the balance sheet and measured at
fair value. Based on the type of hedging relationship (fair value, cash flow, or
foreign currency), Statement 133 requires the recognition of offsetting changes
in value or cash flows of both the derivative and the hedged item in earnings in
the same period. Changes in the fair value of derivatives that are not
designated as hedges or that do not meet the hedge accounting criteria in
Statement 133 are included in earnings in the period of change. During 1999, the
FASB issued Statement 137 which delays the implementation of Statement 133 to
years beginning after June 15, 2000. Upon the initial application of Statement
133, all derivatives are required to be recognized in the balance sheet as
either assets or liabilities and measured at fair value. The Company plans to
adopt this Statement during 2001, and the effect of implementation on the
Company's financial statements has not yet been determined.
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.
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, and deferred policy
acquisition cost adjustments, reported net of tax as a component of
other comprehensive income in stockholder's equity.
- --------------------------------------------------------------------------------
Strategic Advantage 79
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The amortized cost of debt securities 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 hedging fixed maturity assets are reported on the balance
sheet at market value with fixed maturity securities. Derivatives
hedging liabilities are reported on the balance sheet at amortized cost
with other investments.
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, 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.
- --------------------------------------------------------------------------------
Strategic Advantage 80
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
accumulated other comprehensive income in 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
Company and industry experience. These assumptions include provisions for
adverse deviation and are modified as necessary to reflect anticipated trends.
Reserve interest assumptions are those deemed appropriate at the time of policy
issue, and range from 3% to 7.5%. 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 revenue. Benefit
reserves for all other reinsurance assumed are computed to recognize profits in
proportion to the coverage provided.
Benefit reserves for universal life-type policies (including fixed premium
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 3.51% to 7.61% during 1999, 3.80% to 7.81% during
1998, and 4.60% to 7.81% during 1997.
Included in life and annuity reserves is an unearned revenue reserve that
reflects the unamortized balance of excess heaped expense loads over ultimate
renewal expense loads 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.
- --------------------------------------------------------------------------------
Strategic Advantage 81
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
POLICY AND CONTRACT 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 $5,497,000 and $5,816,000 at
December 31, 1999 and 1998, respectively. Participating business approximates
.2% of the Company's ordinary life insurance in force and 1.5% of premium
income. Earnings for participating insurance are based on the actual earnings of
the participation block of policies. Expenses and taxes are allocated based on
the amount of participating insurance in force. Investment income is allocated
based on the yield of the participating investment portfolio. The amount of
dividends to be paid is determined annually by the Board of Directors. Amounts
allocable to participating policyholders are based on published dividend
projections or expected dividend scales. Dividends of $3,424,000, $3,233,000,
and $3,377,000 were incurred in 1999, 1998, and 1997, 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.
- --------------------------------------------------------------------------------
Strategic Advantage 82
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH FLOW INFORMATION
Cash includes cash on hand and demand deposits. Included as a component of
operating activities is interest paid of $2,672,000, $10,121,000, and
$10,110,000 for 1999, 1998, and 1997, 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 guaranty fund assessment liability at December 31, 1999 and 1998
was $17,644,000 and $13,338,000, respectively. The assessment is expected to be
paid over the next five or more years. The related premium tax credit offsets
are $15,339,000 and $11,891,000 at December 31, 1999 and 1998, respectively. The
premium tax credit offsets are expected to be realized over the next five years.
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1999 and 1998 presentation.
- --------------------------------------------------------------------------------
Strategic Advantage 83
<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, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------------------------------
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 $ 98,354 $ 42 $ 7,795 $ 90,601
States, municipalities and political
subdivisions 21,412 - 4,408 17,004
Public utilities securities 276,742 272 19,532 257,482
Debt securities issued by foreign
governments 452 - - 452
Corporate securities 1,431,446 4,131 77,293 1,358,284
Mortgage-backed securities 1,075,807 24,064 56,493 1,043,378
Other asset-backed securities 745,231 7,626 33,635 719,222
Redeemable preferred stocks - - - -
Derivatives hedging fixed maturities
(Note 3) 41 475 - 516
----------------- ------------------ ----------------- -----------------
Total fixed maturities 3,649,485 36,610 199,156 3,486,939
Preferred stocks (nonredeemable) 2,651 329 24 2,956
Common stocks 2,510 2,573 95 4,988
----------------- ------------------ ----------------- -----------------
Total equity securities 5,161 2,902 119 7,944
----------------- ------------------ ----------------- -----------------
Total $3,654,646 $39,512 $199,275 $3,494,883
================= ================== ================= =================
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 84
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------
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 $ 166,611 $ 3,829 $ 589 $ 169,851
States, municipalities and political
subdivisions 23,368 959 1,803 22,524
Public utilities securities 172,968 4,885 904 176,949
Debt securities issued by foreign
governments 952 - - 952
Corporate securities 1,251,462 46,292 23,512 1,274,242
Mortgage-backed securities 1,132,058 75,159 6,922 1,200,295
Other asset-backed securities 635,539 19,968 3,578 651,929
Redeemable preferred stocks 312 42 - 354
Derivatives hedging fixed maturities
(Note 3) 312 6,434 312 6,434
----------------- ------------------ ----------------- -----------------
Total fixed maturities 3,383,582 157,568 37,620 3,503,530
Preferred stocks (nonredeemable) 4,251 6 52 4,205
Common stocks 2,510 1,780 95 4,195
----------------- ------------------ ----------------- -----------------
Total equity securities 6,761 1,786 147 8,400
----------------- ------------------ ----------------- -----------------
Total $3,390,343 $159,354 $37,767 $3,511,930
================= ================== ================= =================
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 85
<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, 1999, 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.
AMORTIZED
COST FAIR VALUE
--------------- --------------------
Available for sale:
Due in one year or less $ 9,637 $ 9,174
Due after one year through five years 247,473 245,401
Due after five years through ten years 749,169 716,715
Due after ten years 822,127 752,532
--------------- --------------------
1,828,406 1,723,822
Mortgage-backed securities 1,075,807 1,043,379
Other asset-backed securities 745,231 719,222
Derivatives 41 516
--------------- --------------------
Total available-for-sale $3,649,485 $3,486,939
=============== ====================
Changes in unrealized gains (losses) on investments in available-for-sale
securities for the years ended December 31, 1999, 1998 and 1997 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------------------
Fixed Equity Total
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Gross unrealized gains $ 36,610 $2,902 $ 39,512
Gross unrealized (losses) (199,156) (119) (199,275)
-------------------- -------------------- --------------------
Net unrealized gains (losses) (162,546) 2,783 (159,763)
Deferred income tax 56,891 (974) 55,917
-------------------- -------------------- --------------------
Net unrealized gains (losses) after taxes (105,655) 1,809 (103,846)
Less:
Balance at beginning of year 77,966 1,065 79,031
-------------------- -------------------- --------------------
Change in net unrealized gains
(losses) $(183,621) $ 744 $(182,877)
==================== ==================== ====================
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 86
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
----------------------------------------
Fixed Equity Total
---------- -------------- --------------
Gross unrealized gains $157,568 $1,786 $159,354
Gross unrealized (losses) (37,620) (147) (37,767)
---------- -------------- --------------
Net unrealized gains 119,948 1,639 121,587
Deferred income tax (41,982) (574) (42,556)
---------- -------------- --------------
Net unrealized gains after taxes 77,966 1,065 79,031
Less:
Balance at beginning of year 94,470 822 95,292
---------- -------------- --------------
Change in net unrealized gains
(losses) $ (16,504) $ 243 $ (16,261)
========== ============== ==============
DECEMBER 31, 1997
----------------------------------------
Fixed Equity Total
---------- -------------- --------------
Gross unrealized gains $161,625 $1,513 $163,138
Gross unrealized (losses) (16,282) (248) (16,530)
---------- -------------- --------------
Net unrealized gains 145,343 1,265 146,608
Deferred income tax (50,873) (443) (51,316)
---------- -------------- --------------
Net unrealized gains 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
========== ============== ==============
As part of its overall investment management strategy, the Company has entered
into agreements to purchase $140,600,000 in mortgage loans as of December 31,
1999. These agreements were settled during 2000. The Company had no agreements
to sell securities at December 31, 1999.
- --------------------------------------------------------------------------------
Strategic Advantage 87
<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):
1999 1998 1997
------------ -------------- ---------------
Fixed maturities $288,694 $278,227 $259,936
Mortgage loans on real estate 66,687 47,567 40,908
Policy loans 60,284 58,016 56,087
Other investments 2,068 2,911 3,159
------------ -------------- ---------------
417,733 386,721 360,090
Investment expenses (23,566) (24,725) (19,192)
------------ -------------- ---------------
Net investment income $394,167 $361,996 $340,898
============ ============== ===============
Net realized gains (losses) on investments for the years ended December 31 are
summarized as follows (in thousands):
1999 1998 1997
------------ -------------- ---------------
Fixed maturities $(41,679) $ 9,691 $27,717
Equity securities 142 168 (57)
Real estate and other 2,042 959 985
------------ -------------- ---------------
Net realized gains (losses) on
investments $(39,495) $10,818 $28,645
============ ============== ===============
During 1999, 1998 and 1997, fixed maturities and marketable equity securities
available-for-sale were sold with fair values at the date of sale of
$2,300,481,000, $5,018,240,000 and $2,281,886,000, respectively. Gross gains of
$20,117,000, $44,314,000 and $41,017,000 and gross losses of $61,654,000,
$34,455,000 and $13,357,000 were realized on those sales in 1999, 1998 and 1997,
respectively.
At December 31, 1999 and 1998, bonds with an amortized cost of $28,755,000 and
$29,081,000, respectively, were on deposit with various state insurance
departments to meet regulatory requirements.
- --------------------------------------------------------------------------------
Strategic Advantage 88
<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.
- --------------------------------------------------------------------------------
Strategic Advantage 89
<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,
1999 and 1998 (in thousands):
DECEMBER 31, 1999
----------------------------------------------
Notional Amortized Fair Balance
amount cost value sheet
---------- ---------- ----------- -----------
Interest rate contracts:
Swaps $1,340,582 $ (125) $19,014 $ 311
Swaps--affiliates 1,034,535 125 (18,869) 125
---------- ---------- ----------- -----------
Total swaps 2,375,117 - 145 436
Caps owned 50,525 80 17 40
Caps owned--affiliates 20,525 (39) (17) (40)
---------- ---------- ----------- -----------
Total caps owned 71,050 41 - -
Floors owned 90,500 252 172 332
Floors owned--affiliates - - - -
---------- ---------- ----------- -----------
Total floors owned 90,500 252 172 332
Options owned 302,000 4,000 7,118 4,000
Options owned--affiliates 277,000 (3,210) (6,198) (3,210)
---------- ---------- ----------- -----------
Total options owned 579,000 790 920 790
---------- ---------- ----------- -----------
Forwards owned 152,300 - 37 -
Forwards owned--affiliates 144,300 - (32) -
---------- ---------- ----------- -----------
Total forwards owned 296,600 - 5 -
---------- ---------- ----------- -----------
Total derivatives $3,412,267 $1,083 $ 1,242 $1,558
========== ========== =========== ===========
- --------------------------------------------------------------------------------
Strategic Advantage 90
<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)
DECEMBER 31, 1998
---------------------------------------------
Notional Amortized Fair Balance
amount cost value sheet
------------ --------- ---------- ----------
Interest rate contracts:
Swaps $ 767,873 $ (155) $(2,952) $(2,952)
Swaps--affiliates 734,176 155 5,440 5,440
------------ --------- ---------- ----------
Total swaps 1,502,049 - 2,488 2,488
Caps owned 560,000 312 11 11
Caps owned--affiliates - - - -
------------ --------- ---------- ----------
Total caps owned 560,000 312 11 11
Floors owned 422,485 (72) 3,768 3,768
Floors owned--affiliates 8,485 72 167 167
------------ --------- ---------- ----------
Total floors owned 430,970 - 3,935 3,935
Options owned 418,300 5,268 2,664 2,664
Options owned--affiliates 418,300 (5,268) (2,664) (2,664)
------------ --------- ---------- ----------
Total options owned 836,600 - - -
------------ --------- ---------- ----------
Forwards owned - - - -
Forwards owned--affiliates - - - -
------------ --------- ---------- ----------
Total forwards owned - - - -
------------ --------- ---------- ----------
Total derivatives $3,329,619 $ 312 $ 6,434 $ 6,434
============ ========= ========== ==========
4. CONCENTRATIONS OF CREDIT RISK
At December 31, 1999, the Company held less-than-investment-grade bonds
classified as available-for-sale with a carrying value and market value of
$319,122,000. These holdings amounted to 9.1% of the Company's investments in
fixed maturity securities and 2.8% 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, 1999, the Company's mortgages involved a concentration of
properties located in Florida (15.2%), Texas (9.9%), and Georgia (6.2%). The
remaining mortgages relate to properties located in 36 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 $24,076,000.
- --------------------------------------------------------------------------------
Strategic Advantage 91
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. EMPLOYEE BENEFIT PLANS
PENSION PLANS AND POSTRETIREMENT BENEFITS
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). In
addition to providing pension plans, the Company provides certain health care
and life insurance benefits for retired employees.
The funded status and the amounts recognized in the balance sheets for the
defined benefit plans and other postretirement benefit plans are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------------ ------------------------------------------
Qualified Post- Qualified Post-
plan SERP retirement plan SERP retirement
------------- ------------- -------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Projected benefit obligation $(36,352) $(11,803) $ (6,256) $(38,685) $(8,320) $ (8,949)
Less plan assets at fair value 50,495 - - 47,230 - -
------------- ------------- -------------- ------------- ----------- --------------
Plan assets in excess (deficient)
of projected benefit obligation $ 14,143 $(11,803) $ (6,256) $ 8,545 $(8,320) $ (8,949)
============= ============= ============== ============= =========== ==============
Net asset (liability) $ 1,200 $ (6,501) $(12,813) $ 1,240 $(4,918) $(12,044)
============= ============= ============== ============= =========== ==============
</TABLE>
As of December 31, 1999 and 1998, the Company recognized an additional minimum
net liability on the SERP of $2,200,000 and $1,482,000, respectively, as this
plan is unfunded and the actuarial present value of accumulated benefit
obligation exceeds the net pension liability. Prior to 1998, the change in the
additional minimum net liability was reported in net income. Beginning in 1998,
the change in the additional minimum net liability is recorded net of tax as a
component of other comprehensive income directly in stockholder's equity.
- --------------------------------------------------------------------------------
Strategic Advantage 92
<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, employer contributions, plan participant
contributions, and benefits paid for the defined benefit plans are as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- --------------------------------- ---------------------------------
Qualified Post- Qualified Post- Qualified Post-
plan SERP retirement plan SERP retirement plan SERP retirement
---------- -------- ------------ ------------ -------- ----------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net periodic pension
expense $ 40 $1,971 $1,236 $ 82 $1,109 $893 $607 $1,502 $755
Employer contributions - 387 467 - 325 218 - 317 198
Plan participants'
contributions - - 94 - - 77 - - 71
Benefits paid 1,238 387 561 890 325 296 811 317 268
</TABLE>
Assumptions used in accounting for the defined benefit plans as of December 31,
1999, 1998, and 1997 were as follows:
1999 1998 1997
-------- ----------- ------------
Weighted-average discount rate 8.00% 6.75% 7.25%
Rate of increase in compensation level 5.00% 4.00% 4.25%
Expected long-term rate of return on assets 9.25% 9.50% 9.50%
Plan assets of the defined benefit plans at December 31, 1999 are invested
primarily in U.S. government securities, corporate bonds, mutual funds, mortgage
loans, money market funds and common stock. Certain of the Qualified Plan's
investments are held in the ING-NA Master Trust, which was established in 1998
for the investment of assets of the Plan and several other ING-NA-sponsored
retirement plans.
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 9.5% graded to 5.5%
over eight 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, 1999 by $1,217,000 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1999 by
$235,000. Decreasing 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, 1999 by $(981,000)
- --------------------------------------------------------------------------------
Strategic Advantage 93
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1999 by $(185,000).
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8.00% at December 31, 1999, 6.75% at
December 31, 1998 and 7.50% at December 31, 1997.
Effective January 1, 2000, the Postretirement Benefit Plan was amended, causing
the Company's current year projected benefit obligation to decrease.
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. Participants may make contributions to the plan
through salary reductions up to a maximum of $10,000 for both 1999 and 1998, and
$9,500 for 1997. 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 $1,423,000 for 1999,
$1,343,000 for 1998, and $1,211,000 for 1997.
Plan assets of the Savings Plan at December 31, 1999 are invested in a group
deposit administration contract (the Contract) with the Company, various stock
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
$28.7 million and $27.8 million at December 31, 1999 and 1998, respectively.
Effective January 1, 2000, the Plan was merged into the ING Savings Plan, a
defined contribution plan sponsored by the Company's parent.
6. SEPARATE ACCOUNTS
Separate account assets and liabilities represent funds segregated by the
Company for the benefit of certain policy and contract holders who bear the
investment risk. Revenues and expenses on the separate account assets and
related liabilities equal the benefits paid to the separate account policy and
contract holders, and are excluded from the amounts reported in the consolidated
statements of income except for benefits paid in excess of policyholder account
values and fees charged for surrender, administration services and mortality
risk.
- --------------------------------------------------------------------------------
Strategic Advantage 94
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LEASES
In 1997, 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 $0 for the years ended December 31, 1999 and 1998, and $4,993,000
for the year ended December 31, 1997.
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, 1999, the Company's retention limit for acceptance of
risk on life insurance policies had been set at various levels up to $3,000,000.
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 retroceded. Consequently, allowances are
established for amounts deemed uncollectible. To minimize its exposure to
significant losses from retrocessionaire insolvencies, the Company evaluates the
financial condition of the retrocessionaire and monitors concentrations of
credit risk. The use of reinsurance pools with more than 30 retrocessionaires
from 10 different countries also minimizes the Company's exposure to significant
losses from retrocessionaire insolvencies.
The Company assumes and cedes, on a coinsurance basis, guaranteed investment
contracts (GICs) to and from affiliates under common ownership. As of December
31, 1999, $3.3 billion of an affiliate's invested assets were held in trust
pursuant to these agreements.
- --------------------------------------------------------------------------------
Strategic Advantage 95
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. REINSURANCE (CONTINUED)
These GIC transactions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------ -------------------------------
Policy Policy
Deposits liabilities Deposits liabilities
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Direct (nonaffiliated) $1,805,434 $3,787,729 $2,773,952 $3,112,460
Assumed from affiliate:
Life Insurance Company of Georgia - 97,490 - 97,552
---------------- --------------- --------------- ----------------
1,805,434 3,885,219 2,773,952 3,210,012
Ceded to affiliates:
Columbine Life Insurance Company (129,768) - (2,547,743) (2,696,409)
Life Insurance Company of Georgia (683,100) (663,325) (225,083) (512,477)
First Columbine Life Insurance Company (650,300) (2,888,079) (1,126) (1,126)
---------------- --------------- --------------- ----------------
Net $ 342,266 $ 333,815 $ - $ -
================ =============== =============== ================
</TABLE>
Ceded GIC policy liabilities totaling $3,551 and $3,210 million as of December
31, 1999 and 1998, respectively, are classified as part of prepaid reinsurance
premiums.
During 1999 and 1998, the Company had ceded blocks of insurance under
reinsurance treaties to provide funds for financial and other purposes. These
reinsurance transactions, generally known as "financial reinsurance," represent
financial arrangements and, in accordance with U.S. GAAP, are not reflected in
the accompanying financial statements except for the risk fees paid to or
received from reinsurers. Financial reinsurance has the effect of increasing
current statutory surplus while reducing future statutory surplus as amounts are
recaptured from reinsurers. During 1998, the Company entered into a new
financial reinsurance contract with an affiliated company.
9. INCOME TAXES
The Company files a consolidated federal income tax return with its parent and
other U.S. affiliates and subsidiaries. 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.
- --------------------------------------------------------------------------------
Strategic Advantage 96
<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):
DECEMBER 31
1999 1998
------------- ---------------
Deferred tax liabilities:
Deferred policy acquisition costs $(344,540) $(272,970)
Unrealized gains/losses - (42,556)
------------- ---------------
Total deferred tax liabilities (344,540) (315,526)
Deferred tax assets:
Benefit reserves and surplus relief 90,895 102,177
Tax-basis deferred policy acquisition costs 90,508 83,836
Investment income 22,201 13,712
Unrealized gains 55,917 -
Nonqualified deferred compensation 14,181 14,667
Postretirement employee benefits 2,542 2,501
Separate accounts 26,961 18,775
Other, net 22,656 19,796
------------- ---------------
Total deferred tax assets 325,861 255,464
------------- ---------------
Net deferred tax liabilities $ (18,679) $ (60,062)
============= ===============
The components of federal income tax expense consist of the following (in
thousands):
DECEMBER 31
1999 1998 1997
-------------- --------------- ---------------
Current $ 9,399 $24,111 $37,542
Deferred 16,934 9,955 9,477
-------------- --------------- ---------------
Federal income tax expense $26,333 $34,066 $47,019
============== =============== ===============
The Company's effective income tax rate did not vary significantly from the
statutory federal income tax rate.
- --------------------------------------------------------------------------------
Strategic Advantage 97
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The Company had net income tax payments of $28,723,000 during 1999, $18,283,000
during 1998, and $55,468,000 during 1997 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 $100,000,000 represents the
cumulative cash draws on a $100,000,000 commitment from ING America Insurance
Holdings, Inc. through December 31, 1999. 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.
The principal and interest is scheduled to be repaid in five annual installments
beginning April 15, 2000 and continuing through April 15, 2004, with the option
of prepaying any outstanding principal and accrued interest. As of December 31,
1999, the Company accrued interest of $11,098,000. Upon receiving approval from
the Commissioner of Insurance of the State of Colorado, the Company made a
$5,128,000 payment for accrued interest during 1998. The Company recognized
interest expense of $5,711,000, $5,387,000, and $5,096,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
- --------------------------------------------------------------------------------
Strategic Advantage 98
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. LONG-TERM DEBT (CONTINUED)
Future minimum payments, assuming a current effective interest rate of 6.65%,
are as follows (in thousands):
TOTAL
YEAR PAYMENTS
- ----------------------------------------- ------------------
2000 $ 26,838
2001 26,838
2002 26,838
2003 26,838
2004 26,838
------------------
Total 134,190
Less imputed interest (34,190)
------------------
Principal outstanding $100,000
==================
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, and from company to company within the state, and may change in
the future.
During 1998, the NAIC completed 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 will require adoption by the various states
before it becomes the prescribed 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 anticipated that the State of Colorado will adopt Codification.
- --------------------------------------------------------------------------------
Strategic Advantage 99
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED)
Prescribed statutory reserve methodology does not fully encompass universal
life-type products. The NAIC, however, has promulgated a Model Regulation
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, 1999, the Company exceeded all minimum RBC
requirements.
Combined capital and surplus, determined in accordance with statutory accounting
practices (SAP), was $434,983,000 and $386,607,000 at December 31, 1999 and
1998, respectively. Combined net income, determined in accordance with SAP, was
$18,635,000, $11,712,000, and $22,261,000 for the years ended December 31, 1999,
1998, and 1997, 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, 1999. 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.
- --------------------------------------------------------------------------------
Strategic Advantage 100
<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.
- --------------------------------------------------------------------------------
Strategic Advantage 101
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1999 and 1998 are summarized below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------------------------- --- ------------------------------------
Carrying Carrying
amount Fair value amount Fair value
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities (Note 2) $3,486,939 $3,486,939 $3,503,530 $3,503,530
Equity securities (Note 2) 7,944 7,944 8,400 8,400
Mortgage loans 1,006,443 975,436 784,108 832,629
Policy loans 961,586 961,586 925,623 925,623
Short-term investments 186,917 186,917 747 747
Cash 48,630 48,630 31,644 31,644
Indebtedness from
related parties 33,220 33,220 4,339 4,339
Separate account assets 644,975 644,975 423,474 423,474
LIABILITIES
Supplemental contracts
without life contingencies 3,778 3,778 3,966 3,966
Other policyholder funds left
on deposit 431,706 431,706 98,638 98,638
Individual and group
annuities, net of reinsurance 149,089 152,824 87,096 86,007
Indebtedness to related
parties 34,231 34,231 13,755 13,755
Long-term debt to related
parties 100,000 100,000 100,000 100,000
Accrued interest on
long-term debt to related
parties 11,098 11,098 5,387 5,387
Separate account liabilities 644,975 644,975 423,474 423,474
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 102
<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
4.2% and 22.9% 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.
- --------------------------------------------------------------------------------
Strategic Advantage 103
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 accepted additional deposits on
existing synthetic guaranteed investment contracts in the amounts of
$70,000,000 and $66,480,000 in 1999 and 1998, respectively, from trustees of
401(k) plans. Pursuant to the terms of these contracts, the trustees own and
retain the assets related to these contracts. Such contracts had a value of
$471,380,000 and $433,689,000 at December 31, 1999 and 1998, 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 90% 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 $198,726,000 which have a market value to the Company of $0 and two
lines of credit totaling $307,902,000 which have a market value to the
Company of $0 (see Note 14).
13. COMMITMENTS AND CONTINGENCIES
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.
- --------------------------------------------------------------------------------
Strategic Advantage 104
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has an accrued liability of $38,000,000 at December 31, 1999 related
to certain potential litigation similar to that faced by other major life
insurers. This litigation relates to sales practices of interest-sensitive
policies. The Company is vigorously defending its position in these cases. 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.
14. OTHER FINANCING ARRANGEMENTS
The Company has a $167,902,000 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 $140,000,000, also to provide short-term liquidity, which expires
July 31, 2000. The amount of funds available under this line is reduced by
borrowings of certain affiliates also party to the agreement. The outstanding
borrowings under these agreements were $16,200,000 and $0 at December 31, 1999
and 1998, respectively. The weighted-average balance outstanding of short-term
debt was $13.1 million during 1999. The weighted-average interest rate paid on
this debt during 1999 was 5.20% (see Note 12).
The Company is the beneficiary of letters of credit totaling $198,726,000 that
were established in accordance with the terms of reinsurance agreements. Such
letters of credit are unconditional and irrevocable, and provide for automatic
renewal for the following year at December 31. The letters were unused during
both 1999 and 1998.
- --------------------------------------------------------------------------------
Strategic Advantage 105
<PAGE>
Financial Statements
Security Life Separate Account L1
of Security Life of Denver
Insurance Company
Years ended December 31, 1999, 1998 and 1997
with Report of Independent Auditors
- --------------------------------------------------------------------------------
Strategic Advantage 106
<PAGE>
Security Life Separate Account L1
Financial Statements
Years ended December 31, 1999, 1998 and 1997
CONTENTS
Report of Independent Auditors ..............................................108
Audited Financial Statements
Statement of Net Assets .....................................................109
Statement of Operations .....................................................116
Statement of Changes in Net Assets ..........................................126
Notes to Financial Statements ...............................................146
- --------------------------------------------------------------------------------
Strategic Advantage 107
<PAGE>
Report of Independent Auditors
Policyholders
Security Life Separate Account L1 of
Security Life of Denver Insurance Company
We have audited the accompanying statement of net assets of Security Life
Separate Account L1 of Security Life of Denver Insurance Company (comprising,
respectively, the Neuberger Berman Advisers Management Trust (comprising the
Limited Maturity Bond, Growth and Partners Divisions) ("NB"), 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, Equity Income, High Yield, Utilities and Small Company Growth
Divisions) ("INVESCO"), the Van Eck Worldwide Trust (comprising the Worldwide
Hard Assets, Worldwide Bond, Worldwide Emerging Markets and Worldwide Real
Estate Divisions) ("Van Eck") and AIM Advisors, Inc. (comprising the Capital
Appreciation and Government Securities Divisions) ("AIM")) as of December 31,
1999, 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 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 auditing standards generally accepted
in the United States. 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, 1999, by
correspondence with the transfer agents. 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, 1999, 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 accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
April 7, 2000
- --------------------------------------------------------------------------------
Strategic Advantage 108
<PAGE>
Security Life Separate Account L1
Statement of Net Assets
December 31, 1999
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS NB ALGER FIDELITY INVESCO VAN ECK AIM
------------- ------------ ------------- --------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value (Note C) $520,874,988 $53,597,588 $109,451,239 $294,325,533 $44,538,862 $6,258,525 $12,703,241
------------- ------------ ------------- --------------- ------------- ------------ -------------
Total assets 520,874,988 53,597,588 109,451,239 294,325,533 44,538,862 6,258,525 12,703,241
------------- ------------ ------------- --------------- ------------- ------------ -------------
LIABILITIES
Due to (from) Security Life of (427,980) (99,394) (63,161) (120,210) (99,549) (45,652) (14)
Denver
------------- ------------ ------------- --------------- ------------- ------------ -------------
Total Liabilities (427,980) (99,394) (63,161) (120,210) (99,549) (45,652) (14)
------------- ------------ ------------- --------------- ------------- ------------ -------------
Net assets $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255
============= ============ ============= =============== ============= ============ =============
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255
------------- ------------ ------------- --------------- ------------- ------------ -------------
TOTAL POLICYHOLDER RESERVES $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255
============= ============ ============= =============== ============= ============ =============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 109
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
<TABLE>
<CAPTION>
NB
--------------------------------------------------------------------------
Total Limited
NB Maturity Bond Growth Partners
------------------ ------------------- --------------- -------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value (Note C) $53,597,588 $11,200,520 $13,066,321 $29,330,747
------------------ ------------------- --------------- -------------------
Total assets 53,597,588 11,200,520 13,066,321 29,330,747
------------------ ------------------- --------------- -------------------
LIABILITIES
Due to (from) Security Life of Denver (99,394) (308) (9,833) (89,253)
------------------ ------------------- --------------- -------------------
Total Liabilities (99,394) (308) (9,833) (89,253)
------------------ ------------------- --------------- -------------------
Net assets $53,696,982 $11,200,828 $13,076,154 $29,420,000
================== =================== =============== ===================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $53,696,982 $11,200,828 $13,076,154 $29,420,000
------------------ ------------------- --------------- -------------------
TOTAL POLICYHOLDER RESERVES $53,696,982 $11,200,828 $13,076,154 $29,420,000
================== =================== =============== ===================
Number of divisional units outstanding
(Note G) 889,159.604 434,338.368 1,212,133.448
=================== =============== ===================
Value per divisional unit $12.60 $30.11 $24.27
=================== =============== ===================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 110
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
<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 (Note C) $109,451,239 $27,748,150 $17,280,636 $41,361,603 $23,060,850
---------------- ------------------ --------------- ---------------- -----------------
Total assets 109,451,239 27,748,150 17,280,636 41,361,603 23,060,850
---------------- ------------------ --------------- ---------------- -----------------
LIABILITIES
Due to (from) Security Life of Denver (63,161) (31,605) (6,851) (21,895) (2,810)
---------------- ------------------ --------------- ---------------- -----------------
Total Liabilities (63,161) (31,605) (6,851) (21,895) (2,810)
---------------- ------------------ --------------- ---------------- -----------------
Net assets $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660
================ ================== =============== ================ =================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660
---------------- ------------------ --------------- ---------------- -----------------
TOTAL POLICYHOLDER RESERVES $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660
================ ================== =============== ================ =================
Number of divisional units outstanding
(Note G) 1,055,757.484 576,738.314 1,257,371.637 425,281.099
================== =============== ================ =================
Value per divisional unit $26.31 $29.97 $32.91 $54.23
================== =============== ================ =================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 111
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
<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 (Note C) $294,325,533 $13,585,360 $58,152,709 $34,884,083 $34,799,038 $152,904,343
---------------------------------------------------------------------------------------------
Total assets 294,325,533 13,585,360 58,152,709 34,884,083 34,799,038 152,904,343
---------------------------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (120,210) (5,098) (5,121) (100,198) 1,630 (11,423)
---------------------------------------------------------------------------------------------
Total Liabilities (120,210) (5,098) (5,121) (100,198) 1,630 (11,423)
---------------------------------------------------------------------------------------------
Net assets $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766
=============================================================================================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766
---------------------------------------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766
=============================================================================================
Number of divisional units outstanding
(Note G) 722,717.906 1,676,236.646 1,716,617.627 2,763,648.297 4,772,484.597
================================================================================
Value per divisional unit $18.80 $34.70 $20.38 $12.59 $32.04
================================================================================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 112
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
<TABLE>
<CAPTION>
INVESCO
---------------------------------------------------------------------------------------------
Small
Total Total Equity Company
INVESCO Return Income High Yield Utilities Growth
--------------- -------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value (Note C) $44,538,862 $10,386,525 $16,189,342 $9,419,547 $4,140,713 $4,402,735
--------------- -------------- -------------- -------------- --------------- --------------
Total assets 44,538,862 10,386,525 16,189,342 9,419,547 4,140,713 4,402,735
--------------- -------------- -------------- -------------- --------------- --------------
LIABILITIES
Due to (from) Security Life of Denver (99,549) (125) (31,211) (1,130) (602) (66,481)
--------------- -------------- -------------- -------------- --------------- --------------
Total Liabilities (99,549) (125) (31,211) (1,130) (602) (66,481)
--------------- -------------- -------------- -------------- --------------- --------------
Net assets $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216
=============== ============== ============== ============== =============== ==============
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216
--------------- -------------- -------------- -------------- --------------- --------------
TOTAL POLICYHOLDER RESERVES $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216
=============== ============== ============== ============== =============== ==============
Number of divisional units outstanding
(Note G) 602,187.614 621,047.937 536,863.946 189,409.984 212,503.210
============== ============== ============== =============== ==============
Value per divisional unit $17.25 $26.12 $17.55 $21.86 $21.03
============== ============== ============== =============== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 113
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
<TABLE>
<CAPTION>
VAN ECK
---------------------------------------------------------------------------------
Worldwide Worldwide Worldwide
Total Hard Worldwide Emerging Real
Van Eck Assets Bond Markets Estate
---------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value (Note C) $6,258,525 $2,305,855 $335,746 $3,067,087 $549,837
---------------- --------------- --------------- -------------- ---------------
Total assets 6,258,525 2,305,855 335,746 3,067,087 549,837
---------------- --------------- --------------- -------------- ---------------
LIABILITIES
Due to (from) Security Life of Denver (45,652) (223) 1,543 (46,972) -
---------------- --------------- --------------- -------------- ---------------
Total Liabilities (45,652) (223) 1,543 (46,972) -
---------------- --------------- --------------- -------------- ---------------
Net assets $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837
================ =============== =============== ============== ===============
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837
---------------- --------------- --------------- -------------- ---------------
TOTAL POLICYHOLDER RESERVES $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837
================ =============== =============== ============== ===============
Number of divisional units outstanding
(Note G) 236,972.429 33,114.078 228,819.195 64,967.173
=============== =============== ============== ===============
Value per divisional unit $9.73 $10.09 $13.61 $8.46
=============== =============== ============== ===============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 114
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
AIM
---------------------------------------
Total Capital Government
AIM Appreciation Securities
------------ ------------ -------------
ASSETS
Investments in mutual funds at
market value (Note C) $12,703,241 $5,308,909 $7,394,332
------------ ------------ -------------
Total assets 12,703,241 5,308,909 7,394,332
------------ ------------ -------------
LIABILITIES
Due to (from) Security Life of Denver (14) (13) (1)
------------ ------------ -------------
Total Liabilities (14) (13) (1)
------------ ------------ -------------
Net assets $12,703,255 $5,308,922 $7,394,333
============ ============ =============
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $12,703,255 $5,308,922 $7,394,333
------------ ------------ -------------
TOTAL POLICYHOLDER RESERVES $12,703,255 $5,308,922 $7,394,333
============ ============ =============
Number of divisional units outstanding
(Note G) 323,846.032 715,905.149
============ =============
Value per divisional unit $16.39 $10.33
============ =============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 115
<PAGE>
Security Life Separate Account L1
Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Total
All Total Total Total Total Total Total
Divisions NB Alger Fidelity INVESCO Van Eck AIM
------------- ------------- ------------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $18,884,169 $2,123,919 $ 7,325,481 $ 7,908,482 $1,183,695 $ 30,826 311,766
Less valuation period deductions
(Note B) 2,908,885 371,218 557,411 1,629,301 272,130 27,814 51,011
------------- ------------- ------------- ------------- ------------- ---------- -----------
Net investment income (loss) 15,975,284 1,752,701 6,768,070 6,279,181 911,565 3,012 260,755
------------- ------------- ------------- ------------- ------------- ---------- -----------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 18,191,446 557,950 5,023,269 11,358,812 1,094,239 73,144 84,032
Net unrealized gains (losses) on
investments 55,998,041 3,797,732 17,500,945 30,152,442 2,135,798 1,374,192 1,036,932
------------- ------------- ------------- ------------- ------------- ---------- -----------
Net realized and unrealized gains
(losses) on investments 74,189,487 4,355,682 22,524,214 41,511,254 3,230,037 1,447,336 1,120,964
------------- ------------- ------------- ------------- ------------- ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $90,164,771 $6,108,383 $29,292,284 $47,790,435 $4,141,602 $1,450,348 $1,381,719
============= ============= ============= ============= ============= ========== ===========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 116
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
NB
---------------------------------------------------------------------
Total Limited
NB Maturity Bond Growth Partners
--------------------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $2,123,919 $911,596 $ 453,085 $ 759,238
Less valuation period deductions
(Note B) 371,218 108,699 70,308 192,211
--------------------------------- ---------------- ----------------
Net investment income (loss) 1,752,701 802,897 382,777 567,027
--------------------------------- ---------------- ----------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 557,950 (293,615) 318,964 532,601
Net unrealized gains (losses) on
investments 3,797,732 (423,477) 3,714,218 506,991
--------------------------------- ---------------- ----------------
Net realized and unrealized gains
(losses) on investments 4,355,682 (717,092) 4,033,182 1,039,592
--------------------------------- ---------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $6,108,383 $ 85,805 $4,415,959 $1,606,619
================================= ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 117
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
<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 $ 7,325,481 $2,200,048 $1,636,538 $2,764,203 $ 724,692
Less valuation period deductions
(Note B) 557,411 141,734 88,955 233,373 93,349
--------------- ------------------- ---------------- ---------------- -----------------
Net investment income (loss) 6,768,070 2,058,314 1,547,583 2,530,830 631,343
--------------- ------------------- ---------------- ---------------- -----------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 5,023,269 94,825 322,974 2,007,625 2,597,845
Net unrealized gains (losses) on
investments 17,500,945 5,993,398 2,015,333 4,584,649 4,907,565
--------------- ------------------- ---------------- ---------------- -----------------
Net realized and unrealized gains
(losses) on investments 22,524,214 6,088,223 2,338,307 6,592,274 7,505,410
--------------- ------------------- ---------------- ---------------- -----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $29,292,284 $8,146,537 $3,885,890 $9,123,104 $8,136,753
=============== =================== ================ ================ =================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 118
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
<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 $ 7,908,482 $ 798,528 $ 3,508,501 $ 820,014 $1,277,704 $ 1,503,735
Less valuation period deductions
(Note B) 1,629,301 83,646 308,868 188,207 188,211 860,369
--------------- ------------- --------------- -------------- --------------- --------------
Net investment income (loss) 6,279,181 714,882 3,199,633 631,807 1,089,493 643,366
--------------- ------------- --------------- -------------- --------------- --------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 11,358,812 122,474 7,459,882 553,230 - 3,223,226
Net unrealized gains (losses) on
investments 30,152,442 316,538 3,509,953 8,740,414 - 17,585,537
--------------- ------------- --------------- -------------- --------------- --------------
Net realized and unrealized gains
(losses) on investments 41,511,254 439,012 10,969,835 9,293,644 - 20,808,763
--------------- ------------- --------------- -------------- --------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $47,790,435 $1,153,894 $14,169,468 $9,925,451 $1,089,493 $21,452,129
=============== ============= =============== ============== =============== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 119
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
INVESCO
-----------------------------------------------------------------------------------------------
Total Total Equity Small Company
INVESCO Return Income High Yield Utilities Growth
--------------- --------------- --------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $1,183,695 $ 276,071 $ 252,055 $618,531 $ 37,038 $ -
Less valuation period deductions
(Note B) 272,130 71,255 97,430 65,338 23,769 14,338
--------------- --------------- --------------- ------------- ------------- ------------------
Net investment income (loss) 911,565 204,816 154,625 553,193 13,269 (14,338)
--------------- --------------- --------------- ------------- ------------- ------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 1,094,239 286,623 506,767 (241,611) 304,911 237,549
Net unrealized gains (losses) on
investments 2,135,798 (923,083) 965,264 379,005 179,598 1,535,014
--------------- --------------- --------------- ------------- ------------- ------------------
Net realized and unrealized gains
(losses) on investments 3,230,037 (636,460) 1,472,031 137,394 484,509 1,772,563
--------------- --------------- --------------- ------------- ------------- ------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $4,141,602 $(431,644) $1,626,656 $690,587 $497,778 $1,758,225
=============== =============== =============== ============= ============= ==================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 120
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
VAN ECK
----------------------------------------------------------------------------------
Worldwide
Total Worldwide Worldwide Emerging Worldwide
Van Eck Hard Assets Bond Markets Real Estate
--------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 30,826 $ 16,585 $ 12,446 - $ 1,795
Less valuation period deductions
(Note B) 27,814 12,646 2,550 10,886 1,732
--------------- --------------- --------------- ---------------- ----------------
Net investment income (loss) 3,012 3,939 9,896 (10,886) 63
--------------- --------------- --------------- ---------------- ----------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 73,144 (313,009) (25,853) 410,384 1,622
Net unrealized gains (losses) on
investments 1,374,192 592,123 (9,920) 809,962 (17,973)
--------------- --------------- --------------- ---------------- ----------------
Net realized and unrealized gains
(losses) on investments 1,447,336 279,114 (35,773) 1,220,346 (16,351)
--------------- --------------- --------------- ---------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $1,450,348 $283,053 $(25,877) $1,209,460 $(16,288)
=============== =============== =============== ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 121
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
AIM
--------------------------------------
Total Capital Government
AIM Appreciation Securities
---------- ------------ --------------
INVESTMENT INCOME
Dividends from mutual funds $ 311,766 $ 113,467 $ 198,299
Less valuation period deductions
(Note B) 51,011 19,289 31,722
---------- ------------ --------------
Net investment income (loss) 260,755 94,178 166,577
---------- ------------ --------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 84,032 92,256 (8,224)
Net unrealized gains (losses) on
investments 1,036,932 1,257,369 (220,437)
---------- ------------ --------------
Net realized and unrealized gains
(losses) on investments 1,120,964 1,349,625 (228,661)
---------- ------------ --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $1,381,719 $1,443,803 $(62,084)
========== ============ ==============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 122
<PAGE>
Security Life Separate Account L1
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS NB ALGER FIDELITY INVESCO VAN ECK AIM
-------------- ------------ ------------- -------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $17,747,833 $4,273,690 $ 4,617,072 $ 6,943,854 $1,625,860 $ 189,620 $ 97,737
Less valuation period deductions
(Note B) 1,740,661 291,487 290,412 971,160 162,321 11,393 13,888
-------------- ------------ ------------- -------------- ------------- ------------ -----------
Net investment income (loss) 16,007,172 3,982,203 4,326,660 5,972,694 1,463,539 178,227 83,849
-------------- ------------ ------------- -------------- ------------- ------------ -----------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599
Net unrealized gains (losses) on
investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087
-------------- ------------ ------------- -------------- ------------- ------------ -----------
Net realized and unrealized gains
(losses) on investments 27,303,251 (1,975,813) 7,511,094 21,633,430 604,461 (628,607) 158,686
-------------- ------------ ------------- -------------- ------------- ------------ -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $43,310,423 $2,006,390 $11,837,754 $27,606,124 $2,068,000 $(450,380) $242,535
============== ============ ============= ============== ============= ============ ===========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 123
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
NB
--------------------------------------------------------------------------------
Total Limited Government
NB Maturity Growth Income Partners
Bond
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $4,273,690 $409,268 $1,579,109 $136,565 $2,148,748
Less valuation period deductions
(Note B) 291,487 87,183 52,660 3,213 148,431
--------------- --------------- --------------- --------------- ---------------
Net investment income (loss) 3,982,203 322,085 1,526,449 133,352 2,000,317
--------------- --------------- --------------- --------------- ---------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 347,823 10,003 (264,148) (53,894) 655,862
Net unrealized gains (losses) on
investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475)
--------------- --------------- --------------- --------------- ---------------
Net realized and unrealized gains
(losses) on investments (1,975,813) 69,372 (345,724) (114,848) (1,584,613)
--------------- --------------- --------------- --------------- ---------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $2,006,390 $391,457 $1,180,725 $ 18,504 $ 415,704
=============== =============== =============== =============== ===============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 124
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<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 $ 4,617,072 $1,681,373 $ 593,045 $2,196,712 $ 145,942
Less valuation period deductions
(Note B) 290,412 95,588 53,316 113,376 28,132
---------------- ----------------- --------------- ---------------- ---------------
Net investment income (loss) 4,326,660 1,585,785 539,729 2,083,336 117,810
---------------- ----------------- --------------- ---------------- ---------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 1,685,294 186,963 316,932 915,872 265,527
Net unrealized gains (losses) on
investments 5,825,800 166,990 1,022,340 3,099,428 1,537,042
---------------- ----------------- --------------- ---------------- ---------------
Net realized and unrealized gains
(losses) on investments 7,511,094 353,953 1,339,272 4,015,300 1,802,569
---------------- ----------------- --------------- ---------------- ---------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM $11,837,754 $1,939,738 $1,879,001 $6,098,636 $1,920,379
OPERATIONS
================ ================= =============== ================ ===============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 125
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<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 $ 6,943,854 $ 808,986 $2,663,618 $1,015,626 $830,137 $ 1,625,487
Less valuation period deductions
(Note B) 971,160 63,669 183,002 129,504 116,932 478,053
-------------- -------------- ------------- -------------- ------------ ---------------
Net investment income (loss) 5,972,694 745,317 2,480,616 886,122 713,205 1,147,434
-------------- -------------- ------------- -------------- ------------ ---------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 6,403,348 20,247 1,534,000 298,379 - 4,550,722
Net unrealized gains (losses) on
investments 15,230,082 315,702 4,444,805 707,398 - 9,762,177
-------------- -------------- ------------- -------------- ------------ ---------------
Net realized and unrealized gains
(losses) on investments 21,633,430 335,949 5,978,805 1,005,777 - 14,312,899
-------------- -------------- ------------- -------------- ------------ ---------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $27,606,124 $1,081,266 $8,459,421 $1,891,899 $713,205 $15,460,333
============== ============== ============= ============== ============ ===============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 126
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
INVESCO
-------------------------------------------------------------------------------------------
Total Total Equity Small Company
INVESCO Return Income High Yield Utilities Growth
---------------- -------------- ------------ -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $1,625,860 $312,534 $ 514,174 $769,805 $ 29,058 $ 289
Less valuation period deductions
(Note B) 162,321 40,898 60,678 49,140 10,730 875
---------------- -------------- ------------ -------------- ------------- ----------------
Net investment income (loss) 1,463,539 271,636 453,496 720,665 18,328 (586)
---------------- -------------- ------------ -------------- ------------- ----------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 355,780 136,473 342,342 (151,382) 35,245 (6,898)
Net unrealized gains (losses) on
investments 248,681 73,689 359,519 (541,125) 282,500 74,098
---------------- -------------- ------------ -------------- ------------- ----------------
Net realized and unrealized gains
(losses) on investments 604,461 210,162 701,861 (692,507) 317,745 67,200
---------------- -------------- ------------ -------------- ------------- ----------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $2,068,000 $481,798 $1,155,357 $ 28,158 $336,073 $66,614
================ ============== ============ ============== ============= ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 127
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
VAN ECK
---------------------------------------------------------------------------------------------
Worldwide Worldwide Worldwide
Total Worldwide Hard Worldwide Emerging Real
Van Eck Balanced Assets Bond Markets Estate
----------------- -------------- --------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 189,620 $45,674 $ 143,946 $ - $ - $ -
Less valuation period deductions
(Note B) 11,393 1,050 8,170 212 1,736 225
----------------- -------------- --------------- -------------- -------------- -------------
Net investment income (loss) 178,227 44,624 135,776 (212) (1,736) (225)
----------------- -------------- --------------- -------------- -------------- -------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments (260,570) 4,682 (162,110) 130 (101,436) (1,836)
Net unrealized gains (losses) on
investments (368,037) (23,403) (395,698) 3,953 47,140 (29)
----------------- -------------- --------------- -------------- -------------- -------------
Net realized and unrealized gains
(losses) on investments (628,607) (18,721) (557,808) 4,083 (54,296) (1,865)
----------------- -------------- --------------- -------------- -------------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(450,380) $25,903 $(422,032) $3,871 $(56,032) $(2,090)
================= ============== =============== ============== ============== =============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 128
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
AIM
-----------------------------------------
Total Capital Government
AIM Appreciation Securities
------------ ------------- ------------
INVESTMENT INCOME
Dividends from mutual funds $ 97,737 $ 27,109 $ 70,628
Less valuation period deductions
(Note B) 13,888 3,056 10,832
--------- -------------- --------------
Net investment income (loss) 83,849 24,053 59,796
--------- -------------- --------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 4,599 (3,315) 7,914
Net unrealized gains (losses) on
investments 154,087 119,225 34,862
--------- -------------- --------------
Net realized and unrealized gains
(losses) on investments 158,686 115,910 42,776
--------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $242,535 $139,963 $102,572
========= ============== ==============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 129
<PAGE>
Security Life Separate Account L1
Statement of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Total
All Total Total Total Total Total
Divisions NB 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
(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.
