As filed with the Securities and Exchange Commission on April 27, 2000.
Registration No. 333-34402
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
Pre-Effective Amendment No. 1
-----------------
SECURITY LIFE SEPARATE ACCOUNT L1
(Exact Name of Trust)
SECURITY LIFE OF DENVER INSURANCE COMPANY
(Name of Depositor)
1290 Broadway
Denver, Colorado 80203-5699
(Address of Depositor's Principal Executive Offices)
Copy to:
GARY W. WAGGONER, ESQ. KIMBERLY J. SMITH, ESQ.
Security Life of Denver Insurance Company Sutherland Asbill & Brennan LLP
1290 Broadway 1275 Pennsylvania Avenue, NW
Denver, Colorado 80203-5699 Washington, D.C. 20004-2415
(202) 383-0314
(Name and Address of Agent for Service)
----------------------------
Title of securities being registered: Strategic Benefit variable life insurance
policies.
Approximate date of proposed public offering: as soon as practicable after the
effective date of this Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 333-34402)
Cross-Reference Table
Form N-8B-2 Item No. Caption in Prospectus
- -------------------- ---------------------
1, 2 Cover; Security Life of Denver Insurance Company;
Security Life Separate Account L1
3 Inapplicable
4 Security Life of Denver Insurance Company
5, 6 Security Life Separate Account L1
7 Inapplicable
8 Financial Statements
9 Inapplicable
10(a), (b), (c), (d), (e) Policy Summary; Policy Values, Determining
Values in the Variable Divisions; Charges and
Deductions; Surrender; Partial Withdrawals;
Guaranteed Interest Division; Transfers of Account
Value; Right to Exchange Policy; Lapse;
Reinstatement; Premiums
10(f) Voting Privileges; Right to Change Operations
10(g), (h) Right to Change Operations
10(i) Tax Considerations; Detailed Information
about the Policy; General Policy Provisions;
Guaranteed Interest Division
11, 12 Security Life Separate Account L1
13 Policy Summary; Charges and Deductions;
and Group or Sponsored Arrangements, or
Corporate Purchasers
ii
<PAGE>
Form N-8B-2 Item No. Caption in Prospectus
- -------------------- ---------------------
14, 15 Policy Summary; Free Look Period; General Policy
Provisions; Applying for a Policy
16 Premiums; Allocation of Net Premiums; How We
Calculate Accumulation Unit Values
17 Premium Payments Affect Your Coverage; Surrender;
Partial Withdrawals
18 Policy Summary; Tax Considerations; Detailed
Information about the Policy; Security Life
Separate Account L1;
19 Reports to Owners; Notification and
Claims Procedures; Performance Information
(Appendix B)
20 See 10(g) & 10(a)
21 Policy Loans
22 Policy Summary; Premiums; Grace Period; Security
Life Separate Account L1; Detailed Information
about the Policy
23 Inapplicable
24 Inapplicable
25 Security Life of Denver Insurance Company
26 Inapplicable
27, 28, 29, 30 Security Life of Denver Insurance Company
31, 32, 33, 34 Inapplicable
35 Inapplicable
36 Inapplicable
iii
<PAGE>
Form N-8B-2 Item No. Caption in Prospectus
- -------------------- ---------------------
37 Inapplicable
38, 39, 40, 41(a) General Policy Provisions; Distribution of
the Policies; Security Life of Denver Insurance
Company
41(b), 41(c), 42, 43 Inapplicable
44 Determining Values in the Variable Divisions;
How We Calculate Accumulation Unit Values
45 Inapplicable
46 Partial Withdrawals; Detailed Information about
the Policy
47, 48, 49, 50 Inapplicable
51 Detailed Information about the Policy
52 Determining Values in the Variable Divisions;
Right to Change Operations
53(a) Tax Considerations
53(b), 54, 55 Inapplicable
56, 57, 58 Inapplicable
59 Financial Statements
iv
<PAGE>
Prospectus
STRATEGIC BENEFIT LIFE INSURANCE
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 and deductions beginning on page 40 in
this prospectus.
You should read this prospectus and keep it for future reference. A prospectus
for each underlying fund 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 returnable by you during the free look period or right to examine
policy period if you are not satisfied.
YOUR POLICY 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
o can be invested in up to 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 if you have an amount in the
guaranteed interest division
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
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
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 Benefit 2
<PAGE>
TABLE OF CONTENTS
POLICY SUMMARY.................................................................4
Your Policy..............................................................4
Free Look Period.........................................................4
Your Premium Payments....................................................4
Charges and Deductions...................................................5
Guaranteed Interest Division.............................................6
Variable Division........................................................6
Policy Values............................................................8
Transfers of Account Value...............................................8
Special Policy Features..................................................8
Policy Modification, Termination and Continuation
Features............................................................9
Death Benefits...........................................................9
Tax Considerations.......................................................9
INFORMATION ABOUT 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....................................19
DETAILED INFORMATION ABOUT THE
POLICY..................................................................19
Applying for a Policy...................................................19
Temporary Insurance.....................................................19
Policy Issuance.........................................................19
Premiums................................................................20
Premium Payments Affect Your Coverage...................................21
Death Benefits..........................................................22
Adjustable Term Insurance Rider.........................................26
Special Features........................................................27
Policy Values...........................................................28
Transfers of Account Value..............................................29
Dollar Cost Averaging...................................................30
Automatic Rebalancing...................................................31
Policy Loans............................................................31
Partial Withdrawals.....................................................32
Lapse...................................................................34
Reinstatement...........................................................34
Surrender...............................................................34
General Policy Provisions...............................................35
Free Look Period...................................................35
Your Policy........................................................35
Guaranteed Issue...................................................35
Age ..............................................................35
Ownership..........................................................35
Beneficiary(ies)...................................................35
Collateral Assignment..............................................36
Incontestability...................................................36
Misstatements of Age or Gender.....................................36
Suicide............................................................36
Transaction Processing.............................................36
Notification and Claims Procedures.................................37
Telephone Privileges...............................................37
Non-participation..................................................37
Distribution of the Policies.......................................37
Advertising Practices and Sales Literature
.............................................................37
Settlement Provisions..............................................38
Administrative Information About the Policy.............................38
CHARGES AND DEDUCTIONS........................................................40
Deductions from Premiums................................................40
Monthly Deductions from Account Value...................................41
Policy Transaction Fees.................................................42
Other Charges...........................................................43
Group or Sponsored Arrangements and Corporate
Purchasers.........................................................43
TAX CONSIDERATIONS............................................................43
Tax Status of the Policy................................................43
Diversification Requirements............................................44
Tax Treatment of Policy Death Benefits..................................44
Modified Endowment Contracts............................................45
Multiple Policies.......................................................45
Distributions Other than Death Benefits from
Modified Endowment Contracts.......................................45
Distributions Other than Death Benefits from
Policies That Are Not Modified Endowment
Contracts..........................................................45
Investment in the Policy................................................46
Policy Loans............................................................46
Section 1035 Exchanges..................................................46
Tax-exempt Policy Owners................................................46
Possible Tax Law Changes................................................46
Changes to Comply with the Law..........................................46
Other...................................................................47
ILLUSTRATIONS.................................................................48
ADDITIONAL INFORMATION........................................................54
Directors and Officers..................................................54
Regulation..............................................................55
Legal Matters...........................................................55
Legal Proceedings.......................................................55
Experts.................................................................55
Registration Statement..................................................55
FINANCIAL STATEMENTS..........................................................56
APPENDIX A...................................................................157
APPENDIX B...................................................................158
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Strategic Benefit 3
<PAGE>
POLICY SUMMARY
YOUR POLICY
This policy is available only to groups of ten or more insured people. This
policy is for use on a multi-life basis where the insured people share a common
employment or business relationship. The policy may be owned by an individual
corporation, trust, association or similar entity. SEE POLICY ISSUANCE, PAGE 19.
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 your policy value by
taking loans or partial withdrawals. You may also surrender your policy for its
surrender value. When the insured person reaches age 100 you may surrender the
policy or continue it under the continuation of coverage option. SEE
CONTINUATION OF COVERAGE, PAGE 27.
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 specified by state law, you have the right to examine your policy
and return it for a refund of all premiums 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 34.
YOUR 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; and
o sufficient to keep your policy in force.
The amount of premium you pay affects the length of time your policy stays in
force. SEE PREMIUMS, PAGE 20.
ALLOCATION OF NET PREMIUMS
This policy has premium-based charges which are subtracted from your payments.
We add the balance, or the 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.
The following table summarizes the policy charges and fees. For details on these
charges, SEE CHARGES AND DEDUCTIONS, PAGE 40.
- --------
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
people's lifetimes.
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 Benefit 4
<PAGE>
CHARGES AND DEDUCTIONS
<TABLE>
<CAPTION>
- ------------------------------------ ----------------------------- -------------------------------------------------
CHARGE WHEN DEDUCTED AMOUNT DEDUCTED
==================================== ============================= =================================================
<S> <C> <C>
Initial Sales Charge From each premium payment 0.5% of premium received in policy or segment
received after the end of years 2 and later
policy year one
- ------------------------------------ ----------------------------- -------------------------------------------------
Tax Charges From each premium payment o 2.5% of premium up to target premium
o State and local taxes received in the first policy or segment year.
2.5% of all premium payments in years 2
o Estimated federal tax and later
treatment of deferred o 1.5% of premium up to target premium
acquisition costs in the first policy or segment year.
1.5% of all premium payments in years 2
and later
These charges are not guaranteed maximum rates.
==================================== ============================= =================================================
Mortality & Expense Risk Charge Monthly from account value o 0.07083% of the variable division
account value during policy years 1
through 10 (equivalent annual rate of
0.85%)
o 0.05000% of the variable division
account value during policy years 11
through 20 (equivalent annual rate of
0.60%)
o 0.00417% of the variable division
account value during policy year 21 and
later (equivalent annual rate of 0.05%)
- ------------------------------------ ----------------------------- -------------------------------------------------
Monthly Administrative Charge Monthly from account value $12 per month for first policy year and $6 per
month thereafter
- ------------------------------------ ----------------------------- -------------------------------------------------
Cost of Insurance Charge Monthly from account value Varies based on net amount at risk. See your
policy schedule pages
==================================== ============================= =================================================
Partial Withdrawal Fee On Transaction date from Up to $25
account value
- ------------------------------------ ----------------------------- -------------------------------------------------
Transfer Fee On Transaction date from Twelve free transfers per policy year, then $10
account value per transfer
- ------------------------------------ ----------------------------- -------------------------------------------------
Illustrations On Transaction date from One free illustration per policy year, then $25
account value per illustration
- ------------------------------------ ----------------------------- -------------------------------------------------
Premium Allocation Change On Transaction date from Twelve free premium allocation changes per
account value policy year, then $25 per change
==================================== ============================= =================================================
Deferred Sales Charge From account value at the o 1.75% of premium received in the first
beginning of each policy or policy or segment year up to target premium
segment year in years 2
through 8 o 1.60% of premium received in the first
policy or segment year, in excess of
target premium
- --------------------------------------------------------------------------------
Strategic Benefit 5
<PAGE>
<CAPTION>
- ------------------------------------ ----------------------------- -------------------------------------------------
CHARGE WHEN DEDUCTED AMOUNT DEDUCTED
==================================== ============================= =================================================
<S> <C> <C>
==================================== ============================= =================================================
Continuation of Coverage Policy anniversary nearest One-time $200 administrative fee.
younger insured person's
100th birthday from account
value
==================================== ============================= =================================================
Investment Portfolio Expenses From portfolio assets, See detailed list on next page.
included in daily unit value
- ------------------------------------ ----------------------------- -------------------------------------------------
</TABLE>
GUARANTEED INTEREST DIVISION
The guaranteed interest division guarantees principal and is part of our general
account. Amounts you direct into the guaranteed interest division are credited
with interest at a fixed rate. SEE GUARANTEED INTEREST DIVISION, PAGE 18.
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 OBJECTIVES OF THE INVESTMENT
PORTFOLIOS, PAGE 13.
The separate account purchases shares of the investment portfolios at net asset
value. This price reflects investment management fees and other direct expenses
that are deducted from the portfolio assets as described in the following table.
The fees and expenses are shown in both gross amounts and net amounts shown
after any expenses or fees have been voluntarily absorbed by the investment
portfolio advisers.
The information in this table was provided to us by the portfolios, and we have
not independently verified it. 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 Benefit 6
<PAGE>
INVESTMENT PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET
ASSETS)
<TABLE>
<CAPTION>
Fees and
Investment Total Expenses Total Net
Management 12-b-1 Other Portfolio Waived or Portfolio
Portfolio Fees Fees Expenses Expenses Reimbursed Expenses
--------- ---- ---- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Capital Appreciation Fund 0.62% NA 0.11% 0.73% NA 0.73%
- ---------------------------------------------------------------------------------------------------------------------------
AIM V.I. Government Securities Fund/1/ 0.50% NA 0.40% 0.90% NA 0.90%
- ---------------------------------------------------------------------------------------------------------------------------
THE ALGER AMERICAN FUND
Alger American Small Capitalization 0.85% NA 0.05% 0.90% NA 0.90%
Portfolio
- ---------------------------------------------------------------------------------------------------------------------------
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP Growth Portfolio service class/2/ 0.58% 0.10% 0.09% 0.77% 0.02% 0.77%
- ---------------------------------------------------------------------------------------------------------------------------
VIP Overseas Portfolio service class/2/ 0.73% 0.10% 0.18% 1.01% 0.03% 1.01%
- ---------------------------------------------------------------------------------------------------------------------------
GCG TRUST/3/
Equity Income Portfolio 0.96% NA 0.00% 0.96% NA 0.96%
- ---------------------------------------------------------------------------------------------------------------------------
Growth Portfolio 1.04% NA 0.00% 1.04% NA 1.04%
- ---------------------------------------------------------------------------------------------------------------------------
Hard Assets Portfolio 0.96% NA 0.00% 0.96% NA 0.96%
- ---------------------------------------------------------------------------------------------------------------------------
Limited Maturity Bond Portfolio 0.56% NA 0.01% 0.57% NA 0.57%
- ---------------------------------------------------------------------------------------------------------------------------
Liquid Assets Money Market 0.56% NA 0.00% 0.56% NA 0.56%
- ---------------------------------------------------------------------------------------------------------------------------
Mid-Cap Growth Portfolio 0.91% NA 0.00% 0.91% NA 0.91%
- ---------------------------------------------------------------------------------------------------------------------------
Research Portfolio 0.91% NA 0.00% 0.91% NA 0.91%
- ---------------------------------------------------------------------------------------------------------------------------
Total Return Portfolio 0.91% NA 0.00% 0.91% NA 0.91%
- ---------------------------------------------------------------------------------------------------------------------------
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF-Equity Income Fund /4/ 0.75% NA 0.44% 1.19% 0.02% 1.17%
- ---------------------------------------------------------------------------------------------------------------------------
INVESCO VIF-High Yield Fund/5/ 0.60% NA 0.48% 1.08% 0.01% 1.07%
- ---------------------------------------------------------------------------------------------------------------------------
INVESCO VIF-Small Company Growth Fund /6/ 0.75% NA 3.35% 4.10% 2.39% 1.71%
- ---------------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH
Balanced Capital Focus Fund/7/ 0.60% NA 0.11% 0.71% NA 0.71%
- ---------------------------------------------------------------------------------------------------------------------------
Basic Value Focus Fund - class B share 0.60% 0.15% 0.06% 0.81% NA 0.81%
- ---------------------------------------------------------------------------------------------------------------------------
Global Growth Focus Fund/7/ 0.75% NA 0.12% 0.87% NA 0.87%
- ---------------------------------------------------------------------------------------------------------------------------
Index 500 Fund 0.30% NA 0.05% 0.35% NA 0.35%
- ---------------------------------------------------------------------------------------------------------------------------
Small Cap Value Focus Fund - class B share 0.75% 0.15% 0.06% 0.96% NA 0.96%
- ---------------------------------------------------------------------------------------------------------------------------
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund 1.00% NA 0.22% 1.22% NA 1.22%
- ---------------------------------------------------------------------------------------------------------------------------
Worldwide Emerging Markets Fund/8/ 1.00% NA 0.54% 1.54% 0.20% 1.34%
- ---------------------------------------------------------------------------------------------------------------------------
Worldwide Real Estate Fund/9/ 1.00% NA 2.23% 3.23% 1.79% 1.44%
- ---------------------------------------------------------------------------------------------------------------------------
SECURITY LIFE OF DENVER INSURANCE COMPANY
Guaranteed Interest Division NA NA NA NA NA NA
</TABLE>
/1/ Included in "Other Expenses" of the AIM V.I. Government Securities
Portfolio is 0.10% of interest expense.
- --------------------------------------------------------------------------------
Strategic Benefit 7
<PAGE>
/2/ Each Fidelity Service class fund currently pays .10% of its average net
assets as a 12-b-1 fee. This fee could vary; but cannot exceed .25%. The
total Net Portfolio Expenses presented are before Fidelity absorbed a
portion of the portfolio and custodian expenses for some portfolios with
brokerage commissions and uninvested cash balances. After the fee
absorption, the total net portfolio expenses would be 0.75% for the VIP
Growth Portfolio and 0.98% for the VIP Overseas Portfolio.
/3/ The GCG Trust pays Directed Services Inc. ("DSI") a monthly management fee
based on the annual rates of the average daily net assets of the investment
portfolios. DSI in turn pays the portfolio managers monthly fees for
managing the assets of the portfolios.
/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 were 0.95% and 1.706% respectively.
/7/ Expenses are annualized.
/8/ Van Eck Associates Corporation absorbed expenses exceeding 1.30% of the
Fund's average daily assets, effective May 13, 1999.
/9/ 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 portion of the fund's expenses.
POLICY VALUES
Your 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 8.
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 a unit of a variable investment option
on a valuation date. Each variable investment option has a different
accumulation unit value. SEE DETERMINING THE VALUE IN THE VARIABLE DIVISION,
PAGE 28.
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
THE VALUE IN THE VARIABLE DIVISION, PAGE 28 AND HOW WE CALCULATE ACCUMULATION
UNIT VALUES, PAGE 29.
TRANSFERS OF ACCOUNT VALUE
You may make twelve free transfers among the variable investment options or to
the guaranteed interest division each policy year. We charge $10 for each
transfer over twelve you make in a policy year. There are restrictions on
transfers from the guaranteed interest division. SEE TRANSFERS OF ACCOUNT VALUE,
PAGE 29.
SPECIAL POLICY FEATURES
DESIGNATED DEDUCTION OPTION
You may designate one investment option from which we will deduct all your
monthly and deferred sales charges. SEE DESIGNATED DEDUCTION OPTION, PAGE 27.
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 30.
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 31.
- --------------------------------------------------------------------------------
Strategic Benefit 8
<PAGE>
LOANS
You may take a loan against your policy's net account value. We charge an annual
loan interest rate of 3.25%. We credit an annual interest rate of 3% on amounts
held in the loan division as collateral for your loan. A loan may have tax
consequences. SEE POLICY LOANS, PAGE 31 AND TAX CONSIDERATIONS, PAGE 43.
PARTIAL WITHDRAWALS
You may withdraw part of your net account value any time after your first policy
year. 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.
Partial withdrawals may have tax consequences. SEE PARTIAL WITHDRAWALS, PAGE 32
AND TAX CONSIDERATIONS, PAGE 43.
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 state law requires differently. There is no charge for
this exchange. SEE RIGHT TO EXCHANGE POLICY, PAGE 27.
SURRENDER
You may surrender your policy for its surrender value at any time while the
insured person is living. All insurance coverage ends on the date we receive
your request. SEE SURRENDER, PAGE 34.
LAPSE
In general, insurance coverage continues as long as your policy's net account
value is enough to pay the monthly deductions. SEE LAPSE, PAGE 33.
REINSTATEMENT
You may reinstate your policy and rider within five years of its lapse if you
still own the policy and the insured person is still insurable. You will need to
pay required reinstatement premiums.
If you had a policy loan when coverage ended, we will reinstate it with accrued
loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 34.
POLICY MATURITY
If the insured person is living on the policy anniversary nearest the date when
the insured person reaches age 100 (the maturity date) and you do not choose
continuation of coverage, you must surrender your policy and we will pay the net
account value. Your policy then ends. SEE POLICY MATURITY, PAGE 27.
CONTINUATION OF COVERAGE
If the insured person is living at age 100 and the policy is in force, you may
choose the continuation of coverage feature. If this feature becomes effective,
we will deduct a one-time administrative fee of $200 and keep your policy in
force. SEE CONTINUATION OF COVERAGE, PAGE 27.
DEATH BENEFITS
After the insured person's death, we pay death proceeds to the beneficiary(ies)
if your policy is still in force. Depending on the death benefit option you have
chosen and whether or not you have coverage under an adjustable term insurance
rider, your policy's death benefit may vary.
Generally, we require a minimum target death benefit of $50,000 per policy. SEE
DEATH BENEFITS, PAGE 22.
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 43.
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.
- --------------------------------------------------------------------------------
Strategic Benefit 9
<PAGE>
In addition to the events listed above, 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 45.
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 Benefit 10
<PAGE>
HOW THE POLICY WORKS
<TABLE>
<S> <C> <C>
YOUR PREMIUM
You make a premium ---------------------------->
payment
o initial 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
|
|
LAON DIVISION |
Amount set aside to <-------------| Monthly Deductions o cost of insurance
secure a policy loan | ---------------------> charge
| | o monthly administrativ
| | charge
\/ | o mortality and expense
ACCUMULATED VALUE | risk charge
The total value of your --|
policy |
|
| Transaction Fees o partial withdrawal fee
|---------------------> o transfer fee
| o illustration fee
| o premium allocation
| change charge
| o continuation of
| coverage administrative fee
|
|
|
|
|
| Annual Fee
---------------------> o deferred sales charge
Years 2 - 8
</TABLE>
- --------------------------------------------------------------------------------
Strategic Benefit 11
<PAGE>
INFORMATION ABOUT 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 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 a registered 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 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 and
charge losses against the separate account without regard to performance of
other investment accounts.
ORDER OF SEPARATE ACCOUNT LIABILITIES
State law provides that we may not charge general account liabilities against
the separate account's assets equal to its reserves and other liabilities. This
means that if we ever became 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. The
investment performance of a policy depends on the performance of the investment
portfolios you choose.
- --------------------------------------------------------------------------------
Strategic Benefit 12
<PAGE>
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, other than the GCG Trust, 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 distribution, servicing or administration expenses. These advisers include
AIM Advisors, Inc.; Fidelity Management & Research Company; Fred Alger
Management, Inc.; Directed Services, Inc.; INVESCO Funds Group, Inc. Merrill
Lynch Asset Management, L.P. and Van Eck Associates Corporation. The amount of
compensation is usually based on the aggregate assets of the investment
portfolio from contracts that we issue or administer. Some advisers, including
our affiliates, may pay us more than others.
- --------------------------------------------------------------------------------
Strategic Benefit 13
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIOS' OBJECTIVES
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Variable Investment Option Investment Company/ Adviser/ Investment Objective and/or Principal Investment Strategy
Manager/ Sub-Adviser
- ------------------------------------ ------------------------------ ----------------------------------------------------------
<S> <C> <C>
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 Small Capitalization Investment Company: Seeks long-term capital appreciation by focusing on
Portfolio The Alger American Fund small, fast-growing companies that offer innovative
Investment Adviser: products, services or technologies to a rapidly
Fred Alger Management, Inc. expanding marketplace. Under normal circumstances, 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.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
VIP Growth Portfolio Investment Company: Fidelity Seeks capital appreciation by investing in common stocks
Variable Insurance Products of companies that it believes have above-average growth
Fund potential, either domestic or foreign issuers.
Investment Manager:
Fidelity Management &
Research Company
- ------------------------------------ ------------------------------ ----------------------------------------------------------
VIP Overseas Portfolio Investment Company: Fidelity Seeks long-term growth of capital by investing at least
Variable Insurance Products 65% of total assets in foreign securities.
Fund
Investment Manager:
Fidelity Management &
Research Company
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Equity Income Portfolio Investment Company: Seeks substantial dividend income as well as long-term
GCG Trust growth of capital. Invests primarily in common stocks
Investment Manager: of well established companies paying above-average
Directed Services, Inc. dividends.
Portfolio Manager:
T. Rowe Price Associates,
Inc.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
- --------------------------------------------------------------------------------
Strategic Benefit 14
<PAGE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIOS' OBJECTIVES
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Variable Investment Option Investment Company/ Adviser/ Investment Objective and/or Principal Investment Strategy
Manager/ Sub-Adviser
- ------------------------------------ ------------------------------ ----------------------------------------------------------
<S> <C> <C>
Growth Portfolio Investment Company: Seeks capital appreciation. Invests primarily in common
GCG Trust stocks of growth companies that have favorable
Investment Manager: relationships between price/earnings ratios and growth
Directed Services, Inc. rates in sectors offering the potential for
Portfolio Manager: above-average returns.
Janus Capital Corporation
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Hard Assets Portfolio Investment Company: Seeks long-term capital appreciation. Invests primarily
GCG Trust in hard asset securities. Hard asset companies produce
Investment Manager: a commodity.
Directed Services, Inc.
Portfolio Manager:
Baring International
Investment Limited
(an affiliate)
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Limited Maturity Bond Portfolio Investment Company: Seeks highest current income consistent with low risk to
GCG Trust principal and liquidity. Also seeks to enhance its
Investment Manager: total return through capital appreciation when market
Directed Services, Inc. factors, such as falling interest rates and rising bond
Portfolio Manager: prices, indicate that capital appreciation may be
ING Investment Management, available without significant risk to principal.
L.L.C. Invests primarily in diversified limited maturity debt
(an affiliate) securities with average maturity dates of five years or
shorter and generally no more than seven years.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Liquid Asset Portfolio Investment Company: Seeks high level of current income consistent with the
GCG Trust preservation of capital and liquidity. An investment in
Investment Manager: the Fund is not insured or guaranteed by the Federal
Directed Services, Inc. Deposit Insurance Corporation or any other government
Portfolio Manager: agency. Although the Fund seeks to preserve the value
ING Investment Management, of your investment at $1.00 per share, it is possible to
LLC lose money by investing in the Fund.
(an affiliate)
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Mid-Cap Growth Portfolio Investment Company: Seeks long-term growth of capital. Invests primarily in
GCG Trust equity securities of companies with medium market
Investment Manager: capitalization which the portfolio manager believes have
Directed Services, Inc. above-average growth potential.
Portfolio Manager:
Massachusetts Financial
Services Company
- ------------------------------------ ------------------------------ ----------------------------------------------------------
- --------------------------------------------------------------------------------
Strategic Benefit 15
<PAGE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIOS' OBJECTIVES
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Variable Investment Option Investment Company/ Adviser/ Investment Objective and/or Principal Investment Strategy
Manager/ Sub-Adviser
- ------------------------------------ ------------------------------ ----------------------------------------------------------
<S> <C> <C>
GCG Trust Invests 80% in common stocks or securities convertible
Investment Manager: into common stocks of companies believed to have better
Directed Services, Inc. than average prospects for long-term growth, expected
Portfolio Manager: earnings or cash flow.
Massachusetts Financial
Services Company
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Total Return Portfolio Investment Company: Seeks above-average income (compared to a portfolio
GCG Trust entirely invested in equity securities) consistent with
Investment Manager: the prudent employment of capital. Invests primarily in
Directed Services, Inc. a combination of equity and fixed income securities.
Portfolio Manager:
Massachusetts Financial
Services 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 stocks.
Investment Adviser: The rest of the fund's assets are invested in debt
INVESCO Funds Group, Inc. securities, and lower-grade debt securities.
Sub-Advisor:
INVESCO Capital Management,
Inc.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
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 lower-rated
Inc. debt securities and preferred stock, including
Investment Manager: securities issued by foreign companies.
INVESCO Funds Group, Inc.
Sub-Advisor:
INVESCO Capital Management,
Inc.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
VIF-Small Company Growth Fund Investment Company: INVESCO Seeks long-term capital growth by investing at least 65%
Variable Investment Funds, of its assets in equity securities of companies with
Inc. market capitalizations of $2 billion or less. The
Investment Manager: remainder of the fund's assets can be invested in a wide
INVESCO Funds Group, Inc. range of securities that may or may not be issued by
Sub-Advisor: small companies.
INVESCO Capital Management,
Inc.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
- --------------------------------------------------------------------------------
Strategic Benefit 16
<PAGE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIOS' OBJECTIVES
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Variable Investment Option Investment Company/ Adviser/ Investment Objective and/or Principal Investment Strategy
Manager/ Sub-Adviser
- ------------------------------------ ------------------------------ ----------------------------------------------------------
<S> <C> <C>
Research Portfolio Investment Company: Seeks long-term growth of capital and future income.
Basic Value Focus Investment Company: Merrill Seeks capital appreciation and, secondarily, income by
Lynch Variable Series Funds, investing in securities, primarily equities, that
Inc. management of the Fund believes are undervalued and
Investment Adviser: therefore represent basic investment value. The Fund
Merrill Lynch Asset seeks special opportunities in securities that are
Management, L.P. selling at a discount either from book value or
historical price-earnings ratios, or seem capable of
recovering from temporarily out-of-favor considerations.
Particular emphasis is placed on securities which
provide an above-average dividend return and sell at a
below-average price/earnings ratio.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Balanced Capital Focus Investment Company: Merrill Seeks to achieve the highest total investment return
Lynch Variable Series Funds, consistent with prudent risk. To do this, management of
Inc. the Fund uses a flexible "fully managed" investment
Investment Adviser: policy that shifts the emphasis among equity, debt
Merrill Lynch Asset (including money market), and convertible securities.
Management, L.P.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Global Growth Focus Investment Company: Merrill Seeks long-term growth of capital. The Fund invests in a
Lynch Variable Series Funds, diversified portfolio of equity securities of issuers
Inc. located in various countries and the United States,
Investment Adviser: placing particular emphasis on companies that have
Merrill Lynch Asset exhibited above-average growth rates in earnings.
Management, L.P. Because a substantial portion of the Fund's assets may
be invested on an international basis, contract owners
should be aware of certain risks, such as fluctuations
in foreign exchange rates, future political and economic
developments, different legal systems, and the possible
imposition of exchange controls or other foreign
government laws or restrictions. An investment in the
Fund may be appropriate only for long-term investors who
can assume the risk of loss of principal, and do not
seek current income.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Index 500 Investment Company: Merrill Seeks investment results that, before expenses,
Lynch Variable Series Funds, correspond to the aggregate price and yield performance
Inc. of the Standard & Poor's 500 Composite Stock Price Index
Investment Adviser: (the "S&P 500 Index").
