-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MfqYK1ULUFRmzv35DiTKvBF0iE1DWdP+PHXALRv1EMkoDyA9AxyV8Djv4TbimFJL vPQF11xVVk7NsckD0t/X2Q== 0000917677-99-000023.txt : 19990426 0000917677-99-000023.hdr.sgml : 19990426 ACCESSION NUMBER: 0000917677-99-000023 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19990423 EFFECTIVENESS DATE: 19990423 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY LIFE SEPARATE ACCOUNT L1 CENTRAL INDEX KEY: 0000917677 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 840499703 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-88148 FILM NUMBER: 99599347 BUSINESS ADDRESS: STREET 1: 1290 BROADWAY STREET 2: C/O SECURITY LIFE CENTER CITY: DENVER STATE: CO ZIP: 80203 BUSINESS PHONE: 3038601290 MAIL ADDRESS: STREET 1: 1290 BROADWAY CITY: DENVER STATE: CO ZIP: 80203-5699 485BPOS 1 SECURITY LIFE POST AMND NO. 6 As filed with the Securities and Exchange Commission on April 23, 1999 Registration No. 33-88148 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 Post-Effective Amendment No. 6 ----------------- 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) ---------------------------- It is proposed that this filing will become effective: on April 15, 1999 pursuant to paragraph (a) of Rule 485 --- 60 days after filing pursuant to paragraph (a) of Rule 485 --- X on May 1, 1999 pursuant to paragraph (b) of Rule 485 --- immediately upon filing pursuant to paragraph (b) of Rule 485 --- this post-effective amendment designates a new effective date for a previously filed post-effective amendment --- Title of securities being registered: Variable life insurance policies. SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 33-88148) 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 the Value in the Variable Divisions; Charges, Deductions and Refunds; Surrender; Partial Withdrawals; The 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 Strategic Advantage Universal Life Policy; General Policy Provisions; The Guaranteed Interest Division 11, 12 Security Life Separate Account L1 13 Policy Summary; Charges, Deductions and Refunds; and Group or Sponsored Arrangements or Corporate Purchasers ii Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 14, 15 Policy Summary; Free Look Period or Right to Examine Policy Period; General Policy Provisions; Applying for a Policy 16 Premiums; Allocation of Net Premiums; How We Calculate Accumulation Unit Values for Each Division 17 Premium Payments Affect Your Coverage; Surrender; Partial Withdrawals 18 Policy Summary; Tax Considerations; Detailed Information about the Strategic Advantage Universal Life Policy; Security Life Separate Account L1; Persistency Refund 19 Reports to Owners; Notification and Claims Procedures; Performance Information (Appendix C) 20 See 10(g) & 10(a) 21 Policy Loans 22 Policy Summary; Premiums; Grace Period; Security Life Separate Account L1; Detailed Information about the Strategic Advantage Universal Life Policy 23 Inapplicable 24 Inapplicable 25 Security Life of Denver Insurance Company 26 Inapplicable 27, 28, 29, 30 Security Life of Denver Insurance Company 31, 32, 33, 34 Inapplicable 35 Inapplicable 36 Inapplicable iii 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 the Value in the Variable Divisions; How We Calculate Accumulation Unit Values for Each Division 45 Inapplicable 46 Partial Withdrawals; Detailed Information about the Strategic Advantage Universal Life Policy 47, 48, 49, 50 Inapplicable 51 Detailed Information about the Strategic Advantage Universal Life Policy 52 Determining the Value 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 Prospectus STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE A FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY issued by SECURITY LIFE OF DENVER INSURANCE COMPANY AND SECURITY LIFE SEPARATE ACCOUNT L1 Consider carefully the policy charges, deductions, and refunds beginning on page 47 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 guaranteed not to lapse during the first three policy years if you meet certain requirements; and o is returnable by you during the free look period 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 divisions and the guaranteed interest division, based on your instructions; o are invested in shares of the underlying investment portfolios under each variable division; and 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 divisions, the guaranteed interest division and the loan division; o has no guaranteed minimum cash value under the variable divisions. The value varies with the value of the matching investment portfolio; o has a minimum guaranteed rate of return if you have an amount in the guaranteed interest division; and o is subject to various expenses and charges. DEATH PROCEEDS o are paid if the policy is still in force when the insured person dies; o are equal to the death benefit minus outstanding policy loans, 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 you have paid minus partial withdrawals you have taken for policies delivered on or before December 31, 1997; and o are generally not federally income taxed if your policy continues to meet the federal income tax definition of life insurance. NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. DATE OF PROSPECTUS MAY 1, 1999 Form V-56-99 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 - -------------------------------------------------------------------------------- Strategic Advantage 2 TABLE OF CONTENTS POLICY SUMMARY.................................................................8 Your Policy...........................................................8 Free Look Period or Right to Examine Policy Period....................8 Your Policy Premiums..................................................8 Allocation of Net Premiums...................................8 Variable Divisions....................................................9 Policy Values.........................................................9 Your Account Value in the Variable Divisions.................9 Transfers of Account Value...........................................10 Special Policy Features..............................................10 Additional Benefits.........................................10 Dollar Cost Averaging.......................................10 Automatic Rebalancing.......................................10 Loans.......................................................10 Partial Withdrawals.........................................10 Persistency Refund..........................................10 Refund of Sales Charges.....................................10 Policy Modification, Termination and Continuation Features...........10 Right to Exchange Policy....................................10 Surrender...................................................10 Lapse.......................................................11 Reinstatement...............................................11 Policy Maturity.............................................11 Death Benefits.......................................................11 Charges and Deductions...............................................11 Deductions from Premium.....................................11 Deductions from the Variable Divisions......................12 Monthly Deductions from Your Account Value..................12 Policy Transaction Fees.....................................12 Tax Considerations...................................................12 INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION.................................13 Security Life of Denver Insurance Company............................13 Year 2000 Preparedness...............................................13 Security Life Separate Account L1....................................14 Variable Account Structure..................................14 Order of Variable Account Liabilities.......................14 Variable Divisions..........................................14 Investment Portfolios.......................................14 Objectives of the Investment Portfolios..............................15 The Guaranteed Interest Division.....................................19 Maximum Number of Investment Divisions...............................19 DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE POLICY...............................................................20 Applying for a Policy................................................20 Policy Issuance.............................................20 Definition of Life Insurance Choice.........................20 Temporary Insurance..................................................20 Premiums ............................................................21 Scheduled Premiums..........................................21 - -------------------------------------------------------------------------------- Strategic Advantage 3 Unscheduled Premium Payments................................21 Minimum Annual Premium......................................21 Special Continuation Period.................................22 Allocation of Net Premiums..................................22 Premium Payments Affect Your Coverage................................22 Modified Endowment Contracts................................23 Death Benefits.......................................................23 Base Death Benefit..........................................25 Death Benefit Options.......................................25 Changes in Death Benefit Options............................26 Changes in Death Benefit Amounts............................27 Guaranteed Minimum Death Benefit............................27 Requirements to Maintain the Guarantee Period...............28 Additional Benefits..................................................29 Accidental Death Benefit Rider..............................29 Additional Insured Rider....................................29 Adjustable Term Insurance Rider.............................29 Guaranteed Insurability Rider...............................31 Right to Change Insured Rider...............................31 Waiver of Cost of Insurance Rider...........................31 Waiver of Specified Premium Rider...........................31 Special Features.....................................................31 Policy Maturity.............................................31 Right to Exchange Policy....................................31 Policy Values........................................................31 Account Value...............................................31 Net Account Value...........................................31 Cash Surrender Value........................................31 Net Cash Surrender Value....................................31 Determining the Value in the Variable Divisions.............32 How We Calculate Accumulation Unit Values for Each Division.32 Transfers of Account Value...........................................33 Excessive Trading...........................................33 Guaranteed Interest Division Transfers......................33 Dollar Cost Averaging................................................33 Changing Dollar Cost Averaging..............................34 Terminating Dollar Cost Averaging...........................34 Automatic Rebalancing................................................34 Changing Automatic Rebalancing..............................35 Terminating Automatic Rebalancing...........................35 Policy Loans.........................................................35 Loan Repayment..............................................36 Loans and Your Benefits.....................................36 Partial Withdrawals..................................................36 Partial Withdrawals under Death Benefit Option 1............37 Partial Withdrawals under Death Benefit Option 2............37 Partial Withdrawals under Death Benefit Option 3............37 Stated Death Benefit and Target Death Benefit Reductions....37 Partial Withdrawal Mechanics................................37 Lapse................................................................37 Grace Period................................................38 If You Have the Guaranteed Minimum Death Benefit in Effect..38 Reinstatement........................................................39 Surrender............................................................39 General Policy Provisions............................................40 - -------------------------------------------------------------------------------- Strategic Advantage 4 Free Look Period or Right to Examine Policy Period..........40 Your Policy.................................................40 Age.........................................................41 Ownership...................................................41 Beneficiary(ies)............................................41 Collateral Assignment.......................................41 Incontestability............................................41 Misstatements of Age or Gender..............................41 Suicide ...................................................42 Transaction Processing......................................42 Notification and Claims Procedures..........................42 Telephone Privileges........................................43 Non-participation...........................................43 Distribution of the Policies................................43 Advertising Practices and Sales Literature..................44 Settlement Provisions.......................................44 Administrative Information About the Policy..........................45 Voting Privileges...........................................45 Material Conflicts..........................................46 Right to Change Operations..................................46 Reports to Owners...........................................47 CHARGES, DEDUCTIONS AND REFUNDS...............................................47 Deductions from Premiums.............................................47 Tax Charges.................................................47 Sales Charge................................................47 Daily Deductions from the Variable Account...........................48 Mortality and Expense Risk Charge...........................48 Monthly Deductions from Your Account Value...........................48 Policy Charge...............................................49 Monthly Administrative Charge...............................49 Cost of Insurance Charge....................................49 Guaranteed Issue............................................49 Charges for Additional Benefits.............................50 Changes in Monthly Charges..................................50 Guaranteed Minimum Death Benefit Charge.....................50 Policy Transaction Fees..............................................50 Partial Withdrawals.........................................50 Transfers...................................................50 Illustrations...............................................50 Premium Allocation Change...................................50 Persistency Refund...................................................50 Refund of Sales Charges..............................................51 Fees and Expenses of the Investment Portfolios.......................51 Investment Portfolio Annual Expenses........................52 Group or Sponsored Arrangements or Corporate Purchasers..............54 Other Charges........................................................54 TAX CONSIDERATIONS............................................................54 Tax Status of the Policy.............................................54 Diversification Requirements.........................................55 Tax Treatment of Policy Death Benefits...............................55 Modified Endowment Contracts.........................................56 Multiple Policies....................................................56 Distributions Other than Death Benefits from Modified Endowment Contracts..........................................................56 - -------------------------------------------------------------------------------- Strategic Advantage 5 Distributions Other than Death Benefits from Policies That Are Not Modified Endowment Contracts.......................................56 Investment in the Policy.............................................56 Policy Loans.........................................................56 Section 1035 Exchanges...............................................57 Tax-exempt Policy Owners.............................................57 Possible Tax Law Changes.............................................57 Changes to Comply with the Law.......................................57 Other................................................................57 ILLUSTRATIONS.................................................................59 ADDITIONAL INFORMATION........................................................67 Directors and Officers...............................................67 Regulation...........................................................70 Legal Matters........................................................70 Legal Proceedings....................................................70 Experts ............................................................70 Registration Statement...............................................70 FINANCIAL STATEMENTS..........................................................71 APPENDIX A...................................................................172 APPENDIX B...................................................................180 APPENDIX C...................................................................181 - -------------------------------------------------------------------------------- Strategic Advantage 6 INDEX OF SPECIAL TERMS The following special terms are used in this prospectus. We explain each term on the page(s) listed in the body of this prospectus and in the summary, if applicable: Account value..................................................................9 Accumulation unit.............................................................32 Accumulation unit value.......................................................32 Adjustable term insurance rider...............................................23 Age.......................................................................20, 41 Base death benefit............................................................25 Beneficiary(ies)..............................................................11 Cash surrender value...........................................................9 Customer service center........................................................2 Death proceeds................................................................25 Free look period..............................................................40 General account...............................................................14 Guarantee period..............................................................28 Guarantee period annual premium...............................................28 Guaranteed interest division..................................................19 Guaranteed minimum death benefit..............................................27 Initial premium...............................................................20 Insured.......................................................................20 Investment date...............................................................20 Investment division...........................................................19 Loan division..................................................................9 Maturity date.................................................................31 Minimum annual premium........................................................21 Monthly processing date.......................................................22 Net account value..............................................................9 Net amount at risk.............................................................9 Net cash surrender value.......................................................9 Net premium................................................................8, 22 Owner......................................................................8, 41 Partial withdrawal............................................................22 Policy.....................................................................8, 14 Policy date...................................................................20 Policy loan...................................................................35 Portfolios.................................................................9, 14 Rider.........................................................................10 Scheduled premium.............................................................21 Segment.......................................................................27 Special continuation period...................................................22 Stated death benefit..........................................................20 Target death benefit..........................................................29 Target premium................................................................47 Total death benefit...........................................................30 Transaction date..............................................................32 Valuation date.................................................................9 Valuation period...........................................................9, 32 Variable account..............................................................14 Variable division(s)..........................................................14 - -------------------------------------------------------------------------------- Strategic Advantage 7 POLICY SUMMARY THIS SUMMARY HIGHLIGHTS SOME OF THE IMPORTANT POINTS ABOUT YOUR POLICY. THE POLICY IS MORE FULLY DESCRIBED IN THE ATTACHED, COMPLETE PROSPECTUS. PLEASE READ THE PROSPECTUS CAREFULLY. "WE," "US," "OUR," AND THE "COMPANY" REFER TO SECURITY LIFE OF DENVER INSURANCE COMPANY. "YOU" AND "YOUR" REFER TO THE POLICY OWNER. THE OWNER IS THE INDIVIDUAL, ENTITY, PARTNERSHIP, REPRESENTATIVE OR PARTY WHO MAY EXERCISE ALL RIGHTS OVER THE POLICY AND RECEIVE THE POLICY BENEFITS DURING THE INSURED PERSON'S LIFETIME. ANY STATE VARIATIONS ARE COVERED IN A SPECIAL POLICY FORM FOR USE 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. YOUR POLICY Your policy provides life insurance protection on the insured person. The policy includes the basic policy, applications, and any 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 net cash surrender value. On the policy anniversary after the insured person reaches age 100, if the insured person is still alive we will pay a maturity benefit instead of a death benefit. SEE POLICY MATURITY, PAGE 31. We designed Strategic Advantage primarily for use on a multi-life basis where the insured people share common employment or a business relationship. The policy may be owned individually or by a corporation, trust, association or similar entity. The policy may be used for such purposes as informally funding non-qualified executive deferred compensation, salary continuation plans, retiree medical benefits or other purposes. Life insurance is not a short-term investment. You should evaluate your need for life insurance coverage and this policy's long-term investment potential and risks before purchasing a policy. FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD You have the right to examine your policy and return it for a refund of premiums paid or the account value, as specified by state law, if you are not satisfied for any reason. The policy is then void. SEE FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD, PAGE 40. YOUR POLICY PREMIUMS The policy is a flexible premium policy because the amount and frequency of the premium payments you make may vary within limits. You must make premium payments: o for us to issue your policy; o sufficient to keep your policy in force; and o as necessary to continue certain benefits. On your application, you choose how much and how often you want to pay premiums. Depending on your choices, it may not be enough to keep your policy or certain riders in force. The amount of premium you pay affects the length of time your policy stays in force. SEE PREMIUMS, PAGE 21. 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 premiums among one or more variable divisions, the guaranteed interest division, or both. You may not invest in more than eighteen investment divisions, including the guaranteed interest division, over the life of your policy. We apply net premium payments we have received from you to your policy after we: o receive your initial premium; o have the information we require; o approve your policy application; and o issue your policy. You need to allocate your premiums to your investment choices in percentages that are whole numbers and which total 100%. SEE ALLOCATION OF NET PREMIUMS, PAGE 22. - -------------------------------------------------------------------------------- Strategic Advantage 8 VARIABLE DIVISIONS Any amount you direct into the guaranteed interest division is credited with interest at a fixed rate set by us. If you invest in any of the following variable divisions, depending on market conditions, you may make or lose money. The variable divisions are described in the prospectuses for the underlying investment portfolios. Each variable division investment portfolio has its own investment objective. SEE OBJECTIVES OF THE INVESTMENT PORTFOLIOS, PAGE 15. AIM VARIABLE INSURANCE FUNDS AIM V.I. Capital Appreciation Fund AIM V.I. Government Securities Fund THE ALGER AMERICAN FUND Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Alger American MidCap Growth Portfolio Alger American Small Capitalization Portfolio FIDELITY VARIABLE INSURANCE PRODUCTS FUND & VARIABLE INSURANCE PRODUCTS FUND II VIP Growth Portfolio VIP Money Market Portfolio VIP Overseas Portfolio VIP II Asset Manager Portfolio VIP II Index 500 Portfolio INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund (formerly, INVESCO VIF-Industrial Income Portfolio) INVESCO VIF-High Yield Fund INVESCO VIF-Small Company Growth Fund INVESCO VIF-Total Return Fund INVESCO VIF-Utilities Fund NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Neuberger Berman AMT Growth Portfolio Neuberger Berman AMT Limited Maturity Bond Portfolio Neuberger Berman AMT Partners Portfolio VAN ECK WORLDWIDE INSURANCE TRUST Van Eck Worldwide Bond Fund Van Eck Worldwide Emerging Markets Fund Van Eck Worldwide Hard Assets Fund Van Eck Worldwide Real Estate Fund POLICY VALUES Your policy account value is the amount you have in the guaranteed interest division, plus the amount you have in each variable division. If you have outstanding policy loans, your account value includes the amount in the loan division. The loan division is part of our general account specifically designed to hold money used as collateral for loans and loan interest. The general account contains all of our assets other than those held in the variable account, or our other separate accounts. Your account value reflects: o net premiums; o deductions for charges; o the investment performance of the amounts you have in the variable divisions; o interest earned on the amount you have in the guaranteed interest division; o interest earned on the amount you have in the loan division; and o partial withdrawals. We subtract charges and partial withdrawals you take from your account value. You make a partial withdrawal when you withdraw part of your net cash surrender value. Partial withdrawals may reduce the amount of base death benefit. Your cash surrender value is equal to your account value plus any refund of sales charges due. Your net cash surrender value is equal to the cash surrender value minus outstanding policy loans and accrued loan interest, if any. Your net account value is equal to the account value minus outstanding policy loans and accrued loan interest, if any. YOUR ACCOUNT VALUE IN THE VARIABLE DIVISIONS Accumulation units are the way we measure value in the variable divisions. Accumulation unit value is the value of a unit of a variable division on the valuation date. Each variable division has a different accumulation unit value. SEE DETERMINING THE VALUE IN THE VARIABLE DIVISIONS, PAGE 32. On each valuation date, we determine the accumulation unit values. The accumulation unit value for each variable division reflects the investment performance of the matching investment portfolio during the valuation period. The valuation - -------------------------------------------------------------------------------- Strategic Advantage 9 period is the time beginning at 4:00 p.m. Eastern time on a valuation date and ending at 4:00 p.m. Eastern time on the next valuation date. Each accumulation unit value reflects asset-based charges under the policy, and the expenses of the investment portfolios. SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION, PAGE 32. TRANSFERS OF ACCOUNT VALUE You may make up to twelve free transfers among the variable divisions or to the guaranteed interest division per policy year. We charge $25 for each transfer over twelve you make in a policy year. This charge does not apply to any automatic rebalancing or dollar cost averaging transfers: they are free. There are restrictions on transfers to or from the guaranteed interest division. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 33. SPECIAL POLICY FEATURES ADDITIONAL BENEFITS You may attach certain additional benefits to your policy by rider. A rider changes benefits under your policy. In most cases, we deduct a monthly charge from your account value for these benefits. SEE ADDITIONAL BENEFITS, PAGE 29. DOLLAR COST AVERAGING You may choose dollar cost averaging on your application or complete a customer service form. Dollar cost averaging is a systematic plan of transferring account values to selected investment divisions. It is intended to protect your policy's value from short-term price fluctuations. However, dollar cost averaging does not assure a profit, nor does it protect against a loss in a declining market. Dollar cost averaging is free. SEE DOLLAR COST AVERAGING, PAGE 33. AUTOMATIC REBALANCING You may choose automatic rebalancing on your policy. Automatic rebalancing periodically reallocates your net account value among the investment divisions to maintain your specified distribution of account value among those divisions. Automatic rebalancing is free. SEE AUTOMATIC REBALANCING, PAGE 34. LOANS You may take loans against your policy's net account value. We charge an annual loan interest rate of 3.75%. We credit an annual interest rate of 3% on amounts held in the loan division as collateral for your loan. Beginning in your eleventh policy year, where permitted by law, we may include amounts in the loan division for calculation of your policy's persistency refund. SEE POLICY LOANS, PAGE 35. 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 the death benefit and will reduce your account value. SEE PARTIAL WITHDRAWALS, PAGE 36. PERSISTENCY REFUND After your tenth policy anniversary, where permitted by state law, we credit your account value with a persistency refund on every monthly processing date. SEE PERSISTENCY REFUND, PAGE 50. REFUND OF SALES CHARGES If you surrender your policy within the first two policy years and the policy has not lapsed, we will refund a portion of the sales charges we previously deducted from the premiums you have paid in the first policy year. SEE REFUND OF SALES CHARGES, PAGE 51. POLICY MODIFICATION, TERMINATION AND CONTINUATION FEATURES RIGHT TO EXCHANGE POLICY For 24 months after the policy date you can exchange your policy for a guaranteed policy, unless state law requires differently. The right to exchange your policy is free. SEE RIGHT TO EXCHANGE POLICY, PAGE 31. SURRENDER You may surrender your policy for its net cash surrender value at any time while the insured person is living. - -------------------------------------------------------------------------------- Strategic Advantage 10 We calculate your net cash surrender value on the valuation date we receive your request and policy at our customer service center. All insurance coverage ends on the date we receive your request. You must return your policy or a lost policy form to us. SEE SURRENDER, PAGE 39. LAPSE In general, insurance coverage continues as long as your policy's net account value is enough to pay the monthly deductions. However, your policy and its riders are guaranteed not to lapse during the first three years of your policy if the conditions of the special continuation period have been met. SEE LAPSE, PAGE 37, AND SPECIAL CONTINUATION PERIOD, PAGE 22. REINSTATEMENT You may reinstate your policy and its riders within five years of its lapse if you still own the policy and the insured person is still living. You will need to give proof that the insured person continues to be insurable. You will also need to pay required reinstatement premiums. If the guaranteed minimum death benefit lapses and you do not correct it, this feature terminates. Once it terminates, you cannot reinstate this feature. We will reinstate any policy loans existing when coverage ended, with accrued loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 39. POLICY MATURITY If the insured person is still living on the maturity date or the policy anniversary nearest the date when the insured person reaches age 100, you must surrender your policy and we will pay the net account value. Your policy then ends. SEE POLICY MATURITY, PAGE 31. DEATH BENEFITS At the insured person's death, we pay death proceeds to the beneficiary(ies) if your policy is still in force. The beneficiary(ies) is(are) the person or people you name to receive the death proceeds. The death proceeds equal the base death benefit plus amounts payable by rider, minus the amount of any outstanding policy loan and accrued loan interest. Based on the death benefit option you have chosen, the base death benefit varies. The base death benefit does not include any adjustable term insurance rider you may have on your policy. The target death benefit includes any adjustable term insurance rider you may have on your policy plus your base death benefit. The total death benefit is at least equal to or greater than your target death benefit. The death benefit at issue may vary from the stated death benefit plus adjustable term insurance coverage for some 1035 exchanges. The minimum stated death benefit to issue a policy is $50,000. However, we may lower this minimum for group or sponsored arrangements, or corporate purchasers. SEE DEATH BENEFITS, PAGE 23. You may change your base death benefit amount while your policy is in force, subject to certain restrictions. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 27. CHARGES AND DEDUCTIONS DEDUCTIONS FROM PREMIUM We make the following deductions from each premium payment you make: 1. Tax charges -- We currently deduct a charge of 2.5% of premiums for state and local taxes. We currently deduct a charge of 1.5% of each premium to cover our estimated cost of the federal income tax treatment of deferred acquisition costs. SEE TAX CHARGES, PAGE 47. 2. Sales charge-- We deduct a percentage of each premium to cover a portion of our expenses in selling your policy. This charge is based on the amount of premium you have paid and the number of years since the policy date or the date of an increase in coverage or when a new segment is added. For each of the first five policy years, this charge equals 8% of the premiums you have paid up to the target premium and 3% of the premiums you have paid in excess of the target premium. Starting in the sixth policy year, the sales charge is equal to 3% of all premiums you have paid. The initial, or first segment, is the stated death benefit on the effective date of the policy. An increase in - -------------------------------------------------------------------------------- Strategic Advantage 11 the stated death benefit (other than one caused by a death benefit option change) will cause a new segment to be created. SEE DEDUCTIONS FROM PREMIUMS, PAGE 47. DEDUCTIONS FROM THE VARIABLE DIVISIONS We assess a mortality and expense risk charge of 0.75% per year or 0.002055% per day against the variable divisions. This charge compensates us for mortality and expense risks under the policies. SEE DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT, PAGE 48. MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE We deduct the following charges from your account value at the beginning of each policy month: 1. Initial policy charge -- $10 per month for the first five policy years. 2. Monthly administrative charge -- $5 per month plus $0.0125 per $1,000 of the stated death benefit, or of the target death benefit, if greater. Currently, we limit the per $1,000 charge to $15 per month. 3. Cost of insurance charge -- Based on the net amount at risk on the life of the insured person. The amount of this charge differs for: o the segments of the base death benefit; and o the adjustable term insurance rider. 4. Charges for additional benefits -- The cost of additional benefits you choose. The adjustable term insurance rider charge is included in the cost of insurance charge. 5. Guaranteed minimum death benefit charge -- currently $0.005 per $1,000 of the stated death benefit during the guarantee period. This charge is guaranteed never to be greater than $0.01 per $1,000 of the stated death benefit. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 48. POLICY TRANSACTION FEES We deduct policy transaction fees from your account value at the time of the transaction. The following are the current transaction fees. SEE POLICY TRANSACTION FEES, PAGE 50. 1. Partial withdrawal fee -- Lesser of $25 or 2% of the amount requested. 2. Transfer fee -- We allow twelve free transfers among investment divisions per policy year. For each transfer beyond that, a $25 fee applies. 3. Illustrations -- You may request one free illustration per policy year. For each illustration beyond that, a $25 fee may apply. 4. Premium Allocation Change -- You may make five free premium allocation changes per policy year. For each premium allocation change beyond that, a $25 fee applies. 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 54. Assuming the policy qualifies as a life insurance contract, under current federal income tax law, your account value earnings are generally not subject to income tax as long as they remain within your policy. However depending on circumstances, the following events may cause taxable consequences for you: o partial withdrawals; o surrender; or o lapse. In addition to the events listed above, if your policy is a modified endowment contract, loans 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 56. You should consult a qualified legal or tax adviser before you purchase your policy. - -------------------------------------------------------------------------------- Strategic Advantage 12 INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION SECURITY LIFE OF DENVER INSURANCE COMPANY Security Life of Denver Insurance Company ("Security Life") is a stock life insurance company organized under the laws of the State of Colorado in 1929. Our headquarters are located at 1290 Broadway, Denver, Colorado 80203-5699. We are admitted to do business in the District of Columbia and all states except New York. At the close of 1998, the company and its consolidated subsidiaries had over $174.3 billion of life insurance in force. As of December 31, 1998 our total assets were over $10.0 billion, and our shareholder's equity was over $926 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 $461.8 billion on a Dutch (modified U.S.) generally accepted accounting principles basis, as of December 31, 1998. 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. YEAR 2000 PREPAREDNESS Security Life of Denver Insurance Company is aware of the computer problems that may exist surrounding the Year 2000. Our senior management projects information processing and delivery systems to have a Year 2000 readiness interim target completion date of June 29, 1999 with a final completion date of December 31, 1999. The Year 2000 problem originates from the predominant use in computer programs of a two-digit field to capture the year, for example 99 instead of 1999. When we reach the year 2000 many of these programs will assume the year 00 is actually 1900 rather than 2000. This incorrect assumption can lead to erroneous results, false calculations or system failures. This is not only a computer problem, but also applies to other machinery or equipment containing computer chips which calculate dates for correct performance, the so-called "embedded systems". That is why errors, ranging from telephone shutdown to other services may occur as well. This potential risk is often referred to as the "Millennium Bug" or the "Year 2000 problem". The problem is made more complex by the many lines of code that can be affected in a single system, the number of systems required to support business activities and the interdependence of both the internal and external systems involved in exchanging data. This is particularly true for the financial services industry, where information is at the heart of the business and which depends heavily on the uninterrupted transfer of data world-wide, bank-to- bank and with clearing houses, exchanges and agencies. If the potential problems are not addressed, this could in some cases result in business system failure. From a financial perspective, this could, for instance, lead to incorrect interest calculations or over/under payments. A project plan has been implemented and our project team has analyzed and remediated our in-house source code. We completed the remediation in December, 1998. The project plan covers Security Life, ING America Equities, Inc., Midwestern United Life Insurance Company, and First ING Life Insurance Company of New York. We will follow our normal project management methodology including communication with senior management on a monthly and as-needed basis. Our targeted completion date is scheduled for June 29, 1999, but there is no assurance that Security Life will be - -------------------------------------------------------------------------------- Strategic Advantage 13 successful, or that interaction with other service providers will not impact our services at that time. Security Life has completed an inventory and assessment of all vendor products. We are in the process of verifying that each vendor product is Year 2000 ready. Funds have been allocated for the 1999 efforts, and we believe we have sufficient resources to ensure Year 2000 processing capabilities. SECURITY LIFE SEPARATE ACCOUNT L1 VARIABLE ACCOUNT STRUCTURE We established Security Life Separate Account L1 (the "variable 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 variable account or Security Life. The variable account is a separate investment account. It is used to support our variable life insurance policies and for other purposes allowed by law and regulation. We keep the variable account assets separate from our general account and other separate accounts. We may offer other variable life insurance contracts with different benefits and charges that invest in the variable account. We do not discuss these contracts in this prospectus. The variable account may invest in other securities not available for the policy described in this prospectus. The general account contains all of our assets other than those held in the variable account (variable divisions) or other separate accounts. The company owns all the assets in the variable account. We credit gains to or charge losses against the variable account without regard to performance of other investment accounts. ORDER OF VARIABLE ACCOUNT LIABILITIES State law provides that we may not charge general account liabilities against variable account assets equal to its reserves and other liabilities. This means that in the event we were ever to become insolvent, the variable account assets will be used first to pay variable account policy claims. Only if assets remain in the variable account after these claims have been satisfied can these assets be used to pay other policy owners and our creditors. The variable account may have liabilities from assets credited to other variable life policies offered by the variable account. If the assets of the variable account are greater than required reserves and policy liabilities, we may transfer the excess to our general account. VARIABLE DIVISIONS The variable account has several divisions. Each division invests in shares of a matching investment portfolio. This means that the investment performance of a policy depends on the performance of the investment portfolios you choose. Each investment portfolio has its own investment objective. These investment portfolios are not available directly to individual investors. They are only available as the underlying investments for variable annuity and variable life insurance contracts and certain pension accounts. INVESTMENT PORTFOLIOS Each of the investment portfolios is a separate series of an open-end management investment company. The investment company receives investment advice from a registered investment adviser who is not associated with us. The investment portfolios sell shares to separate accounts of insurance companies. These insurance companies may or may not be affiliated with us. This is known as "shared funding." Investment portfolios may sell shares as the underlying investment for both variable annuity and variable life insurance contracts. This process is known as "mixed funding." The investment portfolios may sell shares to certain qualified pension and retirement plans that qualify under Section 401 of the Internal Revenue Code ("IRC"). As a result, a material conflict of interest may arise between insurance companies, owners of different types of contracts and retirement plans, or their participants. If there is a material conflict, we will consider what should be done, including removing the investment portfolio from the variable 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. - -------------------------------------------------------------------------------- Strategic Advantage 14 OBJECTIVES OF THE INVESTMENT PORTFOLIOS Each investment portfolio has a different investment objective that it tries to achieve by following its own investment strategy. The objectives and policies of each investment portfolio affect its return and its risks. With this prospectus, you must receive the current prospectus for each investment portfolio. We summarize the investment objectives for each investment portfolio here. You should read each investment portfolio prospectus. Certain investment portfolios offered under this policy have investment objectives and policies similar to other funds managed by the portfolio's investment adviser. The investment results of a portfolio may be higher or lower than those of other funds managed by the same adviser. There is no assurance, and no representation is made, that the investment results of any investment portfolio will be comparable to those of another fund managed by the same investment adviser. Some investment portfolio advisers (or their affiliates) may pay us compensation for servicing, administration or other expenses. Currently, these advisers include A I M Advisors, Inc.; Fidelity Investments(R); Fred Alger Management, Inc.; INVESCO Funds Group, Inc.; Neuberger Berman Management Inc.; and Van Eck Global. The amount of compensation is usually based on the aggregate assets of the investment portfolio from contracts that we issue or administer. Some advisers may pay us more than others. AIM VARIABLE INSURANCE FUNDS, INC. AIM Variable Insurance Funds, Inc. is a registered, open-end, series, management investment company. A I M Advisors, Inc., ("AIM") serves as each fund's investment adviser. AIM has acted as an investment adviser since its organization in 1976. Today, AIM, together with its subsidiaries, advises or manages over 110 investment portfolios encompassing a broad range of investment objectives. AIM V.I. Capital Appreciation Fund -- seeks growth of capital through investment in common stocks, with emphasis on medium- and small-sized growth companies. AIM V.I. Government Securities Fund -- seeks to achieve high current income consistent with reasonable concern for safety of principal by investing in debt securities issued, guaranteed or otherwise backed by the United States Government. THE ALGER AMERICAN FUND The Alger American Fund is a registered investment company organized on April 6, 1988. It is a multi- series Massachusetts business trust. The Fund's investment manager is Fred Alger Management, Inc., which has provided investment advisory services since 1964. Alger American Growth Portfolio -- seeks long-term capital appreciation. The portfolio focuses on growing companies that generally have broad product lines, markets, financial resources and depth of management. Under normal circumstances, the portfolio invests primarily in equity securities of large companies. The portfolio considers a large company to have a market capitalization of $1 billion or greater. Alger American Leveraged AllCap Portfolio -- seeks long-term capital appreciation. Under normal circumstances, the portfolio invests in the equity securities of companies of any size which demonstrate promising growth potential. The portfolio can leverage, that is, borrow money, to buy additional securities. By borrowing money, the portfolio has the potential to increase its returns if the increase in the value of the securities purchased exceeds the cost of borrowing, including interest paid for the money borrowed. Alger American MidCap Growth Portfolio -- seeks long-term capital appreciation. The portfolio focuses on midsize companies with promising growth potential. Under normal circumstances, the portfolio invests primarily in equity securities of companies having a market capitalization within the range of companies in the S&P(R) MidCap 400 Index. Alger American Small Capitalization Portfolio -- seeks long-term capital appreciation. - -------------------------------------------------------------------------------- Strategic Advantage 15 The portfolio focuses on small, fast-growing companies that offer innovative products, services or technologies to a rapidly expanding marketplace. Under normal circumstances, the portfolio invests primarily in equity securities of small capitalization companies. A small capitalization company is one that has a market capitalization within the range of the Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index. FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II Fidelity Variable Insurance Products Fund ("VIP" established November 13, 1981) and Variable Insurance Products Fund II ("VIP II" established March 21, 1988) are open-end, diversified, management investment companies. These funds are organized as Massachusetts business trusts. Fidelity Management & Research Company ("FMR") manages and provides investment and other services to the funds named here. However, Bankers Trust Company also provides sub-advisory services for VIP II Index 500 Portfolio. FMR is the management arm of Fidelity Investments(R), which was established in 1946, and is one of America's largest mutual fund managers. VIP Growth Portfolio -- seeks capital appreciation. FMR's principal investment strategies include: o Investing primarily in common stocks. o Investing in companies that it believes have above-average growth potential (stocks of these companies are often called "growth" stocks). o Investing in domestic and foreign issuers. o Using fundamental analysis of each issuer's financial condition and industry position and market and economic conditions to select investments. VIP Money Market Portfolio -- seeks as high a level of current income as is consistent with the preservation of capital and liquidity. FMR's principal investment strategies include: o Investing in U.S. dollar-denominated money market securities, including U.S. Government securities and repurchase agreements, and entering into reverse repurchase agreements. o Investing more than 25% of total assets in the financial services industry. o Investing in compliance with industry-standard requirements for money market funds for the quality, maturity and diversification of investments. VIP Overseas Portfolio -- seeks long term growth of capital. FMR's principal investment strategies include: o Investing at least 65% of total assets in foreign securities. o Investing primarily in common stocks. o Allocating investments across countries and regions considering the size of the market in each country and region relative to the size of the international market as a whole. o Using fundamental analysis of each issuer's financial condition and industry position and market and economic conditions to select investments. VIP II Asset Manager Portfolio -- seeks high total return with reduced risk over the long term by allocating its assets among stocks, bonds, and short-term instruments. FMR's principal investment strategies include: o Allocating the fund's assets among stocks, bonds, and short-term and money market instruments. o Maintaining a neutral mix over time of 50% of assets in stocks, 40% of assets in bonds, and 10% of assets in short-term and money market instruments. o Adjusting allocation among asset classes gradually within the following ranges: stock class (30 - 70%), bond class (20 - 60%), and short-term/money market class (0 - 50%). o Investing in domestic and foreign issuers. o Analyzing an issuer using fundamental and/or quantitative factors and evaluating each security's current price relative to estimated long-term value in selecting instruments. VIP II Index 500 Portfolio -- seeks investment results that correspond to the total return of common stocks publicly traded in the United States as represented by the S&P(R) 