- --------------------------------------------------------------------------------
Strategic Advantage 130
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
NB
------------------------------------------------------------------------------------
Total Limited Government
NB 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
(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.
- --------------------------------------------------------------------------------
Strategic Advantage 131
<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
(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.
- --------------------------------------------------------------------------------
Strategic Advantage 132
<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
(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.
- --------------------------------------------------------------------------------
Strategic Advantage 133
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
INVESCO
-------------------------------------------------------------------------------
Total Total Equity
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
(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.
- --------------------------------------------------------------------------------
Strategic Advantage 134
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
VAN ECK
---------------------------------------
Total Worldwide Worldwide
Van Eck Balanced Hard Assets
--------- ------------ --------------
INVESTMENT INCOME
Dividends from mutual funds $21,903 $ 9,006 $ 12,897
Less valuation period deductions
(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)
========= ============ ==============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 135
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Total
All Total Total Total Total Total Total
Divisions NB Alger Fidelity INVESCO Van Eck AIM
------------- -------------- -------------- ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $15,975,284 $ 1,752,701 $ 6,768,070 $ 6,279,181 $ 911,565 $ 3,012 $ 260,755
Net realized gains (losses) on
investments 18,191,446 557,950 5,023,269 11,358,812 1,094,239 73,144 84,032
Net unrealized gains (losses) on
investments 55,998,041 3,797,732 17,500,945 30,152,442 2,135,798 1,374,192 1,036,932
------------- -------------- -------------- ------------- ------------- ----------- --------------
Increase in net assets from
operations 90,164,771 6,108,383 29,292,284 47,790,435 4,141,602 1,450,348 1,381,719
------------- -------------- -------------- ------------- ------------- ----------- --------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 162,042,407 9,691,552 19,246,531 115,810,413 12,770,723 1,311,620 3,211,568
Cost of insurance and
administrative charges (20,649,015) (2,172,531) (3,837,369) (11,622,709) (2,460,819) (173,456) (382,131)
Benefit payments (542,037) - - (542,037) - - -
Surrenders (15,066,657) (1,529,928) (3,447,763) (7,887,081) (1,567,128) (33,331) (601,426)
Net transfers among divisions
(including the loan division
and guaranteed interest
division in the general
account) 91,435 (5,513,893) 13,797,533 (17,535,989) 2,140,348 1,919,235 5,284,201
Other 231,958 45,648 34,663 146,782 (17,068) 12,762 9,171
------------- -------------- -------------- ------------- ------------- ----------- --------------
Increase from principal
transactions 126,108,091 520,848 25,793,595 78,369,379 10,866,056 3,036,830 7,521,383
------------- -------------- -------------- ------------- ------------- ----------- --------------
Total increase in net assets 216,272,862 6,629,231 55,085,879 126,159,814 15,007,658 4,487,178 8,903,102
Net assets at beginning of year 305,030,106 47,067,751 54,428,521 168,285,929 29,630,753 1,816,999 3,800,153
------------- -------------- -------------- ------------- ------------- ----------- --------------
Net assets at end of year $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255
============= ============== ============== ============= ============= =========== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 136
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
NB
--------------------------------------------------------------------------
Total Limited
NB Maturity Bond Growth Partners
------------------ --------------- ------------------ ------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 1,752,701 $ 802,897 $ 382,777 $ 567,027
Net realized gains (losses) on
investments 557,950 (293,615) 318,964 532,601
Net unrealized gains (losses) on
investments 3,797,732 (423,477) 3,714,218 506,991
------------------ --------------- ------------------ ------------------
Increase in net assets from
operations 6,108,383 85,805 4,415,959 1,606,619
------------------ --------------- ------------------ ------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 9,691,552 2,691,658 1,968,259 5,031,635
Cost of insurance and
administrative charges (2,172,531) (532,487) (382,030) (1,258,014)
Benefit payments
Surrenders (1,529,928) (1,033,731) (175,255) (320,942)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) (5,513,893) (5,610,959) (1,798,195) 1,895,261
Other 45,648 22,193 21,256 2,199
------------------ --------------- ------------------ ------------------
Increase from principal
transactions 520,848 (4,463,326) (365,965) 5,350,139
------------------ --------------- ------------------ ------------------
Total increase in net assets 6,629,231 (4,377,521) 4,049,994 6,956,758
Net assets at beginning of year 47,067,751 15,578,349 9,026,160 22,463,242
------------------ --------------- ------------------ ------------------
Net assets at end of year $53,696,982 $11,200,828 $13,076,154 $29,420,000
================== =============== ================== ==================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 137
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<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) $ 6,768,070 $ 2,058,314 $ 1,547,583 $ 2,530,830 $ 631,343
Net realized gains (losses) on
investments 5,023,269 94,825 322,974 2,007,625 2,597,845
Net unrealized gains (losses) on
investments 17,500,945 5,993,398 2,015,333 4,584,649 4,907,565
------------------ ----------------- ---------------- ---------------- -----------------
Increase in net assets from
operations 29,292,284 8,146,537 3,885,890 9,123,104 8,136,753
------------------ ----------------- ---------------- ---------------- -----------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 19,246,531 4,618,903 3,508,936 7,654,291 3,464,401
Cost of insurance and
administrative charges (3,837,369) (957,053) (661,896) (1,597,077) (621,343)
Benefit payments
Surrenders (3,447,763) (986,740) (286,174) (1,594,894) (579,955)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 13,797,533 1,461,610 1,637,697 4,904,801 5,793,425
Other 34,663 (6,873) (17,173) (10,341) 69,050
------------------ ----------------- ---------------- ---------------- -----------------
Increase from principal
transactions 25,793,595 4,129,847 4,181,390 9,356,780 8,125,578
------------------ ----------------- ---------------- ---------------- -----------------
Total increase in net assets 55,085,879 12,276,384 8,067,280 18,479,884 16,262,331
Net assets at beginning of year 54,428,521 15,503,371 9,220,207 22,903,614 6,801,329
------------------ ----------------- ---------------- ---------------- -----------------
Net assets at end of year $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660
================== ================= ================ ================ =================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 138
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<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) $ 6,279,181 $ 714,882 $ 3,199,633 $ 631,807 $ 1,089,493 $ 643,366
Net realized gains (losses) on
investments 11,358,812 122,474 7,459,882 553,230 - 3,223,226
Net unrealized gains (losses) on
investments 30,152,442 316,538 3,509,953 8,740,414 - 17,585,537
--------------- --------------- -------------- --------------- -------------- ----------------
Increase in net assets from
operations 47,790,435 1,153,894 14,169,468 9,925,451 1,089,493 21,452,129
--------------- --------------- -------------- --------------- -------------- ----------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 115,810,413 3,791,052 9,969,268 5,963,624 62,143,060 33,943,409
Cost of insurance and
administrative charges (11,622,709) (604,489) (1,912,531) (1,071,163) (2,273,369) (5,761,157)
Benefit payments (542,037) - - - (542,037) -
Surrenders (7,887,081) (641,428) (1,308,922) (1,227,419) (1,281,819) (3,427,493)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) (17,535,989) (349,280) 4,285,808 788,107 (42,741,942) 20,481,318
Other 146,782 3,430 54,597 23,794 (8,230) 73,191
--------------- --------------- -------------- --------------- -------------- ----------------
Increase from principal
transactions 78,369,379 2,199,285 11,088,220 4,476,943 15,295,663 45,309,268
--------------- --------------- -------------- --------------- -------------- ----------------
Total increase in net assets 126,159,814 3,353,179 25,257,688 14,402,394 16,385,156 66,761,397
Net assets at beginning of year 168,285,929 10,237,279 32,900,142 20,581,887 18,412,252 86,154,369
--------------- --------------- -------------- --------------- -------------- ----------------
Net assets at end of year $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766
=============== =============== ============== =============== ============== ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 139
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
INVESCO
------------------------------------------------------------------------------------------
Total Total Equity Small Company
INVESCO Return Income High Yield Utilities Growth
----------- --------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 911,565 $ 204,816 $ 154,625 $ 553,193 $ 13,269 $ (14,338)
Net realized gains (losses) on
investments 1,094,239 286,623 506,767 (241,611) 304,911 237,549
Net unrealized gains (losses) on
investments 2,135,798 (923,083) 965,264 379,005 179,598 1,535,014
----------- --------------- --------------- --------------- -------------- --------------
Increase (decrease) in net assets from
operations 4,141,602 (431,644) 1,626,656 690,587 497,778 1,758,225
----------- --------------- --------------- --------------- -------------- --------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 12,770,723 4,580,034 4,374,844 1,987,501 1,127,118 701,226
Cost of insurance and
administrative charges (2,460,819) (764,047) (922,117) (471,532) (198,877) (104,246)
Benefit payments
Surrenders (1,567,128) (239,246) (333,959) (155,182) (820,016) (18,725)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 2,140,348 (854,496) 643,961 (518,177) 1,491,088 1,377,972
Other (17,068) (9,279) (21,837) 4,698 3,264 6,086
----------- --------------- --------------- --------------- -------------- --------------
Increase from principal
transactions 10,866,056 2,712,966 3,740,892 847,308 1,602,577 1,962,313
----------- --------------- --------------- --------------- -------------- --------------
Total increase in net assets 15,007,658 2,281,322 5,367,548 1,537,895 2,100,355 3,720,538
Net assets at beginning of year 29,630,753 8,105,328 10,853,005 7,882,782 2,040,960 748,678
----------- --------------- --------------- --------------- -------------- --------------
Net assets at end of year $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216
=========== =============== =============== =============== ============== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 140
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
VAN ECK
---------------------------------------------------------------------------------
Worldwide Worldwide Worldwide
Total Hard Worldwide Emerging Real
Van Eck Assets Bond Markets Estate
--------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 3,012 $ 3,939 $ 9,896 $ (10,886) $ 63
Net realized gains (losses) on
investments 73,144 (313,009) (25,853) 410,384 1,622
Net unrealized gains (losses) on
investments 1,374,192 592,123 (9,920) 809,962 (17,973)
--------------- --------------- --------------- ---------------- ---------------
Increase (decrease) in net assets from
operations 1,450,348 283,053 (25,877) 1,209,460 (16,288)
--------------- --------------- --------------- ---------------- ---------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 1,311,620 441,045 253,322 416,537 200,716
Cost of insurance and
administrative charges (173,456) (86,064) (17,509) (56,532) (13,351)
Benefit payments
Surrenders (33,331) (23,325) - (5,545) (4,461)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 1,919,235 602,367 (80,721) 1,091,100 306,489
Other 12,762 15,247 (819) (2,117) 451
--------------- --------------- --------------- ---------------- ---------------
Increase from principal
transactions 3,036,830 949,270 154,273 1,443,443 489,844
--------------- --------------- --------------- ---------------- ---------------
Total increase in net assets 4,487,178 1,232,323 128,396 2,652,903 473,556
Net assets at beginning of year 1,816,999 1,073,755 205,807 461,156 76,281
--------------- --------------- --------------- ---------------- ---------------
Net assets at end of year $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837
=============== =============== =============== ================ ===============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 141
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
AIM
--------------------------------------
Total Capital Government
AIM Appreciation Securities
------------ ------------- -----------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 260,755 $ 94,178 $ 166,577
Net realized gains (losses) on
investments 84,032 92,256 (8,224)
Net unrealized gains (losses) on
investments 1,036,932 1,257,369 (220,437)
------------ ------------- -----------
Increase (decrease) in net assets from
operations 1,381,719 1,443,803 (62,084)
------------ ------------- -----------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 3,211,568 1,497,094 1,714,474
Cost of insurance and
administrative charges (382,131) (216,619) (165,512)
Benefit payments
Surrenders (601,426) (18,584) (582,842)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 5,284,201 1,391,719 3,892,482
Other 9,171 7,073 2,098
------------ ------------- -----------
Increase from principal
transactions 7,521,383 2,660,683 4,860,700
------------ ------------- -----------
Total increase in net assets 8,903,102 4,104,486 4,798,616
Net assets at beginning of year 3,800,153 1,204,436 2,595,717
------------ ------------- -----------
Net assets at end of year $12,703,255 $5,308,922 $7,394,333
============ ============= ===========
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 142
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Total
All Total Total Total Total Total Total
Divisions NB Alger Fidelity INVESCO Van Eck AIM
------------ ----------------------------------------- ------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 16,007,172 $ 3,982,203 $ 4,326,660 $ 5,972,694 $ 1,463,539 $ 178,227 $ 83,849
Net realized gains (losses) on
investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599
Net unrealized gains (losses) on
investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087
------------ ----------------------------------------- ------------- ------------------------
Increase (decrease) in net assets
from operations 43,310,423 2,006,390 11,837,754 27,606,124 2,068,000 (450,380) 242,535
------------ ----------------------------------------- ------------- ------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 128,820,440 12,563,792 13,089,164 92,335,231 8,092,294 875,501 1,864,458
Cost of insurance and
administrative charges (14,458,798) (2,063,802) (2,525,683) (8,200,381) (1,481,570) (108,634) (78,728)
Benefit payments (306,862) (11,220) (26,492) (259,989) (9,161) - -
Surrenders (10,842,736) (725,767) (859,454) (8,654,377) (586,533) (15,198) (1,407)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) (3,936,799) 8,461,193 4,831,250 (25,231,056) 6,011,967 216,552 1,773,295
Other (41,582) (87,331) (18,626) 54,208 9,107 1,060 -
------------ ----------------------------------------- ------------- ------------------------
Increase (decrease) from principal
transactions 99,233,663 18,136,865 14,490,159 50,043,636 12,036,104 969,281 3,557,618
------------ ----------------------------------------- ------------- ------------------------
Total increase (decrease) in net
assets 142,544,086 20,143,255 26,327,913 77,649,760 14,104,104 518,901 3,800,153
Net assets at beginning of year 162,486,020 26,924,496 28,100,608 90,636,169 15,526,649 1,298,098 -
------------ ----------------------------------------- ------------- ------------------------
Net assets at end of year $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153
============ ========================================= ============= ========================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 143
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
NB
-----------------------------------------------------------------------------------------
Total Limited Government
NB Maturity Bond Growth Income Partners
----------------- ------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 3,982,203 $ 322,085 $1,526,449 $133,352 $ 2,000,317
Net realized gains (losses) on
investments 347,823 10,003 (264,148) (53,894) 655,862
Net unrealized gains (losses) on
investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475)
----------------- ------------------- ---------------- ---------------- ----------------
Increase (decrease) in net assets
from operations 2,006,390 391,457 1,180,725 18,504 415,704
----------------- ------------------- ---------------- ---------------- ----------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 12,563,792 3,839,599 2,578,265 31,593 6,114,335
Cost of insurance and
administrative charges (2,063,802) (492,782) (393,894) (14,839) (1,162,287)
Benefit payments (11,220) - - - (11,220)
Surrenders (725,767) (15,922) (419,497) (3,243) (287,105)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 8,461,193 5,212,588 513,663 (894,126) 3,629,068
Other (87,331) (31,757) 3,226 (31,566) (27,234)
----------------- ------------------- ---------------- ---------------- ----------------
Increase (decrease) from principal
transactions 18,136,865 8,511,726 2,281,763 (912,181) 8,255,557
----------------- ------------------- ---------------- ---------------- ----------------
Total increase (decrease) in net assets 20,143,255 8,903,183 3,462,488 (893,677) 8,671,261
Net assets at beginning of year 26,924,496 6,675,166 5,563,672 893,677 13,791,981
----------------- ------------------- ---------------- ---------------- ----------------
Net assets at end of year $47,067,751 $15,578,349 $9,026,160 $ - $22,463,242
================= =================== ================ ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 144
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<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) $ 4,326,660 $ 1,585,785 $ 539,729 $ 2,083,336 $ 117,810
Net realized gains (losses) on
investments 1,685,294 186,963 316,932 915,872 265,527
Net unrealized gains (losses) on
investments 5,825,800 166,990 1,022,340 3,099,428 1,537,042
----------------- ------------------ --------------- ---------------- ----------------
Increase (decrease) in net assets
from operations 11,837,754 1,939,738 1,879,001 6,098,636 1,920,379
----------------- ------------------ --------------- ---------------- ----------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 13,089,164 4,154,774 2,573,424 5,298,963 1,062,003
Cost of insurance and
administrative charges (2,525,683) (803,988) (473,224) (989,260) (259,211)
Benefit payments (26,492) (14,248) (12,244) - -
Surrenders (859,454) (196,345) (376,263) (216,867) (69,979)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 4,831,250 (35,168) 528,261 3,094,366 1,243,791
Other (18,626) (504) (14,286) 1,597 (5,433)
----------------- ------------------ --------------- ---------------- ----------------
Increase (decrease) from principal
transactions 14,490,159 3,104,521 2,225,668 7,188,799 1,971,171
----------------- ------------------ --------------- ---------------- ----------------
Total increase (decrease) in net assets 26,327,913 5,044,259 4,104,669 13,287,435 3,891,550
Net assets at beginning of year 28,100,608 10,459,112 5,115,538 9,616,179 2,909,779
----------------- ------------------ --------------- ---------------- ----------------
Net assets at end of year $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329
================= ================== =============== ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 145
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<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) $ 5,972,694 $ 745,317 $ 2,480,616 $ 886,122 $ 713,205 $ 1,147,434
Net realized gains (losses) on
investments 6,403,348 20,247 1,534,000 298,379 - 4,550,722
Net unrealized gains (losses) on
investments 15,230,082 315,702 4,444,805 707,398 - 9,762,177
--------------- -------------- --------------- -------------- --------------- --------------
Increase (decrease) in net assets
from operations 27,606,124 1,081,266 8,459,421 1,891,899 713,205 15,460,333
--------------- -------------- --------------- -------------- --------------- --------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 92,335,231 2,713,832 8,443,426 5,709,711 55,421,815 20,046,447
Cost of insurance and
administrative charges (8,200,381) (490,838) (1,358,671) (939,010) (1,769,895) (3,641,967)
Benefit payments (259,989) - (8,890) (8,379) (240,733) (1,987)
Surrenders (8,654,377) (652,157) (2,494,098) (438,536) (2,335,262) (2,734,324)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) (25,231,056) 1,440,884 1,798,160 2,169,798 (48,429,964) 17,790,066
Other 54,208 7,219 (14,128) (29,375) 39,827 50,665
--------------- -------------- --------------- -------------- --------------- --------------
Increase (decrease) from principal
transactions 50,043,636 3,018,940 6,365,799 6,464,209 2,685,788 31,508,900
--------------- -------------- --------------- -------------- --------------- --------------
Total increase (decrease) in net assets 77,649,760 4,100,206 14,825,220 8,356,108 3,398,993 46,969,233
Net assets at beginning of year 90,636,169 6,137,073 18,074,922 12,225,779 15,013,259 39,185,136
--------------- -------------- --------------- -------------- --------------- --------------
Net assets at end of year $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369
=============== ============== =============== ============== =============== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 146
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
INVESCO
--------------------------------------------------------------------------------------------
Small
Total Total Equity Company
INVESCO Return Income High Yield Utilities Growth
-------------- -------------- --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 1,463,539 $ 271,636 $ 453,496 $ 720,665 $ 18,328 $ (586)
Net realized gains (losses) on
investments 355,780 136,473 342,342 (151,382) 35,245 (6,898)
Net unrealized gains (losses) on
investments 248,681 73,689 359,519 (541,125) 282,500 74,098
-------------- -------------- --------------- -------------- --------------- -------------
Increase (decrease) in net assets
from operations 2,068,000 481,798 1,155,357 28,158 336,073 66,614
-------------- -------------- --------------- -------------- --------------- -------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 8,092,294 2,104,849 3,170,236 2,297,048 435,105 85,056
Cost of insurance and
administrative charges (1,481,570) (425,176) (567,563) (389,895) (87,692) (11,244)
Benefit payments (9,161) - (9,161) - - -
Surrenders (586,533) (56,509) (192,220) (329,292) (8,210) (302)
Net transfers among divisions
(including the loan division and
Guaranteed interest division in
the general account) 6,011,967 2,955,200 1,315,595 931,519 201,017 608,636
Other 9,107 556 22,617 (18,840) 4,856 (82)
-------------- -------------- --------------- -------------- --------------- -------------
Increase (decrease) from principal
transactions 12,036,104 4,578,920 3,739,504 2,490,540 545,076 682,064
-------------- -------------- --------------- -------------- --------------- -------------
Total increase (decrease) in net assets 14,104,104 5,060,718 4,894,861 2,518,698 881,149 748,678
Net assets at beginning of year 15,526,649 3,044,610 5,958,144 5,364,084 1,159,811 -
-------------- -------------- --------------- -------------- --------------- -------------
Net assets at end of year $29,630,753 $8,105,328 $10,853,005 $7,882,782 $2,040,960 $748,678
============== ============== =============== ============== =============== =============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 147
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
VAN ECK
--------------------------------------------------------------------------------------------
Worldwide Worldwide Worldwide
Total Worldwide Hard Worldwide Emerging Real
Van Eck Balanced Assets Bonds Markets Estate
--------------- -------------- ---------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 178,227 $ 44,624 $ 135,776 $ (212) $ (1,736) $ (225)
Net realized gains (losses) on
investments (260,570) 4,682 (162,110) 130 (101,436) (1,836)
Net unrealized gains (losses) on
investments (368,037) (23,403) (395,698) 3,953 47,140 (29)
--------------- -------------- ---------------- -------------- -------------- -------------
Increase (decrease) in net assets
from operations (450,380) 25,903 (422,032) 3,871 (56,032) (2,090)
--------------- -------------- ---------------- -------------- -------------- -------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 875,501 (1,347) 571,430 129,336 137,102 38,980
Cost of insurance and
administrative charges (108,634) (9,423) (86,867) (1,544) (7,777) (3,023)
Benefit payments - - - 0 0 0
Surrenders (15,198) (3,105) (11,871) 0 0 (222)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 216,552 (399,466) 111,286 74,151 387,960 42,621
Other 1,060 90 1,059 (7) (97) 15
--------------- -------------- ---------------- -------------- -------------- -------------
Increase (decrease) from principal
transactions 969,281 (413,251) 585,037 201,936 517,188 78,371
--------------- -------------- ---------------- -------------- -------------- -------------
Total increase (decrease) in net assets 518,901 (387,348) 163,005 205,807 461,156 76,281
Net assets at beginning of year 1,298,098 387,348 910,750 - - -
--------------- -------------- ---------------- -------------- -------------- -------------
Net assets at end of year $1,816,999 $ - $1,073,755 $205,807 $ 461,156 $76,281
=============== ============== ================ ============== ============== =============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 148
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
AIM
--------------------------------------
Total Capital Government
AIM Appreciation Securities
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income (loss) $ 83,849 $ 24,053 $ 59,796
Net realized gains (losses) on
investments 4,599 (3,315) 7,914
Net unrealized gains (losses) on
investments 154,087 119,225 34,862
------------ ------------ ------------
Increase (decrease) in net assets
from operations 242,535 139,963 102,572
------------ ------------ ------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 1,864,458 329,635 1,534,823
Cost of insurance and
administrative charges (78,728) (28,940) (49,788)
Benefit payments - - -
Surrenders (1,407) (1,407) -
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 1,773,295 765,185 1,008,110
Other - - -
------------ ------------ ------------
Increase (decrease) from principal
transactions 3,557,618 1,064,473 2,493,145
------------ ------------ ------------
Total increase (decrease) in net assets 3,800,153 1,204,436 2,595,717
Net assets at beginning of year - - -
------------ ------------ ------------
Net assets at end of year $3,800,153 $1,204,436 $2,595,717
============ ============ ============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 149
<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 NB 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.
- --------------------------------------------------------------------------------
Strategic Advantage 150
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
NB
-----------------------------------------------------------------------------------------
Total Limited Government
NB 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.
- --------------------------------------------------------------------------------
Strategic Advantage 151
<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.
- --------------------------------------------------------------------------------
Strategic Advantage 152
<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.
- --------------------------------------------------------------------------------
Strategic Advantage 153
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
INVESCO
-----------------------------------------------------------------------------------
Total Total Equity
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.
- --------------------------------------------------------------------------------
Strategic Advantage 154
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
VAN ECK
--------------------------------------
Worldwide
Total Worldwide Hard
Van Eck Balanced Assets
----------- ----------- -------------
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 assets 704,067 59,543 644,524
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
=========== =========== =============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage 155
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements
December 31, 1999
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 Variable Universal
Life, FirstLine II Variable Universal Life, Strategic Advantage Variable
Universal Life, Strategic Advantage II Variable Universal Life, and Variable
Survivorship Universal Life policies ("Variable Universal Life 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 used to
satisfy liabilities arising out of any other operations of the Company.
As of December 31, 1999, the Separate Account offered twenty-three investment
divisions available to the policyholders, each of which invests in an
independently managed mutual fund portfolio ("Fund"). The Funds are as follows:
PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS)
Neuberger Berman Management Incorporated (NB)
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
- --------------------------------------------------------------------------------
Strategic Advantage 156
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE A. ORGANIZATION (CONTINUED)
INVESCO Funds Group, Inc. (INVESCO)
INVESCO VIF Total Return Portfolio
INVESCO VIF Equity Income Portfolio (formerly known as "INVESCO VIF
Industrial Income Portfolio")
INVESCO VIF High Yield Portfolio
INVESCO VIF Utilities Portfolio
INVESCO VIF Small Company Growth Portfolio
Van Eck Associates Corporation (Van Eck)
Van Eck Worldwide Hard Assets Portfolio (formerly known as "Van Eck Gold
and Natural Resources Portfolio")
Van Eck Worldwide Bond Portfolio
Van Eck Worldwide Emerging Markets Portfolio
Van Eck Worldwide Real Estate Portfolio
AIM Advisors, Inc. (AIM)
AIM VI--Capital Appreciation Portfolio
AIM VI--Government Securities 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
Portfolio stopped accepting new investments. These divisions were discontinued
during 1998.
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 Bond Portfolio
Van Eck Worldwide Emerging Markets Portfolio
Van Eck Worldwide Real Estate Portfolio
AIM Advisors, Inc. (AIM)
AIM VI--Capital Appreciation Portfolio
AIM VI--Government Securities Portfolio
INVESCO Funds Group, Inc. (INVESCO)
INVESCO VIF Small Company Growth Portfolio
- --------------------------------------------------------------------------------
Strategic Advantage 157
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE A. ORGANIZATION (CONTINUED)
The Variable Universal Life 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 Variable Universal Life Policies 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 accounting principles generally accepted in the United States
("U.S. GAAP"). The preparation of financial statements in conformity with U.S.
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.
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.
- --------------------------------------------------------------------------------
Strategic Advantage 158
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 years ended December 31, 1999, 1998 and 1997 were $2,908,885, $1,740,661,
and $813,630, respectively.
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.
- --------------------------------------------------------------------------------
Strategic Advantage 159
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
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 for the years ended December 31, 1999,
1998 and 1997 were $20,649,015, $14,458,798, and $8,284,944, respectively.
Dividends made by the Funds are reinvested in the Funds.
The following is a summary of Fund shares owned as of December 31, 1999:
<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 Inc.:
Limited Maturity Bond 845,960.694 $13.24 $ 11,200,520 $ 11,380,242
Growth 350,585.486 $37.27 13,066,321 8,836,640
Partners 1,493,418.911 $19.64 29,330,747 28,931,311
Fred Alger Management, Inc.:
American Small Capitalization 503,139.614 $55.15 27,748,150 21,103,331
American MidCap Growth 536,166.146 $32.23 17,280,636 13,903,676
American Growth 642,460.430 $64.38 41,361,603 32,482,027
American Leveraged AllCap 397,806.619 $57.97 23,060,850 16,645,127
Fidelity Management & Research Co.:
Asset Manager 727,657.184 $18.67 13,585,360 12,533,037
Growth 1,058,669.574 $54.93 58,152,709 48,588,495
Overseas 1,271,285.820 $27.44 34,884,083 25,474,948
Money Market 34,799,038.450 $1.00 34,799,038 34,799,038
Index 500 913,352.492 $167.41 152,904,343 119,231,939
INVESCO Funds Group, Inc.:
Total Return 666,657.538 $15.58 10,386,525 11,019,270
Equity Income 770,554.123 $21.01 16,189,342 14,534,380
High Yield 818,379.460 $11.51 9,419,547 9,910,525
Utilities 197,458.930 $20.97 4,140,713 3,647,584
Small Company Growth 200,033.388 $22.01 4,402,735 2,793,624
Van Eck Associates Corporation:
Worldwide Hard Assets 210,388.243 $10.96 2,305,855 2,157,787
Worldwide Bond 31,407.502 $10.69 335,746 341,712
Worldwide Emerging Markets 215,083.218 $14.26 3,067,087 2,209,985
Worldwide Real Estate 60,091.435 $9.15 549,837 567,839
AIM Advisors, Inc.:
Capital Appreciation 149,210.483 $35.58 5,308,909 3,932,316
Government Securities 695,609.783 $10.63 7,394,332 7,579,908
------------------ ------------------
Total $520,874,988 $432,604,741
================== ==================
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 160
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE C. INVESTMENTS (CONTINUED)
For the year ended December 31, 1999, the cost of purchases (plus reinvested
dividends) and sales of investments are as follows:
<TABLE>
<CAPTION>
BEGINNING END
FUND OF YEAR PURCHASES SALES OF YEAR
- ------------------------------------------- ----------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Neuberger Berman Management Inc.:
Limited Maturity Bond $ 15,334,595 $ 6,135,221 $ (10,089,574) $ 11,380,242
Growth 8,510,696 5,560,097 (5,234,153) 8,836,640
Partners 22,570,797 9,683,589 (3,323,075) 28,931,311
Fred Alger Management, Inc.:
American Small Capitalization 14,851,950 14,105,718 (7,854,337) 21,103,331
American MidCap Growth 7,858,579 7,048,332 (1,003,235) 13,903,676
American Growth 18,608,688 18,809,746 (4,936,407) 32,482,027
American Leveraged AllCap 5,293,171 16,455,429 (5,103,473) 16,645,127
Fidelity Management & Research Co.:
Asset Manager 9,501,494 7,672,857 (4,641,314) 12,533,037
Growth 26,845,882 67,064,022 (45,321,409) 48,588,495
Overseas 19,913,166 15,724,213 (10,162,431) 25,474,948
Money Market 18,412,252 113,113,411 (96,726,625) 34,799,038
Index 500 70,067,500 54,287,747 (5,123,308) 119,231,939
INVESCO Funds Group, Inc.:
Total Return 7,814,990 5,666,870 (2,462,590) 11,019,270
Equity Income 10,163,306 6,427,991 (2,056,917) 14,534,380
High Yield 8,752,765 4,424,859 (3,267,099) 9,910,525
Utilities 1,727,429 2,817,915 (897,760) 3,647,584
Small Company Growth 674,581 2,769,372 (650,329) 2,793,624
Van Eck Associates Corporation:
Worldwide Hard Assets 1,517,809 2,248,842 (1,608,864) 2,157,787
Worldwide Bond 201,853 461,651 (321,792) 341,712
Worldwide Emerging Markets 414,017 5,282,900 (3,486,932) 2,209,985
Worldwide Real Estate 76,310 592,249 (100,720) 567,839
AIM Advisors, Inc.
Capital Appreciation 1,085,211 3,341,733 (494,628) 3,932,316
Government Securities 2,560,855 7,659,984 (2,640,931) 7,579,908
----------------- ------------------- ------------------ ------------------
Total $272,757,896 $377,354,748 $(217,507,903) $432,604,741
================= =================== ================== ==================
</TABLE>
Aggregate proceeds from sales of investments for the year ended December 31,
1999 were $235,699,349.
- --------------------------------------------------------------------------------
Strategic Advantage 161
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE D. OTHER POLICY DEDUCTIONS
The Variable Universal Life policies 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 Variable Universal Life policies allow the policyholders to borrow against
their policies by using them as collateral for a loan. At the time of borrowing
against the policies, an amount equal to the loan amount is transferred from the
Separate Account divisions to a Loan Division in the Company's General Account
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.
- --------------------------------------------------------------------------------
Strategic Advantage 162
<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, 1999:
<TABLE>
<CAPTION>
(DECREASE)
FOR
OUTSTANDING INCREASE WITHDRAWALS OUTSTANDING
AT BEGINNING FOR PAYMENTS AND OTHER AT END
DIVISION OF YEAR RECEIVED DEDUCTIONS OF YEAR
- ------------------------------------------- ----------------- ----------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Neuberger Berman Management Inc.:
Limited Maturity Bond 1,245,559.121 421,349.898 (777,749.415) 889,159.604
Growth 447,486.376 233,319.969 (246,467.977) 434,338.368
Partners 986,298.018 385,667.451 (159,832.021) 1,212,133.448
Fred Alger Management, Inc.:
American Small Capitalization 838,692.418 603,898.891 (386,833.825) 1,055,757.484
American MidCap Growth 402,532.472 225,361.191 (51,155.349) 576,738.314
American Growth 923,696.066 585,374.403 (251,698.832) 1,257,371.637
American Leveraged AllCap 221,642.446 410,084.371 (206,445.718) 425,281.099
Fidelity Management & Research Co.:
Asset Manager 600,255.213 393,745.577 (271,282.884) 722,717.906
Growth 1,293,480.338 2,233,512.279 (1,850,755.971) 1,676,236.646
Overseas 1,429,659.907 963,512.218 (676,554.498) 1,716,617.627
Money Market 1,526,404.399 9,068,762.545 (7,831,518.647) 2,763,648.297
Index 500 3,215,990.519 1,840,375.191 (283,881.113) 4,772,484.597
INVESCO Funds Group, Inc.:
Total Return 450,557.216 300,554.107 (148,923.709) 602,187.614
Equity Income 473,616.752 252,971.948 (105,540.763) 621,047.937
High Yield 486,858.648 226,071.484 (176,066.186) 536,863.946
Utilities 110,379.616 140,069.045 (61,038.677) 189,409.984
Small Company Growth 67,506.441 210,114.805 (65,118.036) 212,503.210
Van Eck Associates Corporation:
Worldwide Hard Assets 132,513.824 246,466.322 (142,007.717) 236,972.429
Worldwide Bond 18,656.317 43,237.412 (28,779.651) 33,114.078
Worldwide Emerging Markets 67,354.295 582,654.548 (421,189.648) 228,819.195
Worldwide Real Estate 8,765.232 67,514.147 (11,312.206) 64,967.173
AIM Advisors, Inc.:
Capital Appreciation 105,457.867 263,795.629 (45,407.464) 323,846.032
Government Securities 246,150.062 723,064.769 (253,309.682) 715,905.149
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 164
<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, 1998:
<TABLE>
<CAPTION>
(DECREASE)
FOR
OUTSTANDING INCREASE WITHDRAWALS OUTSTANDING
AT BEGINNING FOR PAYMENTS AND OTHER AT END
DIVISION OF YEAR RECEIVED DEDUCTIONS OF YEAR
- ------------------------------------------ ------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Neuberger Berman Management Inc.:
Limited Maturity Bond 552,985.394 801,233.327 (108,659.600) 1,245,559.121
Growth 316,146.084 250,854.619 (119,514.327) 447,486.376
Government Income 75,811.559 58.537 (75,870.096) -
Partners 626,285.721 455,096.290 (95,083.993) 986,298.018
Fred Alger Management, Inc.:
American Small Capitalization 648,733.740 333,770.247 (143,811.569) 838,692.418
American MidCap Growth 288,809.482 167,037.228 (53,314.238) 402,532.472
American Growth 569,990.309 442,313.190 (88,607.433) 923,696.066
American Leveraged AllCap 148,542.639 102,168.282 (29,068.475) 221,642.446
Fidelity Management & Research Co.:
Asset Manager 410,906.106 270,972.780 (81,623.673) 600,255.213
Growth 983,842.388 614,542.294 (304,904.344) 1,293,480.338
Overseas 950,328.899 861,220.218 (381,889.210) 1,429,659.907
Money Market 1,303,059.881 5,059,561.984 (4,836,217.466) 1,526,404.399
Index 500 1,863,056.104 1,617,935.444 (265,001.029) 3,215,990.519
INVESCO Funds Group, Inc.:
Total Return 184,042.238 307,178.543 (40,663.565) 450,557.216
Equity Income 297,553.033 216,644.366 (40,580.647) 473,616.752
High Yield 333,501.857 283,205.205 (129,848.414) 486,858.648
Utilities 78,118.685 41,701.114 (9,440.183) 110,379.616
Small Company Growth - 71,535.065 (4,028.624) 67,506.441
Van Eck Associates Corporation:
Worldwide Balanced 32,139.282 190.627 (32,329.909) -
Worldwide Hard Assets 77,046.773 68,491.375 (13,024.324) 132,513.824
Worldwide Bond - 18,882.425 (226.108) 18,656.317
Worldwide Emerging Markets - 105,064.405 (37,710.110) 67,354.295
Worldwide Real Estate - 9,848.072 (1,082.840) 8,765.232
AIM Advisors, Inc.:
Capital Appreciation - 108,895.839 (3,437.972) 105,457.867
Government Securities - 261,432.015 (15,281.953) 246,150.062
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 165
<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, 1997:
<TABLE>
<CAPTION>
(DECREASE)
FOR
OUTSTANDING INCREASE WITHDRAWALS OUTSTANDING
AT BEGINNING FOR PAYMENTS AND OTHER AT END
DIVISION OF YEAR RECEIVED DEDUCTIONS OF YEAR
- ------------------------------------------- ----------------- ------------------ -------------------- -----------------
<S> <C> <C> <C> <C>
Neuberger Berman Management Inc.:
Limited Maturity Bond 218,725.891 334,572.082 (312.579) 552,985.394
Growth 133,567.983 187,433.957 (4,855.856) 316,146.084
Government Income 142,773.403 30,012.660 (96,974.504) 75,811.559
Partners 275,892.457 354,159.052 (3,765.788) 626,285.721
Fred Alger Management, Inc.:
American Small Capitalization 297,073.322 368,659.345 (16,998.927) 648,733.740
American MidCap Growth 150,480.473 143,410.236 (5,081.227) 288,809.482
American Growth 282,175.287 292,019.948 (4,204.926) 569,990.309
American Leveraged AllCap 53,044.470 96,743.489 (1,245.320) 148,542.639
Fidelity Management & Research Co.:
Asset Manager 123,908.168 294,115.342 (7,117.404) 410,906.106
Growth 470,285.667 522,440.765 (8,884.044) 983,842.388
Overseas 367,948.109 589,863.772 (7,482.982) 950,328.899
Money Market 753,707.969 6,017,484.702 (5,468,132.790) 1,303,059.881
Index 500 640,890.650 1,227,420.261 (5,254.807) 1,863,056.104
INVESCO Funds Group, Inc.:
Total Return 64,490.483 121,436.060 (1,884.305) 184,042.238
Equity Income 87,035.356 212,619.908 (2,102.231) 297,553.033
High Yield 108,999.107 225,144.290 (641.540) 333,501.857
Utilities 18,008.490 63,007.328 (2,897.133) 78,118.685
Van Eck Associates Corporation:
Worldwide Balanced 29,808.787 5,838.562 (3,508.067) 32,139.282
Worldwide Hard Assets 21,966.093 55,323.208 (242.528) 77,046.773
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 166
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE H. NET ASSETS
Net assets at December 31, 1999 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 Inc.:
Limited Maturity Bond $ 10,334,928 $ 1,357,452 $ (311,830) $ (179,722) $ 11,200,828
Growth 6,662,216 2,132,968 51,289 4,229,681 13,076,154
Partners 24,515,009 2,799,524 1,706,031 399,436 29,420,000
Fred Alger Management, Inc.:
American Small Capitalization 16,912,254 3,798,599 424,083 6,644,819 27,779,755
American MidCap Growth 10,911,311 2,117,608 881,608 3,376,960 17,287,487
American Growth 24,684,957 4,633,321 3,185,644 8,879,576 41,383,498
American Leveraged AllCap 12,723,008 733,681 3,191,248 6,415,723 23,063,660
Fidelity Management & Research Co.:
Asset Manager 10,710,354 1,643,524 184,257 1,052,323 13,590,458
Growth 32,968,928 5,944,777 9,679,911 9,564,214 58,157,830
Overseas 22,436,070 1,918,003 1,221,073 9,409,135 34,984,281
Money Market 32,057,869 2,739,539 - - 34,797,408
Index 500 108,954,555 2,164,790 8,124,017 33,672,404 152,915,766
INVESCO Funds Group, Inc.:
Total Return 9,954,690 564,724 499,981 (632,745) 10,386,650
Equity Income 12,471,276 1,096,169 998,146 1,654,962 16,220,553
High Yield 8,030,598 1,920,186 (39,129) (490,978) 9,420,677
Utilities 3,156,961 58,753 432,472 493,129 4,141,315
Small Company Growth 2,644,377 (14,924) 230,652 1,609,111 4,469,216
Van Eck Associates Corporation:
Worldwide Hard Assets 2,458,760 148,762 (449,512) 148,068 2,306,078
Worldwide Bond 356,209 9,684 (25,724) (5,966) 334,203
Worldwide Emerging Markets 1,960,631 (12,622) 308,948 857,102 3,114,059
Worldwide Real Estate 568,214 (162) (213) (18,002) 549,837
AIM Advisors, Inc.:
Capital Appreciation 3,725,157 118,230 88,942 1,376,593 5,308,922
Government Securities 7,353,846 226,373 (310) (185,576) 7,394,333
----------------- --------------- ----------------- --------------- ---------------
Total $366,552,178 $36,098,959 $30,381,584 $88,270,247 $521,302,968
================= =============== ================= =============== ===============
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage 167
<PAGE>
APPENDIX A
FACTORS FOR THE
CASH VALUE ACCUMULATION TEST
FOR A LIFE INSURANCE POLICY
MALE NONSMOKER
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
0 12.574 25 6.095 50 2.671 75 1.396
1 12.681 26 5.904 51 2.589 76 1.372
2 12.341 27 5.717 52 2.509 77 1.349
3 11.996 28 5.533 53 2.433 78 1.328
4 11.655 29 5.354 54 2.360 79 1.307
5 11.316 30 5.179 55 2.290 80 1.288
6 10.979 31 5.008 56 2.223 81 1.270
7 10.644 32 4.843 57 2.159 82 1.253
8 10.311 33 4.682 58 2.097 83 1.236
9 9.982 34 4.527 59 2.038 84 1.221
10 9.660 35 4.376 60 1.982 85 1.207
11 9.345 36 4.231 61 1.928 86 1.195
12 9.041 37 4.091 62 1.877 87 1.183
13 8.750 38 3.955 63 1.828 88 1.172
14 8.476 39 3.825 64 1.781 89 1.161
15 8.218 40 3.699 65 1.736 90 1.151
16 7.973 41 3.577 66 1.694 91 1.141
17 7.740 42 3.461 67 1.654 92 1.131
18 7.517 43 3.348 68 1.615 93 1.120
19 7.301 44 3.240 69 1.579 94 1.109
20 7.091 45 3.136 70 1.544 95 1.097
21 6.886 46 3.036 71 1.511 96 1.083
22 6.684 47 2.939 72 1.480 97 1.069
23 6.484 48 2.847 73 1.450 98 1.054
24 6.288 49 2.757 74 1.422 99 1.040
100 1.000
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 168
<PAGE>
APPENDIX A (CONT.)
FACTORS FOR THE
CASH VALUE ACCUMULATION TEST
FOR A LIFE INSURANCE POLICY
MALE SMOKER
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
0 10.511 25 4.963 50 2.267 75 1.330
1 10.508 26 4.811 51 2.205 76 1.312
2 10.203 27 4.661 52 2.145 77 1.295
3 9.897 28 4.515 53 2.088 78 1.280
4 9.597 29 4.371 54 2.034 79 1.265
5 9.301 30 4.231 55 1.982 80 1.251
6 9.007 31 4.094 56 1.933 81 1.238
7 8.718 32 3.962 57 1.886 82 1.225
8 8.433 33 3.834 58 1.841 83 1.213
9 8.153 34 3.710 59 1.798 84 1.202
10 7.879 35 3.590 60 1.757 85 1.191
11 7.613 36 3.475 61 1.717 86 1.182
12 7.356 37 3.363 62 1.680 87 1.173
13 7.109 38 3.256 63 1.644 88 1.164
14 6.876 39 3.153 64 1.610 89 1.155
15 6.654 40 3.054 65 1.577 90 1.147
16 6.456 41 2.959 66 1.547 91 1.138
17 6.269 42 2.869 67 1.518 92 1.129
18 6.091 43 2.782 68 1.490 93 1.120
19 5.919 44 2.698 69 1.464 94 1.109
20 5.752 45 2.619 70 1.438 95 1.097
21 5.590 46 2.542 71 1.414 96 1.083
22 5.430 47 2.469 72 1.391 97 1.069
23 5.272 48 2.399 73 1.369 98 1.054
24 5.117 49 2.331 74 1.349 99 1.040
100 1.000
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 169
<PAGE>
APPENDIX A (CONT.)
FACTORS FOR THE
CASH VALUE ACCUMULATION TEST
FOR A LIFE INSURANCE POLICY
FEMALE NONSMOKER
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
0 14.687 25 6.861 50 3.013 75 1.493
1 14.680 26 6.638 51 2.920 76 1.461
2 14.279 27 6.421 52 2.831 77 1.430
3 13.873 28 6.211 53 2.745 78 1.401
4 13.471 29 6.007 54 2.662 79 1.373
5 13.073 30 5.809 55 2.583 80 1.347
6 12.682 31 5.618 56 2.507 81 1.322
7 12.294 32 5.432 57 2.433 82 1.299
8 11.915 33 5.252 58 2.362 83 1.278
9 11.541 34 5.078 59 2.293 84 1.257
10 11.175 35 4.910 60 2.226 85 1.239
11 10.817 36 4.747 61 2.162 86 1.221
12 10.469 37 4.590 62 2.100 87 1.205
13 10.132 38 4.439 63 2.040 88 1.190
14 9.807 39 4.294 64 1.983 89 1.176
15 9.494 40 4.154 65 1.928 90 1.163
16 9.192 41 4.019 66 1.876 91 1.150
17 8.899 42 3.890 67 1.826 92 1.137
18 8.617 43 3.765 68 1.778 93 1.125
19 8.344 44 3.645 69 1.732 94 1.112
20 8.078 45 3.530 70 1.688 95 1.098
21 7.821 46 3.419 71 1.645 96 1.084
22 7.571 47 3.312 72 1.604 97 1.069
23 7.327 48 3.208 73 1.565 98 1.054
24 7.091 49 3.109 74 1.528 99 1.040
100 1.000
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 170
<PAGE>
APPENDIX A (CONT.)
FACTORS FOR THE
CASH VALUE ACCUMULATION TEST
FOR A LIFE INSURANCE POLICY
FEMALE SMOKER
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
0 13.162 25 6.032 50 2.728 75 1.451
1 13.099 26 5.836 51 2.651 76 1.423
2 12.723 27 5.647 52 2.578 77 1.396
3 12.346 28 5.463 53 2.507 78 1.371
4 11.974 29 5.285 54 2.438 79 1.347
5 11.608 30 5.113 55 2.373 80 1.325
6 11.248 31 4.946 56 2.310 81 1.303
7 10.894 32 4.785 57 2.249 82 1.283
8 10.547 33 4.629 58 2.190 83 1.263
9 10.207 34 4.478 59 2.132 84 1.246
10 9.874 35 4.332 60 2.076 85 1.229
11 9.550 36 4.192 61 2.022 86 1.214
12 9.234 37 4.056 62 1.969 87 1.199
13 8.930 38 3.926 63 1.919 88 1.186
14 8.636 39 3.801 64 1.870 89 1.173
15 8.352 40 3.682 65 1.824 90 1.161
16 8.085 41 3.568 66 1.780 91 1.149
17 7.826 42 3.459 67 1.738 92 1.137
18 7.577 43 3.354 68 1.697 93 1.125
19 7.336 44 3.254 69 1.658 94 1.112
20 7.102 45 3.158 70 1.620 95 1.098
21 6.876 46 3.065 71 1.583 96 1.084
22 6.655 47 2.976 72 1.547 97 1.069
23 6.441 48 2.890 73 1.513 98 1.054
24 6.234 49 2.808 74 1.481 99 1.040
100 1.000
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 171
<PAGE>
APPENDIX A (CONT.)