Merrill Lynch Asset
Management, L.P.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Small Cap Value Focus Investment Company: Merrill Seeks long-term growth of capital by investing in a
Lynch Variable Series Funds, diversified portfolio of securities, primarily common
Inc. stocks, of relatively small companies that management of
Investment Adviser: the Merrill Variable Funds believes have special
Merrill Lynch Asset investment value, and of emerging growth companies
Management, L.P. regardless of size. Companies are selected by
management on the basis of their long-term potential for
expanding their size and profitability or for gaining
increased market recognition for their securities.
Current income is not a factor in the selection of
securities.
- ------------------------------------ ------------------------------ ----------------------------------------------------------
- --------------------------------------------------------------------------------
Strategic Benefit 17
<PAGE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIOS' OBJECTIVES
- ------------------------------------ ------------------------------ ----------------------------------------------------------
Variable Investment Option Investment Company/ Adviser/ Investment Objective and/or Principal Investment Strategy
Manager/ Sub-Adviser
- ------------------------------------ ------------------------------ ----------------------------------------------------------
<S> <C> <C>
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 Real Estate Fund Investment Company: Seeks high total return by investing in equity
Van Eck Worldwide Insurance securities of companies that own significant real estate
Trust or that principally do business in real estate.
Investment Adviser and
Manager:
Van Eck Associates
Corporation
- ------------------------------------ ------------------------------ ----------------------------------------------------------
</TABLE>
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
- --------------------------------------------------------------------------------
Strategic Benefit 18
<PAGE>
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
You may invest in a total of eighteen investment options over the life of your
policy. Investment options include the guaranteed interest division, all of the
variable investment options, 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 other investment options in later years. 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 Benefit 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 50 show how the policies work.
APPLYING FOR A POLICY
You purchase this variable universal life policy by submitting an application.
The insured person is the person on whose life we issue a policy and upon whose
death we pay death proceeds. On the policy date, the insured person must be at
least 15 years of age and no older than age 85. We may 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 35.
TEMPORARY INSURANCE
If you apply and qualify, we may issue temporary insurance in an amount equal to
the face amount of insurance for which you applied. The maximum amount of
temporary insurance for binding limited life insurance coverage is $3 million,
which includes other in-force coverage you may have with us.
Temporary coverage begins when:
o you have completed and signed our binding limited life insurance
coverage form and
o we receive and accept a premium payment
of at least your scheduled premium (selected
on your application) and
o part I of the application is complete.
Temporary coverage ends on the earliest of:
o the date we return your premium payments
or
o five days after we mail notice of termination to the address on your
application or
o the date your policy coverage starts or
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 or
o there is a material misrepresentation in statements on your
application or
o the person or persons intended to be the insured people die 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
completion of underwriting and issue requirements.
The policy date shown on your policy schedule
- --------------------------------------------------------------------------------
Strategic Benefit 19
<PAGE>
determines:
o monthly processing dates.
o policy months.
o policy years.
o policy anniversaries.
It is not affected by the date you receive the policy. The policy date may be
different from the date we receive your first premium payment. If the policy
date is earlier, we charge monthly deductions from the policy date unless
specified otherwise in your contract.
The policy date is determined one of three ways:
1. the date you designate on your application, subject to our approval;
or
2. the back-date of the policy to save age, subject to our approval and
state 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
The federal income tax definition of life insurance for this policy is the cash
value accumulation test. SEE TAX STATUS OF THE POLICY, PAGE 43.
PREMIUMS
You may choose the amount and frequency of premium payments, within limits.
We consider payments we receive to be premium payments if you do not have an
outstanding policy 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 (planned) 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,
semiannual 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
payment method is not available for your initial premium. Your financial
institution 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.
UNSCHEDULED PREMIUM PAYMENTS
Generally speaking, you may make unscheduled premium payments at any time,
however:
o 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 of your unscheduled payment if the death benefit is
increased as a result of it;
o 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
o we will return premium payments which are greater than the
"seven-pay" limit for your policy if they 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 45 AND CHANGES TO COMPLY WITH THE LAW,
PAGE 46.
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 deduct tax or sales charges.
TARGET PREMIUM
- --------------------------------------------------------------------------------
Strategic Benefit 20
<PAGE>
Target premium is not based on your scheduled premium. Target premium is
actuarially determined based on the age, gender, rating and premium class of the
insured person. The target premium is used in determining your initial sales
charge, deferred sales charge and the sales compensation 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 20.
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. Your
initial premium is the first premium we receive and apply to your policy. It
must be at least the amount of your scheduled premiums from your policy date
through your investment date.
The investment date is the first date we apply net premium to your policy.
We apply the initial net premium to your policy after:
a) we have received the required amount of
premium; and
b) all issue requirements have been received by our customer service
center; and
c) we have approved 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 return of your
premium during the free look period, we initially invest amounts you have
designated for the variable division in the GCG Trust Liquid Asset Portfolio. We
later transfer these amounts from the Liquid Asset 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 a policy delivery receipt showing you have received
your policy 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. Your
instructions must specify percentages that are whole numbers totaling 100% and
which use no more than eighteen investment options over the life of your policy.
SEE MAXIMUM NUMBER OF INVESTMENT DIVISIONS, PAGE 19.
You may make twelve free premium allocation changes per year. After the twelve
free premium allocation changes, we charge you $25 for each additional
allocation change per policy year. If you change your designated deduction
option, we consider it a premium allocation change for which there may be a
charge. SEE DESIGNATED DEDUCTION OPTION, PAGE 27 AND POLICY TRANSACTION FEES,
PAGE 42.
PREMIUM PAYMENTS AFFECT YOUR COVERAGE
Your coverage lasts only as long as your net account value is enough to pay the
monthly and annual charges and your account value is more than your outstanding
policy loan plus accrued loan interest. If these conditions are not met, your
policy will enter the 61-day grace period and you must make a premium payment to
avoid lapse. SEE LAPSE, PAGE 33, AND GRACE PERIOD, PAGE 34.
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
- --------------------------------------------------------------------------------
Strategic Benefit 21
<PAGE>
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 45.
DEATH BENEFITS
You 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 one policy.
Generally we require a minimum group first year premium of at least $250,000.
However, depending on underwriting circumstances, we may reduce the minimum
group first year premium in some cases. We do not require a minimum base death
benefit amount, however we generally require a minimum target death benefit of
$50,000 per policy. We may reduce this minimum if the average initial target
death benefit for the group is at least $50,000.
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 sales compensation but may increase the monthly cost of insurance. SEE
ADJUSTABLE TERM INSURANCE RIDER, PAGE 26.
Death benefits are valued as of the date of death of the insured person.
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Strategic Benefit 22
<PAGE>
DEATH BENEFIT SUMMARY
THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES, INCREASES OR DECREASES IN
STATED OR TARGET DEATH BENEFIT AND THAT PARTIAL WITHDRAWALS ARE LESS THAN
PREMIUM RECEIVED.
<TABLE>
<CAPTION>
===============================================================================================================================
Option 1 Option 2 Option 3
===============================================================================================================================
<S> <C> <C> <C>
Stated Death The amount of policy death The amount of policy death The amount of policy death benefit at
Benefit benefit at issue, not including benefit at issue, not including issue, not including rider coverage.
rider coverage. This amount rider coverage. This amount This amount stays level throughout the
stays level throughout the life stays level throughout the life life of the policy.
of the policy. of the policy.
- -------------------------------------------------------------------------------------------------------------------------------
Base Death Benefit The greater of the stated death The greater of the stated death The greater of the stated death benefit
benefit or the account value benefit plus the account value, plus the sum of all premiums we receive
multiplied by the appropriate or the account value multiplied minus partial withdrawals you have
factor from the definition of by the appropriate factor from taken, or the account value multiplied
life insurance factors. the definition of life by the appropriate factor from the
insurance factors. definition of life insurance factors.
- -------------------------------------------------------------------------------------------------------------------------------
Target Death Stated death benefit plus Stated death benefit plus Stated death benefit plus adjustable
Benefit adjustable term insurance rider adjustable term insurance rider term insurance rider benefit. This
benefit. This amount remains benefit. This amount remains amount remains level throughout the
level throughout the life of level throughout the life of life of the policy.
the policy. the policy.
- -------------------------------------------------------------------------------------------------------------------------------
Total Death The greater of the target death The greater of the target death The greater of the target death benefit
Benefit benefit or the base death benefit plus the account value, plus the sum of all premiums we receive
benefit. or the base death benefit. minus partial withdrawals 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 rider benefit is the total benefit is the total death benefit
Benefit death benefit minus base death death benefit minus the base minus the base death benefit, but not
benefit, but not less than death benefit, but not less less than zero. If the account value
zero. If the account value than zero. If the account multiplied by the death benefit
multiplied by the death benefit value multiplied by the death corridor factor is greater than the
corridor factor is greater than benefit corridor factor is stated death benefit plus the sum of
the stated death benefit, the greater than the stated death all premiums we receive minus partial
adjustable term insurance benefit plus the account value, withdrawals you have taken, the
benefit will decrease. It will the adjustable term insurance adjustable term insurance rider benefit
decrease so that the base death rider benefit will decrease. will decrease. It will decrease so
benefit plus the adjustable It will decrease so that the that the sum of the base death benefit
term insurance rider benefit is base death benefit plus the plus the adjustable term insurance
not greater than the target adjustable term insurance rider rider benefit is not greater than the
death benefit. If the base benefit is not greater than the target death benefit plus the sum of
death benefit becomes greater target death benefit plus the all premiums we receive minus partial
than the target death benefit, account value. If the base withdrawals you have taken. If the
the adjustable term insurance death benefit becomes greater base death benefit becomes greater than
rider benefit is zero. than the target death benefit the target death benefit plus the sum
plus the account value, the of all premiums we receive minus
adjustable term insurance rider partial withdrawals you have taken, the
benefit is zero. adjustable term insurance rider benefit
is zero.
===============================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Strategic Benefit 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 a change in your death benefit option;
o increases or decreases to the stated death benefit.
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 the insured person's age and gender. SEE APPENDIX A, PAGE 157.
As long as your policy is in force, we will pay the death proceeds to your
beneficiary(ies) after the insured person dies. 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 insured person's
death.
There could be outstanding policy charges if the insured dies while your policy
is in the grace period.
DEATH BENEFIT OPTIONS
You have a choice of three death benefit options: option 1, option 2 or option 3
(described below). You may choose death benefit option 3 only prior to the issue
of your policy. Your choice may result in your base death benefit being greater
than your stated death benefit. You may change your death benefit option after
the first policy anniversary and before the continuation of coverage feature
begins. SEE CHANGES IN DEATH BENEFIT OPTIONS, PAGE 24 AND CONTINUATION OF
COVERAGE, PAGE 27.
Under death benefit option 1, your base death benefit is the greater of:
o your stated death benefit on the date of the insured person's death;
or
o 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.
Under option 1 positive investment performance is generally reflected in a
reduced net amount at risk which lowers your policy's total cost of insurance
charges. 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:
o your stated death benefit plus your account value on the date of the
insured person's death; or
o 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.
Under option 2, investment performance is reflected in your insurance coverage.
Under death benefit option 3, the base death benefit is the greater of:
o your stated death benefit plus the sum of all premiums we receive
minus partial withdrawals you have taken under your policy; or
o 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.
Under option 3, the base death benefit generally will increase as you pay
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 27.
CHANGES IN DEATH BENEFIT OPTIONS
You may request a change in your death benefit option at any time before the
continuation of coverage period. 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
- --------------------------------------------------------------------------------
Strategic Benefit 24
<PAGE>
option change is effective on your second following
monthly processing date.
After we approve your request, we send a new policy schedule page to you. You
should attach it to your policy. Or, we may ask you to return your policy to our
customer service center so that we can make this change for you.
We may not allow a change to your death benefit option if it reduces the target
death benefit below the minimum we require to issue your policy.
You may change from death benefit option 1 to option 2, from option 2 to option
1, or from option 3 to option 1. YOU MAY NOT CHANGE FROM DEATH BENEFIT OPTION 1
OR 2 TO OPTION 3, OR FROM OPTION 3 TO OPTION 2.
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.
On the effective date of your option change, your stated death benefit is
changed 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.
Option 3 Option 1 your stated death benefit
before the change plus the
sum of the premiums we
receive, minus partial
withdrawals you have taken
as of the effective date of the
change.
We increase or decrease your stated death benefit to keep the net amount at risk
the same on the date of your death benefit option change. There is no change to
the amount of coverage under your adjustable term insurance rider. SEE COST OF
INSURANCE CHARGE, PAGE 41.
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. Consult your tax
adviser before making a change.
CHANGES IN DEATH BENEFIT AMOUNTS
Contact your agent/registered representative or our customer service center to
request an increase or decrease in death benefit. The change is effective as of
the next monthly processing date after we approve your request. 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. Or 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 43.
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.
There may be tax consequences as a result of a decrease in your death benefit.
SEE TAX STATUS OF THE POLICY, PAGE 43 AND MODIFIED ENDOWMENT CONTRACTS, PAGE 45.
Requested reductions in the death benefit amount 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 state law requires differently.
You may increase your target or stated death benefit after your first policy
anniversary and before the
- --------------------------------------------------------------------------------
Strategic Benefit 25
<PAGE>
monthly processing date when the insured person turns age 85.
You must provide satisfactory evidence that the insured person is still
insurable in order to increase your death benefit. Unless you tell us
differently, we assume a request to increase your target death benefit is also a
request for an increase to the stated death benefit. Thus, the amount of your
adjustable term insurance rider will not change. You may change your target
death benefit once in a policy year.
The initial death benefit segment, or first segment, is the stated death benefit
on the effective date of your policy. An increase in the stated death benefit
(other than one caused by an option change) will create a new segment. The
segment year begins on the segment effective date and ends one year later. Once
we create a new segment, it is permanent unless state law requires differently.
Each new segment may have:
o a new sales charge;
o a new deferred 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.
Premiums you pay after an increase are applied to your policy segments in the
same proportion as the target premium for each segment bears to the sum of the
target premium for all segments. For each coverage segment, your schedule shows
your target premium which is used to determine your initial sales charge and
deferred sales charge.
ADJUSTABLE TERM INSURANCE RIDER
You may increase your death proceeds by adding an adjustable term insurance
rider to your policy. This rider enables you to schedule the death benefit based
on 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 scheduled to change at
the beginning of a policy year(s). SEE DEATH BENEFITS, PAGE 22.
The adjustable term insurance rider death benefit is the difference between your
target death benefit and your base death benefit. The death benefit
automatically adjusts daily as your base death benefit changes. Total 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 receive 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 changes in your account value. The adjustable term insurance rider adjusts to
provide death proceeds 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
- --------------------------------------------------------------------------------
Strategic Benefit 26
<PAGE>
coverage 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.
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 the amount of your target death benefit. SEE PARTIAL
WITHDRAWALS, PAGE 32, 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 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 that month. The cost of insurance rates will be
determined by us from time to time. They are based on the issue age, gender,
rating and premium class of the person insured, as well as the length of time
since your policy date. The monthly guaranteed maximum cost of insurance rates
for this rider will be in your policy. SEE COST OF INSURANCE CHARGE, PAGE 41.
The only charge for this coverage is the cost of insurance charge. The total
charges that you pay may be less if you have greater coverage under an
adjustable term insurance rider rather than base death benefit. If the target
death benefit is increased by you after the 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 rating even though new evidence of insurability
is given to us for the increased schedule.
Not all policy features apply to the adjustable term insurance rider. Under this
rider, there is no surrender value and a policy loan is not available. The
adjustable term insurance rider does not contribute to the policy account value
nor to investment performance under your policy. The adjustable term insurance
rider provides benefits only at the insured person's death.
SPECIAL FEATURES
DESIGNATED DEDUCTION OPTION
You may designate an investment option from which we will take your monthly
charges and deferred sales charge. You may make this designation at any time.
You may not use the loan division as your designated deduction option.
If you do not choose a designated deduction option, or if the amount in your
designated deduction option is not enough to cover deductions and charges, the
charges will be 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 as of the monthly processing date.
If you change your designated deduction option, we consider it a premium
allocation change for which there may be a charge. SEE POLICY TRANSACTION FEES,
PAGE 42.
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 state law requires
differently. We transfer the amount you have in the variable division to the
guaranteed interest division. We allocate all future net premiums to the
guaranteed interest division. We do not allow future payments or transfers to
the variable division after you exercise this right. We will not charge you for
this exchange. SEE GUARANTEED INTEREST DIVISION, PAGE 18.
POLICY MATURITY
If the insured person reaches age 100 and you do not want the continuation of
coverage feature, you may surrender your policy for the net account value. Your
policy then ends. Some 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
beyond policy maturity. If you allow the continuation of coverage feature to
become effective, we:
- --------------------------------------------------------------------------------
Strategic Benefit 27
<PAGE>
o transfer your net account value (excluding the amount in the loan
division) into the guaranteed interest division;
o charge a one-time $200 administrative fee to your policy to cover
future expenses;
o terminate the adjustable term insurance rider and the target death
benefit becomes the stated death benefit;
o convert death benefit option 2 or option 3 to death benefit option 1,
if applicable; and
o terminate investment features.
Your insurance coverage continues until the insured person's death, unless your
policy lapses or is surrendered. However, we accept no more premium payments,
deduct no further charges and your monthly deductions cease. SEE CONTINUATION OF
COVERAGE ADMINISTRATIVE FEE, PAGE 42.
Your net account value may not be transferred into the variable division during
the continuation of coverage period, but you may take policy loans or partial
withdrawals.
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 lapse, you may repay loans and make
loan interest payments during the continuation of coverage period.
If you wish to stop coverage after the continuation of coverage feature begins,
you may surrender your policy and receive the net account value. All other
consequences of surrender apply. SEE SURRENDER, PAGE 34.
The continuation of coverage feature is not available in all states. If a state
has approved this feature, it is automatic and you do not need to take any
action to activate it.
The tax consequences of coverage continuing beyond when the insured person
reaches age 100 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 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. Your surrender value
is the same as your net account value.
DETERMINING THE VALUE IN THE VARIABLE DIVISION
The amounts in the variable division are measured by accumulation units and
accumulation unit values. The value of a variable investment option is the
accumulation unit value for that option multiplied by the number of accumulation
units you own in that option.
The accumulation unit value is the value 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; and
o investment portfolio expenses.
Each variable investment option has a different accumulation unit value.
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.
Valuation dates are each day the New York Stock Exchange and the company's
customer service center are open for business, except for days on which a
corresponding investment portfolio does not value its shares, or any other day
as required by law. Each valuation date ends at 4 p.m. Eastern Time. Our
customer service center may not be open for business on: New Year's Day, Martin
Luther King, Jr.'s birthday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, the day after Thanksgiving, Christmas Day and the day before
or after Christmas.
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Strategic Benefit 28
<PAGE>
You purchase accumulation units when you allocate premium or make transfers to a
variable investment option. This includes transfers from the loan division.
We redeem accumulation units:
o when you take a partial withdrawal;
o when amounts are transferred from a variable investment option
(including transfers to the loan division);
o for the monthly deductions from your account value;
o for policy transaction charges;
o when you surrender your policy; and
o to pay the death proceeds.
To calculate the number of accumulation units purchased or redeemed we:
o divide the dollar amount of your transaction by:
o the accumulation unit value calculated at the close of business on
the valuation date of the transaction.
SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES, PAGE 29.
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 as of 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 option goes up or down
depending on investment performance.
FOR AMOUNTS IN THE VARIABLE INVESTMENT OPTIONS, THERE IS NO GUARANTEED MINIMUM
CASH 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, the accumulation
unit value on any valuation date is:
o the accumulation unit value for the preceding valuation date
multiplied by
o the accumulation experience factor for that variable investment
option 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:
o We take the share value of the underlying portfolio shares in the
variable investment option as reported to us by the investment
portfolio managers as of the close of business on that valuation
date.
o 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 from
this amount.
o We divide the remaining amount by the value of the shares in the
underlying investment portfolio for the variable investment option at
the close of business on the previous 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. You may not make transfers
until after your free look period ends if your state requires a refund of
premium during the free look period.
We do not limit your number of transfers, but we charge a $10 fee for each
transfer after the first twelve in a policy year. We do not include transfers
for automatic rebalancing or dollar cost averaging toward your twelve free
transfers. You may not make transfers during the continuation of coverage
period. SEE POLICY TRANSACTION FEES, PAGE 42 AND CONTINUATION OF COVERAGE, PAGE
27.
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
- --------------------------------------------------------------------------------
Strategic Benefit 29
<PAGE>
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
a variable investment option is less than $100 when you make a transfer request,
we transfer the entire amount out of that variable investment option.
EXCESSIVE TRADING
Excessive trading activity can disrupt investment portfolio management
strategies and increase portfolio expenses by causing:
o increased trading and transaction costs;
o disruption of planned investment strategies;
o forced and unplanned portfolio turnover;
o lost opportunity costs; and
o large asset swings that decrease the 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 a market timing
service. 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 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 occur on your policy anniversary. A request received by
us within 30 days after your policy anniversary is effective as of 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
You can elect dollar cost averaging if your policy has at least $10,000 invested
in a qualifying source portfolio, either the Liquid Asset Portfolio or the
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 a portfolio's shares is high. It
also reduces 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 these
investment options each period, you purchase more units when the unit value is
low, and you purchase fewer units when the unit value is high.
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. Dollar cost averaging begins after the end of your free look
period if your state requires a refund of all premium during the free look
period.
With dollar cost averaging, you designate either a dollar amount, or a
percentage of your account value, for automatic transfer from a qualifying
source portfolio. Each period, we automatically transfer the amount you select
from your chosen source portfolio to one or more other variable investment
options. You may not make transfers to or from the guaranteed interest division
or the loan division under dollar cost averaging.
The minimum percentage you may transfer to 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 your monthly processing
date.
We do not count dollar cost averaging transfers toward your twelve free
transfers per policy year. There is no charge for this feature.
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Strategic Benefit 30
<PAGE>
You may have both dollar cost averaging and automatic rebalancing at the same
time. However, your dollar cost averaging source portfolios cannot be included
in your automatic rebalancing program.
CHANGING DOLLAR COST AVERAGING
You may change your dollar cost averaging program once per policy year. If you
have telephone privileges, you may change the program by telephoning our
customer service center. SEE TELEPHONE PRIVILEGES, PAGE 37.
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:
o you specify; or
o your balance in the source portfolio reaches
a dollar amount you set; or
o the amount in the source portfolio is equal to or less than the
amount to be transferred. We will transfer the remaining amount and
end dollar cost averaging.
AUTOMATIC REBALANCING
Automatic rebalancing is a method of maintaining a consistent approach to
investing account value 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 other investment options for that time period.
You may choose automatic rebalancing 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 during the free look period). If
you do not request a date, processing is on the last valuation date of the
calendar quarter in which we receive your request.
You may have both automatic rebalancing and dollar cost averaging at the same
time. However, the source portfolios for your dollar cost averaging cannot be
included in your automatic rebalancing program. You may not include the loan
division.
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 29.
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.
POLICY LOANS
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 (policy loan) is:
o the total amount you borrow; plus
o loan interest that is capitalized when due; minus
o loan repayments you make.
Unless state law requires differently, a new policy
loan must be at least $100. The maximum amount
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Strategic Benefit 31
<PAGE>
you can borrow on any valuation date, unless required differently by state 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 for less than
$25,000 by telephone. SEE TELEPHONE PRIVILEGES, PAGE 37.
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.
When you take a policy loan, we transfer an amount equal to your policy loan
from the specified investment option or proportionately from the variable and
the guaranteed interest divisions to the loan division. We follow this same
process for loan interest due at your policy anniversary. The loan division is
part of our general account, specifically designed to hold collateral for policy
loans and interest. We credit the loan division with interest at an annual rate
of 3%.
Loan interest charges on your policy loan accrue daily at an annual interest
rate of 3.25%. Interest is due in arrears on each policy anniversary. If you do
not pay it when it is due, we add it to your policy loan balance.
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. We assume that payments you make,
other than scheduled premiums, are policy loan repayments. You must tell us if
you want additional payments to be premium payments.
When you make a loan repayment, we transfer an amount equal to your repayment
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
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 or the surrender value payable.
A policy loan may cause your policy to lapse if your account value minus your
policy loan balance and accrued loan interest is not enough to cover your
monthly deductions. 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
45, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT
MODIFIED ENDOWMENT CONTRACTS, PAGE 45.
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, the partial withdrawal must be for an amount 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 37.
You may take only one partial withdrawal per policy year. The minimum partial
withdrawal amount 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
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Strategic Benefit 32
<PAGE>
amount plus a service fee from your account value. SEE CHARGES, PAGE 40.
Partial withdrawals do not reduce the stated death benefit if your base death
benefit has been increased to qualify your policy as life insurance under the
federal income tax laws and if 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 43.
We require a minimum target death benefit to issue your policy. You are not
allowed to take a partial withdrawal if it reduces your target death benefit
below this minimum. SEE GROUP OR SPONSORED ARRANGEMENTS AND CORPORATE
PURCHASERS, PAGE 43.
PARTIAL WITHDRAWAL MECHANICS
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 or, 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 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 45, AND
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS, PAGE 45.
PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1
If you selected death benefit option 1, 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 to
satisfy the federal income tax definition of life insurance. If your policy
death benefit has been increased to satisfy the federal income tax definition of
life insurance 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 death benefit or target death benefit. However, 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 received minus the total of your prior partial
withdrawals, then your stated death benefit will not be reduced. However, your
total death benefit will be reduced by at least the amount of your partial
withdrawal.
If your partial withdrawal is more than the amount of premiums we received minus
the total of your prior partial withdrawals, then a two step process is used:
1. Your withdrawal of the amount that makes
premiums paid 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; or
o more than 15 years have passed since your policy date; or
o the insured person is 81 years of age or older.
STATED DEATH BENEFIT AND TARGET DEATH BENEFIT REDUCTIONS
Generally, we reduce the stated death benefit by the amount of the partial
withdrawal. A partial withdrawal may reduce your target death benefit.
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Strategic Benefit 33
<PAGE>
LAPSE
Your insurance coverage continues as long as your net account value is enough to
pay your deductions each month. If you have an outstanding policy loan, your
policy will lapse if the loan plus accrued interest is more than your account
value. Thus, during the continuation of coverage period, the policy could 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
your net account value is zero (or less).
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 generally is
the past due charges, plus the amount that covers your estimated monthly policy
and rider deductions for the next two months. If the insured person dies during
the grace period, we do pay death proceeds to your beneficiary(ies) with
reductions for your policy loan balance, accrued loan interest, and monthly
deductions owed.
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. We then 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 rider) 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 has ended.
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 rider within five years of the
end of the grace period.
Unless state law requires differently, we will reinstate your policy and rider
if:
o you are the owner and you have not surrendered your policy;
o you provide satisfactory evidence that the insured person is still
insurable according to our normal rules of underwriting; and
o we receive enough premium to keep your policy and rider in force from
the beginning to the end of the grace period and for two months after
the reinstatement date.
Reinstatement is effective as of 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
premium allocation instructions which may be those in effect at the start of the
grace period.
SURRENDER
You may surrender your policy for its surrender value any time while the insured
person is living. You will need to send a written request and your policy or a
lost policy form to our customer service center.
We compute your surrender value (net account value) as of the valuation date we
receive your surrender request and policy. All insurance coverage ends on the
date we receive your surrender request and policy. SEE POLICY VALUES, PAGE 8 AND
SETTLEMENT PROVISIONS, PAGE 38.
We do not pro-rate or add back charges or expenses which we deducted before your
surrender to your account value. You may elect to have your surrender value paid
as other than one payment. SEE SETTLEMENT PROVISIONS, PAGE 38.
A surrender of your policy may have adverse tax consequences. SEE DISTRIBUTIONS
OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 45, AND
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS, PAGE 45.
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Strategic Benefit 34
<PAGE>
GENERAL POLICY PROVISIONS
FREE LOOK PERIOD
You have the right to examine your policy and return it (for any reason) to us
within the period shown in the policy. The right to examine your policy (also
called free look period) starts on the date you receive it. If you return your
policy to us within your state's specified time limit, we cancel it as of your
policy date.
If you cancel your policy during this free look period, you will receive a
refund as determined by state law. Generally, there are two types of free look
refunds:
o some states require a return of all premiums received; and
o others 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 will affect when 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
Some groups under this policy may choose to use a master policy with policy
certificates, rather than a series of individual policies.
The contract between you and us is the combination of:
o the policy (or certificate);
o a copy of your original application and any applications for benefit
increases or decreases;
o the adjustable term insurance rider;
o endorsements;
o 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 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 another officer of our company and our secretary or assistant
secretary must sign all changes or amendments to your policy. No other person
may change its terms or conditions.
GUARANTEED ISSUE
We offer this policy only on a guaranteed issue basis, up to a preset face
amount with evidence of insurability.
AGE
We issue your policy at the insured person's age (stated in your policy
schedule) based on the nearest birth date to the policy date. 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. At issue, the insured person must be no
less than age 15 and no more than age 85.
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 life of the
insured person. This includes the right to change the owner, beneficiaries, or
method designated to pay 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 beneficiaries 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
specify otherwise. If none of your policy beneficiaries has survived the
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Strategic Benefit 35
<PAGE>
insured person, we pay the death proceeds to you or to your estate, as owner.
You may name a new beneficiary(ies) during the insured person's lifetime. We pay
death proceeds to the beneficiary(ies) whom you have most recently named and
whom we have on record. 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
After your policy has been in force and the insured person is alive for two
years from your policy date, and from the effective date of any new segment or
an increase in any other benefit, we will not question the validity of
statements in your applicable application.
MISSTATEMENTS OF AGE OR GENDER
If the insured person's age or gender has been misstated, we adjust the death
benefit. We adjust it 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 insured person's death, or as required by
state law.
If unisex cost of insurance rates apply, we do not make adjustments for a
misstatement of gender.
SUICIDE
If the insured person commits suicide, while sane or insane within two years of
your policy date, unless otherwise required by state law, we limit the death
benefit to:
1. the total of all premium payments we receive to the time of death;
minus
2. the outstanding policy loan balance and accrued loan interest; minus
3. partial withdrawals taken.
If the person insured under the policy changed, and the new insured person dies
by suicide within two years of the change date, we limit the death benefit to:
1. your net account value as of the change date; plus
2. the premiums we received since the change; minus
3. increases in the policy loan balance, accrued loan interest, and
partial withdrawals since the change date.
We make a limited payment to the beneficiary(ies) for a new segment or other
increase if the insured person commits suicide, while 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 state law. The limited
payment is equal to the cost of insurance and monthly expense charges which were
deducted for the increase.
TRANSACTION PROCESSING
Generally, within seven days of when we receive all information required to
process a payment, we pay:
o death proceeds;
o surrender value;
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 death proceeds as of the date of the
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Strategic Benefit 36
<PAGE>
insured person's death. The death proceeds are not affected by subsequent
changes in the value of the variable investment options.
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 any election,
designation, change, assignment or request in writing from the owner.
You must use a form acceptable to us. We are not liable for actions taken before
we receive and record your notice. We may require you to return your policy for
certain policy changes or if you surrender it.