500. - -------------------------------------------------------------------------------- Strategic Advantage 16 Bankers Trust Company (BT)'s principal investment strategies include: o Investing at least 80% of assets in common stocks included in the S&P(R) 500. o Lending securities to earn income for the fund. INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO Variable Investment Funds, Inc. is a registered, open-end management investment company. It was organized as a Maryland corporation on August 19, 1993. It is currently made up of ten diversified investment portfolios. Five of these investment portfolios are described here. INVESCO Funds Group, Inc. is the Funds' investment adviser. As the adviser, it is mostly responsible for providing the portfolios with investment management, various administrative services, and supervising the Fund's daily business affairs. INVESCO Capital Management, Inc. sub-advises the Total Return Fund. "VIF" refers to INVESCO Variable Investment Fund. INVESCO Distributors, Inc. ("IDI"), provides distribution services for the INVESCO Variable Investment Funds, Inc. INVESCO VIF-Equity Income Fund (Formerly, INVESCO VIF-Industrial Income Portfolio) -- seeks high current income, with growth of capital as a secondary objective. The fund normally invests at least 65% of its assets in dividend-paying common and preferred stocks, although in recent years that percentage has been somewhat higher. Stocks held by the fund generally are expected to produce a relatively high level of income and a consistent, stable return. Although it focuses on the stocks of larger companies with a strong record of paying dividends, the fund also may invest in companies that have not paid regular dividends. The fund's equity investments are limited to stocks that can be traded easily in the United States; it may, however, invest in foreign securities in the form of American Depository Receipts (ADRs). The rest of the fund's assets are invested in debt securities, generally corporate bonds that are rated investment grade or better. The fund also may invest up to 15% of its assets in lower-grade debt securities commonly known as "junk bonds", which generally offer higher interest rates, but are riskier investments than investment grade securities. INVESCO VIF-High Yield Fund -- seeks to provide a high level of current income. It invests substantially all of its assets in lower- rated debt securities, commonly called "junk bonds," and preferred stock, including securities issued by foreign companies. Although these securities carry with them higher risks, they generally provide higher yields-- and therefore higher income--than higher-rated debt securities. INVESCO VIF-Small Company Growth Fund -- seeks investment growth over the long term. The fund normally invests at least 80% of its assets in equity securities of companies with market capitalizations of $1 billion or less. INVESCO uses a bottom-up investment approach to the fund's investment portfolio, focusing on companies that are in the developing stages of their life cycles. Using this approach, INVESCO tries to identify companies that it believes are undervalued in the marketplace, have earnings which may be expected to grow faster than the U.S. economy in general, and/or offer the potential for accelerated earnings growth due to rapid growth of sales, new products, management changes, or structural changes in the economy. The prices of securities issued by these small companies tend to rise and fall more rapidly than those of more established companies. The remainder of the fund's assets can be invested in a wide range of securities that may or may not be issued by small companies. In addition to equity securities, the fund can invest in foreign securities and debt securities, including so-called "junk bonds." INVESCO VIF-Total Return Fund -- seeks to provide high total return through both growth and current income. It normally invests at least 30% of its assets in common stocks of companies with a strong history of paying regular dividends and 30% of its assets in debt securities. Debt securities include obligations of the United States - -------------------------------------------------------------------------------- Strategic Advantage 17 Government and government agencies. The remaining 40% of the fund is allocated among these and other investments at INVESCO's discretion, based upon current business, economic and market conditions. INVESCO VIF-Utilities Fund -- seeks capital appreciation and income. The fund normally invests at least 80% of its assets in companies doing business in the utilities economic sector. The remainder of the fund's assets are not required to be invested in the utilities economic sector. The fund is aggressively managed. Although the fund can invest in debt securities, it primarily invests in equity securities that INVESCO believes will rise in price faster than other investments, as well as options and other investments whose value is based upon the values of equity securities. NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Neuberger Berman Advisers Management Trust (the "Trust,") is a registered, open-end management investment company. It was organized as a Delaware business trust on May 23, 1994. The Trust is made up of separate portfolios ("Portfolios"), each of which invests all of its net investable assets in a matching series ("Series") of Advisers Managers Trust ("Managers Trust"). Managers Trust is a diversified, open-end management investment company organized as a New York common law trust on May 24, 1994. This master feeder structure is different from that of many other investment companies which directly purchase and manage their own securities portfolios. Neuberger Berman Management Incorporated acts as investment manager to Managers Trust. Neuberger Berman, LLC is the sub-adviser. The investments for the Portfolio are managed by the same portfolio manager(s) who manage one or more other mutual funds that have similar names, investment objectives and investment styles as the Portfolio. You should be aware that the Portfolio is likely to differ from the other mutual funds in size, cash flow pattern and tax matters. Accordingly, the holdings and performance of the Portfolio can be expected to vary from those of the other mutual funds. Shares of the separate Portfolios of Neuberger Berman Advisers Management Trust are sold only through the currently effective prospectus and are not available to the general public. Shares of the AMT Portfolios may be purchased only by life insurance companies to be used with their separate accounts which fund variable annuity and variable life insurance policies. Neuberger Berman Growth Portfolio -- seeks growth of capital. It invests mainly in common mid-capitalization securities. The portfolio managers currently focus on the securities of mid-capitalization companies. The managers use a growth-oriented investment approach. A growth-oriented approach seeks stocks of companies that are fast-growing in emerging or rapidly evolving industries. Neuberger Berman Limited Maturity Bond Portfolio -- seeks the highest available current income consistent with liquidity and low risk to principal; total return is secondary goal. The Limited Maturity Bond Portfolio invests mainly in investment-grade bonds and other debt securities from U.S. Government and corporate issuers. These may include mortgage-and asset- backed securities. The portfolio may invest up to 10% of its net assets, measured at the time of investment, in below investment grade fixed income securities, or comparable unrated securities. The Limited Maturity Bond Portfolio maintains an average portfolio duration of four years or less. However, the series may invest in securities of any duration. Neuberger Berman Partners Portfolio -- seeks growth of capital. The Portfolio invests mainly in common stocks of mid-to large-capitalization companies. Its investment program seeks securities believed to be undervalued based on strong fundamentals, including low price to earnings ratio, consistent cash flow, and the company's track record through all points of the market cycle. - -------------------------------------------------------------------------------- Strategic Advantage 18 VAN ECK WORLDWIDE INSURANCE TRUST Van Eck Worldwide Insurance Trust is an open-end management investment company organized as a business trust under the laws of the Commonwealth of Massachusetts on January 7, 1987. On April 12, 1995, Van Eck Investment Trust changed its name to Van Eck Worldwide Insurance Trust. Van Eck Associates Corporation serves as investment adviser and manager to the funds. Van Eck Worldwide Bond Fund -- seeks high total return--income plus capital appreciation--by investing globally, primarily in a variety of debt securities. Van Eck Worldwide Emerging Markets Fund -- seeks long term capital appreciation by investing in equity securities in emerging markets around the world. Van Eck Worldwide Hard Assets Fund -- seeks long term capital appreciation by investing primarily in "hard asset securities." Income is a secondary consideration. Hard assets include: o precious metals; o natural resources; o real estate; and o commodities. Van Eck Worldwide Real Estate Fund -- seeks high total return by investing in equity securities of companies that own significant real estate or principally do business in real estate. THE GUARANTEED INTEREST DIVISION You may allocate all or a part of the net premiums and transfers of your net account value into the guaranteed interest division. The guaranteed interest division is part of our general account which guarantees principal. It pays interest at a fixed rate that we declare. 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 included 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 in this prospectus. The amount you have in the guaranteed interest division is the sum of net premiums you allocate to that division, plus transfers you made 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. These interest rates are never less than the minimum guaranteed interest rate of 3% and will be in effect for periods of at least twelve months. Interest compounds daily at an effective annual rate that equals the declared rate. We credit interest to the guaranteed interest division on a daily basis. We pay interest regardless of the actual investment performance of our account. We bear all of the investment risk for the guaranteed interest division. MAXIMUM NUMBER OF INVESTMENT DIVISIONS You may invest in a total of eighteen divisions over the lifetime of your policy. Investment divisions include the variable and the guaranteed interest divisions, but not the loan division. The loan division does not count toward the eighteen division maximum. As an example, if you have had funds in seventeen variable divisions and the guaranteed interest division (or eighteen variable divisions), these are the only divisions to which you may later add or transfer funds. You may want to use fewer divisions in the early years of your policy, so that you can invest in other divisions in the future. Further, if you invest in eighteen variable divisions, you will not be able to invest in the guaranteed interest division. - -------------------------------------------------------------------------------- Strategic Advantage 19 DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE POLICY This prospectus describes our standard Strategic Advantage variable universal life insurance policy. There may be differences in the policy because of state requirements where we issue your policy. We will describe any such differences in your policy. The illustrations beginning on page 61 are to show how the Strategic Advantage policies work. APPLYING FOR A POLICY You purchase a Strategic Advantage policy by submitting an application to us. On the policy date, the insured person must be no older than age 85. The insured person is the person on whose life we issue a policy and upon whose death we pay death proceeds. Age is the insured person's age on the birthday nearest the policy date plus the number of completed policy years since the policy date. 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. POLICY ISSUANCE Before we issue a policy or apply your net premium to the investment divisions, we require satisfactory evidence of insurability of the insured person and payment of your initial premium. This evidence may include a medical examination and completion of all underwriting and issue requirements. The investment date is the first date we apply the net premium payments we have received from you to your policy. Your initial premium is the premium we must receive before coverage can begin. The initial premium is the first premium we receive and apply to your policy. It must be at least equal to the sum of the scheduled premiums which are due from your policy date through your investment date. We generally require a minimum stated death benefit of $50,000. We may reduce the minimum stated death benefit for group or sponsored arrangements or corporate purchasers if the average stated death benefit at policy issuance for the group or sponsored arrangements is at least $50,000. Our underwriting and reinsurance procedures in effect at the time you apply limit the maximum stated death benefit. The policy date as shown on your policy schedule determines: o monthly processing dates; o policy months; o policy years; and 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. DEFINITION OF LIFE INSURANCE CHOICE When you apply for your policy, you choose one of two tests for the federal income tax definition of life insurance. You cannot change your choice later. The tests are the cash value accumulation test and the guideline premium/cash value corridor test. If you choose the guideline premium /cash value corridor test, we may limit premium payments relative to your policy death benefit. SEE TAX STATUS OF THE POLICY, PAGE 54. 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 any in force coverage with us. This temporary insurance is in force as long as you meet all requirements. Coverage begins when: 1. you have completed and signed our binding limited life insurance coverage form; 2. we receive and accept a premium payment of at least your scheduled premium (selected on your application); and 3. part I of the application is completed. - -------------------------------------------------------------------------------- Strategic Advantage 20 Binding limited life insurance coverage ends on the earliest of: o the date we return your premiums; o five days after we mail notice of termination to the address on your application; o the date your policy coverage starts; o the date we refuse to issue you a policy based on your application; or o 90 days after you sign our binding limited life insurance coverage form. There is no death benefit under the temporary insurance agreement if: o there is a material misrepresentation in your answers on the binding limited life insurance coverage form; o there is a material misrepresentation in statements on your application; o the person 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. PREMIUMS You may choose the amount and frequency of premium payments, within limits. SCHEDULED PREMIUMS Your premiums are flexible. You may select your scheduled premium (within our limits) when you apply for your policy. The scheduled premium, shown in your policy and schedule, is the amount you choose to pay over a stated time period. THIS AMOUNT MAY OR MAY NOT BE ENOUGH TO KEEP YOUR POLICY IN FORCE. You may receive premium reminder notices for the scheduled premium on a monthly, quarterly, semiannual, or annual basis. You are not required to pay the scheduled premium. Alternatively, you may choose to pay your premium by electronic funds transfer each month. This option is not available for your initial premium. The financial institution that makes your electronic funds transfer may charge for this service. You can change the amount of your scheduled premium within our minimum and maximum limits at any time. If you fail to pay your scheduled premium or if you change the amount of your scheduled premium, your policy performance will be affected. During the special continuation period, your scheduled premium should not be less than the minimum annual premium shown in your policy. If you want the guaranteed minimum death benefit, your scheduled premium should not be less than the guarantee period annual premium shown in your policy. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27. UNSCHEDULED PREMIUM PAYMENTS Generally speaking, you may make unscheduled premium payments at any time, however: 1. We may limit the amount of your unscheduled premium payments that would result in an increase in the base death benefit amount required by the federal income tax law definition of life insurance. We may require satisfactory evidence that the insured person is insurable at the time that you make the unscheduled premium payment if the death benefit is increased due to your unscheduled premium payments. 2. We may require proof that the insured person is insurable if your unscheduled premium payment will cause the net amount at risk to increase; and 3. We will return premium payments which are greater than the "seven-pay" limit for your policy if your payment would cause your policy to become a modified endowment contract, unless you send us notice acknowledging the new modified endowment contract status for your policy. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 56 AND CHANGES TO COMPLY WITH THE LAW, PAGE 57. If you have an outstanding policy loan and you make an unscheduled payment which is received by us before the maturity date, we will consider this payment a loan repayment, unless you tell us otherwise. If your payment is a loan repayment, we do not take out the tax and sales charges which apply to premium payments. MINIMUM ANNUAL PREMIUM You must pay a minimum annual premium during your first three policy years to qualify for the special continuation period. - -------------------------------------------------------------------------------- Strategic Advantage 21 Your minimum annual premium is based on: o the insured person's age, gender, premium class and any rating; o the stated death benefit of your policy; and o any additional benefits you select. Your minimum annual premium is shown in the schedule pages of your policy. We may reduce the minimum annual premium for group, or sponsored arrangements, or for corporate purchasers. SPECIAL CONTINUATION PERIOD The special continuation period is during the first three policy years. Under the special continuation period, we guarantee that your policy will not lapse, regardless of its net account value, if on a monthly processing date: o the sum of all premiums you have paid, minus partial withdrawals that you have taken, minus policy loans that you have taken, including accrued loan interest is greater than or equal to; o the minimum monthly premiums for each policy month, starting with the first month of your policy through the current policy monthly processing date. On the monthly processing date, we deduct the monthly deductions from your account value. The minimum monthly premium is one-twelfth of the minimum annual premium. During the first three years of your policy, if there is not enough net account value to pay the monthly deductions and you have satisfied our requirements, we do not permanently waive certain charges. Instead, we continue to deduct these charges. This deduction may result in your policy having negative net account value, unless you pay enough premium to prevent this. The negative balance is your unpaid monthly deductions owing. At the end of the special continuation period to avoid lapse of your policy, you must pay enough premium to bring the net account value to zero plus the amount that covers your estimated monthly deductions for the following two months. SEE LAPSE, PAGE 37. ALLOCATION OF NET PREMIUMS The net premium is the balance remaining after we take premium-based charges from your premium payment. We add the net premium to your account value according to your instructions. We apply net premiums we have received from you to your policy after: a) we receive the amount of premium required for your insurance coverage to begin; b) all issue requirements have been met and received by our customer service center; c) we approve your policy application; and d) your policy is issued. All amounts you designated for the guaranteed interest division will be allocated to that division. If your state requires return of your premium during the free look period we invest amounts you have designated for the variable divisions into the Fidelity VIP Money Market Division until 15 days after we issue your policy (deemed delivery time, plus a typical free look period which varies by state). If your state provides for return of account value during the free look period and for premium payments after the end of the free look period, we invest amounts you designated for the variable divisions directly into your selected investment portfolios. SEE FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD, PAGE 40. We allocate premium payments received after we apply your initial net premium payment to your policy on the valuation date of receipt. We always use your most recent premium allocation instructions. Your instructions must specify percentages that are whole numbers totaling 100%. You may invest in a maximum of eighteen divisions over the lifetime of your policy. This eighteen investment division maximum includes the variable divisions and the guaranteed interest division, but not the loan division. SEE MAXIMUM NUMBER OF INVESTMENT DIVISIONS, PAGE 19. You may make five free premium allocation changes per year. After the five free premium allocation changes, we charge you $25 for each additional allocation change per policy year. The $25 fee is withdrawn from each investment division pro rata to the amount in each division. PREMIUM PAYMENTS AFFECT YOUR COVERAGE Unless you have the guaranteed minimum death benefit feature or are in the special continuation period, your policy continues in effect only until your net account value no longer covers the monthly deductions for your benefits. If this happens, your - -------------------------------------------------------------------------------- Strategic Advantage 22 policy will enter the 61-day grace period and you must make a premium payment to avoid lapse. SEE LAPSE, PAGE 37, AND GRACE PERIOD, PAGE 38. If you pay your minimum annual premium each year during the first three policy years, we guarantee your policy and riders will not lapse during the special continuation period, regardless of your net account value. SEE SPECIAL CONTINUATION PERIOD, PAGE 22. Under the guaranteed minimum death benefit, the base death benefit portion of your policy remains effective until the end of the guarantee period. The guaranteed minimum death benefit feature does not apply to riders which can lapse and terminate during the guarantee period. You must meet all conditions of the guarantee. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27. MODIFIED ENDOWMENT CONTRACTS There are special federal income tax rules for distributions from certain life insurance policies known as "modified endowment contracts." These rules apply to distributions such as policy loans, surrenders, and partial withdrawals. Whether or not these rules apply depends upon whether or not the premiums you paid are greater than the "seven-pay" limit. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 56. If we find that your scheduled premium causes your policy to be a modified endowment contract on your policy date, we will require you to acknowledge that you know the policy is a modified endowment contract. We will issue your policy based on the scheduled premium you selected. If you do not want your policy to be issued as a modified endowment contract, you may reduce your scheduled premium to a level which does not cause your policy to be a modified endowment contract. We will then issue your policy based on the revised scheduled premium. DEATH BENEFITS You can decide the amount of insurance you need, now and in the future. You can combine the long-term advantages of permanent life insurance base coverage with the flexibility and short-term advantages of term life insurance. Both permanent and term life insurance are available under your one Strategic Advantage policy. When we issue your policy, we base the initial insurance coverage on the instructions in your application. The initial death benefit is the stated death benefit amount. You can add an adjustable term insurance rider for additional insurance coverage. Death benefits are valued as of the date of death of the insured person. The stated death benefit is the permanent element of your policy. The adjustable term insurance rider is the term insurance element of your policy. The adjustable term insurance rider acts as a bridge. It provides term insurance coverage which automatically adjusts to fill the gap between your total death benefit and your base death benefit depending on which death benefit option you choose. Generally, your stated death benefit may be no less than $50,000 to issue your policy. We do not guarantee coverage provided by the adjustable term insurance rider under the guaranteed minimum death benefit. 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. SEE ADJUSTABLE TERM INSURANCE RIDER, PAGE 29. - -------------------------------------------------------------------------------- Strategic Advantage 23 DEATH BENEFIT SUMMARY THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES, NO REQUESTED OR SCHEDULED INCREASES OR DECREASES IN STATED OR TARGET DEATH BENEFIT AND THAT PARTIAL WITHDRAWALS ARE LESS THAN THE PREMIUM PAID.
OPTION 1 OPTION 2 OPTION 3 ================== ================================ ================================ ================================ STATED The amount of policy death The amount of policy death The amount of policy death DEATH benefit at issue, not including benefit at issue, not including benefit at issue, not including BENEFIT rider coverage. This amount rider coverage. This amount rider coverage. This amount stays level throughout the life of stays level throughout the life of stays level throughout the life of the contract. the contract. the contract. BASE DEATH 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 or benefit plus the sum of all multiplied by the death benefit the account value multiplied by premiums you have paid minus corridor factor. the death benefit corridor factor. partial withdrawals you have taken or the account value multiplied by the death benefit corridor factor. TARGET Stated death benefit plus Stated death benefit plus Stated death benefit plus DEATH adjustable term insurance rider adjustable term insurance rider adjustable term insurance rider BENEFIT benefit. This amount remains benefit. This amount remains benefit. This amount remains level throughout the life of the level throughout the life of the level throughout the life of the policy. policy. policy. TOTAL DEATH This is the total death proceeds. This is the total death proceeds. This is the total death proceeds. BENEFIT It is the greater of the target It is the greater of the target It is the greater of the target death benefit or the base death death benefit plus the account death benefit plus the sum of all benefit. value or the base death benefit premiums you have paid minus partial withdrawals you have taken or the base death benefit. ADJUSTABLE The adjustable term insurance The adjustable term insurance The adjustable term insurance TERM rider benefit is the total death rider benefit is the total death rider benefit is the total death INSURANCE benefit minus base death benefit, benefit minus the base death benefit minus the base death RIDER but it will not be less than zero benefit, but it will not be less benefit, but it will not be less BENEFIT If the account value multiplied than zero. If the account value than zero. If the account value by the death benefit corridor multiplied by the death benefit multiplied by the death benefit factor is greater than the stated corridor factor is greater than the corridor factor is greater than the death benefit, the adjustable stated death benefit plus the stated death benefit plus the sum term insurance benefit will be account value, the adjustable of all premiums you have paid decreased. It will be decreased term insurance rider benefit will minus partial withdrawals you so that the sum of the base death be decreased. It will be have taken, the adjustable term benefit and the adjustable term decreased so that the sum of the insurance rider benefit will be insurance rider benefit is not base death benefit and the decreased. It will be decreased greater than the target death adjustable term insurance rider so that the sum of the base death benefit. If the base death benefit benefit is not greater than the benefit and the adjustable term becomes greater than the target target death benefit plus the insurance rider benefit is not death benefit, then the adjustable account value. If the base death greater than the target death term insurance rider benefit is benefit becomes greater than the benefit plus the sum of all zero. target death benefit plus the premiums you have paid minus account value, then the partial withdrawals you have adjustable term insurance rider taken. If the base death benefit benefit is zero. becomes greater than the target death benefit plus the sum of all premiums you have paid minus partial withdrawals you have taken, then the adjustable term insurance rider benefit is zero.
- -------------------------------------------------------------------------------- Strategic Advantage 24 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 to satisfy the federal income tax law definition of life insurance; o partial withdrawals; o increases or decreases in the stated death benefit; or o a transaction which causes the base death benefit to change. As long as your policy is in force, we will pay the death proceeds to your beneficiary when 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 any rider benefits; minus o your outstanding policy loan with accrued loan interest; minus o outstanding policy charges due before the insured person's date of death. There could be outstanding policy charges if the insured dies while your policy is in the grace period, or three-year special continuation period. DEATH BENEFIT OPTIONS You have a choice of three death benefit options if your policy was delivered on or before December 31, 1997: option 1, option 2 or option 3 (described below). If your policy was delivered after December 31, 1997, you have a choice of two death benefit options: option 1 or option 2. Your choice may result in your having a base death benefit which is greater than your stated death benefit. You may change your death benefit option after the policy date and before the maturity date. SEE CHANGES IN DEATH BENEFIT OPTIONS, PAGE 26. Under death benefit option 1, your base death benefit is the greater of: 1. your stated death benefit on the date of the insured person's death; or 2. your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A or B. Under death benefit option 2, your base death benefit is the greater of: 1. your stated death benefit plus your account value on the date of the insured person's death; or 2. your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A or B. Under option 1 positive investment performance is generally reflected in a reduced net amount at risk. This 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. You should choose option 2 if you want to have investment performance reflected in your insurance coverage. If your policy was delivered on or before December 31, 1997, you may choose death benefit option 3. Under death benefit option 3, the base death benefit is the greater of: 1. your stated death benefit plus the sum of all premiums you have paid minus partial withdrawals you have taken under your policy; or 2. your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A or B. Therefore, the base death benefit generally will increase as you pay premiums, and decrease as you take partial withdrawals. In no event will your base death benefit be less than your 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: o the insured person's age; o the insured person's gender; o possibly the insured person's premium class; and o the test you chose for the federal income tax law definition of life insurance. - -------------------------------------------------------------------------------- Strategic Advantage 25 We will adjust your policy to continue to qualify as life insurance under the federal income tax laws in existence at the time the policy was issued. CHANGES IN DEATH BENEFIT OPTIONS You may request a change in your death benefit option after the policy date and before the maturity date. Your death benefit option change is effective on your next monthly anniversary after we accept and approve your requested change, so long as at least five days remain before your monthly anniversary. If fewer than five days remain before your monthly anniversary, your death benefit option change is effective on your next monthly anniversary. After we approve your request, we send a new policy schedule page to you. You should attach it to your policy. We may ask you to return your policy to our customer service center so that we can note the change in your schedule. A death benefit option change applies to your entire stated or base death benefit. For you to change from death benefit option 1 to option 2, or from death benefit option 1 to option 3 if available under your policy, you must provide to us proof that the insured person is insurable under our normal rules of underwriting for your policy class, except in Florida. Changing your death benefit option may reduce or increase your target death benefit, as well as your stated death benefit. We may not allow you to change the death benefit option if it reduces the target or stated death benefit below the minimum we require to issue your policy. 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 gross account value as of the effective date of the change. Option 2 Option 1 your stated death benefit before the change plus your gross account value as of the effective date of the change. Option 1 Option 3 your stated death benefit before the change minus (a) the sum of the premiums you have paid, plus (b) partial withdrawals you have taken as of the effective date of the change. Option 3 Option 1 your stated death benefit before the change plus (a) the sum of the premiums you have paid, minus (b) partial withdrawals you have taken as of the effective date of the change. Option 2 Option 3 your stated death benefit before the change plus (a) your account value as of the effective date of the change, minus (b) the sum of the premiums you have paid minus partial withdrawals you have taken as of the effective date of the change. Option 3 Option 2 your stated death benefit before the change plus (a) the sum of the premiums you have paid minus partial withdrawals you have taken as of the effective date of the change, minus (b) your account value 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 you change your death benefit option. Additionally, there is no change to the amount of term insurance if you have an adjustable term insurance rider. SEE COST OF INSURANCE CHARGE, PAGE 49. 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. We do not adjust the target premium when you change your death benefit option. - -------------------------------------------------------------------------------- Strategic Advantage 26 CHANGES IN DEATH BENEFIT AMOUNTS You may want to increase the target or stated death benefit under your policy. You may do this while your policy is in force and before the policy anniversary when the insured person turns age 86. You may request a decrease in the stated death benefit only after your first policy anniversary. Contact our customer service center to request an increase or decrease in your policy death benefit. The request is effective as of the next monthly processing date after we receive your request and approve it, unless there are underwriting or other requirements which must be met before your request is effective. Any requested change in your coverage must be for at least $1,000. After we approve your request, we will send you a new schedule page for your policy which includes the: o stated death benefit; o benefit under applicable riders; o guaranteed cost of insurance rates of each segment; o guideline annual premium; and o target death benefit schedule. Keep the new schedule with your policy. We may ask you to send your policy to us so that we can note the change in your schedule. We may not approve a requested change because it will disqualify your policy as life insurance under the applicable 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 54. If you decrease your death benefit, you may not decrease your stated 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 54 AND MODIFIED ENDOWMENT CONTRACTS, PAGE 56. Requested reductions in the death benefit will first be applied to decrease the target death benefit. We decrease your stated death benefit only after your adjustable term insurance rider coverage is reduced to zero. If you have more than one segment, we divide subsequent decreases in stated death benefit among your benefit segments pro rata unless state law requires differently. 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 any request you make for an increase in 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 the target death benefit only once in a policy year. The initial, or first segment, is the stated death benefit on the effective date of the policy. An increase in the stated death benefit (other than one caused by an option change) will cause a new segment to be created. The segment year begins on the segment effective date and ends one year later. The following may apply to each new segment: o a new minimum annual premium during the first three years of your policy; o a new sales charge; o new cost of insurance charges, guaranteed and current; o a new incontestability period; o a new suicide exclusion period; and o a new target premium. A requested increase in your stated death benefit creates a new segment. Once we create a new segment, it is permanent unless state law requires differently. If an option change causes the stated death benefit to increase, no new segment is created. Instead, the size of each existing segment(s) is(are) changed. If it causes the stated death benefit to decrease, each segment is decreased. To determine the applicable sales charge, premiums you pay after an increase are applied to your policy segments in the same proportion as the guideline annual premiums for each segment bears to the sum of the guideline annual premiums for all segments. For each coverage segment, your schedule shows your guideline annual premiums. We allocate the net amount at risk among segments in the same proportion that each segment bears to the total stated death benefit. GUARANTEED MINIMUM DEATH BENEFIT Usually, how long your policy remains in force depends on your policy's net account value. Because we deduct charges monthly from your net account value, your coverage lasts only as long as your net account value is enough to pay these charges and - -------------------------------------------------------------------------------- Strategic Advantage 27 your account value is more than your loan interest due during the special continuation period. Your account value and the length of time your policy remains in force depend on: 1. timing and amount of any premium payments; 2. the investment performance of the variable divisions; 3. the interest you earn in the guaranteed interest division; 4. the amount of your monthly charges; 5. partial withdrawals you take; and 6. loan activity you may have. You can choose whether or not to put one of two guaranteed minimum death benefit options in force only at the issue of your policy. This option extends the period that your policy's stated death benefit remains in effect even if the variable divisions have poor investment performance. See your policy to determine how your benefits are affected in this situation. The two guaranteed minimum death benefit options vary primarily by the length of time they each cover for the guarantee period. These features have a guarantee period that lasts: 1. under one guaranteed minimum death benefit option, until the later of ten policy years or until the insured person is age 65; or 2. under the other guaranteed minimum death benefit option, the lifetime of the insured person so long as your policy is in force, or to the maturity date. The guaranteed minimum death benefit coverage does not apply to any riders, including the adjustable term insurance rider. Therefore, if your net account value is not enough to pay the deductions as they come due on your policy and if your policy is no longer in the special continuation period, only the stated death benefit portion of your coverage is guaranteed to stay in force. See your policy to determine how your benefits are affected in this situation. SEE LAPSE, PAGE 37. The guaranteed minimum death benefit is not available in some states. REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD To qualify for the guaranteed minimum death benefit you must pay an annual premium higher than the minimum annual premium. During the guarantee period, we will also deduct a monthly charge from your account value. This higher premium is called the guarantee period annual premium. The guarantee period monthly premium is equal to one-twelfth of the guarantee period annual premium. Your net account value must also meet certain diversification requirements. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 47. Although the required guarantee period annual premium level is different for the two guarantee period options, the guaranteed minimum death benefit operates similarly for either option. Your guarantee period annual premium depends on which of the two guarantee periods you choose, as well as: o your policy's stated death benefit; o the insured person's age, gender, premium class and underwriting characteristics; o the death benefit option you chose; o additional rider coverage on your policy; and o other additional benefits on your policy. If your policy has no rider coverage, the guarantee period annual premium for the guarantee period for life will be equal to the guideline annual premium determined under the federal income tax law definition of life insurance. The guarantee period annual premium for the ten year or age 65 guarantee period will be the greater of the target premium or the minimum annual premium for each segment. The guarantee period annual premium for the guarantee period for life will be greater than that required for the ten year or age 65 guarantee period. At each monthly processing date we test to see if you have paid enough premium to keep your guarantee in place. We calculate: o actual premiums paid; minus o the amount of any partial withdrawals you make; minus o policy loans you take with accrued loan interest. This amount must equal or exceed; o the sum of the guarantee period monthly premium payments for each policy month starting with your first policy month through the end of the policy month that begins on the current monthly processing date. - -------------------------------------------------------------------------------- Strategic Advantage 28 You must continually meet the requirements of the guarantee period for this feature to remain in effect. We show the guarantee period annual premium on your policy schedule. If your policy benefits increase, the guarantee period annual premium increases. If your policy fails to meet this test on any monthly processing date, the guarantee period ends, and thus the guaranteed minimum death benefit lapses. The guarantee period ends if your net account value on any monthly processing date is not diversified as follows: 1. you must invest your net account value in at least five investment divisions; and 2. you may invest no more than 35% of your net account value in any one division. Your policy will continue to meet the diversification requirements if: 1. you have automatic rebalancing and you meet the two diversification tests listed above; or 2. you have dollar cost averaging which results in transfers into at least four additional investment divisions with no more than 35% of any transfer directed to any one division. SEE DOLLAR COST AVERAGING, PAGE 33, AND AUTOMATIC REBALANCING, PAGE 34. If you fail to satisfy either the premium test or the diversification test and you do not correct it, this feature terminates. If you choose the guaranteed minimum death benefit, you must make sure your policy satisfies the premium test and diversification test. Once it terminates, you cannot reinstate the guaranteed minimum death benefit feature. The guaranteed period annual premium then no longer applies to your policy. ADDITIONAL BENEFITS Your policy may include additional benefits, which we attach by rider. A rider changes benefits under your policy and may or may not add an additional cost to your policy. If applicable, we deduct a monthly charge from your account value for each rider you choose. You may cancel these rider benefits at any time. If you choose any of these benefits your policy will include the details. Not all riders are available for all policies. You may schedule your term rider coverage to increase or decrease at issue. If you want to increase your scheduled benefits after issue of your rider, new guidelines may apply. Scheduled benefits are the kind and amount of benefits you choose under your policy over a stated period of time. Periodically we may offer other riders than those listed here. You should contact your registered representative for a complete list of the riders now available. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 56, FOR INFORMATION ON THE POSSIBLE TAX EFFECTS OF ADDING OR CANCELING THESE BENEFITS. ACCIDENTAL DEATH BENEFIT RIDER This rider is not available for policies issued on or after May 1, 1998. This rider will pay the benefit amount you select if the insured person dies as a result of an accident or if the insured person dies within 90 days of an injury which occurred in an accident where the insured person dies before reaching age 70. ADDITIONAL INSURED RIDER This rider provides death benefits upon the death of immediate family members other than the insured person. You may add up to nine additional insured person riders to your policy. The minimum amount of coverage for each rider is $10,000. The maximum coverage for all additional insured persons is five times your policy's stated death benefit. ADJUSTABLE TERM INSURANCE RIDER You may increase your death proceeds by adding an adjustable term insurance rider on the insured person's life. As the name suggests, the adjustable term insurance rider adjusts over time. You specify a target death benefit when you apply for this rider. The target death benefit can be level or can be scheduled to change at the beginning of any policy year. We generally restrict your target death benefit to an amount not more than ten times your stated death benefit at issue. In other words, if your stated death benefit is $100,000, then the maximum amount of target death benefit we allow you is $1,000,000. - -------------------------------------------------------------------------------- Strategic Advantage 29 The death benefit for the adjustable term insurance rider is the difference between your total 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 greater of the sum of the premiums you have paid 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 increases as a result of an increase in your account value. The adjustable term insurance rider adjusts to provide death proceeds equal to your total death benefit in each year: Base Death Total Death Adjustable Term Benefit Benefit Insurance Rider Amount ----------- ------------ ---------------------- $201,500 $250,000 $48,500 202,500 250,000 47,500 202,250 250,000 47,750 It is possible that the amount of your adjustable term insurance may be zero if your base death benefit increases enough. Using the same example, if the base death benefit under your policy grew to $250,000 or more, the adjustable term insurance would be zero. The adjustable term insurance can never be less than 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 is reduced below your target death benefit, the adjustable term insurance rider amount reappears to maintain the total 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 27. We may deny any future, scheduled increases to your target death benefit if you cancel a scheduled change, or if you ask for an unscheduled decrease in your target death benefit. Partial withdrawals, changes from death benefit option 1 to option 2, changes from death benefit option 1 to option 3 and base decreases may reduce the amount of your target death benefit. SEE PARTIAL WITHDRAWALS, PAGE 36, AND CHANGES IN DEATH BENEFIT OPTIONS, PAGE 26. 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 will be based on the issue age, gender, 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 the policy. SEE COST OF INSURANCE CHARGE, PAGE 49. There are no sales or tax charges for this coverage. The total sales charge that you pay may be less if you have coverage under an adjustable term insurance rider instead of the base death benefit. However, since all policy features apply to the adjustable term insurance rider, you should consider these features as well as cost as you make your purchase decisions. If the target death benefit schedule is increased by you after the rider is issued, we use the same rates for the entire coverage for this rider. These rates are based on the original premium class even though satisfactory new evidence of insurability is given to us for the increased schedule. - -------------------------------------------------------------------------------- Strategic Advantage 30 GUARANTEED INSURABILITY RIDER This rider is not available for policies issued on or after May 1, 1998. This rider allows increases in the stated death benefit without providing us evidence that the insured person remains insurable. Increases in the stated death benefit may be limited in amount and timing. RIGHT TO CHANGE INSURED RIDER This rider allows you to change the insured person under your policy. You must provide satisfactory evidence of insurability for the insured person. A change of the insured person may have federal income tax consequences. If you change the insured person, the cost of your future insurance charges may change, but your account value remains the same as of the date you make this change. Changing the insured person also means that there will be new contestability and suicide periods. There is no charge for this rider. WAIVER OF COST OF INSURANCE RIDER If the insured person becomes totally disabled while your policy is in force, this rider provides that we waive the monthly expense charges, cost of insurance charges, and rider charges during the disability. This means that we do not deduct these amounts from your account value. You must meet all of our requirements for this rider to apply. If you add this rider to your policy, you may not add the waiver of specified premium rider. WAIVER OF SPECIFIED PREMIUM RIDER If the insured person becomes disabled while your policy is in force, this rider provides that we credit a specified premium amount monthly to your policy during the total disability of the insured person. There is a waiting period before this benefit applies. In your application, you select the amount of premium we credit subject to our limits. If you add this rider to your policy, you may not add the waiver of cost of insurance rider. SPECIAL FEATURES POLICY MATURITY On the maturity date if the insured person is still living, you must surrender the policy for the net account value. Your policy then ends. The maturity date is the policy anniversary nearest the date when the insured person reaches age 100. Some part of this payment may be taxable. You should consult your tax adviser. RIGHT TO EXCHANGE POLICY During the first 24 months after your policy date, you have the right to exchange your policy to a guaranteed policy, unless state law requires differently. To do this, we transfer the amount you have in the variable divisions to the guaranteed interest division. We allocate all of your future net premiums only to the guaranteed interest division. We do not allow any future payments or transfers to the variable divisions when you exercise this right. We will not charge you for the transfer to make this exchange. SEE THE GUARANTEED INTEREST DIVISION, PAGE 19. POLICY VALUES ACCOUNT VALUE Your account value is the total amount you have in the guaranteed interest division, the variable divisions, and the loan division. Your account value reflects: o net premiums; o deductions for charges; o partial withdrawals; o investment performance of the variable divisions; o interest earned on the amount you have in the guaranteed interest division; and o interest earned on the amounts you have in the loan division. NET ACCOUNT VALUE Your policy's net account value is your account value minus the amount of your outstanding policy loans and accrued loan interest. CASH SURRENDER VALUE Your cash surrender value is your account value plus any refund of sales charges which may be due. NET CASH SURRENDER VALUE Your net cash surrender value is your cash surrender value minus the amount of your outstanding policy loans and accrued loan interest. - -------------------------------------------------------------------------------- Strategic Advantage 31 DETERMINING THE VALUE IN THE VARIABLE DIVISIONS The amounts included in the variable divisions are measured by accumulation units and accumulation unit values. The value of a variable division is the accumulation unit value for that division times the number of accumulation units you own in that division. Each variable division has a different accumulation unit value. You purchase accumulation units of a division whenever you allocate premium or make transfers to that division. This includes transfers from the loan division. We redeem accumulation units from the variable divisions: o when you take a partial withdrawal; o when amounts are transferred from a variable division (including transfers to the loan division); o for the monthly deductions from your account value; o for policy transaction charges; o on surrender; and o to pay the death benefit when the insured person dies. We calculate the number of variable division accumulation units purchased or redeemed by: 1. dividing the dollar amount of your transaction by: 2. the division's accumulation unit value calculated at the close of business on the valuation date of the transaction. The accumulation unit value is the value of an accumulation unit determined as of each valuation date. The accumulation unit value of each division varies with the investment performance of the matching portfolio. It reflects: o investment income; o realized and unrealized capital gains and losses; o investment portfolio expenses; and o daily mortality and expense risk charges we take from the variable account. SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION, PAGE 32. The date of a transaction is the date we receive your premium, an acceptable request or other transaction request at our customer service center, so long as the date of receipt is a valuation date. Each valuation date ends at 4:00 p.m. Eastern time. 