FACTORS FOR THE
CASH VALUE ACCUMULATION TEST
FOR A LIFE INSURANCE POLICY
UNISEX 1 NONSMOKER
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
0 12.574 25 6.095 50 2.671 75 1.396
1 12.681 26 5.904 51 2.589 76 1.372
2 12.341 27 5.717 52 2.509 77 1.349
3 11.996 28 5.533 53 2.433 78 1.328
4 11.655 29 5.354 54 2.360 79 1.307
5 11.316 30 5.179 55 2.290 80 1.288
6 10.979 31 5.008 56 2.223 81 1.270
7 10.644 32 4.843 57 2.159 82 1.253
8 10.311 33 4.682 58 2.097 83 1.236
9 9.982 34 4.527 59 2.038 84 1.221
10 9.660 35 4.376 60 1.982 85 1.207
11 9.345 36 4.231 61 1.928 86 1.195
12 9.041 37 4.091 62 1.877 87 1.183
13 8.750 38 3.955 63 1.828 88 1.172
14 8.476 39 3.825 64 1.781 89 1.161
15 8.218 40 3.699 65 1.736 90 1.151
16 7.973 41 3.577 66 1.694 91 1.141
17 7.740 42 3.461 67 1.654 92 1.131
18 7.517 43 3.348 68 1.615 93 1.120
19 7.301 44 3.240 69 1.579 94 1.109
20 7.091 45 3.136 70 1.544 95 1.097
21 6.886 46 3.036 71 1.511 96 1.083
22 6.684 47 2.939 72 1.480 97 1.069
23 6.484 48 2.847 73 1.450 98 1.054
24 6.288 49 2.757 74 1.422 99 1.040
100 1.000
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 172
<PAGE>
APPENDIX A (CONT.)
FACTORS FOR THE
CASH VALUE ACCUMULATION TEST
FOR A LIFE INSURANCE POLICY
UNISEX 1 SMOKER
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
0 10.511 25 4.963 50 2.267 75 1.330
1 10.508 26 4.811 51 2.205 76 1.312
2 10.203 27 4.661 52 2.145 77 1.295
3 9.897 28 4.515 53 2.088 78 1.280
4 9.597 29 4.371 54 2.034 79 1.265
5 9.301 30 4.231 55 1.982 80 1.251
6 9.007 31 4.094 56 1.933 81 1.238
7 8.718 32 3.962 57 1.886 82 1.225
8 8.433 33 3.834 58 1.841 83 1.213
9 8.153 34 3.710 59 1.798 84 1.202
10 7.879 35 3.590 60 1.757 85 1.191
11 7.613 36 3.475 61 1.717 86 1.182
12 7.356 37 3.363 62 1.680 87 1.173
13 7.109 38 3.256 63 1.644 88 1.164
14 6.876 39 3.153 64 1.610 89 1.155
15 6.654 40 3.054 65 1.577 90 1.147
16 6.456 41 2.959 66 1.547 91 1.138
17 6.269 42 2.869 67 1.518 92 1.129
18 6.091 43 2.782 68 1.490 93 1.120
19 5.919 44 2.698 69 1.464 94 1.109
20 5.752 45 2.619 70 1.438 95 1.097
21 5.590 46 2.542 71 1.414 96 1.083
22 5.430 47 2.469 72 1.391 97 1.069
23 5.272 48 2.399 73 1.369 98 1.054
24 5.117 49 2.331 74 1.349 99 1.040
100 1.000
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 173
<PAGE>
APPENDIX A (CONT.)
FACTORS FOR THE
CASH VALUE ACCUMULATION TEST
FOR A LIFE INSURANCE POLICY
UNISEX 2 NONSMOKER
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
0 12.943 25 6.234 50 2.733 75 1.418
1 13.032 26 6.037 51 2.649 76 1.392
2 12.683 27 5.845 52 2.568 77 1.368
3 12.327 28 5.657 53 2.490 78 1.345
4 11.975 29 5.473 54 2.415 79 1.323
5 11.626 30 5.294 55 2.343 80 1.303
6 11.278 31 5.120 56 2.275 81 1.283
7 10.934 32 4.950 57 2.209 82 1.265
8 10.593 33 4.786 58 2.146 83 1.247
9 10.256 34 4.627 59 2.085 84 1.231
10 9.926 35 4.474 60 2.027 85 1.216
11 9.604 36 4.325 61 1.972 86 1.202
12 9.292 37 4.182 62 1.918 87 1.190
13 8.994 38 4.043 63 1.868 88 1.178
14 8.710 39 3.910 64 1.819 89 1.166
15 8.443 40 3.782 65 1.773 90 1.155
16 8.188 41 3.658 66 1.729 91 1.144
17 7.945 42 3.539 67 1.687 92 1.133
18 7.712 43 3.424 68 1.647 93 1.122
19 7.487 44 3.314 69 1.609 94 1.110
20 7.267 45 3.208 70 1.573 95 1.097
21 7.053 46 3.106 71 1.538 96 1.084
22 6.843 47 3.007 72 1.506 97 1.069
23 6.637 48 2.912 73 1.475 98 1.054
24 6.433 49 2.821 74 1.445 99 1.040
100 1.000
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 174
<PAGE>
APPENDIX A (CONT.)
FACTORS FOR THE
CASH VALUE ACCUMULATION TEST
FOR A LIFE INSURANCE POLICY
UNISEX 2 SMOKER
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
0 10.942 25 5.143 50 2.347 75 1.361
1 10.931 26 4.984 51 2.282 76 1.341
2 10.616 27 4.828 52 2.221 77 1.323
3 10.298 28 4.675 53 2.162 78 1.306
4 9.985 29 4.526 54 2.105 79 1.289
5 9.677 30 4.380 55 2.052 80 1.274
6 9.373 31 4.239 56 2.000 81 1.259
7 9.072 32 4.102 57 1.951 82 1.244
8 8.777 33 3.969 58 1.904 83 1.230
9 8.487 34 3.841 59 1.859 84 1.217
10 8.203 35 3.717 60 1.816 85 1.205
11 7.927 36 3.597 61 1.774 86 1.194
12 7.660 37 3.481 62 1.735 87 1.183
13 7.405 38 3.371 63 1.697 88 1.173
14 7.161 39 3.264 64 1.660 89 1.163
15 6.930 40 3.162 65 1.626 90 1.153
16 6.721 41 3.064 66 1.594 91 1.143
17 6.523 42 2.970 67 1.563 92 1.133
18 6.334 43 2.880 68 1.534 93 1.122
19 6.152 44 2.794 69 1.505 94 1.110
20 5.975 45 2.711 70 1.478 95 1.097
21 5.803 46 2.632 71 1.452 96 1.084
22 5.634 47 2.556 72 1.427 97 1.069
23 5.468 48 2.484 73 1.404 98 1.054
24 5.305 49 2.414 74 1.382 99 1.040
100 1.000
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 175
<PAGE>
APPENDIX B
FACTORS FOR THE
GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST
FOR A LIFE INSURANCE POLICY
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
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
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 176
<PAGE>
APPENDIX C
PERFORMANCE INFORMATION
POLICY PERFORMANCE
The following hypothetical illustrations demonstrate how the actual investment
experience of each variable investment option of the separate 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 net portfolio's management
fees after any voluntary waiver and other operating expenses but do not reflect
the policy level or separate 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, received
at the beginning of each year, for a hypothetical policy with a $300,000 stated
death benefit, the cash value accumulation test, death benefit option 1, issued
to a nonsmoker male, age 45. It is assumed that all premiums are allocated to
the variable investment option 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 separate account
for mortality and expense risks, and each portfolio's charges and expenses. SEE
CHARGES, DEDUCTIONS AND REFUNDS, PAGE 45. This prospectus also contains
illustrations based on assumed rates of return. SEE ILLUSTRATIONS OF DEATH
BENEFITS, ACCOUNT VALUES, CASH SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE
54.
Past performance is not an indication of future results. Actual investment
results may be more or less than those shown in the hypothetical illustrations.
- --------------------------------------------------------------------------------
Strategic Advantage 177
<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
AIM V.I. CAPITAL APPRECIATION FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/94 2.50% 4,682 4,394 300,000
12/31/95 35.69% 11,731 11,587 300,000
12/31/96 17.58% 18,177 18,177 300,000
12/31/97 13.51% 24,874 24,874 300,000
12/31/98 19.30% 34,113 34,113 300,000
12/31/99 44.61% 55,344 55,344 300,000
AIM V.I. GOVERNMENT SECURITIES FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/94 -3.73% 4,394 4,106 300,000
12/31/95 15.56% 9,607 9,463 300,000
12/31/96 2.29% 13,576 13,576 300,000
12/31/97 8.16% 18,715 18,715 300,000
12/31/98 7.66% 24,117 24,117 300,000
12/31/99 -1.32% 27,748 27,748 300,000
ALGER AMERICAN GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 4.14% 4,757 4,470 300,000
12/31/91 40.39% 12,256 12,112 300,000
12/31/92 12.38% 17,936 17,936 300,000
12/31/93 22.47% 26,593 26,593 300,000
12/31/94 1.45% 30,651 30,651 300,000
12/31/95 36.37% 47,451 47,451 300,000
12/31/96 13.35% 58,333 58,333 300,000
12/31/97 25.75% 78,447 78,447 300,000
12/31/98 48.07% 122,161 122,161 300,000
12/31/99 33.74% 168,326 168,326 397,250
The assumptions underlying these values are described in Performance
Information, page 177.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 178
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/96 12.04% 5,123 4,836 300,000
12/31/97 19.68% 10,831 10,687 300,000
12/31/98 57.83% 23,197 23,197 300,000
12/31/99 78.06% 48,310 48,310 300,000
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/94 -1.54% 4,495 4,207 300,000
12/31/95 44.45% 12,244 12,100 300,000
12/31/96 11.90% 17,843 17,843 300,000
12/31/97 15.01% 24,828 24,828 300,000
12/31/98 30.30% 37,259 37,259 300,000
12/31/99 31.85% 54,537 54,537 300,000
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 8.71% 4,969 4,682 300,000
12/31/91 57.54% 14,132 13,988 300,000
12/31/92 3.55% 18,416 18,416 300,000
12/31/93 13.28% 25,092 25,092 300,000
12/31/94 -4.38% 27,425 27,425 300,000
12/31/95 44.31% 45,613 45,613 300,000
12/31/96 4.18% 51,660 51,660 300,000
12/31/97 11.39% 62,020 62,020 300,000
12/31/98 15.53% 76,288 76,288 300,000
12/31/99 43.42% 115,202 115,202 300,000
The assumptions underlying these values are described in Performance
Information, page 177.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 179
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
FIDELITY VIP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 -11.73% 4,024 3,737 300,000
12/31/91 45.51% 11,655 11,511 300,000
12/31/92 9.32% 16,778 16,778 300,000
12/31/93 19.37% 24,527 24,527 300,000
12/31/94 -0.02% 28,140 28,140 300,000
12/31/95 35.36% 43,709 43,709 300,000
12/31/96 14.71% 54,763 54,763 300,000
12/31/97 23.48% 72,630 72,630 300,000
12/31/98 39.49% 106,967 106,967 300,000
12/31/99 37.44% 152,316 152,316 359,467
FIDELITY VIP MONEY MARKET PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 8.04% 4,938 4,651 300,000
12/31/91 6.09% 9,367 9,224 300,000
12/31/92 3.90% 13,551 13,551 300,000
12/31/93 3.23% 17,808 17,808 300,000
12/31/94 4.25% 22,391 22,391 300,000
12/31/95 5.87% 27,991 27,991 300,000
12/31/96 5.41% 33,773 33,773 300,000
12/31/97 5.51% 39,919 39,919 300,000
12/31/98 5.46% 46,378 46,378 300,000
12/31/99 5.17% 52,992 52,992 300,000
The assumptions underlying these values are described in Performance
Information, page 177.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 180
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
FIDELITY VIP OVERSEAS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 -1.67% 4,489 4,201 300,000
12/31/91 8.00% 9,059 8,915 300,000
12/31/92 -10.72% 11,293 11,293 300,000
12/31/93 37.35% 20,816 20,816 300,000
12/31/94 1.72% 24,881 24,881 300,000
12/31/95 9.74% 31,758 31,758 300,000
12/31/96 13.15% 40,540 40,540 300,000
12/31/97 11.56% 49,759 49,759 300,000
12/31/98 12.81% 60,703 60,703 300,000
12/31/99 42.55% 92,371 92,371 300,000
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 6.72% 4,877 4,589 300,000
12/31/91 22.56% 10,799 10,655 300,000
12/31/92 11.71% 16,205 16,205 300,000
12/31/93 21.23% 24,227 24,227 300,000
12/31/94 -6.09% 26,115 26,115 300,000
12/31/95 16.96% 35,324 35,324 300,000
12/31/96 14.60% 45,138 45,138 300,000
12/31/97 20.65% 59,385 59,385 300,000
12/31/98 15.05% 72,949 72,949 300,000
12/31/99 11.09% 85,407 85,407 300,000
The assumptions underlying these values are described in Performance
Information, page 177.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 181
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
FIDELITY VIP II INDEX 500 PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/93 9.74% 5,017 4,729 300,000
12/31/94 1.04% 8,986 8,842 300,000
12/31/95 37.19% 17,559 17,559 300,000
12/31/96 22.82% 26,210 26,210 300,000
12/31/97 32.82% 39,822 39,822 300,000
12/31/98 28.31% 56,332 56,332 300,000
12/31/99 20.51% 72,717 72,717 300,000
INVESCO VIF-EQUITY INCOME FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 29.25% 5,923 5,636 300,000
12/31/96 22.28% 12,047 11,903 300,000
12/31/97 28.17% 20,271 20,271 300,000
12/31/98 15.30% 27,681 27,681 300,000
12/31/99 14.84% 36,025 36,025 300,000
INVESCO VIF-HIGH YIELD FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 19.76% 5,482 5,194 300,000
12/31/96 16.59% 10,958 10,814 300,000
12/31/97 17.33% 17,235 17,235 300,000
12/31/98 1.42% 21,207 21,207 300,000
12/31/99 9.20% 27,182 27,182 300,000
INVESCO VIF-SMALL COMPANY GROWTH FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/98 16.38% 5,325 5,037 300,000
12/31/99 91.06% 17,904 17,760 300,000
The assumptions underlying these values are described in Performance
Information, page 177.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 182
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
INVESCO VIF-TOTAL RETURN FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 22.79% 5,623 5,335 300,000
12/31/96 12.18% 10,688 10,544 300,000
12/31/97 22.91% 17,752 17,752 300,000
12/31/98 9.56% 23,523 23,523 300,000
12/31/99 -3.40% 26,203 26,203 300,000
INVESCO VIF-UTILITIES FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 9.08% 4,986 4,699 300,000
12/31/96 12.76% 10,031 9,887 300,000
12/31/97 23.41% 17,019 17,019 300,000
12/31/98 25.48% 26,117 26,117 300,000
12/31/99 19.13% 35,539 35,539 300,000
NEUBERGER BERMAN GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 -8.19% 4,188 3,900 300,000
12/31/91 29.73% 10,562 10,418 300,000
12/31/92 9.54% 15,620 15,620 300,000
12/31/93 6.79% 20,644 20,644 300,000
12/31/94 -4.99% 23,037 23,037 300,000
12/31/95 31.73% 35,822 35,822 300,000
12/31/96 9.14% 43,502 43,502 300,000
12/31/97 29.01% 61,437 61,437 300,000
12/31/98 15.53% 75,617 75,617 300,000
12/31/99 50.40% 119,833 119,833 300,000
The assumptions underlying these values are described in Performance
Information, page 177.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 183
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Standard Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
NEUBERGER BERMAN LIMITED MATURITY BOND PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 8.32% 4,951 4,664 300,000
12/31/91 11.34% 9,862 9,718 300,000
12/31/92 5.18% 14,242 14,242 300,000
12/31/93 6.63% 19,149 19,149 300,000
12/31/94 -0.15% 22,754 22,754 300,000
12/31/95 10.94% 29,760 29,760 300,000
12/31/96 4.31% 35,253 35,253 300,000
12/31/97 6.74% 41,965 41,965 300,000
12/31/98 4.39% 48,028 48,028 300,000
12/31/99 1.48% 52,782 52,782 300,000
NEUBERGER BERMAN PARTNERS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 36.47% 6,259 5,972 300,000
12/31/96 29.57% 13,219 13,076 300,000
12/31/97 31.25% 22,306 22,306 300,000
12/31/98 4.21% 27,071 27,071 300,000
12/31/99 7.37% 32,988 32,988 300,000
The assumptions underlying these values are described in Performance
Information, page 177.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 184
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (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 BOND FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 11.25% 5,087 4,799 300,000
12/31/91 18.39% 10,667 10,524 300,000
12/31/92 -5.25% 13,536 13,536 300,000
12/31/93 7.79% 18,605 18,605 300,000
12/31/94 -1.32% 21,946 21,946 300,000
12/31/95 17.30% 30,556 30,556 300,000
12/31/96 2.53% 35,454 35,454 300,000
12/31/97 2.38% 40,434 40,434 300,000
12/31/98 12.75% 50,198 50,198 300,000
12/31/99 -7.82% 49,889 49,889 300,000
VAN ECK WORLDWIDE EMERGING MARKETS FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/96 26.82% 5,810 5,523 300,000
12/31/97 -11.61% 8,520 8,377 300,000
12/31/98 -34.15% 7,845 7,845 300,000
12/31/99 100.28% 23,805 23,805 300,000
VAN ECK WORLDWIDE HARD ASSETS FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/91 -2.93% 4,430 4,143 300,000
12/31/92 -4.09% 7,954 7,810 300,000
12/31/93 64.83% 19,533 19,533 300,000
12/31/94 -4.78% 22,054 22,054 300,000
12/31/95 10.99% 28,574 28,574 300,000
12/31/96 18.04% 38,547 38,547 300,000
12/31/97 -1.67% 41,807 41,807 300,000
12/31/98 -30.93% 31,487 31,487 300,000
12/31/99 21.00% 43,130 43,130 300,000
The assumptions underlying these values are described in Performance
Information, page 177.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 185
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (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 REAL ESTATE FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/98 -11.35% 4,042 3,754 300,000
12/31/99 -2.01% 7,754 7,611 300,000
The assumptions underlying these values are described in Performance
Information, page 177.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage 186
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
- --------------------------------------------------------------------------------
Strategic Advantage 187
Prospectus
STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE
A FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY
issued by
SECURITY LIFE OF DENVER INSURANCE COMPANY
AND
SECURITY LIFE SEPARATE ACCOUNT L1
Consider carefully the policy charges, deductions, and refunds beginning on page
44 in this prospectus.
You should read this prospectus and keep it for future reference. A prospectus
for each underlying investment portfolio must accompany and should be read
together with this prospectus.
This policy is not available in all jurisdictions. This policy is not offered in
any jurisdiction where this type of offering is not legal. Depending on the
state where it is issued, policy features may vary. You should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with information that is different.
Replacing your existing life insurance policy(ies) with this policy may not be
beneficial to you.
YOUR POLICY
o is a flexible premium variable universal life insurance policy;
o is issued by Security Life of Denver Insurance Company;
o is designed primarily for use on a multi-life basis when the insured
people share a common employment or business relationship;
o is guaranteed not to lapse during the first three policy years if you
meet certain requirements; and
o is returnable by you during the free look period if you are not
satisfied.
YOUR PREMIUM PAYMENTS
o are flexible, so the premium amount and frequency may vary;
o are allocated to variable investment options and the guaranteed
interest division, based on your instructions;
o are invested in shares of the underlying investment portfolios under
each variable investment option; and
o can be invested in as many as eighteen investment options over the
policy's lifetime.
YOUR ACCOUNT VALUE
o is the sum of your holdings in the variable division, the guaranteed
interest division and the loan division;
o has no guaranteed minimum value under the variable division. The value
varies with the value of the underlying investment portfolio;
o has a minimum guaranteed rate of return for amounts in the guaranteed
interest division; and
o is subject to specified expenses and charges.
DEATH PROCEEDS
o are paid if the policy is in force when the insured person dies;
o are equal to the death benefit minus an outstanding policy loan,
accrued loan interest and unpaid charges incurred before the insured
person dies;
o are calculated under your choice of options;
* Option 1- a fixed minimum death benefit;
* Option 2- a stated death benefit plus your account value; and
o are generally not federally income taxed if your policy continues to
meet the federal income tax definition of life insurance.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS LIFE INSURANCE POLICY IS NOT A BANK DEPOSIT OR OBLIGATION, FEDERALLY
INSURED OR BACKED BY ANY BANK OR GOVERNMENT AGENCY.
DATE OF PROSPECTUS MAY 1, 2000
<PAGE>
ISSUED BY: Security Life of Denver UNDERWRITTEN BY: ING America Equities, Inc.
Insurance Company 1290 Broadway
ING Security Life Center Denver, CO 80203-5699
1290 Broadway (303) 860-2000
Denver, CO 80203-5699
(800) 525-9852
THROUGH ITS: Security Life Separate Account L1
ADMINISTERED BY: Customer Service Center
P.O. Box 173888
Denver, CO 80217-3888
(800) 848-6362
- --------------------------------------------------------------------------------
Strategic Advantage II 2
<PAGE>
TABLE OF CONTENTS
POLICY SUMMARY.................................................................4
Your Policy..............................................................4
Free Look Period.........................................................4
Premium Payments.........................................................4
Charges, Deductions and Refunds..........................................4
Variable Division........................................................6
Fees and Expenses of the Investment Portfolios...........................6
Guaranteed Interest Division.............................................8
Policy Values............................................................8
Transfers of Account Value...............................................8
Special Policy Features..................................................8
Policy Modification, Termination and Continuation
Features............................................................9
Death Benefits..........................................................10
Tax Considerations......................................................10
SECURITY LIFE, THE SEPARATE ACCOUNT
AND THE INVESTMENT OPTIONS..............................................12
Security Life of Denver Insurance Company...............................12
Security Life Separate Account L1.......................................12
Investment Portfolio Objectives.........................................13
Guaranteed Interest Division............................................18
Maximum Number of Investment Options....................................18
DETAILED INFORMATION ABOUT THE
POLICY..................................................................18
Applying for a Policy...................................................18
Temporary Insurance.....................................................19
Policy Issuance.........................................................19
Premiums................................................................19
Premium Payments Affect Your Coverage...................................21
Death Benefits..........................................................22
Riders..................................................................27
Special Features........................................................28
Policy Values...........................................................30
Transfers of Account Value..............................................31
Dollar Cost Averaging...................................................32
Automatic Rebalancing...................................................33
Policy Loans............................................................34
Partial Withdrawals.....................................................35
Lapse...................................................................36
Reinstatement...........................................................37
Surrender...............................................................37
General Policy Provisions...............................................38
Free Look Period...................................................38
Your Policy........................................................38
Guaranteed Issue...................................................38
Age ..............................................................38
Ownership..........................................................39
Beneficiary(ies)...................................................39
Collateral Assignment..............................................39
Incontestability...................................................39
Misstatements of Age or Gender.....................................39
Suicide............................................................39
Transaction Processing.............................................40
Notification and Claims Procedures.................................40
Telephone Privileges...............................................40
Non-participation..................................................41
Distribution of the Policies.......................................41
Advertising Practices and Sales Literature.........................41
Settlement Provisions..............................................42
Administrative Information About the Policy.............................42
CHARGES, DEDUCTIONS AND REFUNDS...............................................44
Deductions from Premiums................................................44
Daily Deductions from the Separate Account..............................45
Monthly Deductions from Account Value...................................45
Policy Transaction Fees.................................................46
Persistency Refund......................................................47
Refund of Sales Charges.................................................47
Group or Sponsored Arrangements, or Corporate
Purchasers.........................................................47
TAX CONSIDERATIONS............................................................48
Tax Status of the Policy................................................48
Diversification Requirements............................................49
Tax Treatment of Policy Death Benefits..................................49
Modified Endowment Contracts............................................49
Multiple Policies.......................................................50
Distributions Other than Death Benefits from
Modified Endowment Contracts.......................................50
Distributions Other than Death Benefits from
Policies That Are Not Modified Endowment
Contracts..........................................................50
Investment in the Policy................................................50
Policy Loans............................................................50
Section 1035 Exchanges..................................................51
Tax-exempt Policy Owners................................................51
Possible Tax Law Changes................................................51
Changes to Comply with the Law..........................................51
Other...................................................................51
ILLUSTRATIONS.................................................................53
ADDITIONAL INFORMATION........................................................61
Directors and Officers..................................................61
Regulation..............................................................62
Legal Matters...........................................................62
Legal Proceedings.......................................................62
Experts.................................................................62
Registration Statement..................................................62
INDEX OF SPECIAL TERMS........................................................63
FINANCIAL STATEMENTS..........................................................64
APPENDIX A...................................................................166
APPENDIX B...................................................................167
APPENDIX C...................................................................168
- --------------------------------------------------------------------------------
Strategic Advantage II 3
<PAGE>
POLICY SUMMARY
YOUR POLICY
Your policy provides life insurance protection on the insured person. The policy
includes the basic policy, applications and riders or endorsements. As long as
the policy remains in force, we pay a death benefit at the death of the insured
person. While your policy is in force, you may access a portion of your policy
value by taking loans or partial withdrawals. You may surrender your policy for
its net cash surrender value. At the policy anniversary nearest the insured
person's 100th birthday, if the insured person is still alive you may surrender
your policy or continue it under the continuation of coverage option. SEE
CONTINUATION OF COVERAGE, PAGE 29.
We designed Strategic Advantage II primarily for use on a multi-life basis where
the insured people 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.
Life insurance is not a short-term investment. You should evaluate your need for
life insurance coverage and this policy's long-term investment potential and
risks before purchasing a policy.
FREE LOOK PERIOD
Within limits as specified by law, you have the right to examine your policy and
return it for a refund of all premium payments we have received or the account
value, if you are not satisfied for any reason. The policy is then void. SEE
FREE LOOK PERIOD, PAGE 38.
PREMIUM PAYMENTS
The policy is a flexible premium policy because the amount and frequency of the
premium payments you make may vary within limits. You must make premium
payments:
o for us to issue your policy;
o sufficient to keep your policy in force; and
o as necessary to continue certain benefits.
Depending on the amount of premium you choose to pay, it may not be enough to
keep your policy or certain riders in force. SEE PREMIUMS, PAGE 19.
ALLOCATION OF NET PREMIUMS
This policy has premium-based charges which are subtracted from your payments.
We add the balance, or net premium, to your policy based on your investment
instructions. You may allocate the net premium among one or more variable
investment options and the guaranteed interest division. SEE ALLOCATION OF NET
PREMIUMS, PAGE 21.
CHARGES, DEDUCTIONS AND REFUNDS
All charges presented here are current unless stated otherwise.
- --------
This summary highlights some important points about your policy. The policy is
more fully described in the attached, complete prospectus. Please read it
carefully. "We," "us," "our" and the "company" refer to Security Life of Denver
Insurance Company. "You" and "your" refer to the policy owner. The owner is the
individual, entity, partnership, representative or party who may exercise all
rights over the policy and receive the policy benefits during the insured
person's lifetime.
State variations are covered in a special policy form used in that state. This
prospectus provides a general description of the policy. Your actual policy and
any riders are the controlling documents. If you would like to review a copy of
the policy and riders, contact our customer service center or your
agent/registered representative.
- --------------------------------------------------------------------------------
Strategic Advantage II 4
<PAGE>
CHARGES
Other Than Investment Portfolio Annual Expenses
(SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 44)
<TABLE>
<S> <C> <C>
Charge When Charge is Deducted Amount Deducted
Tax Charges Each premium payment received 2.5% for state and local taxes; 1.5%
for estimated federal income tax
treatment of deferred acquisition costs.
Sales Charge Each premium payment received Percentage of policy or segment premium
up to target premium and above target
premium: year 1-10 up to target 12%,
above target 3%, year 11 + 3% of all
premium received.
Mortality & Expense Risk Charge Daily, included in unit value 0.002055% daily (0.75% annually)
Policy Charge Monthly from account value $10 per month for first three
policy years.
Monthly Administrative Charge Monthly from account value $3 per month plus $0.025 per $1,000 of
stated death benefit or target death
benefit, if greater. $30 current
monthly maximum.
Cost of Insurance Charge Monthly from account value Varies based on current cost of
insurance rates and net amount at risk.
Rider Charges Monthly from account value Varies depending on the rider benefits
you choose.
Partial Withdrawal Fee Transaction date from account value Up to $25.
Transfer Fee Transaction date from account value Twelve free transfers per policy year,
then $25 per transfer.
Illustration Fee Transaction date from account value One free illustration per policy year,
then a $25 fee may apply.
Premium Allocation Change Transaction date from account value Twelve free premium allocation changes
per policy year, then $25 per change.
Continuation of Coverage Policy anniversary nearest insured One-time $200 administrative fee.
person's 100th birthday from
account value
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 5
<PAGE>
VARIABLE DIVISION
If you invest in the variable investment options, you may make or lose money
depending on market conditions. The variable investment options are described in
the prospectuses for the underlying investment portfolios. Each investment
portfolio has its own investment objective. SEE INVESTMENT PORTFOLIO OBJECTIVES,
PAGE 13.
FEES AND EXPENSES OF THE INVESTMENT PORTFOLIOS
The separate account purchases shares of the underlying investment portfolios,
at net asset value. This price reflects investment management fees and other
direct expenses deducted from the portfolio assets. This table describes these
fees and expenses in gross amounts and net amounts after waiver or reimbursement
of fees or expenses by the investment portfolio advisers. Waivers or
reimbursements are voluntary and subject to change. The portfolio expense
information was provided to us by the portfolios and we have not independently
verified this information.
These expenses are not direct charges against variable division assets or
reductions from contract values; rather these expenses are included in computing
each underlying portfolio's net asset value, which is the share price used to
calculate the unit values of the variable investment options. For a more
complete description of the portfolios' costs and expenses, see the prospectuses
for the portfolios.
- --------------------------------------------------------------------------------
Strategic Advantage II 6
<PAGE>
INVESTMENT PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET
ASSETS)
<TABLE>
<CAPTION>
Fees and
Investment Total Expenses Total Net
Management Other Portfolio Waived or Portfolio
Portfolio Fees Expenses Expenses Reimbursed Expenses
--------- ---- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Capital Appreciation Fund 0.62% 0.11% 0.73% NA 0.73%
AIM V.I. Government Securities Fund 0.50% 0.40%/1/ 0.90% NA 0.90%
THE ALGER AMERICAN FUND
Alger American Growth Portfolio 0.75% 0.04% 0.79% NA 0.79%
Alger American Leveraged AllCap Portfolio 0.85% 0.08%/2/ 0.93% NA 0.93%
Alger American MidCap Growth Portfolio 0.80% 0.05% 0.85% NA 0.85%
Alger American Small Capitalization Portfolio 0.85% 0.05% 0.90% NA 0.90%
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP Growth Portfolio 0.58% 0.08% 0.66% NA 0.66%/3/
VIP Money Market Portfolio 0.18% 0.09% 0.27% NA 0.27%
VIP Overseas Portfolio 0.73% 0.18% 0.91% NA 0.91%/3/
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II Asset Manager Portfolio 0.53% 0.10% 0.63% NA 0.63%/3/
VIP II Index 500 Portfolio 0.24% 0.10% 0.34% 0.06% 0.28%
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF-Equity Income Fund/4/ 0.75% 0.44% 1.19% 0.02% 1.17%
INVESCO VIF-High Yield Fund/5/ 0.60% 0.48% 1.08% 0.01% 1.07%
INVESCO VIF-Small Company Growth Fund/6/ 0.75% 3.35% 4.10% 2.39% 1.71%
INVESCO VIF-Total Return Fund/7/ 0.75% 0.55% 1.30% 0.13% 1.17%
INVESCO VIF-Utilities Fund/8/ 0.60% 1.08% 1.68% 0.47% 1.21%
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
Growth Portfolio 0.84% 0.08% 0.92% NA 0.92%
Limited Maturity Bond Portfolio 0.65% 0.11% 0.76% NA 0.76%
Partners Portfolio 0.80% 0.07% 0.87% NA 0.87%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund 1.00% 0.22% 1.22% NA 1.22%
Worldwide Emerging Markets Fund 1.00% 0.54% 1.54% 0.20%/9/ 1.34%
Worldwide Hard Assets Fund 1.00% 0.26% 1.26% NA 1.26%
Worldwide Real Estate Fund 1.00% 2.23% 3.23% 1.79%/10/ 1.44%
</TABLE>
- ----------------------------
/1/ Included in AIM V.I. Government Securities Fund's "Other Expenses" is
0.10% of interest expense.
/2/ Included in Alger American Leveraged AllCap portfolio's "Other Expenses"
is 0.01% of interest expense.
/3/ Fidelity absorbed a portion of the portfolio and custodian expenses for
some portfolios with part of the brokerage commissions and un-invested
cash balances. After this absorption, "Total Portfolio Expenses" are 0.65%
for Growth portfolio, 0.87% for Overseas portfolio and 0.62% for Asset
Manager portfolio.
- --------------------------------------------------------------------------------
Strategic Advantage II 7
<PAGE>
/4/ INVESCO absorbed a portion of VIF-Equity Income Fund's "Other Expenses"
and "Total Portfolio Expenses." After this absorption, these expenses are
0.42% and 1.17% respectively.
/5/ INVESCO absorbed a portion of VIF-High Yield Fund's "Other Expenses" and
"Total Portfolio Expenses." After this absorption, these expenses are
0.47% and 1.07% respectively.
/6/ INVESCO absorbed a portion of VIF-Small Company Growth Fund's "Other
Expenses" and "Total Portfolio Expenses." After this absorption, these
expenses are 0.96% and 1.71%, respectively.
/7/ INVESCO absorbed a portion of VIF-Total Return Fund's "Other Expenses" and
"Total Portfolio Expenses." After this absorption, these expenses are
0.42% and 1.17%, respectively.
/8/ INVESCO absorbed a portion of VIF-Utilities Fund's "Other Expenses" and
"Total Portfolio Expenses." After this absorption, these expenses are
0.61% and 1.21%, respectively.
/9/ Van Eck Associates Corporation absorbed expenses exceeding 1.30% of the
Fund's average daily assets, effective May 13, 1999.
/10/ Van Eck Associates Corporation absorbed certain expenses exceeding 1.50%.
The fund's expenses were also reduced by a fee arrangement based on cash
balances left on deposit with the custodian and a directed brokerage
arrangement where the fund directs certain portfolio trades to a broker
that, in turn, pays a potion of the fund's expenses.
GUARANTEED INTEREST DIVISION
The guaranteed interest division guarantees principal and is part of our general
account. Any amount you direct into the guaranteed interest division is credited
with interest at a fixed rate. SEE GUARANTEED INTEREST DIVISION, PAGE 18.
POLICY VALUES
Your policy account value is the amount you have in the guaranteed interest
division, plus the amount you have in each variable investment option. If you
have an outstanding policy loan, your account value includes the amount in the
loan division. SEE POLICY VALUES, PAGE 30 AND PARTIAL WITHDRAWALS, PAGE 35.
YOUR ACCOUNT VALUE IN THE VARIABLE DIVISION
Accumulation units are the way we measure value in the variable division.
Accumulation unit value is the value of one unit of a variable investment option
on a valuation date. Each variable investment option has a different
accumulation unit value. SEE DETERMINING VALUES IN THE VARIABLE DIVISION, PAGE
30.
The accumulation unit value for each variable investment option reflects the
investment performance of the underlying investment portfolio during the
valuation period. Each accumulation unit value reflects asset-based charges
under the policy and the expenses of the investment portfolios. SEE DETERMINING
VALUES IN THE VARIABLE DIVISION, PAGE 30 AND HOW WE CALCULATE ACCUMULATION UNIT
VALUES, PAGE 31.
TRANSFERS OF ACCOUNT VALUE
With some limitations, you may make twelve free transfers among the variable
investment options or to the guaranteed interest division each policy year. We
charge $25 for each transfer over twelve in a policy year. There are
restrictions on transfers from the guaranteed interest division. SEE TRANSFERS
OF ACCOUNT VALUE, PAGE 31 AND POLICY TRANSACTION FEES, PAGE 46.
SPECIAL POLICY FEATURES
DESIGNATED DEDUCTION INVESTMENT OPTION
You may designate one investment option from which we will deduct all of your
monthly deductions. SEE DESIGNATED DEDUCTION INVESTMENT OPTION, PAGE 28.
RIDERS
You may attach additional benefits to your policy by rider. In most cases, we
deduct a monthly charge from your account value for these benefits. SEE RIDERS,
PAGE 27.
- --------------------------------------------------------------------------------
Strategic Advantage II 8
<PAGE>
DOLLAR COST AVERAGING
Dollar cost averaging is a systematic plan of transferring account values to
selected investment options. It is intended to protect your policy's value from
short-term price fluctuations. However, dollar cost averaging does not assure a
profit, nor does it protect against a loss in a declining market. Dollar cost
averaging is free. SEE DOLLAR COST AVERAGING, PAGE 32.
AUTOMATIC REBALANCING
Automatic rebalancing periodically reallocates your net account value among your
selected investment options to maintain your specified distribution of account
value among those investment options. Automatic rebalancing is free. SEE
AUTOMATIC REBALANCING, PAGE 33.
LOANS
You may take loans against your policy's net account value. We charge an annual
loan interest rate of 4.75%. We credit an annual interest rate of 4% on amounts
held in the loan division as collateral for your loan. Beginning in your
eleventh policy year, where permitted by law, we may include amounts in the loan
division for calculation of your policy's persistency refund. SEE POLICY LOANS,
PAGE 34.
Loans may have tax consequences. SEE TAX CONSIDERATIONS, PAGE 48.
PARTIAL WITHDRAWALS
You may withdraw part of your net account value any time after your first policy
anniversary. You may make only one partial withdrawal per policy year. Partial
withdrawals may reduce your policy's death benefit and will reduce your account
value. SEE PARTIAL WITHDRAWALS, PAGE 35.
Partial withdrawals may have tax consequences. SEE TAX CONSIDERATIONS, PAGE 48.
PERSISTENCY REFUND
After your tenth policy anniversary, where permitted by law, we add a
persistency refund to your account value. SEE PERSISTENCY REFUND, PAGE 47.
REFUND OF SALES CHARGE
If you surrender your policy within the first two policy years and the policy
has not lapsed, we will refund a portion of the sales charges we previously
deducted from the premiums we have received in the first policy year. SEE REFUND
OF SALES CHARGES, PAGE 47.
POLICY MODIFICATION, TERMINATION AND CONTINUATION FEATURES
RIGHT TO EXCHANGE POLICY
For 24 months after the policy date you may exchange your policy for a
guaranteed policy, unless law requires differently. There is no charge for this
exchange. SEE RIGHT TO EXCHANGE POLICY, PAGE 28.
SURRENDER
You may surrender your policy for its net cash surrender value at any time
before the death of the insured person. All insurance coverage ends on the date
we receive your request. SEE SURRENDER, PAGE 37.
LAPSE
In general, insurance coverage continues as long as your net account value is
enough to pay the monthly deductions. However, your policy and its riders are
guaranteed not to lapse during the first three years of your policy if the
conditions of the special continuation period have been met. SEE LAPSE, PAGE 36
AND SPECIAL CONTINUATION PERIOD, PAGE 21.
REINSTATEMENT
You may reinstate your policy and its riders within five years of its lapse if
you still own the policy and the insured person meets our underwriting
requirements.
You will need to give proof of insurability as at policy issue. You will also
need to pay required reinstatement premiums.
If the guaranteed minimum death benefit lapses and you do not correct it, this
feature terminates. Once it terminates, you cannot reinstate this feature.
- --------------------------------------------------------------------------------
Strategic Advantage II 9
<PAGE>
If you had a policy loan existing when coverage ended, we will reinstate it with
accrued loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 37.
POLICY MATURITY
If the insured person is still living on the maturity date or the policy
anniversary nearest the insured person's 100th birthday and you do not choose to
let the continuation of coverage feature become effective, you must surrender
your policy. We will pay the net account value. Your policy then ends. SEE
POLICY MATURITY, PAGE 29.
CONTINUATION OF COVERAGE
At the policy anniversary nearest the insured person's 100th birthday, you may
choose to let the continuation of coverage feature become effective. If you do
so, we will deduct a one-time administrative fee of $200 and keep your policy in
force. SEE CONTINUATION OF COVERAGE, PAGE 29.
DEATH BENEFITS
After the death of the insured person, we pay death proceeds to the
beneficiary(ies) if your policy is still in force. Based on the death benefit
option you have chosen, the base death benefit varies.
We generally require a minimum stated death benefit of $50,000 to issue your
policy. However, we may lower this minimum for group or sponsored arrangements,
or corporate purchasers. SEE DEATH BENEFITS, PAGE 22.
You may change your death benefit amount while your policy is in force, subject
to certain restrictions. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 25.
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. We believe it is
reasonable to conclude that the policy will qualify as a life insurance
contract. SEE TAX STATUS OF THE POLICY, PAGE 48.
Assuming the policy qualifies as a life insurance contract under current federal
income tax law, your account value earnings are generally not subject to income
tax as long as they remain within your policy. However depending on
circumstances, the following events may cause taxable consequences for you:
o partial withdrawals;
o surrender; or
o lapse.
In addition, if your policy is a modified endowment contract, a loan against or
secured by the policy may cause income taxation. A penalty tax may be imposed on
a distribution from a modified endowment contract as well. SEE MODIFIED
ENDOWMENT CONTRACTS, PAGE 49.
In recent years, Congress has adopted new rules relating to life insurance owned
by businesses. Any business contemplating the purchase of a new policy or a
change in an existing policy should consult a tax adviser.
You should consult a qualified legal or tax adviser before you purchase your
policy.
- --------------------------------------------------------------------------------
Strategic Advantage II 10
<PAGE>
HOW THE POLICY WORKS
<TABLE>
<S> <C> <C>
YOUR PREMIUM Premium Deductions
You make a premium ---------------------------->
payment
o sales charge
o tax charges
<----------------------------
NET PREMIUM
We allocate the net
premium to the investment
options you choose
|
|
-----------------------------------------
| |
\/ \/
GUARANTEED VARIABLE INVESTMENT INVESTMENT PORTFOLIOS The investment
INTEREST DIVISION OPTIONS The variable investment manager deducts
Amounts you allocate Amounts you allocate are <-- options invest in investment
are held in our general account held in our separate account --> investment portfolios ------> management fees
| | and other
----------------------------------------- portfolio expenses
|
|
o persistency refund Refunds |
------------>| Monthly Deductions o policy charge
| ---------------------> o cost of insurance
| | charge
| | o monthly administrative
\/ | charge
ACCUMULATED VALUE | o rider charges
The total value of your --|
policy |
| | Separate Account
| | Deductions
| |---------------------> o mortality and expense
\/ | risk charge
LOAN DIVISION |
Amount set aside to |
secure a policy loan |
|
| Transaction Fees o partial withdrawal fee
---------------------> o transfer fee
o illustration fee
o premium allocation
change charge
o continuation of
coverage administrative fee
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 11
<PAGE>
SECURITY LIFE, THE SEPARATE ACCOUNT AND THE INVESTMENT OPTIONS
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. At the close of 1999, the company and its consolidated subsidiaries had
over $184.2 billion of life insurance in force. As of December 31, 1999 our
total assets were over $11.3 billion and our shareholder's equity was over $899
million.
We have a complete line of life insurance products, including:
o annuities;
o individual life;
o group life;
o pension products; and
o market life reinsurance.
Security Life is a wholly owned indirect subsidiary of ING Groep, N.V. ("ING").
ING is one of the world's three largest diversified financial services
organizations. ING is headquartered in Amsterdam, The Netherlands. It has
consolidated assets over $495.0 billion on a Dutch (modified U.S.) generally
accepted accounting principles basis, as of December 31, 1999.
The principal underwriter and distributor for our policies is ING America
Equities, Inc. ING America Equities is a stock corporation organized under the
laws of the State of Colorado in 1993. It is a wholly owned subsidiary of
Security Life and is registered as a broker-dealer with the SEC and the NASD.
ING America Equities, Inc. is located at 1290 Broadway, Denver, Colorado
80203-5699.
SECURITY LIFE SEPARATE ACCOUNT L1
SEPARATE ACCOUNT STRUCTURE
We established Security Life Separate Account L1 (the separate account) on
November 3, 1993, under Colorado's insurance law. It is a unit investment trust,
registered with the SEC under the Investment Company Act of 1940. The SEC does
not supervise our management of the separate account or Security Life.
The separate account is used to support our variable life insurance policies and
for other purposes allowed by law and regulation. We keep the separate account
assets separate from our general account and other separate accounts. We may
offer other variable life insurance contracts with different benefits and
charges that invest in the separate account. We do not discuss these contracts
in this prospectus. The separate account may invest in other securities not
available for the policy described in this prospectus.
The company owns all the assets in the separate account. We credit gains to or
charge losses against the separate account without regard to performance of
other investment accounts.
ORDER OF SEPARATE ACCOUNT LIABILITIES
Law provides that we may not charge general account liabilities against separate
account assets equal to its reserves and other liabilities. This means that if
we ever become insolvent, the separate account assets will be used first to pay
separate account policy claims. Only if separate account assets remain after
these claims have been satisfied can these assets be used to pay other policy
owners and creditors.
The separate account may have liabilities from assets credited to other variable
life policies offered by the separate account. If the assets of the separate
account are greater than required reserves and policy liabilities, we may
transfer the excess to our general account.
INVESTMENT OPTIONS
Investment options include the variable and the guaranteed interest divisions,
but not the loan division. The separate account has several variable investment
options which invest in shares of underlying investment portfolios. This means
that the investment performance of a policy depends on
- --------------------------------------------------------------------------------
Strategic Advantage II 12
<PAGE>
the performance of the investment portfolios you choose. Each investment
portfolio has its own investment objective. These investment portfolios are not
available directly to individual investors. They are available only as
underlying investments for variable annuity and variable life insurance
contracts and certain pension accounts.
INVESTMENT PORTFOLIOS
Each of the investment portfolios is a separate series of an open-end management
investment company. The investment company receives investment advice from a
registered investment adviser who is not associated with us.
The investment portfolios sell shares to separate accounts of insurance
companies. These insurance companies may or may not be affiliated with us. This
is known as "shared funding." Investment portfolios may sell shares as the
underlying investment for both variable annuity and variable life insurance
contracts. This process is known as "mixed funding."
The investment portfolios may sell shares to certain qualified pension and
retirement plans that qualify under Section 401 of the Internal Revenue Code
("IRC"). As a result, a material conflict of interest may arise between
insurance companies, owners of different types of contracts and retirement plans
or their participants.
If there is a material conflict, we will consider what should be done, including
removing the investment portfolio from the separate account. There are certain
risks with mixed and shared funding, and with selling shares to qualified
pension and retirement plans. See the investment portfolios' prospectuses.
INVESTMENT PORTFOLIO OBJECTIVES
Each investment portfolio has a different investment objective that it tries to
achieve by following its own investment strategy. The objectives and policies of
each investment portfolio affect its return and its risks. With this prospectus,
you must receive the current prospectus for each investment portfolio. We
summarize the investment objectives for each investment portfolio here. You
should read each investment portfolio prospectus.
Certain investment portfolios offered under this policy have investment
objectives and policies similar to other funds managed by the portfolio's
investment adviser. The investment results of a portfolio may be higher or lower
than those of other funds managed by the same adviser. There is no assurance and
no representation is made that the investment results of any investment
portfolio will be comparable to those of another fund managed by the same
investment adviser.
Some investment portfolio advisers (or their affiliates) may pay us compensation
for servicing, administration or other expenses. The amount of compensation is
usually based on the aggregate assets of the investment portfolio from contracts
that we issue or administer. Some advisers may pay us more or less than others
and our affiliates may pay us significantly more.
- --------------------------------------------------------------------------------
Strategic Advantage II 13
<PAGE>
INVESTMENT PORTFOLIO OBJECTIVES
<TABLE>
<S> <C> <C>
Variable Investment Option Investment Company/ Adviser/ Investment Objective
Manager/ Sub-Adviser
AIM V.I. Capital Appreciation Investment Company: Seeks growth of capital through investment in common
Fund AIM Variable Insurance Funds stocks.
Investment Adviser:
A I M Advisors, Inc.
AIM V.I. Government Securities Investment Company: Seeks to achieve high current income consistent with
Fund AIM Variable Insurance Funds reasonable concern for safety of principal.
Investment Adviser:
A I M Advisors, Inc.
Alger American Growth Portfolio Investment Company: Seeks long-term capital appreciation by focusing on
The Alger American Fund growing companies that generally have broad product
Investment Adviser: lines, markets, financial resources and depth of
Fred Alger Management, Inc. management. Under normal circumstances, the portfolio
invests primarily in the equity securities of large
companies. The portfolio considers a large company to
have a market capitalization of $1 billion or greater.