If the insured person dies while your policy is in force, please let us know as
soon as possible. We will send you instructions on how to make a claim. As proof
of the deceased insured person's death, we may require 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 such as
medical records from doctors and hospitals used by the deceased insured person.
TELEPHONE PRIVILEGES
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. Telephone privileges allow you or your agent/registered
representative to call our customer service center to:
o make transfers;
o change premium allocations;
o change 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:
o requiring personal identification;
o providing written confirmation of transactions; and
o tape recording telephone calls.
By accepting 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 from 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. ING America Equities, Inc. is 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. under a distribution agreement.
We sell this policy exclusively through insurance licensed registered
representatives of certain unaffiliated broker-dealers including Merrill Lynch,
Pierce Fenner & Smith Incorporated.
These broker-dealers have entered into selling agreements with us. Under the
selling agreement, we pay a distribution allowance to the broker-dealer, who
pays commissions to the agent/registered representative who sells the policy.
During the first policy or segment year, the distribution allowance is 5% of the
premium we receive up to the target premium. There is no distribution allowance
paid on premium received above target in the first policy or segment year or on
any premium received after the first policy or segment year.
In addition, we make annual renewal payments to the broker-dealer based on a
percentage of each policy's net account value (trails). These payments are 1.00%
in policy years one through ten, 0.75% in policy years eleven through twenty,
and 0.20% in all later years. We also pay wholesaler fees, marketing and
training allowances.
We pay allowances from our resources which includes sales charges deducted from
premiums.
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Strategic Benefit 37
<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. 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.
SETTLEMENT PROVISIONS
You may take your surrender value in other than one payment. Likewise, you may
elect to have the beneficiary(ies) receive the death proceeds other than in one
payment, if you make this election during the insured person's lifetime. If you
have not made this election, the beneficiary(ies) may do so within 60 days after
we receive proof of the insured person's death.
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 periodic payment must be at least
$20 and the total 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 option's 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 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 changes in the
fundamental investment policy of a particular investment portfolio or 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 in 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 those in which you have invested assets as of the record date
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Strategic Benefit 38
<PAGE>
set by the investment portfolio's Board for the meeting. We determine the number
of investment portfolio shares in each variable investment option for your
policy by dividing your account value in that option by the net asset value of
one share of the matching investment portfolio.
MATERIAL CONFLICTS
We are required to track events to identify 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 division. We cast votes credited to
amounts in the variable division, 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:
o change the investment objective;
o offer additional variable investment options which will invest in
portfolios we find appropriate;
o eliminate variable investment options;
o combine two or more variable investment options;
o substitute a new investment portfolio for an existing portfolio. A
substitution may become necessary if, in our judgment:
a) a portfolio no longer suits the purposes of this policy;
b) there is a change in laws or regulations;
c) there is a change in a portfolio's investment objectives or
restrictions;
d) the portfolio is no longer available for investment; or
e) there is another reason we deem a substitution is appropriate;
o transfer assets related to your policy to another separate account;
o withdraw the separate account from registration under the 1940 Act;
o operate the separate account as a management investment company under
the 1940 Act;
o cause one or more variable investment options to invest in a mutual
fund other than, or in addition to, the investment portfolios;
o stop selling these policies;
o end an employer or plan trustee agreement with us under the
agreement's terms;
o limit or eliminate voting rights for the separate account; or
o make 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
- --------------------------------------------------------------------------------
Strategic Benefit 39
<PAGE>
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 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 AND DEDUCTIONS
The amount of a charge may not correspond to the cost incurred by us to provide
the service or benefit. For example, the sales charges 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 the insured person is not
yet age 100 and you do not have an outstanding policy loan. After we deduct
certain expenses from your payment, we add the remaining net premium to your
policy.
INITIAL SALES CHARGE AND DEFERRED SALES CHARGE
We deduct charges based on the amount of premium we receive each year your
policy or segment is in effect. The sales charge (and deferred sales charge)
helps cover our costs of distribution, preparing sales literature, promotion
expenses and other direct and indirect expenses to sell the policy.
During the first policy or segment year, we do not deduct an initial sales
charge from your premium payments. However, these payments will be used to
calculate the deferred sales charge which is deducted at the beginning of policy
or segment years two through eight. The amount of this annual deduction is 1.75%
of premium paid during policy or segment year one, up to your policy's target
premium (in your policy schedule pages), plus 1.60% of premium paid during
policy or segment year one in excess of target. This deferred sales charge
deduction ends after policy or segment year eight. Thus, first policy or segment
year premiums, up to target, are subject to the highest rate of sales charge,
equivalent to 12.25% over seven years (1.75% per year times 7 years).
During your second policy or segment year, and in each year thereafter, we
deduct 0.5% of all premium payments we receive before we apply the premium to
your policy. This deduction is the policy initial sales charge. Premium payments
from which we deduct a sales charge are not subject to the deferred sales
charge.
SALES CHARGES
AS A
PREMIUM PERCENTAGE OF
PAID PREMIUM WHEN DEDUCTED
- -------------------- ------------------- -----------------------
policy/segment 1.75%* beginning of
year 1 up to policy/segment
target years 2 - 8
- -------------------- ------------------- -----------------------
policy/segment 1.6%* beginning of
year 1 in policy/segment
excess of years 2 - 8
target
- -------------------- ------------------- -----------------------
policy/segment 0.5% upon receipt of
years 2+ payment
- -------------------- ------------------- -----------------------
* THESE ARE THE PERCENTAGES USED TO DETERMINE THE ANNUAL DEDUCTION. ONCE
DETERMINED, THE ANNUAL DEDUCTION IS MADE ONCE EACH YEAR FOR SEVEN YEARS.
SALES CHARGE EXAMPLE
(BASED ON TWO YEARS OF PREMIUM PAYMENTS)
Assume a policy has a target premium of $8,000.
Premium payments of $10,000 are made in each of the first two years and
there has been no change in death benefit.
The $10,000 premium payment for the first year incurs an annual deferred sales
charge of $172 deducted in years two through eight:
1.75% of premium up to target plus 1.6% of premium payments over target
[.0175 x $8,000 + (.016 x $2,000) = $172].
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Strategic Benefit 40
<PAGE>
The deferred sales charge deduction is made on the monthly processing date at
the policy (or segment) anniversary.
The $10,000 premium payment for the second year incurs a sales charge of $50
when it is received:
0.5% of all premium [.005 x $10,000 = $50].
Deducted Deferred Sales Sales Charge
During Policy Charge on First on Second Year
or Segment Year Premium Premium
Year Of $10,000 Of $10,000
- --------------------- -------------------- ---------------------
1 $0 $0
2 $172 $50
3 $172 $0
4 $172 $0
5 $172 $0
6 $172 $0
7 $172 $0
8 $172 $0
9 $0 $0
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% to 5%. In the first policy
or segment year, we deduct 2.5% of each premium payment up to target premium to
cover these taxes. In subsequent years, we deduct 2.5% of all premium payments.
This charge approximates the average tax rate we expect to pay.
To cover our estimated costs for the federal income tax treatment of deferred
acquisition costs, we deduct 1.5% of each premium payment up to target premium
in the first policy or segment year. In subsequent years, we deduct 1.5% of all
premiums. This cost is determined solely by a portion of the amount of life
insurance premiums we receive.
We reserve the right to increase or decrease this charge for state and local
taxes if there are changes in the tax law, within limits set by state law. We
also reserve the right to increase or decrease the charge for the federal income
tax treatment of deferred acquisition costs based on any change in that cost to
us.
MONTHLY DEDUCTIONS FROM ACCOUNT VALUE
We deduct charges from your account value on each monthly processing date.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a charge each month for the mortality and expense risks we assume. The
mortality risk we assume is that insured people, as a group, may live less time
than we estimated. We assume risk that expenses we incur in issuing and
administering the policies and in operating the variable investment options are
greater than the amount we estimated when we set these charges.
This charge is based on the length of time your policy has been in effect and
the amount you have in the variable investment options on the monthly processing
date.
PERCENT OF VARIABLE DIVISION ACCOUNT VALUE
MONTHLY EQUIVALENT
POLICY YEAR CHARGE ANNUAL RATE
- --------------------- -------------------- ---------------------
1 - 10 0.07083% 0.85%
11 - 20 0.05000% 0.60%
21+ 0.00417% 0.05%
MONTHLY ADMINISTRATIVE CHARGE
We deduct an administrative charge of $12 per month for the first policy year
and $6 per month for each policy year beyond that. The monthly administrative
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, including the expected cost of paying death benefits that
could be more than your account value.
The cost of insurance rates may depend on the characteristics of the group of
insured people, such as ages, risk class, size of the group and the total
premium the group pays.
- --------------------------------------------------------------------------------
Strategic Benefit 41
<PAGE>
The cost of insurance charge is our current monthly cost of insurance rate times
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 charges due on that date, other than cost of
insurance charges.
If your base death benefit at the beginning of a month increases (as a
requirement 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.
Because your target death benefit did not change, the net amount at risk for
your adjustable term insurance rider decreases. The amount of your cost of
insurance charge varies from month to month as a result of changes in your net
amount at risk, changes in the death benefit and the increasing age of the
insured person. We allocate the net amount at risk to all segments in the same
proportion that each segment has to the total stated death benefit for all
coverage as of the monthly processing 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 each segment of the base death benefit
and your adjustable term insurance rider.
Your cost of insurance rates may change from time to time however, they are
never more than the guaranteed maximum rates shown in your policy. The
guaranteed maximum rates for base coverage 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
schedule pages. This type of group policy may result in higher cost of insurance
charges than those that would apply if the policy were on an individual basis.
POLICY TRANSACTION FEES
We charge fees for certain transactions you may make under your policy. We
deduct these fees from the variable and the guaranteed interest divisions in the
same proportion that your account value in each division has to your net account
value immediately after the transaction.
PARTIAL WITHDRAWALS
To cover our costs, we deduct a service fee of up to $25 from your account value
for each partial withdrawal you take. SEE PARTIAL WITHDRAWALS, PAGE 32.
TRANSFERS
There is a $10 fee for each additional transfer over twelve per policy year to
cover our costs. If you include multiple transfers in one request, it counts as
one transfer. There is no transfer fee if you are exercising the right to
exchange in your policy. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 29, AND RIGHT TO
EXCHANGE POLICY, PAGE 27.
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 additional policy illustration.
PREMIUM ALLOCATION CHANGE
You may make five free premium allocation changes per policy year. After five,
we charge you $25 for each additional premium allocation change. If you change
your designated withdrawal investment option, we consider it a premium
allocation charge for which there may be a charge. SEE MONTHLY DEDUCTIONS FROM
YOUR ACCOUNT VALUE, PAGE 41.
CONTINUATION OF COVERAGE ADMINISTRATIVE FEE
When the insured person reaches age 100, if your policy has not been
surrendered, the continuation of coverage period begins. We charge a one-time
administrative fee of $200. We then no longer charge you monthly charges. This
charge compensates us for maintaining and servicing your policy until the death
of the insured person.
- --------------------------------------------------------------------------------
Strategic Benefit 42
<PAGE>
DIVISIONS FROM WHICH WE DEDUCT CHARGES, LOANS AND PARTIAL WITHDRAWALS
<TABLE>
<CAPTION>
MONTHLY CHARGES: COST OF
INSURANCE CHARGES,
ADMINISTRATIVE FEES AND
ANNUAL DEDUCTION OF POLICY LOANS AND
DEFERRED SALES CHARGE TRANSACTION FEES PARTIAL WITHDRAWALS
- ------------------- ------------------------------------- ------------------------------------- ---------------------------------
<S> <C> <C> <C>
CHOICE May choose designated Proportionally among variable May choose any investment
deduction option, including and guaranteed interest divisions option or combination of
guaranteed interest division investment options, subject to
requirements
- ------------------- ------------------------------------- ------------------------------------- ---------------------------------
DEFAULT Proportionally among variable Proportionally among variable Proportionally among variable
and guaranteed interest divisions and guaranteed interest divisions and guaranteed interest divisions
</TABLE>
OTHER CHARGES
Under current law, we pay no tax on investment income and capital gains included
in variable life insurance policy reserves. So, no charge is 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 AND CORPORATE PURCHASERS
Only groups of individuals, corporations or other institutions may purchase this
policy. These group arrangements include those in which there is a trustee, an
employer or an association. The group may either purchase policies covering a
group of individuals 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.
Based on the group underwriting, we may reduce or waive the:
o administrative charge;
o minimum target death benefit;
o target premium;
o sales charges;
o cost of insurance charges; or
o other charges normally assessed.
We can reduce or waive these items due to expected economies based on the
characteristics of the group. Our sales, administration and mortality costs
generally vary with the size and stability of the group, among other factors
which we take into account when we reduce 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.
We will not be unfairly discriminatory in the variation in the 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
- --------------------------------------------------------------------------------
Strategic Benefit 43
<PAGE>
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.
Specifically this policy must meet the requirements of the "cash value
accumulation test" as specified in Code Section 7702.
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
and sex at any point in time, multiplied by the account value. SEE APPENDIX A,
PAGE 157, FOR A TABLE OF THE CASH VALUE ACCUMULATION TEST FACTORS.
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 44.
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.
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
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Strategic Benefit 44
<PAGE>
about these consequences.
Generally, the policy owner will not be taxed on any of the policy cash value
until there is a distribution. When distributions from a policy occur, or when a
loan is 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.
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:
o 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.
o 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.
o 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.
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 contact 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 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
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Strategic Benefit 45
<PAGE>
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 other than a policy loan, 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.
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 mortality charge used to calculate whether your policy
qualifies as life insurance for federal income tax purposes. We must base these
calculations on reasonable mortality charges expected to be paid. The Treasury
issued proposed regulations on what it considers reasonable mortality charges.
We believe that the mortality 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 used in the calculation 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
- --------------------------------------------------------------------------------
Strategic Benefit 46
<PAGE>
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.
- --------------------------------------------------------------------------------
Strategic Benefit 47
<PAGE>
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, 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 policies illustrated use the
following assumptions:
<TABLE>
<CAPTION>
Death Stated Scheduled Target
Smoker* Benefit Death Annual Death
Gender Age Status Option Benefit Premium Benefit
- ------ --- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Male 45 Nonsmoker 1 $180,526 $10,000 $180,526
Male 45 Nonsmoker 1 $90,263 $10,000 $180,526
</TABLE>
* "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 surrender values of a
hypothetical policy could vary over an extended period of time, assuming the
variable divisions 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, unisex or smoker rates.
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.
These illustrations assume there are no policy loans.
The net investment return on your policy is lower than the gross investment
return on the variable division as a result of the portfolio charge for
management fees and portfolio expenses. We show the effect of the net investment
return in the amounts for death benefits, account values and surrender values.
The tables reflect annual investment management fees of 0.71% 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
0.24% 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 expense
reimbursements or waivers by investment portfolio managers have been made. The
average of all portfolios' total expenses is 0.95%.
Actual fees vary by portfolio. The portfolio fees and expenses used in the
illustrations are the net amounts shown after expense reimbursements or waivers
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 (0.76%, 0.37% and 1.13%, 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 results in a net rate of
return of:
o (0.95)% on a 0% gross rate of return;
o 11.05% on a 12% gross rate of return; and
o 5.05% on a 6% gross rate of return.
- --------------------------------------------------------------------------------
Strategic Benefit 48
<PAGE>
The tables assume that charges have been deducted including deductions from
premiums, cost of insurance rider charges, monthly deductions and annual
deferred sales charge, mortality and expense risk charge, administrative and
sales charges. The tables show charges at our current rates. The tables also
show charges at the maximum rates we guarantee in our policies. SEE MONTHLY
DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 41. 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
surrender values.
This Strategic Benefit policy is issued only to groups. For this policy, we
generally deliver an illustration which shows a single life scheduled premium
and risk class representative of the particular group covered by this policy. We
base these hypothetical future benefits on both guaranteed and current cost
factor assumptions and actual account value. However, if we are asked to do so,
we will provide personal illustrations based on:
o each 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 the policy form; and
o special features elected on each policy.
- --------------------------------------------------------------------------------
Strategic Benefit 49
<PAGE>
PROSPECT: INSURED PERSON'S NAME
MALE 45 NONSMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC BENEFIT VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $180,526 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $10,000
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 10000 10500 8514 8514 180526 9600 9600 180526 9057 9057 180526
2 10000 21525 16704 16704 180526 19983 19983 180526 18311 18311 180526
3 10000 33101 24725 24725 180526 31409 31409 180526 27934 27934 180526
4 10000 45256 32584 32584 180526 43996 43996 180526 37950 37950 180526
5 10000 58019 40282 40282 180526 57873 57873 180526 48380 48380 180526
6 10000 71420 47823 47823 180526 73187 73187 184579 59248 59248 180526
7 10000 85491 55207 55207 180526 89880 89880 220116 70577 70577 180526
8 -- 89766 52982 52982 180526 97624 97624 232151 72371 72371 180526
9 -- 94254 50856 50856 180526 106202 106202 245433 74355 74355 180526
10 -- 98967 48640 48640 180526 115483 115483 259374 76348 76348 180526
15 -- 126309 36305 36305 180526 176658 176658 346602 87532 87532 180526
20 -- 161206 18948 18948 180526 267222 267222 462829 98907 98907 180526
25 -- 205744 -- -- -- 409525 409525 634763 113013 113013 180526
30 -- 262588 -- -- -- 617891 617891 868754 127556 127556 180526
AGE 65 -- 169267 14553 14553 180526 291371 291371 493000 101684 101684 180526
</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 more or less than 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 Benefit 50
<PAGE>
PROSPECT: INSURED PERSON'S NAME
MALE 45 NONSMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC BENEFIT VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $180,526 DEATH BENEFIT OPTION 1
ANNUAL PREMIUM: $10,000
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 10000 10500 9153 9153 180526 10278 10278 180526 9716 9716 180526
2 10000 21525 17979 17979 180526 21411 21411 180526 19661 19661 180526
3 10000 33101 26635 26635 180526 33659 33659 180526 30010 30010 180526
4 10000 45256 35125 35125 180526 47139 47139 180526 40779 40779 180526
5 10000 58019 43452 43452 180526 61981 61981 180526 51991 51991 180526
6 10000 71420 51623 51623 180526 78317 78317 197515 63666 63666 180526
7 10000 85491 59637 59637 180526 96249 96249 235715 75823 75823 185691
8 -- 89766 58104 58104 180526 105442 105442 250740 78521 78521 186723
9 -- 94254 56743 56743 180526 115714 115714 267415 81495 81495 188334
10 -- 98967 55375 55375 180526 126976 126976 285188 84571 84571 189947
15 -- 126309 48862 48862 180526 204089 204089 400422 102804 102804 201702
20 -- 161206 40891 40891 180526 325948 325948 564543 124152 124152 215032
25 -- 205744 31122 31122 180526 531339 531339 823576 153041 153041 237214
30 -- 262588 15701 15701 180526 859540 859540 1208514 187240 187240 263259
AGE 65 -- 169267 39231 39231 180526 359606 359606 608453 129525 129525 219157
</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
may be more or less than 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 Benefit 51
<PAGE>
PROSPECT: INSURED PERSON'S NAME
MALE 45 NONSMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC BENEFIT VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $90,263 DEATH BENEFIT OPTION 1
INITIAL ADJUSTABLE TERM RIDER: $90,263 ANNUAL PREMIUM: $10,000
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 10000 10500 8608 8608 180526 9711 9711 180526 9160 9160 180526
2 10000 21525 16693 16693 180526 19996 19996 180526 18311 18311 180526
3 10000 33101 24601 24601 180526 31303 31303 180526 27818 27818 180526
4 10000 45256 32338 32338 180526 43782 43782 180526 37716 37716 180526
5 10000 58019 39930 39930 180526 57583 57583 180526 48050 48050 180526
6 10000 71420 47385 47385 180526 72865 72865 183766 58851 58851 180526
7 10000 85491 54700 54700 180526 89537 89537 219277 70147 70147 180526
8 -- 89766 52380 52380 180526 97259 97259 231282 71901 71901 180526
9 -- 94254 50124 50124 180526 105804 105804 244513 73833 73833 180526
10 -- 98967 47744 47744 180526 115050 115050 258403 75768 75768 180526
15 -- 126309 34037 34037 180526 175994 175994 345300 86526 86526 180526
20 -- 161206 14389 14389 180526 266217 266217 461087 97134 97134 180526
25 -- 205744 -- -- -- 407982 407982 632372 109742 109742 180526
30 -- 262588 -- -- -- 615561 615561 865479 121309 121309 180526
AGE 65 -- 169267 9337 9337 180526 290274 290274 491144 99680 99680 180526
</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 more or less than 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 Benefit 52
<PAGE>
PROSPECT: INSURED PERSON'S NAME
MALE 45 NONSMOKER PRESENTED BY:
SECURITY LIFE
STRATEGIC BENEFIT VARIABLE UNIVERSAL LIFE
STATED DEATH BENEFIT: $90,263 DEATH BENEFIT OPTION 1
INITIAL ADJUSTABLE TERM RIDER: $90,263 ANNUAL PREMIUM: $10,000
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 10000 10500 9350 9350 180526 10499 10499 180526 9924 9924 180526
2 10000 21525 18180 18180 180526 21662 21662 180526 19886 19886 180526
3 10000 33101 26839 26839 180526 33943 33943 180526 30251 30251 180526
4 10000 45256 35332 35332 180526 47461 47461 180526 41039 41039 180526
5 10000 58019 43664 43664 180526 62344 62344 180526 52270 52270 180526
6 10000 71420 51838 51838 180526 78724 78724 198541 63965 63965 180526
7 10000 85491 59856 59856 180526 96705 96705 236830 76142 76142 186471
8 -- 89766 58326 58326 180526 105950 105950 251948 78860 78860 187528
9 -- 94254 56961 56961 180526 116272 116272 268704 81846 81846 189147
10 -- 98967 55591 55591 180526 127589 127589 286564 84937 84937 190768
15 -- 126309 49061 49061 180526 205076 205076 402359 103250 103250 202577
20 -- 161206 41075 41075 180526 327527 327527 567277 124692 124692 215967
25 -- 205744 31295 31295 180526 533915 533915 827568 153709 153709 238249
30 -- 262588 15860 15860 180526 863709 863709 1214375 188058 188058 264410
AGE 65 -- 169267 39413 39413 180526 361348 361348 611401 130089 130089 220111
</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
may be more or less than 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 Benefit 53
<PAGE>
ADDITIONAL INFORMATION
DIRECTORS AND OFFICERS
Security Life's address and the business address of each director and principal
officer 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 with one asterisk (*) is ING North America Insurance Corporation,
5780 Powers Ferry Road, Atlanta, Georgia 30327-4390. The business address of
each person 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
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 VP 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
William D. Tyler* Senior Vice President, Chief Information Officer
Gretta Ytterbo Senior Vice President, ING US Legal Services
Gary W. Waggoner Vice President, General Counsel and Corporate
Secretary
- --------------------------------------------------------------------------------
Strategic Benefit 54
<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 Benefit 55
<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 57.
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 Benefit 56
<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 Benefit 57
<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 ...............................................59
Audited Consolidated Financial Statements
Consolidated Balance Sheets ..................................................60
Consolidated Statements of Income ............................................62
Consolidated Statements of Comprehensive Income...............................63
Consolidated Statements of Stockholder's Equity ..............................64
Consolidated Statements of Cash Flows ........................................65
Notes to Consolidated Financial Statements ...................................67
- --------------------------------------------------------------------------------
Strategic Benefit 58
<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 Benefit 59
<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 Benefit 60
<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 Benefit 61
<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 Benefit 62
<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 Benefit 63
<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 Benefit 64
<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 Benefit 65
<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 Benefit 66
<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 Benefit 67
<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 Benefit 68
<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 Benefit 69
<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 Benefit 70
<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 Benefit 71
<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 Benefit 72
<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 Benefit 73
<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 Benefit 74
<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 Benefit 75
<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 Benefit 76
<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 Benefit 77
<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 Benefit 78
<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 Benefit 79
<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 Benefit 80
<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 Benefit 81
<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 Benefit 82
<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 Benefit 83
<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 Benefit 84
<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 Benefit 85
<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 Benefit 86
<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 Benefit 87
<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 Benefit 88
<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 Benefit 89
<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 Benefit 90
<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 Benefit 91
<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 Benefit 92
<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 Benefit 93
<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 Benefit 94
<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 Benefit 95
<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 Benefit 96
<PAGE>
Security Life Separate Account L1
Financial Statements
Years ended December 31, 1999, 1998 and 1997
CONTENTS
Report of Independent Auditors ...............................................98
Audited Financial Statements
Statement of Net Assets ......................................................99
Statement of Operations .....................................................106
Statement of Changes in Net Assets ..........................................126
Notes to Financial Statements ...............................................146
- --------------------------------------------------------------------------------
Strategic Benefit 97
<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 Benefit 98
<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 Benefit 99
<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 Benefit 100
<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 Benefit 101
<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 Benefit 102
<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 Benefit 103
<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 Benefit 104
<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 Benefit 105
<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 Benefit 106
<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 Benefit 107
<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 Benefit 108
<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 Benefit 109
<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 Benefit 110
<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 Benefit 111
<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 Benefit 112
<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 Benefit 113
<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 Benefit 114
<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 Benefit 115
<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 Benefit 116
<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 Benefit 117
<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 Benefit 118
<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 Benefit 119
<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 Benefit 120
<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 Benefit 121
<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 Benefit 122
<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 Benefit 123
<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 Benefit 124
<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 Benefit 125
<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 Benefit 126
<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 Benefit 127
<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 Benefit 128
<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 Benefit 129
<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 Benefit 130
<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 Benefit 131
<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 Benefit 132
<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 Benefit 133
<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 Benefit 134
<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 Benefit 135
<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 Benefit 136
<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 Benefit 137
<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 Benefit 138
<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 Benefit 139
<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 Benefit 140
<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 Benefit 141
<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 Benefit 142
<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 Benefit 143
<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 Benefit 144
<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 Benefit 145
<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 Benefit 146
<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 Benefit 147
<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 Benefit 148
<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 Benefit 149
<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 Benefit 150
<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 Benefit 151
<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 Benefit 152
<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 Benefit 153
<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 Benefit 154
<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 Benefit 155
<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 Benefit 156
<PAGE>
APPENDIX A
FACTORS FOR THE
CASH VALUE ACCUMULATION TEST
FOR A LIFE INSURANCE POLICY
<TABLE>
<CAPTION>
Attained Male | Attained Male | Attained Male
Age or Unisex Female Unisex | Age or Unisex Female Unisex | Age or Unisex Female Unisex
100/0 80/20 | 100/0 80/20 | 100/0 80/20
--- ----- ------ ----- | --- ----- ------ ----- | --- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 11.727 14.234 12.149 | |
1 11.785 14.209 12.194 | 34 4.188 4.902 4.314 | 67 1.617 1.815 1.657
2 11.458 13.815 11.857 | 35 4.052 4.742 4.173 | 68 1.583 1.769 1.620
3 11.128 13.417 11.515 | 36 3.920 4.586 4.037 | 69 1.550 1.724 1.585
4 10.803 13.023 11.178 | 37 3.793 4.437 3.906 | 70 1.518 1.681 1.552
5 10.481 12.635 10.845 | 38 3.670 4.293 3.780 | 71 1.488 1.639 1.520
6 10.161 12.253 10.514 | 39 3.553 4.154 3.658 | 72 1.459 1.599 1.489
7 9.844 11.875 10.187 | 40 3.439 4.021 3.541 | 73 1.432 1.560 1.460
8 9.530 11.505 9.863 | 41 3.330 3.894 3.429 | 74 1.406 1.524 1.433
9 9.221 11.141 9.545 | 42 3.226 3.771 3.322 | 75 1.382 1.490 1.407
10 8.918 10.784 9.233 | 43 3.125 3.654 3.218 | 76 1.359 1.457 1.383
11 8.623 10.436 8.928 | 44 3.028 3.541 3.119 | 77 1.338 1.427 1.360
12 8.338 10.098 8.634 | 45 2.936 3.432 3.023 | 78 1.318 1.398 1.338
13 8.066 9.771 8.353 | 46 2.846 3.328 2.931 | 79 1.299 1.371 1.318
14 7.808 9.455 8.085 | 47 2.761 3.227 2.843 | 80 1.281 1.345 1.298
15 7.564 9.150 7.831 | 48 2.678 3.129 2.758 | 81 1.264 1.321 1.280
16 7.335 8.857 7.592 | 49 2.599 3.035 2.676 | 82 1.248 1.298 1.262
17 7.118 8.575 7.364 | 50 2.522 2.945 2.597 | 83 1.233 1.277 1.245
18 6.911 8.302 7.148 | 51 2.449 2.858 2.522 | 84 1.218 1.257 1.230
19 6.713 8.038 6.939 | 52 2.378 2.774 2.449 | 85 1.205 1.238 1.215
20 6.521 7.782 6.737 | 53 2.311 2.693 2.379 | 86 1.193 1.221 1.202
21 6.334 7.534 6.540 | 54 2.246 2.615 2.312 | 87 1.181 1.205 1.189
22 6.150 7.293 6.347 | 55 2.184 2.540 2.248 | 88 1.171 1.190 1.177
23 5.969 7.059 6.158 | 56 2.125 2.468 2.187 | 89 1.160 1.176 1.166
24 5.791 6.831 5.971 | 57 2.068 2.398 2.128 | 90 1.151 1.163 1.155
25 5.615 6.611 5.788 | 58 2.014 2.330 2.071 | 91 1.141 1.150 1.144
26 5.441 6.396 5.608 | 59 1.962 2.265 2.017 | 92 1.131 1.137 1.133
27 5.271 6.188 5.431 | 60 1.912 2.201 1.965 | 93 1.120 1.125 1.122
28 5.104 5.986 5.258 | 61 1.864 2.139 1.915 | 94 1.109 1.112 1.110
29 4.940 5.791 5.089 | 62 1.818 2.079 1.867 | 95 1.097 1.098 1.097
30 4.781 5.601 4.925 | 63 1.774 2.022 1.821 | 96 1.083 1.084 1.084
31 4.626 5.418 4.765 | 64 1.732 1.967 1.777 | 97 1.069 1.069 1.069
32 4.476 5.241 4.610 | 65 1.692 1.914 1.735 | 98 1.054 1.054 1.054
33 4.330 5.069 4.459 | 66 1.654 1.863 1.695 | 99 1.040 1.040 1.040
| | 100 1.000 1.000 1.000
</TABLE>
- --------------------------------------------------------------------------------
Strategic Benefit 157
<PAGE>
APPENDIX B
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 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.
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 face
amount death benefit Option 1, issued on a preferred 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, PAGE 40. This prospectus also contains illustrations based on assumed
rates of return. SEE ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER
VALUES AND ACCUMULATED PREMIUMS, PAGE 48.