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 divisions goes up or down depending on investment performance. FOR AMOUNTS IN THE VARIABLE DIVISIONS, THERE IS NO GUARANTEED MINIMUM CASH VALUE. HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION We determine accumulation unit values for the variable divisions on each valuation date. We generally set the accumulation unit value for a division at $10 on the date when the division is first opened and begins accepting amounts. After that, the accumulation unit value on any valuation date is: 1. the accumulation unit value for the preceding valuation date multiplied by 2. the accumulation experience factor for that division 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 investment division every valuation date as follows: 1. We take the share value of the underlying portfolio shares in the division as reported to us by the investment portfolio managers as of the close of business on that valuation date. - -------------------------------------------------------------------------------- Strategic Advantage 32 2. We add dividends or capital gain distributions declared per share and reinvested by the investment portfolio on the date that the share value is affected. If applicable, we subtract a charge for taxes from this amount. 3. We divide the remaining amount by the value of the shares in the underlying investment portfolio for the variable division at the close of business on the previous valuation date. 4. We then subtract a charge for the mortality and expense risk which we assume under your policy. The daily charge is .002055% of the accumulation unit value. This is an annual rate of .75% of the accumulation unit value. If the previous day was not a valuation date, the charge is multiplied by the additional number of days since the prior valuation date. The result of these calculations is the accumulation experience factor for the valuation period. TRANSFERS OF ACCOUNT VALUE You may make up to twelve free transfers among the variable divisions, 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 $25 fee for each transfer that you make after the first twelve in each policy year. We do not include transfers for automatic rebalancing or dollar cost averaging toward your twelve free transfers. You may make transfer requests in writing, or by telephone if you have telephone privileges, to our customer service center. Your transfer takes effect on the valuation date we receive your request. The minimum amount you may transfer is $100. This minimum does not need to come from one division or be transferred to one division as long as the total amount you transfer is at least $100. However, if the amount remaining in a variable division is less than $100 when you make a transfer request, we transfer the entire amount out of that division. EXCESSIVE TRADING Excessive trading activity can disrupt investment portfolio management strategies and increase portfolio expenses. Thus, we limit excessive transfer activity. Excessive transfers may cause: o increased trading and transaction costs; o disruption of planned investment strategies; o forced and unplanned portfolio turnover; o lost opportunity costs; and o the investment portfolios to have large asset swings that decrease their 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 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 are deemed to 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 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. Transfers of your account value into the guaranteed interest division are not restricted. DOLLAR COST AVERAGING If your policy has at least $10,000 invested in either the Fidelity VIP Money Market Portfolio, or the Neuberger Berman AMT Limited Maturity Bond - -------------------------------------------------------------------------------- Strategic Advantage 33 Portfolio, you can elect dollar cost averaging. The main goal of dollar cost averaging is to protect your policy values from short-term price changes. DOLLAR COST AVERAGING DOES NOT ASSURE A PROFIT NOR DOES IT PROTECT YOU AGAINST A LOSS IN A DECLINING MARKET. This systematic plan of transferring account values is intended to reduce the risk of investing too much when the price of an investment portfolio's shares is high. It 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 other divisions each period, you purchase more units in a division if the unit value is low, and you purchase fewer units if 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 five days after we receive your dollar cost averaging request. Dollar cost averaging cannot begin until after the end of your free look period if your state requires refund of all premiums paid 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 either the division invested in either the Fidelity VIP Money Market Portfolio or the Neuberger Berman AMT Limited Maturity Bond Portfolio for automatic transfer. Each period, we automatically transfer the amount you select from your chosen source division to one or more other variable divisions. 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 any one division is 1% of the total amount you transfer to all divisions you select. You must transfer at least $100 for each dollar cost averaging transfer. Dollar cost averaging may occur on the same day of the month either monthly, quarterly, semi-annually, or annually. Unless you tell us otherwise, dollar cost averaging automatically takes place monthly, on the 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. You may have both dollar cost averaging and automatic rebalancing at the same time. The dollar cost averaging division from which your transfer will be taken cannot be included in your automatic rebalancing program. CHANGING DOLLAR COST AVERAGING You may change your dollar cost averaging program one time per policy year. If you have telephone privileges, you may make changes to the dollar cost averaging program by telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 43. 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 five days before the next dollar cost averaging date. Dollar cost averaging will terminate if: 1. you specify a termination date; or 2. your balance remaining in the division from which your dollar cost averaging transfers are taken reaches a dollar amount you set; or 3. on any dollar cost averaging date, the amount in the division from which you want to make a transfer is equal to or less than the amount to be transferred. We will transfer the remaining amount and dollar cost averaging ends. AUTOMATIC REBALANCING Automatic rebalancing provides you with a method for maintaining a consistent approach to investing account values over time, and simplifying the process of asset allocation by dividing amounts among the investment options you have chosen. 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 divisions to match your pre-set automatic rebalancing allocation percentages. After the transfers, the ratio of your account value in each division to your total account value for all divisions included in automatic - -------------------------------------------------------------------------------- Strategic Advantage 34 rebalancing matches the automatic rebalancing allocation percentage for that division. This action rebalances the amounts in the investment divisions that do not match your set allocation. This happens if an investment division outperforms other divisions for that time period. You may choose the automatic rebalancing feature on your application or later by completing our customer service form. Automatic rebalancing may occur on the same day of the month either monthly, quarterly, semi-annually, or annually. If you do not specify, automatic rebalancing will occur quarterly. If you choose automatic rebalancing on your policy application, the first transfer occurs on the date you select (after your free look period if your state requires return of all premiums paid during the free look period). If you elect this feature after your policy date, we process the first transaction on the date you have requested. If you requested no date, processing is on the last valuation date of the calendar quarter we receive your notice at our customer service center. When you choose automatic rebalancing allocations, you may choose up to eighteen total investment divisions. SEE MAXIMUM NUMBER OF INVESTMENT DIVISIONS, PAGE 19. You may have both automatic rebalancing and dollar cost averaging at the same time. The division from which your dollar cost averaging transfers are taken cannot be included in your automatic rebalancing allocating program. You may not include the loan division in your automatic rebalancing allocations. 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 33. If you have automatic rebalancing and the guaranteed minimum death benefit and you ask for an allocation which does not meet the guaranteed minimum death benefit diversification requirements, we will notify you that the allocation needs to be changed and ask you for revised instructions. TERMINATING AUTOMATIC REBALANCING You may terminate automatic rebalancing at any time, as long as we receive your notice of termination at least five days before the next automatic rebalancing date. If you have the guaranteed minimum death benefit and you terminate the automatic rebalancing feature, you still must meet the diversification requirements of your net account value for the guarantee period to continue. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27. POLICY LOANS You may borrow against your policy at any time after the first monthly processing date by using your policy as security for a loan, or as otherwise required by law. The amount you borrow is called a policy loan. Your policy loan is: 1. the total amount you borrow from your policy; plus 2. any policy loan interest that is capitalized when due; minus 3. policy loan repayments you make. Unless state law requires differently, any new policy loan you take must be at least $100. The maximum amount 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. 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 telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 43. Based on our administrative system, we may have other rules for policy loans. For example, we may require that your loan request be for a dollar amount rather than a percentage to be taken from a specific division. Loan interest charges on your policy loan accrue daily at an annual interest rate of 3.75%. Interest is due in arrears on each policy anniversary. If you do not pay your interest when it is due, we add it to your policy loan on your policy anniversary. - -------------------------------------------------------------------------------- Strategic Advantage 35 If you request an additional loan, we add the amount you request to your existing outstanding policy loan. This way, there is only one loan outstanding on your policy at any time. You may repay all or part of your policy loan at any time while your policy is in force. We assume that any payments you make, other than your scheduled premiums, are policy loan repayments. You must tell us otherwise if you want us to consider additional payments as premiums. When you request a loan you may specify one investment division from which the loan will be taken. If you do not specify one, the loan will be taken proportionately from each active investment division you have. When you take a policy loan, we transfer an amount equal to your policy loan amount from the variable and the guaranteed interest divisions in the same proportion they represent of your total net account value to the loan division. We follow this same process for loan interest in the amount due at your policy anniversary. We credit the loan division with interest at an annual rate of 3%. The loan division is part of our general account, separate from the guaranteed interest division. When we make transfers to the loan division, we redeem sufficient units of the variable divisions to cover the amount of the loan which you take from the variable account. Unless you tell us otherwise, we deduct the amount transferred from each division in the same proportion that your account value in that division has to your net account value immediately before the loan transaction. We determine the amounts in each division as of the valuation date when we receive your loan request. Policy loans may cause your policy to lapse if your net account value is not enough to pay all deductions each month. SEE LAPSE, PAGE 37. Any policy loans you take may have tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 56. LOAN REPAYMENT We transfer the amount of interest credited to the loan division for a policy year from the loan division on your policy anniversary. When you make a loan repayment, we transfer an amount equal to your repayment from the loan division up to the amount of your policy loan. Unless you tell us otherwise, we allocate these transfers among the variable divisions and the guaranteed interest division in the same proportion as your current premium allocation. LOANS AND YOUR BENEFITS Taking a loan decreases the amount you have in the variable divisions. 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. This means that the benefits under your policy may be affected. The loan is a first lien on your policy. This means we deduct your outstanding policy loan and accrued loan interest from the death benefit payable, the cash surrender value payable on surrender or your account value on the maturity date. Failure to repay your loan may affect the guaranteed minimum death benefit feature and the length of time your policy remains in force. The policy lapses (FOR EXCEPTIONS, SEE SPECIAL CONTINUATION PERIOD, PAGE 22 AND GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27) when the account value minus policy loans and accrued loan interest is not enough to cover your monthly deductions. If your policy lapses with a loan outstanding, you may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 56. If you do not repay your policy loan, we deduct the outstanding policy loan amount and accrued loan interest from the death benefits payable, or the cash surrender value payable upon surrender. PARTIAL WITHDRAWALS You may request a partial withdrawal on any valuation date after your first policy anniversary by contacting our customer service center. If you request partial withdrawals 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 partial withdrawal request must be in writing. SEE TELEPHONE PRIVILEGES, PAGE 43. - -------------------------------------------------------------------------------- Strategic Advantage 36 You may take only one partial withdrawal per policy year. We may set rules on partial withdrawals, based on our administrative system. For example, we may require that you specify a dollar amount rather than a percentage to be taken from a specific division. The minimum partial withdrawal you may take is $100. The maximum partial withdrawal you may take is the amount which leaves $500 as your net account value. If you request a withdrawal of more than this maximum, we require you to surrender your policy. When you take a partial withdrawal, we deduct your withdrawal amount plus a service fee from your account value. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 47. Partial withdrawals may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 56. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1 If you selected death benefit option 1, and if 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 the stated death benefit. Any additional amounts you withdraw will reduce your stated death benefit by the amount of the withdrawal. 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 because your account value is reduced. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 3 If you have selected death benefit option 3, a partial withdrawal may reduce your total death benefit, but only to the level of your target death benefit. 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. 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, 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 54. We require a minimum stated death benefit and a minimum target death benefit to issue your policy. You are not allowed to take a partial withdrawal if it reduces your stated death benefit or target death benefit below this minimum. SEE GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS, PAGE 54. PARTIAL WITHDRAWAL MECHANICS Unless you tell us otherwise, we will make a partial withdrawal from the guaranteed interest division and the variable divisions in the same proportion that each division has to your net account value immediately before your withdrawal. The amount withdrawn from the guaranteed interest division may not be for more than your total withdrawal multiplied by the ratio of your account value in the guaranteed interest division to your total net account value immediately before the partial withdrawal transaction. We will send a new schedule page for your policy showing the effect of your withdrawal if there is any change to your stated death benefit or your target death benefit. To make this change, we may ask that you return the policy to our customer service center. Your withdrawal and any reductions in the death benefits are effective as of the valuation date on which we receive your request. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 56. LAPSE Your insurance coverage continues as long as your net account value is enough to pay all deductions each month. Lapse does not apply if either the guaranteed minimum death benefit or the special continuation period is in effect and you have met all - -------------------------------------------------------------------------------- Strategic Advantage 37 requirements. SEE SPECIAL CONTINUATION PERIOD, PAGE 22, AND GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27. If there is an outstanding policy loan, your policy will lapse if the loan plus the accrued interest owed is more than the account value. GRACE PERIOD Your policy enters the 61-day lapse grace period if, on a monthly processing date: 1. your net account value is zero (or less); and 2. the three-year special continuation period has expired, or you have not paid the required special continuation period premium; and 3. the guaranteed minimum death benefit has expired or terminated. We notify you that the policy is in a grace period at least 30 days before the grace period ends. We provide this notice to you, or a person to whom you have assigned your policy, at the last address in our records. We notify you of the required premium payment necessary to prevent your policy from lapsing. This amount is generally the amount of 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 pay death proceeds to your beneficiary(ies) with reductions for policy loans, accrued loan interest, and monthly deductions owed. We will send you a lapse notice if the guaranteed minimum death benefit is going to lapse. If we receive your payment of the required amount before the end of the grace period, we apply it to your account value in the same manner as your other premium payments, then we take the overdue deductions from your account balance. If you do not pay the full amount we request within the 61-day grace period, your policy and all of its riders lapse without value. We then withdraw your remaining account balance from the variable divisions and the guaranteed interest division. We deduct amounts which you owe us and inform you that the policy has ended. IF YOU HAVE THE GUARANTEED MINIMUM DEATH BENEFIT IN EFFECT After the special continuation period has ended, and if the guaranteed minimum death benefit is in effect, your policy's stated death benefit will not lapse during the guarantee period. This is true even if your net account value is not enough to cover all of the deductions from your account value on any monthly processing date. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27. The guaranteed minimum death benefit does not protect benefits you may have under riders attached to your policy. Nor does it protect any amount of the base death benefit which is more than the stated death benefit. These benefits lapse if on any monthly processing date, your policy net account value is not enough to pay all monthly deductions from your account value (unless your policy is in the three-year special continuation period and your account value is more than the interest due on your loan). While the guaranteed minimum death benefit applies, we reduce your account value by monthly deductions, but not below zero. We permanently waive monthly deductions during the guarantee period which would reduce your account value below zero. The guaranteed minimum death benefit terminates if your policy does not meet the monthly premium or diversification tests. If your guaranteed minimum death benefit terminates, the normal test for lapse then resumes. SEE REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD, PAGE 28. - -------------------------------------------------------------------------------- Strategic Advantage 38 LAPSE SUMMARY
SPECIAL CONTINUATION PERIOD GUARANTEED MINIMUM DEATH BENEFIT (option 1 or option 2) ============================================================ =========================================================== IF YOU MEET THE IF YOU DO NOT MEET THE IF YOU MEET THE IF YOU DO NOT MEET THE REQUIREMENTS REQUIREMENTS REQUIREMENTS REQUIREMENTS - ------------------------------ ---------------------------- ----------------------------- ---------------------------- Your policy does not lapse if Your policy enters the grace Your policy does not lapse if Your policy enters the grace you do not have enough net period if your net account you do not have enough net period if your net account account value to pay the value is not enough to pay account value to pay the value is not enough to pay monthly charges. The the monthly charges, or if monthly charges. However, the monthly charges, or if charges are delayed until the your loan interest due is if you have any riders, they your loan interest due is earlier of: 1) the date you more than your net account lapse after the grace period more than your net account have enough net account value. If you do not pay and only your base coverage value. If you do not pay value to cover the monthly enough premium to cover remains in force. Charges enough premium to cover charge, or 2) until the end of the past due monthly for your base coverage are the past due monthly the special continuation charges and interest due, then deducted each month to charges and interest due, period. plus the monthly charges the extent that there is plus the monthly charges and interest due through the sufficient net account value and interest due through the end of the grace period (at to pay these charges. If end of the grace period (at the end of the following two there is not sufficient net the end of the following two months), your policy lapses. account value to pay a months), your policy lapses. charge, it is permanently waived.
REINSTATEMENT If you do not pay enough premium before the end of the grace period, your policy lapses. You may still reinstate your policy and its riders (other than the guaranteed minimum death benefit) within five years after the grace period ends. Unless state law requires differently, we will reinstate your policy and riders if: 1. you have not surrendered your policy for its net cash surrender value; 2. you provide satisfactory evidence to us that the insured person (and any people insured under your riders) is still insurable according to our normal rules of underwriting for your type of policy; and 3. we receive enough premium from you to keep your policy and its riders in force from the beginning to the end of the grace period and for two months after the reinstatement date. Reinstatement is effective 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 in effect at the time of reinstatement for the age of the insured person are adjusted to reflect the time since the lapse. We apply the net premiums received after reinstatement according to the premium allocation instructions in effect at the start of the grace period, unless you tell us otherwise. SURRENDER You may surrender your policy for its net cash surrender value any time while the insured person is living. You do this by sending a written request and your policy or a lost policy form to our customer service center. Your policy net cash surrender value is your cash surrender value, minus policy loans you have taken including accrued loan interest. - -------------------------------------------------------------------------------- Strategic Advantage 39 We compute your net cash surrender value as of the valuation date we receive your surrender request and policy at our customer service center. All insurance coverage ends on the date we receive your surrender request and policy. We do not pro-rate or add back charges and expenses to your account value which we deducted on the monthly anniversary before the date your surrender is processed. A surrender of your policy may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 56. GENERAL POLICY PROVISIONS FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD You have the right to examine your policy. If for any reason you do not want it, you may return your policy to us or your registered representative within the period shown in the policy. If you return your policy to us within your state's specified time limit, we will consider it canceled as of your policy date. If you cancel your policy during this free look period, you will receive a refund as determined under state law. Generally, there are two types of free look refunds. Some states require a return of all premiums paid while others permit payment of the account value plus a refund of all charges deducted. Your policy will specify what free look refund applies in your state. The type of free look refund allowed in your state will affect when your initial net premium and any additional net premiums we receive from you before the end of the free look period are invested into the variable divisions you selected. Your state may require us to return the premiums you have paid if you cancel your policy during the free look period. In this case, that portion of your initial net premium and any net premium we receive from you during the free look period that you have allocated to the variable divisions will then be held in the division investing in the Fidelity Money Market Portfolio for 15 days after we issue your policy (five days deemed delivery time plus a typical free look period of 10 days), unless state law requires otherwise, if: o you made a premium payment before we issued your policy; and o you have provided all information and documents we have requested. At the end of 15 days, your account value will be allocated among your chosen variable divisions, based on your most recent premium allocation instructions. Your state may require us to return your account value plus a refund of all charges deducted during the free look period. In this case, that portion of your initial net premium that you have allocated to the variable divisions will then be invested according to your most recent premium allocation instructions on the date we issue your policy if: o you made a premium payment before we issued your policy; and o you have provided all information and documents we have requested. Amounts you allocated to the guaranteed interest division will be invested into that division when we issue your policy if you have made a premium payment and have no outstanding information or document requests from us. Once we have applied your net premium to your selected investment divisions, you may transfer funds between investment divisions and activate policy investment features such as automatic rebalancing or dollar cost averaging. YOUR POLICY The entire contract between you and us is the combination of: o your policy; o a copy of your original application and any applications for benefit increases or decreases; o all of your riders; o endorsements; o 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 us your policy, 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 - -------------------------------------------------------------------------------- Strategic Advantage 40 guarantees. We use no statement to deny a claim, unless it is in an application. A president or an officer of our company and our secretary or assistant secretary must sign all changes or amendments we make to your policy. No other person may change the terms or conditions of your policy. AGE We issue your policy at the insured person's age stated in your policy schedule. This is based on the insured person's age as of the nearest birthday 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 and shown in the schedule. OWNERSHIP The original owner is the person named as the owner in the policy application. The owner can exercise all rights and receive the benefits during the insured person's lifetime before the maturity date. This includes the right to change the owner, beneficiaries, or method 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 beneficiary(ies) receive death proceeds only if there is no surviving primary beneficiary(ies). If more than one beneficiary(ies) survives the insured person, they share the death proceeds equally, unless you have told us otherwise. If none of your policy beneficiaries has survived the insured person, we pay the death proceeds to you, or to your estate as owner. Once you tell us who the beneficiary(ies) is/are, we keep this information on file. You may name a new beneficiary during the insured person's lifetime. We pay the death proceeds to the most recent beneficiary(ies) whom you have most recently named and which we have on record. We do not make multiple payments. COLLATERAL ASSIGNMENT You may assign your policy as security 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) were 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 while the insured person is alive for two years from your policy date, we will not question the validity of the statements in your application. After your policy has been in force while the insured person is alive for two years from the effective date of any new segment or from the effective date of an increase in any other benefit, we will not contest the statements in your application for the new segment or other benefit increase. After this policy has been in force while the insured person is alive for two years from the effective date of any reinstatement, we will not contest the statements in your application for reinstatement. MISSTATEMENTS OF AGE OR GENDER If the insured person's age or gender has been misstated, we adjust the death benefit. We adjust death benefits 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 otherwise required by state law. If unisex cost of insurance rates apply, we do not make any adjustments for a misstatement of gender. - -------------------------------------------------------------------------------- Strategic Advantage 41 SUICIDE If the insured person commits suicide, while that insured person is sane or insane within two years of your policy date unless otherwise required by state law, we limit death benefits to: 1. the total of all premiums paid to the time of death; minus 2. the amount of outstanding policy loans and accrued loan interest; minus 3. any partial withdrawals you have taken. If the insured person has been changed, and the new insured person dies by suicide within two years of the change date, we then limit the death benefit to: 1. your net account value as of the change date; plus 2. the premiums you paid since the change date; minus 3. the sum of any increases in policy loans, accrued loan interest, and partial withdrawals taken 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 we make is equal to the cost of insurance and monthly expense charges which were deducted for such increase. TRANSACTION PROCESSING Generally, within seven days of when we receive all information required to process a payment, we pay: o death proceeds; o net cash surrender value upon surrender; o partial withdrawals; and o loan proceeds. We may delay processing these transactions if: o the NYSE is closed for trading; o trading on the NYSE is restricted by the SEC; o there is an emergency so that it is not reasonably possible to sell securities in the variable divisions or to determine the value of an investment division's assets; or o a governmental body with jurisdiction over the separate account allows suspension by its order. Any SEC rules and regulations that apply determine whether or not these conditions exist. We execute transfers among the variable divisions as of the valuation date of our receipt of your request at our customer service center. We determine death proceeds as of the insured person's date of death. The death proceeds are not affected by changes in the value of the variable divisions after the insured person's death. We pay interest at our stated rate (or at a higher rate if required by law) from the insured person's date of death to the date of payment. We may delay payment from our guaranteed interest division for up to six months, unless state law requires otherwise, of: o surrender proceeds; o withdrawal amounts; or o loan amounts. We pay interest at our declared rate (or at a higher rate if required by law) from the date we receive the request if we delay payment more than 30 days. NOTIFICATION AND CLAIMS PROCEDURES Except for certain authorized telephone requests, we must receive in writing any election, designation, change, assignment or request made by the owner. You must use a form acceptable to us. We are not liable for actions taken before we receive and record the written notice. We may require you to return your policy for policy change, or at the time of surrender. If the insured person dies while your policy is in force, please let us or your registered representative know as soon as possible. We will immediately send you instructions on how to make a claim. As proof of the deceased insured person's death, we may require you to provide proof of the deceased insured person's age, and a certified copy of the deceased insured person's death certificate. The beneficiary(ies) and the deceased insured person's next of kin may need to sign authorization forms. These forms allow us to get information about the deceased insured person. This information - -------------------------------------------------------------------------------- Strategic Advantage 42 may include medical records of doctors and hospitals used by the deceased insured person. TELEPHONE PRIVILEGES If your policy was delivered on or after May 1, 1999, telephone privileges are automatically provided to you and your agent or registered representative, unless you tell us otherwise. If you do not wish to have this feature, decline it on the application or contact our customer service center. If your policy was delivered before May 1, 1999, you may choose telephone privileges by completing our customer service form and returning it to our customer service center. Telephone privileges allow you or your agent or registered representative, if applicable, to call our customer service center to: o make transfers; o change premium allocations; o change features in your dollar cost averaging and automatic rebalancing programs; o partial withdrawals; or o request a policy loan. Our customer service center uses reasonable procedures to make sure that instructions received by telephone are genuine. These procedures may include: 1. requiring some form of personal identification; 2. providing written confirmation of any transactions; and 3. tape recording telephone calls. By accepting automatic telephone privileges, you authorize us to record your telephone calls to us. If we use reasonable procedures to confirm instructions, we are not liable for losses due to unauthorized or fraudulent instructions. We may discontinue this privilege at any time. NON-PARTICIPATION Your policy does not participate in the surplus earnings of Security Life. DISTRIBUTION OF THE POLICIES The principal underwriter (distributor) for our policies is ING America Equities, Inc. 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. for acting as the principal underwriter under a distribution agreement. We sell our policies through registered representatives of other broker-dealers including, but not limited to: 1. VESTAX Securities Corporation, a subsidiary of ING America Insurance Holdings, Inc.; 2. Locust Street Securities, Inc., an affiliate of Security Life of Denver Insurance Company; 3. Multi-Financial Services, Inc., an affiliate of Security Life of Denver Insurance Company; and 4. IFG Network Securities, Inc., a subsidiary of Investors Financial Group, Inc., which is a subsidiary of ING America Insurance Holdings, Inc. These broker-dealers have entered into selling agreements with us. They are registered with the SEC and the NASD. Under these selling agreements, we pay a distribution allowance to broker-dealers, who then pay commissions to the registered representative who sells this policy. During the first policy year, the distribution allowance may be up to 15% of the target premium that you paid and 3% of premiums that you paid over your first target premium. For policy years two through five, the distribution allowance may be up to 10% of the target premium and 3% of premiums you have paid over the target premium. For policy years after the fifth, the distribution allowance may equal up to 3% of the premiums you have paid. Broker-dealers may receive annual renewal payments of up to 0.15% of the net account value beginning in the sixth year of your policy. Compensation arrangements vary among broker-dealers and depend on particular circumstances. In addition to the above-described compensation, we may pay: o override payments; o expense allowances; o bonuses; - -------------------------------------------------------------------------------- Strategic Advantage 43 o special marketing fees; o wholesaler fees and marketing allowances; and o training allowances. Under our sales incentive programs, as permitted by law, registered representatives may receive other compensation such as: o expense-paid trips; o expense-paid educational seminars; and o merchandise. We pay all distribution and other allowances from our own resources which includes sales charges deducted from premiums. ADVERTISING PRACTICES AND SALES LITERATURE We may use advertisements and sales literature to promote this product, including: o articles on variable life insurance and other information published in business or financial publications; 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 divisions. But past performance is not indicative of future performance of the investment divisions or the policies and is not reflective of the actual investment experience of individual policyowners. We may feature certain investment divisions and their managers, as well as describe asset levels and sales volumes for our products. 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 elect to have the beneficiary(ies) receive the death proceeds other than in one payment. If you make this election, you must do so 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. You may take your net cash surrender value in other than one payment. The investment performance of the variable divisions 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. A periodic payment must be at least $20. Currently, these alternate payment options are available if the proceeds are $2,000 or more. Option I: PAYOUTS FOR A DESIGNATED PERIOD: Payout payments may be made on a monthly, quarterly, semi-annual, or annual basis. These payments may last for a period from five to thirty years. The installment dollar amounts are equal except for any excess interest. Settlement Option Table I in your policy shows the amount of the first monthly payout for each $1,000 of account value applied. Option II: LIFE INCOME WITH PAYOUTS GUARANTEED FOR A DESIGNATED PERIOD: Payout payments may be made on a monthly, quarterly, semi-annual, or annual basis. We make these payments throughout the lifetime of the person receiving the payment, or if longer for guaranteed periods of five, ten, fifteen, or twenty years. You may choose the length of time to receive the guaranteed payments. If you choose a longer guaranteed period, this will decrease the amount of your periodic payments. The installment dollar amounts are equal except for any excess interest. The Settlement Option Table II in your policy shows the amount of the first monthly payout for each $1,000 of account value applied. This option is available only for the ages shown in this table. - -------------------------------------------------------------------------------- Strategic Advantage 44 Option III: HOLD AT INTEREST: Amounts may be left on deposit with us to be paid at the death of the person you choose to receive the payment, or at a chosen earlier date. We will pay interest at our declared rate on any unpaid balance (or at a higher rate if required by law). You may choose interest to be accumulated or be paid on a monthly, quarterly, semi-annual, or annual basis. You may not leave money on deposit for more than 30 years. Option IV: PAYOUTS OF A DESIGNATED AMOUNT: Payouts will be made until proceeds, including interest, are exhausted. Interest is at a rate we declare (or at a higher rate as required by law). Payout payment choices are on a monthly, quarterly, semi-annual, or annual basis. Option V: OTHER: You, as owner, may ask us to apply money under any options we offer at the time we pay the benefit. The beneficiary(ies) or other person (successor to the beneficiary(ies)) who has the right to receive payments may name someone else to receive amounts that we would otherwise pay to the beneficiary's(ies') estate if he/she/they die(s). The person who has the right to receive payment may name another person, at any time. Designating another person to receive payment may have income, gift or estate tax consequences. Consult a professional tax adviser before making this designation. We must approve an arrangement that involves someone who is to receive payment who is not a human being (for example, a corporation). We must approve a situation involving a person who is to receive payment while acting on behalf of another, called a fiduciary. We base the details of all arrangements on our rules at the time the arrangements are effective. This includes rules on the: o minimum amount we pay under an option; o minimum amounts for installment payments; o withdrawal rights; o right to receive payments over time, which we may offer as a lump sum payment; o naming of people who have the right to receive payment and their successors; and o proof of age and survival. ADMINISTRATIVE INFORMATION ABOUT THE POLICY VOTING PRIVILEGES We invest the variable divisions' assets in shares of investment portfolios. We are the legal owner of the shares held in the variable account and we have the right to vote on certain issues. Among other things, we may vote on issues described in the fund's current prospectus, or issues requiring a vote by shareholders under the Investment Company Act of 1940. Even though we own the shares, we give you the opportunity to tell us how to vote the number of shares attributable to your account value. We count fractional shares. If you have a voting interest, we send you proxy material and a form on which to give us your voting instructions. Each investment portfolio's shares have the right to one vote. The votes of all investment portfolios are cast together on a collective basis, except on issues for which the interests of the portfolios differ. In these cases, voting is done on a portfolio-by-portfolio basis. Examples of issues that require a portfolio-by- portfolio vote are: 1. changes in the fundamental investment policy of a particular investment portfolio; or 2. approval of an investment advisory agreement. We vote the shares in accordance with your instructions at meetings of investment portfolio shareholders. We vote any investment portfolio shares that are not attributable to policies, and any investment portfolio shares for which the owner does not give us instructions, the same way we vote as if we did receive owner instructions. We reserve the right to vote investment portfolio shares without getting instructions from policy owners if the federal securities laws, regulations, or their interpretations change to allow this. You may only instruct us on matters relating to the investment portfolios corresponding to divisions in which you have invested assets as of the record date - -------------------------------------------------------------------------------- Strategic Advantage 45 set by the investment portfolio's Board for the portfolio's shareholders meeting. We determine the number of investment portfolio shares in each division that we attribute to your policy by dividing your account value allocated to that division by the net asset value of one share of the matching investment portfolio. MATERIAL CONFLICTS We are required to track events to identify any material conflicts arising from using investment portfolios for both variable life and variable annuity separate accounts. The boards of the investment portfolios, Security Life, and other insurance companies participating in the investment portfolios, have this same duty. There may be a material conflict if: o state insurance law or federal income tax law changes; o investment management of an investment portfolio changes; or o voting instructions given by owners of variable life insurance policies and variable annuity contracts differ. The investment portfolios may sell shares to certain qualified pension and retirement plans qualifying under Code Section 401. These include cash or deferred arrangements under Code Section 401(k). Therefore, there is a possibility that a material conflict may arise between the interests of owners in general, or between certain classes of owners, and these retirement plans or participants in these retirement plans. If there is a material conflict, we have the duty to determine appropriate action, including removing the portfolios involved from our variable investment options. We may take other action to protect policy owners. This could mean delays or interruptions of the variable operations. When state insurance regulatory authorities require us, 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 the 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 divisions. We cast votes credited to amounts in the variable divisions, but not credited to policies in the same proportion as votes cast by owners. RIGHT TO CHANGE OPERATIONS Subject to state limitations, we may from time to time make any of the following changes to our separate account: 1. Change the investment objective. 2. Offer additional divisions which will invest in portfolios we find appropriate for policies we issue. 3. Eliminate variable divisions. 4. Combine two or more variable divisions. 5. Substitute a new investment portfolio for a portfolio in which the division currently invests. A substitution may become necessary if, in our judgment: o a portfolio no longer suits the purposes of your policy; o there is a change in laws or regulations; o there is a change in a portfolio's investment objectives or restrictions; o the portfolio is no longer available for investment; or o another reason we deem a substitution is appropriate. 6. Transfer assets related to your policy class to another separate account. 7. Withdraw the separate account from registration under the 1940 Act. 8. Operate the separate account as a management investment company under the 1940 Act. 9. Cause one or more divisions to invest in a mutual fund other than, or in addition to, the investment portfolios. 10. Stop selling these policies. 11. End any employer or plan trustee agreement with us under the agreement's terms. 12. Limit or eliminate any voting rights for the separate account. 13. Make any changes required by the 1940 Act, or its rules or regulations. - -------------------------------------------------------------------------------- Strategic Advantage 46 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 then wish to transfer the amount you have in the affected division to another variable division, or to the guaranteed interest division, you may do so free of charge. Just notify us at our customer service center. REPORTS TO OWNERS At the end of each policy year we send a report to you that shows: o your total net policy death benefit (your stated death benefit plus adjustable term insurance rider death benefit, if any); o your account value; o your policy loans, if any, plus accrued interest; o your net cash surrender value; o information about the variable divisions; and o your account transactions during the previous year showing net premiums, transfers, deductions, loans, or withdrawals. We also send semi-annual reports with financial information on the investment portfolios, including a list of the investment holdings of each portfolio to you. We send confirmation notices to you throughout the year for certain policy transactions. CHARGES, DEDUCTIONS AND REFUNDS The amount of a charge may not exactly correspond to the cost incurred by us to provide the service or benefits associated with the particular policy. Many charges are not at "cost". For example, the sales charges may not cover all of the sales and distribution expenses actually incurred by us. Proceeds from other charges, including the mortality and expense risk charge or cost of insurance charges, may be used in part to cover such expenses. DEDUCTIONS FROM PREMIUMS We consider any payment we receive before the maturity date to be a premium if you do not have an outstanding loan. After we deduct certain expenses from your premium payment, we add the remaining net premium to your account value. TAX CHARGES We pay state and local taxes in almost all states. These taxes vary in amount from state to state and may vary from jurisdiction to jurisdiction within a state. Currently, state and local taxes range from 0.5% to 5% with some states not imposing these types of taxes. We currently deduct an amount equal to 2.5% of each premium payment you make to cover these taxes. The 2.5% rate approximates the average tax rate we expect to pay in all states. We also currently deduct an amount equal to 1.5% of each premium payment you make to cover our estimated costs for the federal income tax treatment of deferred acquisition costs. This cost is determined solely by the amount of life insurance premiums we receive. We reserve the right to increase or decrease your premium expense charge for taxes as a result of changes in the tax law, within limits set by state law. We also reserve the right to increase or decrease your premium expense charge for the federal income tax treatment of deferred acquisition costs based on any change in that cost to us. SALES CHARGE We deduct a percentage from each of your premium payments to compensate us for the costs we incur in selling the policies. We base the deducted percentage on the amount of premium you have paid and the number of years since the policy date or an increase in your coverage. For each of the first five policy years, this charge equals 8% of the premiums you have paid up to the target premium and 3% of premiums you have paid in excess of the target premium. After the fifth policy year, the sales charge is 3% of all premiums you have paid. Target premiums are not based on the scheduled premium. Target premiums are actuarially determined based on the age, sex and premium class of the insured person. The target premium for your policy and any segments added since the policy date are listed in the schedule we will provide to you. SEE PREMIUMS, PAGE 21. These premium deductions are a part of the total sales charge. To determine your applicable sales charge, premiums you pay after an increase in stated - -------------------------------------------------------------------------------- Strategic Advantage 47 death benefit are allocated to your policy segments in the same proportion as the guideline annual premium (defined by federal income tax law) for each segment bears to the total guideline annual premium for your stated death benefit. The sales charge covers the costs of distribution, preparing our sales literature, promotional expenses, and other direct and indirect expenses. The amount charged is not specifically related to sales expenses in a particular year. We may reduce or waive the sales charge for certain group or sponsored arrangements or for corporate purchasers. DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT MORTALITY AND EXPENSE RISK CHARGE We deduct a charge each day for the mortality and expense risks we assume. This charge is 0.002055% per day of the amount you have in the variable divisions. This is an annual rate of 0.75%. 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 divisions are greater than the amount we estimated when we set these charges. The mortality and expense risk charge does not apply to your account value which is invested in the guaranteed interest division or the loan division. MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE We deduct charges from your account value on each monthly processing date. On or before November 1, 1999, we will make available to you the option to designate a single withdrawal investment division from which we will take your monthly deductions. You may designate a withdrawal investment division at policy application or at a later time. You may choose to have us withdraw the monthly deduction from the guaranteed interest division or the variable divisions in which you have amounts. You may not use the loan division as your designated withdrawal investment division from which to deduct monthly deductions. If you do not choose a withdrawal investment division from which to deduct monthly deductions, or if the amount you have in your designated withdrawal investment division is not enough to cover the monthly deductions, these charges are taken from the variable and guaranteed interest divisions in the same proportion that your account value in each division has to your total net account value as of the monthly processing date. If you change your designated withdrawal investment division from which monthly deductions are deducted, we may consider this a premium allocation change for which there may be a charge. SEE POLICY TRANSACTION FEES, PAGE 50. DIVISIONS FROM WHICH WE DEDUCT CHARGES