Alger American Leveraged AllCap Investment Company: Seeks long-term capital appreciation by investing,
Portfolio The Alger American Fund under normal circumstances, in the equity securities
Investment Adviser: of companies of any size which demonstrate promising
Fred Alger Management, Inc. growth potential. The portfolio can leverage, that
is, borrow money, up to one-third of its total assets
to buy additional securities. By borrowing money, the
portfolio has the potential to increase its returns if
the increase in the value of the securities purchased
exceeds the cost of borrowing, including interest paid
on the money borrowed.
Alger American MidCap Growth Investment Company: Seeks long-term capital appreciation by focusing on
Portfolio The Alger American Fund midsize companies with promising growth potential.
Investment Adviser: Under normal circumstances, the portfolio invests
Fred Alger Management, Inc. primarily in the equity securities of companies having
a market capitalization within the range of companies
in the S&P MidCap 400 Index.
Alger American Small Seeks long-term capital appreciation by focusing on
Capitalization Portfolio Investment Company: small, fast-growing companies that offer innovative
The Alger American Fund products, services or technologies to a rapidly
Investment Adviser: expanding marketplace. Under normal circumstances,
Fred Alger Management, Inc. the portfolio invests primarily in the equity
securities of small capitalization companies. A small
capitalization company is one that has a market
capitalization within the range of the Russell 2000
Growth Index or the S&P SmallCap 600 Index.
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 14
<PAGE>
INVESTMENT PORTFOLIO OBJECTIVES
<TABLE>
<S> <C> <C>
Variable Investment Option Investment Company/ Adviser/ Investment Objective
Manager/ Sub-Adviser
VIP Growth Portfolio Investment Company: Fidelity Seeks capital appreciation by investing in common
Variable Insurance Products stocks of companies that it believes have
Fund above-average growth potential, either domestic or
Investment Manager: foreign issuers.
Fidelity Management & Research
Company
VIP Money Market Portfolio Investment Company: Fidelity Seeks as high a level of current income as is
Variable Insurance Products consistent with the preservation of capital and
Fund liquidity by investing in U.S. dollar-denominated
Investment Manager: money market securities, including U.S. Government
Fidelity Management & Research securities and repurchase agreements, and entering
Company into reverse repurchase agreements.
VIP Overseas Portfolio Investment Company: Fidelity Seeks long-term growth of capital by investing at
Variable Insurance Products least 65% of total assets in foreign securities.
Fund
Investment Manager:
Fidelity Management & Research
Company
VIP II Asset Manager Portfolio Investment Company: Fidelity Seeks high total return with reduced risk over the
Variable Insurance Products long term by allocating its assets among stocks,
Fund II bonds, and short-term instruments.
Investment Manager:
Fidelity Management & Research
Company
VIP II Index 500 Portfolio Investment Company: Fidelity Seeks investment results that correspond to the total
Variable Insurance Products return of common stocks publicly traded in the United
Fund II States as represented by the S&P/R/ 500.
Investment Manager:
Fidelity Management & Research
Company
Sub-Adviser:
Bankers Trust Company
VIF-Equity Income Fund Investment Company: INVESCO Seeks high current income, with growth of capital as a
Variable Investment Funds, Inc. secondary objective by investing at least 65% of its
Investment Adviser: assets in dividend-paying common and preferred
INVESCO Funds Group, Inc. stocks. The rest of the fund's assets are invested in
Sub-Adviser: debt securities, and lower-grade debt securities.
INVESCO Capital Management, Inc.
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 15
<PAGE>
INVESTMENT PORTFOLIO OBJECTIVES
<TABLE>
<S> <C> <C>
Variable Investment Option Investment Company/ Adviser/ Investment Objective
Manager/ Sub-Adviser
VIF-High Yield Fund Investment Company: INVESCO Seeks to provide a high level of current income by
Variable Investment Funds, Inc. investing substantially all of its assets in
Investment Adviser: lower-rated debt securities and preferred stock,
INVESCO Funds Group, Inc. including securities issued by foreign companies.
Sub-Adviser:
INVESCO Capital Management, Inc.
VIF-Small Company Growth Fund Investment Company: INVESCO Seeks long-term capital growth by investing at least
Variable Investment Funds, Inc. 65% of its assets in equity securities of companies
Investment Adviser: with market capitalizations of $2 billion or less.
INVESCO Funds Group, Inc. The remainder of the fund's assets can be invested in
Sub-Adviser: a wide range of securities that may or may not be
INVESCO Capital Management, Inc. issued by small companies.
VIF-Total Return Fund Investment Company: INVESCO Seeks to provide high total return through both growth
Variable Investment Funds, Inc. and current income by investing at least 30% of its
Investment Adviser: assets in common stocks of companies with a strong
INVESCO Funds Group, Inc. history of paying regular dividends and 30% of its
Sub-Adviser: assets in debt securities. The remaining 40% of the
INVESCO Capital Management, Inc. fund is allocated among these and other investments at
INVESCO's discretion, based upon current business,
economic and market conditions.
VIF-Utilities Fund Investment Company: INVESCO Seeks capital appreciation and income by investing at
Variable Investment Funds, Inc. least 80% of its assets in companies doing business in
Investment Adviser: the utilities economic sector. The remainder of the
INVESCO Funds Group, Inc. fund's assets are not required to be invested in the
Sub-Adviser: utilities economic sector.
INVESCO Capital Management,
Inc.
Growth Portfolio Investment Company: Neuberger Seeks growth of capital by investing mainly in common
Berman Advisers Management Trust stock mid-capitalization companies.
Investment Adviser:
Neuberger Berman Management Inc.
Sub-Adviser:
Neuberger Berman, LLC
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 16
<PAGE>
INVESTMENT PORTFOLIO OBJECTIVES
<TABLE>
<S> <C> <C>
Variable Investment Option Investment Company/ Adviser/ Investment Objective
Manager/ Sub-Adviser
Limited Maturity Bond Portfolio Investment Company: Neuberger Seeks the highest available current income consistent
Berman Advisers Management Trust with liquidity and low risk to principal by investing
Investment Adviser: mainly in investment-grade bonds and other debt
Neuberger Berman Management Inc. securities from U.S. Government and
Sub-Adviser: corporate issuers.
Neuberger Berman, LLC
Partners Portfolio Investment Company: Neuberger Seeks growth of capital by investing mainly in common
Berman Advisers Management Trust stock of mid- to large-capitalization companies.
Investment Adviser:
Neuberger Berman Management Inc.
Sub-Adviser:
Neuberger Berman, LLC
Worldwide Bond Fund Investment Company: Seeks high total return-income plus capital
Van Eck Worldwide Insurance appreciation-by investing globally, primarily in a
Trust variety of debt securities.
Investment Adviser and Manager:
Van Eck Associates Corporation
Worldwide Emerging Markets Fund Investment Company: Seeks long-term capital appreciation by investing in
Van Eck Worldwide Insurance equity securities in emerging markets around
Trust the world.
Investment Adviser and Manager:
Van Eck Associates Corporation
Worldwide Hard Assets Fund Investment Company: Seeks long-term capital appreciation by investing
Van Eck Worldwide Insurance primarily in "hard asset securities." Hard assets
Trust include precious metals, natural resources, real
Investment Adviser and Manager: estate and commodities. Income is a secondary
Van Eck Associates Corporation consideration.
Worldwide Real Estate Fund Investment Company: Seeks high total return by investing in equity
Van Eck Worldwide Insurance securities of companies that own significant real
Trust estate or that principally do business in real estate.
Investment Adviser and Manager:
Van Eck Associates Corporation
</TABLE>
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Strategic Advantage II 17
<PAGE>
GUARANTEED INTEREST DIVISION
You may allocate all or a part of your net premium and transfer your net account
value into the guaranteed interest division. The guaranteed interest division
guarantees principal and is part of our general account. It pays interest at a
fixed rate that we declare.
The general account contains all of our assets other than those held in the
separate account (variable investment options) or other separate accounts.
The general account supports our non-variable insurance and annuity obligations.
We have not registered interests in the guaranteed interest division under the
Securities Act of 1933. Also, we have not registered the guaranteed interest
division or the general account as an investment company under the Investment
Company Act of 1940 (because of exemptive and exclusionary provisions). This
means that the general account, the guaranteed interest division and its
interests are generally not subject to regulation under these Acts.
The SEC staff has not reviewed the disclosures in this prospectus relating to
the general account and the guaranteed interest division. These disclosures,
however, may be subject to certain requirements of the federal securities law
regarding accuracy and completeness of statements made.
The amount you have in the guaranteed interest division is all of the net
premium you allocate to that division, plus transfers you make to the guaranteed
interest division plus interest earned.
Amounts you transfer out of or withdraw from the guaranteed interest division
reduce this amount. It is also reduced by deductions for charges from your
account value allocated to the guaranteed interest division.
We declare the interest rate that applies to all amounts in the guaranteed
interest division. This interest rate is never less than the minimum guaranteed
interest rate of 4% and will be in effect for at least twelve months. Interest
compounds daily at an effective annual rate that equals the declared rate. We
credit interest to the guaranteed interest division on a daily basis. We pay
interest regardless of the actual investment performance of our account. We bear
all of the investment risk for the guaranteed interest division.
MAXIMUM NUMBER OF INVESTMENT OPTIONS
There are three divisions: the variable division, the guaranteed interest
division and the loan division. Under the variable division, there are numerous
variable investment options. SEE SECURITY LIFE SEPARATE ACCOUNT L1, PAGE 12 AND
INVESTMENT PORTFOLIO OBJECTIVES , PAGE 13.
You may invest in a total of eighteen investment options over the life of your
policy. Investment options include the variable and the guaranteed interest
divisions, but not the loan division.
As an example, if you have had funds in seventeen variable investment options
and the guaranteed interest division, these are the only investment options to
which you may later add or transfer funds. However, you could still take a
policy loan and access the loan division.
You may want to use fewer investment options in the early years of your policy,
so that you can invest in others in the future. If you invest in eighteen
variable investment options, you will not be able to invest in the guaranteed
interest division.
DETAILED INFORMATION ABOUT THE POLICY
This prospectus describes our standard Strategic Advantage II variable universal
life insurance policy. There may be differences in the policy because of state
requirements where we issue your policy. We will describe any such differences
in your policy.
The illustrations beginning on page 52 show how the policies work.
APPLYING FOR A POLICY
You purchase this variable universal life policy by submitting an application to
us. The policy is issued on a guaranteed and fully-underwritten basis. On the
policy date, the insured person must be no less than age 15. For a
fully-underwritten policy, the insured person must be no more than age 85. For a
guaranteed issued policy, the insured person must be no more than age 70. The
insured person is the person on whose life we issue the policy. SEE AGE, PAGE
38.
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Strategic Advantage II 18
<PAGE>
You may request that we back-date the policy up to six months to allow the
insured person to give proof of a younger age for the purposes of your policy.
We may reduce the minimum death benefit for group or sponsored arrangements, or
corporate purchasers. Our underwriting and reinsurance procedures in effect at
the time you apply limit the maximum death benefit.
TEMPORARY INSURANCE
If you apply and qualify, we may issue temporary insurance in an amount equal to
the face amount of the permanent insurance for which you applied. The maximum
amount of temporary insurance for binding limited life insurance coverage is $3
million, which includes any other in-force coverage you have with us.
Temporary coverage begins when:
1. you have completed and signed our binding limited life insurance
coverage form;
2. we receive and accept a premium payment of at least your scheduled
premium (selected on your application); and
3. part I of the application is complete.
Temporary life insurance coverage ends on the earliest of:
o the date we return your premium payments;
o five days after we mail notice of termination to the address on your
application;
o the date your policy coverage starts;
o the date we refuse to issue a policy based on your application; or
o 90 days after you sign our binding limited life insurance coverage
form.
There is no death benefit under the temporary insurance agreement if:
o there is a material misrepresentation in your answers on the binding
limited life insurance coverage form;
o there is a material misrepresentation in statements on your
application;
o the person intended to be the insured person dies by suicide or
self-inflicted injury; or
o the bank does not honor your premium check.
POLICY ISSUANCE
Before we issue a policy, we require satisfactory evidence of insurability of
the insured person and payment of your initial premium. This evidence may
include a medical examination and completion of all underwriting and issue
requirements.
The policy date shown on your policy schedule determines:
o monthly processing dates;
o policy months;
o policy years; and
o policy anniversaries.
The policy date is not affected by when you receive the policy. We charge
monthly deductions from the policy date unless your policy specifies otherwise.
The policy date is determined one of three ways:
1. the date you designate on your application, subject to our approval;
2. the back-date of the policy to save age, subject to our approval and
law; or
3. if there is no designated date or back-date, the policy date is:
o the date all underwriting and administrative requirements have
been met if we receive your initial premium before we issue your
policy; or
o the date we receive your initial premium if it is after we approve
your policy for issue.
DEFINITION OF LIFE INSURANCE CHOICE
At policy issue, you may choose one of two tests for the federal income tax
definition of life insurance. You cannot change your choice later. The tests are
the cash value accumulation test and the guideline premium/cash value corridor
test. If you choose the guideline premium/cash value corridor test, we may limit
premium payments relative to your policy death benefit under this test. SEE TAX
STATUS OF THE POLICY, PAGE 48.
PREMIUMS
You may choose the amount and frequency of premium payments, within limits. You
cannot make
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Strategic Advantage II 19
<PAGE>
premium payments after the death of the insured person or after the continuation
of coverage period begins. SEE CONTINUATION OF COVERAGE, PAGE 29.
We consider any payment we receive to be a premium if you do not have an
outstanding loan and your policy is not in the continuation of coverage period.
After we deduct certain charges from your premium payment, we add the remaining
net premium to your policy.
SCHEDULED PREMIUMS
Your premiums are flexible. You may select your scheduled premium (within our
limits) when you apply for your policy. The scheduled premium, shown in your
policy and schedule, is the amount you choose to pay over a stated time period.
THIS AMOUNT MAY OR MAY NOT BE ENOUGH TO KEEP YOUR POLICY IN FORCE. You may
receive premium reminder notices for the scheduled premium on a quarterly,
semi-annual or annual basis. You are not required to pay the scheduled premium.
You may choose to pay your premium by electronic funds transfer each month. This
option is not available for your initial premium. The financial institution that
makes your electronic funds transfer may charge for this service.
You can change the amount of your scheduled premium within our minimum and
maximum limits at any time. If you fail to pay your scheduled premium or if you
change the amount of your scheduled premium, your policy performance will be
affected. During the special continuation period, your scheduled premium should
not be less than the minimum annual premium shown in your policy.
If you want the guaranteed minimum death benefit, your scheduled premium should
not be less than the guarantee period annual premium shown in your policy. SEE
GUARANTEED MINIMUM DEATH BENEFIT, PAGE 25.
UNSCHEDULED PREMIUM PAYMENTS
Generally speaking, you may make unscheduled premium payments at any time,
however:
1. We may limit the amount of your unscheduled premium payments that would
result in an increase in the base death benefit amount required by the
federal income tax law definition of life insurance. We may require
satisfactory evidence that the insured person is insurable at the time
that you make the unscheduled premium payment if the death benefit is
increased due to your unscheduled premium payments;
2. We may require proof that the insured person is insurable if your
unscheduled premium payment will cause the net amount at risk to
increase; and
3. We will return premium payments which are greater than the "seven-pay"
limit for your policy if your payment would cause your policy to become
a modified endowment contract, unless you have acknowledged in writing
the new modified endowment contract status for your policy.
SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 49 AND CHANGES TO COMPLY WITH THE LAW,
PAGE 51.
If you have an outstanding policy loan and you make an unscheduled payment, we
will consider it a loan repayment, unless you tell us otherwise. If your payment
is a loan repayment, we do not take tax or sales charges which apply to premium
payments.
TARGET PREMIUM
Target premium is not based on your scheduled premium. Target premium is
actuarially determined based on the age, gender and premium class of the insured
person. The target premium is used in determining your sales charge and the
distribution allowance we pay. It may or may not be enough to keep your policy
in force. You are not required to pay the target premium and there is no penalty
for paying more or less. The target premium for your policy and additional
segments are listed in the policy schedule we provide to you. SEE PREMIUMS, PAGE
19.
MINIMUM ANNUAL PREMIUM
To qualify for the special continuation period, you must pay a minimum annual
premium during each of your first three policy years.
Your minimum annual premium is based on:
o the insured person's age, gender and premium class;
o the stated death benefit of your policy; and
o riders on your policy.
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Strategic Advantage II 20
<PAGE>
Your minimum annual premium is shown in the schedule pages of your policy. We
may reduce the minimum annual premium for group or sponsored arrangements, or
for corporate purchasers.
SPECIAL CONTINUATION PERIOD
The special continuation period is the first three policy years. Under the
special continuation period, we guarantee that your policy will not lapse,
regardless of its net account value, if on a monthly processing date:
o the sum of all premiums you have paid, minus partial withdrawals that
you have taken, minus policy loans that you have taken, including
accrued loan interest is greater than or equal to;
o the minimum monthly premiums for each policy month from the first month
of your policy through the current policy monthly processing date.
The minimum monthly premium is one-twelfth of the minimum annual premium.
During the first three years of your policy if there is not enough net account
value to pay the monthly deductions and you have satisfied our requirements, we
do not allow your policy to lapse. We do not permanently waive policy charges.
Instead, we continue to deduct these charges which may result in a negative net
account value, unless you pay enough premium to prevent this. The negative
balance is your unpaid monthly deductions owing. At the end of the special
continuation period to avoid lapse of your policy you must pay enough premium to
bring the net account value to zero plus the amount that covers your estimated
monthly deductions for the following two months. SEE LAPSE, PAGE 36.
INVESTMENT DATE AND ALLOCATION OF NET PREMIUMS
The net premium is the balance remaining after we deduct tax and sales charges
from your premium payment.
Insurance coverage does not begin until we receive your initial premium. It must
be at least equal to the sum of scheduled premiums due from your policy date
through your investment date.
The investment date is the first date we apply the net premium we have received
to your policy.
We apply the initial net premium to your policy after:
a) we receive the required amount of premium;
b) all issue requirements have been received by our customer service
center; and
c) we approve your policy for issue.
Amounts you designate for the guaranteed interest division will be allocated to
that division on the investment date. If your state requires the return of your
premium during the free look period, we initially invest amounts you have
designated for the variable division in the Fidelity VIP Money Market Portfolio.
We later transfer these amounts from the Money Market Portfolio to your selected
variable investment options, based on your most recent premium allocation
instructions, at the earlier of the following dates:
o five days after we mailed your policy plus your state free look period
has ended; or
o we have received your delivery receipt plus your state free look period
has ended.
If your state provides for return of account value during the free look period
or no free look period, we invest amounts you designated for the variable
division directly into your selected variable investment options.
We allocate all later premium payments to your policy on the valuation date of
receipt. We use your most recent premium allocation instructions specified in
whole numbers totaling 100% and using up to eighteen investment options over the
life of your policy. SEE MAXIMUM NUMBER OF INVESTMENT OPTIONS, PAGE 18.
You may make twelve free premium allocation changes per year, after which a $25
transaction fee applies. If you change your designated deduction investment
option from which monthly deductions are taken, we consider this a premium
allocation change for which there may be a charge. SEE DESIGNATED DEDUCTION
INVESTMENT OPTION, PAGE 28 AND POLICY TRANSACTION FEES, PAGE 46.
PREMIUM PAYMENTS AFFECT YOUR COVERAGE
Unless you have the guaranteed minimum death benefit feature or your policy is
in the special continuation period, your coverage lasts only as long as your net
account value is enough to pay the monthly charges and your account value is
more than
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Strategic Advantage II 21
<PAGE>
your outstanding policy loan plus accrued loan interest. If you do not meet
these conditions, your policy will enter the 61-day grace period and you must
make a premium payment to avoid lapse. SEE LAPSE, PAGE 36 AND GRACE PERIOD,
PAGE 36.
If you pay your minimum premium each year during the first three policy years
and take no policy loan, we guarantee your policy and riders will not lapse
during the special continuation period, regardless of your net account value.
SEE SPECIAL CONTINUATION PERIOD, PAGE 21.
Under the guaranteed minimum death benefit, the base death benefit portion of
your policy remains effective until the end of the guarantee period. The
guaranteed minimum death benefit feature does not apply to riders which can
lapse and terminate during the guarantee period. You must meet all conditions of
the guarantee. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 25.
MODIFIED ENDOWMENT CONTRACTS
There are special federal income tax rules for distributions from life insurance
policies which are modified endowment contracts. These rules apply to policy
loans, surrenders and partial withdrawals. Whether or not these rules apply
depends upon whether or not the premiums we receive are greater than the
"seven-pay" limit.
If we find that your scheduled premium causes your policy to be a modified
endowment contract on your policy date, we will require you to acknowledge that
you know the policy is a modified endowment contract. We will issue your policy
based on the scheduled premium you selected. If you do not want your policy to
be issued as a modified endowment contract, you may reduce your scheduled
premium to a level which does not cause your policy to be a modified endowment
contract. We will then issue your policy based on the revised scheduled premium.
SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 49.
DEATH BENEFITS
You can decide the amount of insurance you need, now and in the future. You can
combine the long- term advantages of permanent life insurance (base coverage)
with the flexibility and short-term advantages of term life insurance. Both
permanent and term life insurance are available with your one policy. The stated
death benefit is the permanent element of your policy. The adjustable term
insurance rider is the term insurance element of your policy. SEE ADJUSTABLE
TERM INSURANCE RIDER, PAGE 27.
Generally we require a minimum stated death benefit of $50,000 to issue a
policy.
It may be to your economic advantage to include part of your insurance coverage
under the adjustable term insurance rider. Both the cost of insurance under the
adjustable term insurance rider and the cost of insurance for the base death
benefit are deducted monthly from your account value and generally increase with
the age of the insured person. Use of the adjustable term insurance rider may
reduce the distribution allowance, but may increase the monthly cost of
insurance. SEE ADJUSTABLE TERM INSURANCE RIDER, PAGE 27.
Your death benefit is calculated as of the date of death of the insured person.
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Strategic Advantage II 22
<PAGE>
DEATH BENEFIT SUMMARY
THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES AND NO REQUESTED OR SCHEDULED
INCREASES OR DECREASES IN STATED OR TARGET DEATH BENEFIT AND THAT PARTIAL
WITHDRAWALS ARE LESS THAN THE PREMIUM WE RECEIVE.
<TABLE>
<CAPTION>
OPTION 1 OPTION 2
<S> <C> <C>
STATED DEATH The amount of policy death benefit at issue, The amount of policy death benefit at issue,
BENEFIT not including rider coverage. This amount not including rider coverage. This amount
stays level throughout the life of the policy. stays level throughout the life of the policy.
BASE DEATH The greater of the stated death benefit or the The greater of the stated death benefit plus
BENEFIT account value multiplied by the appropriate the account value or the account value
factor from the definition of life multiplied by the appropriate factor from the
insurance factors. definition of life insurance factors.
TARGET DEATH Stated death benefit plus adjustable term Stated death benefit plus adjustable term
BENEFIT insurance rider benefit. This amount remains insurance rider benefit. This amount remains
level throughout the life of the policy. level throughout the life of the policy.
TOTAL DEATH It is the greater of the target death benefit or It is the greater of the target death benefit plus
BENEFIT the base death benefit. the account value or the base death benefit.
ADJUSTABLE The adjustable term insurance rider benefit is The adjustable term insurance rider benefit is
TERM the total death benefit minus base death the total death benefit minus the base death
INSURANCE benefit, but it will not be less than zero. If the benefit, but it will not be less than zero. If the
RIDER BENEFIT account value multiplied by the death benefit account value multiplied by the death benefit
corridor factor is greater than the stated death corridor factor is greater than the stated death
benefit, the adjustable term insurance benefit benefit plus the account value, the adjustable
will be decreased. It will be decreased so that term insurance rider benefit will be decreased.
the sum of the base death benefit and the It will be decreased so that the sum of the
adjustable term insurance rider benefit is not base death benefit and the adjustable term
greater than the target death benefit. If the insurance rider benefit is not greater than the
base death benefit becomes greater than the target death benefit plus the account value. If
target death benefit, then the adjustable term the base death benefit becomes greater than
insurance rider benefit is zero. the target death benefit plus the account
value, then the adjustable term insurance rider
benefit is zero.
</TABLE>
BASE DEATH BENEFIT
Your base death benefit can be different from your stated death benefit as a
result of:
o your choice of death benefit option;
o increases or decreases in the stated death benefit; or
o a change in your death benefit option.
Federal income tax law requires that your death benefit be at least as much as
your account value multiplied by a factor defined by law. This factor is based
on:
o the insured person's age;
o the insured person's gender.
o the cash value accumulation test for the federal income tax law
definition of life insurance. SEE APPENDIX A, PAGE 166.
As long as your policy is in force, we will pay the death proceeds to your
beneficiary(ies) calculated at the death of the insured person. The
beneficiary(ies) is(are) the person (people) you name to receive the death
proceeds from your policy. The death proceeds are:
o your base death benefit; plus o rider benefits; minus o your
outstanding policy loan with accrued loan interest; minus
o outstanding policy charges incurred before the death of the insured
person.
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Strategic Advantage II 23
<PAGE>
There could be outstanding policy charges if the insured person dies while your
policy is in the grace period or in the three-year special continuation period.
DEATH BENEFIT OPTIONS
You have a choice of two death benefit options: option 1 or option 2 (described
below). Your choice may result in your base death benefit being greater than
your stated death benefit.
Under death benefit option 1, your base death benefit is the greater of:
1. your stated death benefit on the date of the insured person's death; or
2. your account value on the date of the insured person's death multiplied
by the appropriate factor from the definition of life insurance factors
shown in Appendix A.
With option 1, positive investment performance generally reduces your net amount
at risk, which lowers your policy's cost of insurance charge. Option 1 offers
insurance coverage that is a set amount with potentially lower cost of insurance
charges over time.
Under death benefit option 2, your base death benefit is the greater of:
1. your stated death benefit plus your account value on the date of the
insured person's death; or
2. your account value on the date of the insured person's death multiplied
by the appropriate factor from the definition of life insurance factors
shown in Appendix A.
With option 2, investment performance is reflected in your insurance coverage.
Death benefit option 2 is not available during the continuation of coverage
period. If you select option 2 on your policy, it automatically converts to
death benefit option 1 when the continuation of coverage period begins. SEE
CONTINUATION OF COVERAGE, PAGE 29.
CHANGES IN DEATH BENEFIT OPTIONS
You may request a change in your death benefit option at any time on or after
your first monthly processing date and before the continuation of coverage
period begins. A death benefit option change applies to your entire stated or
base death benefit. Changing your death benefit option may reduce or increase
your target death benefit, as well as your stated death benefit.
Your death benefit option change is effective on your next monthly processing
date after we approve it, so long as at least one day remains before your
monthly processing date. If less than one day remains before your monthly
processing date, your death benefit option change will be effective on your
second following monthly processing date.
We may not approve a death benefit option change if it reduces the target or
stated death benefit below the minimum we require to issue your policy.
You may change from death benefit option 1 to option 2 or from option 2 to
option 1. For you to change from death benefit option 1 to option 2, we may
require proof that the insured person is insurable under our normal rules of
underwriting.
After we approve your request, we send a new policy schedule page to you. You
should attach it to your policy. We may ask you to return your policy to our
customer service center so that we can make this change for you.
On the effective date of your option change, your stated death benefit changes
as follows:
Change Change Stated Death Benefit
From To Following Change:
---- -- ----------------
Option 1 Option 2 your stated death benefit
before the change minus
your account value as of the
effective date of the change.
Option 2 Option 1 your stated death benefit
before the change plus your
account value as of the
effective date of the change.
We increase or decrease your stated death benefit on the date of your death
benefit option change to keep the net amount at risk the same. There is no
change to the amount of term insurance if you have an adjustable term insurance
rider. SEE COST OF INSURANCE CHARGE, PAGE 45.
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Strategic Advantage II 24
<PAGE>
If you change your death benefit option, we adjust the stated death benefit for
each of your segments by allocating your account value to each benefit segment.
For example, if you change from death benefit option 1 to option 2, your stated
death benefit is decreased by the amount of your account value allocation to
that segment. If you change from death benefit option 2 to option 1, your stated
death benefit is increased by the amount allocated to that segment.
Changing your death benefit option may have tax consequences. You should consult
a tax adviser before making changes.
CHANGES IN DEATH BENEFIT AMOUNTS
Contact your agent/registered representative or our customer service center to
request a change in your policy's death benefit. The request is effective on the
next monthly processing date after we receive and approve your request. There
may be underwriting or other requirements which must be met before your request
can be approved. Your requested change must be for at least $1,000.
After we make your requested change, we will send you a new policy schedule
page. Keep it with your policy. We may ask you to send your policy to us so that
we can make the change for you.
We may not approve a requested change if it will disqualify your policy as life
insurance under federal income tax law. If we disapprove a change for any
reason, we provide you with a notice of our decision. SEE TAX CONSIDERATIONS,
PAGE 48.
You may change your policy's target or stated death benefit on or after your
first policy anniversary, (or first monthly processing date for an increase) and
before the policy anniversary when the insured person turns age 86. You may
change the target death benefit once each policy year.
You cannot decrease the stated death benefit below $50,000 or the minimum we
require to issue your policy. You may request a decrease in the stated death
benefit only after your first policy anniversary.
Requested reductions in the death benefit will be applied first to decrease the
target death benefit. We decrease your stated death benefit only after your
adjustable term insurance rider coverage is reduced to zero. If you have more
than one segment, we divide decreases in stated death benefit among your benefit
segments pro rata unless law requires differently.
You must provide satisfactory evidence that the insured person is still
insurable to increase your death benefit amount. You should consult a tax
adviser before changing your death benefit amount. Unless you tell us
differently, we assume your request for an increase in your target death benefit
is also a request for an increase to your stated death benefit. Thus, the amount
of your adjustable term insurance rider will not change.
The initial death benefit segment, or first segment, is the stated death benefit
on your policy's effective date. A requested increase in stated death benefit
will cause a new segment to be created. Once we create a new segment, it is
permanent unless law requires differently. The segment year runs from the
segment effective date to its anniversary.
Each new segment may have:
o a new minimum annual premium during the special continuation period;
o a new sales charge;
o new cost of insurance charges, guaranteed and current;
o a new incontestability period;
o a new suicide exclusion period; and
o a new target premium.
We allocate the net amount at risk among segments in the same proportion that
each segment bears to the total stated death benefit. Premiums we receive after
an increase are applied to your policy segments in the same proportion as the
target premium for each segment bears to the total target premium for all
segments. For each coverage segment, your schedule shows your target premium
which is used to determine your sales charges.
There may be tax consequences as a result of a change in your death benefit
amount, as well as a possible surrender charge. You should consult a tax adviser
before changing your death benefit amount. SEE TAX STATUS OF THE POLICY, PAGE 48
AND MODIFIED ENDOWMENT CONTRACTS, PAGE 49.
GUARANTEED MINIMUM DEATH BENEFIT
Usually, your coverage lasts only as long as your net account value is enough to
pay the monthly charges and your account value is more than your outstanding
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Strategic Advantage II 25
<PAGE>
policy loan plus accrued loan interest. Your account value depends on:
1. timing and amount of any premium payments;
2. the investment performance of the variable investment options;
3. the interest you earn in the guaranteed interest division;
4. the amount of your monthly charges;
5. partial withdrawals you take; and
6. loan activity you may have.
The guaranteed minimum death benefit may be put in force only at policy issue.
This option extends the period that your policy's stated death benefit remains
in effect even if the variable investment options perform poorly. It has a
guarantee period that lasts until the insured person turns age 65 or ten policy
years, whichever is later.
The guaranteed minimum death benefit coverage does not apply to riders,
including the adjustable term insurance rider. Therefore, if your net account
value is not enough to pay the deductions as they come due on your policy and if
your policy is no longer in the special continuation period, only the stated
death benefit portion of your coverage is guaranteed to stay in force. See your
policy to determine how your benefits are affected in this situation.
Charges for your base coverage are deducted each month to the extent that there
is sufficient net account value to pay these charges. If there is not sufficient
net account value to pay a charge, it is not permanently waived. Deduction of
charges will resume once there is sufficient net account value.
The guaranteed minimum death benefit feature is not available in some states.
REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD
To qualify for the guaranteed minimum death benefit you must pay an annual
premium higher than the minimum annual premium. This higher premium is called
the guarantee period annual premium. The guarantee period monthly premium is
one-twelfth of the guarantee period annual premium. Your net account value must
meet certain diversification requirements.
Your guarantee period annual premium is based on a percentage of the guideline
level premium calculated under the federal tax laws. Your guideline level annual
premium depends on:
o your policy's stated death benefit;
o the insured person's age, gender, premium class and underwriting
characteristics;
o the death benefit option you chose;
o additional rider coverage on your policy; and
o other additional benefits on your policy.
At each monthly processing date we test to see if you have paid enough premium
to keep your guarantee in place. We calculate:
o actual premiums we receive; minus
o the amount of any partial withdrawals you make; minus
o policy loan amounts you take with accrued loan interest. This amount
must equal or exceed;
o the sum of the guarantee period monthly premium payments for each
policy month starting with your first policy month through the end of
the policy month that begins on the current monthly processing date.
You must continually meet the requirements of the guarantee period for this
feature to remain in effect. We show the guarantee period annual premium on your
policy schedule. If your policy benefits increase, the guarantee period annual
premium increases.
In addition, the guarantee period ends if your net account value on any monthly
processing date is not diversified as follows:
1. your net account value is invested in at least five investment options;
and
2. no more than 35% of your net account value is in any one investment
option.
Your policy will continue to meet the diversification requirements if:
1. you have automatic rebalancing and you meet the two diversification
tests listed above; or
2. you have dollar cost averaging which results in transfers into at least
four investment options with no more than 35% of any transfer directed
to any one.
SEE DOLLAR COST AVERAGING, PAGE 32 AND AUTOMATIC REBALANCING, PAGE 33.
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Strategic Advantage II 26
<PAGE>
If you choose the guaranteed minimum death benefit, you must make sure your
policy satisfies the premium test and diversification test. If you fail to
satisfy either test and you do not correct it, this feature terminates. Once it
terminates, you cannot reinstate the guaranteed minimum death benefit feature.
The guarantee period annual premium then no longer applies to your policy.
RIDERS
Your policy may include benefits, attached by rider. A rider may have an
additional cost. You may cancel rider benefits at any time.
Periodically we may offer riders not listed here. Contact your agent/registered
representative for a complete list of riders available.
ADDING OR CANCELING RIDERS MAY HAVE TAX CONSEQUENCES. SEE MODIFIED ENDOWMENT
CONTRACTS, PAGE 49.
ADJUSTABLE TERM INSURANCE RIDER
You may increase your death proceeds by adding an adjustable term insurance
rider. This rider allows you to schedule the pattern of death benefits
appropriate for anticipated needs. As the name suggests, the adjustable term
insurance rider adjusts over time to maintain your desired level of coverage.
You specify a target death benefit when you apply for this rider. The target
death benefit can be level for the life of your policy or can be scheduled to
change at the beginning of a selected policy year(s). SEE DEATH BENEFITS, PAGE
22.
We generally require a minimum stated death benefit of $50,000 to issue a
policy. A separate cost of insurance applies to your base death benefit. If you
have an adjustable term insurance rider, we generally restrict your target death
benefit to not more than ten times your stated death benefit at issue. In other
words, if your stated death benefit is $100,000, then the maximum amount of
target death benefit we allow you is $1,000,000.
The adjustable term insurance rider death benefit is the difference between your
target death benefit and your base death benefit, but not less than zero. The
rider's death benefit automatically adjusts daily as your base death benefit
changes. Your death benefit depends on which death benefit option is in effect:
OPTION 1: If option 1 is in effect, the total death benefit is the
greater of:
a. the target death benefit; or
b. the account value multiplied by the appropriate factor
from the death benefit corridor factors in the policy.
OPTION 2: If option 2 is in effect, the total death benefit is the
greater of:
a. the target death benefit plus the account value; or
b. the account value multiplied by the appropriate factor
from the death benefit corridor factors in the policy.
For example, under option 1, assume your base death benefit changes as a result
of a change in your account value. The adjustable term insurance rider adjusts
to provide death benefits equal to your 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
It is possible that the amount of your adjustable term insurance may be zero if
your base death benefit increases enough. Using the same example, if the base
death benefit under your policy grew to $250,000 or more, the adjustable term
insurance would be zero.
Even when the adjustable term insurance is reduced to zero, your rider remains
in effect until you remove it from your policy. Therefore, if later the base
death benefit drops below your target death benefit, the adjustable term
insurance rider coverage reappears to maintain your target death benefit.
You may change the target death benefit schedule after it is issued, based on
our rules. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 25.
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Strategic Advantage II 27
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We may deny future, scheduled increases to your target death benefit if you
cancel a scheduled change or if you ask for an unscheduled decrease in your
target death benefit.
Partial withdrawals, changes from death benefit option 1 to option 2 and base
decreases may reduce your target death benefit. SEE PARTIAL WITHDRAWALS, PAGE 35
AND CHANGES IN DEATH BENEFIT OPTIONS, PAGE 24.
There is no defined premium for a given amount of adjustable term insurance
coverage. Instead, we deduct a separate monthly cost of insurance charge from
your account value. The cost of insurance for this rider is calculated as the
monthly cost of insurance rate for the rider coverage multiplied by the
adjustable term death benefit in effect at the monthly processing date. The cost
of insurance rates are determined by us from time to time. They are based on the
issue age, gender and premium class of the insured person, as well as your
policy date.
If the target death benefit is increased by you after the adjustable term
insurance rider is issued, we use the same cost of insurance rate schedule for
the entire coverage for this rider. These rates are based on the original
premium class even though satisfactory new evidence of insurability is required
for the increased schedule. The monthly guaranteed maximum cost of insurance
rates for this rider will be stated in the policy. SEE COST OF INSURANCE CHARGE,
PAGE 45.
Not all policy features apply to the adjustable term insurance rider. The rider
does not contribute to the policy account value nor to surrender value. It does
not affect investment performance and cannot be used for a policy loan. The
adjustable term insurance rider provides benefits only at the insured person's
death.
WAIVER OF COST OF INSURANCE RIDER
If the insured person becomes totally disabled while your policy is in force,
this rider provides that we waive the monthly expense, cost of insurance and
rider charges during the disability period. The insured person must be no less
than age 15 and no more than age 55. This rider is available only for fully
underwritten policies. If you add this rider to your policy, you may not add the
waiver of specified premium rider. The monthly charge for this rider is included
as part of your monthly cost of insurance charge. SEE COST OF INSURANCE CHARGE,
PAGE 45.
WAIVER OF SPECIFIED PREMIUM RIDER
If the insured person becomes totally disabled while your policy is in force,
this rider provides that after a waiting period, we credit a specified premium
amount monthly to your policy during the disability period. The insured person
must be no less than age 15 and no more than age 55. You select the amount of
premium we credit, subject to our limits. If you add this rider to your policy,
you may not add the waiver of cost of insurance rider. The monthly charge for
this rider is $0.017 to $0.020 per $1 of rider coverage depending on issue age.
If your policy was a guaranteed issue policy, the monthly charge for this rider
is $0.034 to $0.04 per $1 of coverage depending on issue age.
SPECIAL FEATURES
DESIGNATED DEDUCTION INVESTMENT OPTION
You may designate an investment option from which we will deduct your monthly
charges. You may make this designation at any time. You may not use the loan
division as your designated deduction option.
You may elect not to choose a designated deduction investment option or the
amount in your designated deduction investment option may not be enough to cover
the monthly deductions. If so, these charges are taken from the variable and
guaranteed interest divisions in the same proportion that your account value in
each has to your total net account value on the monthly processing date.
If you change your designated deduction investment option, we consider this a
premium allocation change for which there may be a charge. SEE POLICY
TRANSACTION FEES, PAGE 46.
RIGHT TO EXCHANGE POLICY
During the first 24 months after your policy date, you have the right to
exchange your policy for a guaranteed policy, unless law requires differently.
We transfer the amount you have in the variable division to the guaranteed
interest division. We allocate all of your future net premiums only to the
guaranteed interest division. We do not allow future payments or transfers to
the variable investment options after you exercise this right.
We will not charge you for this exchange. SEE GUARANTEED INTEREST DIVISION, PAGE
18.
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Strategic Advantage II 28
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POLICY MATURITY
You may surrender your policy at any time. At the policy anniversary nearest the
insured person's 100th birthday if you do not choose to let the continuation of
coverage feature become effective, the policy matures. You may then surrender
the policy for the net account value and end coverage. Part of this payment may
be taxable. You should consult your tax adviser.
CONTINUATION OF COVERAGE
The continuation of coverage feature allows your insurance coverage to continue
in force beyond policy maturity. If on the policy anniversary nearest the
insured person's 100th birthday you choose to allow the continuation of coverage
feature to become effective, we:
o convert target death benefit to stated death benefit;
o convert death benefit option 2 to death benefit option 1, if
applicable;
o terminate all riders;
o deduct a one-time $200 administrative fee to cover future expenses;
o transfer your net account value (excluding the amount in the loan
division) into the guaranteed interest division; and
o terminate dollar cost averaging and automatic rebalancing.
Your insurance coverage continues until the death of
the insured person, unless the policy lapses or is
surrendered. However:
o we accept no further premium payments;
o we deduct no further charges;
o your monthly deductions cease; and
o you may not make transfers into the variable division.
SEE CONTINUATION OF COVERAGE ADMINISTRATIVE FEE, PAGE 46.
During the continuation of coverage period, you may take policy loans or partial
withdrawals from your policy. If we pay a persistency refund on the guaranteed
interest division, it will be credited to your policy. SEE PERSISTENCY REFUND,
PAGE 47.
If you have an outstanding policy loan, interest continues to accrue. If you
fail to make sufficient loan or loan interest payments, it is possible that the
loan balance plus accrued interest may become greater than your account value
and cause your policy to lapse. To avoid this lapse, you may make loan and loan
interest payments during the continuation of coverage period.
If you wish to stop coverage during the continuation of coverage period, you may
surrender your policy and receive the net account value. All normal consequences
of surrender apply. SEE SURRENDER, PAGE 37.
The continuation of coverage feature may not be available in all states. If a
state has approved this feature, it is an automatic feature and you do not need
to take any action to activate it.
The tax consequences of coverage continuing beyond the insured person's 100th
birthday are uncertain. You should consult a tax adviser as to those
consequences.
ENHANCED DEATH BENEFIT CORRIDOR OPTION
For policies issued under group or sponsored arrangements, with guaranteed issue
rates, an additional benefit option is available. The policyowner may elect, at
any time prior to the issuance of the policy, the enhanced death benefit
corridor option.
Existing group or corporate owners of Strategic Advantage II policies which have
guaranteed issue rates, can elect to add this option to their policies if it is
added to all existing policies within that issue group. If you would like to do
this, you should contact your registered representative/agent or our customer
service center for instructions.
This option generally provides an opportunity for an increased death benefit on
the life of the insured person at certain ages. Under death benefit options 1
and 2 the account value is multiplied by a factor shown in Appendix A or B. The
result of this calculation is the base death benefit if it exceeds the stated
death benefit. Under the enhanced death benefit corridor option, the calculation
uses the factor shown on the attached new Appendix A-Enhanced and Appendix
B-Enhanced (depending on which definition of life insurance is in effect for
your policy). The result of this calculation is then used to determine the base
death benefit as described under DEATH BENEFIT OPTIONS, PAGE 24.
There is no separate charge for this feature. However, the same account value
may generate a higher base death benefit under policies with this option than on
policies not electing the option. Cost of insurance
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Strategic Advantage II 29
<PAGE>
charges are based on the net amount at risk, which is the difference between the
account value and the base death benefit. Therefore, as a result of the
increased death benefit, the cost of insurance charges may be higher for
policies electing this option. Your registered representative/agent can provide
you with a personalized illustration to show the difference between a policy
with this option and one without it. If your policy does not have sufficient
account value, electing this option may have no effect on the base death
benefit.
Adding this option to your policy does not affect the operation of your policy's
riders, including the Adjustable Term Insurance Rider. When the base death
benefit exceeds the stated death benefit, transactions which reduce your account
value (such as a partial withdrawal) also reduce the death benefit. The dollar
reduction to the death benefit under these circumstances is greater for policies
with the enhancement option than on those without the option.
Once elected, this option cannot be deleted from your policy. You may lose the
benefit of this option if your account value falls below the minimum level
needed to keep it in effect. Once elected, this option continues as long as
coverage on the original insured person continues. If there is a change of
insured person under the right to change insured person rider, the enhanced
death benefit corridor option must be elected on the application for the new
insured person if you want it to be effective. RIGHT TO EXCHANGE POLICY, PAGE
28.
POLICY VALUES
ACCOUNT VALUE
Your account value is the total amount you have in the guaranteed interest
division, the variable division and the loan division. Your account value
reflects:
o net premiums applied;
o charges deducted;
o partial withdrawals taken;
o investment performance of the variable investment options;
o interest earned on the guaranteed interest division; and
o interest earned on the loan division.
NET ACCOUNT VALUE
Your policy's net account value is your account value minus the amount of your
outstanding policy loan and accrued loan interest, if any.
CASH SURRENDER VALUE
Your cash surrender value is your account value plus any refund of sales charges
which may be due.
NET CASH SURRENDER VALUE
Your net cash surrender value is your cash surrender value minus the amount of
your outstanding policy loan and accrued loan interest, if any.
DETERMINING VALUES IN THE VARIABLE DIVISION
The amounts in the variable division are measured by accumulation units and
accumulation unit values. The value of each variable investment option is the
accumulation unit value for that option multiplied by the number of accumulation
units you own in that option. Each variable investment option has a different
accumulation unit value.
The accumulation unit value is the value of one accumulation unit determined on
each valuation date. The accumulation unit value of each variable investment
option varies with the investment performance of the underlying portfolio. It
reflects:
o investment income;
o realized and unrealized gains and losses;
o investment portfolio expenses; and
o daily mortality and expense risk charges we take from the separate
account.
SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES, PAGE 31.
You purchase accumulation units when you allocate premium or make transfers to a
variable investment option, including transfers from the loan division.
We redeem accumulation units:
o when amounts are transferred from a variable investment option
(including transfers to the loan division);
o for your policy's monthly deductions from your account value;
o for policy transaction charges;
o when you take a partial withdrawal;
o when you surrender your policy; and
o to pay the death proceeds.
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Strategic Advantage II 30
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We calculate the number of accumulation units purchased or sold by:
1. dividing the dollar amount of your transaction by:
2. the accumulation unit value for that variable investment option
calculated at the close of business on the valuation date of the
transaction.
A valuation date is one on which the net asset value of the investment portfolio
shares and unit values of the variable investment options are determined. A
valuation date is each day the New York Stock Exchange and the company's
customer service center are open for business, except for days on which an
investment portfolio does not value its shares or any other day as required by
law. Each valuation date ends at 4:00 p.m. Eastern time.
The date of a transaction is the date we receive your premium or transaction
request at our customer service center, so long as the date of receipt is a
valuation date. We use the accumulation unit value which is next calculated
after we receive your premium or transaction request and we use the number of
accumulation units attributable to your policy on the date of receipt.
We take monthly deductions from your account value on the monthly processing
date. If your monthly processing date is not a valuation date, the monthly
deduction is processed on the next valuation date.
The value of amounts allocated to the variable investment options goes up or
down depending on investment performance of the underlying investment portfolio.
FOR AMOUNTS IN THE VARIABLE INVESTMENT OPTIONS, THERE IS NO GUARANTEED MINIMUM
VALUE.
HOW WE CALCULATE ACCUMULATION UNIT VALUES
We determine accumulation unit values on each valuation date.
We generally set the accumulation unit value for a variable investment option at
$10 when the investment option is first opened. After that first date, the
accumulation unit value on any valuation date is:
1. the accumulation unit value for the preceding valuation date multiplied
by
2. the variable investment option's accumulation experience factor for the
valuation period.
Every valuation period 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.
We calculate an accumulation experience factor for each variable investment
option every valuation date as follows:
1. We take the share value of the underlying portfolio shares as reported
to us by the investment portfolio managers as of the close of business
on that valuation date.
2. We add dividends or capital gain distributions declared per share and
reinvested by the investment portfolio on the date that the share value
is affected. If applicable, we subtract a charge for taxes.
3. We divide the resulting amount by the value of the shares in the
underlying investment portfolio at the close of business on the
previous valuation date.
4. We then subtract the mortality and expense risk charge under your
policy. The daily charge is .002055% (.75% annually) of the
accumulation unit value. If the previous day was not a valuation date,
the charge is multiplied by the number of days since the last valuation
date.