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 Benefit 158
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
Nonsmoker Male Age 45 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% 5,233 5,233 300,000
12/31/95 35.69% 13,899 13,899 300,000
12/31/96 17.58% 22,093 22,093 300,000
12/31/97 13.51% 30,513 30,513 300,000
12/31/98 19.30% 42,009 42,009 300,000
12/31/99 44.61% 67,434 67,434 300,000
AIM V.I. GOVERNMENT SECURITIES FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/94 -3.73% 4,904 4,904 300,000
12/31/95 15.56% 11,435 11,435 300,000
12/31/96 2.29% 16,694 16,694 300,000
12/31/97 8.16% 23,269 23,269 300,000
12/31/98 7.66% 30,145 30,145 300,000
12/31/99 -1.32% 34,310 34,310 300,000
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 8.71% 5,561 5,561 300,000
12/31/91 57.54% 16,679 16,679 300,000
12/31/92 3.55% 22,292 22,292 300,000
12/31/93 13.28% 30,675 30,675 300,000
12/31/94 -4.38% 33,781 33,781 300,000
12/31/95 44.31% 55,501 55,501 300,000
12/31/96 4.18% 62,423 62,423 300,000
12/31/97 11.39% 74,372 74,372 300,000
12/31/98 15.53% 90,931 90,931 300,000
12/31/99 43.42% 136,511 136,511 306,603
The assumptions underlying these values are described in Performance
Information, page 158.
* 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 Benefit 159
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 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
12/31/98 39.38% 7,182 7,182 300,000
12/31/99 37.29% 16,721 16,721 300,000
FIDELITY VIP OVERSEAS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/98 12.69% 5,771 5,771 300,000
12/31/99 42.44% 15,360 15,360 300,000
GCG EQUITY/INCOME PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 4.74% 5,351 5,351 300,000
12/31/91 20.02% 12,415 12,415 300,000
12/31/92 1.88% 17,618 17,618 300,000
12/31/93 11.13% 24,932 24,932 300,000
12/31/94 -1.18% 29,284 29,284 300,000
12/31/95 18.93% 40,384 40,384 300,000
12/31/96 8.77% 48,854 48,854 300,000
12/31/97 17.44% 62,598 62,598 300,000
12/31/98 8.26% 72,523 72,523 300,000
12/31/99 -0.72% 76,222 76,222 300,000
GCG GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/99 78.13% 9,235 9,235 300,000
The assumptions underlying these values are described in Performance
Information, page 158.
* 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 Benefit 160
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
- --------------------------------------------------------------------------------
GCG HARD ASSETS PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 -13.84% 4,372 4,372 300,000
12/31/91 4.70% 9,792 9,792 300,000
12/31/92 -9.81% 13,228 13,228 300,000
12/31/93 49.93% 27,178 27,178 300,000
12/31/94 2.53% 32,678 32,678 300,000
12/31/95 10.69% 41,299 41,299 300,000
12/31/96 33.17% 61,086 61,086 300,000
12/31/97 6.22% 69,496 69,496 300,000
12/31/98 -29.58% 51,896 51,896 300,000
12/31/99 23.36% 69,508 69,508 300,000
GCG LIMITED MATURITY BOND PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 7.87% 5,516 5,516 300,000
12/31/91 11.27% 11,680 11,680 300,000
12/31/92 4.84% 17,370 17,370 300,000
12/31/93 6.20% 23,556 23,556 300,000
12/31/94 -1.19% 27,931 27,931 300,000
12/31/95 11.72% 36,419 36,419 300,000
12/31/96 4.32% 42,737 42,737 300,000
12/31/97 6.67% 50,348 50,348 300,000
12/31/98 6.86% 58,575 58,575 300,000
12/31/99 1.13% 63,630 63,630 300,000
The assumptions underlying these values are described in Performance
Information, page 158.
* 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 Benefit 161
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
- --------------------------------------------------------------------------------
GCG LIQUID ASSETS MONEY MARKET PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 7.75% 5,510 5,510 300,000
12/31/91 5.66% 11,076 11,076 300,000
12/31/92 3.13% 16,466 16,466 300,000
12/31/93 2.64% 21,838 21,838 300,000
12/31/94 3.89% 27,606 27,606 300,000
12/31/95 5.51% 34,041 34,041 300,000
12/31/96 5.01% 40,541 40,541 300,000
12/31/97 5.07% 47,297 47,297 300,000
12/31/98 5.13% 54,434 54,434 300,000
12/31/99 4.74% 61,604 61,604 300,000
GCG MID-CAP GROWTH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/99 79.05% 9,284 9,284 300,000
GCG RESEARCH PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/99 24.23% 6,380 6,380 300,000
GCG TOTAL RETURN PORTFOLIO
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/99 3.38% 5,279 5,279 300,000
The assumptions underlying these values are described in Performance
Information, page 158.
* 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 Benefit 162
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
- --------------------------------------------------------------------------------
INVESCO VIF-EQUITY INCOME FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 29.25% 6,646 6,646 300,000
12/31/96 22.28% 14,223 14,223 300,000
12/31/97 28.17% 24,512 24,512 300,000
12/31/98 15.30% 33,766 33,766 300,000
12/31/99 14.84% 44,140 44,140 300,000
INVESCO VIF-HIGH YIELD FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/95 19.76% 6,144 6,144 300,000
12/31/96 16.59% 12,973 12,973 300,000
12/31/97 17.33% 20,967 20,967 300,000
12/31/98 1.42% 26,108 26,108 300,000
12/31/99 9.20% 33,658 33,658 300,000
INVESCO VIF-SMALL COMPANY GROWTH FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/98 16.38% 5,966 5,966 300,000
12/31/99 91.06% 21,037 21,037 300,000
MERRILL LYNCH BALANCED CAPITAL FOCUS FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/99 7.85% 5,515 5,515 300,000
MERRILL LYNCH BASIC VALUE FOCUS FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/98 9.28% 5,591 5,591 300,000
12/31/99 20.97% 12,802 12,802 300,000
The assumptions underlying these values are described in Performance
Information, page 158.
* 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 Benefit 163
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
- --------------------------------------------------------------------------------
MERRILL LYNCH GLOBAL GROWTH FOCUS FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/99 38.69% 7,145 7,145 300,000
MERRILL LYNCH INDEX 500 FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/97 32.81% 6,834 6,834 300,000
12/31/98 28.28% 15,169 15,169 300,000
12/31/99 20.50% 24,165 24,165 300,000
MERRILL LYNCH SMALL CAP VALUE FOCUS FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/98 -6.52% 4,757 4,757 300,000
12/31/99 33.99% 13,090 13,090 300,000
VAN ECK WORLDWIDE BOND FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/90 11.25% 5,695 5,695 300,000
12/31/91 18.39% 12,648 12,648 300,000
12/31/92 -5.25% 16,592 16,592 300,000
12/31/93 7.79% 23,078 23,078 300,000
12/31/94 -1.32% 27,426 27,426 300,000
12/31/95 17.30% 37,663 37,663 300,000
12/31/96 2.53% 43,265 43,265 300,000
12/31/97 2.38% 48,849 48,849 300,000
12/31/98 12.75% 60,142 60,142 300,000
12/31/99 -7.82% 59,404 59,404 300,000
The assumptions underlying these values are described in Performance
Information, page 158.
* 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 Benefit 164
<PAGE>
HYPOTHETICAL ILLUSTRATIONS (continued)
Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $300,000 Annual Premium $5,750
- --------------------------------------------------------------------------------
VAN ECK WORLDWIDE EMERGING MARKETS FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/96 26.82% 6,517 6,517 300,000
12/31/97 -11.61% 10,124 10,124 300,000
12/31/98 -34.15% 9,832 9,832 300,000
12/31/99 100.28% 29,634 29,634 300,000
VAN ECK WORLDWIDE REAL ESTATE FUND
Year Annual Total Cash Surrender Account Death
Ended: Return* Value Value Benefit
12/31/98 -11.35% 4,503 4,503 300,000
12/31/99 -2.01% 9,282 9,282 300,000
The assumptions underlying these values are described in Performance
Information, page 158.
* 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 Benefit 165
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
UNDERTAKING REGARDING INDEMNIFICATION
Please refer to the Articles of Incorporation listed as Exhibits 1.A(6)(a) and
1.A(6)(b-g) and the By-Laws listed as Exhibits 1.A(6)(h) and 1.A(6)(h)(i).
Security Life of Denver's (the "corporation") Certificate of Incorporation and
bylaws provide that the corporation shall have every power and duty of
indemnification of directors, officers, employees and agents, without
limitation, provided by the laws of the state of Colorado. Under Colorado law,
the corporation has the power to indemnify such persons against expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with any threatened, pending or completed action,
suit or proceeding, if such person acted in good faith and in a manner which
that person reasonably believed to be in or not opposed to the best interest of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In the case of actions by
or in the right of the corporation, such indemnification cannot be made where
such person is adjudged liable to the corporation, except pursuant to a court
order. The corporation is required to indemnify directors, officers, employees
and agents against expense actually and reasonably incurred in connection with
actions where such persons have been successful on the merits or otherwise in
defense of such actions.
Insofar as indemnification for liability arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the securities and Exchange
commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling preceding, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
UNDERTAKING REQUIRED BY SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED
Security Life of Denver Insurance Company represents that the fees and charges
deducted under the Policy, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred and the risks assumed by
the Company.
Contents of Registration Statement
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-Reference table.
- --------------------------------------------------------------------------------
Strategic Benefit II - 1
<PAGE>
The prospectus.
The undertaking to file reports.
The undertaking regarding indemnification.
The undertaking required by Section 26(e)2(A) of the Investment Company Act
of 1940, as amended.
The signatures.
Written consents of the following persons:
James L. Livingston, Jr. (See Exhibit 6B).
Ernst & Young, L.L.P. (See Exhibit 7A).
Sutherland Asbill & Brennan LLP (See Exhibit 7B).
The following exhibits:
1.A (1) Resolution of the Executive Committee of the Board of Directors of
Security Life of Denver Insurance Company ("Security Life of Denver")
authorizing the establishment of the Registrant./1/
(2) Not Applicable.
(3) (a) Security Life of Denver Distribution Agreement./1/
(i) Amendment to Security Life of Denver Insurance Company
Distribution Agreement./6/
(ii) Amendment to Security Life of Denver Insurance Company
Distribution Agreement./9/
(b) Compensation Schedule to Selling Agreement with Merrill Lynch./10/
(c) Commission Schedule for Policies./10/
(d) Commission Schedule for Policies.
(4) Not Applicable.
(5) (a) Strategic Benefit Variable Universal Life Insurance Policy
(Form No. 2507(VUL)-5/00)./10/
(b) Adjustable Term Insurance Rider (Form No. R2006-3/00)./5/
(c) Certificate of Insurance./5/
(6) (a) Security Life of Denver's Restated Articles of Incorporation./1/
(b-g) Amendments to Articles of Incorporation through June 12, 1987./1/
(h) Security Life of Denver's By-Laws./1/
(i) Bylaws of Security Life of Denver Insurance Company
(Restated with Amendments through September 30, 1997)./2/
(7) Not Applicable.
(8) (a) Participation Agreements
(i) Participation Agreement by and among AIM Variable Insurance
Funds, Inc., Life Insurance Company, on Behalf of Itself
and its Separate Accounts and Name of Underwriter of
Variable Contracts and Policies./3/
- --------------------------------------------------------------------------------
Strategic Benefit II - 2
<PAGE>
(ii) Sales Agreement by and among The Alger American Fund, Fred
Alger Management, Inc., and Security Life of Denver
Insurance Company./1/
(iii) Sales Agreement by and among Neuberger & Berman Advisers
Management Trust, Neuberger & Berman Management
Incorporated, and Security Life of Denver Insurance
Company./1/
(iv) Participation Agreement among Variable Insurance Products
Fund, Fidelity Distributors Corporation and Security Life
of Denver Insurance Company./1/
(v) Participation Agreement among Variable Insurance Products
Fund II, Fidelity Distributors Corporation and Security
Life of Denver Insurance Company./1/
(vi) Participation Agreement among INVESCO Variable Investment
Funds, Inc., INVESCO Funds Group, Inc., and Security Life
of Denver Insurance Company./1/
(vii) Participation Agreement between Van Eck Investment Trust
and the Trust's investment adviser, Van Eck Associates
Corporation, and Security Life of Denver Insurance
Company./1/
(viii) Participation Agreement among Security Life of Denver
Insurance Company, The GCG Trust and Directed Services,
Inc.
(ix) Fund Participation Agreement between Merrill Lynch Variable
Series Funds, Inc. and Security Life of Denver Insurance
Company.
(b) (i) First Amendment to Fund Participation Agreement between
Security Life of Denver, Van Eck Investment Trust and Van
Eck Associates Corporation. /3/
(ii) Second Amendment to Fund Participation Agreement between
Security Life of Denver, Van Eck Worldwide Insurance Trust
and Van Eck Associates Corporation. /3/
(iii) Assignment and Modification Agreement between Neuberger &
Berman Advisers Management Trust, Neuberger & Berman
Management Incorporated, Neuberger & Berman Advisers
Management Trust, Advisers Managers Trust and Security Life
of Denver Insurance Company. /3/
(iv) First Amendment to Participation Agreement by and among The
Alger American Fund, Fred Alger Management, Inc., Security
Life of Denver Insurance Company./1/
(v) First Amendment to Participation Agreement among Variable
Insurance Products Fund, Fidelity Distributors Corporation
and Security Life of Denver Insurance Company./1/
(vi) Second Amendment to Participation Agreement among Variable
Insurance Products Fund, Fidelity Distributors Corporation
and Security Life of Denver Insurance Company./1/
(vii) First Amendment to Participation Agreement among Variable
Insurance Products Fund II, Fidelity Distributors
Corporation and Security Life of Denver Insurance
Company./1/
(viii) Second Amendment to Participation Agreement among Variable
Insurance Products Fund II, Fidelity Distributors
Corporation and Security Life of Denver Insurance
Company./1/
(ix) First Amendment to Participation Agreement among Security
Life of Denver Insurance Company, INVESCO Variable
Investment Funds, Inc. and INVESCO Funds Group, Inc./1/
(x) Third Amendment to Participation Agreement among Variable
Insurance Products Fund, Fidelity Distributors Corporation
and Security Life of Denver Insurance Company./8/
(xi) Third Amendment to Participation Agreement among Security
Life of Denver Insurance Company, INVESCO Variable
Investment Funds, Inc. and INVESCO Funds Group, Inc./4/
(xii) Fourth Amendment to Participation Agreement among Variable
Insurance Products Fund, Fidelity Distributors Corporation
and Security Life of Denver Insurance Company./4/
(xiii) Fourth Amendment to Participation Agreement among Variable
Insurance Products Fund II, Fidelity Distributors
Corporation and Security Life of Denver Insurance
Company./4/
(xiv) Amendment No. 2 to Participation Agreement among AIM
Variable Insurance Funds, Inc., Security Life of Denver
Insurance Company and ING America Equities, Inc./4/
- --------------------------------------------------------------------------------
Strategic Benefit II - 3
<PAGE>
(xv) Fourth Amendment to Participation Agreement among Security
Life of Denver Insurance Company, INVESCO Variable
Investment Funds, Inc. and INVESCO Funds Group, Inc./6/
(xvi) Amendment No. 3 to Participation Agreement among AIM
Variable Insurance Funds, Inc., Security Life of Denver
Insurance Company and ING America Equities, Inc./6/
(xvii) Fifth Amendment to Participation Agreement among Variable
Insurance Products Fund, Fidelity Distributors Corporation
and Security Life of Denver Insurance Company./6/
(xviii)Fifth Amendment to Participation Agreement among Variable
Insurance Products Fund II, Fidelity Distributors
Corporation and Security Life of Denver Insurance
Company./6/
(xix) Amendment No. 4 to Participation Agreement among AIM
Variable Insurance Funds, Inc., Security Life of Denver
Insurance Company and ING America Equities, Inc.
(xx) Sixth Amendment to Participation Agreement among Variable
Insurance Products Fund, Fidelity Distributors Corporation
and Security Life of Denver Insurance Company.
(xxi) Sixth Amendment to Participation Agreement among Variable
Insurance Products Fund II, Fidelity Distributors
Corporation and Security Life of Denver Insurance Company.
(xxii) Fifth Amendment to Participation Agreement among Security
Life of Denver Insurance Company, INVESCO Variable
Investment Funds, Inc. and INVESCO Funds Group, Inc.
(c) (i) Service Agreement between Fred Alger Management, Inc. and
Security Life of Denver Insurance Company./1/
(ii) Expense Allocation Agreement between A I M Advisors, Inc.,
AIM Distributors, Inc. and Security Life of Denver./9/
(iii) Service Agreement between INVESCO Funds Group, Inc. and
Security Life of Denver Insurance Company./9/
(iv) Service Agreement between Neuberger & Berman Management
Incorporated and Security Life of Denver Insurance
Company./9/
(v) Service Agreement between Fidelity Investments
Institutional Operations Company, Inc. and Security Life of
Denver Insurance Company./9/
(vi) Side Letter between Van Eck Worldwide Insurance Trust and
Security Life of Denver./9/
(vii) Specimen Administrative Services Agreement among Security
Life of Denver Insurance Company and Merrill Lynch Asset
Management, L.P./10/
(9) Not Applicable.
(10) Specimen Guaranteed Issue Variable Life Insurance Application with
Guaranteed Issue Binding Limited Life Insurance Coverage Form
(Form Nos. Q2009-11/97 and Q-1112 B-6/98)./10/
2. Included as Exhibit 1.A(5) above.
3.A Opinion and consent of Gary W. Waggoner as to securities being registered.
4. Not Applicable.
5. Not Applicable.
6.A Opinion and consent of James L. Livingston, Jr. [To be Filed by
Amendment.]
7.A Consent of Ernst & Young L.L.P. [To be Filed by Amendment.]
B Consent of Sutherland Asbill & Brennan LLP. [To be Filed by Amendment.]
8. Not Applicable.
11. Issuance, Transfer and Redemption Procedures Memorandum.
- --------------------------------------------------------------------------------
Strategic Benefit II - 4
<PAGE>
_______________
/1/ Incorporated herein by reference to Post-Effective Amendment No. 7 to the
Form S-6 Registration Statement of Security Life of Denver Insurance
Company and its Security Life Separate Account L1, filed with the
Securities and Exchange Commission on April 27, 1998 (File No. 33-74190).
/2/ Incorporated herein by reference to Post-Effective Amendment No. 5 to the
Form S-6 Registration Statement of Security Life of Denver Insurance
Company and its Security Life Separate Account L1, filed with the
Securities and Exchange Commission on October 29, 1998 (File No.
33-74190).
/3/ Incorporated herein by reference to Post-Effective Amendment No. 6 to the
Form S-6 Registration Statement of Security Life of Denver Insurance
Company and its Security Life Separate Account L1, filed with the
Securities and Exchange Commission on March 2, 1998 (File No. 33-74190).
/4/ Incorporated herein by reference to the Pre-Effective Amendment No. 2 to
the Form S-6 Registration Statement of Security Life of Denver Insurance
Company and its Security Life Separate Account L1, filed with the
Securities and Exchange Commission on May 10, 1999 (File No. 333-72753).
/5/ Incorporated herein by reference to the Initial Registration to the Form
S-6 Registration Statement of Security Life of Denver Insurance Company
and its Security Life Separate Account L1, filed with the Securities and
Exchange Commission on November 8, 1999 (File No. 333-90577).
/6/ Incorporated herein by reference to the Pre-Effective Amendment No. 1 to
the Form S-6 Registration Statement of Security Life of Denver Insurance
Company and its Security Life Separate Account L1, filed with the
Securities and Exchange Commission on December 3, 1999 (File No.
333-90577).
/7/ Incorporated herein by reference to the Pre-Effective Amendment No. 2 to
the Form S-6 Registration Statement of Security Life of Denver Insurance
Company and its Security Life Separate Account L1, filed with the
Securities and Exchange Commission on February 2, 2000 (File No.
333-90577).
/8/ Incorporated herein by reference to the Post-Effective Amendment No. 1 to
the Form S-6 Registration Statement of Security Life of Denver Insurance
Company and its Security Life Separate Account L1, filed with the
Securities and Exchange Commission on February 29, 2000 (File No.
333-72753).
/9/ Incorporated herein by reference to the Post-Effective Amendment No. 10 to
the Form S-6 Registration Statement of Security Life of Denver Insurance
Company and its Security Life Separate Account L1, filed with the
Securities and Exchange Commission on April 23, 1999 (File No. 33-74190).
/10/ Incorporated herein by reference to the Post-Effective Amendment No. 1 to
the Form S-6 Registration Statement of Security Life of Denver Insurance
Company and its Security Life Separate Account L1, filed with the
Securities and Exchange Commission on March 2, 2000 (File No. 333-90577).
- --------------------------------------------------------------------------------
Strategic Benefit II - 5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Security Life of
Denver Insurance Company and the Registrant, Security Life Separate Account L1,
have duly caused this Registration Statement to be signed on their behalf by the
undersigned, hereunto duly authorized, and their seal to be hereunto fixed and
attested, all in the City and County of Denver and the State of Colorado on the
19th day of April, 2000.
SECURITY LIFE OF DENVER INSURANCE COMPANY
(Depositor)
BY: /s/ Stephen M. Christopher
----------------------------------
Stephen M. Christopher
President
(Seal)
ATTEST:
/s/ Gary W. Waggoner
- --------------------------
Gary W. Waggoner
SECURITY LIFE SEPARATE ACCOUNT L1
(Registrant)
BY: SECURITY LIFE OF DENVER INSURANCE COMPANY
(Depositor)
BY: /s/ Stephen M. Christopher
----------------------------------
Stephen M. Christopher
President
(Seal)
ATTEST:
/s/ Gary W. Waggoner
- -------------------------
Gary W. Waggoner
- --------------------------------------------------------------------------------
Strategic Benefit II - 6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities with
Security Life of Denver Insurance Company and on the date indicated.
PRINCIPAL EXECUTIVE OFFICERS:
/s/ Stephen M. Christopher
- -----------------------------------------------
Stephen M. Christopher
President, Chief Executive Officer and Director
/s/ James L. Livingston, Jr.
- -----------------------------------------------
James L. Livingston, Jr.
Executive Vice President and Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ Shari A. Enger
- -----------------------------------------------
Shari A. Enger
Vice President and Controller
DIRECTORS:
/s/ P. Randall. Lowery
- -----------------------------------------------
P. Randall Lowery
/s/ Michael W. Cunningham
- -----------------------------------------------
Michael W. Cunningham
- --------------------------------------------------------------------------------
Strategic Benefit II - 7
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
1.A(3)(b)(i) Compensation Schedule
1.A(3)(c)(i) Commission Schedule
1.A(8)(a)(viii) GCG Trust Participation Agreement
1.A(8)(a)(ix) Merrill Lynch Participation Agreement
1.A(8)(b)(xxiii) Fidelity 7th Amendment
1.A(8)(c)(vii) Merrill Lynch Administrative Services Agreement
1.A(8)(c)(viii) Fidelity Service Contract
6.A Livingston Opinion Letter
7.A Ernst & Young Consent Letter
7.B Sutherland Asbill & Brennan LLP Consent Letter
11. Issuance, Transfer and Redemption Procedures Memorandum.
- --------------------------------------------------------------------------------
Strategic Benefit II - 8
Exhibit 1.A(3)(b)(i)
SCHEDULE SB-1
COMPENSATION SCHEDULE
TO SELLING AGREEMENT FOR MERRILL LYNCH
STRATEGIC BENEFIT VARIABLE UNIVERSAL LIFE
This Schedule is an attachment effective as of May 1, 2000 to the ING America
Equities, Inc. ("ING America Equities") Selling Agreement by and among the
parties pursuant to paragraph 17 of that Selling Agreement. The provisions of
this Schedule shall apply only to ING Security Life's Strategic Benefit Variable
Universal Life policies solicited and issued while this Schedule is in effect.
All compensation payable under this Schedule shall be subject to the terms and
conditions contained herein at the time of issue of the policy by ING Security
Life of Denver Insurance Company ("ING Security Life").
1. Commission Structure:
Commissions are payable on premiums paid in the first year up to the
target premium only. No commissions are paid on premium in excess of
the target premium. Any time a new coverage segment is created,
premiums allocated to that segment in its first year will be
commissionable up to that segment's target premium. The commission
rates as a percent of target premium are:
------------------------------- ---------------------------
POLICY YEAR OF COVERAGE SEGMENT COMMISSION RATE
------------------------------- ---------------------------
1 5%
------------------------------- ---------------------------
2+ 0%
------------------------------- ---------------------------
Premiums received within 15 days prior to policy anniversary will
result in the agent receiving commissions at the same rate as if the
premium was paid on the anniversary date.
If this product is sold with a maximum ATR coverage, the target premium
could be zero which would result in no commissions payable other than
the annual trail commission described in section 2 below.
2. Trail Commissions: are paid as a percent of the net account value. The
trail commission is calculated monthly based on the net account value
at the end of the prior month. It is paid at the end of the policy
year, provided the policy remains in force at that time and is not
subject to the grace period provisions. The trail commissions will
continue when the insured lives past age 100 and the continuation of
coverage feature is in force. The annual trail commission rates are
given below.
Schedule SB-1 (ver 2-25-00) Page 1 of 3
<PAGE>
Annual trail commission rates as a percent of the net account value:
----------------------------- -----------------------------
POLICY YEAR TRAIL COMMISSION RATE
----------------------------- -----------------------------
1 - 10 1.00%
----------------------------- -----------------------------
11 - 20 0.75%
----------------------------- -----------------------------
21+ 0.20%
----------------------------- -----------------------------
3. Riders: The Adjustable Term Insurance Rider coverage is not
commissionable.
4. Commission Calculation: Commissions shall be calculated only on premium
actually received and accepted by ING Security Life. Commissions shall
be paid only on an earned basis. Outstanding loan amounts carried over
are not considered commissionable premium.
5. Premium Allocation: If the Stated Death Benefit has been increased
since the policy date, premiums received are allocated to the coverage
segments in the same proportion that the commission target premium for
each segment bears to the total commission target premium of the
policy.
6. Death Benefit Increases: If a premium payment accompanies a request for
a Stated Death Benefit increase or is received while a request is
pending, the payment will be applied to the policy but commissions
shall not be payable until the increase is effective. The commission
shall then be payable based on the premium being allocated among all
segments as it would normally and the new target premium after the
increase.
7. Compensation Payments: Compensation on initial premium shall be due to
the Selling Broker-Dealer at the time of the issuance of the policy and
for all other premium payments at the time of the receipt and
acceptance of premium by ING Security Life, except that the amount, if
any, and the time of payment of compensation on stated death benefit
increases, replacements, reissues, changes, conversions, exchanges,
term renewals, term conversions, premiums paid in advance, policies
issued on a "guaranteed issue" basis, policies requiring facultative
reinsurance arrangements, and other special cases and programs shall be
governed by ING Security Life's underwriting and administrative rules
then in effect. The Compensation shall be payable to the Selling
Broker-Dealer in accordance with the Schedule I in effect at the time
of issue of the policy.
8. Commission Chargeback: In the event that a policy for which a
commission has been paid is lapsed or surrendered by the Policy Owner
or has a reduction in the Stated Death Benefit during the first three
years or is returned to ING Security Life for refund of premium during
the Free Look Period as described in the policy, ING Security Life and
ING America Equities shall require reimbursement of from Selling
Broker-Dealer as
Schedule SB-1 (ver 2-25-00) Page 2 of 3
<PAGE>
shown below.
---------------------- -----------------------------------------
POLICY OR SEGMENT YEAR COMMISSION CHARGEBACK
---------------------- -----------------------------------------
---------------------- -----------------------------------------
1 5% of first year premiums up to target
---------------------- -----------------------------------------
---------------------- -----------------------------------------
2 2.5% of first year premiums up to target
---------------------- -----------------------------------------
---------------------- -----------------------------------------
3 1.25% of first year premiums up to target
---------------------- -----------------------------------------
---------------------- -----------------------------------------
4+ 0%
---------------------- -----------------------------------------
If a premium payment for which a commission has been paid is refunded
by ING Security Life, a reimbursement of the commission paid on the
amount refunded will be due from the Selling Broker-Dealer. The
reimbursement may be deducted by ING America Equities from the next, or
any subsequent, commission payment to Selling Broker-Dealer.
If the amount to be reimbursed exceeds compensation otherwise due,
Selling Broker-Dealer shall promptly reimburse ING America Equities
before the next commission cycle.
9. Internal Exchanges: No Commissions shall be payable on the exchange of
any policy issued by Security Life or any other ING affiliate for a
Merrill Lynch Corporate Benefits Variable Universal Life policy.
Schedule SB-1 (ver 2-25-00) Page 3 of 3
Exhibit 1.A(3)(c)(i)
Commission Structure:
Commissions are payable on premiums paid up to the target premium only. No
commissions are paid on premium in excess of the target premium. Any time a new
coverage segment is created, premiums allocated to that segment will be
commissionable up to that segment's target premium. The commission rates as a
percent of target premium are given below.
POLICY YEAR OF COVERAGE SEGMENT COMMISSION RATE
1 5%
2+ 0%
Annual trail commission rates as a percent of the net account value:
POLICY YEAR TRAIL COMMISSION RATE
1 - 10 1.00%
11 - 20 0.75%
21+ 0.20%
Commission Chargeback:
In the event that a policy for which a commission has been paid is lapsed or
surrendered by the Policy Owner or has a reduction in the Stated Death Benefit
during the first three policy years or is returned for refund of premium during
the Free Look Period as described in the policy, reimbursement is required from
Selling Broker-Dealer as shown below.
POLICY OR SEGMENT YEAR COMMISSION CHARGEBACK
1 5% of first year premiums up to target
2 2.5% of first year premiums up to target
3 1.25% of first year premiums up to target
4+ 0%
Page 1 of 1
FORM OF PARTICIPATION AGREEMENT
----
AMONG
SECURITY LIFE OF DENVER INSURANCE COMPANY,
THE GCG TRUST,
AND
DIRECTED SERVICES, INC.