MONTHLY CHARGES: COST OF INSURANCE CHARGES, RIDER CHARGES, LOANS AND ADMINISTRATION FEES TRANSACTION FEES PARTIAL WITHDRAWALS - ----------- ---------------------------------------- ---------------------------- ----------------------------------- CHOICE May choose one withdrawal investment Proportionally among May choose any withdrawal division, including guaranteed interest variable divisions and investment division or combination division when this option is available guaranteed interest division of investment divisions, subject to requirements - ----------- ---------------------------------------- ---------------------------- ----------------------------------- DEFAULT Proportionally among variable divisions Proportionally among Proportionally among variable and guaranteed interest division variable divisions and divisions and guaranteed interest guaranteed interest division division
- -------------------------------------------------------------------------------- Strategic Advantage 48 POLICY CHARGE The initial policy charge is $10 per month for the first five years of your policy. This charge compensates us for such costs as: o application processing; o medical examinations; o establishment of policy records; and o insurance underwriting costs. MONTHLY ADMINISTRATIVE CHARGE For this policy, we charge a per month administrative charge of $5 plus $0.0125 per $1,000 for the greater of the stated death benefit, or the target death benefit. The per $1,000 charge is currently limited to $15 per month. 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 under the policy, including the expected cost of paying death proceeds that are more than your account value at the insured person's death. We base the cost of insurance charge rates on the insured person's age, gender, ratings and premium class on the policy for each segment date, or on the date you add a base coverage segment. The cost of insurance charge is equal to 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 the amount of your account value after we deduct your policy and rider charges due on that date, other cost of insurance charges for the base death benefit, adjustable term insurance rider and waiver of cost of insurance rider. If your base death benefit at the beginning of a month increases (due to requirements of the federal income tax law definition of life insurance), the net amount at risk for your base death benefit for that month also increases. Similarly, the net amount at risk for your adjustable term insurance rider decreases. This means that the amount of your cost of insurance charge varies from month to month with changes in your net amount at risk, changes in the death benefit and with the increasing age of the insured person. We allocate the net amount at risk to any segments in the same proportion that each segment has to the total stated death benefit for all coverage segments as of the monthly processing date. We apply unisex rates where appropriate under the law. This currently includes the State of Montana and policies purchased by employers and employee organizations in connection with employment-related insurance or benefit programs. Separate cost of insurance rates apply to: o each segment of the base death benefit; and o your adjustable term insurance rider. These rates are never more than the guaranteed maximum rates shown in your policy; however, they may change from time to time. The guaranteed maximum rates are based on the 1980 Commissioner's Standard Ordinary Sex and Smoker Distinct Mortality Table. The maximum rates for the initial and any new segment will be printed in the schedule which we will provide to you. GUARANTEED ISSUE We may offer policies on a guaranteed issue basis for certain group or sponsored arrangements. When this happens, we issue these policies up to a preset face amount with reduced evidence of insurability requirements. Guaranteed issue policies may carry a different mortality risk to us compared with policies that are fully underwritten. So, we may charge different cost of insurance rates for guaranteed issue policies. The cost of insurance rates under these circumstances may depend on the: o issue age of the insured people; o risk class of the insured people; o size of the group; and o total premium the group pays. Generally, most guaranteed issued policies have higher overall charges for insurance than a similar underwritten policy issued in the standard nonsmoker, or standard smoker class. This means that the insured person in a group or sponsored arrangement could get individually underwritten insurance coverage at a lower overall cost. - -------------------------------------------------------------------------------- Strategic Advantage 49 CHARGES FOR ADDITIONAL BENEFITS On each monthly processing date, we deduct the cost of additional benefits under your riders. SEE ADDITIONAL BENEFITS, PAGE 29. CHANGES IN MONTHLY CHARGES Changes we make in the cost of insurance charges, the guaranteed minimum death benefit charge or charges for additional benefits are for a class of insured persons. We base the new charge on changes in expectations about: o investment earnings; o mortality; o the time policies remain in effect; o expenses; and o taxes. New monthly charges will never be more than the guaranteed maximum rates shown in your policy. GUARANTEED MINIMUM DEATH BENEFIT CHARGE If you choose the guaranteed minimum death benefit we currently charge $0.005 per $1,000 of stated death benefit each month during the guarantee period. This charge is guaranteed never to be more than $0.01 per $1,000 of stated death benefit each month. POLICY TRANSACTION FEES We also charge fees for certain transactions you may make under your policy. We take 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 We charge a service fee of the lesser of $25 or 2% of the amount you request against your account value for each partial withdrawal you take to cover our costs. SEE PARTIAL WITHDRAWALS, PAGE 36. TRANSFERS There is a $25 fee for each additional transfer over twelve per policy year to cover our costs. If you include multiple transfers in one transfer request, it counts as one transfer. There is no transfer fee if you are transferring your account value into the guaranteed interest division under the right to exchange feature in your policy. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 33, AND RIGHT TO EXCHANGE POLICY, PAGE 31. ILLUSTRATIONS The first policy illustration you request in a policy year is free. After that, we may charge a fee of up to $25 for each additional policy illustration you request. PREMIUM ALLOCATION CHANGE You may make five free premium allocation changes per policy year. After the five free premium allocation changes, we charge you $25 for each additional premium allocation change per policy year. PERSISTENCY REFUND Where state law allows us, we pay long-term policy owners a persistency refund. Each month your policy remains in force after your tenth policy anniversary, we credit your account value with a refund. This refund equals 0.5% of your account value on an annual basis. On a monthly basis, this equals 0.04167%. If applicable, we add the persistency refund to the variable and guaranteed interest divisions, but not the loan division, in the same proportion that your account value in each division has to your net account value as of the monthly processing date. Here are two examples of how the persistency refund may affect your account value each month: EXAMPLE 1: YOUR POLICY HAS NO LOAN: o account value = $10,000 (all in the variable divisions) o monthly persistency refund rate = .0004167 o persistency refund = 10,000 x .0004167 = $4.17 Before After Persistency Persistency Refund Refund ----------- ----------- Variable divisions $10,000.00 $10,004.17 - -------------------------------------------------------------------------------- Strategic Advantage 50 EXAMPLE 2: YOUR POLICY DOES HAVE A LOAN: o account value = $10,000 o account value in the variable divisions = $6,000 o account value in the loan division = $4,000 o monthly persistency refund rate = .0004167 o persistency refund = 10,000 x .0004167 = $4.17 Before After Persistency Persistency Refund Refund ----------- ----------- Variable divisions $6,000.00 $6,004.17 Loan $4,000.00 $4,000.00 REFUND OF SALES CHARGES If you surrender your policy within the first two policy years and your policy has not lapsed, we will refund a portion of the sales charges we previously deducted from the premiums you have paid. In the first policy year, the amount of the refund is equal to 5% of the premiums you have paid. In the second policy year, the refund is equal to 2.5% of the premiums you have paid in the first policy year. After the second policy anniversary, there is no refund of sales charges. FEES AND EXPENSES OF THE INVESTMENT PORTFOLIOS The variable 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. The following table describes these investment management fees and other direct expenses of the investment portfolios. 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. - -------------------------------------------------------------------------------- Strategic Advantage 51
INVESTMENT PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS) /1/ Fees and Investment Total Expenses Total Net Management Other Portfolio Waived or Portfolio Portfolio Fees Expenses Expenses Reimbursed Expenses AIM VARIABLE INSURANCE FUNDS, INC. AIM V.I. Capital Appreciation Fund 0.62% 0.05% 0.67% NA 0.67% AIM V.I. Government Securities Fund 0.50% 0.26% 0.76% NA 0.76% THE ALGER AMERICAN FUND Alger American Growth Portfolio 0.75% 0.04% 0.79% NA 0.79% Alger American Leveraged AllCap Portfolio 0.85% 0.11%/2/ 0.96% NA 0.96% Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84% NA 0.84% Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89% NA 0.89% FIDELITY VARIABLE INSURANCE PRODUCTS FUND VIP Growth Portfolio 0.59% 0.09% 0.68% NA 0.68%/4/ VIP Money Market Portfolio 0.20% 0.10% 0.30% NA 0.30% VIP Overseas Portfolio 0.74% 0.17% 0.91% NA 0.91%/4/ FIDELITY VARIABLE INSURANCE PRODUCTS FUND II VIP II Asset Manager Portfolio 0.54% 0.10% 0.64% NA 0.64%/4/ VIP II Index 500 Portfolio 0.24% 0.11% 0.35% 0.07% 0.28%/5/ INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund (formerly VIF-Industrial Income Portfolio) 0.75% 0.42% 1.17%/3/ 0.24%/6/ 0.93% INVESCO VIF-High Yield Fund 0.60% 0.47% 1.07% NA 1.07% INVESCO VIF-Small Company Growth Fund 0.75% 11.92% 12.67%/3/ 10.80%/7/ 1.87% INVESCO VIF-Total Return Fund 0.75% 0.49% 1.24%/3/ 0.07%/8/ 1.17% INVESCO VIF-Utilities Fund 0.60% 1.24% 1.84%/3/ 0.76%/9/ 1.08% NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Growth Portfolio 0.83% 0.09% 0.92% NA 0.92% Limited Maturity Bond Portfolio 0.65% 0.11% 0.76% NA 0.76% Partners Portfolio 0.78% 0.06% 0.84% NA 0.84% VAN ECK WORLDWIDE INSURANCE TRUST Worldwide Bond Fund 1.00% 0.15% 1.15% NA 1.15% Worldwide Emerging Markets Fund 1.00% 0.61% 1.61%/3/ 0.11%/10/ 1.50% Worldwide Hard Assets Fund 1.00% 0.20% 1.20%/3/ NA/11/ 1.20% Worldwide Real Estate Fund 1.00% 4.32% 5.32%/3/ 4.43%/12/ 0.89%
/1/ The preceding portfolio expense information was provided to us by the portfolios, and we have not independently verified such information. These portfolio expenses are not direct charges against division assets or reduction from contract values; rather these portfolio expenses are taken into consideration in computing each underlying portfolio's net asset value, which is the share price used to calculate the unit values of the divisions. For a more complete description of the portfolios' costs and expenses, see the prospectuses for the portfolios. /2/ Included in other expenses of the Alger American Leveraged AllCap Portfolio is 0.03% of interest expense. /3/ Certain expenses of the Fund are being voluntarily absorbed by the Funds. - -------------------------------------------------------------------------------- Strategic Advantage 52 /4/ A Portion of the brokerage commissions that certain funds pay was used to reduce fund expenses. In addition, certain funds have entered into arrangements with their custodian whereby credits realized, as a result of uninvested cash balances were used to reduce custodian expenses. Including these reductions, the total portfolio expenses presented in the table would have been 0.66% for Growth Portfolio, 0.89% for Overseas portfolio and 0.63% for Asset Manager Portfolio. /5/ FMR agreed to reimburse a portion of Index 500 Portfolio's expenses during the period. Without this reimbursement, the funds' total portfolio expenses would have been 0.35%. /6/ Certain expenses of the VIF-Equity Income Fund (formerly VIF-Industrial Income Fund) are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Equity Income Fund's "Other Expenses" and "Total Portfolio Expenses" were 0.18% and 0.93% respectively. This commitment can be changed at any time following consultation with the board of directors. /7/ Certain expenses of the VIF-Small Company Growth Fund are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Small Company Growth Fund's "Other Expenses" and "Total Portfolio Expenses" were 1.12% and 1.87% respectively. This commitment can be changed at any time following consultation with the board of directors. /8/ Certain expenses of the VIF-Total Return Fund are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Total Return Fund's "Other Expenses" and "Total Portfolio Expenses" were 0.42% and 1.17% respectively. This commitment can be changed at any time following consultation with the board of directors. /9/ Certain expenses of the VIF-Utilities Fund are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Utilities Fund's "Other Expenses" and "Total Portfolio Expenses" were 0.48% and 1.08% respectively. This commitment can be changed at any time following consultation with the board of directors. /10/ Van Eck Associates Corporation (the "Advisor") assumed expenses exceeding 1.50% of the Fund's average daily net assets. Due to this arrangement, the actual expenses incurred were "Total Portfolio Expenses" of 1.50%. /11/ The Fund's "Other Expenses" were 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. Due to this arrangement the actual expenses incurred were "Other Expenses" of 0.16% and "Total Portfolio Expenses" of 1.16%. /12/ Van Eck Associates Corporation (the "Advisor") waived its management fees and assumed certain expenses for the period January 1, 1998 to February 28, 1998. The Advisor also assumed expenses exceeding 1.00% of the Fund's average daily net assets for the period March 1,1998 to December 31, 1998. 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. Due to this arrangement the actual expenses incurred were "Investment Management Fees" of 0.00%, "Other Expenses" of 0.89% and "Total Portfolio Expenses" of 0.89%. /13/ Neuberger Berman Advisers Management Trust (the "Trust") is divided into portfolios ("Portfolios"), each of which invests all of its net investable assets in a corresponding series ("Series") of Advisers Managers Trust. The figures reported under "Investment Management and Administration Fees" include the aggregate of the administration fees paid by the Portfolio and the management fees paid by its corresponding Series. Similarly, the "Other Expenses" includes all other expenses of the Portfolio and its corresponding Series. See "Expenses" in the Trust's Prospectus. Expenses may reflect expense reimbursement. NBMI has undertaken to reimburse certain operating expenses, including compensation of NBMI and excluding taxes, interest, extraordinary expense, brokerage commissions and transaction costs, that exceed, in the aggregate, 1% of the Portfolios' average daily net asset value. These expense reimbursement policies are subject to termination upon 60 days written notice to the Portfolios. - -------------------------------------------------------------------------------- Strategic Advantage 53 GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS Individuals, corporations or other institutions may purchase this policy. For group or sponsored arrangements (including employees of Security Life of Denver, its affiliates and appointed sales agents), corporate purchasers, or special exchange programs which we may offer from time to time, we may reduce or waive the: o administrative charge; o minimum stated death benefit; o minimum target death benefit; o minimum annual premium; o target premium; o sales charges; o cost of insurance charges; or o other charges normally assessed. We can reduce or waive these items due to expected economies under a group or sponsored arrangement or with a corporate purchaser. Group arrangements include those in which there is a trustee, an employer or an association. The group either purchases policies covering a group of individuals on a group basis or endorses 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. Our sales, administration and mortality costs generally vary with the size and stability of the group, among other factors. We take all these factors into account when we reduce charges. A group or sponsored arrangement must meet certain requirements to qualify for reduced charges. We make reductions to charges based on our rules in effect when we approve a policy application form. We may change these rules from time to time. Sponsored arrangements or corporations may have different group premium payments and premium requirements. We will not be unfairly discriminatory in any variation in the administrative charge, or other charges, fees and privileges. These variations are based on differences in costs or services. OTHER CHARGES Under current law, we pay no tax on investment income and capital gains included in variable life insurance policy reserves. This means that no charge is currently made to any variable division for our federal income taxes. If the tax law changes and we have federal income tax chargeable to the variable divisions, we may make such a charge in the future. In most states, we must pay state and local taxes. If these taxes increase, we may charge for such taxes. TAX CONSIDERATIONS The following summary provides a general description of the federal income tax considerations associated with the policy and does not purport to be complete or to cover all tax situations. This discussion is not intended as tax advice. Counsel or other competent tax advisers should be consulted for more complete information. This discussion is based upon our understanding of the present federal income tax laws. No representation is made as to the likelihood of continuation of the present federal income tax laws or as to how they may be interpreted by the Internal Revenue Service. TAX STATUS OF THE POLICY This policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the policy shall be construed in a manner which is consistent with that design. In order to qualify as a life insurance contract for federal income tax purposes and to receive the tax treatment normally accorded life insurance contracts under federal tax law, a policy must satisfy certain requirements which are set forth in Internal Revenue Code Section 7702. However, there is very little guidance, with respect to policies issued on a substandard basis. Nevertheless, we believe it is reasonable to conclude that our policies satisfy the applicable requirements. If it is subsequently determined that a policy does not satisfy the applicable requirements, we will take appropriate and reasonable steps to bring the policy into compliance with such requirements and we reserve the right to restrict policy transactions or modify your policy in order to do so. Section 7702 provides that if one of two alternate tests is met, a policy will be treated as a life insurance policy for federal income tax purposes. These tests are referred to as the "cash value accumulation test" and the "guideline premium/cash value corridor test." - -------------------------------------------------------------------------------- Strategic Advantage 54 Under the cash value accumulation test, there is no limit to the amount that may be paid in premiums as long as there is enough death benefit in relation to account value at all times. The death benefit at all times must be at least equal to an actuarially determined factor, depending on the insured person's age, sex, and premium class at any point in time, multiplied by the account value. SEE APPENDIX A, PAGE 172, FOR A TABLE OF THE CASH VALUE ACCUMULATION TEST FACTORS. The guideline premium/cash value corridor test provides for a maximum premium in relation to the death benefit, and a minimum "corridor" of death benefit in relation to account value. In most situations, the death benefit that results from the guideline premium/cash value corridor test will ultimately be less than the amount of death benefit required under the cash value accumulation test. SEE APPENDIX B, PAGE 180, FOR A TABLE OF THE GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST FACTORS. This policy allows the owner to choose, at the time of application, which of these tests we will apply to the policy. A choice of tests is irrevocable. Regardless of which test is chosen, we will at all times assure that the policy meets the statutory definition which qualifies the policy as life insurance for federal income tax purposes. In addition, as long as the policy remains in force, increases in account value as a result of interest or investment experience will not be subject to federal income tax unless and until there is a distribution from the policy, such as a partial withdrawal or loan. SEE TAX TREATMENT OF POLICY DEATH BENEFITS, PAGE 55. DIVERSIFICATION REQUIREMENTS In addition to meeting the Code Section 7702 tests, Code Section 817(h) requires separate account investments, such as our variable 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 division 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 divisions' 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 variable 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 variable 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 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 loans are taken from or secured by a policy, the tax consequences depend on whether or not the policy is a "modified endowment contract." - -------------------------------------------------------------------------------- Strategic Advantage 55 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 paid 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: 1. All distributions other than death benefits, including distributions upon surrender and withdrawals, from a modified endowment contact will be treated first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. 2. Loans taken from or secured by a policy classified as a modified endowment contract are treated as distributions and taxed first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. 3. A 10% additional income tax penalty may be imposed on the distribution amount subject to income tax. Consult a tax adviser to determine whether or not you may be subject to this penalty tax. DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS Distributions other than death benefits from a policy that is not classified as a modified endowment contract are generally treated first as a recovery of the policy owner's investment in the policy. Only after the recovery of all investment in the policy, is there taxable income. However, certain distributions which must be made in order to enable the policy to continue to qualify as a life insurance contract for federal income tax purposes, if policy benefits are reduced during the first fifteen policy years, may be treated in whole or in part as ordinary income subject to tax. Loans from or secured by a policy that is not a modified endowment contract are generally not treated as distributions. Finally, neither distributions from, nor loans 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. Before taking out a policy loan, you should consult a tax adviser as to the tax consequences. - -------------------------------------------------------------------------------- Strategic Advantage 56 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. We will give you advance notice of this change. The tax law limits the amount we can charge for mortality costs and other expenses used to calculate whether your policy qualifies as life insurance for federal income tax purposes. We must base these calculations on reasonable mortality charges and other charges reasonably expected to be paid. The Treasury issued proposed regulations on what it considers reasonable mortality charges. We believe that the charges used for your policy should meet the Treasury's current requirement for "reasonableness." We reserve the right to make changes to the mortality charges if future regulations have standards which make changes necessary in order to continue to qualify your policy as life insurance for federal income tax purposes. Additionally, assuming that you do not want your policy to be or to become a modified endowment contract, we include a policy endorsement under which we have the right to amend your policy, including riders. We do this to attempt to enable your policy to continue to meet the seven-pay test for federal income tax purposes. If the policy premium you pay is more than the seven-pay limit, we have the right to remove any excess premium or to make any appropriate adjustments to your policy's account value and death benefit. It is not clear, however, whether we can take effective action pursuant to this endorsement under all possible circumstances to prevent a policy that has exceeded the premium limitation from being classified as a modified endowment contract. Any increase in your death benefit will cause an increase in your cost of insurance charges. OTHER Policy owners may use our policies in various arrangements, including: o qualified plans; o non-qualified deferred compensation or salary continuance plans; o split dollar insurance plans; o executive bonus plans; o retiree medical benefit plans; and o other plans. The tax consequences of these plans may vary depending on the particular facts and circumstances of each arrangement. If you want to use any of your policies in this type of arrangement, you should consult a qualified tax adviser regarding the tax issues of your particular arrangement. - -------------------------------------------------------------------------------- Strategic Advantage 57 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 Advantage 58 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES, AND ACCUMULATED PREMIUMS The following tables are intended to show how the policy works. This includes how benefits and values can vary over a long period of time. Each table also compares these values with total premiums paid with interest. The policies illustrated include:
Definition Death of Life Stated Target Smoker Benefit Insurance Death Death Gender Age Status Option Test Benefit Premium Benefit - ------ --- ------ ------ ---- ------- ------- ------- Male 45 Non-smoker 1 CVAT 300,000 $5,750 300,000 Male 45 Non-smoker 1 CVAT 150,000 $5,750 300,000 Male 45 Non-smoker 1 GP 300,000 $5,750 300,000
The tables show how death benefits, account values, and cash 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 or unisex rates. These illustrations assume there are no policy loans. We illustrate premium payments as if they were made at the beginning of the year. The third column of each table shows what would happen if an amount equal to the assumed premiums earned interest, after taxes, of 5% compounded annually. The net investment return on your policy is lower than the gross investment return on the variable divisions. This is due to the mortality and expense risk charge, and the portfolio charge for management fees and portfolio expenses. We show the effect of the net investment return in the in the amounts for death benefits, account values and cash surrender values. The tables reflect annual investment management fees of 0.6643% 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, 1998. We assume other portfolio expenses at the rate of 0.2531% of the portfolios' average daily net assets. This is an average of all the portfolios' other expenses for the year ending December 31, 1998 after any absorption by investment portfolio managers has been made. The average of all portfolios' total expenses is 0.9174%. Actual fees vary by portfolio. The portfolio fees and expenses used in the illustrations are the net amounts shown after absorption of fees and expenses by the portfolio's investment manager. Absent such reimbursement, the fees and expenses used in the illustrations would be higher. The tables assume that the current expense reimbursement arrangements will continue. However, they may not continue. The effect of these portfolio charges and expenses, and mortality and expense risk charges results in a net rate of return of: o (1.66)% on a 0% gross rate of return; o 4.30% on a 6% gross rate of return; and o 10.25% on a 12% gross rate of return. - -------------------------------------------------------------------------------- Strategic Advantage 59 The tables assume that charges have been deducted including deductions for premiums, cost of insurance rider charges, monthly deductions and administrative and sales charges. The tables show charges at our current rates which includes a persistency refund. The tables also show charges at the maximum rates we guarantee in our policies. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 48. The tables reflect that we do not currently charge against the variable account for state or federal taxes. If we charge for the taxes in the future, it will take a higher gross rate of return than the rates shown to produce the same death benefits, account values, and cash surrender values. If we are asked to do so, we will give you a comparable personal illustration based on: o the insured person's age and gender; o standard premium class assumptions; o initial stated death benefit; o the chosen death benefit option; o scheduled premiums consistent with your policy form; and o special features elected on your policy. At issue, we deliver an individualized illustration showing the scheduled premium you chose and the insured person's actual risk class. After we issue the policy, if you ask us to, we will give you an illustration of future policy benefits. We base these hypothetical future benefits on both guaranteed and current cost factor assumptions and actual account value. - -------------------------------------------------------------------------------- Strategic Advantage 60 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
------------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 1 5750 6038 3782 4069 300000 4308 4596 300000 4045 4332 300000 2 5750 12377 7435 7579 300000 8992 9135 300000 8197 8340 300000 3 5750 19033 10957 10957 300000 14086 14086 300000 12457 12457 300000 4 5750 26022 14347 14347 300000 19632 19632 300000 16828 16828 300000 5 5750 33361 17597 17597 300000 25671 25671 300000 21306 21306 300000 6 5750 41067 21108 21108 300000 32699 32699 300000 26319 26319 300000 7 5750 49157 24458 24458 300000 40365 40365 300000 31451 31451 300000 8 5750 57653 27633 27633 300000 48726 48726 300000 36694 36694 300000 9 5750 66573 30621 30621 300000 57850 57850 300000 42044 42044 300000 10 5750 75939 33403 33403 300000 67810 67810 300000 47487 47487 300000 15 5750 130281 44820 44820 300000 137116 137116 300000 77784 77784 300000 20 5750 199636 48523 48523 300000 248305 248305 442231 110929 110929 300000 25 5750 288152 38775 38775 300000 415077 415077 655407 145894 145894 300000 30 5750 401125 3008 3008 300000 658365 658365 936195 182322 182322 300000 AGE 65 5750 215655 47878 47878 300000 276591 276591 480162 117783 117783 300000
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE WHICH WERE USED TO CALCULATE THE ABOVE VALUES. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage 61 PROSPECT: INSURED'S NAME: MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
------------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 1 5750 6038 4236 4523 300000 4792 5079 300000 4514 4801 300000 2 5750 12377 8175 8319 300000 9836 9980 300000 8988 9132 300000 3 5750 19033 11863 11863 300000 15204 15204 300000 13465 13465 300000 4 5750 26022 15402 15402 300000 21038 21038 300000 18049 18049 300000 5 5750 33361 18876 18876 300000 27474 27474 300000 22827 22827 300000 6 5750 41067 22686 22686 300000 35019 35019 300000 28230 28230 300000 7 5750 49157 26425 26425 300000 43346 43346 300000 33866 33866 300000 8 5750 57653 30057 30057 300000 52505 52505 300000 39707 39707 300000 9 5750 66573 33565 33565 300000 62568 62568 300000 45746 45746 300000 10 5750 75939 36944 36944 300000 73632 73632 300000 51987 51987 300000 15 5750 130281 52576 52576 300000 151569 151569 308897 88196 88196 300000 20 5750 199636 61556 61556 300000 275803 275803 491205 129856 129856 300000 25 5750 288152 60100 60100 300000 465997 465997 735809 178418 178418 300000 30 5750 401125 38951 38951 300000 749067 749067 1065173 235558 235558 334964 AGE 65 5750 215655 62280 62280 300000 307779 307779 534304 138939 138939 300000
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage 62 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $150000 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $150000 ANNUAL PREMIUM: $5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 1 5750 6038 3781 4069 300000 4308 4595 300000 4044 4332 300000 2 5750 12377 7434 7578 300000 8991 9134 300000 8196 8340 300000 3 5750 19033 10956 10956 300000 14084 14084 300000 12456 12458 300000 4 5750 26022 14346 14346 300000 19630 19630 300000 16827 16827 300000 5 5750 33361 17595 17595 300000 25668 25668 300000 21304 21304 300000 6 5750 41067 21106 21106 300000 32696 32696 300000 26316 26316 300000 7 5750 49157 24456 24456 300000 40362 40362 300000 31448 31448 300000 8 5750 57653 27631 27631 300000 48772 48772 300000 36691 36691 300000 9 5750 66573 30619 30619 300000 57846 57846 300000 42041 42041 300000 10 5750 75939 33403 33403 300000 67807 67807 300000 47486 47486 300000 15 5750 130281 44835 44835 300000 137120 137120 300000 77798 77798 300000 20 5750 199636 48596 48596 300000 248312 248312 442243 110999 110999 300000 25 5750 288152 39053 39053 300000 415087 415087 655423 146119 146119 300000 30 5750 401125 3978 3978 300000 658380 658380 936216 182929 182929 300000 AGE 65 5750 215655 47974 47974 300000 276598 276598 480175 117873 117873 300000
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE WHICH WERE USED TO CALCULATE THE ABOVE VALUES. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage 63 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $150000 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $150000 ANNUAL PREMIUM: $5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
----------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 1 5750 6038 4417 4704 300000 4984 5271 300000 4700 4987 300000 2 5750 12377 8609 8752 300000 10320 10464 300000 9447 9591 300000 3 5750 19033 12606 12606 300000 16076 16076 300000 14271 14271 300000 4 5750 26022 16468 16468 300000 22357 22357 300000 19236 19236 300000 5 5750 33361 20242 20242 300000 29267 29267 300000 24393 24393 300000 6 5750 41067 24330 24330 300000 37318 37318 300000 30176 30176 300000 7 5750 49157 28327 28327 300000 46188 46188 300000 36190 36190 300000 8 5750 57653 32222 32222 300000 55956 55956 300000 42437 42467 300000 9 5750 66573 36003 36003 300000 66698 66698 300000 48915 48915 300000 10 5750 75939 39655 39655 300000 78470 78470 300000 55620 55620 300000 15 5750 130281 56500 56500 300000 160475 160475 327047 94286 94286 300000 20 5750 199636 67115 67115 300000 289959 289959 516417 138981 138981 300000 25 5750 288152 69083 69083 300000 488143 488143 770777 191751 191751 302775 30 5750 401125 55013 55013 300000 783044 783044 1113489 251545 251545 357697 AGE 65 5750 215655 68322 68322 300000 323281 323281 561216 148803 148803 300000
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage 64 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 GUIDELINE PREMIUM TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 1 5750 6038 3782 4069 300000 4308 4596 300000 4045 4332 300000 2 5750 12377 7435 7579 300000 8992 9135 300000 8197 8340 300000 3 5750 19033 10957 10957 300000 14086 14086 300000 12457 12457 300000 4 5750 26022 14347 14347 300000 19632 19632 300000 16828 16828 300000 5 5750 33361 17597 17597 300000 25671 25671 300000 21306 21306 300000 6 5750 41067 21108 21108 300000 32699 32699 300000 26319 26319 300000 7 5750 49157 24458 24458 300000 40365 40365 300000 31451 31451 300000 8 5750 57653 27633 27633 300000 48726 48726 300000 36694 36694 300000 9 5750 66573 30621 30621 300000 57850 57850 300000 42044 42044 300000 10 5750 75939 33403 33403 300000 67810 67810 300000 47487 47487 300000 15 5750 130281 44820 44820 300000 137116 137116 300000 77784 77784 300000 20 5750 199636 48523 48523 300000 254236 254236 310168 110929 110929 300000 25 5750 288152 38775 38775 300000 450475 450475 522551 145894 145894 300000 30 5750 401125 3008 3008 300000 771064 771064 825038 182322 182322 300000 AGE 65 5750 215655 47878 47878 300000 286313 286313 343575 117783 117783 300000
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE WHICH WERE USED TO CALCULATE THE ABOVE VALUES. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage 65 PROSPECT: INSURED'S NAME: MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 GUIDELINE PREMIUM TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
----------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 1 5750 6038 4236 4523 300000 4792 5079 300000 4514 4801 300000 2 5750 12377 8175 8319 300000 9836 9980 300000 8988 9132 300000 3 5750 19033 11863 11863 300000 15204 15204 300000 13465 13465 300000 4 5750 26022 15402 15402 300000 21038 21038 300000 18049 18049 300000 5 5750 33361 18876 18876 300000 27474 27474 300000 22827 22827 300000 6 5750 41067 22686 22686 300000 35019 35019 300000 28230 28230 300000 7 5750 49157 26425 26425 300000 43346 43346 300000 33866 33866 300000 8 5750 57653 30057 30057 300000 52505 52505 300000 39707 39707 300000 9 5750 66573 33565 33565 300000 62568 62568 300000 45746 45746 300000 10 5750 75939 36944 36944 300000 73632 73632 300000 51987 51987 300000 15 5750 130281 52576 52576 300000 151577 151577 300000 88196 88196 300000 20 5750 199636 61556 61556 300000 282525 282525 344681 129856 129856 300000 25 5750 288152 60100 60100 300000 499211 499211 579084 178418 178418 300000 30 5750 401125 38951 38951 300000 854152 854152 913943 238201 238201 300000 AGE 65 5750 215655 62280 62280 300000 317858 317858 381430 138939 138939 300000
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage 66 ADDITIONAL INFORMATION DIRECTORS AND OFFICERS Set forth below is information regarding the directors and principal officers of Security Life of Denver Insurance Company. Security Life's address, and the business address of each person named, except as noted with one or two asterisks (*/**), is Security Life Center, 1290 Broadway, Denver, Colorado 80203-5699. The business address of each person denoted with one asterisk (*) is ING North America Insurance Corporation, 5780 Powers Ferry Road, Atlanta, Georgia 30327-4390. The business address of each person denoted with two asterisks (**) is Security Life of Denver Insurance Company, 9140 Arrowpoint Blvd., Suite 400, Charlotte, North Carolina 28273. Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Stephen M. Christopher Chairman, President and Chief Executive Officer Thomas F. Conroy Director, President, Security Life Reinsurance Michael W. Cunningham* Director, Executive Vice President Linda B. Emory* Director James L. Livingston, Jr. Executive Vice President and Chief Operating Officer Jeffrey R. Messner Executive Vice President and Chief Marketing Officer Jess A. Skriletz President, ING Institutional Markets John R. Barmeyer* Senior Vice President, Chief Legal Officer Wayne D. Bidelman Senior Vice President, CCRC Eugene L. Copeland Senior Vice President and General Counsel, Security Life Reinsurance and ING Institutional Markets Arnold A. Dicke Senior Vice President, Chief Actuary, ING Reinsurance Carol D. Hard Senior Vice President, Variable Products Philip R. Kruse Senior Vice President Charles LeDoyen** Senior Vice President, Structured Settlements Timothy P. McCarthy Senior Vice President, Marketing Services - -------------------------------------------------------------------------------- Strategic Advantage 67 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Gregory G. McGreevey Senior Vice President, New Products and Market Development, ING Institutional Markets Jeffery W. Seel* Senior Vice President, Chief Investment Officer Lawrence D. Taylor Senior Vice President, Chief Actuary Louis N. Trapolino Senior Vice President, Distribution William D. Tyler* Senior Vice President, Chief Information Officer Katherine Anderson Vice President, Chief Product Actuary Carole A. Baumbusch Vice President, Special Projects Evelyn A. Bentz Vice President, M Financial Sales Thomas Kirby Brown, Jr. Vice President, Operations, ING Institutional Markets Douglas W. Campbell Vice President, Agency Sales Daniel S. Clements Vice President and Chief Underwriter Stanley F. Eckert Vice President, National Marketing Shari A. Enger Vice President -- Controller Larry D. Erb Vice President, Information Technology Martha K. Evans Vice President, Variable Operations Fitz Fisher Vice President, Information Technology Deborah B. Holden* Vice President, Corporate Benefits Brian Holland Vice President, Sales and International Risk Management Kenneth R. Kiefer** Vice President, Operations, Structured Settlements Richard D. King Vice President, Medical Director Stephen F. Kraysler Vice President, Structured Reinsurance - -------------------------------------------------------------------------------- Strategic Advantage 68 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- C. Lynn McPherson* Vice President Sue A. Miskie Vice President, Corporate Services David S. Pendergrass* Vice President and Treasury Officer Stephen R. Pryde Vice President, Administration Christiaan M. Rutten Vice President, Structured Reinsurance Casey J. Scott Vice President, National Marketing Alan C. Singer Vice President, Customer Relations and Regulatory Compliance Mark A. Smith Vice President, Insurance Services Jerome M. Strop Vice President, Strategic Marketing Gary W. Waggoner Vice President, General Counsel and Corporate Secretary Amy L. Winsor Vice President and Treasurer William Wojciechowski* Vice President, CCRC Eric G. Banta Assistant Secretary Roger O. Beebe Actuarial Officer Marsha K. Crest Agency Administration Officer Kim M. Curley Appointed Actuary John B. Dickinson Actuarial Officer Relda A. Fleshman Deputy General Counsel Shirley A. Knarr Actuarial Officer Glen E. Stark Actuarial Officer William J. Wagner Actuarial Officer - -------------------------------------------------------------------------------- Strategic Advantage 69 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 variable account, and we do not expect to incur significant losses from such actions. ING America Equities, Inc., the principal underwriter and distributor of the policy, is not engaged in any litigation of any material nature. EXPERTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and the financial statements of the Security Life Separate Account L1 at December 31, 1998, and for each of the three years in the period ended December 31, 1998, 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 Lawrence D. Taylor, F.S.A., M.A.A.A., who is Senior Vice President 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 Variable Account and the variable life insurance policy described in this prospectus with the SEC. The Registration Statement, which is required by the Securities Act of 1933, includes additional information that is not required in this prospectus under the rules and regulations of the SEC. The additional information may be obtained from the SEC's principal office in Washington, DC. There is a charge for this material. - -------------------------------------------------------------------------------- Strategic Advantage 70 FINANCIAL STATEMENTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, are prepared in accordance with generally accepted accounting principles and start on page 72. The financial statements included for the Security Life Separate Account L1 at December 31, 1998 and for each of the three years in the period ended December 31, 1998, are prepared in accordance with generally accepted accounting principles and represent those divisions that had commenced operations by that date. The consolidated financial statements of Security Life and Subsidiaries, as well as the financial statement included for the Security Life Separate Account L1 referred to above have been audited by Ernst & Young LLP. The consolidated financial statements of Security Life and Subsidiaries should be distinguished from the financial statements of the Security Life Separate Account L1 and should be considered only as bearing upon the ability of Security Life and Subsidiaries to meet its obligations under the policies. They should not be considered as bearing upon the investment experience of the divisions of Security Life Separate Account L1. - -------------------------------------------------------------------------------- Strategic Advantage 71 Consolidated Financial Statements Security Life of Denver Insurance Company and Subsidiaries Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Strategic Advantage 71 Security Life of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ...............................................74 Audited Consolidated Financial Statements Consolidated Balance Sheets ..................................................75 Consolidated Statements of Income ............................................77 Consolidated Statements of Comprehensive Income...............................78 Consolidated Statements of Stockholder's Equity ..............................79 Consolidated Statements of Cash Flows ........................................80 Notes to Consolidated Financial Statements ...................................82 - -------------------------------------------------------------------------------- Strategic Advantage 73 [Logo of Ernst & Young LLP appears here] 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, 1998 and 1997, 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, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security Life of Denver Insurance Company and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Denver, Colorado /s/ Ernst & Young LLP April 5, 1999 - -------------------------------------------------------------------------------- Strategic Advantage 74 Security Life of Denver Insurance Company and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)
DECEMBER 31 1998 1997 -------------------------------- Assets Investments (Notes 2 and 3): Fixed maturities, at fair value (amortized cost: 1998--$3,383,582; 1997--$3,007,012) $ 3,503,530 $3,152,355 Equity securities, at fair value (cost: 1998--$6,761; 1997--$6,754) 8,400 8,019 Mortgage loans on real estate 784,108 576,620 Investment real estate, at cost, less accumulated depreciation (1998--$706; 1997--$667) 1,740 1,767 Policy loans 925,623 875,405 Other long-term investments 17,671 14,307 Short-term investments 747 55,466 -------------------------------- Total investments 5,241,819 4,683,939 Cash 31,644 22,299 Accrued investment income 52,440 49,726 Reinsurance recoverable: Paid benefits 11,364 11,170 Unpaid benefits 24,312 14,988 Prepaid reinsurance premiums (Note 8) 3,329,901 2,744,863 Deferred policy acquisition costs (DPAC) 778,126 682,905 Property and equipment, at cost, less accumulated depreciation (1998--$25,981; 1997--$22,925) 36,141 37,943 Federal income tax recoverable (Note 9) -- 5,722 Indebtedness from related parties 4,339 2,443 Other assets 113,019 87,298 Separate account assets (Note 6) 423,474 263,035 -------------------------------- Total assets $10,046,579 $8,606,331 ================================
- -------------------------------------------------------------------------------- Strategic Advantage 75
DECEMBER 31 1998 1997 ----------------------------------------- Liabilities and stockholder's equity Liabilities: Future policy benefits: Life and annuity reserves $ 4,857,141 $4,328,577 Guaranteed investment contracts 3,210,012 2,634,654 Policyholders' funds 81,064 82,291 Advance premiums 272 365 Accrued dividends and dividends on deposit 21,268 21,129 Policy and contract claims 130,100 103,525 ----------- ---------- Total future policy benefits 8,299,857 7,170,541 Accounts payable and accrued expenses 108,165 99,335 Indebtedness to related parties 13,755 7,704 Long-term debt to related parties (Note 10) 100,000 75,000 Accrued interest on long-term debt to related parties (Note 10) 5,387 5,128 Other liabilities 109,593 61,424 Federal income taxes payable (Note 9) 106 -- Deferred federal income taxes (Note 9) 60,062 53,829 Separate account liabilities (Note 6) 423,474 263,035 ----------- ---------- Total liabilities 9,120,399 7,735,996 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 315,722 315,722 Retained earnings 563,553 500,795 Accumulated other comprehensive income 44,025 50,938 ----------- ---------- Total stockholder's equity 926,180 870,335 ----------- ---------- Total liabilities and stockholder's equity $10,046,579 $8,606,331 =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 76 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Income (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------------- Revenues: Traditional life insurance premiums $ 120,675 $ 122,429 $ 118,200 Universal life and investment product charges 229,226 217,108 202,081 Reinsurance premiums assumed 431,267 446,434 339,335 ----------- ----------- --------- 781,168 785,971 659,616 Reinsurance premiums ceded (143,211) (124,815) (117,880) ----------- ----------- --------- 637,957 661,156 541,736 Net investment income 361,996 340,898 312,121 Net realized gains on investments 10,818 28,645 4,770 Other revenues 11,771 6,743 526 ----------- ----------- --------- 1,022,542 1,037,442 859,153 Benefits and expenses: Benefits: Traditional life insurance: Death benefits 239,921 299,305 235,828 Other benefits 77,209 79,849 71,939 Universal life and investment contracts: Interest credited to account balances 236,136 217,614 186,908 Death benefits incurred in excess of account balances 63,103 73,260 54,004 Increase in future policy benefits 102,875 72,685 121,946 Reinsurance recoveries (84,506) (98,376) (80,276) Product conversions 10,578 7,014 16,379 ----------- ----------- --------- 645,316 651,351 606,728 Expenses: Commissions 49,569 46,516 25,846 Insurance operating expenses 125,194 89,075 69,580 Amortization of deferred policy acquisition costs 105,639 116,495 94,685 ----------- ----------- --------- 925,718 903,437 796,839 ----------- ----------- --------- Income before federal income taxes 96,824 134,005 62,314 Federal income taxes (Note 9) 34,066 47,019 21,876 ----------- ----------- --------- Net income $ 62,758 $ 86,986 $ 40,438 =========== =========== =========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 77 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Comprehensive Income (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------------- Net income $ 62,758 $ 86,986 $ 40,438 -------- -------- -------- Other comprehensive income: Unrealized gains (losses) on securities: Net change in unrealized holding gains (losses), net of tax (11,251) 28,367 (25,294) Reclassification adjustment for realized gains included in net income, net of tax (5,010) (4,601) (2,422) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 7,236 (37,522) 13,461 Reclassification effect on DPAC of realized gains and losses included in net income, net of tax 3,075 5,976 -- Net change in pension liability, net of tax (963) -- -- -------- -------- -------- Total other comprehensive income (6,913) (7,780) (14,255) -------- -------- -------- Comprehensive income $ 55,845 $ 79,206 $ 26,183 ======== ======== ========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 78 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Stockholder's Equity (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------- 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 $ 302,722 $ 297,422 Capital contributions -- 13,000 5,300 --------- --------- --------- Balance at end of year $ 315,722 $ 315,722 $ 302,722 ========= ========= ========= Accumulated other comprehensive income: Net unrealized gains on investments: Balance at beginning of year $ 50,938 $ 58,718 $ 72,973 Unrealized gains (losses) on securities: Change in unrealized gains (losses), net of tax (16,261) 23,766 (27,716) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 10,311 (31,546) 13,461 --------- --------- --------- Balance at end of year 44,988 50,938 58,718 Accumulated net pension liability: Balance at beginning of year -- -- -- Net change in pension liability, net of tax (963) -- -- --------- --------- --------- Balance at end of year (963) -- -- --------- --------- --------- Total accumulated other comprehensive income $ 44,025 $ 50,938 $ 58,718 ========= ========= ========= Retained earnings: Balance at beginning of year $ 500,795 $ 413,809 $ 373,371 Net income 62,758 86,986 40,438 --------- --------- --------- Balance at end of year $ 563,553 $ 500,795 $ 413,809 ========= ========= ========= Total stockholder's equity $ 926,180 $ 870,335 $ 778,129 ========= ========= =========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 79 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 -------------------------------------------------- Operating activities Net income $ 62,758 $ 86,986 $ 40,438 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits 874,765 995,632 585,581 Net decrease (increase) in federal income taxes 12,061 (12,317) 78,668 Increase (decrease) in accounts payable and accrued expenses 55,361 21,033 (1,361) Increase in accrued interest on long-term debt 259 1,428 3,676 Increase in accrued investment income (2,714) (4,300) (7,294) (Increase) decrease in reinsurance recoverable (9,518) 3,733 (5,214) Increase in prepaid reinsurance premiums (585,038) (793,851) (336,053) Net realized investment gains (10,818) (28,645) (4,770) Depreciation and amortization expense 3,174 3,630 3,857 Policy acquisition costs deferred (184,993) (174,374) (152,299) Amortization of deferred policy acquisition costs 105,639 116,495 94,685 Increase in accrual for postretirement benefits 675 557 484 Other, net (7,053) 43,538 (15,539) --------- --------- --------- Net cash provided by operating activities 314,558 259,545 284,859 INVESTING ACTIVITIES Securities available-for-sale: Sales: Fixed maturities 5,015,989 2,279,598 334,482 Equity securities 2,251 648 4,198 Maturities--fixed maturities 274,463 410,632 727,937 Purchases: Fixed maturities (5,670,994) (2,919,145) (1,522,369) Equity securities (2,089) (2,561) (428) Sale, maturity or repayment of investments: Mortgage loans on real estate 51,235 38,756 18,102 Investment real estate -- -- 1,354 Other long-term investments 10,678 2,002 --