TRANSFERS OF ACCOUNT VALUE
You may make twelve free transfers among the variable investment options or the
guaranteed interest division in each policy year, with a $25 fee per transaction
after that. If your state requires a refund of premium during the free look
period, you may not make transfers until after your free look period ends. We do
not limit the number of transfers you may make. Transfers for automatic
rebalancing or dollar cost averaging do not count toward your twelve free
transfers. You may not make transfers during the continuation of coverage
period. SEE POLICY TRANSACTION FEES, PAGE 46 AND CONTINUATION OF COVERAGE, PAGE
29.
You may make transfer requests in writing, or by telephone if you have telephone
privileges, to our
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Strategic Advantage II 31
<PAGE>
customer service center. Your transfer takes effect on the valuation date we
receive your request. The minimum amount you may transfer is $100. This minimum
does not need to come from one investment option or be transferred to one
investment option as long as the total amount you transfer is at least $100.
However, if the amount remaining in an investment option is less than $100 and
you make a transfer request from that investment option, we transfer the entire
amount.
EXCESSIVE TRADING
Excessive trading activity can disrupt investment portfolio management
strategies and increase portfolio expenses through:
o increased trading and transaction costs;
o forced and unplanned portfolio turnover;
o lost opportunity costs; and
o large asset swings that decrease the investment portfolio's ability to
provide maximum investment return to all policyowners.
In response to excessive trading, we may place restrictions or refuse transfers
made by third-party agents acting on behalf of owners such as market timing
services. We will refuse or place restrictions on transfers when we determine,
in our sole discretion, that transfers are harmful to the investment portfolios
or to policyowners as a whole.
GUARANTEED INTEREST DIVISION TRANSFERS
Transfers into the guaranteed interest division are not restricted.
You may transfer amounts from the guaranteed interest division only in the first
30 days of each policy year. Transfer requests received within 30 days before
your policy anniversary will be processed on your policy anniversary. A request
received by us within 30 days after your policy anniversary is effective on the
valuation date we receive it. Transfer requests made at any other time will not
be processed.
Transfers from the guaranteed interest division in each year are limited to the
largest of:
o 25% of your guaranteed interest division balance at the time of your
first transfer or withdrawal out of it in that policy year;
o the sum of the amounts you have transferred and withdrawn from the
guaranteed interest division in the prior policy year; or
o $100.
DOLLAR COST AVERAGING
If your policy has at least $10,000 invested in either qualifying source
investment portfolio, you may elect dollar cost averaging. The qualifying source
investment portfolios are the Fidelity VIP Money Market Portfolio or the
Neuberger Berman AMT Limited Maturity Bond Portfolio. The main goal of dollar
cost averaging is to protect your policy values from short-term price changes.
DOLLAR COST AVERAGING DOES NOT ASSURE A PROFIT NOR DOES IT PROTECT YOU AGAINST A
LOSS IN A DECLINING MARKET.
This systematic plan of transferring account values is intended to reduce the
risk of investing too much when the price of an investment portfolio's shares is
high. It is intended to reduce the risk of investing too little when the price
of an investment portfolio's shares is low. Since you transfer the same dollar
amount to other investment options each period, you purchase more units in an
investment option when the unit value is low and you purchase fewer units if the
unit value is high.
We do not count dollar cost averaging transfers toward your twelve free
transfers per policy year. There is no charge for this feature.
You may add dollar cost averaging to your policy at any time. The first dollar
cost averaging date must be at least one day after we receive your dollar cost
averaging request. If your state requires refund of all premiums we receive
during the free look period, dollar cost averaging cannot begin until your free
look period has ended.
With dollar cost averaging, you designate either a dollar amount or a percentage
of your account value for automatic transfer from a qualifying source investment
portfolio. Each period we automatically transfer the amount you select from your
chosen source investment portfolio to one or more other variable investment
options. You may not use the guaranteed interest division or the loan division
in dollar cost averaging.
The minimum percentage you may transfer to any one investment option is 1% of
the total amount you transfer. You must transfer at least $100 on each dollar
cost averaging transfer date.
Dollar cost averaging may occur on the same day of the month on a monthly,
quarterly, semi-annual or
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Strategic Advantage II 32
<PAGE>
annual basis. Unless you tell us otherwise, dollar cost averaging automatically
takes place monthly on the monthly processing date.
You may have both dollar cost averaging and automatic rebalancing at the same
time. However, the dollar cost averaging source investment portfolio cannot be
included in your automatic rebalancing program.
CHANGING DOLLAR COST AVERAGING
You may change your dollar cost averaging program one time per policy year. If
you have telephone privileges, you may change the program by telephoning our
customer service center. SEE TELEPHONE PRIVILEGES, PAGE 40.
TERMINATING DOLLAR COST AVERAGING
You may cancel dollar cost averaging by sending satisfactory notice to our
customer service center. We must receive it at least one day before the next
dollar cost averaging date.
Dollar cost averaging will terminate on the date:
1. you specify; or
2. your balance in the source investment portfolio reaches a dollar amount
you set; or
3. the amount in the source investment portfolio is equal to or less than
the amount to be transferred on a dollar cost averaging date. We will
transfer the remaining amount and dollar cost averaging ends.
AUTOMATIC REBALANCING
Automatic rebalancing is a method of maintaining a consistent approach to
investing account values over time and simplifying the process of asset
allocation among your chosen investment options.
Transfers made for automatic rebalancing do not count toward your twelve free
transfers per policy year. There is no charge for this feature.
If you choose this feature, on each rebalancing date we transfer amounts among
the investment options to match your pre-set automatic rebalancing allocation.
After the transfer, the ratio of your account value in each investment option to
your total account value for all investment options included in automatic
rebalancing matches the automatic rebalancing allocation percentage you set for
that investment option. This action rebalances the amounts in the investment
options that do not match your set allocation. This mismatch can happen if an
investment option outperforms the other investment options for that time period.
You may choose the automatic rebalancing feature on your application or later by
completing our customer service form. Automatic rebalancing may occur on the
same day of the month on a monthly, quarterly, semi-annual or annual basis. If
you do not specify a frequency, automatic rebalancing will occur quarterly.
The first transfer occurs on the date you select (after your free look period
ends if your state requires return of premium we receive during the free look
period). If you do not request a date, processing is on the last valuation date
of the calendar quarter we receive your request.
When you choose automatic rebalancing allocations, you may choose up to eighteen
total investment options. SEE MAXIMUM NUMBER OF INVESTMENT OPTIONS, PAGE 18.
You may have both automatic rebalancing and dollar cost averaging at the same
time. However, the source investment portfolio for your dollar cost averaging
cannot be included in your automatic rebalancing program. You may not include
the loan division in your automatic rebalancing program.
CHANGING AUTOMATIC REBALANCING
You may change your allocation percentages for automatic rebalancing at any
time. Your allocation change is effective on the valuation date that we receive
it at our customer service center. If you reduce the amount allocated to the
guaranteed interest division, it is considered a transfer from that division.
You must meet the requirements for the maximum transfer amount and time
limitations on transfers from the guaranteed interest division. SEE TRANSFERS OF
ACCOUNT VALUE, PAGE 31.
If you have automatic rebalancing and the guaranteed minimum death benefit and
you ask for an allocation which does not meet the guaranteed minimum death
benefit diversification requirements, we will notify you that the allocation
needs to be changed and ask you for revised instructions. SEE GUARANTEED MINIMUM
DEATH BENEFIT, PAGE 25.
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Strategic Advantage II 33
<PAGE>
TERMINATING AUTOMATIC REBALANCING
You may terminate automatic rebalancing at any time, as long as we receive your
notice of termination at least one day before the next automatic rebalancing
date.
If you have the guaranteed minimum death benefit and you terminate the automatic
rebalancing feature, you still must meet the diversification requirements of
your net account value for the guarantee period to continue. SEE GUARANTEED
MINIMUM DEATH BENEFIT, PAGE 25.
POLICY LOANS
The loan division is part of our general account specifically designed to hold
money used as collateral for loans and loan interest.
You may borrow from your policy at any time after the first monthly processing
date, by using your policy as security for a loan, or as otherwise required by
law. The amount you borrow is called a policy loan. Your policy loan is:
1. the total amount you borrow from your policy; plus
2. policy loan interest that is capitalized when due; minus
3. policy loan or interest repayments you make.
Unless law requires differently, a new policy loan must be at least $100. The
maximum amount you may borrow on any valuation date, unless required differently
by law, is your net account value minus the monthly deductions to your next
policy anniversary or 13 monthly deductions if you take a loan within thirty
days before your next policy anniversary.
Your request for a policy loan must be directed to our customer service center.
If you have telephone privileges, you may request a policy loan of less than
$25,000 by telephoning our customer service center. SEE TELEPHONE PRIVILEGES,
PAGE 40.
When you request a loan you may specify one investment option from which the
loan will be taken. If you do not specify one, the loan will be taken
proportionately from each active investment option you have, including the
guaranteed interest division. Loan interest charges on your policy loan accrue
daily at an annual interest rate of 4.75%. Interest is due in arrears on each
policy anniversary. If you do not pay your interest when it is due, we add it to
your policy loan balance.
When you take a policy loan, we transfer an amount equal to your policy loan to
the loan division. We follow this same process for loan interest due at your
policy anniversary. We credit the loan division with interest at an annual rate
of 4%.
If you request an additional loan, we add the new loan amount to your existing
policy loan. This way, there is only one loan outstanding on your policy at any
time.
LOAN REPAYMENT
You may repay your policy loan at any time while your policy is in force. We
assume that payments you make, other than scheduled premiums, are policy loan
repayments. You must tell us if you want payments to be premium payments.
When you make a loan repayment, we transfer an amount equal to your payment from
the loan division to the variable investment options and the guaranteed interest
division in the same proportion as your current premium allocation, unless you
tell us otherwise.
EFFECTS OF A POLICY LOAN ON YOUR POLICY
Taking a loan decreases the amount you have in the investment options. Accruing
loan interest will change your net account value as compared to what it would
have been if you did not take a loan.
Even if you repay your loan, it has a permanent effect on your account value.
The benefits under your policy may be affected.
The loan is a first lien on your policy. If you do not repay your policy loan,
we deduct your outstanding policy loan and accrued loan interest from the death
proceeds payable or the cash surrender value payable on surrender.
Failure to repay your loan may affect the guaranteed minimum death benefit
feature and the length of time your policy remains in force. If you do not make
loan payments your policy could lapse. POLICY LOANS MAY CAUSE YOUR POLICY TO
LAPSE IF YOUR NET ACCOUNT VALUE MINUS POLICY LOAN AMOUNTS AND ACCRUED LOAN
INTEREST IS NOT ENOUGH TO PAY YOUR DEDUCTIONS EACH MONTH. SEE LAPSE, PAGE 36.
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Strategic Advantage II 34
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Policy loans may have tax consequences. If your policy lapses with a loan
outstanding, you may have further tax consequences. SEE DISTRIBUTIONS OTHER THAN
DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 50, AND DISTRIBUTIONS
OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT
CONTRACTS, PAGE 50.
If you use the continuation of coverage feature and you have a policy loan, loan
interest continues to accrue.
PARTIAL WITHDRAWALS
You may request a partial withdrawal to be processed on any valuation date after
your first policy anniversary by contacting our customer service center. You
make a partial withdrawal when you withdraw part of your net account value. If
your request is by telephone, it must be for less than $25,000 and may not cause
a decrease in your death benefit. Otherwise, your request must be in writing.
SEE TELEPHONE PRIVILEGES, PAGE 40.
You may take only one partial withdrawal per policy year. The minimum partial
withdrawal you may take is $100. The maximum partial withdrawal you may take is
the amount which leaves $500 as your net account value. If you request a
withdrawal of more than this maximum, we require you to surrender your policy or
reduce the withdrawal.
When you take a partial withdrawal, we deduct your withdrawal amount plus a
service fee from your account value. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE
44.
Unless you tell us otherwise, we will make a partial withdrawal from the
guaranteed interest division and the variable investment options in the same
proportion that each has to your net account value immediately before your
withdrawal. You may select one investment option from which your partial
withdrawal will be taken. If you select the guaranteed interest division,
however, the amount withdrawn from it may not be for more than your total
withdrawal multiplied by the ratio of your account value in the guaranteed
interest division to your total net account value immediately before the partial
withdrawal transaction.
Partial withdrawals may have adverse tax consequences. SEE DISTRIBUTIONS OTHER
THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 49, AND
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS, PAGE 50.
PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1
If you selected death benefit option 1, it is your first partial withdrawal of
the policy year, no more than fifteen years have passed since your policy date
and the insured person is not yet age 81, you may make a partial withdrawal of
up to the greater of 10% of your account value, or 5% of your stated death
benefit without decreasing your stated death benefit.
Otherwise, amounts you withdraw will reduce your stated death benefit by the
amount of the withdrawal unless your policy death benefit has been increased due
to the federal income tax definition of life insurance. If your policy death
benefit has been increased due to the federal income tax definition of life
insurance at the time of the partial withdrawal, then at least part of your
partial withdrawal may be made without reducing your stated death benefit.
PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 2
If you have selected death benefit option 2, a partial withdrawal does not
reduce your stated or target death benefit. However because your account value
is reduced, we reduce the total death benefit by at least the partial withdrawal
amount.
STATED DEATH BENEFIT AND TARGET DEATH BENEFIT REDUCTIONS
Regardless of your chosen death benefit option, partial withdrawals do not
reduce your stated death benefit if:
o your base death benefit has been increased to qualify your policy as
life insurance under the federal income tax laws; and
o you withdraw an amount that is no greater than the amount that reduces
your account value to a level which no longer requires your base death
benefit to be increased to qualify as life insurance for federal income
tax law purposes. SEE TAX STATUS OF THE POLICY, PAGE 48.
We require a minimum stated death benefit and a minimum target death benefit to
issue your policy. You may not take a partial withdrawal if it reduces your
stated death benefit or target death benefit below this minimum. SEE POLICY
ISSUANCE, PAGE 47.
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Strategic Advantage II 35
<PAGE>
We will send a new policy schedule page for your policy showing the effect of
your withdrawal if there is any change to your stated death benefit or your
target death benefit.
In order to make this change, we may ask that you return the policy to our
customer service center. Your withdrawal and any reductions in the death
benefits are effective as of the valuation date on which we receive your
request. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT
CONTRACTS, PAGE 50, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES
THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 50.
LAPSE
Your insurance coverage continues as long as your net account value is enough to
pay your deductions each month. Lapse does not apply if either the guaranteed
minimum death benefit or the special continuation period is in effect and you
have met all requirements. SEE SPECIAL CONTINUATION PERIOD, PAGE 21 AND
GUARANTEED MINIMUM DEATH BENEFIT, PAGE 25.
If the continuation of coverage feature is active, your policy could still lapse
if there is an outstanding policy loan even though there are no further monthly
deductions.
GRACE PERIOD
Your policy enters a 61-day lapse grace period if, on a monthly processing date:
1. your net account value is zero (or less);
2. the three-year special continuation period has expired or you have not
paid the required special continuation period premium; and
3. you do not have the guaranteed minimum death benefit or it has expired
or terminated.
We notify you that your policy is in a grace period at least 30 days before it
ends. We send this notice to you (or a person to whom you have assigned your
policy) at your last known address in our records. We notify you of the premium
payment necessary to prevent your policy from lapsing. This amount is generally
the past due charges, plus your estimated monthly policy and rider deductions
for the next two months. If the death of the insured person occurs during the
grace period we do pay death proceeds to your beneficiary(ies), but with
reductions for your policy loan balance, accrued loan interest and monthly
deductions owed. No lapse notice will be sent to you if the guaranteed minimum
death benefit is going to lapse.
If we receive payment of the required amount before the end of the grace period,
we apply it to your account value in the same manner as your other premium
payments, then we deduct the overdue amounts from your account balance.
If you do not pay the full amount within the 61-day grace period, your policy
and its riders lapse without value. We withdraw your remaining account balance
from the variable and guaranteed interest divisions. We deduct amounts you owe
us and inform you that your policy coverage has ended.
IF YOU HAVE THE GUARANTEED MINIMUM DEATH BENEFIT IN EFFECT
After the special continuation period has ended and if the guaranteed minimum
death benefit is in effect, your policy's stated death benefit will not lapse
during the guarantee period. This is true even if your net account value is not
enough to cover all of the deductions from your account value on any monthly
processing date. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 25.
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Strategic Advantage II 36
<PAGE>
LAPSE SUMMARY
<TABLE>
<CAPTION>
SPECIAL CONTINUATION PERIOD GUARANTEED MINIMUM DEATH BENEFIT
IF YOU MEET THE IF YOU DO NOT MEET THE IF YOU MEET THE IF YOU DO NOT MEET THE
REQUIREMENTS REQUIREMENTS OR IT IS NO REQUIREMENTS REQUIREMENTS OR IT IS NO
LONGER IN EFFECT LONGER IN EFFECT
<S> <C> <C> <C>
Your policy does not lapse Your policy enters the Your policy does not lapse Your policy enters the
if you do not have enough grace period if your net if you do not have enough grace period if your net
net account value to pay account value is not net account value to pay account value is not
the monthly charges. The enough to pay the monthly the monthly charges. enough to pay the monthly
charges are deducted and charges, or if your loan However, if you have any charges, or if your loan
may cause a negative plus accrued loan interest riders, they lapse after the plus accrued loan interest
account value until the is more than your account grace period and only your is more than your account
earlier of: 1) the date you value. If you do not pay base coverage remains in value. If you do not pay
have enough net account enough premium to cover force. Charges for your enough premium to cover
value, or 2) until the end the past due monthly base coverage are then the past due monthly
of the special continuation charges and interest due deducted each month to charges and interest due
period. plus the monthly charges the extent that there is plus the monthly charges
and interest due through sufficient net account and interest due through
the end of the grace value to pay these charges. the end of the grace
period, your policy lapses. If there is not sufficient period, your policy lapses.
net account value to pay a
charge, it is permanently
waived.
</TABLE>
REINSTATEMENT
If you do not pay enough premium before the end of the grace period, your policy
lapses. You may still reinstate your policy and its riders (other than the
guaranteed minimum death benefit) within five years of the end of the grace
period if you still own the policy and the insured person meets our underwriting
requirements.
Unless law requires differently, we will reinstate your policy and riders if:
1. you have not surrendered your policy;
2. you provide satisfactory evidence to us that the insured person (and
any people insured under your riders) is alive and still insurable
according to our normal rules of underwriting; and
3. we receive enough premium from you to keep your policy and its riders
in force from the beginning to the end of the grace period and for two
months after the reinstatement date.
Reinstatement is effective on the monthly processing date following our approval
of your reinstatement application. If you had a policy loan when coverage ended,
we reinstate it with accrued loan interest to the date of lapse. The cost of
insurance charges at the time of reinstatement are adjusted to reflect the time
since the lapse.
We apply net premiums received after reinstatement according to your most recent
instructions which may be the premium allocation instructions in effect at the
start of the grace period.
SURRENDER
You may surrender your policy for its net cash surrender value any time before
the death of the insured person. You may take your net cash surrender value in
other than one payment. We compute your net cash surrender value as of the
valuation date we receive your written surrender request and policy at our
customer service center. All insurance coverage ends on the date we receive your
surrender request and policy. SEE POLICY VALUES, PAGE 30 AND SETTLEMENT
PROVISIONS, PAGE 42.
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Strategic Advantage II 37
<PAGE>
We do not pro-rate or add back charges or expenses which were deducted before
your surrender to your account value.
A surrender of your policy may have adverse tax consequences. SEE DISTRIBUTIONS
OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 50, AND
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS, PAGE 50.
GENERAL POLICY PROVISIONS
FREE LOOK PERIOD
You have the right to examine your policy. The right to examine your policy,
often called the free look period, starts on the date you receive your policy
and is a length of time specified by law. If for any reason you do not want it,
you may return your policy to us or your agent/registered representative within
the period shown on the policy's face page. If you return your policy to us
within that time period, we will consider it canceled as of your policy date.
If you cancel your policy during this free look period, you will receive a
refund as determined under law. Generally, there are two types of free look
refunds:
o some states require a return of all premiums we receive;
o other states require payment of account value plus a refund of all
charges deducted.
Your policy will specify what type of free look refund applies in your state.
The type of free look refund in your state will affect when the net premium we
receive before the end of the free look period is invested into the variable
investment options. SEE ALLOCATION OF NET PREMIUMS, PAGE 21.
YOUR POLICY
The entire contract between you and us is the combination of:
o your policy;
o a copy of your original application and any applications for benefit
increases or decreases;
o all of your riders;
o endorsements;
o policy schedule pages; and
o reinstatement applications.
If you make a change to your coverage, we give you a copy of your changed
application and new policy schedules. If you send your policy to us, we attach
these items to your policy and return it to you. Otherwise, you need to attach
them to your policy.
Unless there is fraud, we consider all statements made in an application to be
representations and not guarantees. We use no statement to deny a claim, unless
it is in an application.
A president or an officer of our company and our secretary or assistant
secretary must sign all changes or amendments we make to your policy. No other
person may change the terms or conditions of your policy.
GUARANTEED ISSUE
We may offer policies on a guaranteed issue basis for certain group or sponsored
arrangements. When this happens, we issue these policies up to a preset face
amount with reduced evidence of insurability requirements. Guaranteed issue
policies may carry a different mortality risk to us compared with policies that
are fully underwritten. So, we may charge different cost of insurance rates for
guaranteed issue policies. The cost of insurance rates under these circumstances
may depend on the:
o issue age of the insured people;
o risk class of the insured people;
o size of the group; and
o total premium the group pays.
Generally, most guaranteed issued policies have higher overall charges for
insurance than a similar underwritten policy issued in the standard nonsmoker or
standard smoker class. This means that the insured person in a group or
sponsored arrangement could get individually underwritten insurance coverage at
a lower overall cost.
AGE
The age stated in your policy schedule is the age of the insured person we use
to issue your policy. This is based on the insured person's age as of the
nearest birthday to the policy date.
The policy is issued on a guaranteed and fully- underwritten basis. On the
policy date, the insured person must be no less than age 15. For a fully-
underwritten policy, the insured person must be no more than age 85. For a
guaranteed issued policy, the insured person must be no more than age 70.
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Strategic Advantage II 38
<PAGE>
We generally use age to calculate rates, charges and values. We determine the
insured person's age at any given time by adding the number of completed policy
years to the age calculated at issue.
The policy anniversary nearest the insured person's 100th birthday is the date
used for policy maturity and continuation of coverage.
OWNERSHIP
The original owner is the person named as the owner in the policy application.
The owner can exercise all rights and receive benefits during the insured
person's lifetime while the policy is still in force. This includes the right to
change the owner, beneficiary(ies) or the method designated to pay death
proceeds.
As a matter of law, all rights of ownership are limited by the rights of any
person who has been assigned rights under the policy and any irrevocable
beneficiary(ies).
You may name a new owner by giving us written notice. The effective date of the
change to the new owner is the date the prior owner signs the notice. However,
we will not be liable for any action we take before a change is recorded at our
customer service center. A change in ownership may cause the prior owner to
recognize taxable income on gain under the policy.
BENEFICIARY(IES)
You, as owner, name the beneficiary(ies) when you apply for your policy. The
primary beneficiary(ies) who survives the insured person receives the death
proceeds. Other surviving beneficiary(ies) receive death proceeds only if there
is no surviving primary beneficiary(ies). If more than one beneficiary(ies)
survives the insured person, they share the death proceeds equally, unless you
have told us otherwise. If none of your policy beneficiaries has survived the
insured person, we pay the death proceeds to you or to your estate, as owner.
Once you tell us who the beneficiary(ies) is/are, we keep this information on
file. You may name a new beneficiary(ies) any time before death of the insured
person. We pay the death proceeds to the beneficiary(ies) whom you have most
recently named according to our records. We do not make payments to multiple
sets of beneficiaries.
COLLATERAL ASSIGNMENT
You may assign your policy by sending written notice to us. After we record the
assignment, your rights as owner and the beneficiary's(ies') rights (unless the
beneficiary(ies) was made an irrevocable beneficiary(ies) under an earlier
assignment) are subject to the assignment. It is your responsibility to make
sure the assignment is valid.
INCONTESTABILITY
If your policy has been in force and the insured person is alive for two years
from your policy date, we will not question the validity of the statements in
your application. If your policy has been in force and the insured person is
alive for two years from the effective date of a new segment or from the
effective date of an increase in any other benefit, with respect to the insured
person (such as an increase in stated death benefit) we will not contest the
statements in your application for the new segment or other increase.
If this policy has been in force and the insured person is alive for two years
from the effective date of reinstatement, we will not contest the statements in
your application for reinstatement.
MISSTATEMENTS OF AGE OR GENDER
If the insured person's age or gender has been misstated, we adjust the death
benefit to the amount which would have been purchased for the insured person's
correct age and gender. We base the adjusted death benefit on the cost of
insurance charges deducted from your account value on the last monthly
processing date before the death of the insured person, or as otherwise required
by law.
If unisex cost of insurance rates apply, we do not make any adjustments for a
misstatement of gender.
SUICIDE
If the insured person commits suicide (while that insured person is sane or
insane) within two years of your policy date, unless otherwise required by law,
we limit death proceeds payable in one sum to:
1. the total of all premiums we receive to the time of death; minus
2. outstanding policy loan amounts and accrued loan interest; minus
3. partial withdrawals you have taken.
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Strategic Advantage II 39
<PAGE>
We make a limited payment to the beneficiary(ies) for a new segment or other
increase if the death of the insured person is due to suicide (while that
insured person is sane or insane), within two years of the effective date of a
new segment or within two years of an increase in any other benefit, unless
otherwise required by law. The limited payment we make is equal to the cost of
insurance and monthly expense charges which were deducted for such increase.
TRANSACTION PROCESSING
Generally, within seven days of when we receive all information required to
process a payment, we pay:
o death proceeds;
o net cash surrender value upon surrender;
o partial withdrawals; and
o loan proceeds.
We may delay processing these transactions if:
o the NYSE is closed for trading;
o trading on the NYSE is restricted by the SEC;
o there is an emergency so that it is not reasonably possible to sell
securities in the variable investment options or to determine the value
of a variable investment option's assets; or
o a governmental body with jurisdiction over the separate account allows
suspension by its order.
SEC rules and regulations determine whether or not these conditions exist.
We execute transfers among the variable investment options as of the valuation
date of our receipt of your request at our customer service center.
We determine the death benefit as of the date of the death of the insured
person. The death proceeds are not affected by changes in the value of the
variable investment options after that date.
We may delay payment from our guaranteed interest division for up to six months,
unless law requires otherwise, of surrender proceeds, withdrawal amounts or loan
amounts. If we delay payment more than 30 days, we pay interest at our declared
rate (or at a higher rate if required by law) from the date we receive your
complete request.
NOTIFICATION AND CLAIMS PROCEDURES
Except for certain authorized telephone requests, we must receive in writing any
election, designation, change, assignment or request made by the owner.
You must use a form acceptable to us. We are not liable for actions taken before
we receive and record the written notice. We may require you to return your
policy for policy changes and at the time of surrender.
If the insured person dies while your policy is in force, please let us or your
agent/registered representative know as soon as possible. We will immediately
send you instructions on how to make a claim at the insured person's death. As
proof of the insured person's death, we may require you to provide proof of the
deceased insured person's age and a certified copy of the death certificate.
The beneficiary(ies) and the deceased insured person's next of kin may need to
sign authorization forms. These forms allow us to get information about the
deceased insured person. This information may include medical records of doctors
and hospitals used by the deceased insured person.
TELEPHONE PRIVILEGES
If your policy was delivered on or after May 1, 1999, telephone privileges are
automatically provided to you and your agent/registered representative, unless
you decline it on the application or contact our customer service center. If
your policy was delivered before May 1, 1999, you may choose telephone
privileges by completing our customer service form and returning it to our
customer service center. Telephone privileges allow you or your agent/registered
representative, if applicable, to call our customer service center to:
o make transfers;
o change premium allocations;
o change features in your dollar cost averaging and automatic rebalancing
programs;
o request partial withdrawals; or
o request a policy loan.
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Strategic Advantage II 40
<PAGE>
Our customer service center uses reasonable procedures to make sure that
instructions received by telephone are genuine. These procedures may include:
1. requiring some form of personal identification;
2. providing written confirmation of any transactions; and
3. tape recording telephone calls.
By accepting automatic telephone privileges, you authorize us to record your
telephone calls with us. If we use reasonable procedures to confirm
instructions, we are not liable for losses due to unauthorized or fraudulent
instructions. We may discontinue this privilege at any time.
NON-PARTICIPATION
Your policy does not participate in the surplus earnings of Security Life.
DISTRIBUTION OF THE POLICIES
The principal underwriter (distributor) for our policies is ING America
Equities, Inc., a wholly owned subsidiary of Security Life. It is registered as
a broker-dealer with the SEC and the NASD. We pay ING America Equities, Inc. for
acting as the principal underwriter under a distribution agreement.
We sell our policies through licensed insurance agents who are registered
representatives of other broker-dealers including, but not limited to:
1. VESTAX Securities Corporation, an indirect affiliate of Security Life
of Denver Insurance Company;
2. Locust Street Securities, Inc., an indirect affiliate of Security Life
of Denver Insurance Company;
3. Multi-Financial Securities, Corp., an indirect affiliate of Security
Life of Denver Insurance Company; and
4. IFG Network Securities, Inc., an indirect affiliate of Security Life of
Denver Insurance Company.
All broker-dealers who sell this policy have entered into selling agreements
with us. Under these selling agreements, we pay a distribution allowance to
broker-dealers, who pay commissions to their agents/registered representatives
who sell this policy.
During the first policy year, the distribution allowance is 15% of premium we
receive up to target premium and 3% of premium we receive in excess of target
premium. For policy years two through ten, the distribution allowance is 12% of
premium we receive up to target premium and 3% of premiums we receive in excess
of target premium. For policy years after the tenth, the distribution allowance
is 3% of all premiums we receive (does not apply to some firms). Some
broker-dealers receive a slightly lower distribution allowance because we
provide them with greater marketing and administrative support.
Broker-dealers receive annual renewal payments (trails) of 0.15% of the average
net account value at the beginning of the sixth policy year.
In addition to the distribution allowances, we may pay wholesaler fees or
marketing and training allowances. We pay all allowances from our resources
which include sales charges deducted from premiums.
ADVERTISING PRACTICES AND SALES LITERATURE
We may use advertisements and sales literature to promote this product,
including:
o articles on variable life insurance and other information published in
business or financial publications; and
o indices or rankings of investment securities;
o comparisons with other investment vehicles, including tax
considerations.
We may use information regarding the past performance of the variable investment
options. However, past performance is not indicative of future performance of
the investment options or the policies and is not reflective of the actual
investment experience of policyowners.
We may feature certain investment options and their managers, as well as
describe asset levels and sales volumes. We may refer to past, current, or
prospective economic trends, and investment performance or other information we
believe may be of interest to our customers.
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Strategic Advantage II 41
<PAGE>
SETTLEMENT PROVISIONS
You may elect to have the beneficiary(ies) receive the death proceeds other than
in one payment. If you make this election, you must do so before the death of
the insured person. If you have not made this election, the beneficiary(ies) may
do so within 60 days after we receive proof of the death of the insured person.
You may take your net cash surrender value in other than one payment.
The investment performance of the variable investment options does not affect
payments under these settlement options. Instead, interest accrues at a fixed
rate based on the option you choose. Payment options are subject to our rules at
the time you make your selection. Currently a periodic payment must be at least
$20 and the proceeds must be $2,000 or more.
OPTION I: PAYOUTS FOR A DESIGNATED PERIOD
OPTION II: LIFE INCOME WITH PAYOUTS GUARANTEED FOR A DESIGNATED PERIOD
OPTION III: HOLD AT INTEREST
OPTION IV: PAYOUTS OF A DESIGNATED AMOUNT
OPTION V: OTHER OPTIONS WE OFFER AT THE TIME WE PAY THE BENEFIT
ADMINISTRATIVE INFORMATION ABOUT THE POLICY
VOTING PRIVILEGES
We invest the variable investment options' assets in shares of investment
portfolios. We are the legal owner of the shares held in the separate account
and we have the right to vote on certain issues. Among other things, we may vote
on issues described in the fund's current prospectus or issues requiring a vote
by shareholders under the Investment Company Act of 1940.
Even though we own the shares, we give you the opportunity to tell us how to
vote the number of shares attributable to your account value.
We count fractional shares. If you have a voting interest, we send you proxy
material and a form on which to give us your voting instructions.
Each investment portfolio share has the right to one vote. The votes of all
investment portfolio shares are cast together on a collective basis, except on
issues for which the interests of the portfolios differ. In these cases, voting
is done on a portfolio-by-portfolio basis.
Examples of issues that require a portfolio-by- portfolio vote are:
1. changes in the fundamental investment policy of a particular investment
portfolio; or
2. approval of an investment advisory agreement.
We vote the shares in accordance with your instructions at meetings of
investment portfolio shareholders. We vote any investment portfolio shares that
are not attributable to policies and any investment portfolio shares for which
the owner does not give us instructions, the same way we vote as if we did
receive owner instructions.
We reserve the right to vote investment portfolio shares without getting
instructions from policy owners if the federal securities laws, regulations or
their interpretations change to allow this.
You may instruct us only on matters relating to the investment portfolios
corresponding to variable investment options in which you have invested assets
as of the record date set by the investment portfolio's board for the
portfolio's shareholders meeting. We determine the number of investment
portfolio shares in each variable investment option that we attribute to your
policy by dividing your account value allocated to that variable investment
option by the net asset value of one share of the matching investment portfolio.
MATERIAL CONFLICTS
We are required to track events to identify any material conflicts arising from
using investment portfolios for both variable life and variable annuity separate
accounts. The boards of the investment portfolios, Security Life and other
insurance companies participating in the investment portfolios,
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Strategic Advantage II 42
<PAGE>
have this same duty. There may be a material conflict if:
o state insurance law or federal income tax law changes;
o investment management of an investment portfolio changes; or
o voting instructions given by owners of variable life insurance policies
and variable annuity contracts differ.
The investment portfolios may sell shares to certain qualified pension and
retirement plans qualifying under Code Section 401. These include cash or
deferred arrangements under Code Section 401(k). Therefore, there is a
possibility that a material conflict may arise between the interests of owners
in general or between certain classes of owners; and these retirement plans or
participants in these retirement plans.
If there is a material conflict, we have the duty to determine appropriate
action including removing the portfolios involved from our variable investment
options. We may take other action to protect policy owners. This could mean
delays or interruptions of the variable operations.
When state insurance regulatory authorities require it, we may ignore voting
instructions relating to changes in an investment portfolio's adviser or its
investment policies. If we do ignore voting instructions, we give you a summary
of our actions in our next semi-annual report to owners.
Under the Investment Company Act of 1940, we must get your approval for certain
actions involving our separate account. In this case, you have one vote for
every $100 of value you have in the variable investment options. We cast votes
credited to amounts in the variable investment options, but not credited to
policies in the same proportion as votes cast by owners.
RIGHT TO CHANGE OPERATIONS
Subject to state limitations, we may from time to time make any of the following
changes to our separate account:
1. Change the investment objective.
2. Offer additional variable investment options which will invest in
portfolios we find appropriate for policies we issue.
3. Eliminate variable investment options.
4. Combine two or more variable investment options.
5. Substitute a new investment portfolio for a portfolio in which the
division currently invests. A substitution may become necessary if, in
our judgment:
o a portfolio no longer suits the purposes of your policy;
o there is a change in laws or regulations;
o there is a change in a portfolio's investment objectives or
restrictions;
o the portfolio is no longer available for investment; or
o another reason we deem a substitution is appropriate.
6. Transfer assets related to your policy class to another separate
account.
7. Withdraw the separate account from registration under the 1940 Act.
8. Operate the separate account as a management investment company under
the 1940 Act.
9. Cause one or more variable investment options to invest in a mutual
fund other than, or in addition to, the investment portfolios.
10. Stop selling these policies.
11. End any employer or plan trustee agreement with us under the
agreement's terms.
12. Limit or eliminate any voting rights for the separate account.
13. Make any changes required by the 1940 Act or its rules or regulations.
We will not make a change until it is effective with the SEC and approved by the
appropriate state insurance departments, if necessary. We will notify you of
changes. If you wish to transfer the amount you have in the affected investment
option to another variable investment option or to the guaranteed interest
division, you may do so free of charge. Just notify us at our customer service
center.
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Strategic Advantage II 43
<PAGE>
REPORTS TO OWNERS
At the end of each policy year we send a report to you that shows:
o your total net policy death benefit (your stated death benefit plus
adjustable term insurance rider death benefit, if any);
o your account value;
o your policy loan, if any, plus accrued interest;
o your net cash surrender value;
o information about the variable investment options; and
o your account transactions during the policy year showing net premiums,
transfers, deductions, loan amounts and withdrawals.
We also send semi-annual reports with financial information on the investment
portfolios, including a list of the investment holdings of each portfolio to
you.
We send confirmation notices to you throughout the year for certain policy
transactions.
CHARGES, DEDUCTIONS AND REFUNDS
The amount of a charge may not correspond to the cost incurred by us to provide
the service or benefit. For example, the sales charge may not cover all of our
sales and distribution expenses. Some proceeds from other charges, including the
mortality and expense risk charge or cost of insurance charges, may be used to
cover such expenses.
DEDUCTIONS FROM PREMIUMS
We treat payments we receive as premium payments if you do not have an
outstanding loan and your policy is not in the continuation of coverage period.
After we deduct certain charges from your premium payment, we add the remaining
net premium to your policy.
SALES CHARGE
We deduct a percentage from each premium payment to compensate us for the costs
we incur in selling the policies. The sales charge helps cover the costs of
distribution, preparing our sales literature, promotional expenses and other
direct and indirect expenses.
We base the percentage on the length of time since your policy or a segment
becomes effective:
Sales Charge Percentage
-----------------------
Above Policy
Up To Policy or or Segment
Policy or Segment Target
Segment Year Target Premium Premium
------------ -------------- -------
1 - 10 12% 3%
11 + 3% 3%
These premium deductions are a part of the total sales charge. To determine your
applicable sales charge, premiums we receive after an increase in stated death
benefit are allocated to your policy segments in the same proportion as the
guideline annual premium (defined by federal income tax law) for each segment
bears to the total guideline annual premium for your stated death benefit.
We may reduce or waive the sales charge for certain group or sponsored
arrangements, or for corporate purchasers. SEE GROUP OR SPONSORED ARRANGEMENTS,
OR CORPORATE PURCHASERS, PAGE 47.
TAX CHARGES
We pay state and local taxes in almost all states. These taxes vary in amount
from state to state and may vary from jurisdiction to jurisdiction within a
state. Currently, state and local taxes range from 0.5% to 5% with some states
not imposing these types of taxes. We deduct 2.5% of each premium payment to
cover these taxes. This rate approximates the average tax rate we expect to pay
in all states.
We also deduct 1.5% of each premium payment to cover our estimated costs for the
federal income tax treatment of deferred acquisition costs. This cost is
determined solely by the amount of life insurance premiums we receive.
We reserve the right to increase or decrease your premium expense charge for
taxes as a result of changes in the tax law, within limits set by law. We also
reserve the right to increase or decrease your premium expense charge for the
federal income tax treatment of deferred acquisition costs based on any change
in that cost to us.
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Strategic Advantage II 44
<PAGE>
DAILY DEDUCTIONS FROM THE SEPARATE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE
We deduct 0.002055% per day (0.75% annually) of the amount you have in the
variable investment options for the mortality and expense risks we assume. This
charge is deducted as part of the calculation of the daily unit values for the
variable investment options and does not appear as a separate charge on your
statement or confirmation.
The mortality risk is that insured people, as a group, may live less time than
we estimated. The expense risk is that the costs of issuing and administering
the policies and in operating the variable division are greater than the amount
we estimated.
The mortality and expense risk charge does not apply to your account value in
the guaranteed interest division or the loan division.
MONTHLY DEDUCTIONS FROM ACCOUNT VALUE
We deduct charges from your account value on each monthly processing date until
the maturity date or until the continuation of coverage period begins.
POLICY CHARGE
The policy charge is $10 per month for the first three years of your policy.
This charge compensates us for such costs as:
o application processing;
o medical examinations;
o establishment of policy records; and
o insurance underwriting costs.
MONTHLY ADMINISTRATIVE CHARGE
We charge a per month administrative charge of $3 plus $0.025 per $1,000 for the
greater of the stated death benefit, or the target death benefit. We currently
limit the charge to $30 per month.
This charge is designed to compensate us for ongoing costs such as:
o premium billing and collections;
o claim processing;
o policy transactions;
o record keeping;
o reporting and communications with policy owners; and
o other expenses and overhead.
COST OF INSURANCE CHARGE
The cost of insurance charge compensates us for the ongoing costs of providing
insurance coverage under the policy, including the expected cost of paying death
proceeds that may be more than your account value at the insured person's death.
The cost of insurance charge is equal to our current monthly cost of insurance
rate multiplied by the net amount at risk for each portion of your death
benefit. We calculate the net amount at risk monthly, at the beginning of each
policy month. For the base death benefit, the net amount at risk is calculated
using the difference between the current base death benefit and your account
value. We determine your account value after we deduct your policy and rider
charges due on that date other than cost of insurance charges for the base death
benefit, adjustable term insurance and waiver of cost of insurance riders.
If your base death benefit at the beginning of a month increases (due to
requirements of the federal income tax law definition of life insurance), the
net amount at risk for your base death benefit for that month also increases.
Similarly, the net amount at risk for your adjustable term insurance rider
decreases. This means that your cost of insurance charge varies from month to
month with changes in your net amount at risk, changes in the death benefit and
with the increasing age of the insured person. We allocate the net amount at
risk to segments in the same proportion that each segment has to the total
stated death benefit for all coverage segments as of the monthly processing
date.
We base your current cost of insurance rates on the insured person's age, gender
and premium class on the policy and each segment date.
We apply unisex rates where appropriate under the law. This currently includes
the state of Montana and policies purchased by employers and employee
organizations in connection with employment-related insurance or benefit
programs.
Separate cost of insurance rates apply to:
o each segment of the base death benefit;
o your adjustable term insurance rider; and
o your waiver of cost of insurance rider.
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Strategic Advantage II 45
<PAGE>
We may make changes in the cost of insurance or rider charges for a class of
insured persons. We base the new charge on changes in expectations about:
o investment earnings;
o mortality;
o the time policies remain in effect;
o expenses; and
o taxes.
These rates are never more than the guaranteed maximum rates shown in your
policy. The guaranteed maximum rates are based on the 1980 Commissioner's
Standard Ordinary Sex Distinct Mortality Table.
The maximum rates for the initial and each new segment will be printed in your
policy schedule pages.
RIDER CHARGES
On each monthly processing date, we deduct the cost of benefits under your
riders. Rider charges do not include the adjustable term insurance and waiver of
cost of insurance riders. SEE RIDERS, PAGE 27.
POLICY TRANSACTION FEES
We charge fees for certain transactions under your policy. We deduct these fees
from the variable and guaranteed interest divisions pro rata to the account
value in each.
PARTIAL WITHDRAWALS
We deduct the lesser of a $25 service fee or 2% of the requested partial
withdrawal from your account value for each partial withdrawal you take to cover
our costs. We may also deduct a surrender charge from your account value. SEE
PARTIAL WITHDRAWALS, PAGE 35.
TRANSFERS
There is a $25 fee to cover our costs for each transfer over twelve free
transfers per policy year. If you include multiple transfers in one transfer
request, it counts as one transfer. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 31.
ILLUSTRATIONS
The first policy illustration you request in a policy year is free. After that,
we charge a fee of up to $25 for each policy illustration.
PREMIUM ALLOCATION CHANGE
You may make twelve free premium allocation changes per policy year. After the
twelve free changes, we charge $25 for each additional premium allocation change
in that policy year. If you change your designated deduction investment option,
we consider it a premium allocation change. SEE MONTHLY DEDUCTIONS FROM ACCOUNT
VALUE, PAGE 45.
CONTINUATION OF COVERAGE ADMINISTRATIVE FEE
At the policy anniversary nearest the insured person's 100th birthday, if your
policy has not been surrendered, the continuation of coverage period begins.
We charge a one-time administrative fee of $200. This charge compensates us for
maintaining and servicing your policy until the death of the insured person. We
then no longer charge monthly charges.
DIVISIONS FROM WHICH WE DEDUCT
CHARGES, LOANS AND PARTIAL WITHDRAWALS
<TABLE>
<CAPTION>
MONTHLY CHARGES: COST OF LOANS AND
INSURANCE CHARGES, RIDER TRANSACTION FEES PARTIAL WITHDRAWALS
CHARGES, ADMINISTRATIVE FEES
<S> <C> <C> <C>
Choice May choose a designated deduction Proportionally among May choose any investment
investment option, including variable and guaranteed option or combination of
guaranteed interest division interest divisions investment options
Default Proportionally among variable and Proportionally among Proportionally among variable
guaranteed interest divisions variable and guaranteed and guaranteed interest divisions
interest divisions
</TABLE>
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Strategic Advantage II 46
<PAGE>
PERSISTENCY REFUND
Where law allows us, we pay long-term policy owners a persistency refund. Each
month your policy remains in force after your tenth policy anniversary, we
credit your account value with a refund of 0.05% of account value. This refund
is 0.6% of your account value on an annual basis.
We do not guarantee that we will pay a persistency refund on the guaranteed
interest division. If we pay a persistency refund on the guaranteed interest
division, we will pay it even if your policy is in the continuation of coverage
period.
If applicable, we add the persistency refund to the variable and guaranteed
interest divisions, but not the loan division, in the same proportion that your
account value in each investment option has to your net account value as of the
monthly processing date.
Here are two examples of how the persistency refund may affect your account
value:
EXAMPLE 1: YOUR POLICY HAS NO LOAN:
o account value = $10,000 (all in the variable division)
o monthly persistency refund rate = .0005
o persistency refund = 10,000 x .0005 = $5.00
Value Before Value After
Persistency Persistency
Refund Refund
Variable
Division $10,000.00 $10,005.00
EXAMPLE 2: YOUR POLICY DOES HAVE A LOAN:
o account value = $10,000
o account value in the variable division = $6,000
o account value in the loan division = $4,000
o monthly persistency refund rate = .0005
o persistency refund = 10,000 x .0005 = $5.00
Value Before Value After
Persistency Persistency
Refund Refund
Variable
Division $6,000.00 $6,005.00
Loan $4,000.00 $4,000.00
REFUND OF SALES CHARGES
If you surrender your policy within the first two policy years and your policy
has not lapsed, we will refund a portion of the sales charges we previously
deducted from the premiums we received. In the first policy year, the amount of
the refund is guaranteed to be at least 5% of the premiums we receive. In the
second policy year, the refund is guaranteed to be at least 2.5% of the premiums
we receive in the first policy year. The refund of sales charge is guaranteed
only for the first two policy years. The refund of sales charge is not available
if your policy was purchased with the proceeds of a policy issued by use or one
of our affiliates.
OTHER CHARGES
Under current law, we pay no tax on investment income and capital gains included
in variable life insurance policy reserves. This means that no charge is
currently made to any variable investment option for our federal income taxes.
If the tax law changes and we have federal income tax chargeable to the variable
investment options, we may make such a charge in the future.
GROUP OR SPONSORED ARRANGEMENTS, OR CORPORATE PURCHASERS
Individuals, corporations or other institutions may purchase this policy. For
group or sponsored arrangements (including employees and certain family members
of employees of Security Life, its affiliates and appointed sales agents),
corporate purchasers or special exchange programs which we may offer from time
to time, we may reduce or waive the:
o administrative charge;
o minimum stated death benefit;
o minimum target death benefit;
o minimum annual premium;
o target premium;
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Strategic Advantage II 47
<PAGE>
o sales charges;
o cost of insurance charges; or
o other charges normally assessed.
We can reduce or waive these items based on expected economies under a group or
sponsored arrangement or with a corporate purchaser. Our sales, administration
and mortality costs generally vary with the size and stability of the group,
among other factors. We take all these factors into account when we reduce
charges. A group or sponsored arrangement must meet certain requirements to
qualify for reduced charges. We make reductions to charges based on our rules in
effect when we approve a policy application. We may change these rules from time
to time.
Group arrangements include those in which there is a trustee, an employer or an
association. The group may purchase multiple policies covering a group of
individuals on a group basis or endorse a 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.
Each sponsored arrangement or corporation may have different group premium
payments and premium requirements.
We will not unfairly discriminate in any variation in the surrender charge,
administrative charge, or other charges, fees and privileges. These variations
are based on differences in costs or services.
TAX CONSIDERATIONS
The following summary provides a general description of the federal income tax
considerations associated with the policy and does not purport to be complete or
to cover all tax situations. This discussion is not intended as tax advice.
Counsel or other competent tax advisers should be consulted for more complete
information. This discussion is based upon our understanding of the present
federal income tax laws. No representation is made as to the likelihood of
continuation of the present federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service.