THIS AGREEMENT, dated as of the 11th day of February, 2000, by and among
Security Life of Denver Insurance Company (the "Company"), a life insurance
company organized under the laws of the State of Colorado, on its own behalf and
on behalf of each separate account of the Company set forth on Schedule A hereto
as may be amended from time to time (each such account hereinafter referred to
as the "Account"), The GCG Trust (the "Fund"), a management investment company
and business trust organized under the laws of the Commonwealth of
Massachusetts, Directed Services, Inc.(the "Adviser" and the "Distributor), a
corporation organized under the laws of the State of New York.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance and variable annuity contracts (the
"Variable Insurance Products") to be offered by insurance companies which have
entered into participation agreements with the Fund, Adviser and Distributor
("Participating Insurance Companies");
WHEREAS, the shares of beneficial interest of the Fund are divided into
several series of shares, each designated a "Portfolio" and representing the
interest in a particular managed portfolio of securities and other assets;
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission (the "SEC") granting Participating Insurance Companies and variable
annuity and variable life insurance separate accounts exemptions from the
provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company
Act of 1940, as amended, (the "1940 Act") and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, if and to the extent necessary to permit shares of
the Fund to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
(the "Mixed and Shared Funding Exemptive Order"), and the parties to this
Agreement agree to comply with the conditions or undertakings specified in the
Mixed and Shared Funding Exemptive Order to the extent applicable to each such
party;
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933, as amended (the "1933 Act");
WHEREAS, the Adviser, which serves as investment adviser to the Fund, is
duly registered as an investment adviser under the federal Investment Advisers
Act of 1940, as amended;
WHEREAS, the Company has registered or will register certain variable life
insurance contracts (the "Contracts") under the 1933 Act;
WHEREAS, the Account is a duly organized, validly existing segregated asset
account, established by the Company under the insurance laws of the State of
Colorado, to set aside and invest assets attributable to the Contracts;
WHEREAS, the Company has registered the Account as a unit
investment trust under the 1940 Act;
-A1-
<PAGE>
WHEREAS, the Company has issued or will issue certain variable life
insurance contracts supported wholly or partially by the Account (the
"Contracts"), and said Contracts are listed in Schedule A hereto, as it may be
amended from time to time by mutual written agreement;
WHEREAS, the Distributor, which serves as distributor to the Fund, is
registered as a broker dealer with the SEC under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule B hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts, and the Distributor is authorized to sell such shares to
the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund, the Adviser, and the Distributor agree as follows:
ARTICLE I. Sale of Fund Shares
-------------------
1.1. The Fund agrees to sell to the Company those shares of the Designated
Portfolios that each Account or the appropriate subaccount of each Account
orders, executing such orders on a daily basis at the net asset value next
computed after receipt and acceptance by the Fund or its designee of the order
for the shares of the Fund. For purposes of this Section 1.1, the Company will
be the designee of the Fund for receipt of such orders from each Account or the
appropriate subaccount of each Account and receipt by such designee will
constitute receipt by the Fund; provided that the Fund receives notice of such
order by 10:00 a.m. Eastern Time on the next following business day ("T+1").
"Business Day" will mean any day on which the New York Stock Exchange is open
for trading and on which the Fund calculates its net asset value pursuant to the
rules of the SEC.
1.2. The Company will pay for Fund shares on T+1 that an order to
purchase Fund shares is made in accordance with Section 1.1 above.
Payment will be in federal funds transmitted by wire. This wire
transfer will be initiated by 12:00 p.m. Eastern Time.
1.3. The Fund agrees to make shares of the Designated Portfolios available
indefinitely for purchase at the applicable net asset value per share by
Participating Insurance Companies and their separate accounts on those days on
which the Fund calculates its Designated Portfolio net asset value pursuant to
rules of the SEC and the Fund shall use reasonable efforts to calculate such net
asset value on each day the New York Stock Exchange is open for trading;
provided, however, that the Board of Trustees of the Fund (the "Fund Board") may
refuse to sell shares of any Portfolio to any person, or suspend or terminate
the offering of shares of any Portfolio if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of the
Fund Board, acting in good faith and in light of its fiduciary duties under
federal and any applicable state laws, necessary in the best interests of the
shareholders of such Portfolio.
1.4. On each Business Day on which the Fund calculates its net asset value,
the Company will aggregate and calculate the net purchase or redemption orders
for each Account or the appropriate subaccount of each Account maintained by the
Fund in which contract owner assets are invested. Net orders will only reflect
orders that the Company has received prior to the close of regular trading on
the New York Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m., Eastern
Time) on that Business Day. Orders that the Company has received after the close
of regular trading on the NYSE will be treated as though received on the next
Business Day. Each communication of orders by the Company will constitute a
representation that such orders were received by it prior to the close of
regular trading on the NYSE on the Business Day on which the purchase or
redemption order is priced in accordance with Rule 22c-1 under the 1940 Act.
Other procedures relating to the handling of orders will be in accordance with
the prospectus and statement of information of the relevant Designated Portfolio
or with oral or written instructions that the Distributor or the Fund will
forward to the Company from time to time.
1.5. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts, qualified pension
and retirement plans or such other persons as are permitted under
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applicable provisions of the Internal Revenue Code of 1986, as amended, (the
"Internal Revenue Code"), and regulations promulgated thereunder, the sale to
which will not impair the tax treatment currently afforded the Contracts. No
shares of any Portfolio will be sold to the general public except as set forth
in this Section 1.5.
1.6. The Fund agrees to redeem for cash, upon the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt and
acceptance by the Fund or its agent of the request for redemption. For purposes
of this Section 1.6, the Company will be the designee of the Fund for receipt of
requests for redemption from each Account or the appropriate subaccount of each
Account and receipt by such designee will constitute receipt by the Fund,
provided the Fund receives notice of request for redemption by 10:00 a.m.
Eastern Time on the next following Business Day. Payment will be in federal
funds transmitted by wire to the Company's account as designated by the Company
in writing from time to time, on the same Business Day the Fund receives notice
of the redemption order from the Company. The Fund reserves the right to delay
payment of redemption proceeds, but in no event may such payment be delayed
longer than the period permitted by the 1940 Act. The Fund will not bear any
responsibility whatsoever for the proper disbursement or crediting of redemption
proceeds; the Company alone will be responsible for such action. If notification
of redemption is received after 10:00 a.m. Eastern Time, payment for redeemed
shares will be made on the next following Business Day.
1.7. The Company agrees to purchase and redeem the shares of the Designated
Portfolios offered by the then current prospectus of the Fund in accordance with
the provisions of such prospectus.
1.8. Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Purchase
and redemption orders for Fund shares will be recorded in an appropriate title
for each Account or the appropriate subaccount of each Account.
1.9. The Fund will furnish same day notice (by telecopier, followed by
written confirmation) to the Company of the declaration of any income, dividends
or capital gain distributions payable on each Designated Portfolio's shares. The
Company hereby elects to receive all such dividends and distributions as are
payable on the Designated Portfolio shares in the form of additional shares of
that Designated Portfolio. The Fund will notify the Company of the number of
shares so issued as payment of such dividends and distributions. The Company
reserves the right to revoke this election upon reasonable prior notice to the
Fund and to receive all such dividends and distributions in cash.
1.10. The Fund will make the net asset value per share for each Designated
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and will use its
best efforts to make such net asset value per share available by 6:00 p.m.,
Eastern Time, but in no event later than 7:00 p.m., Eastern Time, each business
day.
1.11. Any error in the calculation of the net asset value, dividend and
capital gain information greater than or equal to $0.01 per share of the Fund's
shares, shall be reported immediately upon discovery to the Company. Any error
of a lesser amount shall be corrected in the next Business Day's net asset value
per share for the Fund. Any such notice will state for each day for which an
error occurred the incorrect price, the correct price and, to the extent
communicated to the Fund's shareholders, the reason for the price change. The
Company may send this notice or a derivation thereof (so long as such derivation
is approved in advance by the Distributor or the Adviser) to contractowners
whose accounts are affected by the price change. The parties will negotiate in
good faith to develop a reasonable method for effecting such adjustments. The
Fund shall provide the Company, on behalf of the Account or the appropriate
subaccount of each Account, with a prompt adjustment to the number of shares
purchased or redeemed to reflect the correct share net asset value.
1.12.
(a) The parties hereto acknowledge that the arrangement contemplated
by this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies (subject to Section 1.8 hereof) and the cash value of
the Contracts may be invested in other investment companies, provided,
however, that until this Agreement is terminated pursuant to Article X, the
Company shall promote the Designated Portfolios on the same basis as other
funding vehicles available under the Contracts and funding vehicles
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other than those listed on Schedule B to this Agreement may be available
for the investment of the cash value of the Contracts.
(b) The Company shall not, without prior notice to the Advisor and the
Distributor (unless otherwise required by applicable law), take any action
to operate the Account as a management investment company under the 1940
Act.
(c) The Company shall not, without prior notice to the Advisor and the
Distributor (unless otherwise required by applicable law), induce Contract
owners to change or modify the Fund or change the Fund's distributor or
investment adviser.
(d) The Company shall not, without prior notice to the Fund, induce
Contract owners to vote on any matter submitted for consideration by the
shareholders of the Fund in a manner other than as recommended by the Board
of Trustees of the Fund.
ARTICLE II. Representations and Warranties
------------------------------
2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act and that the Contracts will be issued and sold in
compliance with all applicable federal and state laws, including state insurance
suitability requirements. The Company further represents and warrants that it is
an insurance company duly organized and in good standing under applicable law
and that it has legally and validly established each Account as a separate
account under applicable state law and has registered the Account as a unit
investment trust in accordance with the provisions of thin 1940 Act to serve as
a segregated investment account for the Contracts, and that it will maintain
such registration for so long as any Contracts are outstanding. The Company will
amend the registration statement under the 1933 Act for the Contracts and the
registration statement under the 1940 Act for the Account from time to time as
required in order to effect the continuous offering of the Contracts or as may
otherwise be required by applicable law. The Company will register and qualify
the Contracts for sale in accordance with the securities laws of the various
states only if and to the extent deemed necessary by the Company.
2.2. The Company represents that the Contracts are currently and at the
time of issuance will be treated as endowment or life insurance contracts under
applicable provisions of the Internal Revenue Code, and that it will make every
effort to maintain such treatment and that it will notify the Fund and the
Adviser immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
2.3. The Company represents and warrants that it will not purchase shares
of the Designated Portfolios with assets derived from tax-qualified retirement
plans except, indirectly, through Contracts purchased in connection with such
plans.
2.4. The Fund represents and warrants that Fund shares of the Designated
Portfolios sold pursuant to this Agreement will be registered under the 1933 Act
and duly authorized for issuance in accordance with applicable law and that the
Fund is and will remain registered under the 1940 Act for as long as such shares
of the Designated Portfolios are outstanding. The Fund will amend the
registration statement for its shares under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous offering of its
shares. The Fund will register and qualify the shares of the Designated
Portfolios for sale in accordance with the laws of the various states only if
and to the extent deemed advisable by the Fund.
2.5. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code, and that it
will make every effort to maintain such qualification (under Subchapter M or any
successor or similar provision) and that it will notify the Company immediately
upon having a reasonable basis for believing that it has ceased to so qualify or
that it might not so qualify in the future.
2.6. The Fund represents and warrants that in performing the services
described in this Agreement, the Fund will comply with all applicable laws,
rules and regulations. The Fund makes no representation as to whether any aspect
of its operations (including, but not limited to, fees and expenses and
investment policies, objectives and restrictions) complies with the insurance
laws and regulations of any state. The Fund and the Distributor agree that
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upon request they will use their best efforts to furnish the information
required by state insurance laws so that the Company can obtain the authority
needed to issue the Contracts in the various states.
2.7. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it
reserves the right to make such payments in the future. To the extent that it
decides to finance distribution expenses pursuant to Rule 12b-1 the Fund
undertakes to have its Fund Board formulate and approve any plan under Rule
12b-1 to finance distribution expenses in accordance with the 1940 Act.
2.8. The Distributor represents and warrants that it will distribute the
Fund shares of the Designated Portfolios in accordance with all applicable
federal and state securities laws including, without limitation, the 1933 Act,
the 1934 Act and the 1940 Act.
2.9. The Fund represents that it is lawfully organized and validly existing
under the laws of the Commonwealth of Massachusetts and that it does and will
comply in all material respects with applicable provisions of the 1940 Act.
2.10. The Distributor represents and warrants that it is and will remain
duly registered under all applicable federal and state securities laws and that
it will perform its obligations for the Fund in accordance in all material
respects with any applicable state and federal securities laws.
2.11. The Fund and the Distributor represent and warrant that all of their
trustees, officers, employees, investment advisers, and other
individuals/entities having access to the funds and/or securities of the Fund
are and continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid bond
includes coverage for larceny and embezzlement and is issued by a reputable
bonding company.
ARTICLE III. Prospectuses and Proxy Statements; Voting
-----------------------------------------
3.1. The Fund or the Distributor will provide the Company, at the Fund's or
its affiliate's expense, with as many copies of the current Fund prospectus for
the Designated Portfolios as the Company may reasonably request for
distribution, at the Company's expense, to prospective contractowners and
applicants. The Fund or the Distributor will provide, at the Fund's or its
affiliate's expense, as many copies of said prospectus as necessary for
distribution, at the Company's expense, to existing contractowners. The Fund or
the Distributor will provide the copies of said prospectus to the Company or to
its mailing agent. If requested by the Company in lieu thereof, the Fund or the
Distributor will provide such documentation, including a computer diskette or a
final copy of a current prospectus set in type at the Fund's or its affiliate's
expense, and such other assistance as is reasonably necessary in order for the
Company at least annually (or more frequently if the Fund prospectus is amended
more frequently) to have the Fund's prospectus and the prospectuses of other
mutual funds in which assets attributable to the Contracts may be invested
printed together in one document, in which case the Fund or its affiliate will
bear its reasonable share of expenses as described above, allocated based on the
proportionate number of pages of the Fund's and other fund's respective portions
of the document.
3.2. The Fund or the Distributor will provide the Company, at the Fund's or
its affiliate's expense, with as many copies of the statement of additional
information as the Company may reasonably request for distribution, at the
Company's expense, to prospective contractowners and applicants. The Fund or the
Distributor will provide, at the Fund's or its affiliate's expense, as many
copies of said statement of additional information as necessary for
distribution, at the Company's expense, to any existing contractowner who
requests such statement or whenever state or federal law otherwise requires that
such statement be provided. The Fund or the Distributor will provide the copies
of said statement of additional information to the Company or to its mailing
agent.
3.3. The Fund or the Distributor, at the Fund's or its affiliate's expense,
will provide the Company or its mailing agent with copies of its proxy material,
if any, reports to shareholders and other communications to shareholders in such
quantity as the Company will reasonably require. The Company will distribute
this proxy material, reports and other communications to existing contract
owners and tabulate the votes.
3.4. If and to the extent required by law the Company will:
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(a) solicit voting instructions from contractowners;
(b) vote the shares of the Designated Portfolios held in the
Account in accordance with instructions received from
contractowners; and
(c) vote shares of the Designated Portfolios held in the Account for
which no timely instructions have been received, as well as shares it owns,
in the same proportion as shares of such Designated Portfolio for which
instructions have been received from the Company's contractowners;
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contractowners. Except as
set forth above, the Company reserves the right to vote Fund shares held in any
segregated asset account in its own right, to the extent permitted by law. The
Company will be responsible for assuring that each of its separate accounts
participating in the Fund calculates voting privileges in a manner consistent
with all legal requirements, including the Mixed and Shared Funding Exemptive
Order.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular, the Fund either will provide for
annual meetings (except insofar as the SEC may interpret Section 16 of the 1940
Act not to require such meetings) or, as the Fund currently intends to comply
with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts
described in Section 16(c) of that Act) as well as with Sections 16(a) and, if
and when applicable, 16(b). Further, the Fund will act in accordance with the
SEC's interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees and with whatever rules the SEC may promulgate
with respect thereto.
ARTICLE IV. Sales Material and Information
------------------------------
4.1. the Distributor will provide the Company on a timely basis with
investment performance information for each Designated Portfolio in which the
Company maintains a subaccount of the Account, including total return for the
preceding calendar month and calendar quarter, the calendar year to date, and
the prior one-year, five-year, and ten year (or life of the Fund) periods. The
Company may, based on the SEC mandated information supplied by the Distributor,
prepare communications for contractowners ("Contractowner Materials"). The
Company will provide copies of all Contractowner Materials concurrently with
their first use for the Distributor's internal recordkeeping purposes. It is
understood that neither the Distributor nor any Designated Portfolio will be
responsible for errors or omissions in, or the content of, Contractowner
Materials except to the extent that the error or omission resulted from
information provided by or on behalf of the Distributor or the Designated
Portfolio. Any printed information that is furnished to the Company pursuant to
this Agreement other than each Designated Portfolio's prospectus or statement of
additional information (or information supplemental thereto), periodic reports
and proxy solicitation materials is the Distributor's sole responsibility and
not the responsibility of any Designated Portfolio or the Fund. The Company
agrees that the Portfolios, the shareholders of the Portfolios and the officers
and governing Board of the Fund will have no liability or responsibility to the
Company in these respects.
4.2. The Company will not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection with
the sale of the Contracts other than the information or representations
contained in the registration statement, prospectus or statement of additional
information for Fund shares, as such registration statement, prospectus and
statement of additional information may be amended or supplemented from time to
time, or in reports or proxy statements for the Fund, or in published reports
for the Fund which are in the public domain or approved by the Fund or the
Distributor for distribution, or in sales literature or other material provided
by the Fund, Adviser or by the Distributor, except with permission of the
Distributor. Any piece of sales literature or other promotional material
intended to be used by the Company which requires the permission of the
Distributor prior to use will be furnished by Company to the Distributor, or its
designee, at least ten (10) business days prior to its use. No such material
will be used if the Distributor reasonably objects to such use within five (5)
business days after receipt.
Nothing in this Section 4.2 will be construed as preventing the Company or its
employees or agents from giving advice on investment in the Fund.
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<PAGE>
4.3. The Fund, the Adviser or the Distributor will furnish, or will cause
to be furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company or its Account is named, at
least ten (10) business days prior to its use. No such material will be used if
the Company reasonably objects to such use within five (5) business days after
receipt of such material.
4.4. The Fund, the Adviser and the Distributor will not give any
information or make any representations or statements on behalf of the Company
or concerning the Company, each Account, or the Contracts other than the
information or representations contained in a registration statement, prospectus
or statement of additional information for the Contracts, as such registration
statement, prospectus and statement of additional information may be amended or
supplemented from time to time, or in published reports for each Account or the
Contracts which are in the public domain or approved by the Company for
distribution to contractowners, or in sales literature or other material
provided by the Company, except with permission of the Company. The Company
agrees to respond to any request for approval on a prompt and timely basis.
4.5. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, statements of additions information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the SEC, the NASD or other regulatory
authority.
4.6. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
each Account, contemporaneously with the filing of such document with the SEC,
the NASD or other regulatory authority.
4.7. For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media, (e.g., on-line
networks such as the Internet or other electronic messages), sales literature
(i.e., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, research reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisements sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, registration statements, prospectuses,
statements of additional information, shareholder reports, and proxy materials
and any other material constituting sales literature or advertising under the
NASD rules, the 1933 Act or the 1940 Act.
4.8. The Fund and the Distributor hereby consent to the Company's use of
the names The GCG Trust, Directed Services, Inc., the portfolio names designated
on Schedule B or other designated names as may be used from time to time in
connection with the marketing of the Contracts, subject to the terms of Sections
4.1 and 4.2 of this Agreement. Such consent will terminate with the termination
of this Agreement.
ARTICLE V. Fees and Expenses
-----------------
5.1. The Fund, the Adviser and the Distributor will pay no fee or other
compensation to the Company under this Agreement except if the Fund or any
Designated Portfolio adopts and implements a plan pursuant to Rule 12b-1 under
the 1940 Act to finance distribution expenses, then, subject to obtaining any
required exemptive orders or other regulatory approvals, the Fund may make
payments to the Company or to the underwriter for the Contracts if and in such
amounts agreed to by the Fund in writing.
5.2. All expenses incident to performance by the Fund of this Agreement
will be paid by the Fund to the extent permitted by law. The Fund will bear the
expenses for the cost of registration and qualification of the Fund's shares;
preparation and filing of the Fund's prospectus, statement of additional
information and registration statement, proxy materials and reports; setting in
type and printing the Fund's prospectus; setting in type and printing proxy
materials and reports by it to contractowners (including the costs of printing a
Fund prospectus that constitutes an annual report); the preparation of all
statements and notices required by any federal or state law; all taxes on the
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issuance or transfer of the Fund's shares; any expenses permitted to be paid or
assumed by the Fund pursuant to a plan, if any, under Rule 12b-1 under the 1940
Act; and all other expenses set forth in Article III of this Agreement. All
expenses incident to the distribution and tabulation of the Fund's proxy
materials will be paid by the Fund, except postage which will be paid by the
Company.
ARTICLE VI. Diversification and Qualification
---------------------------------
6.1. The Adviser will ensure that the Fund will at all times invest money
from the Contracts in such a manner as to ensure that the Contracts will be
treated as variable insurance contracts under the Internal Revenue Code and the
regulations issued thereunder. Without limiting the scope of the foregoing, the
Fund will comply with Section 817(h) of the Internal Revenue Code and Treasury
Regulation 1.817-5, as amended from time to time, relating to the
diversification requirements for variable insurance, endowment, or life
insurance contracts and any amendments or other modifications to such Section or
Regulation. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps: (a) to notify the Company of such breach; and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Treasury Regulation 1.817-5.
6.2. The Fund represents that it is or will be qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code, and that it
will make every effort to maintain such qualification (under Subchapter M or any
successor or similar provisions) and that it will notify the Company immediately
upon having a reasonable basis for believing that it has ceased to so qualify or
that it might not so qualify in the future.
6.3. The Company represents that the Contracts are currently, and at the
time of issuance shall be, treated as life insurance contracts, under applicable
provisions of the Internal Revenue Code, and that it will make every effort to
maintain such treatment, and that it will notify the Fund and the Distributor
immediately upon having a reasonable basis for believing the Contracts have
ceased to be so treated or that they might not be so treated in the future. The
Company agrees that any prospectus offering a contract that is a "modified
endowment contract" as that term is defined in Section 7702A of the Internal
Revenue Code (or any successor or similar provision), shall identify such
contract as a modified endowment contract.
ARTICLE VII. Potential Conflicts
-------------------
7.1. The Fund Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the Contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable life insurance contract owners; or (f) a decision by an insurer to
disregard the voting instructions of contract owners. The Fund Board shall
promptly inform the Company if it determines that an irreconcilable material
conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Fund Board. The Company will assist the Fund Board in
carrying out its responsibilities under the Mixed and Shared Funding Exemptive
Order, by providing the Fund Board with all information reasonably necessary for
the Fund Board to consider any issues raised. This includes, but is not limited
to, an obligation by the Company to inform the Fund Board whenever Contract
owner voting instructions are disregarded.
7.3. If it is determined by a majority of the Fund Board, or a majority of
its disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested Fund Board members), take whatever steps are necessary to remedy
or eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life
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insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the Account's investment in
the Fund and terminate this Agreement with respect to each Account; provided,
however, that such withdrawal and termination shall be limited to the extent
required by the foregoing material irreconcilable conflict as determined by a
majority of the disinterested members of the Fund Board. Any such withdrawal and
termination must take place within six (6) months after the Fund gives written
notice that this provision is being implemented, and until the end of that six
month period the Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Fund Board informs the
Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Fund Board. Until the end of the foregoing six month period, the Fund
shall continue to accept and implement orders by the Company for the purchase
(and redemption) of shares of the Fund.
7.6. For purposes of Section 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Fund Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contract if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Fund Board determines
that any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Fund Board informs
the Company in writing of the foregoing determination; provided, however, that
such withdrawal and termination shall be limited to the extent required by any
such material irreconcilable conflict as determined by a majority of the
disinterested members of the Fund Board.
7.7. If and to the extent the Mixed and Shared Funding Exemption Order or
any amendment thereto contains terms and conditions different from Sections 3.4,
3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement, then the Fund and/or
the Participating Insurance Companies, as appropriate, shall take such steps as
may be necessary to comply with the Mixed and Shared Funding Exemptive Order,
and Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in the Mixed and Shared Funding
Exemptive Order or any amendment thereto. If and to the extent that Rule 6e-2
and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive
relief from any provision of the 1940 Act or the rules promulgated thereunder
with respect to mixed or shared funding (as defined in the Mixed and Shared
Funding Exemptive Order) on terms and conditions materially different from those
contained in the Mixed and Shared Funding Exemptive Order, then (a) the Fund
and/or the Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and
Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections
3.5, 3.6, 7.1., 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in
effect only to the extent that terms and conditions substantially identical to
such Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
---------------
8.1. Indemnification By The Company
------------------------------
(a) The Company agrees to indemnify and hold harmless the Fund, the
Adviser, the Distributor, and each person, if any, who controls or is
associated with the Fund, the Adviser or the Distributor within
-9-
<PAGE>
the meaning of such terms under the federal securities laws and any
director, trustee, officer, partner, employee or agent of the foregoing
(collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, expenses, damages, liabilities
(including amounts paid in settlement with the written consent of the
Company) or litigation (including reasonable legal and other expenses), to
which the Indemnified Parties may become subject under any statute,
regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or
settlements:
(1) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
registration statement, prospectus or statement of additional
information for the Contracts or contained in the Contracts or sales
literature or other promotional material for the Contracts (or any
amendment or supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to state therein a
material fact required to be stated or necessary to make such
statements not misleading in light of the circumstances in which they
were made; provided that this agreement to indemnify will not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
written information furnished to the Company by the Fund, the Adviser
or the Distributor for use in the registration statement, prospectus
or statement of additional information for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or Fund
shares; or
(2) arise out of or as a result of statements or representations
by or on behalf of the Company or wrongful conduct of the Company or
persons under its control, with respect to the sale or distribution of
the Contracts or Fund shares; or
(3) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Fund registration statement,
prospectus, statement of additional information or sales literature or
other promotional material of the Fund (or amendment or supplement) or
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make such statements not
misleading in light of the circumstances in which they were made, if
such a statement or omission was made in reliance upon and in
conformity with information furnished to the Fund by or on behalf of
the Company or persons under its control; or
(4) arise as a result of any failure by the Company to
provide the services and furnish the materials under the terms
of this Agreement; or
(5) arise out of any material breach of any representation and/or
warranty made by the Company in this Agreement or arise out of or
result from any other material breach by the Company of this
Agreement;
except to the extent provided in Sections 8.1(b) and 8.3 hereof. This
indemnification will be in addition to any liability that the Company
otherwise may have.
(b) No party will be entitled to indemnification under Section 8.1(a)
to the extent such loss, claim, damage, liability or litigation is due to
the willful misfeasance, bad faith, or gross negligence in the performance
of such party's duties under this Agreement, or by reason of such party's
reckless disregard of its obligations or duties under this Agreement by the
party seeking indemnification.
(c) The Indemnified Parties promptly will notify the Company of the
commencement of any litigation, proceedings, complaints or actions by
regulatory authorities against them in connection with the issuance or sale
of the Fund shares or the Contracts or the operation of the Fund.
8.2. Indemnification By The Adviser, the Fund and the Distributor
------------------------------------------------------------
(a) The Adviser, the Fund and the Distributor, in each case solely to
the extent relating to such party's responsibilities hereunder, agree to
indemnify and hold harmless the Company and each person, if
-10-
<PAGE>
any, who controls or is associated with the Company within the meaning of
such terms under the federal securities laws and any director, trustee,
officer, partner, employee or agent of the foregoing (collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and all
losses, claims, expenses, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation
(including reasonable legal and other expenses) to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) or settlements:
(1) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement, prospectus or statement of additional
information for the Fund or sales literature or other promotional
material of the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated or necessary to make such statements not misleading in light of
the circumstances in which they were made; provided that this
agreement to indemnify will not apply as to any Indemnified Party if
such statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with information furnished to
the Adviser, the Distributor or the Fund by or on behalf of the
Company for use in the registration statement, prospectus or statement
of additional information for the Fund or in sales literature of the
Fund (or any amendment or supplement thereto) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(2) arise out of or as a result of statements or representations
or wrongful conduct of the Adviser, the Fund or the Distributor or
persons under the control of the Adviser, the Fund or the Distributor
respectively, with respect to the sale of the Fund shares; or
(3) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement, prospectus,
statement of additional information or sales literature or other
promotional material covering the Contracts (or any amendment or
supplement thereto), or the omission or alleged omission to state
therein a material fact required to be stated or necessary to make
such statement or statements not misleading in light of the
circumstances in which they were made, if such statement or omission
was made in reliance upon and in conformity with written information
furnished to the Company by the Adviser, the Fund or the Distributor
or persons under the control of the Adviser, the Fund or the
Distributor; or
(4) arise as a result of any failure by the Fund, the Adviser or
the Distributor to provide the services and furnish the materials
under the terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply with the
diversification requirements and procedures related thereto specified
in Article VI of this Agreement); or
(5) arise out of or result from any material breach of any
representation and/or warranty made by the Adviser, the Fund or the
Distributor in this Agreement, or arise out of or result from any
other material breach of this Agreement by the Adviser the Fund or the
Distributor;
except to the extent provided in Sections 8.2(b) and 8.3 hereof. This
indemnification will be in addition to any liability that the Fund, Adviser
or the Distributor otherwise may have.
(b) No party will be entitled to indemnification under Section 8.2(a)
to the extent such loss, claim, damage, liability or litigation is due to
the willful misfeasance, bad faith, or gross negligence in the performance
of such party's duties under this Agreement, or by reason of such party's
reckless disregard of its obligations or duties under this Agreement by the
party seeking indemnification.
(c) The Indemnified Parties will promptly notify the Adviser, the Fund
and the Distributor of the commencement of any litigation, proceedings,
complaints or actions by regulatory authorities against them in connection
with the issuance or sale of the Contracts or the operation of the account.
8.3. Indemnification Procedure
-------------------------
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<PAGE>
Any person obligated to provide indemnification under this Article VIII
("Indemnifying Party" for the purpose of this Section 8.3) will not be liable
under the indemnification provisions of this Article VIII with respect to any
claim made against a party entitled to indemnification under this Article VIII
("Indemnified Party" for the purpose of this Section 8.3) unless such
Indemnified Party will have notified the Indemnifying Party in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim will have been served upon such
Indemnified Party (or after such party will have received notice of such service
on any designated agent), but failure to notify the Indemnifying Party of any
such claim will not relieve the Indemnifying Party from any liability which it
may have to the Indemnified Party against whom such action is brought otherwise
than on account of the indemnification provision of this Article VIII, except to
the extent that the failure to notify results in the failure of actual notice to
the Indemnifying Party and such Indemnifying Party is damaged solely as a result
of failure to give such notice. In case any such action is brought against the
Indemnified Party, the Indemnifying Party will be entitled to participate, at
its own expense, in the defense thereof. The Indemnifying Party also will be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Indemnifying Party to the Indemnified
Party of the Indemnifying Party's election to assume the defense thereof, the
Indemnified Party will bear the fees and expenses of any additional counsel
retained by it, and the Indemnifying Party will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation, unless: (a) the Indemnifying Party and the
Indemnified Party will have mutually agreed to the retention of such counsel; or
(b) the named parties to any such proceeding (including any impleaded parties)
include both the Indemnifying Party and the Indemnified Party and representation
of both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. The Indemnifying Party will not be
liable for any settlement of any proceeding effected without its written consent
but if settled with such consent or if there is a final judgment for the
plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from
and against any loss or liability by reason of such settlement or judgment. A
successor by law of the parties to this Agreement will be entitled to the
benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII will survive any
termination of this Agreement.