- -------------------------------------------------------------------------------- Strategic Advantage 80 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (continued) (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ---------------------------------------------- Investing activities (continued) Purchase or issuance of investments: Mortgage loans on real estate $(259,945) $(163,528) $(186,228) Investment real estate (13) (35) -- Policy loans, net (50,218) (80,094) (41,071) Other long-term investments (14,042) (5,248) 809 Short-term investments, net 55,115 (48,447) 3,942 Additions to property and equipment (1,418) (2,687) (4,482) Disposals of property and equipment 68 145 2,389 --------- --------- --------- Net cash used by investing activities (588,920) (489,964) (661,365) FINANCING ACTIVITIES Increase in indebtedness to related parties 29,156 5,217 42,206 Cash contributions from parent -- 13,000 5,300 Receipts from interest sensitive products credited to policyholder account balances 505,728 555,223 434,726 Return of policyholder account balances on interest sensitive policies (251,177) (334,543) (123,949) --------- --------- --------- Net cash provided by financing activities 283,707 238,897 358,283 --------- --------- --------- Net increase (decrease) in cash 9,345 8,478 (18,223) Cash at beginning of year 22,299 13,821 32,044 --------- --------- --------- Cash at end of year $ 31,644 $ 22,299 $ 13,821 ========= ========= =========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 81 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements December 31, 1998 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and operations, after intercompany eliminations, of Security Life of Denver Insurance Company (Security Life) and its wholly-owned subsidiaries: Midwestern United Life Insurance Company (Midwestern United); First ING Life Insurance Company of New York (First ING); First Secured Mortgage Deposit Corporation; and ING America Equities, Inc. NATURE OF OPERATIONS Security Life of Denver Insurance Company and its subsidiaries (the Company) is a wholly-owned subsidiary of ING America Insurance Holdings, Inc. (ING America). The Company focuses on two markets, the advanced market and reinsurance to other insurers. The life insurance products offered for the advanced market include wealth transfer and estate planning, executive benefits, charitable giving and corporate owned life insurance. These products include traditional life, interest sensitive life, universal life and variable life. Operations are conducted almost entirely on the general agency basis and the Company is presently licensed in all states (approved for reinsurance only in New York), the District of Columbia and the Virgin Islands. In the reinsurance market, the Company offers financial security to clients through a mix of total risk management and traditional life insurance services. The significant accounting policies followed by the Company that materially affect the financial statements are summarized below: BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) which, as to the insurance companies included in the consolidation, differ from statutory accounting practices prescribed or permitted by state insurance regulatory authorities. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - -------------------------------------------------------------------------------- Strategic Advantage 82 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES During June 1996, the Financial Accounting Standards Board (FASB) issued Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Also in 1996, the FASB issued Statement No. 127, which delayed certain provisions of FAS 125 dealing with transactions such as securities lending, repurchase and dollar repurchase agreements until 1998. The portion of FAS 125 that became effective in 1997 requires the entity to recognize financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The application of the new rules did not have a material impact on the financial statements of the Company. Effective January 1, 1996, the Company adopted FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the valuation for long-lived assets that are identified for disposal. Adoption of this standard resulted in an insignificant impact to net income and stockholder's equity. 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. - -------------------------------------------------------------------------------- Strategic Advantage 83 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. The implementation of this Statement is required for years beginning after June 15, 1999, and upon the initial application of the Statement 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 2000, 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 and reevaluates such designation as of each balance sheet date. The Company does not hold any securities classified as held-to-maturity or trading securities. Debt securities and marketable equity securities are classified as available-for- sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, and deferred policy acquisition cost adjustments, reported net of tax as a component of other comprehensive income in stockholder's equity. - -------------------------------------------------------------------------------- Strategic Advantage 84 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 classified as held-to-maturity or available-for- sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in net investment income as earned. Mortgage loans are carried at the unpaid balances less an allowance for credit losses. Investment real estate is carried at cost, less accumulated depreciation. Policy loans are carried at unpaid balances. Derivatives are accounted for on the same basis as the asset hedged. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains on investments. The cost of securities sold is based on the specific identification method. RECOGNITION OF PREMIUM REVENUES Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, are recognized as revenue when due. Revenues for universal life insurance policies and for investment products consist of policy charges for the cost of insurance, 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 - -------------------------------------------------------------------------------- Strategic Advantage 85 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) expected gross margins from surrender charges, investments, mortality, and expenses. This amortization is adjusted retrospectively when estimates of current or future gross margins to be realized from a group of products are revised. Deferred policy acquisition costs are adjusted to reflect changes that would have been necessary if unrealized investment gains and losses related to available-for-sale securities had been realized. The Company has reflected those adjustments in the asset balance with the offset as a direct adjustment to 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 3.80% to 7.81% during 1998, 4.60% to 7.81% during 1997, and 4.60% to 7.45% during 1996. 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 benefitted, using the same assumptions and factors used to amortize deferred policy acquisition costs. - -------------------------------------------------------------------------------- Strategic Advantage 86 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 $5,816,000 and $6,074,000 at December 31, 1998 and 1997, respectively. Participating business approximates .2% of the Company's ordinary life insurance in force and 1.4% of premium income. Earnings for participating insurance are based on the actual earnings of the participation block of policies. Expenses and taxes are allocated based on the amount of participating insurance in force. Investment income is allocated based on the yield of the participating investment portfolio. The amount of dividends to be paid is determined annually by the Board of Directors. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales. Dividends of $3,233,000; $3,377,000; and $3,307,000 were incurred in 1998, 1997, and 1996, respectively. FEDERAL INCOME TAXES Deferred federal income taxes have been provided or credited to reflect significant temporary differences between income reported for tax and financial reporting purposes using reasonable assumptions. - -------------------------------------------------------------------------------- Strategic Advantage 87 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 $10,121,000; $10,110,000; and $1,016,000 for 1998, 1997, and 1996, respectively. GUARANTY FUND ASSESSMENTS Insurance companies are assessed the costs of funding the insolvencies of other insurance companies by the various state guaranty associations, generally based on the amount of premium companies collect in that state. The Company accrues the cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in each state. The Company reduces the accrual by credits allowed in some states to reduce future premium taxes by a portion of assessments in that state. RECLASSIFICATIONS Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. - -------------------------------------------------------------------------------- Strategic Advantage 88 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, 1998 and 1997:
December 31, 1998 --------------------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------- (Dollars in Thousands) 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 ========== ======== ======= ==========
- -------------------------------------------------------------------------------- Strategic Advantage 89 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED)
December 31, 1997 ------------------------------------------------------ Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------ (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 51,387 $ 1,629 $ 39 $ 52,977 States, municipalities and political subdivisions 43,185 1,023 128 44,080 Public utilities securities 151,642 5,030 1,216 155,456 Debt securities issued by foreign governments 3,272 -- -- 3,272 Corporate securities 1,147,380 48,001 6,539 1,188,842 Mortgage-backed securities 1,165,376 89,539 6,661 1,248,254 Other asset-backed securities 443,473 13,285 584 456,174 Redeemable preferred stocks -- -- -- -- Derivatives hedging fixed maturities (Note 3) 1,297 3,118 1,115 3,300 ---------- -------- ------- ---------- Total fixed maturities 3,007,012 161,625 16,282 3,152,355 Preferred stocks (nonredeemable) 3,368 67 122 3,313 Common stocks 3,386 1,446 126 4,706 ---------- -------- ------- ---------- Total equity securities 6,754 1,513 248 8,019 ---------- -------- ------- ---------- Total $3,013,766 $163,138 $16,530 $3,160,374 ========== ======== ======= ==========
- -------------------------------------------------------------------------------- Strategic Advantage 90 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, 1998, 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 $ 18,024 $ 18,156 Due after one year through five years 187,198 183,735 Due after five years through ten years 695,842 702,563 Due after ten years 714,609 740,418 ---------- ---------- 1,615,673 1,644,872 Mortgage-backed securities 1,132,058 1,200,295 Other asset-backed securities 635,539 651,929 Derivatives 312 6,434 ---------- ---------- Total available-for-sale $3,383,582 $3,503,530 ========== ========== Changes in unrealized gains (losses) on investments in available-for-sale securities for the years ended December 31, 1998, 1997 and 1996 are summarized as follows (in thousands): 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) ========= ======= ========= - -------------------------------------------------------------------------------- Strategic Advantage 91 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 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 ========= ======= ========= December 31, 1996 ------------------------------------------ Fixed Equity Total ------------------------------------------ Gross unrealized gains $ 140,089 $ 822 $ 140,911 Gross unrealized (losses) (30,493) (376) (30,869) --------- ------- --------- Net unrealized gains 109,596 446 110,042 Deferred income tax (38,359) (157) (38,516) --------- ------- --------- Net unrealized gains after taxes 71,237 289 71,526 Less: Balance at beginning of year 99,389 (147) 99,242 --------- ------- --------- Change in net unrealized gains (losses) $ (28,152) $ 436 $ (27,716) ========= ======= ========= As part of its overall investment management strategy, the Company has entered into agreements to purchase $79,175,000 in mortgage loans as of December 31, 1998. These agreements were settled during 1999. The Company had no agreements to sell securities at December 31, 1998. - -------------------------------------------------------------------------------- Strategic Advantage 92 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): 1998 1997 1996 --------------------------------------------- Fixed maturities $ 278,227 $ 259,936 $ 240,931 Mortgage loans on real estate 47,567 40,908 29,143 Policy loans 58,016 56,087 52,205 Other investments 2,911 3,159 2,197 --------- --------- --------- 386,721 360,090 324,476 Investment expenses (24,725) (19,192) (12,355) --------- --------- --------- Net investment income $ 361,996 $ 340,898 $ 312,121 ========= ========= ========= Net realized gains (losses) on investments for the years ended December 31 are summarized as follows (in thousands): 1998 1997 1996 ---------------------------------------------- Fixed maturities $ 9,691 $ 27,717 $4,540 Equity securities 168 (57) 79 Real estate and other 959 985 151 ------- -------- ------ Net realized gains on investments $10,818 $ 28,645 $4,770 ======= ======== ====== During 1998, 1997 and 1996, fixed maturities and marketable equity securities available- for-sale were sold with fair values at the date of sale of $5,018,240,000; $2,281,886,000 and $334,482,000, respectively. Gross gains of $44,314,000; $41,017,000 and $7,248,000 and gross losses of $34,455,000; $13,357,000 and $2,629,000 were realized on those sales in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, bonds with an amortized cost of $29,081,000 and $28,434,000, respectively, were on deposit with various state insurance departments to meet regulatory requirements. - -------------------------------------------------------------------------------- Strategic Advantage 93 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into interest rate and currency contracts, including swaps, caps, floors, and options, to reduce and manage risks which include the risk of a change in the value, yield, price, cash flows, exchange rates or quantity of, or a degree of exposure with respect to assets, liabilities, or future cash flows which the Company has acquired or incurred. Hedge accounting practices are supported by cash flow matching, scenario testing and duration matching. Interest rate swap agreements generally involve the exchange of fixed and floating interest payments over the life of the agreement without an exchange of the underlying principal amount. Currency swap agreements generally involve the exchange of local and foreign currency payments over the life of the agreements without an exchange of the underlying principal amount. Interest rate cap and interest rate floor agreements owned entitle the Company to receive payments to the extent reference interest rates exceed or fall below strike levels in the contracts based on the notional amounts. Premiums paid for the purchase of interest rate contracts are included in other assets and are being amortized to interest expense over the remaining terms of the contracts or in a manner consistent with the financial instruments being hedged. Amounts paid or received, if any, from such contracts are included in interest expense or income. Accrued amounts payable to or receivable from counterparties are included in other liabilities or assets. Gains and losses as a result of early terminations of interest rate contracts are amortized to investment income over the remaining term of the items being hedged to the extent the hedge is considered to be effective; otherwise, they are recognized upon termination. Interest rate contracts that are matched or otherwise designated to be associated with other financial instruments are recorded at fair value if the related financial instruments mature, are sold, or are otherwise terminated or if the interest rate contracts cease to be effective hedges. The Company manages the potential credit exposure from interest rate contracts through careful evaluation of the counterparties' credit standing, collateral agreements, and master netting agreements. The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate contracts; however, the Company does not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in such contacts. - -------------------------------------------------------------------------------- Strategic Advantage 94 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, 1998 and 1997 (in thousands): 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 ---------- ------- ------- ------- 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 -- -- -- ---------- ------- ------- ------- Total derivatives $3,329,619 $ 312 $ 6,434 $ 6,434 ========== ======= ======= ======= - -------------------------------------------------------------------------------- Strategic Advantage 95 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, 1997 ----------------------------------------------- Notional Amortized Fair Balance Amount Cost Value Sheet ---------------------------------------------- Interest rate contracts: Swaps $ 913,630 $ (185) $ (625) $ (625) Swaps-affiliates 879,745 185 1,429 1,429 ---------- ------- ------- ------- Total swaps 1,793,375 -- 804 804 Caps owned 760,000 986 766 766 ---------- ------- ------- ------- Total caps owned 760,000 986 766 766 Floors owned 354,000 311 1,730 1,730 Floors owned-affiliates -- -- -- -- ---------- ------- ------- ------- Total floors owned 354,000 311 1,730 1,730 Options owned 384,300 6,192 4,312 4,312 Options owned-affiliates 384,300 (6,192) (4,312) (4,312) ---------- ------- ------- ------- Total options owned 768,600 -- -- -- ---------- ------- ------- ------- Total derivatives $3,675,975 $ 1,297 $ 3,300 $ 3,300 ========== ======= ======= ======= 4. CONCENTRATIONS OF CREDIT RISK At December 31, 1998, the Company held less-than-investment-grade bonds classified as available-for-sale with a carrying value and market value of $277,793,000. These holdings amounted to 7.9% 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, 1998, the Company's mortgages involved a concentration of properties located in Florida (15.5%), Texas (9.7%), and Georgia (7.5%). The remaining mortgages relate to properties located in 35 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 $16,068,000. - -------------------------------------------------------------------------------- Strategic Advantage 96 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):
December 31 1998 1997 --------------------------------------- ---------------------------------- Qualified Post- Qualified Post- Plan SERP Retirement Plan SERP Retirement --------------------------------------- ---------------------------------- Projected benefit obligation $ (38,685) $ (8,320) $ (8,949) $(37,801) $(9,154) $ (7,590) Less plan assets at fair value 47,230 -- -- 40,150 -- -- ---------- ----------- --------- -------- ------- -------- Plan assets in excess (deficient) of projected benefit obligation $ 8,545 $ (8,320) $ (8,949) $ 2,349 $(9,154) $ (7,590) ========== =========== ========= ======== ======= ======== Net asset (liability) $ 1,240 $ (4,918) $ (12,044) $ 1,322 $(4,135) $(11,369) ========== =========== ========= ======== ======= ========
As of December 31, 1998 and 1997, the Company recognized an additional minimum net liability on the SERP of $1,482,000 and $3,848,000, 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, net of tax. - -------------------------------------------------------------------------------- Strategic Advantage 97 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):
1998 1997 1996 -------------------------------- --------------------------------- ---------------------------------- Qualified Post- Qualified Post- Qualified Post- Plan SERP Retirement Plan SERP Retirement Plan SERP Retirement -------------------------------- --------------------------------- ---------------------------------- Net periodic pension expense $ 82 $1,109 $893 $607 $1,502 $755 $ 390 $1,109 $669 Employer contributions -- 325 218 -- 317 198 -- 320 Not available Plan participants' contributions -- -- 77 -- -- 71 -- -- Not available Benefits paid 890 325 296 811 317 268 1,466 320 187
The information for employer and plan participant contributions to the postretirement plan for 1996 is not readily available. Assumptions used in accounting for the defined benefit plans as of December 31, 1998, 1997, and 1996 were as follows: 1998 1997 1996 ------------------------- Weighted-average discount rate 6.75% 7.25% 7.50% Rate of increase in compensation level 4.00% 4.25% 4.50% Expected long-term rate of return on assets 9.50% 9.50% 9.50% Plan assets of the defined benefit plans at December 31, 1998 are invested primarily in U.S. government securities, corporate bonds, mutual funds, mortgage loans, money market funds and common stock. 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 9.75% graded to 5.25% over 9 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, 1998 by $1,015,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1998 by $136,000. 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, 1998 by $(862,000) and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1998 by $(113,000). - -------------------------------------------------------------------------------- Strategic Advantage 98 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 6.75% at December 31, 1998 and 7.50% at December 31, 1997 and December 31, 1996. 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 1998, and $9,500 for both 1997 and 1996. 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 $1,343,000 for 1998, $1,211,000 for 1997, and $1,143,000 for 1996. Plan assets of the Savings Plan at December 31, 1998 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 $27.8 million and $26.6 million at December 31, 1998 and 1997, respectively. 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 fees charged for administration services and mortality risk. - -------------------------------------------------------------------------------- Strategic Advantage 99 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, $4,993,000 and $6,151,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 8. REINSURANCE The Company is involved in both ceded and assumed reinsurance with other companies for the purpose of diversifying risk and limiting exposure on larger risks. As of December 31, 1998, the Company's retention limit for acceptance of risk on life insurance policies had been set at various levels up to $1,500,000. Reinsurance premiums, commissions, and expense reimbursements related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reserves are based on the terms of the reinsurance contracts, and are consistent with the risks assumed. To the extent that the assuming companies become unable to meet their obligations under these treaties, the Company remains contingently liable to its policyholders for the portion 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 arising from similar geographic regions, activities, or economic characteristics of the reinsurers. The use of reinsurance pools with retrocessionaires 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, 1998, $2.7 billion of an affiliate's invested assets were held in trust pursuant to these agreements. - -------------------------------------------------------------------------------- Strategic Advantage 100 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):
1998 1997 ------------------------------------------------------------ Policy Policy Deposits Liabilities Deposits Liabilities ------------------------------------------------------------ Direct (nonaffiliated) $ 2,773,952 $ 3,112,460 $ 1,673,471 $2,527,957 Assumed from Life Insurance Company of Georgia -- 97,552 35,000 106,698 ----------- ----------- ----------- --------- 2,773,952 3,210,012 1,708,471 2,634,655 Ceded to Columbine Life Insurance Company (2,547,743) (2,696,409) (1,479,371) (2,231,118) Ceded to Life Insurance Company of Georgia (225,083) (512,477) (116,100) (403,537) Ceded to First Columbine Life Insurance Company (1,126) (1,126) -- -- ----------- ----------- ----------- --------- Net $ -- $ -- $ 113,000 $ -- =========== =========== =========== ==========
Ceded GIC policy liabilities totaling $3,210 and $2,635 million as of December 31, 1998 and 1997, respectively, are classified as part of prepaid reinsurance premiums. During 1998 and 1997, 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 generally accepted accounting principles, 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, with the exception of First ING. The affiliated companies that join in the filing of the consolidated federal income tax return have an agreement for the allocation of taxes between members that join in the consolidated return. The agreement specifies that the separate return payable or the separate return receivable of each member will be the federal income tax payable or receivable that the member would have had for the period had it filed a separate return. - -------------------------------------------------------------------------------- Strategic Advantage 101 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 1998 1997 ------------------------ Deferred tax liabilities: Deferred policy acquisition costs $(272,970) $(239,678) Unrealized gains/losses (42,556) (51,312) --------- --------- Total deferred tax liabilities (315,526) (290,990) Deferred tax assets: Benefit reserves and surplus relief 102,177 111,610 Tax-basis deferred policy acquisition costs 83,836 71,241 Investment income 13,712 13,459 Unearned investment income -- 9,208 Nonqualified deferred compensation 14,667 14,129 Postretirement employee benefits 2,501 3,979 Separate accounts 18,775 8,571 Other, net 19,796 4,964 --------- --------- Total deferred tax assets 255,464 237,161 --------- --------- Net deferred tax liabilities $ (60,062) $ (53,829) ========= ========= The components of federal income tax expense consist of the following (in thousands): December 31 1998 1997 1996 --------------------------------- Current $24,111 $37,542 $10,340 Deferred 9,955 9,477 11,536 ------- ------- ------- Federal income tax expense $34,066 $47,019 $21,876 ======= ======= ======= The Company's effective income tax rate did not vary significantly from the statutory federal income tax rate. - -------------------------------------------------------------------------------- Strategic Advantage 102 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 (receipts) of $18,283,000 during 1998, $55,468,000 during 1997, and $(61,467,000) during 1996 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, 1998. 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, 1998, the Company accrued interest of $5,387,000. 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 $5,387,000; $5,096,000; and $3,644,000 for the years ended December 31, 1998, 1997, and 1996, respectively. - -------------------------------------------------------------------------------- Strategic Advantage 103 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 5.41%, are as follows (in thousands): Total YEAR Payments - --------------------------------------------------------- 2000 $ 25,946 2001 25,946 2002 25,946 2003 25,946 2004 25,946 -------- Total 129,730 Less imputed interest (29,730) -------- Present value of payments $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, 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 unknown whether the State of Colorado will adopt Codification. - -------------------------------------------------------------------------------- Strategic Advantage 104 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, 1998, the Company exceeded all minimum RBC requirements. Combined capital and surplus, determined in accordance with statutory accounting practices (SAP), was $386,607,000 and $403,239,000 at December 31, 1998 and 1997, respectively. Combined net income, determined in accordance with SAP, was $11,712,000; $22,261,000; and $9,141,000 for the years ended December 31, 1998, 1997, and 1996, 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, 1998. Additionally, the amount of dividends which can be paid by each company to its stockholder without prior approval of the various state insurance departments is generally limited to the greater of 10% of statutory surplus or the statutory net gain from operations. - -------------------------------------------------------------------------------- Strategic Advantage 105 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Life insurance liabilities that contain mortality risk and all nonfinancial instruments are excluded from disclosure requirements. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. - -------------------------------------------------------------------------------- Strategic Advantage 106 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, 1998 and 1997 are summarized below (in thousands):
December 31, 1998 December 31, 1997 ----------------------------- ------------------------------ Carrying Carrying Amount Fair Value Amount Fair Value ----------------------------- ------------------------------ Assets Fixed maturities (Note 2) $3,503,530 $3,503,530 $3,152,355 $3,152,355 Equity securities (Note 2) 8,400 8,400 8,019 8,019 Mortgage loans 784,108 832,629 576,620 630,019 Policy loans 925,623 925,623 875,405 875,405 Short-term investments 747 747 55,466 55,466 Cash 31,644 31,644 22,299 22,299 Indebtedness from related parties 4,339 4,339 2,443 2,443 Separate account assets 423,474 423,474 263,035 263,035 LIABILITIES Supplemental contracts without life contingencies 3,966 3,966 4,240 4,240 Other policyholder funds left on deposit 98,638 98,638 99,545 99,545 Individual and group annuities, net of reinsurance 87,096 86,007 43,313 43,077 Indebtedness to related parties 13,755 13,755 7,704 7,704 Long-term debt to related parties 100,000 100,000 75,000 75,000 Accrued interest on long-term debt to related parties 5,387 5,387 5,128 5,128 Separate account liabilities 423,474 423,474 263,035 263,035
- -------------------------------------------------------------------------------- Strategic Advantage 107 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 4.5% - 14.0% over the total portfolio. The fair values of equity securities are based on quoted market prices. MORTGAGE LOANS: Estimated market values for commercial real estate loans are generated using a discounted cash flow approach. Loans in good standing are discounted using interest rates determined by U.S. Treasury yields on December 31 and spreads implied by independent published surveys. The same is applied on new loans with similar characteristics. The amortizing features of all loans are incorporated in the valuation. Where data on option features is available, option values are determined using a binomial valuation method, and are incorporated into the mortgage valuation. Restructured loans are valued in the same manner; however, these are discounted at a greater spread to reflect increased risk. All residential loans are valued at their outstanding principal balances, which approximate their fair values. POLICY LOANS: The carrying amounts reported in the balance sheets for these financial instruments approximate their fair values. DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet derivative financial instruments (caps and floors) and off-balance-sheet derivative financial instruments (swaps) are based on broker/dealer valuations or on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties' credit standing. - -------------------------------------------------------------------------------- Strategic Advantage 108 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 $66,480,000 and $1,000,000 in 1998 and 1997, 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 assets had a value of $433,689,000 and $493,757,000 at December 31, 1998 and 1997, respectively. Under synthetic guaranteed investment contracts, the synthetic issuer may assume interest rate risk on individual plan participant initiated withdrawals from stable value options of 401(k) plans. Approximately 85% of the synthetic guaranteed investment contract book values are on a participating basis and have a credited interest rate reset mechanism which passes such interest rate risk to plan participants. LETTERS OF CREDIT The Company is the beneficiary of letters of credit totaling $197,254,000 which have a market value to the Company of $0 and two lines of credit totaling $284,471,000 which have a market value to the Company of $0 (see Note 14). 13. COMMITMENTS AND CONTINGENCIES The Company is a party to pending or threatened lawsuits arising from the normal conduct of its business. Due to the climate in insurance and business litigation, suits against the Company sometimes include substantial additional claims, consequential damages, punitive damages and other similar types of relief. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a material adverse effect on the Company's financial position or interfere with its operations. - -------------------------------------------------------------------------------- Strategic Advantage 109 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) In 1998, the Company established an accrued liability of $40,000,000 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. No such litigation reserve was established in 1997. 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 $144,471,000 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, 1999. The amount of funds available under this line is reduced by borrowings of certain affiliates also party to the agreement. There were no outstanding borrowings under either of these agreements at December 31, 1998 or 1997. The weighted-average balance outstanding of short-term debt was $37.5 million during 1998. The weighted-average interest rate paid on this debt during 1998 was 5.63% (see Note 12). The Company is the beneficiary of letters of credit totaling $197,254,000 that were established in accordance with the terms of reinsurance agreements. Such letters of credit are unconditional, irrevocable, and provide for automatic renewal for the following year at December 31. The letters were unused during both 1998 and 1997. 15. YEAR 2000 (UNAUDITED) The Company has initiated a program to prepare its computer systems and applications for the year 2000. This program includes all systems utilized by the Company as well as the systems of other companies that interface with the Company. The Company has completed modification and preliminary testing of portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated at approximately $6.4 million. To date the Company has incurred approximately $2.6 million for the above activities. Accordingly, the Company does not expect the amounts required for this project to have a material effect on its financial position. - -------------------------------------------------------------------------------- Strategic Advantage 110 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. YEAR 2000 (UNAUDITED) (CONTINUED) The project is estimated to be completed no later than June 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, and conversions to new software, the Year 2000 will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, it could have a material impact on the operations of the Company. The Company has initiated formal communications and interface testing plans with all of its suppliers and customers to determine the extent to which its interface systems are vulnerable to those third parties' failure to have their systems Year 2000 compatible and will act accordingly to prevent operational disruptions. - -------------------------------------------------------------------------------- Strategic Advantage 111 Financial Statements Security Life Separate Account L1 of Security Life of Denver Insurance Company Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Strategic Advantage 112 Security Life Separate Account L1 Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ..............................................114 Audited Financial Statements Statement of Net Assets .....................................................115 Statements of Operations ....................................................122 Statements of Changes in Net Assets .........................................141 Notes to Financial Statements ...............................................160 - -------------------------------------------------------------------------------- Strategic Advantage 113 [Logo of Ernst & Young LLP appears here] Report of Independent Auditors Policyholders Security Life Separate Account L1 of Security Life of Denver Insurance Company We have audited the accompanying statement of net assets of Security Life Separate Account L1 (comprising, respectively, the Neuberger Berman Advisers Management Trust (comprising the Limited Maturity Bond, Growth, Government Income and Partners Divisions) ("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, Industrial Income, High Yield, Utilities and Small Company Growth Divisions) ("INVESCO"), the Van Eck Worldwide Trust (comprising the Worldwide Balanced, 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, 1998, and the related statements of operations and changes in net assets for each of the three years in the period then ended. These financial statements are the responsibility of the Separate Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1998, 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, 1998, and the results of its operations and changes in its net assets for each of the three years in the period then ended, in conformity with generally accepted accounting principles. Denver, Colorado /s/ Ernst & Young LLP April 5, 1999 - -------------------------------------------------------------------------------- Strategic Advantage 114 Security Life Separate Account L1 Statement of Net Assets December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ----------------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ------------ ----------- ----------- ------------ ----------- ---------- ---------- Net assets $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ =========== =========== ============ =========== ========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ------------ ----------- ----------- ------------ ----------- ---------- ---------- TOTAL POLICYHOLDER RESERVES $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ =========== =========== ============ =========== ========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 115 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
NB ------------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------- ----------------- --------------- --------------- ------------- Assets Investments in mutual funds at market value (Note C) $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ------------ -------------- ------------ ----------- ----------- Net assets $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ============ ============== ============ =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ------------ -------------- ------------ ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ============ ============== ============ =========== =========== Number of division units outstanding (Note G) 1,245,559.121 447,486.376 -- 986,298.018 ============== ============ =========== =========== Value per divisional unit $ 12.51 $ 20.17 $ -- $ 22.78 ============== ============ =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 116 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Alger ------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ---------------------------------------------------------- ------------ Assets Investments in mutual funds at market value (Note C) $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 ----------- ----------- ---------- ----------- ---------- Net assets $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 =========== =========== ========== =========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 ----------- ----------- ---------- ----------- ---------- TOTAL POLICYHOLDER RESERVES $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 =========== =========== ========== =========== ========== Number of division units outstanding (Note G) 838,692.418 402,532.472 923,696.066 221,642.446 =========== ========== =========== ========== Value per divisional unit $ 18.49 $ 22.91 $ 24.80 $ 30.69 =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 117 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Fidelity ---------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ---------------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 600,255.213 1,293,480.338 1,429,659.907 1,526,404.399 3,215,990.519 =========== =========== =========== =========== =========== Value per divisional unit $ 17.05 $ 25.44 $ 14.40 $ 12.06 $ 26.79 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 118 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
INVESCO ---------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ---------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 450,557.216 473,616.752 486,858.648 110,379.616 67,506.441 =========== =========== =========== =========== =========== Value per divisional unit $ 17.99 $ 22.92 $ 16.19 $ 18.49 $ 11.09 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 119 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Van Eck ----------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bond Markets Estate ----------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 0.000 132,513.824 18,656.317 67,354.295 8,765.232 =========== =========== =========== =========== =========== Value per divisional unit $ 0.00 $ 8.10 $ 11.03 $ 6.85 $ 8.70 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 120 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- Assets Investments in mutual funds at market value (Note C) $3,800,153 $1,204,436 $2,595,717 ---------- ---------- ---------- Net assets $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $3,800,153 $1,204,436 $2,595,717 ---------- ---------- ---------- TOTAL POLICYHOLDER RESERVES $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== Number of division units outstanding (Note G) 105,457.867 246,150.062 ========== ========== Value per divisional unit $ 11.42 $ 10.55 ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 121 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ------------------------------------------------------------------------------------- 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 =========== =========== =========== =========== ========== ========= ========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 122 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
NB ------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners ------------------------------------------------------------------------- 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 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 123 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Alger ------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ------------------------------------------------------------------------- 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 OPERATIONS $11,837,754 $ 1,939,738 $1,879,001 $ 6,098,636 $1,920,379 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 124 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Fidelity --------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 --------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 125 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
INVESCO ------------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ------------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 126 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Van Eck ----------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bond Markets Estate ----------------------------------------------------------------------------------------- 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) ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 127 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- Investment income Dividends from mutual funds $ 97,737 $ 27,109 $ 70,628 Less valuation period deductions (Note B) 13,888 3,056 10,832 ---------- ---------- ---------- Net investment income (loss) 83,849 24,053 59,796 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 158,686 115,910 42,776 ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 242,535 $ 139,963 $ 102,572 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 128 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck --------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 129 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
NB -------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners -------------------------------------------------------------------------- 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 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 130 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
Alger ------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ------------------------------------------------------------------------ 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 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 131 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
Fidelity ---------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ---------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 132 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
INVESCO --------------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities --------------------------------------------------------------------------- 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 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 133 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997 Van Eck ------------------------------------------ Total Worldwide Worldwide Van Eck Balanced Hard Assets ------------------------------------------ INVESTMENT INCOME Dividends from mutual funds $ 21,903 $ 9,006 $ 12,897 Less valuation period deductions (Note B) 7,743 3,329 4,414 ---------- ---------- ---------- Net investment income (loss) 14,160 5,677 8,483 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 381 41,907 (41,526) ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 14,541 $ 47,584 $ (33,043) ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 134 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1996
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck -------------------------------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 1,183,779 $ 292,143 $ 56,842 $ 593,973 $ 238,653 $ 2,168 Less valuation period deductions (Note B) 241,127 50,116 44,898 128,637 14,752 2,724 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 942,652 242,027 11,944 465,336 223,901 (556) ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 3,077,159 643,752 458,973 1,834,000 100,274 40,160 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,019,811 $ 885,779 $ 470,917 $ 2,299,336 $ 324,175 $ 39,604 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 135 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
NB -------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners -------------------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 292,143 $ 127,305 $ 76,287 $ 35,420 $ 53,131 Less valuation period deductions (Note B) 50,116 13,218 9,400 8,882 18,616 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 242,027 114,087 66,887 26,538 34,515 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 643,752 (45,891) 42,460 4,310 642,873 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 885,779 $ 68,196 $ 109,347 $ 30,848 $ 677,388 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 136 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
Alger --------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap --------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 56,842 $ 7,668 $ 10,435 $ 37,109 $ 1,630 Less valuation period deductions (Note B) 44,898 18,457 7,398 16,087 2,956 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 11,944 (10,789) 3,037 21,022 (1,326) ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 458,973 66,527 99,334 250,014 43,098 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 470,917 $ 55,738 $ 102,371 $ 271,036 $ 41,772 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 137 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
Fidelity ------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ------------- ------------- -------------- ------------- -------------- ------------- Investment income Dividends from mutual funds $ 593,973 $ 9,800 $ 109,786 $ 27,966 $ 246,349 $ 200,072 Less valuation period deductions (Note B) 128,637 3,818 25,455 16,972 35,006 47,386 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 465,336 5,982 84,331 10,994 211,343 152,686 ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 -- 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 -- 1,161,135 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 1,834,000 70,973 283,096 272,764 -- 1,207,167 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,299,336 $ 76,955 $ 367,427 $ 283,758 $ 211,343 $ 1,359,853 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 138 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
INVESCO ----------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities ----------------------------------------------------------------------- Investment income Dividends from mutual funds $ 238,653 $ 25,285 $ 93,816 $ 114,676 $ 4,876 Less valuation period deductions (Note B) 14,752 3,402 4,272 6,357 721 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 223,901 21,883 89,544 108,319 4,155 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 100,274 39,220 23,847 29,428 7,779 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 324,175 $ 61,103 $ 113,391 $ 137,747 $ 11,934 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 139 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996 Van Eck ---------------------------------------- Total Worldwide Worldwide Van Eck Balanced Hard Assets ---------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 2,168 $ 169 $ 1,999 Less valuation period deductions (Note B) 2,724 1,304 1,420 ---------- ---------- ---------- Net investment income (loss) (556) (1,135) 579 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 40,160 22,327 17,833 ---------- ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 39,604 $ 21,192 $ 18,412 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 140 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM -------------------------------------------------------------------------------------------- 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 ============ =========== =========== ============ =========== ========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 141 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