TAX STATUS OF THE POLICY
This policy is designed to qualify as a life insurance contract under the
Internal Revenue Code. All terms and provisions of the policy shall be construed
in a manner which is consistent with that design. In order to qualify as a life
insurance contract for federal income tax purposes and to receive the tax
treatment normally accorded life insurance contracts under federal tax law, a
policy must satisfy certain requirements which are set forth in Internal Revenue
Code Section 7702. While there is little guidance as to how these requirements
are applied, we believe it is reasonable to conclude that our policies satisfy
the applicable requirements. If it is subsequently determined that a policy does
not satisfy the applicable requirements, we will take appropriate and reasonable
steps to bring the policy into compliance with such requirements and we reserve
the right to restrict policy transactions or modify your policy in order to do
so.
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."
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 person's
age, sex and premium class at any point in time, multiplied by the account
value. SEE APPENDIX A, PAGE 166, 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 166, 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
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Strategic Advantage II 48
<PAGE>
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. SEE TAX TREATMENT OF POLICY DEATH BENEFITS, PAGE 49.
DIVERSIFICATION REQUIREMENTS
In addition to meeting the Code Section 7702 tests, Code Section 817(h) requires
separate account investments, such as our separate account, to be adequately
diversified. The Treasury has issued regulations which set the standards for
measuring the adequacy of any diversification. To be adequately diversified,
each variable investment option must meet certain tests. If your variable life
policy is not adequately diversified under these regulations, it is not treated
as life insurance under Code Section 7702. You would then be subject to federal
income tax on your policy income as you earn it. Our variable investment
options' investment portfolios have promised they will meet the diversification
standards that apply to your policy.
In certain circumstances, you, as owner of a variable life insurance contract,
may be considered the owner for federal income tax purposes of the separate
account assets used to support your contract. Any income and gains from the
separate account assets are includable in the gross income from your policy
under these circumstances. The IRS has stated in published rulings that a
variable contract owner is considered the owner of separate account assets if
the contract owner has "indicia of ownership" in those assets. "Indicia of
ownership" includes the ability to exercise investment control over the assets.
Your ownership rights under your policy are similar to, but different in some
ways from those described by the IRS in rulings in which it determined that
policy owners are not owners of separate account assets. For example, you have
flexibility in allocating your premium payments and in your policy values. These
differences could result in the IRS treating you as the owner of a pro rata
share of the separate account assets. We do not know what standards will be set
forth in the future, if any, in Treasury regulations or rulings. We reserve the
right to modify your policy, as necessary, to try to prevent you from being
considered the owner of a pro rata share of the separate account assets, or to
otherwise qualify your policy for favorable tax treatment. 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.
SEE TAX TREATMENT OF POLICY DEATH BENEFITS, PAGE 49.
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY DEATH BENEFITS
We believe that the death benefit under a policy is generally excludable from
the gross income of the beneficiary(ies) under section 101(a)(1) of the Code.
However, there are exceptions to this general rule. Additionally, federal and
local transfer, estate inheritance and other tax consequences of ownership or
receipt of policy proceeds depend on the circumstances of each policy owner or
beneficiary(ies). A tax adviser should be consulted about these consequences.
Generally, the policy owner will not be taxed on any of the policy account value
until there is a distribution. When distributions from a policy occur, or when
loan amounts are taken from or secured by a policy, the tax consequences depend
on whether or not the policy is a "modified endowment contract."
Special rules also apply if you are subject to the alternative minimum tax. You
should consult a tax adviser if you are subject to the alternative minimum tax.
MODIFIED ENDOWMENT CONTRACTS
Under the Internal Revenue Code, certain life insurance contracts are classified
as "modified endowment contracts" and are given less favorable tax treatment
than other life insurance contracts. Due to the flexibility of the policies as
to premiums and benefits, the individual circumstances of each policy will
determine whether or not it is classified as a modified endowment contract. The
rules are too complex to be summarized here, but generally
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Strategic Advantage II 49
<PAGE>
depend on the amount of premiums we receive during the first seven policy years.
Certain changes in a policy after it is issued could also cause it to be
classified as a modified endowment contract. A current or prospective policy
owner should consult with a competent adviser to determine whether or not a
policy transaction will cause the policy to be classified as a modified
endowment contract.
If a policy becomes a modified endowment contract, distributions that occur
during the policy year will be taxed as distributions from a modified endowment
contract. In addition, distributions for a policy within two years before it
becomes a modified endowment contract will be taxed in this manner. This means
that a distribution made from a policy that is not a modified endowment contract
could later become taxable as a distribution from a modified endowment contract.
MULTIPLE POLICIES
All modified endowment contracts that are issued by us (or our affiliates) to
the same policy owner during any calendar year are treated as one modified
endowment contract for purposes of determining the amount includable in the
policy owner's income when a taxable distribution occurs.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS
Once a policy is classified as a modified endowment contract, the following tax
rules apply both prospectively and to any distributions made in the prior two
years:
1. All distributions other than death benefits, including distributions
upon surrender and withdrawals, from a modified endowment contact will
be treated first as distributions of gain taxable as ordinary income
and as tax-free recovery of the policy owner's investment in the policy
only after all gain has been distributed.
2. Loan amounts taken from or secured by a policy classified as a modified
endowment contract are treated as distributions and taxed first as
distributions of gain taxable as ordinary income and as tax-free
recovery of the policy owner's investment in the policy only after all
gain has been distributed.
3. A 10% additional income tax penalty may be imposed on the distribution
amount subject to income tax. Consult a tax adviser to determine
whether or not you may be subject to this penalty tax.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS
Distributions other than death benefits from a policy that is not classified as
a modified endowment contract are generally treated first as a recovery of the
policy owner's investment in the policy. Only after the recovery of all
investment in the policy, is there taxable income. However, certain
distributions which must be made in order to enable the policy to continue to
qualify as a life insurance contract for federal income tax purposes, if policy
benefits are reduced during the first fifteen policy years, may be treated in
whole or in part as ordinary income subject to tax.
Loan amounts from or secured by a policy that is not a modified endowment
contract are generally not treated as distributions. Finally, neither
distributions from, nor loan amounts from or secured by, a policy that is not a
modified endowment contract are subject to the 10% additional income tax.
INVESTMENT IN THE POLICY
Your investment in the policy is generally the total of your aggregate premiums.
When a distribution is taken from the policy, your investment in the policy is
reduced by the amount of the distribution that is tax free.
POLICY LOANS
In general, interest on a policy loan will not be deductible. Moreover, the tax
consequences associated with a low-cost loan such as the loan available in the
policy are uncertain. Before taking out a policy loan, you should consult a tax
adviser as to the tax consequences.
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Strategic Advantage II 50
<PAGE>
If a loan from a policy is outstanding when the policy is canceled or lapses,
then the amount of the outstanding indebtedness will be added to the amount
treated as a distribution from the policy and will be taxed accordingly.
SECTION 1035 EXCHANGES
Code Section 1035 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 exchanges. If you wish
to take advantage of Section 1035, you should consult your tax adviser.
TAX-EXEMPT POLICY OWNERS
Special rules may apply to a policy that is owned by a tax-exempt entity.
Tax-exempt entities should consult their tax adviser regarding the consequences
of purchasing and owning a policy. These consequences could include an effect on
the tax- exempt status of the entity and the possibility of the unrelated
business income tax.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative action is uncertain, there is always the
possibility that the tax treatment of the policy could be changed by legislation
or otherwise. You should consult a tax adviser with respect to legislative
developments and their effect on the policy.
CHANGES TO COMPLY WITH THE LAW
So that your policy continues to qualify as life insurance under the Code, we
reserve the right to refuse to accept all or part of your premium payments or to
change your death benefit. We may refuse to allow you to make partial
withdrawals that would cause your policy to fail to qualify as life insurance.
We also may:
o make changes to your policy or its riders; or
o take distributions from your policy to the degree that we deem
necessary to qualify your policy as life insurance for tax purposes.
If we make any change of this type, it applies the same way to all affected
policies.
The tax law limits the amount we can charge for mortality costs and other
expenses used to calculate whether your policy qualifies as life insurance for
federal income tax purposes. We must base these calculations on reasonable
mortality charges and as permitted, other charges reasonably expected to be
paid. The Treasury issued proposed regulations on what it considers reasonable
mortality charges. We believe that the charges used for your policy should meet
the Treasury's current requirement for "reasonableness." We reserve the right to
make changes to the mortality charges if future regulations have standards which
make changes necessary in order to continue to qualify your policy as life
insurance for federal income tax purposes.
Additionally, assuming that you do not want your policy to be or to become a
modified endowment contract, we include a policy endorsement under which we have
the right to amend your policy, including riders. We do this to attempt to
enable your policy to continue to meet the seven-pay test for federal income tax
purposes. If the policy premium you pay is more than the seven-pay limit, we
have the right to remove any excess premium or to make any appropriate
adjustments to your policy's account value and death benefit. It is not clear,
however, whether we can take effective action pursuant to this endorsement under
all possible circumstances to prevent a policy that has exceeded the premium
limitation from being classified as a modified endowment contract.
Any increase in your death benefit will cause an increase in your cost of
insurance charges.
OTHER
Policy owners may use our policies in various arrangements, including:
o qualified plans;
o non-qualified deferred compensation or salary continuance plans;
o split dollar insurance plans;
o executive bonus plans;
o retiree medical benefit plans; and
o other plans.
The tax consequences of these plans may vary depending on the particular facts
and circumstances of each arrangement. If you want to use any of your
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Strategic Advantage II 51
<PAGE>
policies in this type of arrangement, you should consult a qualified tax adviser
regarding the tax issues of your particular arrangement.
In recent years, Congress has adopted new rules relating to life insurance owned
by businesses. Any business contemplating the purchase of a new policy or a
change in an existing policy should consult a tax adviser.
The IRS requires us to withhold income taxes from any portion of the amounts
individuals receive in a taxable transaction. We do not withhold income taxes if
you elect in writing not to have withholding apply. If the amount withheld for
you is insufficient to cover income taxes, you may have to pay income taxes and
possibly penalties later.
The transfer of the policy or designation of a beneficiary may have federal,
state and/or local transfer and inheritance tax consequences, including the
imposition of gift, estate and generation-skipping transfer taxes. For example
the transfer of the policy to or the designation as a beneficiary of or the
payment of proceeds to a person who is assigned to a generation which is two or
more generations below the generation assignment of the policy owner may have
generation skipping transfer tax consequences under federal tax law. The
individual situation of each policy owner or beneficiary will determine the
extent, if any, to which federal, state and local transfer and inheritance taxes
may be imposed and how ownership or receipt of policy proceeds will be treated
for purposes of federal, state and local estate, inheritance, generation
skipping and other taxes.
YOU SHOULD CONSULT QUALIFIED LEGAL OR TAX ADVISERS FOR COMPLETE INFORMATION ON
FEDERAL, STATE, LOCAL AND OTHER TAX CONSIDERATIONS.
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Strategic Advantage II 52
<PAGE>
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, CASH SURRENDER VALUES AND
ACCUMULATED PREMIUMS
The following tables are intended to show how the policy works, including how
benefits and values can vary over time. Each table compares these values with
total premiums we receive with interest. The policy illustrated uses the
following assumptions:
Definition
Death of Life Stated Target
Smoker Benefit Insurance Death Death
Gender Age Status Option Test Benefit Premium Benefit
- ------ --- ------ ------ ---- ------- ------- -------
Male 45 Nonsmoker 1 CVAT 300,000 $5,750 300,000
Preferred
Male 45 Nonsmoker 1 CVAT 150,000 $5,750 300,000
Preferred
Male 45 Nonsmoker 1 GP 300,000 $5,750 300,000
Preferred
- -------------------
* "Smoker" includes the use of cigarettes, cigars, pipes, chewing tobacco,
nicotine chewing gum or patch, snuff or any other tobacco or nicotine-based
product.
The tables show how death benefits, account values and net cash surrender values
of a hypothetical policy could vary over an extended period of time, assuming
the variable division had constant hypothetical gross annual investment returns
of 0%, 12%, or 6% over the periods indicated in each table. Values would differ
from those shown in the tables if the annual investment returns were not
constant. The amounts shown would differ if we had used female or unisex rates.
These illustrations assume there is no policy loan.
We illustrate premium payments as if they were made at the beginning of the
year. The third column of each table shows what would happen if an amount equal
to the assumed premiums earned interest, after taxes, of 5% compounded annually.
The net investment return on your policy is lower than the gross investment
return on the variable investment options as a result of the mortality and
expense risk charge, the portfolio management fees and portfolio expenses. We
show the effect of the net investment return in the amounts for death benefits,
account values and cash surrender values.
The tables reflect annual investment management fees of 0.66% of the portfolios'
aggregate average daily net assets. This hypothetical rate is a simple average
of the investment advisory fees applying to the investment portfolios for the
year ending December 31, 1999. We assume other portfolio expenses at the rate of
0.31% of the portfolios' average daily net assets. This is an average of all the
portfolios' other expenses for the year ending December 31, 1999 after any
expense reimbursements or waivers by investment portfolio managers has been
made. The average of all portfolios' total expenses is 0.97%.
Actual fees vary by portfolio. The portfolio fees and expenses used in the
illustrations are the net amounts shown after absorption of fees and expenses by
the portfolio's investment manager. Absent such expense reimbursements
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Strategic Advantage II 53
<PAGE>
or waivers, the total average investment management fees, average other
portfolio expenses and the average of all portfolios' total expenses used in the
illustrations would have been higher (0.71%, 0.47% and 1.18%, respectively). The
tables assume that the current expense reimbursement arrangements will continue.
However, they may not continue through 2000.
The effect of these portfolio charges and expenses, and mortality and expense
risk charges result in a net rate of return of:
o (1.71)% on a 0% gross rate of return;
o 10.20 % on a 12% gross rate of return; and
o 4.25% on a 6% gross rate of return.
The tables assume that charges have been deducted including deductions for
premiums, cost of insurance rider charges, monthly deductions, mortality and
expense risk charge, administrative and sales charges. The tables show charges
at our current rates which includes a persistency refund. The tables also show
charges at the maximum rates we guarantee in our policies. SEE MONTHLY
DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 45. The tables reflect that we do not
currently charge against the separate account for state or federal taxes. If we
charge for the taxes in the future, it will take a higher gross rate of return
than the rates shown to produce the same death benefits, account values and cash
surrender values.
If we are asked to do so, we will give you a comparable personal illustration
based on:
o the insured person's age and gender;
o standard premium class assumptions;
o initial stated death benefit;
o the chosen death benefit option;
o scheduled premiums consistent with your policy form; and
o special features elected on your policy.
At issue, we deliver an individualized illustration showing the scheduled
premium you chose and the insured person's actual risk class. After we issue the
policy, if you ask us to, we will give you an illustration of future policy
benefits. We base these hypothetical future benefits on both guaranteed and
current cost factor assumptions and actual account value.
- --------------------------------------------------------------------------------
Strategic Advantage II 54
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NONSMOKER PRESENTED BY:
PREFERRED
SECURITY LIFE
STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $5750
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 6038 3174 3461 300000 3649 3936 300000 3411 3698 300000
2 5750 12377 6200 6343 300000 7574 7718 300000 6872 7016 300000
3 5750 19033 9074 9074 300000 11800 11800 300000 10379 10379 300000
4 5750 26022 11914 11914 300000 16483 16483 300000 14056 14056 300000
5 5750 33361 14589 14589 300000 21535 21535 300000 17775 17775 300000
6 5750 41067 17095 17095 300000 26994 26994 300000 21535 21535 300000
7 5750 49157 19412 19412 300000 32883 32883 300000 25314 25314 300000
8 5750 57653 21524 21524 300000 39237 39237 300000 29101 29101 300000
9 5750 66573 23412 23412 300000 46095 46095 300000 32874 32874 300000
10 5750 75939 25054 25054 300000 53495 53495 300000 36614 36614 300000
15 5750 130281 32611 32611 300000 107854 107854 300000 59144 59144 300000
20 5750 199636 31146 31146 300000 197311 197311 341743 80617 80617 300000
25 5750 288152 13966 13966 300000 334851 334851 519020 96904 96904 300000
30 5750 401125 -- -- -- 536259 536259 753981 99958 99958 300000
AGE 65 5750 215655 29229 29229 300000 220643 220643 373327 84437 84437 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 are not a
representation of past or future investment results. Actual investment results
may be different from those shown and will depend on a number of factors,
including selected investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 55
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NONSMOKER 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 6038 4324 4899 300000 4872 5447 300000 4598 5173 300000
2 5750 12377 8456 9218 300000 10117 10879 300000 9270 10032 300000
3 5750 19033 12436 12954 300000 15812 16330 300000 14057 14575 300000
4 5750 26022 16404 16404 300000 22152 22152 300000 19107 19107 300000
5 5750 33361 20257 20257 300000 29095 29095 300000 24326 24326 300000
6 5750 41067 23999 23999 300000 36705 36705 300000 29722 29722 300000
7 5750 49157 27632 27632 300000 45056 45056 300000 35307 35307 300000
8 5750 57653 31161 31161 300000 54230 54230 300000 41092 41092 300000
9 5750 66573 34585 34585 300000 64314 64314 300000 47084 47084 300000
10 5750 75939 37917 37917 300000 75415 75415 300000 53306 53306 300000
15 5750 130281 56443 56443 300000 157791 157791 309587 93039 93039 300000
20 5750 199636 70561 70561 300000 292104 292104 505925 141084 141084 300000
25 5750 288152 79305 79305 300000 507158 507158 786095 200793 200793 311229
30 5750 401125 80899 80899 300000 849799 849799 1194817 273751 273751 384893
AGE 65 5750 215655 72764 72764 300000 327438 327438 554025 151939 151939 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 are not a
representation of past or future investment results. Actual investment results
and policy charges may be different from those shown and will depend on a number
of factors, including the investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 56
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NONSMOKER 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 6038 3171 3459 300000 3646 3934 300000 3408 3696 300000
2 5750 12377 6195 6339 300000 7569 7713 300000 6867 7011 300000
3 5750 19033 9067 9067 300000 11791 11791 300000 10372 10372 300000
4 5750 26022 11904 11904 300000 16471 16471 300000 14045 14045 300000
5 5750 33361 14576 14576 300000 21518 21518 300000 17761 17761 300000
6 5750 41067 17079 17079 300000 26971 26971 300000 21516 21516 300000
7 5750 49157 19393 19393 300000 32854 32854 300000 25291 25291 300000
8 5750 57653 21501 21501 300000 39202 39202 300000 29072 29072 300000
9 5750 66573 23385 23385 300000 46050 46050 300000 32840 32840 300000
10 5750 75939 25022 25022 300000 53441 53441 300000 36573 36573 300000
15 5750 130281 32548 32548 300000 107722 107722 300000 59053 59053 300000
20 5750 199636 31032 31032 300000 197066 197066 341319 80434 80434 300000
25 5750 288152 13762 13762 300000 334478 334478 518441 96542 96542 300000
30 5750 401125 -- -- -- 535698 535698 753192 99224 99224 300000
AGE 65 5750 215655 29102 29102 300000 220376 220376 372876 84227 84227 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 are not a
representation of past or future investment results. Actual investment results
may be different from those shown and will depend on a number of factors,
including selected investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 57
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NONSMOKER 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 6038 4344 4919 300000 4894 5469 300000 4619 5194 300000
2 5750 12377 8526 9288 300000 10194 10956 300000 9343 10105 300000
3 5750 19033 12567 13084 300000 15963 16480 300000 14197 14715 300000
4 5750 26022 16600 16600 300000 22390 22390 300000 19324 19324 300000
5 5750 33361 20520 20520 300000 29432 29432 300000 24624 24624 300000
6 5750 41067 24328 24328 300000 37152 37152 300000 30106 30106 300000
7 5750 49157 28021 28021 300000 45620 45620 300000 35776 35776 300000
8 5750 57653 31600 31600 300000 54912 54912 300000 41638 41638 300000
9 5750 66573 35060 35060 300000 65111 65111 300000 47699 47699 300000
10 5750 75939 38409 38409 300000 76319 76319 300000 53973 53973 300000
15 5750 130281 56908 56908 300000 159325 159325 312596 93891 93891 300000
20 5750 199636 70998 70998 300000 294601 294601 510248 142194 142194 300000
25 5750 288152 79715 79715 300000 511192 511192 792347 202250 202250 313488
30 5750 401125 81278 81278 300000 856279 856279 1203928 275525 275525 387388
AGE 65 5750 215655 73197 73197 300000 330187 330187 558676 153113 153113 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 are not a
representation of past or future investment results. Actual investment results
and policy charges may be different from those shown and will depend on a number
of factors, including the investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 58
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NONSMOKER 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
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 6038 3174 3461 300000 3649 3936 300000 3411 3698 300000
2 5750 12377 6200 6343 300000 7574 7718 300000 6872 7016 300000
3 5750 19033 9074 9074 300000 11800 11800 300000 10379 10379 300000
4 5750 26022 11914 11914 300000 16483 16483 300000 14056 14056 300000
5 5750 33361 14589 14589 300000 21535 21535 300000 17775 17775 300000
6 5750 41067 17095 17095 300000 26994 26994 300000 21535 21535 300000
7 5750 49157 19412 19412 300000 32883 32883 300000 25314 25314 300000
8 5750 57653 21524 21524 300000 39237 39237 300000 29101 29101 300000
9 5750 66573 23412 23412 300000 46095 46095 300000 32874 32874 300000
10 5750 75939 25054 25054 300000 53495 53495 300000 36614 36614 300000
15 5750 130281 32611 32611 300000 107854 107854 300000 59144 59144 300000
20 5750 199636 31146 31146 300000 198013 198013 300000 80617 80617 300000
25 5750 288152 13966 13966 300000 355771 355771 412694 96904 96904 300000
30 5750 401125 -- -- -- 616641 616641 659805 99958 99958 300000
AGE 65 5750 215655 29229 29229 300000 222974 222974 300000 84437 84437 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 are not a
representation of past or future investment results. Actual investment results
may be different from those shown and will depend on a number of factors,
including selected investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 59
<PAGE>
PROSPECT: INSURED'S NAME
MALE 45 NONSMOKER 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 6038 4324 4899 300000 4872 5447 300000 4598 5173 300000
2 5750 12377 8456 9218 300000 10117 10879 300000 9270 10032 300000
3 5750 19033 12436 12954 300000 15812 16330 300000 14057 14575 300000
4 5750 26022 16404 16404 300000 22152 22152 300000 19107 19107 300000
5 5750 33361 20257 20257 300000 29095 29095 300000 24326 24326 300000
6 5750 41067 23999 23999 300000 36705 36705 300000 29722 29722 300000
7 5750 49157 27632 27632 300000 45056 45056 300000 35307 35307 300000
8 5750 57653 31161 31161 300000 54230 54230 300000 41092 41092 300000
9 5750 66573 34585 34585 300000 64314 64314 300000 47084 47084 300000
10 5750 75939 37917 37917 300000 75415 75415 300000 53306 53306 300000
15 5750 130281 56443 56443 300000 157797 157797 300000 93039 93039 300000
20 5750 199636 70561 70561 300000 296308 296308 361496 141084 141084 300000
25 5750 288152 79305 79305 300000 526907 526907 611212 200862 200862 300000
30 5750 401125 80899 80899 300000 909871 909871 973562 279050 279050 300000
AGE 65 5750 215655 72764 72764 300000 333654 333654 400385 151939 151939 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 are not a
representation of past or future investment results. Actual investment results
and policy charges may be different from those shown and will depend on a number
of factors, including the investment allocations and investment experience. No
representation is made that these hypothetical gross investment returns can be
achieved 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 60
<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.
Name and Principal
Business and Address Position and Offices with Security Life of Denver
- --------------------
Stephen M. Christopher Chairman, President and Chief Executive Officer
Jess A. Skriletz Director, Chief Executive Officer and General
Manager, ING Reinsurance and ING Institutional
Markets
Michael W. Cunningham* Director, Executive Vice President
Mark A. Tullis* Director
P. Randall Lowery* Director
Thomas F. Conroy President, ING Reinsurance International
Gregory G. McGreevey President, ING Institutional Markets
Jerome J. Cwiok* Executive Vice President and Chief Operating Officer
James L. Livingston, Jr. Executive Vice President, CFO and Chief Actuary
Jeffrey R. Messner Executive Vice President and Chief Marketing Officer
John R. Barmeyer* Senior Vice President, ING US Legal Services
Peter Bell Senior Vice President, Risk Selection and Medical
Director, ING Reinsurance
Wayne D. Bidelman Senior Vice President, CCRC, ING Reinsurance
R. Thomas Daniel* Senior Vice President, Marketing
Arnold A. Dicke Senior Vice President and Chief Actuary, ING
Reinsurance
Charles E. LeDoyen** Senior Vice President, Structured Settlements
Terry L. Morrison Senior Vice President, New Business Operations
Derek J. Reynolds* Senior Vice President and Chief Information Officer
Jeffrey W. Seel* Senior Vice President, Chief Investment Officer
Mark A. Smith Senior Vice President, Insurance Services
Lawrence D. Taylor Senior Vice President, Product Management
Gretta Ytterbo Senior Vice President, ING US Legal Services
Gary W. Waggoner Vice President, General Counsel and Corporate
Secretary
- --------------------------------------------------------------------------------
Strategic Advantage II 61
<PAGE>
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. Sutherland Asbill &
Brennan LLP has provided advice on certain matters relating to the federal
securities laws.
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 separate 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, 1999 and 1998, and for each of the
three years in the period ended December 31, 1999, and the financial statements
of the Security Life Separate Account L1 at December 31, 1999, and for each of
the three years in the period ended December 31, 1999, 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 on the authority of
such firm as experts in accounting and auditing.
Actuarial matters in this prospectus have been examined by James L. Livingston,
Jr., F.S.A., M.A.A.A., who is Executive Vice President, CFO and Chief Actuary of
Security Life. 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 separate 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. There is a charge for this
material.
- --------------------------------------------------------------------------------
Strategic Advantage II 62
<PAGE>
INDEX OF SPECIAL TERMS
The following special terms are used in this prospectus. We explain each term on
the page(s) listed in the body of this prospectus and in the summary, if
applicable:
Account value..............................................8
Accumulation unit.........................................30
Accumulation unit value....................................8
Adjustable term insurance rider...........................22
Base death benefit........................................23
Beneficiary(ies)..........................................23
Cash surrender value......................................30
Continuation of coverage..................................29
Death proceeds............................................23
Divisions.................................................18
Free look period..........................................38
General account...........................................18
Guarantee period..........................................26
Guarantee period annual premium...........................26
Guaranteed interest division..............................18
Guaranteed minimum death benefit..........................25
Initial premium...........................................21
Insured person's 100th birthday............................4
Investment date...........................................21
Investment options........................................13
Loan division.............................................34
Minimum annual premium....................................20
Net account value.........................................30
Net amount at risk........................................45
Net cash surrender value..................................30
Net premium............................................4, 21
Partial withdrawal........................................21
Policy.....................................................4
Policy date...............................................19
Policy loan...............................................34
Portfolios................................................13
Scheduled premium.........................................20
Segment...................................................25
Special continuation period...............................21
Stated death benefit......................................19
Target death benefit......................................27
Target premium............................................20
Total death benefit.......................................27
Transaction date..........................................31
Valuation date............................................30
Valuation period..........................................31
Variable division.........................................18
Variable investment option................................12
- --------------------------------------------------------------------------------
Strategic Advantage II 63
<PAGE>
FINANCIAL STATEMENTS
The consolidated financial statements of Security Life of Denver Insurance
Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1999
and 1998, and for each of the three years in the period ended December 31, 1999,
are prepared in accordance with accounting principles generally accepted in the
United States and start on page 65.
The financial statements included for the Security Life Separate Account L1 at
December 31, 1999 and for each of the three years in the period ended December
31, 1999, are prepared in accordance with accounting principles generally
accepted in the United States 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 64
<PAGE>
Consolidated Financial Statements
Security Life of Denver
Insurance Company
and Subsidiaries
Years ended December 31, 1999, 1998 and 1997
with Report of Independent Auditors
- --------------------------------------------------------------------------------
Strategic Advantage II 65
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
CONTENTS
Report of Independent Auditors ...............................................67
Audited Consolidated Financial Statements
Consolidated Balance Sheets ..................................................68
Consolidated Statements of Income ............................................70
Consolidated Statements of Comprehensive Income...............................71
Consolidated Statements of Stockholder's Equity ..............................72
Consolidated Statements of Cash Flows ........................................73
Notes to Consolidated Financial Statements ...................................74
- --------------------------------------------------------------------------------
Strategic Advantage II 66
<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, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
April 14, 2000
- --------------------------------------------------------------------------------
Strategic Advantage II 67
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------ ---------------
<S> <C> <C>
ASSETS
Investments (Notes 2 and 3):
Fixed maturities, at fair value (amortized cost:
1999--$3,649,485; 1998--$3,383,582) $ 3,486,939 $ 3,503,530
Equity securities, at fair value (cost: 1999--$5,161;
1998--$6,761) 7,944 8,400
Mortgage loans on real estate 1,006,443 784,108
Investment real estate, at cost, less accumulated
depreciation (1999--$561; 1998--$706) 1,028 1,740
Policy loans 961,586 925,623
Other long-term investments 37,284 17,671
Short-term investments 186,917 747
------------ ---------------
Total investments 5,688,141 5,241,819
Cash 48,630 31,644
Accrued investment income 78,866 52,440
Reinsurance recoverable:
Paid benefits 19,738 11,364
Unpaid benefits 28,060 24,312
Prepaid reinsurance premiums (Note 8) 3,666,882 3,329,901
Deferred policy acquisition costs (DPAC) 982,713 778,126
Property and equipment, at cost, less accumulated
depreciation (1999--$28,522; 1998--$25,981) 34,704 36,141
Federal income tax recoverable (Note 9) 27,663 -
Indebtedness from related parties 33,220 4,339
Other assets 134,913 113,019
Separate account assets (Note 6) 644,975 423,474
------------ ---------------
Total assets $11,388,505 $10,046,579
============ ===============
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 68
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------- --------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Life and annuity reserves $ 5,313,006 $ 4,857,141
Guaranteed investment contracts 3,885,219 3,210,012
Policyholders' funds 79,648 81,064
Advance premiums 192 272
Accrued dividends and dividends on deposit 21,603 21,268
Policy and contract claims 155,679 130,100
-------------------- --------------------
Total future policy benefits 9,455,347 8,299,857
Accounts payable and accrued expenses 126,857 108,165
Indebtedness to related parties 34,231 13,755
Long-term debt to related parties (Note 10) 100,000 100,000
Accrued interest on long-term debt to related
parties (Note 10) 11,098 5,387
Other liabilities 98,225 109,593
Federal income taxes payable (Note 9) - 106
Deferred federal income taxes (Note 9) 18,679 60,062
Separate account liabilities (Note 6) 644,975 423,474
-------------------- --------------------
Total liabilities 10,489,412 9,120,399
Commitments and contingencies
(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 345,722 315,722
Retained earnings 614,785 563,553
Accumulated other comprehensive income (loss) (64,294) 44,025
-------------------- --------------------
Total stockholder's equity 899,093 926,180
-------------------- --------------------
Total liabilities and stockholder's equity $11,388,505 $10,046,579
==================== ====================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 69
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Income
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Traditional life insurance premiums $ 104,133 $ 120,675 $ 122,429
Universal life and investment product charges 247,066 229,226 217,108
Reinsurance premiums assumed 526,563 431,267 446,434
---------------- ---------------- ----------------
877,762 781,168 785,971
Reinsurance premiums ceded (147,068) (143,211) (124,815)
---------------- ---------------- ----------------
730,694 637,957 661,156
Net investment income 394,167 361,996 340,898
Net realized gains (losses) on investments (39,495) 10,818 28,645
Other revenues 18,304 11,771 6,743
---------------- ---------------- ----------------
1,103,670 1,022,542 1,037,442
Benefits and expenses:
Benefits:
Traditional life insurance:
Death benefits 357,472 239,921 299,305
Other benefits 72,286 77,209 79,849
Universal life and investment contracts:
Interest credited to account balances 258,167 236,136 217,614
Death benefits incurred in excess of account
balances 95,444 63,103 73,260
Increase in future policy benefits 95,511 102,875 72,685
Reinsurance recoveries (127,238) (84,506) (98,376)
Product conversions 3,701 10,578 7,014
---------------- ---------------- ----------------
755,343 645,316 651,351
Expenses:
Commissions 81,539 49,569 46,516
Insurance operating expenses 91,172 125,194 89,075
Amortization of deferred policy acquisition costs 98,051 105,639 116,495
---------------- ---------------- ----------------
1,026,105 925,718 903,437
---------------- ---------------- ----------------
Income before federal income taxes 77,565 96,824 134,005
Federal income taxes (Note 9) 26,333 34,066 47,019
---------------- ---------------- ----------------
Net income $ 51,232 $ 62,758 $ 86,986
================ ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 70
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net income $ 51,232 $ 62,758 $ 86,986
---------------- ---------------- ----------------
Other comprehensive income:
Unrealized gains (losses) on securities:
Net change in unrealized holding gains (losses), net of tax (150,423) (11,251) 28,367
Reclassification adjustment for realized gains
included in net income, net of tax (32,454) (5,010) (4,601)
Effect on DPAC of unrealized gains and
losses on fixed maturities, net of tax 82,098 7,236 (37,522)
Reclassification effect on DPAC of realized gains
and losses included in net income, net of tax (7,073) 3,075 5,976
Net change in pension liability, net of tax (467) (963) -
---------------- ---------------- ----------------
Total other comprehensive income (loss) (108,319) (6,913) (7,780)
---------------- ---------------- ----------------
Comprehensive income (loss) $ (57,087) $ 55,845 $ 79,206
================ ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 71
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
================== ================= ==================
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year $ 2,880 $ 2,880 $ 2,880
================== ================= ==================
Additional paid-in capital:
Balance at beginning of year $315,722 $315,722 $302,722
Capital contributions 30,000 - 13,000
------------------ ----------------- ------------------
Balance at end of year $345,722 $315,722 $315,722
================== ================= ==================
Accumulated other comprehensive income (loss):
Net unrealized gains on investments:
Balance at beginning of year $ 44,988 $ 50,938 $ 58,718
Unrealized gains (losses) on securities:
Change in unrealized gains (losses),
net of tax (182,877) (16,261) 23,766
Effect on DPAC of unrealized gains and
losses on fixed maturities, net of tax 75,025 10,311 (31,546)
------------------ ----------------- ------------------
Balance at end of year (62,864) 44,988 50,938
Accumulated net pension liability:
Balance at beginning of year (963) - -
Net change in pension liability, net of tax (467) (963) -
------------------ ----------------- ------------------
Balance at end of year (1,430) (963) -
------------------ ----------------- ------------------
Total accumulated other comprehensive
income (loss) $(64,294) $ 44,025 $ 50,938
================== ================= ==================
Retained earnings:
Balance at beginning of year $563,553 $500,795 $413,809
Net income 51,232 62,758 86,986
------------------ ----------------- ------------------
Balance at end of year $614,785 $563,553 $500,795
================== ================= ==================
Total stockholder's equity $899,093 $926,180 $870,335
================== ================= ==================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 72
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------- ------------------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 51,232 $ 62,758 $ 86,986
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in future policy benefits 624,769 874,765 995,632
Net (increase) decrease in federal income taxes (69,152) 12,061 (12,317)
Increase in accounts payable and accrued
expenses 6,088 55,361 21,033
Increase in accrued interest on long-term debt 5,711 259 1,428
Increase in accrued investment income (26,426) (2,714) (4,300)
(Increase) decrease in reinsurance recoverable (12,122) (9,518) 3,733
Increase in prepaid reinsurance premiums (336,981) (585,038) (793,851)
Net realized investment (gains) losses 39,495 (10,818) (28,645)
Depreciation and amortization expense 2,567 3,174 3,630
Policy acquisition costs deferred (187,214) (184,993) (174,374)
Amortization of deferred policy acquisition
costs 98,049 105,639 116,495
Increase in accrual for postretirement benefits 769 675 557
Other, net 51,980 (7,053) 43,538
----------------- ------------------- -------------------
Net cash provided by operating activities 248,765 314,558 259,545
INVESTING ACTIVITIES
Securities available-for-sale:
Sales:
Fixed maturities 2,300,734 5,015,989 2,279,598
Equity securities 2,053 2,251 648
Maturities--fixed maturities 193,664 274,463 410,632
Purchases:
Fixed maturities (2,816,711) (5,670,994) (2,919,145)
Equity securities - (2,089) (2,561)
Sale, maturity or repayment of investments:
Mortgage loans on real estate 47,851 51,235 38,756
Investment real estate 1,109 - -
Other long-term investments 70,790 10,678 2,002
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 73
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------- ------------------- -------------------
<S> <C> <C> <C>
Investing activities (continued)
Purchase or issuance of investments:
Mortgage loans on real estate $(271,686) $(259,945) $(163,528)
Investment real estate - (13) (35)
Policy loans, net (35,963) (50,218) (80,094)
Other long-term investments (88,661) (14,042) (5,248)
Short-term investments, net (186,174) 55,115 (48,447)
Additions to property and equipment (1,247) (1,418) (2,687)
Disposals of property and equipment 147 68 145
----------------- ------------------- -------------------
Net cash used by investing activities (784,094) (588,920) (489,964)
Financing activities
(Decrease) increase in indebtedness to related parties (8,406) 29,156 5,217
Cash contributions from parent 30,000 - 13,000
Receipts from interest-sensitive products
credited to policyholder account balances 829,493 505,728 555,223
Return of policyholder account balances on
interest-sensitive policies (298,772) (251,177) (334,543)
----------------- ------------------- -------------------
Net cash provided by financing activities 552,315 283,707 238,897
----------------- ------------------- -------------------
Net increase in cash 16,986 9,345 8,478
Cash at beginning of year 31,644 22,299 13,821
----------------- ------------------- -------------------
Cash at end of year $ 48,630 $ 31,644 $ 22,299
================= =================== ===================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 74
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
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;
Tailored Investment Notes Trust 1999-1 (Trust); and ING America 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 three markets, the advanced market, reinsurance to other
insurers, and the investment products market. 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 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.
In the investment products market, the Company offers guaranteed investment
contracts, funding agreements and Trust notes to institutional buyers.
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 accounting principles generally accepted in the United States
(U.S. 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 U.S. 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 75
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
During 1998, the Company adopted FASB Statement No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, which standardizes the
disclosure requirements for pension and other postretirement benefits. This
Statement is effective for years beginning after December 15, 1997, with the
restatement of disclosures for prior periods provided for comparative purposes,
unless prior period information is not readily available.
During 1998, the Company adopted FASB Statement No. 130, Reporting Comprehensive
Income, which requires an entity to divide comprehensive income into net income
and other comprehensive income in the period recognized. This Statement is
effective for fiscal years beginning after December 15, 1997, with the
restatement of prior period disclosures for comparative purposes. As a result of
implementing this Statement, the Company has classified items of other
comprehensive income by their nature in the statements of comprehensive income
and the accumulated balance of other comprehensive income in the equity section
of the balance sheet. This Statement affects the presentation of the financial
statements, with no effect on the valuation of total stockholder's equity.
During 1999, the Company adopted Statement of Position 97-3, Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments. This
Statement is effective for fiscal years beginning after December 31, 1998 and
requires a liability to be recognized for the 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
premiums written in each state. The Statement also requires that when it is
probable a paid or accrued assessment will result in an amount that is
recoverable from premium tax offsets or policy surcharges, an asset be
recognized at the time the liability is recorded. Additional disclosures are
also required, including the amount of the liability, the amount of the related
asset for premium tax offsets or policy surcharges, the periods over which the
assessments are expected to be paid, and the period over which the recorded
premium tax offsets or policy surcharges are expected to be realized. Prior
period financial statements presented for comparative purposes are not restated.
The adoption of this Statement had no effect on the valuation of total
stockholder's equity.
- --------------------------------------------------------------------------------
Strategic Advantage II 76
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENDING ACCOUNTING STANDARDS
During 1998, the FASB issued Statement No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities, which establishes a new model for
accounting and reporting for derivatives and hedging activities. Statement 133
requires all derivatives to be recognized on the balance sheet and measured at
fair value. Based on the type of hedging relationship (fair value, cash flow, or
foreign currency), Statement 133 requires the recognition of offsetting changes
in value or cash flows of both the derivative and the hedged item in earnings in
the same period. Changes in the fair value of derivatives that are not
designated as hedges or that do not meet the hedge accounting criteria in
Statement 133 are included in earnings in the period of change. During 1999, the
FASB issued Statement 137 which delays the implementation of Statement 133 to
years beginning after June 15, 2000. Upon the initial application of Statement
133, all derivatives are required to be recognized in the balance sheet as
either assets or liabilities and measured at fair value. The Company plans to
adopt this Statement during 2001, and the effect of implementation on the
Company's financial statements has not yet been determined.
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.
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, and deferred policy
acquisition cost adjustments, reported net of tax as a component of
other comprehensive income in stockholder's equity.
- --------------------------------------------------------------------------------
Strategic Advantage II 77
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The amortized cost of debt securities 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 hedging fixed maturity assets are reported on the balance
sheet at market value with fixed maturity securities. Derivatives
hedging liabilities are reported on the balance sheet at amortized cost
with other investments.
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, 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 78
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
accumulated other comprehensive income in 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
Company and industry experience. These assumptions include provisions for
adverse deviation and are modified as necessary to reflect anticipated trends.
Reserve interest assumptions are those deemed appropriate at the time of policy
issue, and range from 3% to 7.5%. 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 revenue. Benefit
reserves for all other reinsurance assumed are computed to recognize profits in
proportion to the coverage provided.
Benefit reserves for universal life-type policies (including fixed premium
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 3.51% to 7.61% during 1999, 3.80% to 7.81% during
1998, and 4.60% to 7.81% during 1997.
Included in life and annuity reserves is an unearned revenue reserve that
reflects the unamortized balance of excess heaped expense loads over ultimate
renewal expense loads 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 79
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
POLICY AND CONTRACT 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 $5,497,000 and $5,816,000 at
December 31, 1999 and 1998, respectively. Participating business approximates
.2% of the Company's ordinary life insurance in force and 1.5% of premium
income. Earnings for participating insurance are based on the actual earnings of
the participation block of policies. Expenses and taxes are allocated based on
the amount of participating insurance in force. Investment income is allocated
based on the yield of the participating investment portfolio. The amount of
dividends to be paid is determined annually by the Board of Directors. Amounts
allocable to participating policyholders are based on published dividend
projections or expected dividend scales. Dividends of $3,424,000, $3,233,000,
and $3,377,000 were incurred in 1999, 1998, and 1997, 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 80
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH FLOW INFORMATION
Cash includes cash on hand and demand deposits. Included as a component of
operating activities is interest paid of $2,672,000, $10,121,000, and
$10,110,000 for 1999, 1998, and 1997, 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 guaranty fund assessment liability at December 31, 1999 and 1998
was $17,644,000 and $13,338,000, respectively. The assessment is expected to be
paid over the next five or more years. The related premium tax credit offsets
are $15,339,000 and $11,891,000 at December 31, 1999 and 1998, respectively. The
premium tax credit offsets are expected to be realized over the next five years.
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1999 and 1998 presentation.
- --------------------------------------------------------------------------------
Strategic Advantage II 81
<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, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------------------------------
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 $ 98,354 $ 42 $ 7,795 $ 90,601
States, municipalities and political
subdivisions 21,412 - 4,408 17,004
Public utilities securities 276,742 272 19,532 257,482
Debt securities issued by foreign
governments 452 - - 452
Corporate securities 1,431,446 4,131 77,293 1,358,284
Mortgage-backed securities 1,075,807 24,064 56,493 1,043,378
Other asset-backed securities 745,231 7,626 33,635 719,222
Redeemable preferred stocks - - - -
Derivatives hedging fixed maturities
(Note 3) 41 475 - 516
----------------- ------------------ ----------------- -----------------
Total fixed maturities 3,649,485 36,610 199,156 3,486,939
Preferred stocks (nonredeemable) 2,651 329 24 2,956
Common stocks 2,510 2,573 95 4,988
----------------- ------------------ ----------------- -----------------
Total equity securities 5,161 2,902 119 7,944
----------------- ------------------ ----------------- -----------------
Total $3,654,646 $39,512 $199,275 $3,494,883
================= ================== ================= =================
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 82
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------
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 $ 166,611 $ 3,829 $ 589 $ 169,851
States, municipalities and political
subdivisions 23,368 959 1,803 22,524
Public utilities securities 172,968 4,885 904 176,949
Debt securities issued by foreign
governments 952 - - 952
Corporate securities 1,251,462 46,292 23,512 1,274,242
Mortgage-backed securities 1,132,058 75,159 6,922 1,200,295
Other asset-backed securities 635,539 19,968 3,578 651,929
Redeemable preferred stocks 312 42 - 354
Derivatives hedging fixed maturities
(Note 3) 312 6,434 312 6,434
----------------- ------------------ ----------------- -----------------
Total fixed maturities 3,383,582 157,568 37,620 3,503,530
Preferred stocks (nonredeemable) 4,251 6 52 4,205
Common stocks 2,510 1,780 95 4,195
----------------- ------------------ ----------------- -----------------
Total equity securities 6,761 1,786 147 8,400
----------------- ------------------ ----------------- -----------------
Total $3,390,343 $159,354 $37,767 $3,511,930
================= ================== ================= =================
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 83
<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, 1999, 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.
AMORTIZED
COST FAIR VALUE
--------------- --------------------
Available for sale:
Due in one year or less $ 9,637 $ 9,174
Due after one year through five years 247,473 245,401
Due after five years through ten years 749,169 716,715
Due after ten years 822,127 752,532
--------------- --------------------
1,828,406 1,723,822
Mortgage-backed securities 1,075,807 1,043,379
Other asset-backed securities 745,231 719,222
Derivatives 41 516
--------------- --------------------
Total available-for-sale $3,649,485 $3,486,939
=============== ====================
Changes in unrealized gains (losses) on investments in available-for-sale
securities for the years ended December 31, 1999, 1998 and 1997 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------------------
Fixed Equity Total
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Gross unrealized gains $ 36,610 $2,902 $ 39,512
Gross unrealized (losses) (199,156) (119) (199,275)
-------------------- -------------------- --------------------
Net unrealized gains (losses) (162,546) 2,783 (159,763)
Deferred income tax 56,891 (974) 55,917
-------------------- -------------------- --------------------
Net unrealized gains (losses) after taxes (105,655) 1,809 (103,846)
Less:
Balance at beginning of year 77,966 1,065 79,031
-------------------- -------------------- --------------------
Change in net unrealized gains
(losses) $(183,621) $ 744 $(182,877)
==================== ==================== ====================
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 84
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
----------------------------------------
Fixed Equity Total
---------- -------------- --------------
Gross unrealized gains $157,568 $1,786 $159,354
Gross unrealized (losses) (37,620) (147) (37,767)
---------- -------------- --------------
Net unrealized gains 119,948 1,639 121,587
Deferred income tax (41,982) (574) (42,556)
---------- -------------- --------------
Net unrealized gains after taxes 77,966 1,065 79,031
Less:
Balance at beginning of year 94,470 822 95,292
---------- -------------- --------------
Change in net unrealized gains
(losses) $ (16,504) $ 243 $ (16,261)
========== ============== ==============
DECEMBER 31, 1997
----------------------------------------
Fixed Equity Total
---------- -------------- --------------
Gross unrealized gains $161,625 $1,513 $163,138
Gross unrealized (losses) (16,282) (248) (16,530)
---------- -------------- --------------
Net unrealized gains 145,343 1,265 146,608
Deferred income tax (50,873) (443) (51,316)
---------- -------------- --------------
Net unrealized gains 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
========== ============== ==============
As part of its overall investment management strategy, the Company has entered
into agreements to purchase $140,600,000 in mortgage loans as of December 31,
1999. These agreements were settled during 2000. The Company had no agreements
to sell securities at December 31, 1999.
- --------------------------------------------------------------------------------
Strategic Advantage II 85
<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):
1999 1998 1997
------------ -------------- ---------------
Fixed maturities $288,694 $278,227 $259,936
Mortgage loans on real estate 66,687 47,567 40,908
Policy loans 60,284 58,016 56,087
Other investments 2,068 2,911 3,159
------------ -------------- ---------------
417,733 386,721 360,090
Investment expenses (23,566) (24,725) (19,192)
------------ -------------- ---------------
Net investment income $394,167 $361,996 $340,898
============ ============== ===============
Net realized gains (losses) on investments for the years ended December 31 are
summarized as follows (in thousands):
1999 1998 1997
------------ -------------- ---------------
Fixed maturities $(41,679) $ 9,691 $27,717
Equity securities 142 168 (57)
Real estate and other 2,042 959 985
------------ -------------- ---------------
Net realized gains (losses) on
investments $(39,495) $10,818 $28,645
============ ============== ===============
During 1999, 1998 and 1997, fixed maturities and marketable equity securities
available-for-sale were sold with fair values at the date of sale of
$2,300,481,000, $5,018,240,000 and $2,281,886,000, respectively. Gross gains of
$20,117,000, $44,314,000 and $41,017,000 and gross losses of $61,654,000,
$34,455,000 and $13,357,000 were realized on those sales in 1999, 1998 and 1997,
respectively.