ARTICLE IX. Applicable Law
--------------
9.1 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of Delaware.
9.2 This Agreement shall be subject to the provisions of the 1933, 1934 and
1940 Acts, and the rules and regulations and rulings thereunder, including such
exemptions from those statutes, rules and regulations as the SEC may grant
(including, but not limited to, any Mixed and Shared Funding Exemptive Order)
and the terms hereof shall be interpreted and construed in accordance therewith.
If, in the future, the Mixed and Shared Funding Exemptive Order should no longer
be necessary under applicable law, then Article VII shall no longer apply.
ARTICLE X. Termination
-----------
10.1. This Agreement will terminate:
(a) at the option of any party, with or without cause, with respect to
some or all of the Designated Portfolios, upon sixty (60) days' advance
written notice to the other parties or, if later, upon receipt of any
required exemptive relief or orders from the SEC, unless otherwise agreed
in a separate written agreement among the parties; or
(b) at the option of the Company, upon receipt of the Company's
written notice by the other parties, with respect to any Designated
Portfolio if shares of the Designated Portfolio are not reasonably
available to meet the requirements of the Contracts as determined in good
faith by the Company; or
(c) at the option of the Company, upon receipt of the Company's
written notice by the other parties, with respect to any Designated
Portfolio in the event any of the Designated Portfolio's shares are not
registered, issued or sold in accordance with applicable state and/or
Federal law or such law precludes
-12-
<PAGE>
the use of such shares as the underlying investment media of the Contracts
issued or to be issued by Company; or
(d) at the option of the Fund, upon receipt of the Fund's written
notice by the other parties, upon institution of formal proceedings against
the Company by the NASD, the SEC, the insurance commission of any state or
any other regulatory body regarding the Company's duties under this
Agreement or related to the sale of the Contracts, the administration of
the Contracts, the operation of the Account, or the purchase of the Fund
shares, provided that the Fund determines in its sole judgment, exercised
in good faith, that any such proceeding would have a material adverse
effect on the Company's ability to perform its obligations under this
Agreement; or
(e) at the option of the Company, upon receipt of the Company's
written notice by the other parties, upon institution of formal proceedings
against the Fund, Adviser or the Distributor by the NASD, the SEC, or any
state securities or insurance department or any other regulatory body,
provided that the Company determines in its sole judgment, exercised in
good faith, that any such proceeding would have a material adverse effect
on the Fund's or the Distributor's ability to perform its obligations under
this Agreement; or
(f) at the option of the Company, upon receipt of the Company's
written notice by the other parties, if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter M of the Internal Revenue
Code, or under any successor or similar provision, or if the Company
reasonably and in good faith believes that the Fund may fail to so qualify;
or
(g) at the option of the Company, upon receipt of the Company's
written notice by the other parties, with respect to any Designated
Portfolio if the Fund fails to meet the diversification requirements
specified in Article VI hereof or if the Company reasonably and in good
faith believes the Fund may fail to meet such requirements; or
(h) at the option of any party to this Agreement, upon written notice
to the other parties, upon another party's material breach of any provision
of this Agreement which material breach is not cured within thirty (30)
days of said notice; or
(i) at the option of the Company, if the Company determines in its
sole judgment exercised in good faith, that either the Fund, the Adviser or
the Distributor has suffered a material adverse change in its business,
operations or financial condition since the date of this Agreement or is
the subject of material adverse publicity which is likely to have a
material adverse impact upon the business and operations of the Company,
such termination to be effective sixty (60) days' after receipt by the
other parties of written notice of the election to terminate; or
(j) at the option of the Fund or the Distributor, if the Fund or the
Distributor respectively, determines in its sole judgment exercised in good
faith, that the Company has suffered a material adverse change in its
business, operations or financial condition since the date of this
Agreement or is the subject of material adverse publicity which is likely
to have a material adverse impact upon the business and operations of the
Fund or the Adviser, such termination to be effective sixty (60) days'
after receipt by the other parties of written notice of the election to
terminate; or
(k) at the option of the Company or the Fund upon receipt of any
necessary regulatory approvals and/or the vote of the contractowners having
an interest in the Account (or any subaccount) to substitute the shares of
another investment company for the corresponding Designated Portfolio
shares of the Fund in accordance with the terms of the Contracts for which
those Designated Portfolio shares had been selected to serve as the
underlying investment media. The Company will give sixty (60) days' prior
written notice to the Fund of the date of any proposed vote or other action
taken to replace the Fund's shares; or
(l) at the option of the Company or the Fund upon a determination by a
majority of the Fund Board, or a majority of the disinterested Fund Board
members, that an irreconcilable material conflict exists
-13-
<PAGE>
among the interests of: (1) all contractowners of variable insurance
products of all separate accounts; or (2) the interests of the
Participating Insurance Companies investing in the Fund as set forth in
Article VII of this Agreement; or
(m) at the option of the Fund in the event any of the Contracts are
not issued or sold in accordance with applicable federal and/or state law.
Termination will be effective immediately upon such occurrence without
notice.
10.2. Notice Requirement. No termination of this Agreement
-------------------
will be effective unless and until the party terminating this Agreement gives
prior written notice to all other parties of its intent to terminate, which
notice will set forth the basis for the termination.
10.3. Effect of Termination. Notwithstanding any termination
----------------------
of this Agreement, the Fund and the Distributor will, at the option of the
Company, continue to make available additional shares of the Fund pursuant to
the terms and conditions of this Agreement, for all Contracts in effect on the
effective date of termination of this Agreement ( hereinafter referred to as
"Existing Contracts.") . Specifically, without limitation, the owners of the
Existing Contracts will be permitted to reallocate investments in the Portfolios
(as in effect on such date), redeem investments in the Portfolios and/or invest
in the Portfolios upon the making of additional purchase payments under the
Existing Contracts.
10.4. Surviving Provisions. Notwithstanding any termination
---------------------
this Agreement, each party's obligations under Article VIII to indemnify other
parties will survive and not be affected by any termination of this Agreement.
In addition, each party's obligations under Section 12.7 will survive and not be
affected by any termination of this Agreement. Finally, with respect to Existing
Contracts, all provisions of this Agreement also will survive and not be
affected by any termination of this Agreement.
ARTICLE XI. Notices
-------
11.1. Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund: The GCG Trust
c/o Myles Tashman
Secretary
1475 Dunwoody Drive
West Chester, PA 19380-1479
If to the Company: Security Life of Denver Insurance Company
c/o Office of General Counsel
ATTN: Variable Attorney
1290 Broadway
Denver, CO 80203-5699
If to Adviser: Directed Services, Inc.
c/o Myles Tashman
Executive Vice President and General Counsel
1475 Dunwoody Drive
West Chester, PA 19380-1479
If to Distributor: ING America Equities, Inc.
c/o Chief Legal Officer
1290 Broadway
Denver, CO 80203-5699
-14-
<PAGE>
ARTICLE XII. Miscellaneous
-------------
12.1. All persons dealing with the Fund must look solely to the property of
the Fund for the enforcement of any claims against the Fund as neither the
directors, trustees, officers, partners, employees, agents or shareholders
assume any personal liability for obligations entered into on behalf of the
Fund. No Portfolio or series of the Fund will be liable for the obligations or
liabilities of any other Portfolio or series.
12.2. The Fund, the Adviser and the Distributor acknowledge that the
identities of the customers of the Company or any of its affiliates
(collectively the "Company Protected Parties" for purposes of this Section
12.2), information maintained regarding those customers, and all computer
programs and procedures or other information developed or used by the Company
Protected Parties or any of their employees or agents in connection with the
Company's performance of its duties under this Agreement are the valuable
property of the Company Protected Parties. The Fund, the Adviser and the
Distributor agree that if they come into possession of any list or compilation
of the identities of or other information about the Company Protected Parties'
customers, or any other information or property of the Company Protected
Parties, other than such information as is publicly available or as may be
independently developed or compiled by the Fund, the Adviser or the Distributor
from information supplied to them by the Company Protected Parties' customers
who also maintain accounts directly with the Fund, the Adviser or the
Distributor, the Fund, the Adviser and the Distributor will hold such
information or property in confidence and refrain from using, disclosing or
distributing any of such information or other property except: (a) with the
Company's prior written consent; or (b) as required by law or judicial process.
The Company acknowledges that the identities of the customers of the Fund, the
Adviser, the Distributor or any of their affiliates (collectively the "Adviser
Protected Parties" for purposes of this Section 12.2), information maintained
regarding those customers, and all computer programs and procedures or other
information developed or used by the Adviser Protected Parties or any of their
employees or agents in connection with the Fund's, the Adviser's or the
Distributor's performance of their respective duties under this Agreement are
the valuable property of the Adviser Protected Parties. The Company agrees that
if it comes into possession of any list or compilation of the identities of or
other information about the Adviser Protected Parties' customers, or any other
information or property of the Adviser Protected Parties, other than such
information as is publicly available or as may be independently developed or
compiled by the Company from information supplied to them by the Adviser
Protected Parties' customers who also maintain accounts directly with the
Company, the Company will hold such information or property in confidence and
refrain from using, disclosing or distributing any of such information or other
property except: (a) with the Fund's, the Adviser's or the Distributor's prior
written consent; or (b) as required by law or judicial process. Each party
acknowledges that any breach of the agreements in this Section 12.2 would result
in immediate and irreparable harm to the other parties for which there would be
no adequate remedy at law and agree that in the event of such a breach, the
other parties will be entitled to equitable relief by way of temporary and
permanent injunctions, as well as such other relief as any court of competent
jurisdiction deems appropriate.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together will constitute one and the same
instrument.
12.5. If any provision of this Agreement will be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement will
not be affected thereby.
12.6. This Agreement will not be assigned by any party hereto without the
prior written consent of all the parties.
12.7. Each party to this Agreement will maintain all records required by
law, including records detailing the services it provides. Such records will be
preserved, maintained and made available to the extent required by law and in
accordance with the 1940 Act and the rules thereunder. Each party to this
Agreement will cooperate with each other party and all appropriate governmental
authorities (including without limitation the SEC, the NASD and state insurance
regulators) and will permit each other and such authorities reasonable access to
its books and records in connection with any investigation or inquiry relating
to this Agreement or the transactions contemplated hereby.
-15-
<PAGE>
Upon request by the Fund or the Distributor, the Company agrees to promptly make
copies or, if required, originals of all records pertaining to the performance
of services under this Agreement available to the Fund or the Distributor, as
the case may be. The Fund agrees that the Company will have the right to
inspect, audit and copy all records pertaining to the performance of services
under this Agreement pursuant to the requirements of any state insurance
department. Each party also agrees to promptly notify the other parties if it
experiences any difficulty in maintaining the records in an accurate and
complete manner. This provision will survive termination of this Agreement.
12.8. Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate or board action, as applicable, by
such party and when so executed and delivered this Agreement will be the valid
and binding obligation of such party enforceable in accordance with its terms.
12.9. The parties to this Agreement may amend the schedules to this
Agreement from time to time to reflect changes in or relating to the Contracts,
the Accounts or the Designated Portfolios of the Fund or other applicable terms
of this Agreement.
12.10. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights.
12.11. If Fund is a Mass business trust - The parties to this Agreement
acknowledge and agree that all liabilities of the Fund arising, directly or
indirectly, under this agreement, will be satisfied solely out of the assets of
the Fund and that no trustee, officer, agent or holder of shares of beneficial
interest of the Fund will be personally liable for any such liabilities.
-16-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below:
SECURITY LIFE OF DENVER INSURANCE
COMPANY:
By: /s/ Stephen M. Christopher
-------------------------------
Title: President
----------------------------
Date: 2/29/00
----------------------------
THE GCG TRUST:
By: /s/ Marilyn Talman
------------------------------
Title: Assistant Secretary
---------------------------
Date: 3/1/00
----------------------------
DIRECTED SERVICES, INC :
By: /s/ David L. Jacobson
------------------------------
Title: Senior Vice President
---------------------------
Date: 3/1/00
----------------------------
ING AMERICA EQUITIES, INC.
By: /s/ James L. Livingston, Jr.
------------------------------
Title: President
---------------------------
Date: 2/29/00
----------------------------
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<PAGE>
SCHEDULE A
SECURITY LIFE OF DENVER INSURANCE COMPANY
CONTRACTS AND SEPARATE ACCOUNT(S)
SEPARATE ACCOUNT(S):
Security Life of Denver Insurance Company Separate
Account L1
CONTRACT(S):
Corporate Benefits Variable
Universal Life
Strategic Benefit Variable
Universal Life
-A1-
<PAGE>
SCHEDULE B
THE GCG TRUST
DESIGNATED PORTFOLIOS
PORTFOLIOS:
Equity Income Series
Fully Managed Series
Limited Maturity Bond Series
Hard Assets Series
Real Estate Series
Liquid Asset Series
Capital Appreciation Series
Rising Dividends Series
Emerging Markets Series
Value Equity Series
Strategic Equity Series
Small Cap Series
Mid-Cap Growth Series
Total Return Series
Research Series
Capital Growth Series
Growth Series
Global Fixed Income Series
Developing World Series
All Cap Series
Investors Series
Managed Global Series
Large Cap Value Series
Schedule Date: February 2, 2000
-B1-
Exhibit 1.A(8)(a)(ix)
FUND PARTICIPATION AGREEMENT
BETWEEN
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
AND
SECURITY LIFE OF DENVER INSURANCE COMPANY
THIS Fund Participation Agreement, by and between MERRILL LYNCH
VARIABLE SERIES FUNDS, INC., an open-end management investment company organized
as a Maryland corporation (the "Fund") and SECURITY LIFE OF DENVER INSURANCE
COMPANY (the "Company"), a life insurance company organized under the laws of
the state of Colorado on the Company's own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A as attached
hereto, as such schedule may be amended from time to time (the "Accounts"), is
made as of the 1st day of May, 2000.
W I T N E S S E T H
WHEREAS, the Fund has filed a registration statement with the
Securities and Exchange Commission to register itself as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and to register the offer and sale of its shares under the
Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Fund desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Fund (the "Participating Insurance
Companies"); and
WHEREAS, the capital stock of the Fund is divided into several series
of shares, each series representing an interest in a particular managed
portfolio of securities and other assets; and
WHEREAS, the several series of shares of the Fund offered by the Fund
to the Company and the Accounts are set forth on Schedule B attached hereto
(each, a "Portfolio," and, collectively, the "Portfolios"); and
WHEREAS, the Fund has received an order from the SEC granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and
rules 6e-2(b) (15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and unaffiliated
life insurance companies and certain qualified pension and retirement plans (the
"Shared Fund Exemptive Order");
WHEREAS, Merrill Lynch Asset Management, L.P. ("MLAM") is duly
registered as an investment adviser under the Investment Advisers Act of 1940,
<PAGE>
as amended, and any applicable state securities law, and acts as the Fund's
investment adviser; and
WHEREAS, Princeton Funds Distributor, Inc. (the "Underwriter") is
registered as a broker-dealer with the Securities and Exchange Commission (the
"SEC") under the Securities Exchange Act of 1934, as amended (the "1934 Act"),
is a member in good standing of The National Association of Securities Dealers,
Inc. (the "NASD") and acts as principal underwriter of the shares of the Fund;
and
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies funded or to be funded through one or
more of the Accounts (the "Contracts"); and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios (the "Shares") on behalf of the Accounts to fund the Contracts, and
the Fund intends to sell such Shares to the relevant Accounts at such Shares'
net asset value.
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE 1
SALE OF THE FUND SHARES
1.1 Subject to Section 1.3 of this Agreement, the Fund shall cause the
Underwriter to make Shares of the Portfolios available to the Accounts at such
Shares' most recent net asset value provided to the Company prior to receipt of
such purchase order by the Fund (or the Underwriter or its agent), in accordance
with the operational procedures mutually agreed to by the Underwriter and the
Company from time to time and the provisions of the then-current prospectus of
the Fund. Shares of a particular Portfolio of the Fund shall be ordered in such
quantities and at such times as determined by the Company to be necessary to
meet the requirements of the Contracts. The Directors of the Fund (the
"Directors") may refuse to sell Shares of any Portfolio to any person (including
the Company and the Accounts), or suspend or terminate the offering of Shares of
any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Directors acting in
good faith and in light of their fiduciary duties under federal and any
applicable state laws, necessary in the best interests of the shareholders of
such Portfolio.
1.2 Subject to Section 1.3 of this Agreement, the Fund will redeem any
full or fractional Shares of any Portfolio when requested by the Company on
behalf of an Account at such Shares' most recent net asset value provided to the
Company prior to receipt by the Fund (or the Underwriter or its agent) of the
request for redemption, as established in accordance with the operational
procedures mutually agreed to by the Underwriter and the Company from time to
<PAGE>
time and the provisions of the then current-prospectus of the Fund. The Fund
shall make payment for such Shares on the next business day, or within seven
days, with notice to the Company by 3:00 p.m. Eastern Time, but in no event
shall payment be delayed for a greater period than is permitted by the 1940 Act
(including any Rule or order of the SEC thereunder).
1.3 The Fund shall accept purchase and redemption orders resulting from
investment in and payments under the Contracts on each Business Day, provided
that such orders are received prior to 9:00 a.m. Eastern Time on such Business
Day and reflect instructions received by the Company from Contract holders in
good order prior to the time the net asset value of each Portfolio is priced in
accordance with its prospectus (such Portfolio's "valuation time") on the prior
Business Day. Any purchase or redemption order for Shares of any Portfolio
received, on any Business Day, after such Portfolio's valuation time on such
Business Day shall be deemed received prior to 9:00 a.m. Eastern Time on the
next succeeding Business Day. "Business Day" shall mean any day on which the New
York Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the SEC. Purchase and redemption orders
shall be provided by the Company to the Underwriter as agent for the Fund in
such written or electronic form (including facsimile) as may be mutually
acceptable to the Company and the Underwriter. The Underwriter may reject
purchase and redemption orders that are not in proper form. In the event that
the Company and the Underwriter agree to use a form of written or electronic
communication which is not capable of recording the time, date and recipient of
any communication and confirming good transmission, the Company agrees that it
shall be responsible (i) for confirming with the Underwriter that any
communication sent by the Company was in fact received by the Underwriter in
proper form, and (ii) for the effect of any delay in the Underwriter's receipt
of such communication in proper form. The Fund and its agents shall be entitled
to rely, and shall be fully protected from all liability in acting, upon the
instructions of the persons named in the list of authorized individuals attached
hereto as Schedule C, or any subsequent list of authorized individuals provided
to the Fund or its agents by the Company in such form, without being required to
determine the authenticity of the authorization or the authority of the persons
named therein.
1.4 Purchase orders that are transmitted to the Fund in accordance with
Section 1.3 of this Agreement shall be paid for no later than 12:00 noon on the
same Business Day that the Fund receives notice of the order. Payment for
purchase orders may be made on the net of redemption order basis. Payments shall
be made in federal funds transmitted by wire. In the event that the Company
shall fail to pay in a timely manner for any purchase order validly received by
the Underwriter on behalf of the Fund pursuant to Section 1.3 of this Agreement
(whether or not such failure is the fault of the Company), the Company shall
hold the Fund harmless from any losses reasonably sustained by the Fund as the
result of acting in reliance on such purchase order.
<PAGE>
1.5 Issuance and transfer of the Fund's Shares will be by book entry
only. Stock certificates will not be issued to the Company or to any Account.
Shares ordered from the Fund will be recorded in the appropriate title for each
Account.
1.6 The Fund shall furnish prompt notice to the Company of any income,
dividends or capital gain distribution payable on Shares of any Portfolio. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's Shares in additional Shares of
that Portfolio. The Fund shall notify the Company of the number of Shares so
issued as payments of such dividends and distributions.
1.7 The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after such net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 6:30 p.m., New
York time.
1.8 The Company agrees that it will not take any action to operate any
Account as a management investment company under the 1940 Act without the Fund's
and the Underwriter's prior written consent.
1.9 The Fund agrees that its Shares will be sold only to Participating
Insurance Companies and their separate accounts. No Shares of any Portfolio will
be sold directly to the general public. The Company agrees that the Fund Shares
will be used only for the purposes of funding the Contracts and Accounts listed
in Schedule A, as such schedule may be amended from time to time.
1.10 The Fund agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.11 and
Article 4 of this Agreement.
1.11 So long as it shall be the intention of the Fund to maintain the
net asset value per share of any Portfolio at $1.00, on any day on which (a) the
net asset value per share of the Shares is determined, (b) MLAM determines, in
the manner described in the then-current prospectus of the Fund, that the net
income of such Portfolio on such day is negative, and (c) MLAM delivers a
certificate to the Companies setting forth the reduction in the number of
outstanding Shares to be effected as described in the then-current prospectus of
the Fund in connection with such determination, the Company, on behalf of itself
and the Accounts, agrees to return to the Fund its pro rata share of the number
of Shares to be reduced and agrees that, upon delivery by MLAM to the Company of
such certificate, (a) the Company's ownership interest in the Shares so to be
returned shall immediately cease, (b) such Shares shall be deemed to have been
canceled and to be no longer outstanding, and (c) all rights in respect of such
Shares shall cease.
<PAGE>
ARTICLE 2
OBLIGATION OF THE PARTIES
2.1 The Fund shall prepare and be responsible for filing with the SEC
and any state securities regulators requiring such filing, all shareholder
reports, notices, proxy materials (or similar materials such as voting
instruction solicitation materials), prospectuses and statements of additional
information of the Fund. The Fund shall bear the costs or registration and
qualification of its Shares, preparation and filing of the documents listed in
this Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its shares.
2.2 At least annually, the Fund or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios) for the Shares as the Company may reasonably
request for distribution to existing Contract owners whose Contracts are funded
by such Shares. The Fund or its designee shall provide the Company, at the
Companies' expense, with as many copies of the current prospectus for the Shares
as the Company may reasonably request for distribution to prospective purchasers
of Contracts. If requested by the Company in lieu thereof, the Fund or its
designee shall provide such documentation (including a "camera ready" copy of
the new prospectus as set in type) and other assistance as is reasonably
necessary in order for the parties hereto once each year (or more frequently if
the prospectus for the Shares is supplemented or amended) to have the prospectus
for the Contracts and the prospectus for the Shares printed together in one
document; the expenses of such printing to be borne by the Company. In the event
that the Company requests that the Fund or its designee provide the Fund's
prospectus in a "camera ready" format, the Fund shall be responsible solely for
providing the prospectus in the format in which it is accustomed to formatting
prospectuses and shall bear the expense of providing the prospectus in such
format (e.g., typesetting expenses), and the Company shall bear the expense of
adjusting or changing the format to conform with any of its prospectuses.
2.3 The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Fund or its
designee. The Fund or its designee, at its expense, shall print and provide such
statement of additional information to the Company (or a master of such
statement suitable for duplication by the Company) for distribution to any owner
of a Contract funded by the Shares. The Fund or its designee, at the Company's
expense, shall print and provide such statement to the Company (or a master of
such statement suitable for duplication by the Company) for distribution to a
prospective purchaser who requests such statement.
2.4 The Fund or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Fund's proxy
materials, reports to Shareholders and other communications to Shareholders in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.5 With respect to any prospectus, shareholder report or proxy
solicitation materials that concern solely the Fund and no other investment
vehicle funding the Accounts, the Fund shall pay for the expenses of
<PAGE>
solicitation and tabulation, and the Company's postage costs in connection with
mailing such materials to existing Contract owners. With respect to any
prospectus, shareholder report or proxy solicitation materials that concern the
Fund together with other investment vehicles funding the Accounts, the Fund
shall pay a proportionate amount of the Company's postage costs, based on the
percentage of such Account's overall assets that are invested in the Fund, in
connection with mailing such materials to existing Contract owners.
2.6 The Company shall furnish, or cause to be furnished, to the Fund or
its designee, a copy of each prospectus for the Contracts or statement of
additional information for the Contracts in which the Fund or its investment
adviser is named prior to the filing of such document with the SEC. The Company
shall furnish, or shall cause to be furnished, to the Fund or its designee, each
piece of sales literature or other promotional material in which the Fund or its
investment adviser is named, at least five Business Days prior to is use. No
such prospectus, statement of additional information or material shall be used
if the Fund or its designee reasonably objects to such use within five Business
Days after receipt of such material.
2.7 The Fund shall furnish, or cause to be furnished, to the Company a
copy of each piece of sales literature or other material in which the Company is
named, at least five business days prior to its use. No such material shall be
used if the Company reasonably objects to such use with five business days after
receipt of such material.
2.8 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund or
its investment adviser in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from the
registration statement or prospectus for the Fund Shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
reports of the Fund, Fund-sponsored proxy statement, or in sales literature or
other promotional material approved by the Fund or its designee, except with the
written permission of the Fund or its designee.
2.9 The Fund shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may be amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
with the written permission of the Company.
2.10 The Company shall amend the registration statement of the
Contracts under the 1933 Act and registration statement for each Account under
the 1940 Act from time to time as required in order to effect the continuous
offering of the Contracts or as may otherwise be required by applicable law. The
Company shall register and qualify the Contracts for sale to the extent required
by applicable securities laws and insurance laws of the various states.
<PAGE>
2.11 The Company shall be responsible for assuring that any prospectus
offering a Contract that is a life insurance contract where it is reasonably
probable that such Contract would be a "modified endowment contract," as that
term is defined in Section 7702A of the Internal Revenue Code of 1986, as
amended (the "Code"), will identify such Contract as a modified endowment
contract (or policy).
2.12 Solely with respect to Contracts and Accounts that are subject to
the 1940 Act, so long as, and the extent that, the SEC interprets the 1940 Act
to require pass-through voting privileges for variable policyowners: (a) the
Company will provide pass-through voting privileges to owners of Contracts whose
cash values are invested, through the Accounts, in Shares of the Fund; (b) the
Fund shall require all Participating Insurance Companies to calculate voting
privileges in the same manner and the Company shall be responsible for assuring
that the Accounts calculate voting privileges in the manner established by the
Fund; (c) with respect to each Account, the Company will vote Shares of the Fund
held by the Account and for which no timely voting instructions from Contract or
policyowners are received, as well as Shares held by the Account that are owned
by the Company for their general accounts, in the same proportion as the Company
votes Shares held by the Account for which timely voting instructions are
received from Contract owners; and (d) the Company and its agents will in no way
recommend or oppose or interfere with the solicitation of proxies for Fund
Shares held by Contract owners without the prior written consent of the Fund,
which consent may be withheld in the Fund's sole discretion.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Colorado and
has established each Account as a segregated asset account under such law on the
date set forth in Schedule A.
3.2 The Company represents and warrants that it has registered or,
prior to any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
3.3 The Company represents and warrants that the Contracts will be
registered under the 1933 Act prior to any issuance or sale of the Contracts;
the Contracts will be issued and sold in compliance in all material respects
with all applicable federal and state laws; and the sale of the Contracts shall
comply in all material respects with state insurance requirements.
3.4 The Company represents and warrants that the Contracts are
currently and at the time of issuance will be treated as life insurance
policies, whichever is appropriate, under applicable provisions of the Code. The
Company shall make every effort to maintain such treatment and shall notify the
<PAGE>
Fund and the Underwriter immediately upon having a reasonable basis for
believing that the Contracts have ceased to be so treated or that they might not
be so treated in the future.
3.5 The Fund represents and warrants that it is duly organized and
validly existing under the laws of the State of Maryland.
3.6 The Fund represents and warrants that the sale of the Fund Shares
offered and sold pursuant to this Agreement will be registered under the 1933
Act and that the Fund is registered under the 1940 Act. The Fund shall use its
best efforts to amend its registration statement under the 1933 Act and the 1940
Act from time to time as required in order to affect the continuous offering of
its shares. If the Fund determines registration is appropriate, the Fund shall
use its best efforts to register and qualify its Shares for sale in accordance
with the laws of all fifty states, the District of Columbia, Virgin Islands and
Puerto Rico and such other jurisdictions reasonably requested by the Company.
3.7 The Fund represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in section
817(h) of the Code and the rules and regulations thereunder.
ARTICLE 4
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Fund's Shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Directors will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities decision in any relevant proceeding; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Directors shall promptly inform the Company
if they determine that an irreconcilable material conflict exists and the
implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which they are aware to the Directors. The Company will assist the
Directors in carrying out their responsibilities under the Shared Fund Exemptive
Order by providing the Directors with all information reasonably necessary for
the Directors to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
<PAGE>
4.3 If it is determined by a majority of the Directors, or a majority
of the Fund's Directors who are not affiliated with the Adviser or the
Underwriter (the "Disinterested Directors"), that a material irreconcilable
conflict exists that affects the interests of Contract owners, the Company
shall, in cooperation with other Participating Insurance Companies whose
contract owners are also affected, at their expense and to the extent reasonably
practicable (as determined by the Directors) take whatever steps are necessary
to remedy or eliminate the irreconcilable material conflict, which steps could
include: (a) withdrawing the assets allocable to some or all of the Accounts
from the Fund or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of the Fund,
or submitting the question of whether or not such segregation should be
implemented to a vote of all affected Contract owners and, as appropriate,
segregating the assets of any appropriate group (i.e., annuity contract owners,
life insurance contract owners, or variable contract owners of one or more
Participating Insurance Companies) that votes in favor of such segregation, or
offering to the affected Contract owners the option of making such a change; and
(b) establishing a new registered management investment company or managed
separate account.
4.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's or
Accounts' investment in the Fund and terminate this Agreement with respect to
such Account(s); provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the Disinterested Directors. Any such
withdrawal and termination must take place within 30 days after the Fund gives
written notice that this provision is being implemented. Until the end of such
30-day period, the Fund shall continue to accept and implement orders by the
Company for the purchase and redemption of Shares of the Fund.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Fund informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the Disinterested
Directors. Until the end of such 30-day period, the Fund shall continue to
accept and implement orders by the Company for the purchase and redemption of
Shares of the Fund.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the Disinterested Directors shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Company be required to establish a new funding medium for the Contracts
if an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
<PAGE>
event that the Directors determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Directors
inform the Company in writing of the foregoing determination; provided, however,
that such withdrawal and termination shall be limited to the extent required by
any such material irreconcilable conflict as determined by a majority of the
Disinterested Directors.
4.7 The Company shall at least annually submit to the Directors such
reports, materials or data as the Directors may reasonably request so that the
Directors may fully carry out the duties imposed upon them by the Shared Fund
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if deemed appropriate by the Directors.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the application for the Shared Fund Exemptive Order) on
terms and conditions materially different from those contained in the
application for the Shared Fund Exemptive Order, then the Fund and/or the
Participating Insurance Companies, as appropriate, shall take such steps as may
be necessary (a) to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable.