NB ----------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------- --------------- ------------- --------------- --------------- 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 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 142 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Alger ---------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ---------------------------------------------------------------------------- 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 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 143 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Fidelity ------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 5,972,694 $ 745,317 $ $ 886,122 $ 713,205 $ 1,147,434 2,480,616 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 144 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
INVESCO ------------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ------------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 145 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Van Eck ------------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bonds Markets Estate ------------------------------------------------------------------------------------------- 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 -- -- -- -- -- -- Surrenders (15,198) (3,105) (11,871) -- -- (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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 146 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 83,849 $ 24,053 $ 59,796 Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 ---------- ---------- ---------- Increase (decrease) in net assets from operations 242,535 139,963 102,572 ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 1,864,458 329,635 1,534,823 Cost of insurance and administrative charges (78,728) (28,940) (49,788) Benefit payments -- -- -- Surrenders (1,407) (1,407) -- Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 1,773,295 765,185 1,008,110 Other -- -- -- ---------- ---------- ---------- Increase (decrease) from principal transactions 3,557,618 1,064,473 2,493,145 ---------- ---------- ---------- Total increase (decrease) in net assets 3,800,153 1,204,436 2,595,717 Net assets at beginning of year -- -- -- ---------- ---------- ---------- Net assets at end of year $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 147 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck ------------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 148 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
NB ------------------------------------------------------------------------ Total Limited Government NB Maturity Bond Growth Income Partners ------------------------------------------------------------------------ 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 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 149 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
Alger ------------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap -------------------------------------------------------------------------- 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 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 150 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
Fidelity ----------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ----------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 151 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
INVESCO ------------------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities --------------- --------------- --------------- --------------- --------------- 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 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 152 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997 Van Eck -------------------------------------- Worldwide Total Worldwide Hard Van Eck Balanced Assets ---------- ---------- ---------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 14,160 $ 5,677 $ 8,483 Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ---------- ---------- ---------- Increase (decrease) in net assets from operations 14,541 47,584 (33,043) ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 254,716 65,167 189,549 Cost of insurance and administrative charges (91,222) (44,774) (46,448) Benefit payments -- -- -- Surrenders (11,563) (7,995) (3,568) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 541,748 (120) 541,868 Other (4,153) (319) (3,834) ---------- ---------- ---------- Increase (decrease) from principal transactions 689,526 11,959 677,567 ---------- ---------- ---------- Total increase (decrease) in net assets 704,067 59,543 644,524 Net assets at beginning of year 594,031 327,805 266,226 ---------- ---------- ---------- Net assets at end of year $1,298,098 $ 387,348 $ 910,750 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 153 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1996
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck ----------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 942,652 $ 242,027 $ 11,944 $ 465,336 $ 223,901 $ (556) Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 ------------ ----------- ----------- ----------- ----------- ----------- Increase in net assets from operations 4,019,811 885,779 470,917 2,299,336 324,175 39,604 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 44,534,972 2,246,849 2,646,310 38,833,137 609,861 198,815 Cost of insurance and administrative charges (2,843,666) (378,501) (531,589) (1,733,703) (158,637) (41,236) Benefit payments (9,641) -- (9,457) (184) -- -- Surrenders (139,851) (10,863) (32,300) (89,374) (5,730) (1,584) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (905,917) 3,446,134 6,535,350 (13,409,127) 2,217,943 303,783 Other (25,415) 4,193 (1,186) (29,113) 1,108 (417) ------------ ----------- ----------- ----------- ----------- ----------- Increase from principal transactions 40,610,482 5,307,812 8,607,128 23,571,636 2,664,545 459,361 ------------ ----------- ----------- ----------- ----------- ----------- Total increase in net assets 44,630,293 6,193,591 9,078,045 25,870,972 2,988,720 498,965 Net assets at beginning of year 13,226,534 4,345,755 2,278,044 5,528,643 979,026 95,066 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 57,856,827 $10,539,346 $11,356,089 $31,399,615 $ 3,967,746 $ 594,031 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 154 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
NB --------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 242,027 $ 114,087 $ 66,887 $ 26,538 $ 34,515 Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 885,779 68,196 109,347 30,848 677,388 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,246,849 317,539 634,087 372,680 922,543 Cost of insurance and administrative charges (378,501) (74,422) (101,596) (56,065) (146,418) Benefit payments -- -- -- -- -- Surrenders (10,863) (1,157) (2,385) (48) (7,273) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 3,446,134 398,684 433,683 368,389 2,245,378 Other 4,193 (272) (579) 41 5,003 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 5,307,812 640,372 963,210 684,997 3,019,233 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 6,193,591 708,568 1,072,557 715,845 3,696,621 Net assets at beginning of year 4,345,755 1,783,508 763,157 832,469 966,621 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $10,539,346 $ 2,492,076 $1,835,714 $ 1,548,314 $4,663,242 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 155 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
Alger --------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap --------------------------------------------------------------------- Increase (decrease) in net assets OPERATIONS Net investment income (loss) $ 11,944 $ (10,789) $ 3,037 $ 21,022 $ (1,326) Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 470,917 55,738 102,371 271,036 41,772 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,646,310 792,375 410,528 1,189,559 253,848 Cost of insurance and administrative charges (531,589) (209,010) (92,306) (193,812) (36,461) Benefit payments (9,457) (4,658) -- -- (4,799) Surrenders (32,300) (7,839) (10,926) (9,795) (3,740) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 6,535,350 2,581,122 1,649,714 1,717,965 586,549 Other (1,186) (3,605) 587 1,213 619 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 8,607,128 3,148,385 1,957,597 2,705,130 796,016 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 9,078,045 3,204,123 2,059,968 2,976,166 837,788 Net assets at beginning of year 2,278,044 1,127,985 275,087 838,012 36,960 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $11,356,089 $ 4,332,108 $2,335,055 $ 3,814,178 $ 874,748 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 156 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
Fidelity ----------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ----------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 465,336 $ 5,982 $ 84,331 $ 10,994 $ 211,343 $ 152,686 Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 -- 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 -- 1,161,135 ------------ ----------- ----------- ----------- ----------- ----------- Increase in net assets from operations 2,299,336 76,955 367,427 283,758 211,343 1,359,853 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 38,833,137 202,285 1,158,382 537,007 36,012,540 922,923 Cost of insurance and administrative charges (1,733,703) (59,703) (298,466) (145,781) (938,219) (291,534) Benefit payments (184) -- -- -- -- (184) Surrenders (89,374) (973) (9,215) (8,511) (56,983) (13,692) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (13,409,127) 1,199,005 4,485,230 2,637,971 (28,785,556) 7,054,223 Other (29,113) 277 (47) (13) (27,783) (1,547) ------------ ----------- ----------- ----------- ----------- ----------- Increase from principal transactions 23,571,636 1,340,891 5,335,884 3,020,673 6,203,999 7,670,189 ------------ ----------- ----------- ----------- ----------- ----------- Total increase in net assets 25,870,972 1,417,846 5,703,311 3,304,431 6,415,342 9,030,042 Net assets at beginning of year 5,528,643 127,491 1,346,108 970,698 1,880,324 1,204,022 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 31,399,615 $ 1,545,337 $ 7,049,419 $ 4,275,129 $ 8,295,666 $10,234,064 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 157 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
INVESCO ---------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities ---------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 223,901 $ 21,883 $ 89,544 $ 108,319 $ 4,155 Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 324,175 61,103 113,391 137,747 11,934 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 609,861 199,674 243,848 121,818 44,521 Cost of insurance and administrative charges (158,637) (45,283) (55,233) (48,934) (9,187) Benefit payments -- -- -- -- -- Surrenders (5,730) (2,038) (2,171) (1,386) (135) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 2,217,943 506,505 810,269 750,404 150,765 Other 1,108 943 (126) 277 14 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 2,664,545 659,801 996,587 822,179 185,978 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 2,988,720 720,904 1,109,978 959,926 197,912 Net assets at beginning of year 979,026 153,563 259,639 545,475 20,349 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $ 3,967,746 $ 874,467 $1,369,617 $ 1,505,401 $ 218,261 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 158 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996 Van Eck ----------------------------------------- Total Worldwide Worldwide Van Eck Balanced Hard Assets ----------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ (556) $ (1,135) $ 579 Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 ---------- ---------- ---------- Increase in net assets from operations 39,604 21,192 18,412 ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 198,815 135,181 63,634 Cost of insurance and administrative charges (41,236) (29,480) (11,756) Benefit payments -- -- -- Surrenders (1,584) (1,584) -- Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 303,783 126,152 177,631 Other (417) (468) 51 ---------- ---------- ---------- Increase from principal transactions 459,361 229,801 229,560 ---------- ---------- ---------- Total increase in net assets 498,965 250,993 247,972 Net assets at beginning of year 95,066 76,812 18,254 ---------- ---------- ---------- Net assets at end of year $ 594,031 $ 327,805 $ 266,226 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage 159 Security Life Separate Account L1 Notes to Financial Statements December 31, 1998 NOTE A. ORGANIZATION Security Life Separate Account L1 (the "Separate Account") was established by resolution of the Board of Directors of Security Life of Denver Insurance Company (the "Company") on November 3, 1993. The Separate Account is organized as a unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940. The Separate Account supports the operations of the FirstLine and Strategic Advantage Variable Universal Life ("FirstLine and Strategic Advantage") policies offered by the Company. The Separate Account may be used to support other variable life policies as they are offered by the Company. The assets of the Separate Account are the property of the Company. However, the portion of the Separate Account's assets attributable to the policies will not be used to satisfy liabilities arising out of any other operations of the Company. As of December 31, 1998, the Separate Account offered twenty-three investment divisions available to the policyholders, each of which invests in an independently managed mutual fund portfolio ("Fund"). The Funds are as follows: PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS) Neuberger Berman Management Incorporated (NB) Neuberger Berman Limited Maturity Bond Portfolio Neuberger Berman Growth Portfolio Neuberger Berman Partners Portfolio Fred Alger Management, Inc. (Alger) Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Fidelity Management & Research Company (Fidelity) Fidelity Investments VIP II Asset Manager Portfolio Fidelity Investments VIP Growth Portfolio Fidelity Investments VIP Overseas Portfolio Fidelity Investments VIP Money Market Portfolio Fidelity Investments VIP II Index 500 Portfolio - -------------------------------------------------------------------------------- Strategic Advantage 160 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 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 Real Estate Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Bond 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 Real Estate Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Bond Portfolio AIM Advisors, Inc. (AIM) AIM VI - Capital Appreciation Portfolio AIM VI - Government Securities Portfolio INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Small Company Growth Portfolio - -------------------------------------------------------------------------------- Strategic Advantage 161 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE A. ORGANIZATION (CONTINUED) The FirstLine and Strategic Advantage policies allow the policyholders to specify the allocation of their net premium to the various Funds. They can also transfer their account values among the Funds. The FirstLine and Strategic Advantage products also provide the policyholders the option to allocate their net premiums, or to transfer their account values, to a Guaranteed Interest Division ("GID") in the Company's general account. The GID guarantees a rate of interest to the policyholder, and it is not variable in nature. Therefore, it is not included in these Separate Account statements. NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements of the Separate Account have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting principles followed by the Separate Account and the methods of applying those principles are presented below or in the footnotes which follow: INVESTMENT VALUATION--The investments in shares of the Funds are valued at the closing net asset value (market value) per share as determined by the Funds on the day of measurement. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--The investments in shares of the Funds are accounted for on the date the order to buy or sell is confirmed. Dividend income and distributions of capital gains are recorded on the ex-dividend date. Realized gains and losses from sales transactions are reported using the first-in, first-out ("FIFO") method of accounting for cost. The difference between cost and current market value of investments owned on the day of measurement is recorded as unrealized gain or loss on investment. VALUATION PERIOD DEDUCTIONS--Charges are made directly against the assets of the Separate Account divisions and are reflected daily in the computation of the unit values of the divisions. - -------------------------------------------------------------------------------- Strategic Advantage 162 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, 1998, 1997 and 1996 were $1,740,661; $813,630 and $241,127, respectively. POLICYHOLDER RESERVES--Policyholder reserves are recorded in the Separate Account at the aggregate account values of the policyholders invested in the Separate Account divisions. To the extent that benefits to be paid to the policyholders exceed their account values, the Company will contribute additional funds to the benefit proceeds. - -------------------------------------------------------------------------------- Strategic Advantage 163 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, 1998, 1997 and 1996 were $14,458,798; $8,284,944 and $2,843,666, respectively. Dividends made by the Funds are reinvested in the Funds. The following is a summary of Fund shares owned as of December 31, 1998:
Number Net Value of Asset of Shares Cost of FUND Shares Value at Market Shares - ---------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 1,127,232.206 $13.82 $ 15,578,349 $ 15,334,595 Growth 343,330.535 $26.29 9,026,160 8,510,696 Government Income -- $11.14 -- -- Partners 1,186,647.771 $18.93 22,463,242 22,570,797 Fred Alger Management, Inc.: American Small Capitalization 352,589.754 $43.97 15,503,371 14,851,950 American MidCap Growth 319,369.785 $28.87 9,220,207 7,858,579 American Growth 430,357.281 $53.22 22,903,614 18,608,688 American Leveraged AllCap 194,880.482 $34.90 6,801,329 5,293,171 Fidelity Management & Research Co.: Asset Manager 563,726.801 $18.16 10,237,279 9,501,494 Growth 733,232.497 $44.87 32,900,142 26,845,882 Overseas 1,026,528.069 $20.05 20,581,887 19,913,166 Money Market 18,412,252.400 $1.00 18,412,252 18,412,252 Index 500 609,942.422 $141.25 86,154,369 70,067,500 INVESCO Funds Group, Inc.: Total Return 488,861.727 $16.58 8,105,328 7,814,990 Industrial Income 583,181.351 $18.61 10,853,005 10,163,306 High Yield 696,358.875 $11.32 7,882,782 8,752,765 Utilities 114,789.679 $17.78 2,040,960 1,727,429 Small Company Growth 64,989.440 $11.52 748,678 674,581 Van Eck Associates Corporation: Worldwide Balanced -- $12.03 -- -- Worldwide Hard Assets 116,712.440 $9.20 1,073,755 1,517,809 Worldwide Bond 16,759.491 $12.28 205,807 201,853 Worldwide Emerging Markets 64,769.133 $7.12 461,156 414,017 Worldwide Real Estate 7,995.940 $9.54 76,281 76,310 AIM Advisors, Inc.: Capital Appreciation 47,795.065 $25.20 1,204,436 1,085,211 Government Securities 232,175.030 $11.18 2,595,717 2,560,855 ----------------- ----------------- Total $305,030,106 $272,757,896 ================= =================
- -------------------------------------------------------------------------------- Strategic Advantage 164 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE C. INVESTMENTS (CONTINUED) For the year ended December 31, 1998, the cost of purchases (plus reinvested dividends) and sales of investments are as follows:
Beginning End FUND of Year Purchases Sales of Year - ------------------------------------------------------------------------------------------------------------------ Neuberger Berman Management Inc.: Limited Maturity Bond $6,490,167 $11,289,258 ($2,444,830) $15,334,595 Growth 4,895,677 7,029,074 (3,414,055) 8,510,696 Government Income 833,365 137,502 (970,867) -- Partners 11,515,832 13,300,529 (2,245,564) 22,570,797 Fred Alger Management, Inc.: American Small Capitalization 10,791,047 8,512,969 (4,452,066) 14,851,950 American MidCap Growth 4,680,691 5,007,799 (1,829,911) 7,858,579 American Growth 8,426,205 12,330,367 (2,147,884) 18,608,688 American Leveraged AllCap 2,939,669 4,357,148 (2,003,646) 5,293,171 Fidelity Management & Research Co.: Asset Manager 5,638,123 5,278,809 (1,415,438) 9,501,494 Growth 16,477,099 23,941,147 (13,572,364) 26,845,882 Overseas 12,237,937 23,905,882 (16,230,653) 19,913,166 Money Market 14,300,455 74,696,311 (70,584,514) 18,412,252 Index 500 32,789,297 45,050,855 (7,772,652) 70,067,500 INVESCO Funds Group, Inc.: Total Return 2,812,500 5,585,718 (583,228) 7,814,990 Industrial Income 5,602,678 5,964,437 (1,403,809) 10,163,306 High Yield 4,793,052 10,924,985 (6,965,272) 8,752,765 Utilities 1,129,569 919,214 (321,354) 1,727,429 Small Company Growth -- 775,726 (101,145) 674,581 Van Eck Associates Corporation: Worldwide Balanced 364,193 72,504 (436,697) -- Worldwide Hard Assets 959,451 1,175,104 (616,746) 1,517,809 Worldwide Bond -- 222,604 (20,751) 201,853 Worldwide Emerging Markets -- 771,909 (357,892) 414,017 Worldwide Real Estate -- 95,356 (19,046) 76,310 AIM Advisors, Inc. Capital Appreciation -- 1,174,137 (88,926) 1,085,211 Government Securities -- 2,744,143 (183,288) 2,560,855 --------------- ------------ -------------- ------------ Total $147,677,007 $265,263,487 ($140,182,598) $272,757,896 =============== ============ ============== ============
Aggregate proceeds from sales of investments for the year ended December 31, 1998 were $148,718,872. - -------------------------------------------------------------------------------- Strategic Advantage 165 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE D. OTHER POLICY DEDUCTIONS The FirstLine and Strategic Advantage products provide for certain deductions for sales and tax loads from premium payments received from the policyholders and for surrender charges and taxes from amounts paid to policyholders. Such deductions are taken before the purchase of divisional units or after the redemption of divisional units of the Separate Account. Such deductions are not included in the Separate Account financial statements. NOTE E. POLICY LOANS The FirstLine and Strategic Advantage policies allow the policyholders to borrow against their policies by using them as collateral for a loan. At the time of borrowing against the policies, an amount equal to the loan amount is transferred from the Separate Account divisions to a Loan Division in the Company's General Account to secure the loan. As payments are made on the policy loan, amounts are transferred back from the Loan Division to the Separate Account divisions. Interest is credited to the balance in the Loan Division at a fixed rate. The Loan Division is not variable in nature and is not included in these Separate Account statements. NOTE F. FEDERAL INCOME TAXES The Separate Account is not taxed separately because the operations of the Separate Account are part of the total operations of the Company. The Company is taxed as a life insurance company under the Internal Revenue Code. The Separate Account is not taxed as a "Regulated Investment Company" under subchapter "M" of the Internal Revenue Code. - -------------------------------------------------------------------------------- Strategic Advantage 166 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, 1998:
(Decrease) for Outstanding Increase Withdrawals Outstanding At Beginning for Payments and Other At End Division of Year Received Deductions of Year - ----------------------------------------------------------------------------------------------------------- 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 Industrial 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
- -------------------------------------------------------------------------------- Strategic Advantage 167 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:
(Decrease) for Outstanding Increase Withdrawals Outstanding At Beginning for Payments and Other At End Division of Year Received Deductions of Year - -------------------------------------------------------------------------------------------------------------- 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 Industrial 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
- -------------------------------------------------------------------------------- Strategic Advantage 168 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED) The following schedule summarizes the changes in divisional units for the year ended December 31, 1996:
(Decrease) for Outstanding Increase Withdrawals Outstanding at Beginning or Payments and Other at End Division of Year Received Deductions of Year - -------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 162,009.578 57,300.933 (584.620) 218,725.891 Growth 60,162.107 74,132.806 (726.930) 133,567.983 Government Income 77,187.706 65,930.987 (345.290) 142,773.403 Partners 73,535.288 203,456.199 (1,099.030) 275,892.457 Fred Alger Management, Inc.: American Small Capitalization 80,027.266 218,770.486 (1,724.430) 297,073.322 American MidCap Growth 19,692.860 131,814.883 (1,027.270) 150,480.473 American Growth 69,805.233 214,057.614 (1,687.560) 282,175.287 American Leveraged AllCap 2,494.731 51,210.999 (661.260) 53,044.470 Fidelity Management & Research Co.: Asset Manager 11,627.088 112,576.840 (295.760) 123,908.168 Growth 102,248.988 369,855.299 (1,818.620) 470,285.667 Overseas 93,906.733 275,584.696 (1,543.320) 367,948.109 Money Market 178,653.159 3,174,656.740 (2,599,601.930) 753,707.969 Index 500 91,903.027 551,031.963 (2,044.340) 640,890.650 INVESCO Funds Group, Inc.: Total Return 12,602.664 52,659.359 (771.540) 64,490.483 Industrial Income 20,026.102 67,339.104 (329.850) 87,035.356 High Yield 45,708.358 63,646.889 (356.140) 108,999.107 Utilities 1,879.859 16,197.511 (68.880) 18,008.490 Van Eck Associates Corporation: Worldwide Balanced 7,739.274 22,412.363 (342.850) 29,808.787 Worldwide Hard Assets 1,765.913 20,257.020 (56.840) 21,966.093
- -------------------------------------------------------------------------------- Strategic Advantage 169 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE H. NET ASSETS Net assets at December 31, 1998 consisted of the following:
Accumulated Net Accumulated Net Realized Unrealized Investment Gains Gains Principal Income (Losses) On (Losses) On Division Transactions (Loss) Investments Investments Net Assets - ------------------------------------------------------------------------------------------------------------------------------ Neuberger Berman Management Inc.: Limited Maturity Bond $ 14,798,256 $ 554,555 $ (18,215) $ 243,753 $ 15,578,349 Growth 7,028,181 1,750,191 (267,675) 515,463 9,026,160 Government Income (197,709) 219,245 (21,536) - - Partners 19,164,868 2,232,497 1,173,430 (107,553) 22,463,242 Fred Alger Management, Inc.: American Small Capitalization 12,782,408 1,740,285 329,258 651,420 15,503,371 American MidCap Growth 6,729,922 570,025 558,634 1,361,626 9,220,207 American Growth 15,328,177 2,102,491 1,178,019 4,294,927 22,903,614 American Leveraged AllCap 4,597,430 102,339 593,403 1,508,157 6,801,329 Fidelity Management & Research Co.: Asset Manager 8,511,070 928,642 61,784 735,783 10,237,279 Growth 21,880,758 2,745,144 2,220,029 6,054,211 32,900,142 Overseas 17,959,130 1,286,196 667,842 668,719 20,581,887 Money Market 16,762,206 1,650,046 - - 18,412,252 Index 500 63,645,284 1,521,424 4,900,792 16,086,869 86,154,369 INVESCO Funds Group, Inc.: Total Return 7,241,724 359,909 213,358 290,337 8,105,328 Industrial Income 8,730,383 941,544 491,379 689,699 10,853,005 High Yield 7,183,287 1,366,993 202,483 (869,981) 7,882,782 Utilities 1,554,382 45,485 127,560 313,533 2,040,960 Small Company Growth 682,064 (586) (6,898) 74,098 748,678 Van Eck Associates Corporation: Worldwide Balanced (94,857) 49,411 45,446 - - Worldwide Hard Assets 1,509,491 144,822 (136,502) (444,056) 1,073,755 Worldwide Bond 201,935 (212) 130 3,954 205,807 Worldwide Emerging Markets 517,189 (1,736) (101,436) 47,139 461,156 Worldwide Real Estate 78,370 (225) (1,836) (28) 76,281 AIM Advisors, Inc.: Capital Appreciation 1,064,475 24,052 (3,314) 119,223 1,204,436 Government Securities 2,493,145 59,796 7,914 34,862 2,595,717 ------------ ----------- ----------- ----------- ------------ Total $240,151,569 $20,392,333 $12,214,049 $32,272,155 $305,030,106 ============ =========== =========== =========== ============
- -------------------------------------------------------------------------------- Strategic Advantage 170 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE I. YEAR 2000 (UNAUDITED) The Company has initiated a program to prepare the Company's computer systems and applications for the year 2000. This program includes all systems utilized by the Company as well as the systems of other companies that interface with the Company. The Company has completed an assessment and is in the process of modifying portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. Accordingly, the Company does not expect the amounts required for this project to have a material effect on its financial position. The project is estimated to be completed no later than June 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, and conversions to new software, the Year 2000 will not pose significant operational problems for its computer software systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, it could have a material impact on the operations of the Company. The Company has initiated formal communications and interface testing plans with all of its suppliers and customers to determine the extent to which its interface systems are vulnerable to those third parties' failure to have their systems Year 2000 compatible and will act accordingly to prevent operational disruptions. - -------------------------------------------------------------------------------- Strategic Advantage 171 APPENDIX A FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY MALE NON-SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.574 25 6.095 50 2.671 75 1.396 1 12.681 26 5.904 51 2.589 76 1.372 2 12.341 27 5.717 52 2.509 77 1.349 3 11.996 28 5.533 53 2.433 78 1.328 4 11.655 29 5.354 54 2.360 79 1.307 5 11.316 30 5.179 55 2.290 80 1.288 6 10.979 31 5.008 56 2.223 81 1.270 7 10.644 32 4.843 57 2.159 82 1.253 8 10.311 33 4.682 58 2.097 83 1.236 9 9.982 34 4.527 59 2.038 84 1.221 10 9.660 35 4.376 60 1.982 85 1.207 11 9.345 36 4.231 61 1.928 86 1.195 12 9.041 37 4.091 62 1.877 87 1.183 13 8.750 38 3.955 63 1.828 88 1.172 14 8.476 39 3.825 64 1.781 89 1.161 15 8.218 40 3.699 65 1.736 90 1.151 16 7.973 41 3.577 66 1.694 91 1.141 17 7.740 42 3.461 67 1.654 92 1.131 18 7.517 43 3.348 68 1.615 93 1.120 19 7.301 44 3.240 69 1.579 94 1.109 20 7.091 45 3.136 70 1.544 95 1.097 21 6.886 46 3.036 71 1.511 96 1.083 22 6.684 47 2.939 72 1.480 97 1.069 23 6.484 48 2.847 73 1.450 98 1.054 24 6.288 49 2.757 74 1.422 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 172 APPENDIX A (CONT.) FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY MALE SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.511 25 4.963 50 2.267 75 1.330 1 10.508 26 4.811 51 2.205 76 1.312 2 10.203 27 4.661 52 2.145 77 1.295 3 9.897 28 4.515 53 2.088 78 1.280 4 9.597 29 4.371 54 2.034 79 1.265 5 9.301 30 4.231 55 1.982 80 1.251 6 9.007 31 4.094 56 1.933 81 1.238 7 8.718 32 3.962 57 1.886 82 1.225 8 8.433 33 3.834 58 1.841 83 1.213 9 8.153 34 3.710 59 1.798 84 1.202 10 7.879 35 3.590 60 1.757 85 1.191 11 7.613 36 3.475 61 1.717 86 1.182 12 7.356 37 3.363 62 1.680 87 1.173 13 7.109 38 3.256 63 1.644 88 1.164 14 6.876 39 3.153 64 1.610 89 1.155 15 6.654 40 3.054 65 1.577 90 1.147 16 6.456 41 2.959 66 1.547 91 1.138 17 6.269 42 2.869 67 1.518 92 1.129 18 6.091 43 2.782 68 1.490 93 1.120 19 5.919 44 2.698 69 1.464 94 1.109 20 5.752 45 2.619 70 1.438 95 1.097 21 5.590 46 2.542 71 1.414 96 1.083 22 5.430 47 2.469 72 1.391 97 1.069 23 5.272 48 2.399 73 1.369 98 1.054 24 5.117 49 2.331 74 1.349 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 173 APPENDIX A (CONT.) FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY FEMALE NON-SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 14.687 25 6.861 50 3.013 75 1.493 1 14.680 26 6.638 51 2.920 76 1.461 2 14.279 27 6.421 52 2.831 77 1.430 3 13.873 28 6.211 53 2.745 78 1.401 4 13.471 29 6.007 54 2.662 79 1.373 5 13.073 30 5.809 55 2.583 80 1.347 6 12.682 31 5.618 56 2.507 81 1.322 7 12.294 32 5.432 57 2.433 82 1.299 8 11.915 33 5.252 58 2.362 83 1.278 9 11.541 34 5.078 59 2.293 84 1.257 10 11.175 35 4.910 60 2.226 85 1.239 11 10.817 36 4.747 61 2.162 86 1.221 12 10.469 37 4.590 62 2.100 87 1.205 13 10.132 38 4.439 63 2.040 88 1.190 14 9.807 39 4.294 64 1.983 89 1.176 15 9.494 40 4.154 65 1.928 90 1.163 16 9.192 41 4.019 66 1.876 91 1.150 17 8.899 42 3.890 67 1.826 92 1.137 18 8.617 43 3.765 68 1.778 93 1.125 19 8.344 44 3.645 69 1.732 94 1.112 20 8.078 45 3.530 70 1.688 95 1.098 21 7.821 46 3.419 71 1.645 96 1.084 22 7.571 47 3.312 72 1.604 97 1.069 23 7.327 48 3.208 73 1.565 98 1.054 24 7.091 49 3.109 74 1.528 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 174 APPENDIX A (CONT.) FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY FEMALE SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 13.162 25 6.032 50 2.728 75 1.451 1 13.099 26 5.836 51 2.651 76 1.423 2 12.723 27 5.647 52 2.578 77 1.396 3 12.346 28 5.463 53 2.507 78 1.371 4 11.974 29 5.285 54 2.438 79 1.347 5 11.608 30 5.113 55 2.373 80 1.325 6 11.248 31 4.946 56 2.310 81 1.303 7 10.894 32 4.785 57 2.249 82 1.283 8 10.547 33 4.629 58 2.190 83 1.263 9 10.207 34 4.478 59 2.132 84 1.246 10 9.874 35 4.332 60 2.076 85 1.229 11 9.550 36 4.192 61 2.022 86 1.214 12 9.234 37 4.056 62 1.969 87 1.199 13 8.930 38 3.926 63 1.919 88 1.186 14 8.636 39 3.801 64 1.870 89 1.173 15 8.352 40 3.682 65 1.824 90 1.161 16 8.085 41 3.568 66 1.780 91 1.149 17 7.826 42 3.459 67 1.738 92 1.137 18 7.577 43 3.354 68 1.697 93 1.125 19 7.336 44 3.254 69 1.658 94 1.112 20 7.102 45 3.158 70 1.620 95 1.098 21 6.876 46 3.065 71 1.583 96 1.084 22 6.655 47 2.976 72 1.547 97 1.069 23 6.441 48 2.890 73 1.513 98 1.054 24 6.234 49 2.808 74 1.481 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 175 APPENDIX A (CONT.) FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY UNISEX 1 NON-SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.574 25 6.095 50 2.671 75 1.396 1 12.681 26 5.904 51 2.589 76 1.372 2 12.341 27 5.717 52 2.509 77 1.349 3 11.996 28 5.533 53 2.433 78 1.328 4 11.655 29 5.354 54 2.360 79 1.307 5 11.316 30 5.179 55 2.290 80 1.288 6 10.979 31 5.008 56 2.223 81 1.270 7 10.644 32 4.843 57 2.159 82 1.253 8 10.311 33 4.682 58 2.097 83 1.236 9 9.982 34 4.527 59 2.038 84 1.221 10 9.660 35 4.376 60 1.982 85 1.207 11 9.345 36 4.231 61 1.928 86 1.195 12 9.041 37 4.091 62 1.877 87 1.183 13 8.750 38 3.955 63 1.828 88 1.172 14 8.476 39 3.825 64 1.781 89 1.161 15 8.218 40 3.699 65 1.736 90 1.151 16 7.973 41 3.577 66 1.694 91 1.141 17 7.740 42 3.461 67 1.654 92 1.131 18 7.517 43 3.348 68 1.615 93 1.120 19 7.301 44 3.240 69 1.579 94 1.109 20 7.091 45 3.136 70 1.544 95 1.097 21 6.886 46 3.036 71 1.511 96 1.083 22 6.684 47 2.939 72 1.480 97 1.069 23 6.484 48 2.847 73 1.450 98 1.054 24 6.288 49 2.757 74 1.422 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 176 APPENDIX A (CONT.) FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY UNISEX 1 SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.511 25 4.963 50 2.267 75 1.330 1 10.508 26 4.811 51 2.205 76 1.312 2 10.203 27 4.661 52 2.145 77 1.295 3 9.897 28 4.515 53 2.088 78 1.280 4 9.597 29 4.371 54 2.034 79 1.265 5 9.301 30 4.231 55 1.982 80 1.251 6 9.007 31 4.094 56 1.933 81 1.238 7 8.718 32 3.962 57 1.886 82 1.225 8 8.433 33 3.834 58 1.841 83 1.213 9 8.153 34 3.710 59 1.798 84 1.202 10 7.879 35 3.590 60 1.757 85 1.191 11 7.613 36 3.475 61 1.717 86 1.182 12 7.356 37 3.363 62 1.680 87 1.173 13 7.109 38 3.256 63 1.644 88 1.164 14 6.876 39 3.153 64 1.610 89 1.155 15 6.654 40 3.054 65 1.577 90 1.147 16 6.456 41 2.959 66 1.547 91 1.138 17 6.269 42 2.869 67 1.518 92 1.129 18 6.091 43 2.782 68 1.490 93 1.120 19 5.919 44 2.698 69 1.464 94 1.109 20 5.752 45 2.619 70 1.438 95 1.097 21 5.590 46 2.542 71 1.414 96 1.083 22 5.430 47 2.469 72 1.391 97 1.069 23 5.272 48 2.399 73 1.369 98 1.054 24 5.117 49 2.331 74 1.349 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 177 APPENDIX A (CONT.) FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY UNISEX 2 NON-SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.943 25 6.234 50 2.733 75 1.418 1 13.032 26 6.037 51 2.649 76 1.392 2 12.683 27 5.845 52 2.568 77 1.368 3 12.327 28 5.657 53 2.490 78 1.345 4 11.975 29 5.473 54 2.415 79 1.323 5 11.626 30 5.294 55 2.343 80 1.303 6 11.278 31 5.120 56 2.275 81 1.283 7 10.934 32 4.950 57 2.209 82 1.265 8 10.593 33 4.786 58 2.146 83 1.247 9 10.256 34 4.627 59 2.085 84 1.231 10 9.926 35 4.474 60 2.027 85 1.216 11 9.604 36 4.325 61 1.972 86 1.202 12 9.292 37 4.182 62 1.918 87 1.190 13 8.994 38 4.043 63 1.868 88 1.178 14 8.710 39 3.910 64 1.819 89 1.166 15 8.443 40 3.782 65 1.773 90 1.155 16 8.188 41 3.658 66 1.729 91 1.144 17 7.945 42 3.539 67 1.687 92 1.133 18 7.712 43 3.424 68 1.647 93 1.122 19 7.487 44 3.314 69 1.609 94 1.110 20 7.267 45 3.208 70 1.573 95 1.097 21 7.053 46 3.106 71 1.538 96 1.084 22 6.843 47 3.007 72 1.506 97 1.069 23 6.637 48 2.912 73 1.475 98 1.054 24 6.433 49 2.821 74 1.445 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 178 APPENDIX A (CONT.) FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY UNISEX 2 SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.942 25 5.143 50 2.347 75 1.361 1 10.931 26 4.984 51 2.282 76 1.341 2 10.616 27 4.828 52 2.221 77 1.323 3 10.298 28 4.675 53 2.162 78 1.306 4 9.985 29 4.526 54 2.105 79 1.289 5 9.677 30 4.380 55 2.052 80 1.274 6 9.373 31 4.239 56 2.000 81 1.259 7 9.072 32 4.102 57 1.951 82 1.244 8 8.777 33 3.969 58 1.904 83 1.230 9 8.487 34 3.841 59 1.859 84 1.217 10 8.203 35 3.717 60 1.816 85 1.205 11 7.927 36 3.597 61 1.774 86 1.194 12 7.660 37 3.481 62 1.735 87 1.183 13 7.405 38 3.371 63 1.697 88 1.173 14 7.161 39 3.264 64 1.660 89 1.163 15 6.930 40 3.162 65 1.626 90 1.153 16 6.721 41 3.064 66 1.594 91 1.143 17 6.523 42 2.970 67 1.563 92 1.133 18 6.334 43 2.880 68 1.534 93 1.122 19 6.152 44 2.794 69 1.505 94 1.110 20 5.975 45 2.711 70 1.478 95 1.097 21 5.803 46 2.632 71 1.452 96 1.084 22 5.634 47 2.556 72 1.427 97 1.069 23 5.468 48 2.484 73 1.404 98 1.054 24 5.305 49 2.414 74 1.382 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 179 APPENDIX B FACTORS FOR THE GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST FOR A LIFE INSURANCE POLICY Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 2.50 25 2.50 50 1.85 75 1.05 1 2.50 26 2.50 51 1.78 76 1.05 2 2.50 27 2.50 52 1.71 77 1.05 3 2.50 28 2.50 53 1.64 78 1.05 4 2.50 29 2.50 54 1.57 79 1.05 5 2.50 30 2.50 55 1.50 80 1.05 6 2.50 31 2.50 56 1.46 81 1.05 7 2.50 32 2.50 57 1.42 82 1.05 8 2.50 33 2.50 58 1.38 83 1.05 9 2.50 34 2.50 59 1.34 84 1.05 10 2.50 35 2.50 60 1.30 85 1.05 11 2.50 36 2.50 61 1.28 86 1.05 12 2.50 37 2.50 62 1.26 87 1.05 13 2.50 38 2.50 63 1.24 88 1.05 14 2.50 39 2.50 64 1.22 89 1.05 15 2.50 40 2.50 65 1.20 90 1.05 16 2.50 41 2.43 66 1.19 91 1.04 17 2.50 42 2.36 67 1.18 92 1.03 18 2.50 43 2.29 68 1.17 93 1.02 19 2.50 44 2.22 69 1.16 94 1.01 20 2.50 45 2.15 70 1.15 95 1.00 21 2.50 46 2.09 71 1.13 96 1.00 22 2.50 47 2.03 72 1.11 97 1.00 23 2.50 48 1.97 73 1.09 98 1.00 24 2.50 49 1.91 74 1.07 99 1.00 100 1.00 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 180 APPENDIX C PERFORMANCE INFORMATION POLICY PERFORMANCE The following hypothetical illustrations demonstrate how the actual investment experience of each division of the variable account affects the cash surrender value, account value and death benefit of a policy. These hypothetical illustrations are based on the actual historical return of each portfolio as if a policy had been issued on the date indicated. Each portfolio's annual total return is based on the total return calculated for each fiscal year. These annual total return figures reflect the net portfolio's management fees after any voluntary waiver and other operating expenses but do not reflect the policy level or variable account asset-based charges and deductions, which if reflected, would result in lower total return figures than those shown. The illustrations are based on the payment of a $5,750 annual premium, paid at the beginning of each year, for a hypothetical policy with a $300,000 face amount, the cash value accumulation test, death benefit option 1, issued to a non-smoker male, age 45. In each case, it is assumed that all premiums are allocated to the division illustrated for the period shown. The benefits are calculated for a specific date. The amount and timing of premium payments and the use of other policy features, such as policy loans, would affect individual policy benefits. The amounts shown for the cash surrender values, account values and death benefits take into account the charges against premiums, current cost of insurance and monthly deductions, the daily charge against the variable account for mortality and expense risks, and each portfolio's charges and expenses. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 47. This prospectus also contains illustrations based on assumed rates of return. SEE ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE 59. - -------------------------------------------------------------------------------- Strategic Advantage 181 HYPOTHETICAL ILLUSTRATIONS Non-smoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- AIM V.I. CAPITAL APPRECIATION FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 2.50% 4,682 4,394 300,000 12/31/95 35.69% 11,731 11,587 300,000 12/31/96 17.58% 18,177 18,177 300,000 12/31/97 13.51% 24,874 24,874 300,000 12/31/98 19.30% 34,113 34,113 300,000 AIM V.I. GOVERNMENT SECURITIES FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (3.73)% 4,394 4,106 300,000 12/31/95 15.56% 9,607 9,463 300,000 12/31/96 2.29% 13,576 13,576 300,000 12/31/97 8.16% 18,715 18,715 300,000 12/31/98 7.66% 24,116 24,116 300,000 ALGER AMERICAN GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 4.14% 4,757 4,470 300,000 12/31/91 40.39% 12,256 12,112 300,000 12/31/92 12.38% 17,935 17,935 300,000 12/31/93 22.47% 26,593 26,593 300,000 12/31/94 1.45% 30,651 30,651 300,000 12/31/95 36.37% 47,446 47,446 300,000 12/31/96 13.35% 58,278 58,278 300,000 12/31/97 25.75% 78,236 78,236 300,000 12/31/98 48.07% 121,619 121,619 300,000 ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 12.04% 5,123 4,836 300,000 12/31/97 19.68% 10,831 10,687 300,000 12/31/98 57.83% 23,197 23,197 300,000 The assumptions underlying these values are described in Performance Information, page 181. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage 182 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- ALGER AMERICAN MIDCAP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (1.54)% 4,495 4,207 300,000 12/31/95 44.45% 12,243 12,100 300,000 12/31/96 11.90% 17,843 17,843 300,000 12/31/97 15.01% 24,828 24,828 300,000 12/31/98 30.30% 37,259 37,259 300,000 ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 64.48% 7,567 7,280 300,000 12/31/90 8.71% 12,451 12,307 300,000 12/31/91 57.54% 25,695 25,695 300,000 12/31/92 3.55% 30,391 30,391 300,000 12/31/93 13.28% 38,585 38,585 300,000 12/31/94 (4.38)% 40,649 40,649 300,000 12/31/95 44.31% 64,596 64,596 300,000 12/31/96 4.18% 71,266 71,266 300,000 12/31/97 11.39% 83,576 83,576 300,000 12/31/98 15.53% 100,811 100,811 300,000 FIDELITY VIP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 31.51% 6,028 5,741 300,000 12/31/90 (11.73)% 8,700 8,556 300,000 12/31/91 45.51% 18,248 18,248 300,000 12/31/92 9.32% 24,010 24,010 300,000 12/31/93 19.37% 33,106 33,106 300,000 12/31/94 (0.02)% 37,070 37,070 300,000 12/31/95 35.36% 55,723 55,723 300,000 12/31/96 14.71% 68,389 68,389 300,000 12/31/97 23.48% 89,180 89,180 300,000 12/31/98 39.49% 129,671 129,671 300,000 The assumptions underlying these values are described in Performance Information, page 181. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage 183 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- FIDELITY VIP MONEY MARKET PORTFOLIO Year Annual Total Cash Surrender Account Death Ended Return * Value Value Benefit 12/31/89 9.12% 4,988 4,701 300,000 12/31/90 8.04% 9,599 9,456 300,000 12/31/91 6.09% 14,093 14,093 300,000 12/31/92 3.90% 18,489 18,489 300,000 12/31/93 3.23% 22,866 22,866 300,000 12/31/94 4.25% 28,043 28,043 300,000 12/31/95 5.87% 33,926 33,926 300,000 12/31/96 5.41% 39,896 39,896 300,000 12/31/97 5.51% 46,133 46,133 300,000 12/31/98 5.46% 52,584 52,584 300,000 FIDELITY VIP OVERSEAS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 26.28% 5,785 5,497 300,000 12/31/90 (1.67)% 9,488 9,344 300,000 12/31/91 8.00% 14,237 14,237 300,000 12/31/92 (10.72)% 15,932 15,932 300,000 12/31/93 37.35% 27,140 27,140 300,000 12/31/94 1.72% 31,679 31,679 300,000 12/31/95 9.74% 39,164 39,164 300,000 12/31/96 13.15% 48,778 48,778 300,000 12/31/97 11.56% 58,695 58,695 300,000 12/31/98 12.81% 70,430 70,430 300,000 FIDELITY VIP II ASSET MANAGER PORTFOLIO Year Annual Total Cash Surrender Account Death Ended Return * Value Value Benefit 12/31/90 6.72% 4,877 4,589 300,000 12/31/91 22.56% 10,799 10,655 300,000 12/31/92 11.71% 16,205 16,205 300,000 12/31/93 21.23% 24,227 24,227 300,000 12/31/94 (6.09)% 26,115 26,115 300,000 12/31/95 16.96% 35,319 35,319 300,000 12/31/96 14.60% 45,081 45,081 300,000 12/31/97 20.65% 59,168 59,168 300,000 12/31/98 15.05% 72,469 72,469 300,000 The assumptions underlying these values are described in Performance Information, page 181. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage 184 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- FIDELITY VIP II INDEX 500 PORTFOLIO Year Annual Total Cash Surrender Account Death Ended Return * Value Value Benefit 12/31/93 9.74% 5,017 4,729 300,000 12/31/94 1.04% 8,986 8,842 300,000 12/31/95 37.19% 17,559 17,559 300,000 12/31/96 22.82% 26,210 26,210 300,000 12/31/97 32.82% 39,822 39,822 300,000 12/31/98 28.31% 56,328 56,328 300,000 INVESCO VIF-EQUITY INCOME FUND (formerly VIF-Industrial Income Portfolio) Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 29.25% 5,923 5,636 300,000 12/31/96 22.28% 12,047 11,903 300,000 12/31/97 28.17% 20,271 20,271 300,000 12/31/98 15.30% 27,681 27,681 300,000 INVESCO VIF-HIGH YIELD FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 19.76% 5,482 5,194 300,000 12/31/96 16.59% 10,958 10,814 300,000 12/31/97 17.33% 17,235 17,235 300,000 12/31/98 1.42% 21,207 21,207 300,000 INVESCO VIF-SMALL COMPANY GROWTH FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 16.38% 5,325 5,037 300,000 INVESCO VIF-TOTAL RETURN FUND Year Annual Total Cash Surrender Account Death Ended Return * Value Value Benefit 12/31/95 22.79% 5,623 5,335 300,000 12/31/96 12.18% 10,688 10,544 300,000 12/31/97 22.91% 17,752 17,752 300,000 12/31/98 9.56% 23,523 23,523 300,000 The assumptions underlying these values are described in Performance Information, page 181. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage 185 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- INVESCO VIF-UTILITIES FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 9.08% 4,986 4,699 300,000 12/31/96 12.76% 10,031 9,887 300,000 12/31/97 23.41% 17,019 17,019 300,000 12/31/98 25.48% 26,117 26,117 300,000 NEUBERGER BERMAN GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 29.47% 5,933 5,646 300,000 12/31/90 (8.19)% 8,974 8,830 300,000 12/31/91 29.73% 16,556 16,556 300,000 12/31/92 9.54% 22,213 22,213 300,000 12/31/93 6.79% 27,638 27,638 300,000 12/31/94 (4.99)% 30,024 30,024 300,000 12/31/95 31.73% 44,963 44,963 300,000 12/31/96 9.14% 53,334 53,334 300,000 12/31/97 29.01% 73,844 73,844 300,000 12/31/98 15.53% 89,599 89,599 300,000 NEUBERGER BERMAN LIMITED MATURITY BOND PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 10.77% 5,065 4,777 300,000 12/31/90 8.32% 9,708 9,564 300,000 12/31/91 11.34% 14,939 14,939 300,000 12/31/92 5.18% 19,610 19,610 300,000 12/31/93 6.63% 24,831 24,831 300,000 12/31/94 (0.15)% 28,790 28,790 300,000 12/31/95 10.94% 36,404 36,404 300,000 12/31/96 4.31% 42,050 42,050 300,000 12/31/97 6.74% 48,970 48,970 300,000 12/31/98 4.39% 54,997 54,997 300,000 NEUBERGER BERMAN PARTNERS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 36.47% 6,259 5,972 300,000 12/31/96 29.57% 13,219 13,076 300,000 12/31/97 31.25% 22,306 22,306 300,000 12/31/98 4.21% 27,071 27,071 300,000 The assumptions underlying these values are described in Performance Information, page 181. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage 186 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- VAN ECK WORLDWIDE BOND FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 11.25% 5,087 4,799 300,000 12/31/91 18.39% 10,667 10,524 300,000 12/31/92 (5.25)% 13,536 13,536 300,000 12/31/93 7.79% 18,605 18,605 300,000 12/31/94 (1.32)% 21,945 21,945 300,000 12/31/95 17.30% 30,551 30,551 300,000 12/31/96 2.53% 35,399 35,399 300,000 12/31/97 2.38% 40,235 40,235 300,000 12/31/98 12.75% 49,725 49,725 300,000 VAN ECK WORLDWIDE EMERGING MARKETS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 26.82% 5,810 5,522 300,000 12/31/97 (11.61)% 8,520 8,376 300,000 12/31/98 (34.15)% 7,845 7,845 300,000 VAN ECK WORLDWIDE HARD ASSETS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/91 (2.93)% 4,430 4,143 300,000 12/31/92 (4.09)% 7,954 7,810 300,000 12/31/93 64.83% 19,533 19,533 300,000 12/31/94 (4.78)% 22,054 22,054 300,000 12/31/95 10.99% 28,574 28,574 300,000 12/31/96 18.04% 38,542 38,542 300,000 12/31/97 (1.67)% 41,755 41,755 300,000 12/31/98 (30.93)% 31,334 31,334 300,000 VAN ECK WORLDWIDE REAL ESTATE FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 (11.35)% 4,042 3,754 300,000 The assumptions underlying these values are described in Performance Information, page 181. *These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage 187 Prospectus STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE A FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY issued by SECURITY LIFE OF DENVER INSURANCE COMPANY AND SECURITY LIFE SEPARATE ACCOUNT L1 Consider carefully the policy charges, deductions, and refunds beginning on page 47 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 guaranteed not to lapse during the first three policy years if you meet certain requirements; and o is returnable by you during the free look period 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 divisions and the guaranteed interest division, based on your instructions; o are invested in shares of the underlying investment portfolios under each variable division; and 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 divisions, the guaranteed interest division and the loan division; o has no guaranteed minimum cash value under the variable divisions. The value varies with the value of the matching investment portfolio; o has a minimum guaranteed rate of return if you have an amount in the guaranteed interest division; and o is subject to various expenses and charges. DEATH PROCEEDS o are paid if the policy is still in force when the insured person dies; o are equal to the death benefit minus outstanding policy loans, accrued loan interest and unpaid charges incurred before the insured person dies; o are calculated under your choice of options; * Option 1- a fixed minimum death benefit * Option 2- a stated death benefit plus your account value; and o are generally not federally income taxed if your policy continues to meet the federal income tax definition of life insurance. NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. DATE OF PROSPECTUS MAY 1, 1999 Form V-63-99 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 MASSACHUSETTS: Unisex Policies described in this prospectus will provide policy values that do not differentiate on the basis of sex. In addition, all unisex policies offered by this prospectus to insure residents of Massachusetts will have premiums and benefits which are based on actuarial tables that do not differentiate on the basis of sex. - -------------------------------------------------------------------------------- Strategic Advantage II 2 TABLE OF CONTENTS POLICY SUMMARY.................................................................8 Your Policy...........................................................8 Free Look Period or Right to Examine Policy Period....................8 Your Policy Premiums..................................................8 Allocation of Net Premiums...................................8 Variable Divisions....................................................9 Policy Values.........................................................9 Your Account Value in the Variable Divisions.................9 Transfers of Account Value...........................................10 Special Policy Features..............................................10 Additional Benefits.........................................10 Dollar Cost Averaging.......................................10 Automatic Rebalancing.......................................10 Loans ...................................................10 Partial Withdrawals.........................................10 Persistency Refund..........................................10 Refund of Sales Charges.....................................10 Policy Modification, Termination and Continuation Features...........10 Right to Exchange Policy....................................10 Surrender...................................................10 Lapse ...................................................11 Reinstatement...............................................11 Continuation of Coverage....................................11 Death Benefits.......................................................11 Charges and Deductions...............................................11 Deductions from Premium.....................................11 Deductions from the Variable Divisions......................12 Monthly Deductions from Your Account Value..................12 Policy Transaction Fees.....................................12 Tax Considerations...................................................12 INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION.................................13 Security Life of Denver Insurance Company............................13 Year 2000 Preparedness...............................................13 Security Life Separate Account L1....................................14 Variable Account Structure..................................14 Order of Variable Account Liabilities.......................14 Variable Divisions..........................................14 Investment Portfolios.......................................14 Objectives of the Investment Portfolios..............................15 The Guaranteed Interest Division.....................................19 Maximum Number of Investment Divisions...............................19 DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE POLICY...............................................................20 Applying for a Policy................................................20 Policy Issuance.............................................20 Definition of Life Insurance Choice.........................20 Temporary Insurance..................................................20 Premiums ............................................................21 Scheduled Premiums..........................................21 - -------------------------------------------------------------------------------- Strategic Advantage II 3 Unscheduled Premium Payments................................21 Minimum Annual Premium......................................21 Special Continuation Period.................................22 Allocation of Net Premiums..................................22 Premium Payments Affect Your Coverage................................22 Modified Endowment Contracts................................23 Death Benefits.......................................................23 Base Death Benefit..........................................24 Death Benefit Options.......................................25 Changes in Death Benefit Options............................25 Changes in Death Benefit Amounts............................26 Guaranteed Minimum Death Benefit............................27 Requirements to Maintain the Guarantee Period...............27 Additional Benefits..................................................28 Adjustable Term Insurance Rider.............................28 Right to Change Insured Rider...............................29 Waiver of Cost of Insurance Rider...........................29 Waiver of Specified Premium Rider...........................29 Special Features.....................................................30 Policy Maturity.............................................30 Right to Exchange Policy....................................30 Continuation of Coverage....................................30 Enhanced Death Benefit Corridor Option......................30 Policy Values........................................................31 Account Value...............................................31 Net Account Value...........................................31 Cash Surrender Value........................................31 Net Cash Surrender Value....................................31 Determining the Value in the Variable Divisions.............31 How We Calculate Accumulation Unit Values for Each Division..................................................32 Transfers of Account Value...........................................33 Excessive Trading...........................................33 Guaranteed Interest Division Transfers......................33 Dollar Cost Averaging................................................33 Changing Dollar Cost Averaging..............................34 Terminating Dollar Cost Averaging...........................34 Automatic Rebalancing................................................34 Changing Automatic Rebalancing..............................35 Terminating Automatic Rebalancing...........................35 Policy Loans.........................................................35 Loan Repayment..............................................36 Loans and Your Benefits.....................................36 Partial Withdrawals..................................................36 Partial Withdrawals under Death Benefit Option 1............37 Partial Withdrawals under Death Benefit Option 2............37 Stated Death Benefit and Target Death Benefit Reductions....37 Partial Withdrawal Mechanics................................37 Lapse................................................................37 Grace Period................................................38 If You Have the Guaranteed Minimum Death Benefit in Effect..38 Reinstatement........................................................39 Surrender............................................................39 General Policy Provisions............................................40 Free Look Period or Right to Examine Policy Period..........40 Your Policy.................................................40 - -------------------------------------------------------------------------------- Strategic Advantage II 4 Age.........................................................41 Ownership...................................................41 Beneficiary(ies)............................................41 Collateral Assignment.......................................41 Incontestability............................................41 Misstatements of Age or Gender..............................41 Suicide ...................................................41 Transaction Processing......................................42 Notification and Claims Procedures..........................42 Telephone Privileges........................................42 Non-participation...........................................43 Distribution of the Policies................................43 Advertising Practices and Sales Literature..................44 Settlement Provisions.......................................44 Administrative Information About the Policy..........................45 Voting Privileges...........................................45 Material Conflicts..........................................46 Right to Change Operations..................................46 Reports to Owners...........................................47 CHARGES, DEDUCTIONS AND REFUNDS...............................................47 Deductions from Premiums.............................................47 Tax Charges.................................................47 Sales Charge................................................47 Daily Deductions from the Variable Account...........................48 Mortality and Expense Risk Charge...........................48 Monthly Deductions from Your Account Value...........................48 Policy Charge...............................................49 Monthly Administrative Charge...............................49 Cost of Insurance Charge....................................49 Guaranteed Issue............................................49 Charges for Additional Benefits.............................50 Changes in Monthly Charges..................................50 Continuation of Coverage Administrative Fee.................50 Policy Transaction Fees..............................................50 Partial Withdrawals.........................................50 Transfers...................................................50 Illustrations...............................................50 Premium Allocation Change...................................50 Persistency Refund...................................................50 Refund of Sales Charges..............................................51 Fees and Expenses of the Investment Portfolios.......................51 Investment Portfolio Annual Expenses........................52 Group or Sponsored Arrangements or Corporate Purchasers..............54 Other Charges........................................................54 TAX CONSIDERATIONS............................................................54 Tax Status of the Policy.............................................54 Diversification Requirements.........................................55 Tax Treatment of Policy Death Benefits...............................55 Modified Endowment Contracts.........................................56 Multiple Policies....................................................56 Distributions Other than Death Benefits from Modified Endowment Contracts..........................................................56 Distributions Other than Death Benefits from Policies That Are Not Modified Endowment Contracts.......................................56 Investment in the Policy.............................................56 - -------------------------------------------------------------------------------- Strategic Advantage II 5 Policy Loans.........................................................56 Section 1035 Exchanges...............................................57 Tax-exempt Policy Owners.............................................57 Possible Tax Law Changes.............................................57 Changes to Comply with the Law.......................................57 Other................................................................57 ILLUSTRATIONS.................................................................59 ADDITIONAL INFORMATION........................................................67 Directors and Officers...............................................67 Regulation...........................................................70 Legal Matters........................................................70 Legal Proceedings....................................................70 Experts ............................................................70 Registration Statement...............................................70 FINANCIAL STATEMENTS..........................................................71 APPENDIX A...................................................................173 APPENDIX A -- ENHANCED.......................................................174 APPENDIX B...................................................................176 APPENDIX B -- ENHANCED.......................................................177 APPENDIX C...................................................................178 - -------------------------------------------------------------------------------- Strategic Advantage II 6 INDEX OF SPECIAL TERMS The following special terms are used in this prospectus. We explain each term on the page(s) listed in the body of this prospectus and in the summary, if applicable: Account value..................................................................9 Accumulation unit.............................................................32 Accumulation unit value.......................................................32 Adjustable term insurance rider...............................................23 Age.......................................................................20, 41 Base death benefit............................................................24 Beneficiary(ies)..............................................................11 Cash surrender value...........................................................9 Customer service center........................................................2 Continuation of coverage......................................................30 Death proceeds................................................................24 Free look period..............................................................40 General account...............................................................14 Guarantee period..............................................................27 Guarantee period annual premium...............................................27 Guaranteed interest division..................................................19 Guaranteed minimum death benefit..............................................27 Initial premium...............................................................20 Insured.......................................................................20 Investment date...............................................................20 Investment division...........................................................19 Loan division..................................................................9 Minimum annual premium........................................................21 Monthly processing date.......................................................22 Net account value..........................................................9, 31 Net amount at risk.............................................................9 Net cash surrender value.......................................................9 Net premium................................................................8, 22 Owner......................................................................8, 41 Partial withdrawal............................................................22 Policy.....................................................................8, 14 Policy date...................................................................20 Policy loan...................................................................35 Portfolios.................................................................9, 14 Rider.........................................................................10 Scheduled premium.............................................................21 Segment.......................................................................26 Special continuation period...................................................22 Stated death benefit..........................................................20 Target death benefit..........................................................28 Target premium................................................................47 Total death benefit...........................................................28 Transaction date..............................................................32 Valuation date.................................................................9 Valuation period...........................................................9, 32 Variable account..............................................................14 Variable division(s)..........................................................14 - -------------------------------------------------------------------------------- Strategic Advantage II 7 POLICY SUMMARY THIS SUMMARY HIGHLIGHTS SOME OF THE IMPORTANT POINTS ABOUT YOUR POLICY. THE POLICY IS MORE FULLY DESCRIBED IN THE ATTACHED, COMPLETE PROSPECTUS. PLEASE READ THE PROSPECTUS CAREFULLY. "WE," "US," "OUR," AND THE "COMPANY" REFER TO SECURITY LIFE OF DENVER INSURANCE COMPANY. "YOU" AND "YOUR" REFER TO THE POLICY OWNER. THE OWNER IS THE INDIVIDUAL, ENTITY, PARTNERSHIP, REPRESENTATIVE OR PARTY WHO MAY EXERCISE ALL RIGHTS OVER THE POLICY AND RECEIVE THE POLICY BENEFITS DURING THE INSURED PERSON'S LIFETIME. ANY STATE VARIATIONS ARE COVERED IN A SPECIAL POLICY FORM FOR USE 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. YOUR POLICY Your policy provides life insurance protection on the insured person. The policy includes the basic policy, applications, and any 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 net cash surrender value. When the insured person reaches age 100, the policy can be surrendered or continued under the continuation of coverage option. SEE CONTINUATION OF COVERAGE, PAGE 30. We designed Strategic Advantage II primarily for use on a multi-life basis where the insured people share common employment or a business relationship. The policy may be owned individually or by a corporation, trust, association or similar entity. The policy may be used for such purposes as informally funding non-qualified executive deferred compensation, salary continuation plans, retiree medical benefits or other purposes. Life insurance is not a short-term investment. You should evaluate your need for life insurance coverage and this policy's long-term investment potential and risks before purchasing a policy. FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD You have the right to examine your policy and return it for a refund of premiums paid or the account value, as specified by state law, if you are not satisfied for any reason. The policy is then void. SEE FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD, PAGE 40. YOUR POLICY PREMIUMS The policy is a flexible premium policy because the amount and frequency of the premium payments you make may vary within limits. You must make premium payments: o for us to issue your policy; o sufficient to keep your policy in force; and o as necessary to continue certain benefits. On your application, you choose how much and how often you want to pay premiums. Depending on your choices, it may not be enough to keep your policy or certain riders in force. The amount of premium you pay affects the length of time your policy stays in force. SEE PREMIUMS, PAGE 21. 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 premiums among one or more variable divisions, the guaranteed interest division, or both. You may not invest in more than eighteen investment divisions, including the guaranteed interest division, over the life of your policy. We apply net premium payments we have received from you to your policy after we: o receive your initial premium; o have the information we require; o approve your policy application; and o issue your policy. You need to allocate your premiums to your investment choices in percentages that are whole numbers and which total 100%. SEE ALLOCATION OF NET PREMIUMS, PAGE 22. - -------------------------------------------------------------------------------- Strategic Advantage II 8 VARIABLE DIVISIONS Any amount you direct into the guaranteed interest division is credited with interest at a fixed rate set by us. If you invest in any of the following variable divisions, depending on market conditions, you may make or lose money. The variable divisions are described in the prospectuses for the underlying investment portfolios. Each variable division investment portfolio has its own investment objective. SEE OBJECTIVES OF THE INVESTMENT PORTFOLIOS, PAGE 15. AIM VARIABLE INSURANCE FUNDS AIM V.I. Capital Appreciation Fund AIM V.I. Government Securities Fund THE ALGER AMERICAN FUND Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Alger American MidCap Growth Portfolio Alger American Small Capitalization Portfolio FIDELITY VARIABLE INSURANCE PRODUCTS FUND & VARIABLE INSURANCE PRODUCTS FUND II VIP Growth Portfolio VIP Money Market Portfolio VIP Overseas Portfolio VIP II Asset Manager Portfolio VIP II Index 500 Portfolio INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund (formerly, INVESCO VIF-Industrial Income Portfolio) INVESCO VIF-High Yield Fund INVESCO VIF-Small Company Growth Fund INVESCO VIF-Total Return Fund INVESCO VIF-Utilities Fund NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Neuberger Berman AMT Growth Portfolio Neuberger Berman AMT Limited Maturity Bond Portfolio Neuberger Berman AMT Partners Portfolio VAN ECK WORLDWIDE INSURANCE TRUST Van Eck Worldwide Bond Fund Van Eck Worldwide Emerging Markets Fund Van Eck Worldwide Hard Assets Fund Van Eck Worldwide Real Estate Fund POLICY VALUES Your policy account value is the amount you have in the guaranteed interest division, plus the amount you have in each variable division. If you have outstanding policy loans, your account value includes the amount in the loan division. The loan division is part of our general account specifically designed to hold money used as collateral for loans and loan interest. The general account contains all of our assets other than those held in the variable account, or our other separate accounts. Your account value reflects: o net premiums; o deductions for charges; o the investment performance of the amounts you have in the variable divisions; o interest earned on the amount you have in the guaranteed interest division; o interest earned on the amount you have in the loan division; and o partial withdrawals. We subtract charges and partial withdrawals you take from your account value. You make a partial withdrawal when you withdraw part of your net cash surrender value. Partial withdrawals may reduce the amount of base death benefit. Your cash surrender value is equal to your account value plus any refund of sales charges due. Your net cash surrender value is equal to the cash surrender value minus outstanding policy loans and accrued loan interest, if any. Your net account value is equal to the account value minus outstanding policy loans and accrued loan interest, if any. YOUR ACCOUNT VALUE IN THE VARIABLE DIVISIONS Accumulation units are the way we measure value in the variable divisions. Accumulation unit value is the value of a unit of a variable division on the valuation date. Each variable division has a different accumulation unit value. SEE DETERMINING THE VALUE IN THE VARIABLE DIVISIONS, PAGE 31. On each valuation date, we determine the accumulation unit values. The accumulation unit value for each variable division reflects the investment performance of the matching investment portfolio during the valuation period. The valuation - -------------------------------------------------------------------------------- Strategic Advantage II 9 period is the time beginning at 4:00 p.m. Eastern time on a valuation date and ending at 4:00 p.m. Eastern time on the next valuation date. Each accumulation unit value reflects asset-based charges under the policy, and the expenses of the investment portfolios. SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION, PAGE 32. TRANSFERS OF ACCOUNT VALUE You may make up to twelve free transfers among the variable divisions or to the guaranteed interest division per policy year. We charge $25 for each transfer over twelve you make in a policy year. This charge does not apply to any automatic rebalancing or dollar cost averaging transfers: they are free. There are restrictions on transfers to or from the guaranteed interest division. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 33. SPECIAL POLICY FEATURES ADDITIONAL BENEFITS You may attach certain additional benefits to your policy by rider. A rider changes benefits under your policy. In most cases, we deduct a monthly charge from your account value for these benefits. SEE ADDITIONAL BENEFITS, PAGE 28. DOLLAR COST AVERAGING You may choose dollar cost averaging on your application or complete a customer service form. Dollar cost averaging is a systematic plan of transferring account values to selected investment divisions. It is intended to protect your policy's value from short-term price fluctuations. However, dollar cost averaging does not assure a profit, nor does it protect against a loss in a declining market. Dollar cost averaging is free. SEE DOLLAR COST AVERAGING, PAGE 33. AUTOMATIC REBALANCING You may choose automatic rebalancing on your policy. Automatic rebalancing periodically reallocates your net account value among the investment divisions to maintain your specified distribution of account value among those divisions. Automatic rebalancing is free. SEE AUTOMATIC REBALANCING, PAGE 34. LOANS You may take loans against your policy's net account surrender value. We charge an annual loan interest rate of 4.75%. We credit an annual interest rate of 4% on amounts held in the loan division as collateral for your loan. Beginning in your eleventh policy year, where permitted by law, we may include amounts in the loan division for calculation of your policy's persistency refund. SEE POLICY LOANS, PAGE 35. 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 the death benefit and will reduce your account value. SEE PARTIAL WITHDRAWALS, PAGE 36. PERSISTENCY REFUND After your tenth policy anniversary, where permitted by state law, we credit your account value with a persistency refund on every monthly processing date. SEE PERSISTENCY REFUND, PAGE 50. REFUND OF SALES CHARGES If you surrender your policy within the first two policy years and the policy has not lapsed, we will refund a portion of the sales charges we previously deducted from the premiums you have paid in the first policy year. SEE REFUND OF SALES CHARGES, PAGE 51. POLICY MODIFICATION, TERMINATION AND CONTINUATION FEATURES RIGHT TO EXCHANGE POLICY For 24 months after the policy date you can exchange your policy for a guaranteed policy, unless state law requires differently. The right to exchange your policy is free. SEE RIGHT TO EXCHANGE POLICY, PAGE 30. SURRENDER You may surrender your policy for its net cash surrender value at any time while the insured person is living. - -------------------------------------------------------------------------------- Strategic Advantage II 10 We calculate your net cash surrender value on the valuation date we receive your request and policy at our customer service center. All insurance coverage ends on the date we receive your request. You must return your policy or a lost policy form to us. SEE SURRENDER, PAGE 39. LAPSE In general, insurance coverage continues as long as your policy's net account value is enough to pay the monthly deductions. However, your policy and its riders are guaranteed not to lapse during the first three years of your policy if the conditions of the special continuation period have been met. SEE LAPSE, PAGE 37, AND SPECIAL CONTINUATION PERIOD, PAGE 22. REINSTATEMENT You may reinstate your policy and its riders within five years of its lapse if you still own the policy and the insured person is still living. You will need to give proof that the insured person continues to be insurable. You will also need to pay required reinstatement premiums. If the guaranteed minimum death benefit lapses and you do not correct it, this feature terminates. Once it terminates, you cannot reinstate this feature. We will reinstate any policy loans existing when coverage ended, with accrued loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 39. CONTINUATION OF COVERAGE If the insured person is still living at age 100, you may either surrender your policy or choose the continuation of coverage feature. If the continuation of coverage feature becomes effective, we will deduct a one-time administrative fee of $200 and keep your policy in force. SEE CONTINUATION OF COVERAGE, PAGE 30. DEATH BENEFITS At the insured person's death, we pay death proceeds to the beneficiary(ies) if your policy is still in force. The beneficiary(ies) is(are) the person or people you name to receive the death proceeds. The death proceeds equal the base death benefit plus amounts payable by rider, minus the amount of any outstanding policy loan and accrued loan interest. Based on the death benefit option you have chosen, the base death benefit varies. The base death benefit does not include any adjustable term insurance rider you may have on your policy. The target death benefit includes any adjustable term insurance rider you may have on your policy plus your base death benefit. The total death benefit is at least equal to or greater than your target death benefit. The death benefit at issue may vary from the stated death benefit plus adjustable term insurance coverage for some 1035 exchanges. The minimum stated death benefit to issue a policy is $50,000. However, we may lower this minimum for group or sponsored arrangements, or corporate purchasers. SEE DEATH BENEFITS, PAGE 23. You may change your base death benefit amount while your policy is in force, subject to certain restrictions. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 26. CHARGES AND DEDUCTIONS DEDUCTIONS FROM PREMIUM We make the following deductions from each premium payment you make: 1. Tax charges -- We currently deduct a charge of 2.5% of premiums for state and local taxes. We currently deduct a charge of 1.5% of each premium to cover our estimated cost of the federal income tax treatment of deferred acquisition costs. SEE TAX CHARGES, PAGE 47. 2. Sales charge-- We deduct a percentage of each premium to cover a portion of our expenses in selling your policy. This charge is based on the amount of premium you have paid and the number of years since the policy date or the date of an increase in coverage or when a new segment is added. For each of the first ten policy years, this charge equals 12% of the premiums you have paid up to the target premium and 3% of the premiums you have paid in excess of the target premium. Starting in the eleventh policy year, the sales charge is equal to 3% of all premiums you have paid. The initial, or first segment, is the stated death benefit - -------------------------------------------------------------------------------- Strategic Advantage II 11 on the effective date of the policy. An increase in the stated death benefit (other than one caused by a death benefit option change) will cause a new segment to be created. SEE DEDUCTIONS FROM PREMIUMS, PAGE 47. DEDUCTIONS FROM THE VARIABLE DIVISIONS We assess a mortality and expense risk charge of 0.75% per year or 0.002055% per day against the variable divisions. This charge compensates us for mortality and expense risks under the policies. SEE DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT, PAGE 48. MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE We deduct the following charges from your account value at the beginning of each policy month: 1. Initial policy charge -- $10 per month for the first three policy years. 2. Monthly administrative charge -- $3 per month plus $0.025 per $1,000 of the stated death benefit, or of the target death benefit, if greater. Currently, we limit the per $1,000 charge to $30 per month. 3. Cost of insurance charge -- Based on the net amount at risk on the life of the insured person. The amount of this charge differs for: o the segments of the base death benefit; and o the adjustable term insurance rider. 4. Charges for additional benefits -- The cost of additional benefits you choose. The adjustable term insurance rider charge is included in the cost of insurance charge. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 48. POLICY TRANSACTION FEES We deduct policy transaction fees from your account value at the time of the transaction. The following are the current transaction fees. SEE POLICY TRANSACTION FEES, PAGE 50. 1. Partial withdrawal fee -- $25. 2. Transfer fee -- We allow twelve free transfers among investment divisions per policy year. For each transfer beyond that, a $25 fee applies. 3. Illustrations -- You may request one free illustration per policy year. For each illustration beyond that, a $25 fee may apply. 4. Premium Allocation Change -- You may make five free premium allocation changes per policy year. For each premium allocation change beyond that, a $25 fee applies. 5. Continuation of Coverage -- We will charge a one-time $200 administrative fee when the insured person turns age 100 to activate continued coverage. 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 54. Assuming the policy qualifies as a life insurance contract, under current federal income tax law, your account value earnings are generally not subject to income tax as long as they remain within your policy. However depending on circumstances, the following events may cause taxable consequences for you: o partial withdrawals; o surrender; or o lapse. In addition to the events listed above, if your policy is a modified endowment contract, loans 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 56. You should consult a qualified legal or tax adviser before you purchase your policy. - -------------------------------------------------------------------------------- Strategic Advantage II 12 INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION SECURITY LIFE OF DENVER INSURANCE COMPANY Security Life of Denver Insurance Company ("Security Life") is a stock life insurance company organized under the laws of the State of Colorado in 1929. Our headquarters are located at 1290 Broadway, Denver, Colorado 80203-5699. We are admitted to do business in the District of Columbia and all states except New York. At the close of 1998, the company and its consolidated subsidiaries had over $174.3 billion of life insurance in force. As of December 31, 1998 our total assets were over $10.0 billion, and our shareholder's equity was over $926 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 $461.8 billion on a Dutch (modified U.S.) generally accepted accounting principles basis, as of December 31, 1998. 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. YEAR 2000 PREPAREDNESS Security Life of Denver Insurance Company is aware of the computer problems that may exist surrounding the Year 2000. Our senior management projects information processing and delivery systems to have a Year 2000 readiness interim target completion date of June 29, 1999 with a final completion date of December 31, 1999. The Year 2000 problem originates from the predominant use in computer programs of a two-digit field to capture the year, for example 99 instead of 1999. When we reach the year 2000 many of these programs will assume the year 00 is actually 1900 rather than 2000. This incorrect assumption can lead to erroneous results, false calculations or system failures. This is not only a computer problem, but also applies to other machinery or equipment containing computer chips which calculate dates for correct performance, the so-called "embedded systems". That is why errors, ranging from telephone shutdown to other services may occur as well. This potential risk is often referred to as the "Millennium Bug" or the "Year 2000 problem". The problem is made more complex by the many lines of code that can be affected in a single system, the number of systems required to support business activities and the interdependence of both the internal and external systems involved in exchanging data. This is particularly true for the financial services industry, where information is at the heart of the business and which depends heavily on the uninterrupted transfer of data world-wide, bank-to- bank and with clearing houses, exchanges and agencies. If the potential problems are not addressed, this could in some cases result in business system failure. From a financial perspective, this could, for instance, lead to incorrect interest calculations or over/under payments. A project plan has been implemented and our project team has analyzed and remediated our in-house source code. We completed the remediation in December, 1998. The project plan covers Security Life, ING America Equities, Inc., Midwestern United Life Insurance Company, and First ING Life Insurance Company of New York. We will follow our normal project management methodology including communication with senior management on a monthly and as-needed basis. Our targeted completion date is scheduled for June 29, 1999, but there is no assurance that Security Life will be successful, or that interaction with other service providers will not impact our services at that time. - -------------------------------------------------------------------------------- Strategic Advantage II 13 Security Life has completed an inventory and assessment of all vendor products. We are in the process of verifying that each vendor product is Year 2000 ready. Funds have been allocated for the 1999 efforts, and we believe we have sufficient resources to ensure Year 2000 processing capabilities. SECURITY LIFE SEPARATE ACCOUNT L1 VARIABLE ACCOUNT STRUCTURE We established Security Life Separate Account L1 (the "variable 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 variable account or Security Life. The variable account is a separate investment account. It is used to support our variable life insurance policies and for other purposes allowed by law and regulation. We keep the variable account assets separate from our general account and other separate accounts. We may offer other variable life insurance contracts with different benefits and charges that invest in the variable account. We do not discuss these contracts in this prospectus. The variable account may invest in other securities not available for the policy described in this prospectus. The general account contains all of our assets other than those held in the variable account (variable divisions) or other separate accounts. The company owns all the assets in the variable account. We credit gains to or charge losses against the variable account without regard to performance of other investment accounts. ORDER OF VARIABLE ACCOUNT LIABILITIES State law provides that we may not charge general account liabilities against variable account assets equal to its reserves and other liabilities. This means that in the event we were ever to become insolvent, the variable account assets will be used first to pay variable account policy claims. Only if assets remain in the variable account after these claims have been satisfied can these assets be used to pay other policy owners and our creditors. The variable account may have liabilities from assets credited to other variable life policies offered by the variable account. If the assets of the variable account are greater than required reserves and policy liabilities, we may transfer the excess to our general account. VARIABLE DIVISIONS The variable account has several divisions. Each division invests in shares of a matching investment portfolio. This means that the investment performance of a policy depends on the performance of the investment portfolios you choose. Each investment portfolio has its own investment objective. These investment portfolios are not available directly to individual investors. They are only available as the underlying investments for variable annuity and variable life insurance contracts and certain pension accounts. INVESTMENT PORTFOLIOS Each of the investment portfolios is a separate series of an open-end management investment company. The investment company receives investment advice from a registered investment adviser who is not associated with us. The investment portfolios sell shares to separate accounts of insurance companies. These insurance companies may or may not be affiliated with us. This is known as "shared funding." Investment portfolios may sell shares as the underlying investment for both variable annuity and variable life insurance contracts. This process is known as "mixed funding." The investment portfolios may sell shares to certain qualified pension and retirement plans that qualify under Section 401 of the Internal Revenue Code ("IRC"). As a result, a material conflict of interest may arise between insurance companies, owners of different types of contracts and retirement plans, or their participants. If there is a material conflict, we will consider what should be done, including removing the investment portfolio from the variable 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. - -------------------------------------------------------------------------------- Strategic Advantage II 14 OBJECTIVES OF THE INVESTMENT PORTFOLIOS Each investment portfolio has a different investment objective that it tries to achieve by following its own investment strategy. The objectives and policies of each investment portfolio affect its return and its risks. With this prospectus, you must receive the current prospectus for each investment portfolio. We summarize the investment objectives for each investment portfolio here. You should read each investment portfolio prospectus. Certain investment portfolios offered under this policy have investment objectives and policies similar to other funds managed by the portfolio's investment adviser. The investment results of a portfolio may be higher or lower than those of other funds managed by the same adviser. There is no assurance, and no representation is made, that the investment results of any investment portfolio will be comparable to those of another fund managed by the same investment adviser. Some investment portfolio advisers (or their affiliates) may pay us compensation for servicing, administration or other expenses. Currently, these advisers include A I M Advisors, Inc.; Fidelity Investments(R); Fred Alger Management, Inc.; INVESCO Funds Group, Inc.; Neuberger Berman Management Inc.; and Van Eck Global. The amount of compensation is usually based on the aggregate assets of the investment portfolio from contracts that we issue or administer. Some advisers may pay us more than others. AIM VARIABLE INSURANCE FUNDS, INC. AIM Variable Insurance Funds, Inc. is a registered, open-end, series, management investment company. A I M Advisors, Inc., ("AIM") serves as each fund's investment adviser. AIM has acted as an investment adviser since its organization in 1976. Today, AIM, together with its subsidiaries, advises or manages over 110 investment portfolios encompassing a broad range of investment objectives. AIM V.I. Capital Appreciation Fund -- seeks growth of capital through investment in common stocks, with emphasis on medium- and small-sized growth companies. AIM V.I. Government Securities Fund -- seeks to achieve high current income consistent with reasonable concern for safety of principal by investing in debt securities issued, guaranteed or otherwise backed by the United States Government. THE ALGER AMERICAN FUND The Alger American Fund is a registered investment company organized on April 6, 1988. It is a multi- series Massachusetts business trust. The Fund's investment manager is Fred Alger Management, Inc., which has provided investment advisory services since 1964. Alger American Growth Portfolio -- seeks long-term capital appreciation. The portfolio focuses on growing companies that generally have broad product lines, markets, financial resources and depth of management. Under normal circumstances, the portfolio invests primarily in equity securities of large companies. The portfolio considers a large company to have a market capitalization of $1 billion or greater. Alger American Leveraged AllCap Portfolio -- seeks long-term capital appreciation. Under normal circumstances, the portfolio invests in the equity securities of companies of any size which demonstrate promising growth potential. The portfolio can leverage, that is, borrow money, to buy additional securities. By borrowing money, the portfolio has the potential to increase its returns if the increase in the value of the securities purchased exceeds the cost of borrowing, including interest paid for the money borrowed. Alger American MidCap Growth Portfolio -- seeks long-term capital appreciation. The portfolio focuses on midsize companies with promising growth potential. Under normal circumstances, the portfolio invests primarily in equity securities of companies having a market capitalization within the range of companies in the S&P(R) MidCap 400 Index. - -------------------------------------------------------------------------------- Strategic Advantage II 15 Alger American Small Capitalization Portfolio -- seeks long-term capital appreciation. The portfolio focuses on small, fast-growing companies that offer innovative products, services or technologies to a rapidly expanding marketplace. Under normal circumstances, the portfolio invests primarily in equity securities of small capitalization companies. A small capitalization company is one that has a market capitalization within the range of the Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index. FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II Fidelity Variable Insurance Products Fund ("VIP" established November 13, 1981) and Variable Insurance Products Fund II ("VIP II" established March 21, 1988) are open-end, diversified, management investment companies. These funds are organized as Massachusetts business trusts. Fidelity Management & Research Company ("FMR") manages and provides investment and other services to the funds named here. However, Bankers Trust Company also provides sub-advisory services for VIP II Index 500 Portfolio. FMR is the management arm of Fidelity Investments(R), which was established in 1946, and is one of America's largest mutual fund managers. VIP Growth Portfolio -- seeks capital appreciation. FMR's principal investment strategies include: o Investing primarily in common stocks. o Investing in companies that it believes have above-average growth potential (stocks of these companies are often called "growth" stocks). o Investing in domestic and foreign issuers. o Using fundamental analysis of each issuer's financial condition and industry position and market and economic conditions to select investments. VIP Money Market Portfolio -- seeks as high a level of current income as is consistent with the preservation of capital and liquidity. FMR's principal investment strategies include: o Investing in U.S. dollar-denominated money market securities, including U.S. Government securities and repurchase agreements, and entering into reverse repurchase agreements. o Investing more than 25% of total assets in the financial services industry. o Investing in compliance with industry- standard requirements for money market funds for the quality, maturity and diversification of investments. VIP Overseas Portfolio -- seeks long-term growth of capital. FMR's principal investment strategies include: o Investing at least 65% of total assets in foreign securities. o Investing primarily in common stocks. o Allocating investments across countries and regions considering the size of the market in each country and region relative to the size of the international market as a whole. o Using fundamental analysis of each issuer's financial condition and industry position and market and economic conditions to select investments. VIP II Asset Manager Portfolio -- seeks high total return with reduced risk over the long term by allocating its assets among stocks, bonds, and short-term instruments. FMR's principal investment strategies include: o Allocating the fund's assets among stocks, bonds, and short-term and money market instruments. o Maintaining a neutral mix over time of 50% of assets in stocks, 40% of assets in bonds, and 10% of assets in short-term and money market instruments. o Adjusting allocation among asset classes gradually within the following ranges: stock class (30 - 70%), bond class (20 - 60%), and short-term/money market class (0 - 50%). o Investing in domestic and foreign issuers. o Analyzing an issuer using fundamental and/or quantitative factors and evaluating each security's current price relative to estimated long-term value in selecting instruments. - -------------------------------------------------------------------------------- Strategic Advantage II 16 VIP II Index 500 Portfolio -- seeks investment results that correspond to the total return of common stocks publicly traded in the United States as represented by the S&P(R) 500. Bankers Trust Company (BT)'s principal investment strategies include: o Investing at least 80% of assets in common stocks included in the S&P(R) 500. o Lending securities to earn income for the fund. INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO Variable Investment Funds, Inc. is a registered, open-end management investment company. It was organized as a Maryland corporation on August 19, 1993. It is currently made up of ten diversified investment portfolios. Five of these investment portfolios are described here. INVESCO Funds Group, Inc. is the Funds' investment adviser. As the adviser, it is mostly responsible for providing the portfolios with investment management, various administrative services, and supervising the Fund's daily business affairs. INVESCO Capital Management, Inc. sub-advises the Total Return Fund. "VIF" refers to INVESCO Variable Investment Fund. INVESCO Distributors, Inc. ("IDI"), provides distribution services for the INVESCO Variable Investment Funds, Inc. INVESCO VIF-Equity Income Fund (Formerly, INVESCO VIF-Industrial Income Portfolio) -- seeks high current income, with growth of capital as a secondary objective. The fund normally invests at least 65% of its assets in dividend-paying common and preferred stocks, although in recent years that percentage has been somewhat higher. Stocks held by the fund generally are expected to produce a relatively high level of income and a consistent, stable return. Although it focuses on the stocks of larger companies with a strong record of paying dividends, the fund also may invest in companies that have not paid regular dividends. The fund's equity investments are limited to stocks that can be traded easily in the United States; it may, however, invest in foreign securities in the form of American Depository Receipts (ADRs). The rest of the fund's assets are invested in debt securities, generally corporate bonds that are rated investment grade or better. The fund also may invest up to 15% of its assets in lower-grade debt securities commonly known as "junk bonds", which generally offer higher interest rates, but are riskier investments than investment grade securities. INVESCO VIF-High Yield Fund -- seeks to provide a high level of current income. It invests substantially all of its assets in lower- rated debt securities, commonly called "junk bonds," and preferred stock, including securities issued by foreign companies. Although these securities carry with them higher risks, they generally provide higher yields-- and therefore higher income--than higher-rated debt securities. INVESCO VIF-Small Company Growth Fund -- seeks investment growth over the long term. The fund normally invests at least 80% of its assets in equity securities of companies with market capitalizations of $1 billion or less. INVESCO uses a bottom-up investment approach to the fund's investment portfolio, focusing on companies that are in the developing stages of their life cycles. Using this approach, INVESCO tries to identify companies that it believes are undervalued in the marketplace, have earnings which may be expected to grow faster than the U.S. economy in general, and/or offer the potential for accelerated earnings growth due to rapid growth of sales, new products, management changes, or structural changes in the economy. The prices of securities issued by these small companies tend to rise and fall more rapidly than those of more established companies. The remainder of the fund's assets can be invested in a wide range of securities that may or may not be issued by small companies. In addition to equity securities, the fund can invest in foreign securities and debt securities, including so-called "junk bonds." - -------------------------------------------------------------------------------- Strategic Advantage II 17 INVESCO VIF-Total Return Fund -- seeks to provide high total return through both growth and current income. It normally invests at least 30% of its assets in common stocks of companies with a strong history of paying regular dividends and 30% of its assets in debt securities. Debt securities include obligations of the United States Government and government agencies. The remaining 40% of the fund is allocated among these and other investments at INVESCO's discretion, based upon current business, economic and market conditions. INVESCO VIF-Utilities Fund -- seeks capital appreciation and income. The fund normally invests at least 80% of its assets in companies doing business in the utilities economic sector. The remainder of the fund's assets are not required to be invested in the utilities economic sector. The fund is aggressively managed. Although the fund can invest in debt securities, it primarily invests in equity securities that INVESCO believes will rise in price faster than other investments, as well as options and other investments whose value is based upon the values of equity securities. NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Neuberger Berman Advisers Management Trust (the "Trust,") is a registered, open-end management investment company. It was organized as a Delaware business trust on May 23, 1994. The Trust is made up of separate portfolios ("Portfolios"), each of which invests all of its net investable assets in a matching series ("Series") of Advisers Managers Trust ("Managers Trust"). Managers Trust is a diversified, open-end management investment company organized as a New York common law trust on May 24, 1994. This master feeder structure is different from that of many other investment companies which directly purchase and manage their own securities portfolios. Neuberger Berman Management Incorporated acts as investment manager to Managers Trust. Neuberger Berman, LLC is the sub-adviser. The investments for the Portfolio are managed by the same portfolio manager(s) who manage one or more other mutual funds that have similar names, investment objectives and investment styles as the Portfolio. You should be aware that the Portfolio is likely to differ from the other mutual funds in size, cash flow pattern and tax matters. Accordingly, the holdings and performance of the Portfolio can be expected to vary from those of the other mutual funds. Shares of the separate Portfolios of Neuberger Berman Advisers Management Trust are sold only through the currently effective prospectus and are not available to the general public. Shares of the AMT Portfolios may be purchased only by life insurance companies to be used with their separate accounts which fund variable annuity and variable life insurance policies. Neuberger Berman Growth Portfolio -- seeks growth of capital. It invests mainly in common mid-capitalization securities. The portfolio managers currently focus on the securities of mid-capitalization companies. The managers use a growth-oriented investment approach. A growth-oriented approach seeks stocks of companies that are fast-growing in emerging or rapidly evolving industries. Neuberger Berman Limited Maturity Bond Portfolio -- seeks the highest available current income consistent with liquidity and low risk to principal; total return is secondary goal. The Limited Maturity Bond Portfolio invests mainly in investment-grade bonds and other debt securities from U.S. Government and corporate issuers. These may include mortgage-and asset- backed securities. The portfolio may invest up to 10% of its net assets, measured at the time of investment, in below investment grade fixed income securities, or comparable unrated securities. The Limited Maturity Bond Portfolio maintains an average portfolio duration of four years or less. However, the series may invest in securities of any duration. Neuberger Berman Partners Portfolio -- seeks growth of capital. The Portfolio invests mainly in common stocks of mid-to large-capitalization companies. - -------------------------------------------------------------------------------- Strategic Advantage II 18 Its investment program seeks securities believed to be undervalued based on strong fundamentals, including low price to earnings ratio, consistent cash flow, and the company's track record through all points of the market cycle. VAN ECK WORLDWIDE INSURANCE TRUST Van Eck Worldwide Insurance Trust is an open-end management investment company organized as a business trust under the laws of the Commonwealth of Massachusetts on January 7, 1987. On April 12, 1995, Van Eck Investment Trust changed its name to Van Eck Worldwide Insurance Trust. Van Eck Associates Corporation serves as investment adviser and manager to the funds. Van Eck Worldwide Bond Fund -- seeks high total return--income plus capital appreciation--by investing globally, primarily in a variety of debt securities. Van Eck Worldwide Emerging Markets Fund -- seeks long term capital appreciation by investing in equity securities in emerging markets around the world. Van Eck Worldwide Hard Assets Fund -- seeks long term capital appreciation by investing primarily in "hard asset securities." Income is a secondary consideration. Hard assets include: o precious metals; o natural resources; o real estate; and o commodities. Van Eck Worldwide Real Estate Fund -- seeks high total return by investing in equity securities of companies that own significant real estate or principally do business in real estate. THE GUARANTEED INTEREST DIVISION You may allocate all or a part of the net premiums and transfers of your net account value into the guaranteed interest division. The guaranteed interest division is part of our general account which guarantees principal. It pays interest at a fixed rate that we declare. 