At December 31, 1999 and 1998, bonds with an amortized cost of $28,755,000 and
$29,081,000, respectively, were on deposit with various state insurance
departments to meet regulatory requirements.
- --------------------------------------------------------------------------------
Strategic Advantage II 86
<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.
- --------------------------------------------------------------------------------
Strategic Advantage II 87
<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,
1999 and 1998 (in thousands):
DECEMBER 31, 1999
----------------------------------------------
Notional Amortized Fair Balance
amount cost value sheet
---------- ---------- ----------- -----------
Interest rate contracts:
Swaps $1,340,582 $ (125) $19,014 $ 311
Swaps--affiliates 1,034,535 125 (18,869) 125
---------- ---------- ----------- -----------
Total swaps 2,375,117 - 145 436
Caps owned 50,525 80 17 40
Caps owned--affiliates 20,525 (39) (17) (40)
---------- ---------- ----------- -----------
Total caps owned 71,050 41 - -
Floors owned 90,500 252 172 332
Floors owned--affiliates - - - -
---------- ---------- ----------- -----------
Total floors owned 90,500 252 172 332
Options owned 302,000 4,000 7,118 4,000
Options owned--affiliates 277,000 (3,210) (6,198) (3,210)
---------- ---------- ----------- -----------
Total options owned 579,000 790 920 790
---------- ---------- ----------- -----------
Forwards owned 152,300 - 37 -
Forwards owned--affiliates 144,300 - (32) -
---------- ---------- ----------- -----------
Total forwards owned 296,600 - 5 -
---------- ---------- ----------- -----------
Total derivatives $3,412,267 $1,083 $ 1,242 $1,558
========== ========== =========== ===========
- --------------------------------------------------------------------------------
Strategic Advantage II 88
<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)
DECEMBER 31, 1998
---------------------------------------------
Notional Amortized Fair Balance
amount cost value sheet
------------ --------- ---------- ----------
Interest rate contracts:
Swaps $ 767,873 $ (155) $(2,952) $(2,952)
Swaps--affiliates 734,176 155 5,440 5,440
------------ --------- ---------- ----------
Total swaps 1,502,049 - 2,488 2,488
Caps owned 560,000 312 11 11
Caps owned--affiliates - - - -
------------ --------- ---------- ----------
Total caps owned 560,000 312 11 11
Floors owned 422,485 (72) 3,768 3,768
Floors owned--affiliates 8,485 72 167 167
------------ --------- ---------- ----------
Total floors owned 430,970 - 3,935 3,935
Options owned 418,300 5,268 2,664 2,664
Options owned--affiliates 418,300 (5,268) (2,664) (2,664)
------------ --------- ---------- ----------
Total options owned 836,600 - - -
------------ --------- ---------- ----------
Forwards owned - - - -
Forwards owned--affiliates - - - -
------------ --------- ---------- ----------
Total forwards owned - - - -
------------ --------- ---------- ----------
Total derivatives $3,329,619 $ 312 $ 6,434 $ 6,434
============ ========= ========== ==========
4. CONCENTRATIONS OF CREDIT RISK
At December 31, 1999, the Company held less-than-investment-grade bonds
classified as available-for-sale with a carrying value and market value of
$319,122,000. These holdings amounted to 9.1% of the Company's investments in
fixed maturity securities and 2.8% 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, 1999, the Company's mortgages involved a concentration of
properties located in Florida (15.2%), Texas (9.9%), and Georgia (6.2%). The
remaining mortgages relate to properties located in 36 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 $24,076,000.
- --------------------------------------------------------------------------------
Strategic Advantage II 89
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. EMPLOYEE BENEFIT PLANS
PENSION PLANS AND POSTRETIREMENT BENEFITS
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). In
addition to providing pension plans, the Company provides certain health care
and life insurance benefits for retired employees.
The funded status and the amounts recognized in the balance sheets for the
defined benefit plans and other postretirement benefit plans are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------------ ------------------------------------------
Qualified Post- Qualified Post-
plan SERP retirement plan SERP retirement
------------- ------------- -------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Projected benefit obligation $(36,352) $(11,803) $ (6,256) $(38,685) $(8,320) $ (8,949)
Less plan assets at fair value 50,495 - - 47,230 - -
------------- ------------- -------------- ------------- ----------- --------------
Plan assets in excess (deficient)
of projected benefit obligation $ 14,143 $(11,803) $ (6,256) $ 8,545 $(8,320) $ (8,949)
============= ============= ============== ============= =========== ==============
Net asset (liability) $ 1,200 $ (6,501) $(12,813) $ 1,240 $(4,918) $(12,044)
============= ============= ============== ============= =========== ==============
</TABLE>
As of December 31, 1999 and 1998, the Company recognized an additional minimum
net liability on the SERP of $2,200,000 and $1,482,000, respectively, as this
plan is unfunded and the actuarial present value of accumulated benefit
obligation exceeds the net pension liability. Prior to 1998, the change in the
additional minimum net liability was reported in net income. Beginning in 1998,
the change in the additional minimum net liability is recorded net of tax as a
component of other comprehensive income directly in stockholder's equity.
- --------------------------------------------------------------------------------
Strategic Advantage II 90
<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, employer contributions, plan participant
contributions, and benefits paid for the defined benefit plans are as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- --------------------------------- ---------------------------------
Qualified Post- Qualified Post- Qualified Post-
plan SERP retirement plan SERP retirement plan SERP retirement
---------- -------- ------------ ------------ -------- ----------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net periodic pension
expense $ 40 $1,971 $1,236 $ 82 $1,109 $893 $607 $1,502 $755
Employer contributions - 387 467 - 325 218 - 317 198
Plan participants'
contributions - - 94 - - 77 - - 71
Benefits paid 1,238 387 561 890 325 296 811 317 268
</TABLE>
Assumptions used in accounting for the defined benefit plans as of December 31,
1999, 1998, and 1997 were as follows:
1999 1998 1997
-------- ----------- ------------
Weighted-average discount rate 8.00% 6.75% 7.25%
Rate of increase in compensation level 5.00% 4.00% 4.25%
Expected long-term rate of return on assets 9.25% 9.50% 9.50%
Plan assets of the defined benefit plans at December 31, 1999 are invested
primarily in U.S. government securities, corporate bonds, mutual funds, mortgage
loans, money market funds and common stock. Certain of the Qualified Plan's
investments are held in the ING-NA Master Trust, which was established in 1998
for the investment of assets of the Plan and several other ING-NA-sponsored
retirement plans.
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 9.5% graded to 5.5%
over eight 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, 1999 by $1,217,000 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1999 by
$235,000. Decreasing 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, 1999 by $(981,000)
- --------------------------------------------------------------------------------
Strategic Advantage II 91
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. EMPLOYEE BENEFIT PLANS (CONTINUED)
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1999 by $(185,000).
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8.00% at December 31, 1999, 6.75% at
December 31, 1998 and 7.50% at December 31, 1997.
Effective January 1, 2000, the Postretirement Benefit Plan was amended, causing
the Company's current year projected benefit obligation to decrease.
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. Participants may make contributions to the plan
through salary reductions up to a maximum of $10,000 for both 1999 and 1998, and
$9,500 for 1997. 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 $1,423,000 for 1999,
$1,343,000 for 1998, and $1,211,000 for 1997.
Plan assets of the Savings Plan at December 31, 1999 are invested in a group
deposit administration contract (the Contract) with the Company, various stock
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
$28.7 million and $27.8 million at December 31, 1999 and 1998, respectively.
Effective January 1, 2000, the Plan was merged into the ING Savings Plan, a
defined contribution plan sponsored by the Company's parent.
6. SEPARATE ACCOUNTS
Separate account assets and liabilities represent funds segregated by the
Company for the benefit of certain policy and contract holders who bear the
investment risk. Revenues and expenses on the separate account assets and
related liabilities equal the benefits paid to the separate account policy and
contract holders, and are excluded from the amounts reported in the consolidated
statements of income except for benefits paid in excess of policyholder account
values and fees charged for surrender, administration services and mortality
risk.
- --------------------------------------------------------------------------------
Strategic Advantage II 92
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. LEASES
In 1997, 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 $0 for the years ended December 31, 1999 and 1998, and $4,993,000
for the year ended December 31, 1997.
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, 1999, the Company's retention limit for acceptance of
risk on life insurance policies had been set at various levels up to $3,000,000.
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 retroceded. Consequently, allowances are
established for amounts deemed uncollectible. To minimize its exposure to
significant losses from retrocessionaire insolvencies, the Company evaluates the
financial condition of the retrocessionaire and monitors concentrations of
credit risk. The use of reinsurance pools with more than 30 retrocessionaires
from 10 different countries also minimizes the Company's exposure to significant
losses from retrocessionaire insolvencies.
The Company assumes and cedes, on a coinsurance basis, guaranteed investment
contracts (GICs) to and from affiliates under common ownership. As of December
31, 1999, $3.3 billion of an affiliate's invested assets were held in trust
pursuant to these agreements.
- --------------------------------------------------------------------------------
Strategic Advantage II 93
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. REINSURANCE (CONTINUED)
These GIC transactions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------ -------------------------------
Policy Policy
Deposits liabilities Deposits liabilities
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Direct (nonaffiliated) $1,805,434 $3,787,729 $2,773,952 $3,112,460
Assumed from affiliate:
Life Insurance Company of Georgia - 97,490 - 97,552
---------------- --------------- --------------- ----------------
1,805,434 3,885,219 2,773,952 3,210,012
Ceded to affiliates:
Columbine Life Insurance Company (129,768) - (2,547,743) (2,696,409)
Life Insurance Company of Georgia (683,100) (663,325) (225,083) (512,477)
First Columbine Life Insurance Company (650,300) (2,888,079) (1,126) (1,126)
---------------- --------------- --------------- ----------------
Net $ 342,266 $ 333,815 $ - $ -
================ =============== =============== ================
</TABLE>
Ceded GIC policy liabilities totaling $3,551 and $3,210 million as of December
31, 1999 and 1998, respectively, are classified as part of prepaid reinsurance
premiums.
During 1999 and 1998, the Company had ceded blocks of insurance under
reinsurance treaties to provide funds for financial and other purposes. These
reinsurance transactions, generally known as "financial reinsurance," represent
financial arrangements and, in accordance with U.S. GAAP, are not reflected in
the accompanying financial statements except for the risk fees paid to or
received from reinsurers. Financial reinsurance has the effect of increasing
current statutory surplus while reducing future statutory surplus as amounts are
recaptured from reinsurers. During 1998, the Company entered into a new
financial reinsurance contract with an affiliated company.
9. INCOME TAXES
The Company files a consolidated federal income tax return with its parent and
other U.S. affiliates and subsidiaries. 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 94
<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):
DECEMBER 31
1999 1998
------------- ---------------
Deferred tax liabilities:
Deferred policy acquisition costs $(344,540) $(272,970)
Unrealized gains/losses - (42,556)
------------- ---------------
Total deferred tax liabilities (344,540) (315,526)
Deferred tax assets:
Benefit reserves and surplus relief 90,895 102,177
Tax-basis deferred policy acquisition costs 90,508 83,836
Investment income 22,201 13,712
Unrealized gains 55,917 -
Nonqualified deferred compensation 14,181 14,667
Postretirement employee benefits 2,542 2,501
Separate accounts 26,961 18,775
Other, net 22,656 19,796
------------- ---------------
Total deferred tax assets 325,861 255,464
------------- ---------------
Net deferred tax liabilities $ (18,679) $ (60,062)
============= ===============
The components of federal income tax expense consist of the following (in
thousands):
DECEMBER 31
1999 1998 1997
-------------- --------------- ---------------
Current $ 9,399 $24,111 $37,542
Deferred 16,934 9,955 9,477
-------------- --------------- ---------------
Federal income tax expense $26,333 $34,066 $47,019
============== =============== ===============
The Company's effective income tax rate did not vary significantly from the
statutory federal income tax rate.
- --------------------------------------------------------------------------------
Strategic Advantage II 95
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
The Company had net income tax payments of $28,723,000 during 1999, $18,283,000
during 1998, and $55,468,000 during 1997 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 $100,000,000 represents the
cumulative cash draws on a $100,000,000 commitment from ING America Insurance
Holdings, Inc. through December 31, 1999. 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.
The principal and interest is scheduled to be repaid in five annual installments
beginning April 15, 2000 and continuing through April 15, 2004, with the option
of prepaying any outstanding principal and accrued interest. As of December 31,
1999, the Company accrued interest of $11,098,000. Upon receiving approval from
the Commissioner of Insurance of the State of Colorado, the Company made a
$5,128,000 payment for accrued interest during 1998. The Company recognized
interest expense of $5,711,000, $5,387,000, and $5,096,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
- --------------------------------------------------------------------------------
Strategic Advantage II 96
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. LONG-TERM DEBT (CONTINUED)
Future minimum payments, assuming a current effective interest rate of 6.65%,
are as follows (in thousands):
TOTAL
YEAR PAYMENTS
- ----------------------------------------- ------------------
2000 $ 26,838
2001 26,838
2002 26,838
2003 26,838
2004 26,838
------------------
Total 134,190
Less imputed interest (34,190)
------------------
Principal outstanding $100,000
==================
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, and from company to company within the state, and may change in
the future.
During 1998, the NAIC completed 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 will require adoption by the various states
before it becomes the prescribed 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 anticipated that the State of Colorado will adopt Codification.
- --------------------------------------------------------------------------------
Strategic Advantage II 97
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED)
Prescribed statutory reserve methodology does not fully encompass universal
life-type products. The NAIC, however, has promulgated a Model Regulation
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, 1999, the Company exceeded all minimum RBC
requirements.
Combined capital and surplus, determined in accordance with statutory accounting
practices (SAP), was $434,983,000 and $386,607,000 at December 31, 1999 and
1998, respectively. Combined net income, determined in accordance with SAP, was
$18,635,000, $11,712,000, and $22,261,000 for the years ended December 31, 1999,
1998, and 1997, 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, 1999. 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 98
<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.
- --------------------------------------------------------------------------------
Strategic Advantage II 99
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1999 and 1998 are summarized below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---------------------------------- --- ------------------------------------
Carrying Carrying
amount Fair value amount Fair value
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities (Note 2) $3,486,939 $3,486,939 $3,503,530 $3,503,530
Equity securities (Note 2) 7,944 7,944 8,400 8,400
Mortgage loans 1,006,443 975,436 784,108 832,629
Policy loans 961,586 961,586 925,623 925,623
Short-term investments 186,917 186,917 747 747
Cash 48,630 48,630 31,644 31,644
Indebtedness from
related parties 33,220 33,220 4,339 4,339
Separate account assets 644,975 644,975 423,474 423,474
LIABILITIES
Supplemental contracts
without life contingencies 3,778 3,778 3,966 3,966
Other policyholder funds left
on deposit 431,706 431,706 98,638 98,638
Individual and group
annuities, net of reinsurance 149,089 152,824 87,096 86,007
Indebtedness to related
parties 34,231 34,231 13,755 13,755
Long-term debt to related
parties 100,000 100,000 100,000 100,000
Accrued interest on
long-term debt to related
parties 11,098 11,098 5,387 5,387
Separate account liabilities 644,975 644,975 423,474 423,474
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 100
<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
4.2% and 22.9% 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 101
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 accepted additional deposits on
existing synthetic guaranteed investment contracts in the amounts of
$70,000,000 and $66,480,000 in 1999 and 1998, respectively, from trustees of
401(k) plans. Pursuant to the terms of these contracts, the trustees own and
retain the assets related to these contracts. Such contracts had a value of
$471,380,000 and $433,689,000 at December 31, 1999 and 1998, 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 90% 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 $198,726,000 which have a market value to the Company of $0 and two
lines of credit totaling $307,902,000 which have a market value to the
Company of $0 (see Note 14).
13. COMMITMENTS AND CONTINGENCIES
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.
- --------------------------------------------------------------------------------
Strategic Advantage II 102
<PAGE>
Security Life of Denver Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has an accrued liability of $38,000,000 at December 31, 1999 related
to certain potential litigation similar to that faced by other major life
insurers. This litigation relates to sales practices of interest-sensitive
policies. The Company is vigorously defending its position in these cases. 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.
14. OTHER FINANCING ARRANGEMENTS
The Company has a $167,902,000 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 $140,000,000, also to provide short-term liquidity, which expires
July 31, 2000. The amount of funds available under this line is reduced by
borrowings of certain affiliates also party to the agreement. The outstanding
borrowings under these agreements were $16,200,000 and $0 at December 31, 1999
and 1998, respectively. The weighted-average balance outstanding of short-term
debt was $13.1 million during 1999. The weighted-average interest rate paid on
this debt during 1999 was 5.20% (see Note 12).
The Company is the beneficiary of letters of credit totaling $198,726,000 that
were established in accordance with the terms of reinsurance agreements. Such
letters of credit are unconditional and irrevocable, and provide for automatic
renewal for the following year at December 31. The letters were unused during
both 1999 and 1998.
- --------------------------------------------------------------------------------
Strategic Advantage II 103
<PAGE>
Financial Statements
Security Life Separate Account L1
of Security Life of Denver
Insurance Company
Years ended December 31, 1999, 1998 and 1997
with Report of Independent Auditors
- --------------------------------------------------------------------------------
Strategic Advantage II 104
<PAGE>
Security Life Separate Account L1
Financial Statements
Years ended December 31, 1999, 1998 and 1997
CONTENTS
Report of Independent Auditors ..............................................105
Audited Financial Statements
Statement of Net Assets .....................................................106
Statement of Operations .....................................................113
Statement of Changes in Net Assets ..........................................133
Notes to Financial Statements ...............................................153
- --------------------------------------------------------------------------------
Strategic Advantage II 105
<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 of Security Life of Denver Insurance Company (comprising,
respectively, the Neuberger Berman Advisers Management Trust (comprising the
Limited Maturity Bond, Growth and Partners Divisions) ("NB"), 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, Equity Income, High Yield, Utilities and Small Company Growth
Divisions) ("INVESCO"), the Van Eck Worldwide Trust (comprising the Worldwide
Hard Assets, Worldwide Bond, Worldwide Emerging Markets and Worldwide Real
Estate Divisions) ("Van Eck") and AIM Advisors, Inc. (comprising the Capital
Appreciation and Government Securities Divisions) ("AIM")) as of December 31,
1999, 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 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 auditing standards generally accepted
in the United States. 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, 1999, by
correspondence with the transfer agents. 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, 1999, 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 accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
April 7, 2000
- --------------------------------------------------------------------------------
Strategic Advantage II 106
<PAGE>
Security Life Separate Account L1
Statement of Net Assets
December 31, 1999
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS NB ALGER FIDELITY INVESCO VAN ECK AIM
------------- ------------ ------------- --------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value (Note C) $520,874,988 $53,597,588 $109,451,239 $294,325,533 $44,538,862 $6,258,525 $12,703,241
------------- ------------ ------------- --------------- ------------- ------------ -------------
Total assets 520,874,988 53,597,588 109,451,239 294,325,533 44,538,862 6,258,525 12,703,241
------------- ------------ ------------- --------------- ------------- ------------ -------------
LIABILITIES
Due to (from) Security Life of (427,980) (99,394) (63,161) (120,210) (99,549) (45,652) (14)
Denver
------------- ------------ ------------- --------------- ------------- ------------ -------------
Total Liabilities (427,980) (99,394) (63,161) (120,210) (99,549) (45,652) (14)
------------- ------------ ------------- --------------- ------------- ------------ -------------
Net assets $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255
============= ============ ============= =============== ============= ============ =============
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255
------------- ------------ ------------- --------------- ------------- ------------ -------------
TOTAL POLICYHOLDER RESERVES $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255
============= ============ ============= =============== ============= ============ =============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 107
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
<TABLE>
<CAPTION>
NB
--------------------------------------------------------------------------
Total Limited
NB Maturity Bond Growth Partners
------------------ ------------------- --------------- -------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value (Note C) $53,597,588 $11,200,520 $13,066,321 $29,330,747
------------------ ------------------- --------------- -------------------
Total assets 53,597,588 11,200,520 13,066,321 29,330,747
------------------ ------------------- --------------- -------------------
LIABILITIES
Due to (from) Security Life of Denver (99,394) (308) (9,833) (89,253)
------------------ ------------------- --------------- -------------------
Total Liabilities (99,394) (308) (9,833) (89,253)
------------------ ------------------- --------------- -------------------
Net assets $53,696,982 $11,200,828 $13,076,154 $29,420,000
================== =================== =============== ===================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $53,696,982 $11,200,828 $13,076,154 $29,420,000
------------------ ------------------- --------------- -------------------
TOTAL POLICYHOLDER RESERVES $53,696,982 $11,200,828 $13,076,154 $29,420,000
================== =================== =============== ===================
Number of divisional units outstanding
(Note G) 889,159.604 434,338.368 1,212,133.448
=================== =============== ===================
Value per divisional unit $12.60 $30.11 $24.27
=================== =============== ===================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 108
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
<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 (Note C) $109,451,239 $27,748,150 $17,280,636 $41,361,603 $23,060,850
---------------- ------------------ --------------- ---------------- -----------------
Total assets 109,451,239 27,748,150 17,280,636 41,361,603 23,060,850
---------------- ------------------ --------------- ---------------- -----------------
LIABILITIES
Due to (from) Security Life of Denver (63,161) (31,605) (6,851) (21,895) (2,810)
---------------- ------------------ --------------- ---------------- -----------------
Total Liabilities (63,161) (31,605) (6,851) (21,895) (2,810)
---------------- ------------------ --------------- ---------------- -----------------
Net assets $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660
================ ================== =============== ================ =================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660
---------------- ------------------ --------------- ---------------- -----------------
TOTAL POLICYHOLDER RESERVES $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660
================ ================== =============== ================ =================
Number of divisional units outstanding
(Note G) 1,055,757.484 576,738.314 1,257,371.637 425,281.099
================== =============== ================ =================
Value per divisional unit $26.31 $29.97 $32.91 $54.23
================== =============== ================ =================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 109
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
<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 (Note C) $294,325,533 $13,585,360 $58,152,709 $34,884,083 $34,799,038 $152,904,343
---------------------------------------------------------------------------------------------
Total assets 294,325,533 13,585,360 58,152,709 34,884,083 34,799,038 152,904,343
---------------------------------------------------------------------------------------------
LIABILITIES
Due to (from) Security Life of Denver (120,210) (5,098) (5,121) (100,198) 1,630 (11,423)
---------------------------------------------------------------------------------------------
Total Liabilities (120,210) (5,098) (5,121) (100,198) 1,630 (11,423)
---------------------------------------------------------------------------------------------
Net assets $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766
=============================================================================================
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766
---------------------------------------------------------------------------------------------
TOTAL POLICYHOLDER RESERVES $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766
=============================================================================================
Number of divisional units outstanding
(Note G) 722,717.906 1,676,236.646 1,716,617.627 2,763,648.297 4,772,484.597
================================================================================
Value per divisional unit $18.80 $34.70 $20.38 $12.59 $32.04
================================================================================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 110
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
<TABLE>
<CAPTION>
INVESCO
---------------------------------------------------------------------------------------------
Small
Total Total Equity Company
INVESCO Return Income High Yield Utilities Growth
--------------- -------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value (Note C) $44,538,862 $10,386,525 $16,189,342 $9,419,547 $4,140,713 $4,402,735
--------------- -------------- -------------- -------------- --------------- --------------
Total assets 44,538,862 10,386,525 16,189,342 9,419,547 4,140,713 4,402,735
--------------- -------------- -------------- -------------- --------------- --------------
LIABILITIES
Due to (from) Security Life of Denver (99,549) (125) (31,211) (1,130) (602) (66,481)
--------------- -------------- -------------- -------------- --------------- --------------
Total Liabilities (99,549) (125) (31,211) (1,130) (602) (66,481)
--------------- -------------- -------------- -------------- --------------- --------------
Net assets $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216
=============== ============== ============== ============== =============== ==============
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216
--------------- -------------- -------------- -------------- --------------- --------------
TOTAL POLICYHOLDER RESERVES $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216
=============== ============== ============== ============== =============== ==============
Number of divisional units outstanding
(Note G) 602,187.614 621,047.937 536,863.946 189,409.984 212,503.210
============== ============== ============== =============== ==============
Value per divisional unit $17.25 $26.12 $17.55 $21.86 $21.03
============== ============== ============== =============== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 111
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
<TABLE>
<CAPTION>
VAN ECK
---------------------------------------------------------------------------------
Worldwide Worldwide Worldwide
Total Hard Worldwide Emerging Real
Van Eck Assets Bond Markets Estate
---------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in mutual funds at
market value (Note C) $6,258,525 $2,305,855 $335,746 $3,067,087 $549,837
---------------- --------------- --------------- -------------- ---------------
Total assets 6,258,525 2,305,855 335,746 3,067,087 549,837
---------------- --------------- --------------- -------------- ---------------
LIABILITIES
Due to (from) Security Life of Denver (45,652) (223) 1,543 (46,972) -
---------------- --------------- --------------- -------------- ---------------
Total Liabilities (45,652) (223) 1,543 (46,972) -
---------------- --------------- --------------- -------------- ---------------
Net assets $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837
================ =============== =============== ============== ===============
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837
---------------- --------------- --------------- -------------- ---------------
TOTAL POLICYHOLDER RESERVES $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837
================ =============== =============== ============== ===============
Number of divisional units outstanding
(Note G) 236,972.429 33,114.078 228,819.195 64,967.173
=============== =============== ============== ===============
Value per divisional unit $9.73 $10.09 $13.61 $8.46
=============== =============== ============== ===============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 112
<PAGE>
Security Life Separate Account L1
Statement of Net Assets (continued)
December 31, 1999
AIM
---------------------------------------
Total Capital Government
AIM Appreciation Securities
------------ ------------ -------------
ASSETS
Investments in mutual funds at
market value (Note C) $12,703,241 $5,308,909 $7,394,332
------------ ------------ -------------
Total assets 12,703,241 5,308,909 7,394,332
------------ ------------ -------------
LIABILITIES
Due to (from) Security Life of Denver (14) (13) (1)
------------ ------------ -------------
Total Liabilities (14) (13) (1)
------------ ------------ -------------
Net assets $12,703,255 $5,308,922 $7,394,333
============ ============ =============
POLICYHOLDER RESERVES
Reserves attributable to the
policyholders (Note B) $12,703,255 $5,308,922 $7,394,333
------------ ------------ -------------
TOTAL POLICYHOLDER RESERVES $12,703,255 $5,308,922 $7,394,333
============ ============ =============
Number of divisional units outstanding
(Note G) 323,846.032 715,905.149
============ =============
Value per divisional unit $16.39 $10.33
============ =============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 113
<PAGE>
Security Life Separate Account L1
Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Total
All Total Total Total Total Total Total
Divisions NB Alger Fidelity INVESCO Van Eck AIM
------------- ------------- ------------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $18,884,169 $2,123,919 $ 7,325,481 $ 7,908,482 $1,183,695 $ 30,826 311,766
Less valuation period deductions
(Note B) 2,908,885 371,218 557,411 1,629,301 272,130 27,814 51,011
------------- ------------- ------------- ------------- ------------- ---------- -----------
Net investment income (loss) 15,975,284 1,752,701 6,768,070 6,279,181 911,565 3,012 260,755
------------- ------------- ------------- ------------- ------------- ---------- -----------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 18,191,446 557,950 5,023,269 11,358,812 1,094,239 73,144 84,032
Net unrealized gains (losses) on
investments 55,998,041 3,797,732 17,500,945 30,152,442 2,135,798 1,374,192 1,036,932
------------- ------------- ------------- ------------- ------------- ---------- -----------
Net realized and unrealized gains
(losses) on investments 74,189,487 4,355,682 22,524,214 41,511,254 3,230,037 1,447,336 1,120,964
------------- ------------- ------------- ------------- ------------- ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $90,164,771 $6,108,383 $29,292,284 $47,790,435 $4,141,602 $1,450,348 $1,381,719
============= ============= ============= ============= ============= ========== ===========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 114
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
NB
---------------------------------------------------------------------
Total Limited
NB Maturity Bond Growth Partners
--------------------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $2,123,919 $911,596 $ 453,085 $ 759,238
Less valuation period deductions
(Note B) 371,218 108,699 70,308 192,211
--------------------------------- ---------------- ----------------
Net investment income (loss) 1,752,701 802,897 382,777 567,027
--------------------------------- ---------------- ----------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 557,950 (293,615) 318,964 532,601
Net unrealized gains (losses) on
investments 3,797,732 (423,477) 3,714,218 506,991
--------------------------------- ---------------- ----------------
Net realized and unrealized gains
(losses) on investments 4,355,682 (717,092) 4,033,182 1,039,592
--------------------------------- ---------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $6,108,383 $ 85,805 $4,415,959 $1,606,619
================================= ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 115
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
<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 $ 7,325,481 $2,200,048 $1,636,538 $2,764,203 $ 724,692
Less valuation period deductions
(Note B) 557,411 141,734 88,955 233,373 93,349
--------------- ------------------- ---------------- ---------------- -----------------
Net investment income (loss) 6,768,070 2,058,314 1,547,583 2,530,830 631,343
--------------- ------------------- ---------------- ---------------- -----------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 5,023,269 94,825 322,974 2,007,625 2,597,845
Net unrealized gains (losses) on
investments 17,500,945 5,993,398 2,015,333 4,584,649 4,907,565
--------------- ------------------- ---------------- ---------------- -----------------
Net realized and unrealized gains
(losses) on investments 22,524,214 6,088,223 2,338,307 6,592,274 7,505,410
--------------- ------------------- ---------------- ---------------- -----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $29,292,284 $8,146,537 $3,885,890 $9,123,104 $8,136,753
=============== =================== ================ ================ =================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 116
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
<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 $ 7,908,482 $ 798,528 $ 3,508,501 $ 820,014 $1,277,704 $ 1,503,735
Less valuation period deductions
(Note B) 1,629,301 83,646 308,868 188,207 188,211 860,369
--------------- ------------- --------------- -------------- --------------- --------------
Net investment income (loss) 6,279,181 714,882 3,199,633 631,807 1,089,493 643,366
--------------- ------------- --------------- -------------- --------------- --------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 11,358,812 122,474 7,459,882 553,230 - 3,223,226
Net unrealized gains (losses) on
investments 30,152,442 316,538 3,509,953 8,740,414 - 17,585,537
--------------- ------------- --------------- -------------- --------------- --------------
Net realized and unrealized gains
(losses) on investments 41,511,254 439,012 10,969,835 9,293,644 - 20,808,763
--------------- ------------- --------------- -------------- --------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $47,790,435 $1,153,894 $14,169,468 $9,925,451 $1,089,493 $21,452,129
=============== ============= =============== ============== =============== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 117
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
INVESCO
-----------------------------------------------------------------------------------------------
Total Total Equity Small Company
INVESCO Return Income High Yield Utilities Growth
--------------- --------------- --------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $1,183,695 $ 276,071 $ 252,055 $618,531 $ 37,038 $ -
Less valuation period deductions
(Note B) 272,130 71,255 97,430 65,338 23,769 14,338
--------------- --------------- --------------- ------------- ------------- ------------------
Net investment income (loss) 911,565 204,816 154,625 553,193 13,269 (14,338)
--------------- --------------- --------------- ------------- ------------- ------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 1,094,239 286,623 506,767 (241,611) 304,911 237,549
Net unrealized gains (losses) on
investments 2,135,798 (923,083) 965,264 379,005 179,598 1,535,014
--------------- --------------- --------------- ------------- ------------- ------------------
Net realized and unrealized gains
(losses) on investments 3,230,037 (636,460) 1,472,031 137,394 484,509 1,772,563
--------------- --------------- --------------- ------------- ------------- ------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $4,141,602 $(431,644) $1,626,656 $690,587 $497,778 $1,758,225
=============== =============== =============== ============= ============= ==================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 118
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
VAN ECK
----------------------------------------------------------------------------------
Worldwide
Total Worldwide Worldwide Emerging Worldwide
Van Eck Hard Assets Bond Markets Real Estate
--------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 30,826 $ 16,585 $ 12,446 - $ 1,795
Less valuation period deductions
(Note B) 27,814 12,646 2,550 10,886 1,732
--------------- --------------- --------------- ---------------- ----------------
Net investment income (loss) 3,012 3,939 9,896 (10,886) 63
--------------- --------------- --------------- ---------------- ----------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 73,144 (313,009) (25,853) 410,384 1,622
Net unrealized gains (losses) on
investments 1,374,192 592,123 (9,920) 809,962 (17,973)
--------------- --------------- --------------- ---------------- ----------------
Net realized and unrealized gains
(losses) on investments 1,447,336 279,114 (35,773) 1,220,346 (16,351)
--------------- --------------- --------------- ---------------- ----------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $1,450,348 $283,053 $(25,877) $1,209,460 $(16,288)
=============== =============== =============== ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 119
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1999
AIM
--------------------------------------
Total Capital Government
AIM Appreciation Securities
---------- ------------ --------------
INVESTMENT INCOME
Dividends from mutual funds $ 311,766 $ 113,467 $ 198,299
Less valuation period deductions
(Note B) 51,011 19,289 31,722
---------- ------------ --------------
Net investment income (loss) 260,755 94,178 166,577
---------- ------------ --------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 84,032 92,256 (8,224)
Net unrealized gains (losses) on
investments 1,036,932 1,257,369 (220,437)
---------- ------------ --------------
Net realized and unrealized gains
(losses) on investments 1,120,964 1,349,625 (228,661)
---------- ------------ --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $1,381,719 $1,443,803 $(62,084)
========== ============ ==============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 120
<PAGE>
Security Life Separate Account L1
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
TOTAL
ALL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
DIVISIONS NB ALGER FIDELITY INVESCO VAN ECK AIM
-------------- ------------ ------------- -------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $17,747,833 $4,273,690 $ 4,617,072 $ 6,943,854 $1,625,860 $ 189,620 $ 97,737
Less valuation period deductions
(Note B) 1,740,661 291,487 290,412 971,160 162,321 11,393 13,888
-------------- ------------ ------------- -------------- ------------- ------------ -----------
Net investment income (loss) 16,007,172 3,982,203 4,326,660 5,972,694 1,463,539 178,227 83,849
-------------- ------------ ------------- -------------- ------------- ------------ -----------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599
Net unrealized gains (losses) on
investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087
-------------- ------------ ------------- -------------- ------------- ------------ -----------
Net realized and unrealized gains
(losses) on investments 27,303,251 (1,975,813) 7,511,094 21,633,430 604,461 (628,607) 158,686
-------------- ------------ ------------- -------------- ------------- ------------ -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $43,310,423 $2,006,390 $11,837,754 $27,606,124 $2,068,000 $(450,380) $242,535
============== ============ ============= ============== ============= ============ ===========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 121
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
NB
--------------------------------------------------------------------------------
Total Limited Government
NB Maturity Growth Income Partners
Bond
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $4,273,690 $409,268 $1,579,109 $136,565 $2,148,748
Less valuation period deductions
(Note B) 291,487 87,183 52,660 3,213 148,431
--------------- --------------- --------------- --------------- ---------------
Net investment income (loss) 3,982,203 322,085 1,526,449 133,352 2,000,317
--------------- --------------- --------------- --------------- ---------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 347,823 10,003 (264,148) (53,894) 655,862
Net unrealized gains (losses) on
investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475)
--------------- --------------- --------------- --------------- ---------------
Net realized and unrealized gains
(losses) on investments (1,975,813) 69,372 (345,724) (114,848) (1,584,613)
--------------- --------------- --------------- --------------- ---------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $2,006,390 $391,457 $1,180,725 $ 18,504 $ 415,704
=============== =============== =============== =============== ===============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 122
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<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 $ 4,617,072 $1,681,373 $ 593,045 $2,196,712 $ 145,942
Less valuation period deductions
(Note B) 290,412 95,588 53,316 113,376 28,132
---------------- ----------------- --------------- ---------------- ---------------
Net investment income (loss) 4,326,660 1,585,785 539,729 2,083,336 117,810
---------------- ----------------- --------------- ---------------- ---------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 1,685,294 186,963 316,932 915,872 265,527
Net unrealized gains (losses) on
investments 5,825,800 166,990 1,022,340 3,099,428 1,537,042
---------------- ----------------- --------------- ---------------- ---------------
Net realized and unrealized gains
(losses) on investments 7,511,094 353,953 1,339,272 4,015,300 1,802,569
---------------- ----------------- --------------- ---------------- ---------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM $11,837,754 $1,939,738 $1,879,001 $6,098,636 $1,920,379
OPERATIONS
================ ================= =============== ================ ===============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 123
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<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 $ 6,943,854 $ 808,986 $2,663,618 $1,015,626 $830,137 $ 1,625,487
Less valuation period deductions
(Note B) 971,160 63,669 183,002 129,504 116,932 478,053
-------------- -------------- ------------- -------------- ------------ ---------------
Net investment income (loss) 5,972,694 745,317 2,480,616 886,122 713,205 1,147,434
-------------- -------------- ------------- -------------- ------------ ---------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 6,403,348 20,247 1,534,000 298,379 - 4,550,722
Net unrealized gains (losses) on
investments 15,230,082 315,702 4,444,805 707,398 - 9,762,177
-------------- -------------- ------------- -------------- ------------ ---------------
Net realized and unrealized gains
(losses) on investments 21,633,430 335,949 5,978,805 1,005,777 - 14,312,899
-------------- -------------- ------------- -------------- ------------ ---------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $27,606,124 $1,081,266 $8,459,421 $1,891,899 $713,205 $15,460,333
============== ============== ============= ============== ============ ===============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 124
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
INVESCO
-------------------------------------------------------------------------------------------
Total Total Equity Small Company
INVESCO Return Income High Yield Utilities Growth
---------------- -------------- ------------ -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $1,625,860 $312,534 $ 514,174 $769,805 $ 29,058 $ 289
Less valuation period deductions
(Note B) 162,321 40,898 60,678 49,140 10,730 875
---------------- -------------- ------------ -------------- ------------- ----------------
Net investment income (loss) 1,463,539 271,636 453,496 720,665 18,328 (586)
---------------- -------------- ------------ -------------- ------------- ----------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 355,780 136,473 342,342 (151,382) 35,245 (6,898)
Net unrealized gains (losses) on
investments 248,681 73,689 359,519 (541,125) 282,500 74,098
---------------- -------------- ------------ -------------- ------------- ----------------
Net realized and unrealized gains
(losses) on investments 604,461 210,162 701,861 (692,507) 317,745 67,200
---------------- -------------- ------------ -------------- ------------- ----------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $2,068,000 $481,798 $1,155,357 $ 28,158 $336,073 $66,614
================ ============== ============ ============== ============= ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 125
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
VAN ECK
---------------------------------------------------------------------------------------------
Worldwide Worldwide Worldwide
Total Worldwide Hard Worldwide Emerging Real
Van Eck Balanced Assets Bond Markets Estate
----------------- -------------- --------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends from mutual funds $ 189,620 $45,674 $ 143,946 $ - $ - $ -
Less valuation period deductions
(Note B) 11,393 1,050 8,170 212 1,736 225
----------------- -------------- --------------- -------------- -------------- -------------
Net investment income (loss) 178,227 44,624 135,776 (212) (1,736) (225)
----------------- -------------- --------------- -------------- -------------- -------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments (260,570) 4,682 (162,110) 130 (101,436) (1,836)
Net unrealized gains (losses) on
investments (368,037) (23,403) (395,698) 3,953 47,140 (29)
----------------- -------------- --------------- -------------- -------------- -------------
Net realized and unrealized gains
(losses) on investments (628,607) (18,721) (557,808) 4,083 (54,296) (1,865)
----------------- -------------- --------------- -------------- -------------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(450,380) $25,903 $(422,032) $3,871 $(56,032) $(2,090)
================= ============== =============== ============== ============== =============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 126
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1998
AIM
-----------------------------------------
Total Capital Government
AIM Appreciation Securities
------------ ------------- ------------
INVESTMENT INCOME
Dividends from mutual funds $ 97,737 $ 27,109 $ 70,628
Less valuation period deductions
(Note B) 13,888 3,056 10,832
--------- -------------- --------------
Net investment income (loss) 83,849 24,053 59,796
--------- -------------- --------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gains (losses) on
investments 4,599 (3,315) 7,914
Net unrealized gains (losses) on
investments 154,087 119,225 34,862
--------- -------------- --------------
Net realized and unrealized gains
(losses) on investments 158,686 115,910 42,776
--------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $242,535 $139,963 $102,572
========= ============== ==============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 127
<PAGE>
Security Life Separate Account L1
Statement of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Total
All Total Total Total Total Total
Divisions NB 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
(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.
- --------------------------------------------------------------------------------
Strategic Advantage II 128
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
NB
------------------------------------------------------------------------------------
Total Limited Government
NB 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
(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.
- --------------------------------------------------------------------------------
Strategic Advantage II 129
<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
(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.
- --------------------------------------------------------------------------------
Strategic Advantage II 130
<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
(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.
- --------------------------------------------------------------------------------
Strategic Advantage II 131
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
INVESCO
-------------------------------------------------------------------------------
Total Total Equity
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
(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.