ARTICLE 5
INDEMNIFICATION
5.1 Indemnification by the Company. The Company agrees to indemnify and
hold harmless the Fund and each of its Directors, officers, employees and agents
and each person, if any, who controls the Fund within the meaning of Section 15
of the 1933 Act (collectively the "Indemnified Parties" for purposes of this
Article 5) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which such Indemnified
Parties may become subject under any statute or regulation, or common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
registration statement or prospectus for the Contracts or in the
Contracts themselves or in sales literature generated or approved by
the Company on behalf of the Contracts or Accounts (or any amendment or
supplement to any of the foregoing) (collectively, "Company Documents"
for the purposes of this Article 5), or arise out of or are based upon
the omission or the alleged omission to state therein a material fact
<PAGE>
required to be stated therein or necessary to make the statement
therein not misleading, provided that this indemnity shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was accurately
derived from written information furnished to the Company by or on
behalf of the Fund for use in Company Documents or otherwise for use in
connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statements or representations
(other than statements or representations contained in and accurately
derived from Fund Documents (as defined in Section 5.2(a) below) or
wrongful conduct of the Company or persons under its control, with
respect to the sale or acquisition of the Contracts or Shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Fund Documents
(defined below) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was
made in reliance upon and accurately derived from written information
furnished to the Fund by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to
provide the services or furnish the materials required under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company.
5.2 Indemnification by the Fund. The Fund agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article 5) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage liability or expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which such Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statement of any material fact contained in the
registration statement or prospectus for the Fund (or any amendment or
supplement thereto) or in sales literature approved by the Fund (but
solely with respect to statements regarding the Fund), (collectively,
"Fund Documents" for the purposes of this Article 5), or arise out of
or are based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make the
<PAGE>
statements therein not misleading, provided that this indemnity shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Fund by or
on behalf of the Company for use in Fund Documents or otherwise for use
in connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statements or representations
(other than statements or representations contained in and accurately
derived from Company Documents) or wrongful conduct of the Fund or
persons under its control, with respect to the sale or acquisition of
the Contracts or Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Company
Documents or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was
made in reliance upon and accurately derived from written information
furnished to the Company by or on behalf of the Fund; or
(d) arise out of or result from any failure by the Fund to
provide the services or furnish the materials required under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Fund.
5.3 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any Losses incurred or assessed against any Indemnified Party to the extent such
Losses arise out of or result from such Indemnified Party's willful misfeasance,
bad faith or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement.
5.4 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any claim made against an Indemnified Party unless such Indemnified Party shall
have notified the party against whom indemnification is sought in writing within
a reasonable time after the summons, or other first written notification, giving
information of the nature of the claim shall have been served upon or otherwise
received by such Indemnified Party (or after such Indemnified Party shall have
received notice of service upon or other notification to any designated agent),
but failure to notify the party against whom indemnification is sought of any
such claim shall not relieve that party from any liability that it may have to
the Indemnified Party in the absence of Sections 5.1 and 5.2.
<PAGE>
5.5 In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the Indemnified
Party of an election to assume such defense, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof other
than reasonable costs of investigation.
ARTICLE 6
TERMINATION
6.1 This Agreement may be terminated by either party for any reason by
six (6) months' advance written notice to the other party, and may be terminated
by the Fund pursuant to Sections 6.2 through 6.4 below upon sixty (60) days'
advance written notice to the Company or by the Company pursuant to Section 6.5
below upon sixty (60) days' advance written notice to the Fund.
6.2 This Agreement may be terminated at the option of the Fund upon
institution of formal proceedings against the Company by the NASD, the SEC, the
insurance department of any state, or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of the Contracts,
the operation of the Account, the administration of the Contracts or the
purchase of the Shares, or an expected or anticipated ruling, judgment or
outcome that would, in the Fund's reasonable judgment, materially impair the
Company's ability to meet and perform the Company's obligations and duties
hereunder.
6.3 This Agreement may be terminated at the option of the Fund if the
Internal Revenue Service determines that the Contracts cease to qualify as
annuity contracts or life insurance policies, as applicable, under the Code.
6.4 This Agreement may be terminated by the Fund, at its option, if the
Fund shall determine, in its sole judgment exercised in good faith, that either
(1) the Company shall have suffered a material adverse change in its business or
financial condition, (2) the Company shall have been the subject of material
adverse publicity that is likely to have a material adverse impact upon the
business and operations of either the Fund, the Adviser or the Underwriter, or
(3) the Company breaches any obligation under this Agreement in a material
respect and such breach shall continue unremedied for thirty (30) days after
receipt of notice from the Fund of such breach. Notwithstanding any other
provision of this Agreement, in the event that the Fund exercises its right to
terminate this Agreement pursuant to this Section 6.4, such termination shall
not become effective until the earlier of (i) the time which the Company
notifies the Fund it has made arrangements (including obtaining any necessary
<PAGE>
regulatory approvals) to substitute other funding vehicles for shares of the
Portfolios under the Contracts, and (ii) one year following the date the Fund
exercises its right to terminate.
6.5 This Agreement may be terminated at the option of the Company if
(A) the Internal Revenue Serve determines that any Portfolio fails to qualify as
a `Regulated Investment Company' under the Code or fails to comply with the
diversification requirements of Section 817(h) of the Code, or (B) upon or after
institution of formal proceedings against the Fund, its adviser or distributor
by the NASD, the SEC, or any other regulatory body regarding the Fund's duties
under this Agreement, or the operation or administration of the Fund, the
Company shall determine, in its sole judgment exercised in good faith, that
either (1) the Fund or the Underwriter shall have been the subject of material
adverse publicity which is likely to have a material adverse impact upon the
business and operations of the Company, or (2) the Fund breaches any obligation
under this Agreement in a material respect and such breach shall continue
unremedied for thirty (30) days after receipt of notice from the Company of such
breach.
6.6 The provisions of Article 5 shall survive the termination of this
Agreement, and the provisions of Article 4 and Sections 2.4 and 2.11 shall
survive the termination of this Agreement as long as shares of the Fund are held
on behalf of Contract owners in accordance with Section 6.5.
ARTICLE 7
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Merrill Lynch Variable Series Fund, Inc.
c/o Merrill Lynch Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: General Counsel
If to the Company:
Security Life Insurance Company of Denver
Office of the General Counsel
1290 Broadway
Denver, Colorado 80203
Attention: Variable Counsel
<PAGE>
ARTICLE 8
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York,
shall be subject to the provisions of the 1933, 1934, and 1940 Acts, and the
rules, regulations and rulings thereunder, including such exemptions from those
statutes, rules and regulations as the SEC may grant and the terms hereof shall
be interpreted and construed in accordance therewith.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Fund arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Fund and that no Director, officer, agent, or holder of shares of
beneficial interest of the Fund shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may
be assigned by either party without the prior written approval of the other
party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
SECURITY LIFE INSURANCE COMPANY OF DENVER
By: /s/ Jim Livingston
-------------------------------
Name: Jim Livingston
Title: Executive Vice President
MERRILL LYNCH VARIABLE SERIES
FUNDS, INC.
By: /s/ Terry K. Glenn
-------------------------------
Name: Terry K. Glenn
Title: President
<PAGE>
SCHEDULE A
Segregated Accounts of Security Life Insurance Company of Denver
Name of Separate Account Date Established
Security Life of Denver November 3, 1993
Separate Account L1
<PAGE>
SCHEDULE B
Portfolios of Merrill Lynch Variable Series Funds, Inc.
Offered to Segregated Accounts
Class A Shares
Merrill Lynch Global Growth Focus Fund
Merrill Lynch Index 500 Fund
Merrill Lynch Balanced Capital Focus Fund
Class B Shares
Merrill Lynch Basic Value Focus Fund
Merrill Lynch Small Cap Value Focus Fund
<PAGE>
SCHEDULE C
Persons Authorized to Act on Behalf of Security Life Insurance Company of Denver
- --------------------------------------------------------------------------------
The Fund, the Underwriter and their respective agents are authorized to
rely on instructions from the following individuals on behalf of each Account:
Name Signature
Jerry Cwiok /s/ Jerry Cwiok
Mark Smith /s/ Mark Smith
Terry Morrison /s/ Terry Morrison
Pamela Anson /s/ Pamela Anson
Linda Turley /s/ Linda Turley
Marty Evans /s/ Marty Evans
Debra Bell /s/ Debra Bell
Jim Livingston /s/ Jim Livingston
Deborah Hancock /s/ Deborah Hancock
Exhibit 1.A(8)(b)(xxiii)
SEVENTH AMENDMENT TO PARTICIPATION AGREEMENT
THIS AGREEMENT is made by and among Security Life of Denver Insurance
Company, a life insurance company organized under the laws of the State of
Colorado (the "Company"), Variable Insurance Products Fund, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(the "Fund"), and Fidelity Distributors Corporation, a Massachusetts corporation
(the "Underwriter") (collectively, the "Parties").
WHEREAS, the Parties executed a participation agreement dated August 10,
1994 (the "Participation Agreement"), governing how shares of the Fund's
portfolios are to be made available to certain variable life insurance and/or
variable annuity contracts (the "Contracts") offered by the Company through
certain separate accounts (the "Separate Accounts");
WHEREAS, the various contracts for which shares are purchased are listed
in Schedule A of the Participation Agreement;
WHEREAS, the Parties have agreed that it is in their interests to add an
additional Contract and class of Fund to be purchased by the Separate Accounts;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
1. The Participation Agreement is hereby amended by substituting for
the current Schedule A an amended Schedule A in the form attached
hereto which adds the Strategic Benefit and Estate Designer
Variable Universal Life policies to the list of Contracts funded
by the Separate Accounts.
2. Section 2.5 of Article II. Representations and Warranties is
hereby deleted and replaced in its entirety with the following:
2.5. (a) With respect to Initial Class shares, the Fund
currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the
1940 Act or otherwise, although it may make such payments
in the future. The Fund has adopted a "no fee" or
"defensive" Rule 12b-1 Plan under which it makes no
payments for distribution expenses. To the extent that it
decides to finance distribution expenses pursuant to Rule
12b-1, the Fund undertakes to have a board of trustees, a
majority of whom are not interested persons of the Fund,
formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
(b) With respect to Service Class shares and Service Class
2 shares, the Fund has adopted Rule 12b-1 Plans under
which it makes payments to finance distribution expenses.
The Fund represents and warrants that it has a board of
trustees, a majority of whom are not interested persons of
the Fund, which has formulated and approved each of its
Rule 12b-1 Plans to finance distribution expenses of the
Fund and that any changes to the Fund's Rule 12b-1 Plans
will be approved by a similarly constituted board of
trustees.
3. Paragraph 5.1 of Article V. Fees and Expenses is hereby amended
to delete the following sentence as of the date of this
Amendment, "Currently, no such payments are contemplated."
<PAGE>
4. The Participation Agreement is hereby amended by substituting for
the current Schedule C an amended Schedule C in the form attached
hereto which adds certain other investment options to the
Contracts funded by the Separate Accounts.
5. The Participation Agreement is hereby amended by substituting for
the current Schedule D an amended Schedule D in the form attached
hereto which adds certain classes of certain Fidelity Funds to
some Contracts funded by the Separate Accounts.
Executed this 26th day of April, 2000.
Security Life of Denver Variable Insurance Products Fund
Insurance Company
BY: /s/ Jim Livingston BY: /s/ Robert C. Pozen
------------------------------ ----------------------------
Jim Livingston Robert C. Pozen
Executive Vice President Senior Vice President
Fidelity Distributors Corporation
BY: /s/ Kevin J. Kelly
-----------------------------
Kevin J. Kelly
Vice President
<PAGE>
Schedule A
----------
Separate Accounts and Associated Contracts
------------------------------------------
Name of Separate Account and Contracts Funded
Date of Established by Board of Directors By Separate Account
- ----------------------------------------- -------------------
Security Life Separate Account A1 o The Exchequer Variable Annuity
(November 3, 1993) (Flexible Premium Deferred
Combination Fixed and Variable
Annuity Contract)
Security Life Separate Account L1 o First Line (Flexible Premium
(November 3, 1993) Variable Life Insurance Policy)
o Strategic Advantage Variable
Universal Life (Flexible
Premium Variable Universal Life
Insurance Policy)
o FirstLine II Variable Universal
Life (Flexible Premium Variable
Universal Life Insurance
Policy)
o Strategic Advantage II Variable
Universal Life (Flexible
Premium Variable Life
Insurance)
o Variable Survivorship Universal
Life (Flexible Premium Variable
Life Insurance)
o Corporate Benefits Variable
Universal Life (Flexible
Premium Variable Life
Insurance)
o Strategic Benefit Variable
Universal Life (Flexible
Premium Variable Life
Insurance)
o Estate Designer Variable
Universal Life (Joint and
Survivor Flexible Premium
Variable Life Insurance)
<PAGE>
Schedule C
----------
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company (not al funds/portfolios are
available in all products):
AIM VI Capital Appreciation Portfolio
AIM VI Government Securities Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Growth Portfolio
Alger American Leveraged Allcap Portfolio
GCG Trust
Equity Income Portfolio
Growth Portfolio
Hard Assets Portfolio
Limited Maturity Bond Portfolio
Liquid Asset Portfolio
Mid-Cap Growth Portfolio
Research Portfolio
Total Return Portfolio
INVESCO VIF High Yield Fund
INVESCO VIF Equity Income Fund
INVESCO VIF Total Return Fund
INVESCO VIF Utilities Fund
INVESCO VIF Small Company Growth Fund
Neuberger Berman Growth Portfolio
Neuberger Berman Limited Maturity Bond Portfolio
Neuberger Berman Partners Portfolio
Van Eck Worldwide Insurance Trust
Worldwide Bond Fund
Worldwide Emerging Markets Fund
Worldwide Hard Assets Fund
Worldwide Real Estate Fund
Fidelity Investments Variable Insurance Products Fund II
Asset Manager Portfolio
Index 500
<PAGE>
Schedule D
----------
Portfolios of the Fund available as funding vehicles under the
Contracts:
Initial Class Shares
Growth Portfolio
Money Market Portfolio
Overseas Portfolio
Service Class Shares (Strategic Benefit Contracts only)
Growth Portfolio
Overseas Portfolio
Exhibit 1.A(8)(c)(vii)
ADMINISTRATIVE SERVICES AGREEMENT
SECURITY LIFE OF DENVER INSURANCE COMPANY (the "Insurer") and MERRILL
LYNCH ASSET MANAGEMENT, L.P. ("MLAM") mutually agree to the arrangements set
forth in this Agreement (the "Agreement") dated as of May 1, 2000.
WHEREAS, MLAM is the investment adviser to the Merrill Lynch Variable
Series Funds, Inc. (the "Fund"); and
WHEREAS, the Insurer issues variable life insurance policies (the
"Policies"); and
WHEREAS, the Insurer and the Fund have entered into a Fund
Participation Agreement ("Participation Agreement") dated May 1, 2000, providing
for the sale of shares of the Fund to certain segregated separate accounts of
the Insurer; and
WHEREAS, amounts invested in the Policies by policy holders are
deposited in one or more separate accounts of the Insurer which will in turn
purchase shares of certain portfolios of the Fund, each of which is an
investment option offered by the Policies (the "Portfolios"); and
WHEREAS, the Fund expects to derive substantial savings in
administrative expenses by virtue of having separate accounts of the Insurer as
shareholders of record of Fund shares and having the Insurer perform certain
administrative services for the Fund (which are identified on Schedule A
hereto); and
WHEREAS, neither MLAM nor the Insurer has any contractual or other
legal obligation to perform such administrative services for the Fund; and
WHEREAS, the Insurer desires to be compensated for providing such
administrative services to the Fund;
and
WHEREAS, MLAM desires that the Fund benefit from the lower
administrative expenses expected to result from the administrative services
performed by the Insurer; and
WHEREAS, MLAM accordingly would prefer to compensate the Insurer for
providing administrative services to the Fund from its own funds, derived from
its own resources, including its bona fide profits, rather than request that the
Fund bear the costs of such compensation:
NOW, THEREFORE, the parties agree as follows:
1. ADMINISTRATION EXPENSE PAYMENTS.
(a) MLAM agrees to pay the Insurer an amount as
identified and described on Schedule B hereto of that
portion of the gross annual investment advisory fees
paid by the Fund to MLAM attributable to certain
<PAGE>
investments in portfolios of the Fund by separate
accounts of the Insurer.
(b) the Insurer shall calculate the payment contemplated
by this Section 1 at the end of each fiscal quarter
and will invoice such payment to MLAM, which shall
remit payment reasonably promptly thereafter.
2. NATURE OF PAYMENTS.
The parties to this Agreement recognize and agree that MLAM's
payments to the Insurer are for administrative services only and do not
constitute payment in any manner for investment advisory services or
for costs of distribution of Policies or of Fund shares and are not
otherwise related to investment advisory or distribution services or
expenses. The amount of administration expense payments made by MLAM to
the Insurer pursuant to Section 1(a) of this Agreement are not intended
to be, and shall not be deemed to be, indicative of MLAM's bona fide
profits from serving as investment adviser to any Fund.
3. TERM AND TERMINATION.
(a) Any Party may terminate this Agreement, without
penalty, on ninety day's advance written notice to
the other Party. Unless so terminated, this Agreement
shall continue in effect for so long as MLAM or its
successor(s) in interest, or any affiliate thereof,
continues to perform in a similar capacity for the
Fund, and for so long as Insurer or its successors(s)
in interest, or any affiliate thereof, provides the
services contemplated hereunder with respect to
Contracts under which values or monies are allocated
to a Portfolio.
(b) This Agreement shall automatically terminate upon (i)
the termination of the Participation Agreement
between the Insurer and the Fund, or (ii) the
dissolution or bankruptcy of any party hereto, or in
the event that any party hereto is placed in
receivership or rehabilitation, or in the event that
the management of its affairs is assumed by any
governmental, regulatory or judicial authority.
4. AMENDMENT.
This Agreement may be amended only upon mutual agreement of
the parties hereto in writing.
5. NOTICES.
All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly
given if delivered
(a) to MLAM, at 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, attention: Michael Hennewinkel, General
Counsel; and
(b) to the Insurer, at Office of the General Counsel,
1290 Broadway, Denver, Colorado 80203, Attention:
Variable Counsel.
<PAGE>
6. MISCELLANEOUS.
(a) Successors and Assigns. This Agreement shall be
binding upon the parties hereto and their
transferees, successors and assigns. The benefits of
and the right to enforce this Agreement shall accrue
to the parties and their transferees, successors and
assigns.
(b) Assignment. Neither this Agreement nor any of the
rights, obligations or liabilities of either party
hereto shall be assigned without the written consent
of the other party.
(c) Intended Beneficiaries. Nothing in this Agreement
shall be construed to give any person or entity other
than the parties hereto any legal or equitable claim,
right or remedy. Rather, this Agreement is intended
to be for the sole and exclusive benefit of the
parties hereto.
(d) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an
original but all of which shall together constitute
one and the same instrument.
(e) Applicable Law. This Agreement shall be interpreted,
construed, and enforced in accordance with the laws
of the State of New York, without reference to the
conflict of law thereof.
(f) Severability. If any portion of this Agreement shall
be found to be invalid or unenforceable by a court or
tribunal or regulatory agency of competent
jurisdiction, the remainder shall not be affected
thereby, but shall have the same force and effect as
of the invalid or unenforceable portion had not been
inserted.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SECURITY LIFE INSURANCE COMPANY OF DENVER
By: /s/ Jim Livingston
Name: Jim Livingston
Title: Executive Vice President
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: Princeton Services, Inc.
its General Partner
/s/ Terry K. Glenn
Terry K. Glenn
Executive Vice President
<PAGE>
SCHEDULE A
ADMINISTRATIVE SERVICES FOR THE FUND
MAINTENANCE OF BOOKS AND RECORDS
o Maintaining an inventory of share purchases to assist transfer agent in
recording issuance of shares.
o Performing miscellaneous accounting services to assist transfer agent
in recording transfers of shares (via net purchase orders).
o Reconciliation and balancing of the separate account at the Fund level
in the general ledger and reconciliation of cash accounts at general
account.
PURCHASE ORDERS
o Determination of net amount of cash flow into Fund.
o Reconciliation and deposit of receipts at Fund and confirmation
thereof.
REDEMPTION ORDERS
o Determination of net amount required for redemptions by Fund.
o Notification to Fund of cash required to meet payments.
o Cost of share redemptions.
REPORTS
o Periodic information reporting to the Fund.
FUND-RELATED CONTRACT OWNER SERVICES
o Telephonic support for contract owners with respect to inquiries about
the Fund (not including information about performance or related to
sales.)
OTHER ADMINISTRATIVE SUPPORT
o Sub-Accounting services.
o Providing other administrative support to the Fund as mutually agreed
between the Insurer and the Fund.
o Relieving the Fund of other usual or incidental administrative services
provided to individual policyholders.
o Preparation of reports to certain third-party reporting services.
<PAGE>
SCHEDULE B
PORTFOLIOS OF MERRILL APPLICABLE FEE RATE
LYNCH VARIABLE SERIES FUNDS, INC.
(CLASS A SHARES)
Merrill Lynch Global Growth Focus Fund 0.15%
Merrill Lynch Balanced Capital Focus Fund 0.15%
Merrill Lynch Index 500 Portfolio 0.05%
Exhibit 1.A(8)(c)(viii)
FORM OF
SERVICE CONTRACT
With Respect to Service Class Shares of:
( ) Variable Insurance Products Fund - High Income Portfolio
( ) Variable Insurance Products Fund - Equity-Income Portfolio
(x) Variable Insurance Products Fund - Growth Portfolio
(x) Variable Insurance Products Fund - Overseas Portfolio
( ) Variable Insurance Products Fund II - Asset Manager Portfolio
( ) Variable Insurance Products Fund II - Contrafund Portfolio
( ) Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
( ) Variable Insurance Products Fund III - Growth Opportunities Portfolio
( ) Variable Insurance Products Fund III - Balanced Portfolio
( ) Variable Insurance Products Fund III - Growth & Income Portfolio
( ) Variable Insurance Products Fund III - Mid Cap Portfolio
To Fidelity Distributors Corporation:
We desire to enter into a Contract with you to be effective May 1, 2000, for
activities in connection with (i) the distribution of shares of the funds noted
above (the "Funds") of which you are the principal underwriter as defined in the
Investment Company Act of 1940 (the "Act") and for which you are the agent for
the continuous distribution of shares, and (ii) the servicing of holders of
shares of the Funds and existing and prospective holders of Variable Products
(as defined below).
THE TERMS AND CONDITIONS OF THIS CONTRACT ARE AS FOLLOWS:
1. We shall provide distribution and certain shareholder services for our
clients who own or are considering the purchase of variable annuity contracts or
variable life insurance policies as specified on the attached schedule, for
which shares of the Funds are available as underlying investment options
("Variable Products"), which services may include, without limitation, answering
questions about the Funds from owners of Variable Products; receiving and
answering correspondence (including requests for prospectuses and statements of
additional information for the Funds); performing subaccounting with respect to
Variable Products' values allocated to the Funds; preparing, printing and
distributing reports of values to owners of Variable Products who have contract
values allocated to the Funds; printing and distributing prospectuses,
statements of additional information, any supplements to prospectuses and
statements of additional information, and shareholder reports; preparing,
printing and distributing marketing materials for Variable Products; assisting
customers in completing applications for Variable Products and selecting
underlying mutual fund investment options; preparing, printing and distributing
subaccount performance figures for subaccounts investing in Fund shares; and
providing other reasonable assistance in connection with the distribution of
Fund shares to insurers.
2. We shall provide such office space and equipment, telephone facilities and
personnel (which may be all or any part of the space, equipment and facilities
currently used in our business, or all or any personnel employed by us) as is
necessary or beneficial for us to provide information and services to existing
and prospective owners of Variable Products, and to assist you in providing
services with respect to Variable Products.
3. We agree to indemnify and hold you, the Funds, and the Funds' advisers and
transfer agent harmless from any and all direct or indirect liabilities or
losses resulting from requests, directions, actions or inactions, of or by us or
our officers, employees or agents regarding the purchase, redemption, transfer
or registration of Fund shares that underlie Variable Products of our clients.
Such indemnification shall survive the termination of this Contract.
Neither we nor any of our officers, employees or agents are authorized to
make any representation concerning Fund shares except those contained in the
registration statement or prospectus for the Fund shares, as such registration
statement and prospectus may be amended or supplemented from time to time, or in
reports or proxy statements for the Fund, or in sales literature or other
promotional material approved by the Fund or its designee or by you, except with
the permission of the Fund or you or the designee of either.
4. In consideration of the services and facilities described herein, we shall
be entitled to receive, and you shall pay or cause to be paid to us, fees at an
annual rate as set forth on the accompanying fee schedule. We understand that
the payment of such fees has been authorized pursuant to, and shall be paid in
accordance with, a Distribution and Service Plan approved by the Board of
Trustees of the applicable Fund, by those Trustees who are not "interested
persons" of the Fund (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Distribution and Service
Plan or in any agreements related to the Distribution and Service Plan
("Qualified Trustees"), and by shareholders of such class; and that such fees
are subject to change during the term of this Contract and shall be paid only so
long as this Contract is in effect. We also understand and agree that,
notwithstanding anything to the contrary, if at any time payment of all such
fees would, in your reasonable determination, conflict with the limitations on
sales or service charges set forth in Section 2830(d) of the NASD Conduct Rules,
then such fees shall not be paid; provided that in such event each Fund's Board
of Trustees may, but is not required to, establish procedures to pay such fees,
or a portion thereof, in such manner and amount as they shall deem appropriate.
5. We agree to conduct our activities in accordance with any applicable federal
or state laws and regulations, including securities laws and any obligation
thereunder to disclose to our clients the receipt of fees in connection with
their investment in Variable Products.
6. This Contract shall continue in force for one year from the effective date
(see below), and thereafter shall continue automatically for successive annual
periods, provided such continuance is specifically subject to termination
without penalty at any time if a majority of each Fund's Qualified Trustees or a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the applicable class vote to terminate or not to continue the Distribution and
Service Plan. Either of us also may cancel this Contract without penalty upon
telephonic or written notice to the other; and upon telephonic or written notice
to us, you may also amend or change any provision of this Contract. This
Contract will also terminate automatically in the event of its assignment (as
defined in the 1940 Act).
7. All communications to you shall be sent to you at your offices, 82
Devonshire Street, Boston, MA 02109. Any notice to us shall be duly given if
mailed or telegraphed to us at the address shown in this Contract.
8. This Contract shall be construed in accordance with the laws of the
Commonwealth of Massachusetts.
Very truly yours,
ING America Equities, Inc. BY:/s/ James L. Livingston
- ---------------------------------------------- -------------------------
Name of Qualified Recipient (Please Print or Type) James L. Livingston, Jr.
President
1290 Broadway
- ------------------------------
Street
Denver Colorado 80203
- ----------------------------------------------
City State Zip Code
Date:
----------------------------
FIDELITY DISTRIBUTORS CORPORATION
By: /s/ Eric D. Roiter
--------------------------------
Eric D. Roiter
Vice President
NOTE: Please return TWO signed copies of this Service Contract to Fidelity
Distributors Corporation. Upon acceptance, one countersigned copy will be
returned to you.
FOR INTERNAL USE ONLY:
EFFECTIVE DATE:
------------------
<PAGE>
FEE SCHEDULE FOR QUALIFIED RECIPIENTS OF
Variable Insurance Products Fund - High Income Portfolio
Variable Insurance Products Fund - Equity-Income Portfolio
Variable Insurance Products Fund - Growth Portfolio
Variable Insurance Products Fund - Overseas Portfolio
Variable Insurance Products Fund II - Asset Manager Portfolio
Variable Insurance Products Fund II - Contrafund Portfolio
Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
Variable Insurance Products Fund III - Growth Opportunities Portfolio
Variable Insurance Products Fund III - Balanced Portfolio
Variable Insurance Products Fund III - Growth & Income Portfolio
Variable Insurance Products Fund III - Mid Cap Portfolio
(1) Those who have signed the Service Contract and who render distribution,
administrative support and recordkeeping services as described in paragraph 1 of
the Service Contract will hereafter be referred to as "Qualified Recipients."
(2) A Qualified Recipient providing services pursuant to the Service
Contract will be paid a monthly fee at an annualized rate of 10 basis points of
the average aggregate net assets of its clients invested in Service Class shares
of the Funds listed above.
(3) In addition, a Qualified Recipient providing services pursuant to the
Service Contract will be paid a quarterly fee at an annualized rate of 5 basis
points of the average aggregate net assets of its clients invested in service
class Shares of the Funds listed above. In order to be assured of receiving full
payment under this paragraph (3) for a given calendar quarter, a Qualified
Recipient must have insurance company clients with a minimum of $100 million of
average net assets in the aggregate in the Funds listed below. For any calendar
quarter during which assets in these Funds are in the aggregate less than $100
million, the amount of qualifying assets may be considered to be zero for the
purpose of computing the payments due under this paragraph (3), and the payments
under this paragraph (3) may be reduced or eliminated.
Variable Insurance Products Fund - Equity-Income Portfolio Variable Insurance
Products Fund - Growth Portfolio Variable Insurance Products Fund - Overseas
Portfolio Variable Insurance Products Fund II - Asset Manager Portfolio Variable
Insurance Products Fund II - Contrafund Portfolio Variable Insurance Products
Fund II - Asset Manager: Growth Portfolio Variable Insurance Products Fund III -
Growth Opportunities Portfolio Variable Insurance Products Fund III - Balanced
Portfolio Variable Insurance Products Fund III - Growth & Income Portfolio
Variable insurance Products Fund III - Mid Cap Portfolio
(4) The fees paid to each Qualified Recipient will be calculated and paid
quarterly. Checks will be mailed to each Qualified Recipient by the 30th of
the following month.
<PAGE>
SCHEDULE OF VARIABLE PRODUCTS ISSUED BY
SECURITY LIFE OF DENVER INSURANCE COMPANY
WITH "SERVICE CLASS" SHARES
Strategic Benefit VUL
EXHIBIT 6.A
[letterhead of Security Life here]
April 27, 2000
Security Life of Denver Insurance Company
1290 Broadway
Denver, CO 80203-5699
Re: Security Life Separate Account L1
Pre-Effective Amendment No. 1; SEC File No. 333-34402
Gentlemen:
In my capacity as Executive Vice President, CFO and Chief Actuary of Security
Life of Denver Insurance Company ("Security Life"), I have provided actuarial
advice concerning:
The preparation of Pre-Effective Amendment No. 1 to the Registration Statement
on Form S-6 (File No. 333-34402) to be filed by Security Life and its Security
Life Separate Account L1 (the "Separate Account") with the Securities and
Exchange Commission ("SEC") under the Securities Act of 1933 with respect to the
Strategic Benefit variable universal life insurance policies; and
The preparation of the policy forms for the Strategic Benefit variable universal
life insurance policies described in Pre-Effective Amendment No. 1 (the
"Policies").
It is my professional opinion that
1. The aggregate fees and charges under the Policies are reasonable in
relation to the services rendered the expenses expected to be incurred
and the risks assumed by Security Life.
2. The illustrations of death benefits, account value, cash surrender
value, and total premiums paid plus interest at 5 percent shown in the
Prospectus, based on the assumptions stated in the illustration are
consistent with the provisions of the Policies. The rate structures of
the Policies have not been designed so as to make the relationship
between premiums and benefits, as shown in the illustrations included,
appear to be correspondingly more favorable to prospective buyers than
other illustrations which could have been provided at other combinations
of ages, sex of the insured, death benefit option and amount, definition
of life insurance test, premium class, and premium amounts. Insureds of
other premium classes may have higher costs of insurance charges.
3. All other numerical examples shown in the Prospectus are consistent with
the Policies and our other practices, and have not been designed to
appear more favorable to prospective buyers than other examples which
could have been provided.
I hereby consent to the filing of this opinion as an Exhibit to Pre-Effective
Amendment No. 1 to the Registration Statement and the use of my name under the
heading "Experts" in the Prospectus.
Sincerely,
/s/ James L. Livingston, Jr.
James L. Livingston, Jr., F.S.A., M.A.A.A.
JLL:tls
Exhibit 7.A
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Experts" and
"Financial Statements" and to the use of our reports dated April 7, 2000 and
April 14, 2000 (with respect to the financial statements of Security Life
Separate Account L1 and the consolidated financial statements of Security Life
of Denver Insurance Company and Subsidiaries, respectively), in Pre-Effective
Amendment No. 1 to the Registration Statement (Form S-6 No. 333-34402) and
related Prospectus of Security Life of Denver Insurance Company and Security
Life Separate Account L1 dated May 1, 2000.
/s/ ERNST & YOUNG LLP
Denver, Colorado
April 27, 2000
[SUTHERLAND ASBILL & BRENNAN LLP]
CONSENT OF SUTHERLAND ASBILL & BRENNAN LLP
We consent to the reference to our firm in the prospectus included in
Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 for
Security Life of Denver Separate Account L1 (File No. 333-34402). In giving this
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ Kimberly J. Smith
--------------------------
Kimberly J. Smith
Washington, D.C.
April 27, 2000
EXHIBIT 11
STRATEGIC BENEFIT VUL
DESCRIPTION OF ISSUANCE, TRANSFER, AND REDEMPTION PROCEDURES
FOR POLICIES PURSUANT TO RULE 6E-3(T)(B)(12)(III)
This document sets forth the administrative procedures that will be followed by
Security Life of Denver ("Security Life") in connection with the issuance of its
Strategic Benefit flexible premium variable universal life insurance policies
(the "policies") issued through Security Life Separate Account L1 (the "Separate
Account"), the transfer of assets held under the policies, and the redemption of
interests in policies for use on multi-life basis when the insured people share
a common employment or business relationship.
I. PROCEDURES RELATING TO ISSUANCE AND PURCHASE OF THE POLICIES
A. Offering of the Policy
The policy is offered only to corporate entities or qualifying groups
of ten or more insured people who may be individual owners ("owners")
who satisfy certain suitability standards. The policy may be purchased
to insure the life of a person (an "insured") in whom the owner has an
insurable interest. Security Life requires satisfactory evidence of
insurability, which may include a medical examination of the insured.
The issue ages are 15 through 85. Age is determined by the insured's
age as of the birthday nearest the policy date.
Generally, a minimum total group first year premium of at least
$250,000 is required. However, depending on underwriting circumstances,
the minimum total group first year premium may be reduced. There is no
minimum required base death benefit, although a minimum target death
benefit of $50,000 per policy is required. The minimum target death
benefit on some policies may be less as long as the average target
death benefit for the group at policy issuance is at least $50,000.
Acceptance of an application depends on Security Life's underwriting
rules. Security Life reserves the right to reject an application for
any reason.
If a policy has more than one owner (joint owners), then transactions
under the policy except for telephone transfers of account value
require the authorization of all owners.
B. Cost of Insurance Charges Structure, Payments and Underwriting
Standards
Security Life places the insured in a premium class when the policy is
issued, based on underwriting. This original premium class applies to
the initial stated death benefit.
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The cost of insurance charge for a policy is based on the age at issue,
sex, premium class of the insured, and on the policy year. Therefore
the charge varies from time to time. Security Life places insureds in
the following premium classes, based on underwriting: Standard smoker
(ages 0-85); and Standard Non-smoker (ages 20-85). Security Life's
definition of "Smoker" includes the use of cigarettes, cigars, pipes,
chewing tobacco, nicotine chewing gun or patch, snuff or any other
tobacco or nicotine-based product or, insureds may be placed in a
substandard rate class, with a higher mortality risk than the standard
smoker or standard non- smoker classes.
Security Life guarantees that the cost of insurance rates used to
calculate the monthly cost of insurance charge will not exceed the
maximum cost of insurance set forth in the policies. The guaranteed
cost of insurance rate for standard classes are based on the 1980
Commissioners' Standard ordinary mortality Tables, Male or Female,
Smoker or Nonsmoker Mortality Premiums (1980 CSO Tables). The
guaranteed cost of insurance rates for substandard classes are based on
multiples of or additives to the 1980 CSO Tables.
At any time, Security Life's current cost of insurance may be less than
the guaranteed cost of insurance that is set forth in the policy.
Current cost of insurance rates are determined based on expectations as
to future mortality, investment earnings, expenses, taxes, and
persistency experience. These rates may change from time to time.
Cost of insurance rates (whether guaranteed or current) for an insured
in a standard non-smoker class are equal to or lower than guaranteed
cost of insurance for an insured of the same age and sex in a standard
smoker class. Cost of insurance rates (whether guaranteed or current)
for an insured in a standard non-smoker or smoker class are generally
lower than guaranteed cost of insurance for an insured of the same age
and sex and smoker status in a substandard class.
The cost of insurance will not be the same for all policies. Insurance
is based on the principle of pooling and distribution of mortality
risks which assumes that each owner is charged a cost of insurance
commensurate with the insured's mortality risk as actuarially
determined, reflecting factors such as age, sex, health, and
underwriting method. A uniform cost of insurance charge for all
insureds would discriminate unfairly in favor of those insureds
representing higher risks. However, there will be a uniform cost of
insurance charge for all insureds of the same issue age, sex, policy
duration and underwriting classification.
If the insured's age or sex has been misstated in the application for
the policy or in any application for supplemental or rider benefits,
and if the misstatement becomes known during the lifetime of the
insured, then policy values will be adjusted to reflect the correct
monthly deductions (based on the correct age or sex) since the policy
date. If the policy's values are insufficient to cover the monthly
deduction on the prior monthly date, the grace period will be deemed to
have begun, and notification will be sent to the owner at least 61 days
prior to the end of the grace period. See "Policy Termination and Grace
Period," below.
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C. Death Benefit
The policy provides coverage on a named insured and a Death Benefit
payable upon the death of the insured. The policy will remain in force
as long as the policy's cash surrender value is sufficient to cover the
charges due.
On or after the first monthly processing date, the owner may request a
reduction in the stated death benefit, by written notice to Security
Life, subject to the following rules. If a change in the stated death
benefit would result in total premiums paid exceeding the premium
limitations prescribed under current tax law to qualify the policy as a
life insurance contract, Security Life will refund promptly to the
owner the excess above the premium limitations.
The minimum amount of a decrease in stated death benefit is $1,000, and
a decrease will become effective on the monthly processing date next
following the date that notice requesting the decrease is received and
approved by Security Life. Security Life reserves the right to decline
a requested decrease in the stated death benefit if compliance with the
guideline premium limitations under current tax law resulting from this
decrease would result in immediate termination of the policy, or if to
effect the requested decrease, payments to the owner would have to be
made from the accumulated value for compliance with the guideline
premium limitations, and the amount of such payments would exceed the
cash surrender value under the policy.
At any time the owner may request an increase in the stated death
benefit; any increase in the stated death benefit must be at least
$1,000 (unless the increase is effected pursuant to a rider providing
for automatic increases in stated death benefit), and an application
must be submitted. An increase that is not guaranteed by rider will
require satisfactory evidence of insurability and must meet Security
Life's underwriting rules. The increase in stated death benefit will
become effective on the next monthly processing date after the request
is approved. The account value will be adjusted to reflect a monthly
deduction (as of the effective date) based on the increased stated
death benefit.
Security Life will determine a cost of insurance rate for each increase
in coverage based on the age of the insured at the time of the
increase. The following rules apply to determine the risk amount for
each rate.
When an increase in stated death benefit is requested, Security Life
conducts underwriting before approving the increase to determine
whether a different premium class will apply to the increase. If the
premium class for the increase has lower cost of insurance rates than
the original premium class, then the premium class for the increase
will also be applied to the initial stated death benefit. If the
premium class for the increase has higher cost of insurance rates than
the original premium class, the premium class for the increase will
apply only to the increase in stated death benefit, and the original
premium class will continue to apply to the initial stated death
benefit.
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To determine the risk amount associated with a stated death benefit,
Security Life will attribute the total net amount at risk for the total
stated death benefit. If there is a decrease in stated death benefit
after an increase, the decrease is applied first to decrease prior
increases in stated death benefit starting with the most recent
increase.
The policy will be offered and sold pursuant to an established
mortality structure and underwriting standards in accordance with state
insurance laws. Where state insurance laws prohibit the use of
actuarial tables that distinguish between men and women in determining
premiums and policy benefits for their insured resident, Security Life
will comply.
D. Application and Payment Processing
To purchase a policy, an application must be completed and submitted
through an authorized Security Life agent. Temporary life insurance
coverage may be provided prior to the policy date under the terms of a
temporary insurance agreement. In accordance with Security Life's
underwriting rules, temporary life insurance coverage may not exceed
$3,000,000 and will not remain in effect for more than ninety (90)
days.
The insurance coverage becomes effective on the policy date, which may
be specified on the application. The policy date is used to determine
the monthly processing date, coverage effective date and policy
anniversaries.
The policy date is: 1) the date specified on the application, 2) the
back-date of the policy to save age; or if neither 1) or 2) apply, it
is the date all underwriting and administrative requirements are met if
the initial premium has been received. Otherwise, it is the date the
initial premium is received by Security Life.
The investment date is the date that Security Life first applies
premium to the policy. It is the first valuation date following
Security Life's: 1) receipt of the initial premium, 2) approval of the
policy for issue, and 3) receipt of all issue requirements.
As provided under state insurance law, the owner may be permitted to
backdate the policy to preserve insurance age. In no case may the
policy date be more than six months prior to the application date. The
monthly deductions for the backdated period are deducted on the policy
date.
The initial premium payment must be at least equal to the sum of the
scheduled premiums from the policy date through the investment date.
Planned periodic premiums and unscheduled premiums that are not
underwritten will be credited to the policy and the net premium
invested on the valuation date they are received by Security Life. If a
premium payment is rejected, Security Life will return it promptly,
without adjustment.
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<PAGE>
The policy date is the date from which policy months, years, and
anniversaries are measured. A policy month is a one-month period
beginning with a monthly processing date and ending with the day
immediately preceding the next following monthly processing date (i.e.
8/15 - 9/14). The monthly processing date is the same as the policy
date for each succeeding month. The monthly deductions are made each
monthly processing date.
A policy year is twelve months commencing with the policy date and
ending with the day immediately preceding the next annual date (i.e.
8/15/1999 - 8/14/2000).
The issue date, if the same as the policy date, is the date from which
the suicide and contestable periods start. It is shown in the policy.
E. Allocation of Net Premiums
On the investment date, the account value equals the initial premium
payment minus premium expense charges, minus monthly deductions made as
the policy date (up to six months for backdated policies). On each
investment date thereafter, the account value is the sum of the amounts
in the variable investment options, the guaranteed interest division,
and the loan division. The account value will vary with the performance
of the selected investment options, interest credited on amounts in the
guaranteed interest division, interest credited on amounts in the loan
division, charges, transfers, partial withdrawals, loans and loan
repayments. The net account value is cash value minus outstanding
policy debt.
When applying for a policy, the owner selects a plan for paying premium
payments at specified intervals, e.g., quarterly, semi-annually or
annually, until the maturity date. If the owner elects, Security Life
will arrange for payment of planned period premiums on a monthly basis
under a pre-authorized, electronic funds transfer (bank draft)
arrangement. The owner is not required to pay premium in accordance
with the plan; but can pay more or less than planned or skip a planned
premium entirely. Currently, there is no minimum amount for each
premium payment. Security Life may establish a minimum amount effective
90 days after sending a written notice to the owner. Subject to certain
limits (described below), the owner can change the amount and frequency
of planned periodic premiums at any time by sending a notice to
Security Life. However, Security Life reserves the right to limit the
amount of a premium payment or the total premium paid.
In the application, the owner specifies the percentage of net premium
to be allocated to each investment option including the guaranteed
interest division (G.I.D.). Net premiums generally will be invested on
the valuation date that Security Life receives them and in accordance
with the owner's most recent allocation instructions.
The net premium allocation percentages specified in the application
will apply to subsequent premium payments until the owner instructs
otherwise. The minimum percentage that may be specified for an
investment option is 1%, and all percentages must be whole numbers. The
sum of allocations must equal 100%. Security Life limits the number of
investment options (18) to which account value may be allocated over
the life of the policy. An owner can change the
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allocation percentages at any time by sending a notice to Security Life
or, if telephone privileges are in effect, the request can be received
by phone. The change applies to all premium payments received with or
after receipt of the owner's notice.
F. Free Look
Some states mandate that if an owner exercises his/her free look right
he/she is entitled to a full premium refund. Other states mandate that
if the owner exercises his/her free look option he/she is entitled to
receive the value of the fund allocations plus a refund of the policy
charges previously deducted.
Amounts designated for the guaranteed interest division will be
invested into that division on the investment date. If the owner's
state requires return of premium during the free look period, amounts
designated for the variable division are initially invested into the
Liquid Asset Portfolio. Later, these amounts are transferred from the
Liquid Asset Portfolio to the selected variable investment options, at
the earlier of:
1) five days after we mailed the policy and the state free look
period has ended; or
2) we have received the policy delivery receipt an the state free
look period has ended.
If the owner's state provides for return of account value during the
free look period or no free look period, amounts designated for the
variable division are invested directly into the selected variable
investment options.
G. Additional Payment
Additional unscheduled premium payments can be made at any time while
the policy is in force. Premium payments after the initial premium
payment must be made to the home office.
Security Life has the right to limit the number and amount of such
premium payments. Total premium payments paid in a policy year may not
exceed guideline premium payment limitations for life insurance set
forth in the Internal Revenue Code. Security Life will promptly refund
the portion of any premium payment that is determined to be in excess
of the premium payment limit established by law to qualify a policy as
a contract for life insurance.
Security Life reserves the right to reject a requested increase in
planned periodic premiums, or unscheduled premium. Security Life also
reserves the right to require satisfactory evidence of insurability
prior to accepting a premium which increases the risk amount of the
policy. No premium payment will be accepted after the maturity date.
The payment of premiums may cause a policy to be a Modified Endowment
Contract (M.E.C.) under the Internal Revenue Code. If acceptance of a
premium paid would, in Security Life's view, cause the policy to become
a M.E.C., then to the extent feasible Security Life will not accept
that portion of the premium that would cause the policy to become a
M.E.C. unless the owner confirms in writing that it is his/her intent
to convert the policy to a
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M.E.C. Security Life may return the excess portion of the payment
pending receipt of instructions from the owner.
The owner may specify that a particular unscheduled payment is to be a
repayment of policy debt.
H. Policy Termination and Grace Period
The policy terminates at the earliest of: 1) the end of the grace
period, 2) the surrender of the policy or, 3) the fulfillment of
Security Life's obligations under the policy (i.e., payment of the
death benefit proceeds).
If the cash surrender value on a monthly processing date is less than
the amount of the monthly deduction to be deducted, the policy will be
in default. In addition, if on a monthly processing date the
outstanding policy debt exceeds the account value, the policy will be
in default. The owner, and any assignee of record, will be sent notice
of the default.
If a policy goes into default, the owner will be allowed a 61-day grace
period to pay a premium payment sufficient to cover the monthly
deductions due during the grace period and for two additional months,
or a sufficient amount to avoid termination caused by a high
outstanding loan balance. Security Life will send notice of the amount
required ("grace period premium payment") to the owner's last known
address and the address of the assignee of record. The grace period
will begin when the notice is sent. The policy will remain in effect
during the grace period. If the insured should die during the grace
period, the death benefit proceeds will be payable to the beneficiary,
but the amount paid will be reduced for the monthly deductions which
were due as of the date of death and for outstanding policy debt. If
the grace period premium payment is not paid by the end of the grace
period, the policy will lapse. It will have no value and no benefits
will be payable.
I. Reinstatement of a Policy Terminated for Insufficient Values
The policy may be reinstated within five years after lapse and before
the maturity date, subject to compliance with certain conditions,
including a necessary premium payment and submission of satisfactory
evidence of insurability.
J. Repayment of a Loan
An owner may repay all or part of his/her policy debt at any time while
the insured person is living and the policy is in force. Loan
repayments must be sent to the home office and will be credited as of
the date received. The owner may instruct Security Life that a specific
unscheduled payment is to be applied as a loan repayment. When a loan
repayment is made, account value in the loan division in an amount
equal to the repayment, is transferred from the loan division to the
investment options according to the owner's current net premium
allocation instructions.
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K. Policy Riders
Rider benefits may be available to be added to the policy. Monthly
charges for the rider will be deducted from the account value as part
of the monthly deductions. The only rider available is the Adjustable
Term Insurance Rider.
Additional rules and limits apply to the rider benefits and are set
forth in the rider.
II. TRANSFERS AMONG INVESTMENT OPTIONS
Several investment options of the Separate Account are available for
allocation of net premiums paid, subject to certain limitations set forth
in the policy. Each invests in shares or units of an underlying portfolio.
Currently available investment options invest in portfolios of AIM Variable
Insurance Funds, Inc., The Alger American Fund, Fidelity Variable Insurance
Products Fund and Variable Insurance Products Fund II, the GCG Trust,
INVESCO Variable Investment Funds, Inc., Neuberger Berman Advisors
Management Trust, Van Eck Worldwide Insurance Trust and to portfolios of
Merrill Lynch Asset Management, L.P. All Funds are registered under the
Investment Company Act of 1940 as open-end management investment companies.
Additional funds may be made available in the future.
After the free-look period and prior to the maturity date, the owner may
transfer all or part of the account value from the investment options to
other investment options or to the guaranteed interest division. An amount
may be transferred from the guaranteed interest division to the variable
investment options, subject to some restrictions. The minimum transfer
amount is the lesser of $100 or the entire amount in that investment
option. A transfer request that would reduce the amount in an investment
option below $100 will be treated as a transfer request for the entire
amount. Transfers from the guaranteed interest division are permitted only
within the first 30 days of a policy year. Transfer requests received
within 30 days prior to a policy anniversary will be processed on the
policy anniversary. Such transfers are limited in amount to the greatest
of: 25% of the balance in the guaranteed interest division on the policy
anniversary; the total withdrawn in the prior policy year; or $100.00. With
the exception of the Right to Exchange (described below), Security Life
reserves the right to limit the number or frequency of transfers permitted
in the future.
Security Life will make the transfer as of the end of the valuation period
during which such transfer is received by Security Life. Currently, there
is a limit on the number (12) of free transfers that can be made between
investment options in a policy year. Currently, Security Life assesses an
excess transfer charge of $10 for each transfer in excess of the first
twelve transfers during a policy year. The excess transfer charge will be
deducted from the investment option from which the requested transfer is
being made.
Transfer requests will be accepted by telephone, provided the appropriate
authorization has been provided to Security Life. Security Life reserves
the right to suspend telephone transfer privileges
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at any time, for any reason, if Security Life deems such suspension to be
in the best interests of owners.
Transfers may be effected pursuant to the dollar cost averaging or
automatic rebalancing feature if elected by the owner as described in the
current prospectus (without charge).
During the first twenty-four policy months following the policy date, and
within sixty days of the later of notification of a change in the
investment policy of the separate account or the effective date of such
change, the owner may exercise a one-time Right to Exchange the policy by
requesting that all of the variable account value be transferred to the
guaranteed interest division. Exercise of the Right to Exchange is not
subject to the excess transfer charge. Following the exercise of the Right
to Exchange, premium may not be allocated to the variable account, and
transfers of account value to the variable account will not be permitted.
The other terms and conditions of the policy will continue to apply.
III. REDEMPTION PROCEDURES, SURRENDER AND RELATED TRANSACTIONS
A. Surrender for Cash Surrender Value
An owner may surrender the policy at any time for its cash surrender
value by submitting notice to the home office. Security Life may
require return of the policy. A surrender request will be processed as
of the valuation date the surrender notice and all required documents
are received. Payment generally will be made within seven calendar
days. An owner's policy will terminate and cease to be in force if it
is surrendered. It cannot be reinstated later.
B. Death Claims
The death benefit proceeds are equal to the sum of the base death
benefit for each coverage segment under the death benefit option
selected, calculated on the date of the insured's death, plus rider
benefits, minus outstanding policy debt, minus unpaid monthly
deductions incurred prior to the date of death. If the insured's age or
sex has been misstated in the application for the policy or in an
application for supplemental or rider benefits, and if the misstatement
becomes known after the death of the insured person, then the death
benefit under the policy or such supplemental or rider benefits will be
that which the cost of insurance charge which was deducted from the
account value on the last monthly processing date prior to the death of
the insured would have purchased for the correct sex and age.
Security Life will pay interest at the rate declared by us or at a
higher rate required by law.
Security Life will usually pay the death benefit proceeds to the
beneficiary within seven days after receipt at its home office of due
proof of death of the insured and all other requirements necessary to
make payment. If the payment of the death benefit of a policy is
contested, payment of proceeds may be delayed.
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The death benefit payable depends on the death benefit option in effect
on the date of death. Subject to certain conditions, owners may change
the death benefit option. Under Option 1, the base death benefit is the
greater of the specified amount, which includes the account value or
the applicable percentage of account value on the date of the insured's
death. Under Option 2, the base death benefit is the greater of the
specified amount plus the account value on the date of death, or the
applicable percentage of the account value on the date of the insured's
death. Under Option 3, the base death benefit is the greater of the
stated death benefit plus the sum of all premiums received minus
partial withdrawals, or the account value multiplied by the applicable
percentage of the account value on the date of the insured's death.
The "applicable percentage" is the appropriate factor from the
Definition of Life Insurance factors shown in the policy's appendix A.
A table showing the applicable percentages for attained ages 0 to 95 is
set forth in the policy.
On or after one year from the policy date, the owner may change the
death benefit option on the policy, by notice to Security Life, subject
to the following rules. A change in the Death Benefit Option may be
requested at least one day prior to a policy anniversary. After the
change, the specified death benefit amount must still comply with the
minimum to issue a policy. The effective date of the change will be the
next monthly processing date following the day that Security life
approves the request. Security Life may require satisfactory evidence
of insurability for some changes.
An owner may change from death benefit option 1 to option 2, from
option 2 to option 1 or from option 3 to option 1. NO CHANGE FROM DEATH
BENEFIT OPTION 1 OR 2 TO OPTION 3, OR OPTION 3 TO OPTION 2 IS
PERMITTED.
When a change from Option 1 to Option 2 is made, the specified death
benefit amount after the change is effected will be the specified death
benefit amount before the change minus the account value on the
effective date of the change. When a change from Option 2 to Option 1
is made, the specified death benefit amount after the change will be
the specified death benefit amount before the change plus the account
value on the effective date of the change. When a change from Option 3
to Option 1 is made, the specified amount will be the stated death
benefit before the change plus the sum of premiums received minus
partial withdrawals taken as of the effective date of the change.
C. Policy Loan
After the first monthly processing date and while the insured is
living, provided the policy is not in the grace period, the owner may
borrow against the policy by submitting a request to the home office.
The minimum amount of a loan is $100. The maximum loan amount is the
cash surrender value less monthly deductions to the next policy
anniversary or 13 monthly deductions if the loan request is received
within 30 days prior to a policy anniversary. Maximum loan amounts may
be different if required by state law.
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An outstanding loan reduces the amount available for a new loan. A loan
is processed as of the date the loan request is approved. Loan proceeds
generally will be sent to the owner within seven calendar days.
When a policy loan is made, an amount sufficient to secure the loan is
transferred out of the investment options and into the policy's loan
division. Thus, a loan will have no immediate effect on the account
value, but other policy values, such as the cash surrender value and
the death benefit proceeds, will be reduced immediately by the amount
borrowed. This transfer is made from the account value in each
investment option in proportion to the account value in each on the
date of the loan, unless the owner specifies that transfers be made
from a specific investment option. An amount equal to due and unpaid
loan interest which exceeds interest credited to the loan division will
be transferred to the loan division on each policy anniversary. Such
interest will be transferred from each investment option in the same
proportion that account value in each bears to the total unloaned
account value.
The loan account will be credited with interest at an effective annual
rate of not less than the annual loan interest rate of 3%. Loan
interest accrues daily at a compound annual interest rate of 3.25%.
Interest is due in arrears on each policy anniversary. Outstanding loan
amounts (including unpaid interest added to the loan) plus accrued
interest not yet due equals the total policy debt.
D. Partial Withdrawals
An owner may make partial cash surrenders (known as partial
withdrawals) under the policy at any time after the first policy
anniversary. An owner must submit a request to the home office. Each
partial withdrawal must be at least $100. The maximum partial
withdrawal is the amount which will leave $500 as the net cash
surrender value. When a partial withdrawal is taken, the amount of the
withdrawal plus a service fee is deducted from the account value. This
service fee is 2% of the amount of the withdrawal, up to a maximum fee
of $25. As of the date Security Life processes the partial withdrawal,
the cash value will be reduced by the partial withdrawal amount.
Unless the owner requests that a partial cash surrender be deducted
from specified investment options, it will be deducted from the
investment options on a pro-rata basis in proportion to the account
value in each.
If death benefit Option 1 is in effect, Security life may reduce the
specified death benefit amount. Security Life may reject a partial
withdrawal request if it would reduce the specified death benefit
amount below the minimum amount required to issue the policy, or if the
partial withdrawal would cause the policy to fail to qualify as a life
insurance contract under applicable tax laws, as interpreted by
Security Life.
Partial withdrawals will be processed as of the valuation date the
request is received by Security Life, and generally will be paid within
seven calendar days.
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E. Monthly Charges
On each monthly processing date, Security Life will deduct from the
account value the monthly deductions due, commencing as of the policy
date. An owner's policy date is the date used to determine the
applicable monthly processing date. The monthly deduction consists of
(1) cost of insurance charges, (2) the monthly administrative charge,
(3) mortality and expense charge, and (4) charges for rider benefits.
The monthly deduction is deducted from the investment options,
including the guaranteed interest division pro rata based on the
account value in each investment option, unless the owner has selected
a designated deduction investment option for the policy.
F. Continuation of Coverage
The maturity date is generally the insured's 100th birthday, and is
shown in the policy.
At the policy's maturity date, the owner may surrender the policy for
its net cash surrender value. Or, he/she may allow insurance coverage
to continue under the continuation of coverage feature. If the policy
is in effect and not surrendered, the target death benefit, which
includes term rider coverage, becomes the specified death benefit
amount. All riders are terminated. Policies with death benefit options
2 or 3 become policies with death benefit option 1. A one-time fee of
$200 is deducted to cover all future costs of the policy and the
account value is transferred into the Guaranteed Interest Division. No
further premium payments can be made, however, loan and interest
payments are accepted. All variable investment features terminate.
Loans and partial withdrawals may be taken. The policy will continue
until the death of the insured person, so long as it does not lapse.
G. Change of Insured
The owner of the policy may choose, at any time after issue, to change
the insured person under the policy. There is no fee for this change.
However, the new insured must be insurable under Security Life's normal
rules of underwriting. The account value will be moved to a new policy
number and the new insured. Charges and fees under the new policy may
change based on the new insured.
At the time of the change, target premium and surrender charges are
calculated under both policies. If the surrender charge on the new
policy is higher, no surrender charge is deducted at the time of the
change. If the surrender charge on the new policy is lower, a surrender
charge in the amount of the difference (between old and new policy) is
deducted. The resulting account value, less tax charges as described in
the prospectus, is transferred into the new policy. No initial sales
charge is deducted on the change; but the new policy is subject to all
applicable charges running from its policy date and for all new premium
payments received. If there is a policy loan outstanding, it is
transferred to the new policy.
H. Settlement Options
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During the insured's lifetime, the owner may elect that the beneficiary
receive the death proceeds other than in one sum. If this election has
not been made, the beneficiary may do so within 60 days after the
insured person's death. The owner may also elect to take the net cash
surrender value under one of these options.
Option I: Payouts for a Designated Period: Payouts will be made in
1, 2, 4 or 12 installments per year as elected for a
designated period, which may be 5 to 30 years. The
installment dollar amounts will be equal except for any
excess interest. The amount of the first monthly payout
for each $1,000 of account value applied is shown in
Settlement Option Table I in the policy.
Option II: Life Income with Payouts Guaranteed for a Designated
Period: payouts will be made in 1, 2, 4 or 12 installments
per year throughout the payee's lifetime, or if longer,
for a period of 5, 10, 15, or 20 years as elected. The
installment dollar amounts will be equal except for any
excess interest. The amount of the first monthly payout
for each $1,000 of account value applied is shown in
Settlement Option Table II in the policy. This option is
not available for ages not shown in this Table.
Option III: Hold at Interest: Amounts may be left on deposit with us
to be paid upon the death of the payee or at any earlier
date elected. Interest on any unpaid balance will be at
the rate declared by us or at any higher rate required by
law. Interest may be accumulated or paid in 1, 2, 4 or 12
installments per year, as elected. Money may not be left
on deposit for more than 30 years.
Option IV: Payouts of a Designated Amount: Payouts will be made until
proceeds, together with interest, which will be at the
rate declared by us or at any higher rate required by law,
are exhausted. Payouts will be made in 1, 2, 4 or 12 equal
installments per year, as elected.
Option V: Other: The owner may ask us to apply the money under any
other option that we make available at the time the
benefit is paid.
Payments under these options are not affected by the investment
experience of any division of our variable account. Instead, interest
accrues pursuant to the options chosen. Payment options will also be
subject to our rules at the time of selection. These alternate payment
options are available only if the proceeds applied are $2,000 or more
and a periodic payment will be at least $20.
The beneficiary or any other person who is entitled to receive payment
may name a successor to receive any amount that we would otherwise pay
to that person's estate if that person died. The person who is entitled
to receive payment may change the successor at any time.
We must approve an arrangement that involves a payee who is not a
natural person (for example, a corporation), or a payee who is a
fiduciary. Also, the details of all arrangements
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will be subject to our rules at the time the arrangements take effect.
This includes rules on the minimum amount we will pay under an option,
minimum amounts for installment payments, withdrawal or commutation
rights (i.e., the rights to receive payments over time, for which we
may offer a lump sum payment), the naming of people who are entitled to
receive payment and their successors, and the ways of proving age and
survival.
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