- --------------------------------------------------------------------------------
Strategic Advantage II 132
<PAGE>
Security Life Separate Account L1
Statement of Operations (continued)
Year Ended December 31, 1997
VAN ECK
---------------------------------------
Total Worldwide Worldwide
Van Eck Balanced Hard Assets
--------- ------------ --------------
INVESTMENT INCOME
Dividends from mutual funds $21,903 $ 9,006 $ 12,897
Less valuation period deductions
(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)
========= ============ ==============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 133
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Total
All Total Total Total Total Total Total
Divisions NB Alger Fidelity INVESCO Van Eck AIM
------------- -------------- -------------- ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $15,975,284 $ 1,752,701 $ 6,768,070 $ 6,279,181 $ 911,565 $ 3,012 $ 260,755
Net realized gains (losses) on
investments 18,191,446 557,950 5,023,269 11,358,812 1,094,239 73,144 84,032
Net unrealized gains (losses) on
investments 55,998,041 3,797,732 17,500,945 30,152,442 2,135,798 1,374,192 1,036,932
------------- -------------- -------------- ------------- ------------- ----------- --------------
Increase in net assets from
operations 90,164,771 6,108,383 29,292,284 47,790,435 4,141,602 1,450,348 1,381,719
------------- -------------- -------------- ------------- ------------- ----------- --------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 162,042,407 9,691,552 19,246,531 115,810,413 12,770,723 1,311,620 3,211,568
Cost of insurance and
administrative charges (20,649,015) (2,172,531) (3,837,369) (11,622,709) (2,460,819) (173,456) (382,131)
Benefit payments (542,037) - - (542,037) - - -
Surrenders (15,066,657) (1,529,928) (3,447,763) (7,887,081) (1,567,128) (33,331) (601,426)
Net transfers among divisions
(including the loan division
and guaranteed interest
division in the general
account) 91,435 (5,513,893) 13,797,533 (17,535,989) 2,140,348 1,919,235 5,284,201
Other 231,958 45,648 34,663 146,782 (17,068) 12,762 9,171
------------- -------------- -------------- ------------- ------------- ----------- --------------
Increase from principal
transactions 126,108,091 520,848 25,793,595 78,369,379 10,866,056 3,036,830 7,521,383
------------- -------------- -------------- ------------- ------------- ----------- --------------
Total increase in net assets 216,272,862 6,629,231 55,085,879 126,159,814 15,007,658 4,487,178 8,903,102
Net assets at beginning of year 305,030,106 47,067,751 54,428,521 168,285,929 29,630,753 1,816,999 3,800,153
------------- -------------- -------------- ------------- ------------- ----------- --------------
Net assets at end of year $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255
============= ============== ============== ============= ============= =========== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 134
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
NB
--------------------------------------------------------------------------
Total Limited
NB Maturity Bond Growth Partners
------------------ --------------- ------------------ ------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 1,752,701 $ 802,897 $ 382,777 $ 567,027
Net realized gains (losses) on
investments 557,950 (293,615) 318,964 532,601
Net unrealized gains (losses) on
investments 3,797,732 (423,477) 3,714,218 506,991
------------------ --------------- ------------------ ------------------
Increase in net assets from
operations 6,108,383 85,805 4,415,959 1,606,619
------------------ --------------- ------------------ ------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 9,691,552 2,691,658 1,968,259 5,031,635
Cost of insurance and
administrative charges (2,172,531) (532,487) (382,030) (1,258,014)
Benefit payments
Surrenders (1,529,928) (1,033,731) (175,255) (320,942)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) (5,513,893) (5,610,959) (1,798,195) 1,895,261
Other 45,648 22,193 21,256 2,199
------------------ --------------- ------------------ ------------------
Increase from principal
transactions 520,848 (4,463,326) (365,965) 5,350,139
------------------ --------------- ------------------ ------------------
Total increase in net assets 6,629,231 (4,377,521) 4,049,994 6,956,758
Net assets at beginning of year 47,067,751 15,578,349 9,026,160 22,463,242
------------------ --------------- ------------------ ------------------
Net assets at end of year $53,696,982 $11,200,828 $13,076,154 $29,420,000
================== =============== ================== ==================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 135
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<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) $ 6,768,070 $ 2,058,314 $ 1,547,583 $ 2,530,830 $ 631,343
Net realized gains (losses) on
investments 5,023,269 94,825 322,974 2,007,625 2,597,845
Net unrealized gains (losses) on
investments 17,500,945 5,993,398 2,015,333 4,584,649 4,907,565
------------------ ----------------- ---------------- ---------------- -----------------
Increase in net assets from
operations 29,292,284 8,146,537 3,885,890 9,123,104 8,136,753
------------------ ----------------- ---------------- ---------------- -----------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 19,246,531 4,618,903 3,508,936 7,654,291 3,464,401
Cost of insurance and
administrative charges (3,837,369) (957,053) (661,896) (1,597,077) (621,343)
Benefit payments
Surrenders (3,447,763) (986,740) (286,174) (1,594,894) (579,955)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 13,797,533 1,461,610 1,637,697 4,904,801 5,793,425
Other 34,663 (6,873) (17,173) (10,341) 69,050
------------------ ----------------- ---------------- ---------------- -----------------
Increase from principal
transactions 25,793,595 4,129,847 4,181,390 9,356,780 8,125,578
------------------ ----------------- ---------------- ---------------- -----------------
Total increase in net assets 55,085,879 12,276,384 8,067,280 18,479,884 16,262,331
Net assets at beginning of year 54,428,521 15,503,371 9,220,207 22,903,614 6,801,329
------------------ ----------------- ---------------- ---------------- -----------------
Net assets at end of year $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660
================== ================= ================ ================ =================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 136
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<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) $ 6,279,181 $ 714,882 $ 3,199,633 $ 631,807 $ 1,089,493 $ 643,366
Net realized gains (losses) on
investments 11,358,812 122,474 7,459,882 553,230 - 3,223,226
Net unrealized gains (losses) on
investments 30,152,442 316,538 3,509,953 8,740,414 - 17,585,537
--------------- --------------- -------------- --------------- -------------- ----------------
Increase in net assets from
operations 47,790,435 1,153,894 14,169,468 9,925,451 1,089,493 21,452,129
--------------- --------------- -------------- --------------- -------------- ----------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 115,810,413 3,791,052 9,969,268 5,963,624 62,143,060 33,943,409
Cost of insurance and
administrative charges (11,622,709) (604,489) (1,912,531) (1,071,163) (2,273,369) (5,761,157)
Benefit payments (542,037) - - - (542,037) -
Surrenders (7,887,081) (641,428) (1,308,922) (1,227,419) (1,281,819) (3,427,493)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) (17,535,989) (349,280) 4,285,808 788,107 (42,741,942) 20,481,318
Other 146,782 3,430 54,597 23,794 (8,230) 73,191
--------------- --------------- -------------- --------------- -------------- ----------------
Increase from principal
transactions 78,369,379 2,199,285 11,088,220 4,476,943 15,295,663 45,309,268
--------------- --------------- -------------- --------------- -------------- ----------------
Total increase in net assets 126,159,814 3,353,179 25,257,688 14,402,394 16,385,156 66,761,397
Net assets at beginning of year 168,285,929 10,237,279 32,900,142 20,581,887 18,412,252 86,154,369
--------------- --------------- -------------- --------------- -------------- ----------------
Net assets at end of year $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766
=============== =============== ============== =============== ============== ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 137
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
INVESCO
------------------------------------------------------------------------------------------
Total Total Equity Small Company
INVESCO Return Income High Yield Utilities Growth
----------- --------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 911,565 $ 204,816 $ 154,625 $ 553,193 $ 13,269 $ (14,338)
Net realized gains (losses) on
investments 1,094,239 286,623 506,767 (241,611) 304,911 237,549
Net unrealized gains (losses) on
investments 2,135,798 (923,083) 965,264 379,005 179,598 1,535,014
----------- --------------- --------------- --------------- -------------- --------------
Increase (decrease) in net assets from
operations 4,141,602 (431,644) 1,626,656 690,587 497,778 1,758,225
----------- --------------- --------------- --------------- -------------- --------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 12,770,723 4,580,034 4,374,844 1,987,501 1,127,118 701,226
Cost of insurance and
administrative charges (2,460,819) (764,047) (922,117) (471,532) (198,877) (104,246)
Benefit payments
Surrenders (1,567,128) (239,246) (333,959) (155,182) (820,016) (18,725)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 2,140,348 (854,496) 643,961 (518,177) 1,491,088 1,377,972
Other (17,068) (9,279) (21,837) 4,698 3,264 6,086
----------- --------------- --------------- --------------- -------------- --------------
Increase from principal
transactions 10,866,056 2,712,966 3,740,892 847,308 1,602,577 1,962,313
----------- --------------- --------------- --------------- -------------- --------------
Total increase in net assets 15,007,658 2,281,322 5,367,548 1,537,895 2,100,355 3,720,538
Net assets at beginning of year 29,630,753 8,105,328 10,853,005 7,882,782 2,040,960 748,678
----------- --------------- --------------- --------------- -------------- --------------
Net assets at end of year $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216
=========== =============== =============== =============== ============== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 138
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
VAN ECK
---------------------------------------------------------------------------------
Worldwide Worldwide Worldwide
Total Hard Worldwide Emerging Real
Van Eck Assets Bond Markets Estate
--------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 3,012 $ 3,939 $ 9,896 $ (10,886) $ 63
Net realized gains (losses) on
investments 73,144 (313,009) (25,853) 410,384 1,622
Net unrealized gains (losses) on
investments 1,374,192 592,123 (9,920) 809,962 (17,973)
--------------- --------------- --------------- ---------------- ---------------
Increase (decrease) in net assets from
operations 1,450,348 283,053 (25,877) 1,209,460 (16,288)
--------------- --------------- --------------- ---------------- ---------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 1,311,620 441,045 253,322 416,537 200,716
Cost of insurance and
administrative charges (173,456) (86,064) (17,509) (56,532) (13,351)
Benefit payments
Surrenders (33,331) (23,325) - (5,545) (4,461)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 1,919,235 602,367 (80,721) 1,091,100 306,489
Other 12,762 15,247 (819) (2,117) 451
--------------- --------------- --------------- ---------------- ---------------
Increase from principal
transactions 3,036,830 949,270 154,273 1,443,443 489,844
--------------- --------------- --------------- ---------------- ---------------
Total increase in net assets 4,487,178 1,232,323 128,396 2,652,903 473,556
Net assets at beginning of year 1,816,999 1,073,755 205,807 461,156 76,281
--------------- --------------- --------------- ---------------- ---------------
Net assets at end of year $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837
=============== =============== =============== ================ ===============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 139
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1999
AIM
--------------------------------------
Total Capital Government
AIM Appreciation Securities
------------ ------------- -----------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 260,755 $ 94,178 $ 166,577
Net realized gains (losses) on
investments 84,032 92,256 (8,224)
Net unrealized gains (losses) on
investments 1,036,932 1,257,369 (220,437)
------------ ------------- -----------
Increase (decrease) in net assets from
operations 1,381,719 1,443,803 (62,084)
------------ ------------- -----------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 3,211,568 1,497,094 1,714,474
Cost of insurance and
administrative charges (382,131) (216,619) (165,512)
Benefit payments
Surrenders (601,426) (18,584) (582,842)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 5,284,201 1,391,719 3,892,482
Other 9,171 7,073 2,098
------------ ------------- -----------
Increase from principal
transactions 7,521,383 2,660,683 4,860,700
------------ ------------- -----------
Total increase in net assets 8,903,102 4,104,486 4,798,616
Net assets at beginning of year 3,800,153 1,204,436 2,595,717
------------ ------------- -----------
Net assets at end of year $12,703,255 $5,308,922 $7,394,333
============ ============= ===========
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 140
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Total
All Total Total Total Total Total Total
Divisions NB Alger Fidelity INVESCO Van Eck AIM
------------ ----------------------------------------- ------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 16,007,172 $ 3,982,203 $ 4,326,660 $ 5,972,694 $ 1,463,539 $ 178,227 $ 83,849
Net realized gains (losses) on
investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599
Net unrealized gains (losses) on
investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087
------------ ----------------------------------------- ------------- ------------------------
Increase (decrease) in net assets
from operations 43,310,423 2,006,390 11,837,754 27,606,124 2,068,000 (450,380) 242,535
------------ ----------------------------------------- ------------- ------------------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 128,820,440 12,563,792 13,089,164 92,335,231 8,092,294 875,501 1,864,458
Cost of insurance and
administrative charges (14,458,798) (2,063,802) (2,525,683) (8,200,381) (1,481,570) (108,634) (78,728)
Benefit payments (306,862) (11,220) (26,492) (259,989) (9,161) - -
Surrenders (10,842,736) (725,767) (859,454) (8,654,377) (586,533) (15,198) (1,407)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) (3,936,799) 8,461,193 4,831,250 (25,231,056) 6,011,967 216,552 1,773,295
Other (41,582) (87,331) (18,626) 54,208 9,107 1,060 -
------------ ----------------------------------------- ------------- ------------------------
Increase (decrease) from principal
transactions 99,233,663 18,136,865 14,490,159 50,043,636 12,036,104 969,281 3,557,618
------------ ----------------------------------------- ------------- ------------------------
Total increase (decrease) in net
assets 142,544,086 20,143,255 26,327,913 77,649,760 14,104,104 518,901 3,800,153
Net assets at beginning of year 162,486,020 26,924,496 28,100,608 90,636,169 15,526,649 1,298,098 -
------------ ----------------------------------------- ------------- ------------------------
Net assets at end of year $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153
============ ========================================= ============= ========================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 141
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
NB
-----------------------------------------------------------------------------------------
Total Limited Government
NB Maturity Bond Growth Income Partners
----------------- ------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 3,982,203 $ 322,085 $1,526,449 $133,352 $ 2,000,317
Net realized gains (losses) on
investments 347,823 10,003 (264,148) (53,894) 655,862
Net unrealized gains (losses) on
investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475)
----------------- ------------------- ---------------- ---------------- ----------------
Increase (decrease) in net assets
from operations 2,006,390 391,457 1,180,725 18,504 415,704
----------------- ------------------- ---------------- ---------------- ----------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 12,563,792 3,839,599 2,578,265 31,593 6,114,335
Cost of insurance and
administrative charges (2,063,802) (492,782) (393,894) (14,839) (1,162,287)
Benefit payments (11,220) - - - (11,220)
Surrenders (725,767) (15,922) (419,497) (3,243) (287,105)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 8,461,193 5,212,588 513,663 (894,126) 3,629,068
Other (87,331) (31,757) 3,226 (31,566) (27,234)
----------------- ------------------- ---------------- ---------------- ----------------
Increase (decrease) from principal
transactions 18,136,865 8,511,726 2,281,763 (912,181) 8,255,557
----------------- ------------------- ---------------- ---------------- ----------------
Total increase (decrease) in net assets 20,143,255 8,903,183 3,462,488 (893,677) 8,671,261
Net assets at beginning of year 26,924,496 6,675,166 5,563,672 893,677 13,791,981
----------------- ------------------- ---------------- ---------------- ----------------
Net assets at end of year $47,067,751 $15,578,349 $9,026,160 $ - $22,463,242
================= =================== ================ ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 142
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<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) $ 4,326,660 $ 1,585,785 $ 539,729 $ 2,083,336 $ 117,810
Net realized gains (losses) on
investments 1,685,294 186,963 316,932 915,872 265,527
Net unrealized gains (losses) on
investments 5,825,800 166,990 1,022,340 3,099,428 1,537,042
----------------- ------------------ --------------- ---------------- ----------------
Increase (decrease) in net assets
from operations 11,837,754 1,939,738 1,879,001 6,098,636 1,920,379
----------------- ------------------ --------------- ---------------- ----------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 13,089,164 4,154,774 2,573,424 5,298,963 1,062,003
Cost of insurance and
administrative charges (2,525,683) (803,988) (473,224) (989,260) (259,211)
Benefit payments (26,492) (14,248) (12,244) - -
Surrenders (859,454) (196,345) (376,263) (216,867) (69,979)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 4,831,250 (35,168) 528,261 3,094,366 1,243,791
Other (18,626) (504) (14,286) 1,597 (5,433)
----------------- ------------------ --------------- ---------------- ----------------
Increase (decrease) from principal
transactions 14,490,159 3,104,521 2,225,668 7,188,799 1,971,171
----------------- ------------------ --------------- ---------------- ----------------
Total increase (decrease) in net assets 26,327,913 5,044,259 4,104,669 13,287,435 3,891,550
Net assets at beginning of year 28,100,608 10,459,112 5,115,538 9,616,179 2,909,779
----------------- ------------------ --------------- ---------------- ----------------
Net assets at end of year $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329
================= ================== =============== ================ ================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 143
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<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) $ 5,972,694 $ 745,317 $ 2,480,616 $ 886,122 $ 713,205 $ 1,147,434
Net realized gains (losses) on
investments 6,403,348 20,247 1,534,000 298,379 - 4,550,722
Net unrealized gains (losses) on
investments 15,230,082 315,702 4,444,805 707,398 - 9,762,177
--------------- -------------- --------------- -------------- --------------- --------------
Increase (decrease) in net assets
from operations 27,606,124 1,081,266 8,459,421 1,891,899 713,205 15,460,333
--------------- -------------- --------------- -------------- --------------- --------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 92,335,231 2,713,832 8,443,426 5,709,711 55,421,815 20,046,447
Cost of insurance and
administrative charges (8,200,381) (490,838) (1,358,671) (939,010) (1,769,895) (3,641,967)
Benefit payments (259,989) - (8,890) (8,379) (240,733) (1,987)
Surrenders (8,654,377) (652,157) (2,494,098) (438,536) (2,335,262) (2,734,324)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) (25,231,056) 1,440,884 1,798,160 2,169,798 (48,429,964) 17,790,066
Other 54,208 7,219 (14,128) (29,375) 39,827 50,665
--------------- -------------- --------------- -------------- --------------- --------------
Increase (decrease) from principal
transactions 50,043,636 3,018,940 6,365,799 6,464,209 2,685,788 31,508,900
--------------- -------------- --------------- -------------- --------------- --------------
Total increase (decrease) in net assets 77,649,760 4,100,206 14,825,220 8,356,108 3,398,993 46,969,233
Net assets at beginning of year 90,636,169 6,137,073 18,074,922 12,225,779 15,013,259 39,185,136
--------------- -------------- --------------- -------------- --------------- --------------
Net assets at end of year $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369
=============== ============== =============== ============== =============== ==============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 144
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
INVESCO
--------------------------------------------------------------------------------------------
Small
Total Total Equity Company
INVESCO Return Income High Yield Utilities Growth
-------------- -------------- --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 1,463,539 $ 271,636 $ 453,496 $ 720,665 $ 18,328 $ (586)
Net realized gains (losses) on
investments 355,780 136,473 342,342 (151,382) 35,245 (6,898)
Net unrealized gains (losses) on
investments 248,681 73,689 359,519 (541,125) 282,500 74,098
-------------- -------------- --------------- -------------- --------------- -------------
Increase (decrease) in net assets
from operations 2,068,000 481,798 1,155,357 28,158 336,073 66,614
-------------- -------------- --------------- -------------- --------------- -------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 8,092,294 2,104,849 3,170,236 2,297,048 435,105 85,056
Cost of insurance and
administrative charges (1,481,570) (425,176) (567,563) (389,895) (87,692) (11,244)
Benefit payments (9,161) - (9,161) - - -
Surrenders (586,533) (56,509) (192,220) (329,292) (8,210) (302)
Net transfers among divisions
(including the loan division and
Guaranteed interest division in
the general account) 6,011,967 2,955,200 1,315,595 931,519 201,017 608,636
Other 9,107 556 22,617 (18,840) 4,856 (82)
-------------- -------------- --------------- -------------- --------------- -------------
Increase (decrease) from principal
transactions 12,036,104 4,578,920 3,739,504 2,490,540 545,076 682,064
-------------- -------------- --------------- -------------- --------------- -------------
Total increase (decrease) in net assets 14,104,104 5,060,718 4,894,861 2,518,698 881,149 748,678
Net assets at beginning of year 15,526,649 3,044,610 5,958,144 5,364,084 1,159,811 -
-------------- -------------- --------------- -------------- --------------- -------------
Net assets at end of year $29,630,753 $8,105,328 $10,853,005 $7,882,782 $2,040,960 $748,678
============== ============== =============== ============== =============== =============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 145
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
VAN ECK
--------------------------------------------------------------------------------------------
Worldwide Worldwide Worldwide
Total Worldwide Hard Worldwide Emerging Real
Van Eck Balanced Assets Bonds Markets Estate
--------------- -------------- ---------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (loss) $ 178,227 $ 44,624 $ 135,776 $ (212) $ (1,736) $ (225)
Net realized gains (losses) on
investments (260,570) 4,682 (162,110) 130 (101,436) (1,836)
Net unrealized gains (losses) on
investments (368,037) (23,403) (395,698) 3,953 47,140 (29)
--------------- -------------- ---------------- -------------- -------------- -------------
Increase (decrease) in net assets
from operations (450,380) 25,903 (422,032) 3,871 (56,032) (2,090)
--------------- -------------- ---------------- -------------- -------------- -------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 875,501 (1,347) 571,430 129,336 137,102 38,980
Cost of insurance and
administrative charges (108,634) (9,423) (86,867) (1,544) (7,777) (3,023)
Benefit payments - - - 0 0 0
Surrenders (15,198) (3,105) (11,871) 0 0 (222)
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 216,552 (399,466) 111,286 74,151 387,960 42,621
Other 1,060 90 1,059 (7) (97) 15
--------------- -------------- ---------------- -------------- -------------- -------------
Increase (decrease) from principal
transactions 969,281 (413,251) 585,037 201,936 517,188 78,371
--------------- -------------- ---------------- -------------- -------------- -------------
Total increase (decrease) in net assets 518,901 (387,348) 163,005 205,807 461,156 76,281
Net assets at beginning of year 1,298,098 387,348 910,750 - - -
--------------- -------------- ---------------- -------------- -------------- -------------
Net assets at end of year $1,816,999 $ - $1,073,755 $205,807 $ 461,156 $76,281
=============== ============== ================ ============== ============== =============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 146
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
AIM
--------------------------------------
Total Capital Government
AIM Appreciation Securities
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income (loss) $ 83,849 $ 24,053 $ 59,796
Net realized gains (losses) on
investments 4,599 (3,315) 7,914
Net unrealized gains (losses) on
investments 154,087 119,225 34,862
------------ ------------ ------------
Increase (decrease) in net assets
from operations 242,535 139,963 102,572
------------ ------------ ------------
CHANGES FROM PRINCIPAL
TRANSACTIONS
Net premiums 1,864,458 329,635 1,534,823
Cost of insurance and
administrative charges (78,728) (28,940) (49,788)
Benefit payments - - -
Surrenders (1,407) (1,407) -
Net transfers among divisions
(including the loan division and
guaranteed interest division in
the general account) 1,773,295 765,185 1,008,110
Other - - -
------------ ------------ ------------
Increase (decrease) from principal
transactions 3,557,618 1,064,473 2,493,145
------------ ------------ ------------
Total increase (decrease) in net assets 3,800,153 1,204,436 2,595,717
Net assets at beginning of year - - -
------------ ------------ ------------
Net assets at end of year $3,800,153 $1,204,436 $2,595,717
============ ============ ============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 147
<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 NB 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 148
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
NB
-----------------------------------------------------------------------------------------
Total Limited Government
NB 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.
- --------------------------------------------------------------------------------
Strategic Advantage II 149
<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.
- --------------------------------------------------------------------------------
Strategic Advantage II 150
<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.
- --------------------------------------------------------------------------------
Strategic Advantage II 151
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
INVESCO
-----------------------------------------------------------------------------------
Total Total Equity
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.
- --------------------------------------------------------------------------------
Strategic Advantage II 152
<PAGE>
Security Life Separate Account L1
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
VAN ECK
--------------------------------------
Worldwide
Total Worldwide Hard
Van Eck Balanced Assets
----------- ----------- -------------
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 assets 704,067 59,543 644,524
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
=========== =========== =============
See accompanying notes.
- --------------------------------------------------------------------------------
Strategic Advantage II 153
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements
December 31, 1999
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 Variable Universal
Life, FirstLine II Variable Universal Life, Strategic Advantage Variable
Universal Life, Strategic Advantage II Variable Universal Life, and Variable
Survivorship Universal Life policies ("Variable Universal Life 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 used to
satisfy liabilities arising out of any other operations of the Company.
As of December 31, 1999, the Separate Account offered twenty-three investment
divisions available to the policyholders, each of which invests in an
independently managed mutual fund portfolio ("Fund"). The Funds are as follows:
PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS)
Neuberger Berman Management Incorporated (NB)
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
- --------------------------------------------------------------------------------
Strategic Advantage II 154
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE A. ORGANIZATION (CONTINUED)
INVESCO Funds Group, Inc. (INVESCO)
INVESCO VIF Total Return Portfolio
INVESCO VIF Equity Income Portfolio (formerly known as "INVESCO VIF
Industrial Income Portfolio")
INVESCO VIF High Yield Portfolio
INVESCO VIF Utilities Portfolio
INVESCO VIF Small Company Growth Portfolio
Van Eck Associates Corporation (Van Eck)
Van Eck Worldwide Hard Assets Portfolio (formerly known as "Van Eck Gold
and Natural Resources Portfolio")
Van Eck Worldwide Bond Portfolio
Van Eck Worldwide Emerging Markets Portfolio
Van Eck Worldwide Real Estate Portfolio
AIM Advisors, Inc. (AIM)
AIM VI--Capital Appreciation Portfolio
AIM VI--Government Securities 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
Portfolio stopped accepting new investments. These divisions were discontinued
during 1998.
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 Bond Portfolio
Van Eck Worldwide Emerging Markets Portfolio
Van Eck Worldwide Real Estate Portfolio
AIM Advisors, Inc. (AIM)
AIM VI--Capital Appreciation Portfolio
AIM VI--Government Securities Portfolio
INVESCO Funds Group, Inc. (INVESCO)
INVESCO VIF Small Company Growth Portfolio
- --------------------------------------------------------------------------------
Strategic Advantage II 155
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE A. ORGANIZATION (CONTINUED)
The Variable Universal Life 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 Variable Universal Life Policies 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 accounting principles generally accepted in the United States
("U.S. GAAP"). The preparation of financial statements in conformity with U.S.
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.
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.
- --------------------------------------------------------------------------------
Strategic Advantage II 156
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 years ended December 31, 1999, 1998 and 1997 were $2,908,885, $1,740,661,
and $813,630, respectively.
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.
- --------------------------------------------------------------------------------
Strategic Advantage II 157
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
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 for the years ended December 31, 1999,
1998 and 1997 were $20,649,015, $14,458,798, and $8,284,944, respectively.
Dividends made by the Funds are reinvested in the Funds.
The following is a summary of Fund shares owned as of December 31, 1999:
<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 Inc.:
Limited Maturity Bond 845,960.694 $13.24 $ 11,200,520 $ 11,380,242
Growth 350,585.486 $37.27 13,066,321 8,836,640
Partners 1,493,418.911 $19.64 29,330,747 28,931,311
Fred Alger Management, Inc.:
American Small Capitalization 503,139.614 $55.15 27,748,150 21,103,331
American MidCap Growth 536,166.146 $32.23 17,280,636 13,903,676
American Growth 642,460.430 $64.38 41,361,603 32,482,027
American Leveraged AllCap 397,806.619 $57.97 23,060,850 16,645,127
Fidelity Management & Research Co.:
Asset Manager 727,657.184 $18.67 13,585,360 12,533,037
Growth 1,058,669.574 $54.93 58,152,709 48,588,495
Overseas 1,271,285.820 $27.44 34,884,083 25,474,948
Money Market 34,799,038.450 $1.00 34,799,038 34,799,038
Index 500 913,352.492 $167.41 152,904,343 119,231,939
INVESCO Funds Group, Inc.:
Total Return 666,657.538 $15.58 10,386,525 11,019,270
Equity Income 770,554.123 $21.01 16,189,342 14,534,380
High Yield 818,379.460 $11.51 9,419,547 9,910,525
Utilities 197,458.930 $20.97 4,140,713 3,647,584
Small Company Growth 200,033.388 $22.01 4,402,735 2,793,624
Van Eck Associates Corporation:
Worldwide Hard Assets 210,388.243 $10.96 2,305,855 2,157,787
Worldwide Bond 31,407.502 $10.69 335,746 341,712
Worldwide Emerging Markets 215,083.218 $14.26 3,067,087 2,209,985
Worldwide Real Estate 60,091.435 $9.15 549,837 567,839
AIM Advisors, Inc.:
Capital Appreciation 149,210.483 $35.58 5,308,909 3,932,316
Government Securities 695,609.783 $10.63 7,394,332 7,579,908
------------------ ------------------
Total $520,874,988 $432,604,741
================== ==================
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 158
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE C. INVESTMENTS (CONTINUED)
For the year ended December 31, 1999, the cost of purchases (plus reinvested
dividends) and sales of investments are as follows:
<TABLE>
<CAPTION>
BEGINNING END
FUND OF YEAR PURCHASES SALES OF YEAR
- ------------------------------------------- ----------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Neuberger Berman Management Inc.:
Limited Maturity Bond $ 15,334,595 $ 6,135,221 $ (10,089,574) $ 11,380,242
Growth 8,510,696 5,560,097 (5,234,153) 8,836,640
Partners 22,570,797 9,683,589 (3,323,075) 28,931,311
Fred Alger Management, Inc.:
American Small Capitalization 14,851,950 14,105,718 (7,854,337) 21,103,331
American MidCap Growth 7,858,579 7,048,332 (1,003,235) 13,903,676
American Growth 18,608,688 18,809,746 (4,936,407) 32,482,027
American Leveraged AllCap 5,293,171 16,455,429 (5,103,473) 16,645,127
Fidelity Management & Research Co.:
Asset Manager 9,501,494 7,672,857 (4,641,314) 12,533,037
Growth 26,845,882 67,064,022 (45,321,409) 48,588,495
Overseas 19,913,166 15,724,213 (10,162,431) 25,474,948
Money Market 18,412,252 113,113,411 (96,726,625) 34,799,038
Index 500 70,067,500 54,287,747 (5,123,308) 119,231,939
INVESCO Funds Group, Inc.:
Total Return 7,814,990 5,666,870 (2,462,590) 11,019,270
Equity Income 10,163,306 6,427,991 (2,056,917) 14,534,380
High Yield 8,752,765 4,424,859 (3,267,099) 9,910,525
Utilities 1,727,429 2,817,915 (897,760) 3,647,584
Small Company Growth 674,581 2,769,372 (650,329) 2,793,624
Van Eck Associates Corporation:
Worldwide Hard Assets 1,517,809 2,248,842 (1,608,864) 2,157,787
Worldwide Bond 201,853 461,651 (321,792) 341,712
Worldwide Emerging Markets 414,017 5,282,900 (3,486,932) 2,209,985
Worldwide Real Estate 76,310 592,249 (100,720) 567,839
AIM Advisors, Inc.
Capital Appreciation 1,085,211 3,341,733 (494,628) 3,932,316
Government Securities 2,560,855 7,659,984 (2,640,931) 7,579,908
----------------- ------------------- ------------------ ------------------
Total $272,757,896 $377,354,748 $(217,507,903) $432,604,741
================= =================== ================== ==================
</TABLE>
Aggregate proceeds from sales of investments for the year ended December 31,
1999 were $235,699,349.
- --------------------------------------------------------------------------------
Strategic Advantage II 159
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE D. OTHER POLICY DEDUCTIONS
The Variable Universal Life policies 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 Variable Universal Life policies allow the policyholders to borrow against
their policies by using them as collateral for a loan. At the time of borrowing
against the policies, an amount equal to the loan amount is transferred from the
Separate Account divisions to a Loan Division in the Company's General Account
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.
- --------------------------------------------------------------------------------
Strategic Advantage II 160
<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, 1999:
<TABLE>
<CAPTION>
(DECREASE)
FOR
OUTSTANDING INCREASE WITHDRAWALS OUTSTANDING
AT BEGINNING FOR PAYMENTS AND OTHER AT END
DIVISION OF YEAR RECEIVED DEDUCTIONS OF YEAR
- ------------------------------------------- ----------------- ----------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Neuberger Berman Management Inc.:
Limited Maturity Bond 1,245,559.121 421,349.898 (777,749.415) 889,159.604
Growth 447,486.376 233,319.969 (246,467.977) 434,338.368
Partners 986,298.018 385,667.451 (159,832.021) 1,212,133.448
Fred Alger Management, Inc.:
American Small Capitalization 838,692.418 603,898.891 (386,833.825) 1,055,757.484
American MidCap Growth 402,532.472 225,361.191 (51,155.349) 576,738.314
American Growth 923,696.066 585,374.403 (251,698.832) 1,257,371.637
American Leveraged AllCap 221,642.446 410,084.371 (206,445.718) 425,281.099
Fidelity Management & Research Co.:
Asset Manager 600,255.213 393,745.577 (271,282.884) 722,717.906
Growth 1,293,480.338 2,233,512.279 (1,850,755.971) 1,676,236.646
Overseas 1,429,659.907 963,512.218 (676,554.498) 1,716,617.627
Money Market 1,526,404.399 9,068,762.545 (7,831,518.647) 2,763,648.297
Index 500 3,215,990.519 1,840,375.191 (283,881.113) 4,772,484.597
INVESCO Funds Group, Inc.:
Total Return 450,557.216 300,554.107 (148,923.709) 602,187.614
Equity Income 473,616.752 252,971.948 (105,540.763) 621,047.937
High Yield 486,858.648 226,071.484 (176,066.186) 536,863.946
Utilities 110,379.616 140,069.045 (61,038.677) 189,409.984
Small Company Growth 67,506.441 210,114.805 (65,118.036) 212,503.210
Van Eck Associates Corporation:
Worldwide Hard Assets 132,513.824 246,466.322 (142,007.717) 236,972.429
Worldwide Bond 18,656.317 43,237.412 (28,779.651) 33,114.078
Worldwide Emerging Markets 67,354.295 582,654.548 (421,189.648) 228,819.195
Worldwide Real Estate 8,765.232 67,514.147 (11,312.206) 64,967.173
AIM Advisors, Inc.:
Capital Appreciation 105,457.867 263,795.629 (45,407.464) 323,846.032
Government Securities 246,150.062 723,064.769 (253,309.682) 715,905.149
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 161
<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, 1998:
<TABLE>
<CAPTION>
(DECREASE)
FOR
OUTSTANDING INCREASE WITHDRAWALS OUTSTANDING
AT BEGINNING FOR PAYMENTS AND OTHER AT END
DIVISION OF YEAR RECEIVED DEDUCTIONS OF YEAR
- ------------------------------------------ ------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Neuberger Berman Management Inc.:
Limited Maturity Bond 552,985.394 801,233.327 (108,659.600) 1,245,559.121
Growth 316,146.084 250,854.619 (119,514.327) 447,486.376
Government Income 75,811.559 58.537 (75,870.096) -
Partners 626,285.721 455,096.290 (95,083.993) 986,298.018
Fred Alger Management, Inc.:
American Small Capitalization 648,733.740 333,770.247 (143,811.569) 838,692.418
American MidCap Growth 288,809.482 167,037.228 (53,314.238) 402,532.472
American Growth 569,990.309 442,313.190 (88,607.433) 923,696.066
American Leveraged AllCap 148,542.639 102,168.282 (29,068.475) 221,642.446
Fidelity Management & Research Co.:
Asset Manager 410,906.106 270,972.780 (81,623.673) 600,255.213
Growth 983,842.388 614,542.294 (304,904.344) 1,293,480.338
Overseas 950,328.899 861,220.218 (381,889.210) 1,429,659.907
Money Market 1,303,059.881 5,059,561.984 (4,836,217.466) 1,526,404.399
Index 500 1,863,056.104 1,617,935.444 (265,001.029) 3,215,990.519
INVESCO Funds Group, Inc.:
Total Return 184,042.238 307,178.543 (40,663.565) 450,557.216
Equity Income 297,553.033 216,644.366 (40,580.647) 473,616.752
High Yield 333,501.857 283,205.205 (129,848.414) 486,858.648
Utilities 78,118.685 41,701.114 (9,440.183) 110,379.616
Small Company Growth - 71,535.065 (4,028.624) 67,506.441
Van Eck Associates Corporation:
Worldwide Balanced 32,139.282 190.627 (32,329.909) -
Worldwide Hard Assets 77,046.773 68,491.375 (13,024.324) 132,513.824
Worldwide Bond - 18,882.425 (226.108) 18,656.317
Worldwide Emerging Markets - 105,064.405 (37,710.110) 67,354.295
Worldwide Real Estate - 9,848.072 (1,082.840) 8,765.232
AIM Advisors, Inc.:
Capital Appreciation - 108,895.839 (3,437.972) 105,457.867
Government Securities - 261,432.015 (15,281.953) 246,150.062
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 162
<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, 1997:
<TABLE>
<CAPTION>
(DECREASE)
FOR
OUTSTANDING INCREASE WITHDRAWALS OUTSTANDING
AT BEGINNING FOR PAYMENTS AND OTHER AT END
DIVISION OF YEAR RECEIVED DEDUCTIONS OF YEAR
- ------------------------------------------- ----------------- ------------------ -------------------- -----------------
<S> <C> <C> <C> <C>
Neuberger Berman Management Inc.:
Limited Maturity Bond 218,725.891 334,572.082 (312.579) 552,985.394
Growth 133,567.983 187,433.957 (4,855.856) 316,146.084
Government Income 142,773.403 30,012.660 (96,974.504) 75,811.559
Partners 275,892.457 354,159.052 (3,765.788) 626,285.721
Fred Alger Management, Inc.:
American Small Capitalization 297,073.322 368,659.345 (16,998.927) 648,733.740
American MidCap Growth 150,480.473 143,410.236 (5,081.227) 288,809.482
American Growth 282,175.287 292,019.948 (4,204.926) 569,990.309
American Leveraged AllCap 53,044.470 96,743.489 (1,245.320) 148,542.639
Fidelity Management & Research Co.:
Asset Manager 123,908.168 294,115.342 (7,117.404) 410,906.106
Growth 470,285.667 522,440.765 (8,884.044) 983,842.388
Overseas 367,948.109 589,863.772 (7,482.982) 950,328.899
Money Market 753,707.969 6,017,484.702 (5,468,132.790) 1,303,059.881
Index 500 640,890.650 1,227,420.261 (5,254.807) 1,863,056.104
INVESCO Funds Group, Inc.:
Total Return 64,490.483 121,436.060 (1,884.305) 184,042.238
Equity Income 87,035.356 212,619.908 (2,102.231) 297,553.033
High Yield 108,999.107 225,144.290 (641.540) 333,501.857
Utilities 18,008.490 63,007.328 (2,897.133) 78,118.685
Van Eck Associates Corporation:
Worldwide Balanced 29,808.787 5,838.562 (3,508.067) 32,139.282
Worldwide Hard Assets 21,966.093 55,323.208 (242.528) 77,046.773
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 163
<PAGE>
Security Life Separate Account L1
Notes to Financial Statements (continued)
NOTE H. NET ASSETS
Net assets at December 31, 1999 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 Inc.:
Limited Maturity Bond $ 10,334,928 $ 1,357,452 $ (311,830) $ (179,722) $ 11,200,828
Growth 6,662,216 2,132,968 51,289 4,229,681 13,076,154
Partners 24,515,009 2,799,524 1,706,031 399,436 29,420,000
Fred Alger Management, Inc.:
American Small Capitalization 16,912,254 3,798,599 424,083 6,644,819 27,779,755
American MidCap Growth 10,911,311 2,117,608 881,608 3,376,960 17,287,487
American Growth 24,684,957 4,633,321 3,185,644 8,879,576 41,383,498
American Leveraged AllCap 12,723,008 733,681 3,191,248 6,415,723 23,063,660
Fidelity Management & Research Co.:
Asset Manager 10,710,354 1,643,524 184,257 1,052,323 13,590,458
Growth 32,968,928 5,944,777 9,679,911 9,564,214 58,157,830
Overseas 22,436,070 1,918,003 1,221,073 9,409,135 34,984,281
Money Market 32,057,869 2,739,539 - - 34,797,408
Index 500 108,954,555 2,164,790 8,124,017 33,672,404 152,915,766
INVESCO Funds Group, Inc.:
Total Return 9,954,690 564,724 499,981 (632,745) 10,386,650
Equity Income 12,471,276 1,096,169 998,146 1,654,962 16,220,553
High Yield 8,030,598 1,920,186 (39,129) (490,978) 9,420,677
Utilities 3,156,961 58,753 432,472 493,129 4,141,315
Small Company Growth 2,644,377 (14,924) 230,652 1,609,111 4,469,216
Van Eck Associates Corporation:
Worldwide Hard Assets 2,458,760 148,762 (449,512) 148,068 2,306,078
Worldwide Bond 356,209 9,684 (25,724) (5,966) 334,203
Worldwide Emerging Markets 1,960,631 (12,622) 308,948 857,102 3,114,059
Worldwide Real Estate 568,214 (162) (213) (18,002) 549,837
AIM Advisors, Inc.:
Capital Appreciation 3,725,157 118,230 88,942 1,376,593 5,308,922
Government Securities 7,353,846 226,373 (310) (185,576) 7,394,333
----------------- --------------- ----------------- --------------- ---------------
Total $366,552,178 $36,098,959 $30,381,584 $88,270,247 $521,302,968
================= =============== ================= =============== ===============
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 165
<PAGE>
APPENDIX A
FACTORS FOR THE
CASH VALUE ACCUMULATION TEST
FOR A LIFE INSURANCE POLICY
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Attained Attained Attained
Age Male Female Unisex Age Male Female Unisex Age Male Female Unisex
--- ---- ------ ------ --- ---- ------ ------ --- ---- ------ ------
0 11.727 14.234 12.149 34 4.188 4.902 4.314 68 1.583 1.769 1.620
1 11.785 14.209 12.194 35 4.052 4.742 4.173 69 1.550 1.724 1.585
2 11.458 13.815 11.857 36 3.920 4.586 4.037 70 1.518 1.681 1.552
3 11.128 13.417 11.515 37 3.793 4.437 3.906 71 1.488 1.639 1.520
4 10.803 13.023 11.178 38 3.670 4.293 3.780 72 1.459 1.599 1.489
5 10.481 12.635 10.845 39 3.553 4.154 3.658 73 1.432 1.560 1.460
6 10.161 12.253 10.514 40 3.439 4.021 3.541 74 1.406 1.524 1.433
7 9.844 11.875 10.187 41 3.330 3.894 3.429 75 1.382 1.490 1.407
8 9.530 11.505 9.863 42 3.226 3.771 3.322 76 1.359 1.457 1.383
9 9.221 11.141 9.545 43 3.125 3.654 3.218 77 1.338 1.427 1.360
10 8.918 10.784 9.233 44 3.028 3.541 3.119 78 1.318 1.398 1.338
11 8.623 10.436 8.928 45 2.936 3.432 3.023 79 1.299 1.371 1.318
12 8.338 10.098 8.634 46 2.846 3.328 2.931 80 1.281 1.345 1.298
13 8.066 9.771 8.353 47 2.761 3.227 2.843 81 1.264 1.321 1.280
14 7.808 9.455 8.085 48 2.678 3.129 2.758 82 1.248 1.298 1.262
15 7.564 9.150 7.831 49 2.599 3.035 2.676 83 1.233 1.277 1.245
16 7.335 8.857 7.592 50 2.522 2.945 2.597 84 1.218 1.257 1.230
17 7.118 8.575 7.364 51 2.449 2.858 2.522 85 1.205 1.238 1.215
18 6.911 8.302 7.148 52 2.378 2.774 2.449 86 1.193 1.221 1.202
19 6.713 8.038 6.939 53 2.311 2.693 2.379 87 1.181 1.205 1.189
20 6.521 7.782 6.737 54 2.246 2.615 2.312 88 1.171 1.190 1.177
21 6.334 7.534 6.540 55 2.184 2.540 2.248 89 1.160 1.176 1.166
22 6.150 7.293 6.347 56 2.125 2.468 2.187 90 1.151 1.163 1.155
23 5.969 7.059 6.158 57 2.068 2.398 2.128 91 1.141 1.150 1.144
24 5.791 6.831 5.971 58 2.014 2.330 2.071 92 1.131 1.137 1.133
25 5.615 6.611 5.788 59 1.962 2.265 2.017 93 1.120 1.125 1.122
26 5.441 6.396 5.608 60 1.912 2.201 1.965 94 1.109 1.112 1.110
27 5.271 6.188 5.431 61 1.864 2.139 1.915 95 1.097 1.098 1.097
28 5.104 5.986 5.258 62 1.818 2.079 1.867 96 1.083 1.084 1.084
29 4.940 5.791 5.089 63 1.774 2.022 1.821 97 1.069 1.069 1.069
30 4.781 5.601 4.925 64 1.732 1.967 1.777 98 1.054 1.054 1.054
31 4.626 5.418 4.765 65 1.692 1.914 1.735 99 1.040 1.040 1.040
32 4.476 5.241 4.610 66 1.654 1.863 1.695 100 1.000 1.000 1.000
33 4.330 5.069 4.459 67 1.617 1.815 1.657
</TABLE>
- --------------------------------------------------------------------------------
Strategic Advantage II 166
<PAGE>
APPENDIX B
FACTORS FOR THE
GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST
FOR A LIFE INSURANCE POLICY
Attained Attained Attained Attained
Age Factor Age Factor Age Factor Age Factor
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
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 167
<PAGE>
APPENDIX C
PERFORMANCE INFORMATION
POLICY PERFORMANCE
The following hypothetical illustrations demonstrate how the actual investment
experience of each variable investment option of the separate 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 net portfolio's management
fees after any voluntary waiver and other operating expenses but do not reflect
the policy level or separate 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, received
at the beginning of each year, for a hypothetical policy with a $300,000 stated
death benefit, 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 variable investment option 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 separate account
for mortality and expense risks, and each portfolio's charges and expenses. SEE
CHARGES, DEDUCTIONS AND REFUNDS, PAGE 44. This prospectus also contains
illustrations based on assumed rates of return. SEE ILLUSTRATIONS OF DEATH
BENEFITS, ACCOUNT VALUES, CASH SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE
52.
Past performance is not an indication of future results. Actual investment
results may be more or less than those shown in the hypothetical illustrations.
- --------------------------------------------------------------------------------
Strategic Advantage II 168
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
Nonsmoker Male Age 45 Cash Value Accumulation Test
Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
AIM V.I. CAPITAL APPRECIATION FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/94 2.50% 5,058 4,483 300,000
12/31/95 35.69% 12,661 11,899 300,000
12/31/96 17.58% 19,364 18,846 300,000
12/31/97 13.51% 26,077 26,077 300,000
12/31/98 19.30% 35,941 35,941 300,000
12/31/99 44.61% 57,759 57,759 300,000
AIM V.I. GOVERNMENT SECURITIES FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/94 -3.73% 4,773 4,198 300,000
12/31/95 15.56% 10,528 9,766 300,000
12/31/96 2.29% 14,705 14,188 300,000
12/31/97 8.16% 19,825 19,825 300,000
12/31/98 7.66% 25,711 25,711 300,000
12/31/99 -1.32% 29,265 29,265 300,000
ALGER AMERICAN GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 4.14% 5,132 4,557 300,000
12/31/91 40.39% 13,187 12,426 300,000
12/31/92 12.38% 19,105 18,587 300,000
12/31/93 22.47% 27,843 27,843 300,000
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
12/31/98 48.07% 124,944 124,944 300,000
12/31/99 33.74% 171,536 171,536 385,271
The assumptions underlying these values are described in Performance
Information, page 168.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage II 169
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/96 12.04% 5,494 4,919 300,000
12/31/97 19.68% 11,743 10,981 300,000
12/31/98 57.83% 24,488 23,970 300,000
12/31/99 78.06% 50,153 50,153 300,000
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/94 -1.54% 4,873 4,298 300,000
12/31/95 44.45% 13,183 12,421 300,000
12/31/96 11.90% 19,019 18,501 300,000
12/31/97 15.01% 26,031 26,031 300,000
12/31/98 30.30% 39,225 39,225 300,000
12/31/99 31.85% 56,937 56,937 300,000
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 8.71% 5,341 4,766 300,000
12/31/91 57.54% 15,068 14,306 300,000
12/31/92 3.55% 19,556 19,038 300,000
12/31/93 13.28% 26,240 26,240 300,000
12/31/94 -4.38% 28,901 28,901 300,000
12/31/95 44.31% 47,535 47,535 300,000
12/31/96 4.18% 53,477 53,477 300,000
12/31/97 11.39% 63,739 63,739 300,000
12/31/98 15.53% 77,869 77,869 300,000
12/31/99 43.42% 116,899 116,899 300,000
The assumptions underlying these values are described in Performance
Information, page 168.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage II 170
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
FIDELITY VIP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 -11.73% 4,408 3,833 300,000
12/31/91 45.51% 12,604 11,843 300,000
12/31/92 9.32% 17,957 17,439 300,000
12/31/93 19.37% 25,768 25,768 300,000
12/31/94 -0.02% 29,763 29,763 300,000
12/31/95 35.36% 45,725 45,725 300,000
12/31/96 14.71% 56,854 56,854 300,000
12/31/97 23.48% 74,850 74,850 300,000
12/31/98 39.49% 109,532 109,532 300,000
12/31/99 37.44% 155,287 155,287 348,776
FIDELITY VIP MONEY MARKET PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 8.04% 5,311 4,736 300,000
12/31/91 6.09% 10,273 9,511 300,000
12/31/92 3.90% 14,669 14,152 300,000
12/31/93 3.23% 18,872 18,872 300,000
12/31/94 4.25% 23,899 23,899 300,000
12/31/95 5.87% 29,513 29,513 300,000
12/31/96 5.41% 35,217 35,217 300,000
12/31/97 5.51% 41,187 41,187 300,000
12/31/98 5.46% 47,378 47,378 300,000
12/31/99 5.17% 53,686 53,686 300,000
The assumptions underlying these values are described in Performance
Information, page 168.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage II 171
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
FIDELITY VIP OVERSEAS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 -1.67% 4,867 4,292 300,000
12/31/91 8.00% 9,973 9,211 300,000
12/31/92 -10.72% 12,371 11,853 300,000
12/31/93 37.35% 22,068 22,068 300,000
12/31/94 1.72% 26,544 26,544 300,000
12/31/95 9.74% 33,491 33,491 300,000
12/31/96 13.15% 42,307 42,307 300,000
12/31/97 11.56% 51,439 51,439 300,000
12/31/98 12.81% 62,218 62,218 300,000
12/31/99 42.55% 93,984 93,984 300,000
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 6.72% 5,250 4,675 300,000
12/31/91 22.56% 11,717 10,955 300,000
12/31/92 11.71% 17,360 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
12/31/98 15.05% 74,543 74,543 300,000
12/31/99 11.09% 86,765 86,765 300,000
The assumptions underlying these values are described in Performance
Information, page 168.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage II 172
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
FIDELITY VIP II INDEX 500 PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/93 9.74% 5,388 4,813 300,000
12/31/94 1.04% 9,886 9,124 300,000
12/31/95 37.19% 18,777 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
12/31/98 28.31% 58,889 58,889 300,000
12/31/99 20.51% 75,527 75,527 300,000
INVESCO VIF-EQUITY INCOME FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 29.25% 6,281 5,706 300,000
12/31/96 22.28% 12,944 12,182 300,000
12/31/97 28.17% 21,451 20,933 300,000
12/31/98 15.30% 28,885 28,885 300,000
12/31/99 14.84% 37,791 37,791 300,000
INVESCO VIF-HIGH YIELD FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 19.76% 5,847 5,272 300,000
12/31/96 16.59% 11,861 11,099 300,000
12/31/97 17.33% 18,390 17,873 300,000
12/31/98 1.42% 22,288 22,288 300,000
12/31/99 9.20% 28,758 28,758 300,000
INVESCO VIF-SMALL COMPANY GROWTH FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/98 16.38% 5,692 5,117 300,000
12/31/99 91.06% 18,845 18,083 300,000
The assumptions underlying these values are described in Performance
Information, page 168.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage II 173
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
INVESCO VIF-TOTAL RETURN FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 22.79% 5,985 5,410 300,000
12/31/96 12.18% 11,586 10,824 300,000
12/31/97 22.91% 18,919 18,402 300,000
12/31/98 9.56% 24,675 24,675 300,000
12/31/99 -3.40% 27,697 27,697 300,000
INVESCO VIF-UTILITIES FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 9.08% 5,358 4,783 300,000
12/31/96 12.76% 10,940 10,179 300,000
12/31/97 23.41% 18,204 17,686 300,000
12/31/98 25.48% 27,411 27,411 300,000
12/31/99 19.13% 37,469 37,469 300,000
NEUBERGER BERMAN GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 -8.19% 4,570 3,995 300,000
12/31/91 29.73% 11,497 10,735 300,000
12/31/92 9.54% 16,787 16,269 300,000
12/31/93 6.79% 21,781 21,781 300,000
12/31/94 -4.99% 24,502 24,502 300,000
12/31/95 31.73% 37,597 37,597 300,000
12/31/96 9.14% 45,251 45,251 300,000
12/31/97 29.01% 63,328 63,328 300,000
12/31/98 15.53% 77,396 77,396 300,000
12/31/99 50.40% 121,906 121,906 300,000
The assumptions underlying these values are described in Performance
Information, page 168.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage II 174
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
NEUBERGER BERMAN LIMITED MATURITY BOND PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 8.32% 5,323 4,748 300,000
12/31/91 11.34% 10,771 10,009 300,000
12/31/92 5.18% 15,368 14,850 300,000
12/31/93 6.63% 20,243 20,243 300,000
12/31/94 -0.15% 24,239 24,239 300,000
12/31/95 10.94% 31,318 31,318 300,000
12/31/96 4.31% 36,718 36,718 300,000
12/31/97 6.74% 43,265 43,265 300,000
12/31/98 4.39% 49,052 49,052 300,000
12/31/99 1.48% 53,477 53,477 300,000
NEUBERGER BERMAN PARTNERS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 36.47% 6,612 6,037 300,000
12/31/96 29.57% 14,113 13,351 300,000
12/31/97 31.25% 23,486 22,969 300,000
12/31/98 4.21% 28,188 28,188 300,000
12/31/99 7.37% 34,569 34,569 300,000
The assumptions underlying these values are described in Performance
Information, page 168.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage II 175
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
VAN ECK WORLDWIDE BOND FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 11.25% 5,457 4,882 300,000
12/31/91 18.39% 11,579 10,817 300,000
12/31/92 -5.25% 14,627 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
12/31/98 12.75% 51,254 51,254 300,000
12/31/99 -7.82% 50,558 50,558 300,000
VAN ECK WORLDWIDE EMERGING MARKETS FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/96 26.82% 6,170 5,595 300,000
12/31/97 -11.61% 9,399 8,637 300,000
12/31/98 -34.15% 8,814 8,297 300,000
12/31/99 100.28% 25,249 25,249 300,000
VAN ECK WORLDWIDE HARD ASSETS FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/91 -2.93% 4,810 4,235 300,000
12/31/92 -4.09% 8,858 8,096 300,000
12/31/93 64.83% 20,842 20,324 300,000
12/31/94 -4.78% 23,229 23,229 300,000
12/31/95 10.99% 30,273 30,273 300,000
12/31/96 18.04% 40,426 40,426 300,000
12/31/97 -1.67% 43,502 43,502 300,000
12/31/98 -30.93% 32,531 32,531 300,000
12/31/99 21.00% 44,001 44,001 300,000
The assumptions underlying these values are described in Performance
Information, page 168.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage II 176
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test
Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
VAN ECK WORLDWIDE REAL ESTATE FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/98 -11.35% 4,426 3,851 300,000
12/31/99 -2.01% 8,665 7,904 300,000
The assumptions underlying these values are described in Performance
Information, page 168.
* These annual total return figures reflect the portfolio's management fees and
other operating expenses but do not reflect the policy level or separate account
asset-based charges and deductions which, if reflected, would result in lower
total return figures than those shown.
- --------------------------------------------------------------------------------
Strategic Advantage II 177
<PAGE>
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Strategic Advantage II 178