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 included 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 in this prospectus. The amount you have in the guaranteed interest division is the sum of net premiums you allocate to that division, plus transfers you made 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. These interest rates are never less than the minimum guaranteed interest rate of 4% and will be in effect for periods of at least twelve months. Interest compounds daily at an effective annual rate that equals the declared rate. We credit interest to the guaranteed interest division on a daily basis. We pay interest regardless of the actual investment performance of our account. We bear all of the investment risk for the guaranteed interest division. MAXIMUM NUMBER OF INVESTMENT DIVISIONS You may invest in a total of eighteen divisions over the lifetime of your policy. Investment divisions include the variable and the guaranteed interest divisions, but not the loan division. The loan division does not count toward the eighteen division maximum. As an example, if you have had funds in seventeen variable divisions and the guaranteed interest division (or eighteen variable divisions), these are the only divisions to which you may later add or transfer - -------------------------------------------------------------------------------- Strategic Advantage II 19 funds. You may want to use fewer divisions in the early years of your policy, so that you can invest in other divisions in the future. Further, if you invest in eighteen variable divisions, you will not be able to invest in the guaranteed interest division. DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE POLICY This prospectus describes our standard Strategic Advantage II variable universal life 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 61 are to show how the Strategic Advantage II policies work. APPLYING FOR A POLICY You purchase a Strategic Advantage II policy by submitting an application to us. On the policy date, the insured person must be no older than age 85. The insured person is the person on whose life we issue a policy and upon whose death we pay death proceeds. Age is the insured person's age on the birthday nearest the policy date plus the number of completed policy years since the policy date. 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. POLICY ISSUANCE Before we issue a policy or apply your net premium to the investment divisions, we require satisfactory evidence of insurability of the insured person and payment of your initial premium. This evidence may include a medical examination and completion of all underwriting and issue requirements. The investment date is the first date we apply the net premium payments we have received from you to your policy. Your initial premium is the premium we must receive before coverage can begin. The initial premium is the first premium we receive and apply to your policy. It must be at least equal to the sum of the scheduled premiums which are due from your policy date through your investment date. We generally require a minimum stated death benefit of $50,000. We may reduce the minimum stated death benefit for group or sponsored arrangements or corporate purchasers if the average stated death benefit at policy issuance for the group or sponsored arrangements is at least $50,000. Our underwriting and reinsurance procedures in effect at the time you apply limit the maximum stated death benefit. The policy date as shown on your policy schedule determines: o monthly processing dates; o policy months; o policy years; and 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. DEFINITION OF LIFE INSURANCE CHOICE When you apply for your policy, you choose one of two tests for the federal income tax definition of life insurance. You cannot change your choice later. The tests are the cash value accumulation test and the guideline premium/cash value corridor test. If you choose the guideline premium /cash value corridor test, we may limit premium payments relative to your policy death benefit. SEE TAX STATUS OF THE POLICY, PAGE 54. 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 any in force coverage with us. This temporary insurance is in force as long as you meet all requirements. Coverage begins when: 1. you have completed and signed our binding limited life insurance coverage form; 2. we receive and accept a premium payment of at least your scheduled premium (selected on your application); and 3. part I of the application is completed. - -------------------------------------------------------------------------------- Strategic Advantage II 20 Binding limited life insurance coverage ends on the earliest of: o the date we return your premiums; o five days after we mail notice of termination to the address on your application; o the date your policy coverage starts; o the date we refuse to issue you a policy based on your application; or o 90 days after you sign our binding limited life insurance coverage form. There is no death benefit under the temporary insurance agreement if: o there is a material misrepresentation in your answers on the binding limited life insurance coverage form; o there is a material misrepresentation in statements on your application; o the person 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. PREMIUMS You may choose the amount and frequency of premium payments, within limits. SCHEDULED PREMIUMS Your premiums are flexible. You may select your scheduled premium (within our limits) when you apply for your policy. The scheduled premium, shown in your policy and schedule, is the amount you choose to pay over a stated time period. THIS AMOUNT MAY OR MAY NOT BE ENOUGH TO KEEP YOUR POLICY IN FORCE. You may receive premium reminder notices for the scheduled premium on a monthly, quarterly, semiannual, or annual basis. You are not required to pay the scheduled premium. Alternatively, you may choose to pay your premium by electronic funds transfer each month. This option is not available for your initial premium. The financial institution that makes your electronic funds transfer may charge for this service. You can change the amount of your scheduled premium within our minimum and maximum limits at any time. If you fail to pay your scheduled premium or if you change the amount of your scheduled premium, your policy performance will be affected. During the special continuation period, your scheduled premium should not be less than the minimum annual premium shown in your policy. If you want the guaranteed minimum death benefit, your scheduled premium should not be less than the guarantee period annual premium shown in your policy. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27. UNSCHEDULED PREMIUM PAYMENTS Generally speaking, you may make unscheduled premium payments at any time, however: 1. We may limit the amount of your unscheduled premium payments that would result in an increase in the base death benefit amount required by the federal income tax law definition of life insurance. We may require satisfactory evidence that the insured person is insurable at the time that you make the unscheduled premium payment if the death benefit is increased due to your unscheduled premium payments. 2. We may require proof that the insured person is insurable if your unscheduled premium payment will cause the net amount at risk to increase; and 3. We will return premium payments which are greater than the "seven-pay" limit for your policy if your payment would cause your policy to become a modified endowment contract, unless you send us notice acknowledging the new modified endowment contract status for your policy. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 56 AND CHANGES TO COMPLY WITH THE LAW, PAGE 57. If you have an outstanding policy loan and you make an unscheduled payment, we will consider this payment a loan repayment, unless you tell us otherwise. If your payment is a loan repayment, we do not take out the tax and sales charges which apply to premium payments. MINIMUM ANNUAL PREMIUM You must pay a minimum annual premium during your first three policy years to qualify for the special continuation period. - -------------------------------------------------------------------------------- Strategic Advantage II 21 Your minimum annual premium is based on: o the insured person's age, gender, premium class and any rating; o the stated death benefit of your policy; and o any additional benefits you select. Your minimum annual premium is shown in the schedule pages of your policy. We may reduce the minimum annual premium for group, or sponsored arrangements, or for corporate purchasers. SPECIAL CONTINUATION PERIOD The special continuation period is during the first three policy years. Under the special continuation period, we guarantee that your policy will not lapse, regardless of its net account value, if on a monthly processing date: o the sum of all premiums you have paid, minus partial withdrawals that you have taken, minus policy loans that you have taken, including accrued loan interest is greater than or equal to; o the minimum monthly premiums for each policy month, starting with the first month of your policy through the current policy monthly processing date. On the monthly processing date, we deduct the monthly deductions from your account value. The minimum monthly premium is one-twelfth of the minimum annual premium. During the first three years of your policy, if there is not enough net account value to pay the monthly deductions and you have satisfied our requirements, we do not permanently waive certain charges. Instead, we continue to deduct these charges. This deduction may result in your policy having negative net account value, unless you pay enough premium to prevent this. The negative balance is your unpaid monthly deductions owing. At the end of the special continuation period to avoid lapse of your policy, you must pay enough premium to bring the net account value to zero plus the amount that covers your estimated monthly deductions for the following two months. SEE LAPSE, PAGE 37. ALLOCATION OF NET PREMIUMS The net premium is the balance remaining after we take premium-based charges from your premium payment. We add the net premium to your account value according to your instructions. We apply net premiums we have received from you to your policy after: a) we receive the amount of premium required for your insurance coverage to begin; b) all issue requirements have been met and received by our customer service center; c) we approve your policy application; and d) your policy is issued. All amounts you designated for the guaranteed interest division will be allocated to that division. If your state requires return of your premium during the free look period we invest amounts you have designated for the variable divisions into the Fidelity VIP Money Market Division until 15 days after we issue your policy (deemed delivery time, plus a typical free look period which varies by state). If your state provides for return of account value during the free look period and for premium payments after the end of the free look period, we invest amounts you designated for the variable divisions directly into your selected investment portfolios. SEE FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD, PAGE 40. We allocate premium payments received after we apply your initial net premium payment to your policy on the valuation date of receipt. We always use your most recent premium allocation instructions. Your instructions must specify percentages that are whole numbers totaling 100%. You may invest in a maximum of eighteen divisions over the lifetime of your policy. This eighteen investment division maximum includes the variable divisions and the guaranteed interest division, but not the loan division. SEE MAXIMUM NUMBER OF INVESTMENT DIVISIONS, PAGE 19. You may make five free premium allocation changes per year. After the five free premium allocation changes, we charge you $25 for each additional allocation change per policy year. The $25 fee is withdrawn from each investment division pro rata to the amount in each division. PREMIUM PAYMENTS AFFECT YOUR COVERAGE Unless you have the guaranteed minimum death benefit feature or are in the special continuation period, your policy continues in effect only until your net account value no longer covers the monthly deductions for your benefits. If this happens, your - -------------------------------------------------------------------------------- Strategic Advantage II 22 policy will enter the 61-day grace period and you must make a premium payment to avoid lapse. SEE LAPSE, PAGE 37, AND GRACE PERIOD, PAGE 38. If you pay your minimum annual premium each year during the first three policy years, we guarantee your policy and riders will not lapse during the special continuation period, regardless of your net account value. SEE SPECIAL CONTINUATION PERIOD, PAGE 22. Under the guaranteed minimum death benefit, the base death benefit portion of your policy remains effective until the end of the guarantee period. The guaranteed minimum death benefit feature does not apply to riders which can lapse and terminate during the guarantee period. You must meet all conditions of the guarantee. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27. MODIFIED ENDOWMENT CONTRACTS There are special federal income tax rules for distributions from certain life insurance policies known as "modified endowment contracts." These rules apply to distributions such as policy loans, surrenders, and partial withdrawals. Whether or not these rules apply depends upon whether or not the premiums you paid are greater than the "seven-pay" limit. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 56. If we find that your scheduled premium causes your policy to be a modified endowment contract on your policy date, we will require you to acknowledge that you know the policy is a modified endowment contract. We will issue your policy based on the scheduled premium you selected. If you do not want your policy to be issued as a modified endowment contract, you may reduce your scheduled premium to a level which does not cause your policy to be a modified endowment contract. We will then issue your policy based on the revised scheduled premium. DEATH BENEFITS You can decide the amount of insurance you need, now and in the future. You can combine the long-term advantages of permanent life insurance base coverage with the flexibility and short-term advantages of term life insurance. Both permanent and term life insurance are available under your one Strategic Advantage II policy. When we issue your policy, we base the initial insurance coverage on the instructions in your application. The initial death benefit is the stated death benefit amount. You can add an adjustable term insurance rider for additional insurance coverage. Death benefits are valued as of the date of death of the insured person. The stated death benefit is the permanent element of your policy. The adjustable term insurance rider is the term insurance element of your policy. The adjustable term insurance rider acts as a bridge. It provides term insurance coverage which automatically adjusts to fill the gap between your total death benefit and your base death benefit depending on which death benefit option you choose. Generally, your stated death benefit may be no less than $50,000 to issue your policy. We do not guarantee coverage provided by the adjustable term insurance rider under the guaranteed minimum death benefit. 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. SEE ADJUSTABLE TERM INSURANCE RIDER, PAGE 28. - -------------------------------------------------------------------------------- Strategic Advantage II 23 DEATH BENEFIT SUMMARY THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES, NO REQUESTED OR SCHEDULED INCREASES OR DECREASES IN STATED OR TARGET DEATH BENEFIT AND THAT PARTIAL WITHDRAWALS ARE LESS THAN THE PREMIUM PAID.
OPTION 1 OPTION 2 ========================= ============================================= ============================================ STATED DEATH The amount of policy death benefit at issue, The amount of policy death benefit at issue, BENEFIT not including rider coverage. This amount not including rider coverage. This amount stays level throughout the life of the contract stays level throughout the life of the contract. BASE DEATH The greater of the stated death benefit or the The greater of the stated death benefit plus the BENEFIT account value multiplied by the death benefit account value or the account value multiplied corridor factor. by the death benefit corridor factor. TARGET DEATH Stated death benefit plus adjustable term Stated death benefit plus adjustable term BENEFIT insurance rider benefit. This amount remains insurance rider benefit. This amount remains level throughout the life of the policy. level throughout the life of the policy. TOTAL DEATH This is the total death proceeds. It is the greater This is the total death proceeds. It is the greater BENEFIT of the target death benefit or the base death of the target death benefit plus the account benefit. value or the base death benefit. ADJUSTABLE The adjustable term insurance rider benefit is The adjustable term insurance rider benefit is TERM INSURANCE the total death benefit minus base death benefit, the total death benefit minus the base death RIDER BENEFIT but it will not be less than zero. If the account benefit, but it will not be less than zero. If the value multiplied by the death benefit corridor account value multiplied by the death benefit factor is greater than the stated death benefit, corridor factor is greater than the stated death the adjustable term insurance benefit will be benefit plus the account value, the adjustable decreased. It will be decreased so that the sum term insurance rider benefit will be decreased. of the base death benefit and the adjustable It will be decreased so that the sum of the base term insurance rider benefit is not greater than death benefit and the adjustable term insurance the target death benefit. If the base death rider benefit is not greater than the target death benefit becomes greater than the target death benefit plus the account value. If the base benefit, then the adjustable term insurance rider death benefit becomes greater than the target benefit is zero. death benefit plus the account value, then the adjustable term insurance rider benefit is zero.
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 your choice of the enhanced death benefit corridor option; o a change in your death benefit option; o increases to satisfy the federal income tax law definition of life insurance; o partial withdrawals; o increases or decreases in the stated death benefit; or o a transaction which causes the base death benefit to change. As long as your policy is in force, we will pay the death proceeds to your beneficiary when 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 any rider benefits; minus o your outstanding policy loan with accrued loan interest; minus o outstanding policy charges due before the insured person's date of death. There could be outstanding policy charges if the insured dies while your policy is in the grace period, or three-year special continuation period. - -------------------------------------------------------------------------------- Strategic Advantage II 24 DEATH BENEFIT OPTIONS You have a choice of two death benefit options: option 1 or option 2 (described below). Your choice may result in your having a base death benefit which is greater than your stated death benefit. You may change your death benefit option after the policy date and before the continuation of coverage feature begins. You may not change your enhanced death benefit corridor option. You must choose whether or not you want the enhanced death benefit corridor option before we issue your policy. SEE CHANGES IN DEATH BENEFIT OPTIONS, PAGE 25. Under death benefit option 1, your base death benefit is the greater of: 1. your stated death benefit on the date of the insured person's death; or 2. your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A or B. Under death benefit option 2, your base death benefit is the greater of: 1. your stated death benefit plus your account value on the date of the insured person's death; or 2. your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A or B. Under option 1 positive investment performance is generally reflected in a reduced net amount at risk. This 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. You should choose option 2 if you want to have investment performance reflected in your insurance coverage. Federal income tax law requires that your death benefit be at least as much as your account value multiplied by a factor defined by law. This factor is based on: o the insured person's age; o the insured person's gender; o the test you chose for the federal income tax law definition of life insurance; and o the enhanced death benefit corridor option, if elected. We will adjust your policy to continue to qualify as life insurance under the federal income tax laws in existence at the time the policy was issued. CHANGES IN DEATH BENEFIT OPTIONS You may request a change in your death benefit option 1 or 2 after the policy date and before the continuation of coverage feature. Your death benefit option change is effective on your next monthly anniversary after we accept and approve your requested change, so long as at least five days remain before your monthly anniversary. If fewer than five days remain before your monthly anniversary, your death benefit option change is effective on your next monthly anniversary. After we approve your request, we send a new policy schedule page to you. You should attach it to your policy. We may ask you to return your policy to our customer service center so that we can note the change in your schedule. A death benefit option change applies to your entire stated or base death benefit. For you to change from death benefit option 1 to option 2, you must provide to us proof that the insured person is insurable under our normal rules of underwriting for your policy class, except in Florida. Changing your death benefit option may reduce or increase your target death benefit, as well as your stated death benefit. We may not allow you to change the death benefit option if it reduces the target or stated death benefit below the minimum we require to issue your policy. 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 gross account value as of the effective date of the change. Option 2 Option 1 your stated death benefit before the change plus your gross account value as of the effective date of the change. - -------------------------------------------------------------------------------- Strategic Advantage II 25 We increase or decrease your stated death benefit to keep the net amount at risk the same on the date you change your death benefit option. Additionally, there is no change to the amount of term insurance if you have an adjustable term insurance rider. SEE COST OF INSURANCE CHARGE, PAGE 49. 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. We do not adjust the target premium when you change your death benefit option. If the insured person is 100 years of age or older and the continuation of coverage feature is in effect, death benefit option 2 is not available. CHANGES IN DEATH BENEFIT AMOUNTS You may want to increase the target or stated death benefit under your policy. You may do this while your policy is in force and before the policy anniversary when the insured person turns age 86. You may request a decrease in the stated death benefit only after your first policy anniversary. Contact our customer service center to request an increase or decrease in your policy death benefit. The request is effective as of the next monthly processing date after we receive your request and approve it, unless there are underwriting or other requirements which must be met before your request is effective. Any requested change in your coverage must be for at least $1,000. After we approve your request, we will send you a new schedule page for your policy which includes the: o stated death benefit; o benefit under applicable riders; o guaranteed cost of insurance rates of each segment; o guideline annual premium; and o target death benefit schedule. Keep the new schedule with your policy. We may ask you to send your policy to us so that we can note the change in your schedule. We may not approve a requested change because it will disqualify your policy as life insurance under the applicable 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 54. If you decrease your death benefit, you may not decrease your stated 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 54 AND MODIFIED ENDOWMENT CONTRACTS, PAGE 56. Requested reductions in the death benefit will first be applied to decrease the target death benefit. We decrease your stated death benefit only after your adjustable term insurance rider coverage is reduced to zero. If you have more than one segment, we divide subsequent decreases in stated death benefit among your benefit segments pro rata unless state law requires differently. 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 any request you make for an increase in 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 the target death benefit only once in a policy year. The initial, or first segment, is the stated death benefit on the effective date of the policy. An increase in the stated death benefit (other than one caused by an option change) will cause a new segment to be created. The segment year begins on the segment effective date and ends one year later. The following may apply to each new segment: o a new minimum annual premium during the first three years of your policy; o a new sales charge; o new cost of insurance charges, guaranteed and current; o a new incontestability period; o a new suicide exclusion period; and o a new target premium. A requested increase in your stated death benefit creates a new segment. Once we create a new segment, it is permanent unless state law requires differently. If an option change causes the stated death benefit to increase, no new segment is created. - -------------------------------------------------------------------------------- Strategic Advantage II 26 Instead, the size of each existing segment(s) is(are) changed. If it causes the stated death benefit to decrease, each segment is decreased. To determine the applicable sales charge, premiums you pay after an increase are applied to your policy segments in the same proportion as the guideline annual premiums for each segment bears to the sum of the guideline annual premiums for all segments. For each coverage segment, your schedule shows your guideline annual premiums. We allocate the net amount at risk among segments in the same proportion that each segment bears to the total stated death benefit. GUARANTEED MINIMUM DEATH BENEFIT Usually, how long your policy remains in force depends on your policy's net account value. Because we deduct charges monthly from your net account value, your coverage lasts only as long as your net account value is enough to pay these charges and your account value is more than your loan interest due during the special continuation period. Your account value and the length of time your policy remains in force depend on: 1. timing and amount of any premium payments; 2. the investment performance of the variable divisions; 3. the interest you earn in the guaranteed interest division; 4. the amount of your monthly charges; 5. partial withdrawals you take; and 6. loan activity you may have. This feature extends the period that your policy's stated death benefit remains in effect even if the variable divisions have poor investment performance. See your policy to determine how your benefits are affected in this situation. It has a guarantee period that lasts until the later of ten policy years or until the insured person is age 65. The guaranteed minimum death benefit coverage does not apply to any riders, including the adjustable term insurance rider. Therefore, if your net account value is not enough to pay the deductions as they come due on your policy and if your policy is no longer in the special continuation period, only the stated death benefit portion of your coverage is guaranteed to stay in force. See your policy to determine how your benefits are affected in this situation. SEE LAPSE, PAGE 37. The guaranteed minimum death benefit is not available in some states. REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD To qualify for the guaranteed minimum death benefit you must pay an annual premium higher than the minimum annual premium. This higher premium is called the guarantee period annual premium. The guarantee period monthly premium is equal to one-twelfth of the guarantee period annual premium. Your net account value must also meet certain diversification requirements. Your guarantee period annual premium depends on: o your policy's stated death benefit; o the insured person's age, gender, premium class and underwriting characteristics; o the death benefit option you chose; o additional rider coverage on your policy; and o other additional benefits on your policy. At each monthly processing date we test to see if you have paid enough premium to keep your guarantee in place. We calculate: o actual premiums paid; minus o the amount of any partial withdrawals you make; minus o policy loans you take with accrued loan interest. This amount must equal or exceed; o the sum of the guarantee period monthly premium payments for each policy month starting with your first policy month through the end of the policy month that begins on the current monthly processing date. You must continually meet the requirements of the guarantee period for this feature to remain in effect. We show the guarantee period annual premium on your policy schedule. If your policy benefits increase, the guarantee period annual premium increases. If your policy fails to meet this test on any monthly processing date, the guarantee period ends, and thus the guaranteed minimum death benefit lapses. - -------------------------------------------------------------------------------- Strategic Advantage II 27 The guarantee period ends if your net account value on any monthly processing date is not diversified as follows: 1. you must invest your net account value in at least five investment divisions; and 2. you may invest no more than 35% of your net account value in any one division. Your policy will continue to meet the diversification requirements if: 1. you have automatic rebalancing and you meet the two diversification tests listed above; or 2. you have dollar cost averaging which results in transfers into at least four additional investment divisions with no more than 35% of any transfer directed to any one division. SEE DOLLAR COST AVERAGING, PAGE 33, AND AUTOMATIC REBALANCING, PAGE 34. If you fail to satisfy either the premium test or the diversification test and you do not correct it, this feature terminates. We will not send you notice that the guaranteed minimum death benefit has lapsed if you fail to satisfy either of these tests. If you choose the guaranteed minimum death benefit, you must make sure your policy satisfies the premium test and diversification test. Once it terminates, you cannot reinstate the guaranteed minimum death benefit feature. The guaranteed period annual premium then no longer applies to your policy. ADDITIONAL BENEFITS Your policy may include additional benefits, which we attach by rider. A rider changes benefits under your policy and may or may not add an additional cost to your policy. If applicable, we deduct a monthly charge from your account value for each rider you choose. You may cancel these rider benefits at any time. If you choose any of these benefits your policy will include the details. Not all riders are available for all policies. You may schedule your term rider coverage to increase or decrease at issue. If you want to increase your scheduled benefits after issue of your rider, new guidelines may apply. Scheduled benefits are the kind and amount of benefits you choose under your policy over a stated period of time. Periodically we may offer other riders than those listed here. You should contact your registered representative for a complete list of the riders now available. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 56, FOR INFORMATION ON THE POSSIBLE TAX EFFECTS OF ADDING OR CANCELING THESE BENEFITS. ADJUSTABLE TERM INSURANCE RIDER You may increase your death proceeds by adding an adjustable term insurance rider on the insured person's life. As the name suggests, the adjustable term insurance rider adjusts over time. You specify a target death benefit when you apply for this rider. The target death benefit can be level or can be scheduled to change at the beginning of any policy year. We generally restrict your target death benefit to an amount not more than ten times your stated death benefit at issue. In other words, if your stated death benefit is $100,000, then the maximum amount of target death benefit we allow you is $1,000,000. The death benefit for the adjustable term insurance rider is the difference between your total 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. For example, under option 1, assume your base death benefit increases as a result of an increase in your - -------------------------------------------------------------------------------- Strategic Advantage II 28 account value. The adjustable term insurance rider adjusts to provide death proceeds equal to your total death benefit in each year: Base Death Total Death Adjustable Term Benefit Benefit Insurance Rider Amount ------- ------- ---------------------- $201,500 $250,000 $48,500 202,500 250,000 47,500 202,250 250,000 47,750 It is possible that the amount of your adjustable term insurance may be zero if your base death benefit increases enough. Using the same example, if the base death benefit under your policy grew to $250,000 or more, the adjustable term insurance would be zero. The adjustable term insurance can never be less than 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 is reduced below your target death benefit, the adjustable term insurance rider amount reappears to maintain the total death benefit. You may change the target death benefit schedule after it is issued, based on our rules. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 26. We may deny any 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 death benefit option 2, and base decreases may reduce the amount of your target death benefit. SEE PARTIAL WITHDRAWALS, PAGE 36, AND CHANGES IN DEATH BENEFIT OPTIONS, PAGE 25. There is no defined premium for a given amount of adjustable term insurance coverage. Instead, we deduct a 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 will be based on the issue age, gender, 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 the policy. SEE COST OF INSURANCE CHARGE, PAGE 49. There are no sales or tax charges for this coverage. The total sales charge that you pay may be less if you have coverage under an adjustable term insurance rider instead of the base death benefit. However, since all policy features apply to the adjustable term insurance rider, you should consider these features as well as cost as you make your purchase decisions. If the target death benefit schedule is increased by you after the rider is issued, we use the same rates for the entire coverage for this rider. These rates are based on the original premium class even though satisfactory new evidence of insurability is given to us for the increased schedule. RIGHT TO CHANGE INSURED RIDER This rider allows you to change the insured person under your policy. You must provide satisfactory evidence of insurability for the insured person. A change of the insured person may have federal income tax consequences. If you change the insured person, the cost of your future insurance charges may change, but your account value remains the same as of the date you make this change. Changing the insured person also means that there will be new contestability and suicide periods. There is no charge for this rider. WAIVER OF COST OF INSURANCE RIDER If the insured person becomes totally disabled while your policy is in force, this rider provides that we waive the monthly expense charges, cost of insurance charges, and rider charges during the disability. This means that we do not deduct these amounts from your account value. You must meet all of our requirements for this rider to apply. If you add this rider to your policy, you may not add the waiver of specified premium rider. WAIVER OF SPECIFIED PREMIUM RIDER If the insured person becomes disabled while your policy is in force, this rider provides that we credit a specified premium amount monthly to your policy during the total disability of the insured person. There is a waiting period before this benefit applies. In your application, you select the amount of premium we credit subject to our limits. If you add this rider to your policy, you may not add the waiver of cost of insurance rider. - -------------------------------------------------------------------------------- Strategic Advantage II 29 SPECIAL FEATURES POLICY MATURITY If the insured person reaches age 100 and you do not want to use the continuation of coverage feature, you may surrender the policy for the net account value. Your policy then ends. Some part of this payment may be taxable. You should consult your tax adviser. RIGHT TO EXCHANGE POLICY During the first 24 months after your policy date, you have the right to exchange your policy to a guaranteed policy, unless state law requires differently. To do this, we transfer the amount you have in the variable divisions to the guaranteed interest division. We allocate all of your future net premiums only to the guaranteed interest division. We do not allow any future payments or transfers to the variable divisions when you exercise this right. We will not charge you for the transfer to make this exchange. SEE THE GUARANTEED INTEREST DIVISION, PAGE 19. CONTINUATION OF COVERAGE The continuation of coverage feature allows insurance coverage to continue in force beyond when the insured person reaches age 100. If you choose to allow the continuation of coverage feature to become effective, we: 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 all riders; o convert death benefit option 2 to death benefit option 1, if applicable; and o terminate investment features such as dollar cost averaging and automatic rebalancing. When the insured person reaches age 100, if an adjustable term insurance rider is in effect, the target death benefit becomes the stated death benefit. All riders, including the adjustable term insurance rider, then terminate. If you have no adjustable term insurance rider coverage, your stated death benefit is unchanged. You may make no further premium payments. Your insurance coverage continues in force until the insured person's death, unless the policy lapses or is surrendered. However, we deduct no further cost of insurance charges. Your monthly deductions also cease when continuation of coverage begins. SEE CONTINUATION OF COVERAGE ADMINISTRATIVE FEE, PAGE 50. Your net account value may not be transferred into the variable divisions after the insured person reaches age 100. During the continuation of coverage period, you may take policy loans or partial withdrawals from your policy. If we are paying a persistency refund on the guaranteed interest division, and your policy is in the continuation of coverage period, we credit you with the persistency refund. SEE PERSISTENCY REFUND, PAGE 50. If you have outstanding policy loans, interest continues to accrue. If you fail to make sufficient loan payments or loan interest payments, it is possible that the loan plus accrued interest may become greater than your account value and cause your policy to lapse. To avoid this, you may repay loans and make loan interest payments during the continuation of coverage period. However, we will not accept any additional premium payments. If you wish to stop coverage after the continuation of coverage feature begins, you may surrender your policy and receive the net account value. There is no surrender charge after the insured person reaches age 100. All normal consequences of surrender apply. SEE SURRENDER, PAGE 39. The continuation of coverage feature may not be available in all states. If a state has approved this feature, it is an automatic feature and you do not need to take any action to activate it. 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. ENHANCED DEATH BENEFIT CORRIDOR OPTION For policies issued under group or sponsored arrangements, with guaranteed issue rates, an additional benefit option is available. The policyowner may elect, at any time prior to the issuance of the policy, the enhanced death benefit corridor option. - -------------------------------------------------------------------------------- Strategic Advantage II 30 Existing group or corporate owners of Strategic Advantage II policies which have guaranteed issue rates, can elect to add this option to their policies if it is added to all existing policies within that issue group. If you would like to do this, you should contact your registered representative/agent or our customer service center for instructions. This option generally provides an opportunity for an increased death benefit on the life of the insured person at certain ages. Under death benefit options 1 and 2 the account value is multiplied by a factor shown in Appendix A or B. The result of this calculation is the base death benefit if it exceeds the stated death benefit. Under the enhanced death benefit corridor option, the calculation uses the factor shown on the attached new Appendix A-Enhanced and Appendix B-Enhanced (depending on which definition of life insurance is in effect for your policy). The result of this calculation is then used to determine the base death benefit as described under DEATH BENEFIT OPTIONS, PAGE 25. There is no separate charge for this feature. However, the same account value may generate a higher base death benefit under policies with this option than on policies not electing the option. Cost of insurance charges are based on the net amount at risk, which is the difference between the account value and the base death benefit. Therefore, as a result of the increased death benefit, the cost of insurance charges may be higher for policies electing this option. Your registered representative/agent can provide you with a personalized illustration to show the difference between a policy with this option and one without it. If your policy does not have sufficient account value, electing this option may have no effect on the base death benefit. Adding this option to your policy does not affect the operation of your policy's riders, including the Adjustable Term Insurance Rider. When the base death benefit exceeds the stated death benefit, transactions which reduce your account value (such as a partial withdrawal) also reduce the death benefit. The dollar reduction to the death benefit under these circumstances is greater for policies with the enhancement option than on those without the option. Once elected, this option cannot be deleted from your policy. You may lose the benefit of this option if your account value falls below the minimum level needed to keep it in effect. Once elected, this option continues as long as coverage on the original insured person continues. If there is a change of insured person under the right to change insured person rider, the enhanced death benefit corridor option must be elected on the application for the new insured person if you want it to be effective. SEE RIGHT TO CHANGE INSURED PERSON RIDER, PAGE 29 AND RIGHT TO EXCHANGE POLICY, PAGE 30. POLICY VALUES ACCOUNT VALUE Your account value is the total amount you have in the guaranteed interest division, the variable divisions, and the loan division. Your account value reflects: o net premiums; o deductions for charges; o partial withdrawals; o investment performance of the variable divisions; o interest earned on the amount you have in the guaranteed interest division; and o interest earned on the amounts you have in the loan division. NET ACCOUNT VALUE Your policy's net account value is your account value minus the amount of your outstanding policy loans and accrued loan interest. CASH SURRENDER VALUE Your cash surrender value is your account value plus any refund of sales charges which may be due. NET CASH SURRENDER VALUE Your net cash surrender value is your cash surrender value minus the amount of your outstanding policy loans and accrued loan interest. DETERMINING THE VALUE IN THE VARIABLE DIVISIONS The amounts included in the variable divisions are measured by accumulation units and accumulation unit values. The value of a variable division is the accumulation unit value for that division times the number of accumulation units you own in that division. Each variable division has a different accumulation unit value. - -------------------------------------------------------------------------------- Strategic Advantage II 31 You purchase accumulation units of a division whenever you allocate premium or make transfers to that division. This includes transfers from the loan division. We redeem accumulation units from the variable divisions: o when you take a partial withdrawal; o when amounts are transferred from a variable division (including transfers to the loan division); o for the monthly deductions from your account value; o for policy transaction charges; o on surrender; and o to pay the death benefit when the insured person dies. We calculate the number of variable division accumulation units purchased or redeemed by: 1. dividing the dollar amount of your transaction by: 2. the division's accumulation unit value calculated at the close of business on the valuation date of the transaction. The accumulation unit value is the value of an accumulation unit determined as of each valuation date. The accumulation unit value of each division varies with the investment performance of the matching portfolio. It reflects: o investment income; o realized and unrealized capital gains and losses; o investment portfolio expenses; and o daily mortality and expense risk charges we take from the variable account. SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION, PAGE 32. The date of a transaction is the date we receive your premium, an acceptable request or other transaction request at our customer service center, so long as the date of receipt is a valuation date. Each valuation date ends at 4:00 p.m. Eastern time. 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 divisions goes up or down depending on investment performance. FOR AMOUNTS IN THE VARIABLE DIVISIONS, THERE IS NO GUARANTEED MINIMUM CASH VALUE. HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION We determine accumulation unit values for the variable divisions on each valuation date. We generally set the accumulation unit value for a division at $10 on the date when the division is first opened and begins accepting amounts. After that, the accumulation unit value on any valuation date is: 1. the accumulation unit value for the preceding valuation date multiplied by 2. the accumulation experience factor for that division 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 investment division every valuation date as follows: 1. We take the share value of the underlying portfolio shares in the division as reported to us by the investment portfolio managers as of the close of business on that valuation date. 2. We add dividends or capital gain distributions declared per share and reinvested by the investment portfolio on the date that the share value is affected. If applicable, we subtract a charge for taxes from this amount. 3. We divide the remaining amount by the value of the shares in the underlying investment portfolio for the variable division at the close of business on the previous valuation date. - -------------------------------------------------------------------------------- Strategic Advantage II 32 4. We then subtract a charge for the mortality and expense risk which we assume under your policy. The daily charge is .002055% of the accumulation unit value. This is an annual rate of .75% of the accumulation unit value. If the previous day was not a valuation date, the charge is multiplied by the additional number of days since the prior valuation date. The result of these calculations is the accumulation experience factor for the valuation period. TRANSFERS OF ACCOUNT VALUE You may make up to twelve free transfers among the variable divisions, 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 $25 fee for each transfer that you make after the first twelve in each policy year. We do not include transfers for automatic rebalancing or dollar cost averaging toward your twelve free transfers. You may make transfer requests in writing, or by telephone if you have telephone privileges, to our customer service center. You may not make transfers during the continuation of coverage period. Your transfer takes effect on the valuation date we receive your request. The minimum amount you may transfer is $100. This minimum does not need to come from one division or be transferred to one division as long as the total amount you transfer is at least $100. However, if the amount remaining in a variable division is less than $100 when you make a transfer request, we transfer the entire amount out of that division. EXCESSIVE TRADING Excessive trading activity can disrupt investment portfolio management strategies and increase portfolio expenses. Thus, we limit excessive transfer activity. Excessive transfers may cause: o increased trading and transaction costs; o disruption of planned investment strategies; o forced and unplanned portfolio turnover; o lost opportunity costs; and o the investment portfolios to have large asset swings that decrease their 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 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 are deemed to 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 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. Transfers of your account value into the guaranteed interest division are not restricted. DOLLAR COST AVERAGING If your policy has at least $10,000 invested in either the Fidelity VIP Money Market Portfolio, or the Neuberger Berman AMT Limited Maturity Bond Portfolio, you can elect dollar cost averaging. 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. - -------------------------------------------------------------------------------- Strategic Advantage II 33 This systematic plan of transferring account values is intended to reduce the risk of investing too much when the price of an investment portfolio's shares is high. It 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 other divisions each period, you purchase more units in a division if the unit value is low, and you purchase fewer units if 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 five days after we receive your dollar cost averaging request. Dollar cost averaging cannot begin until after the end of your free look period if your state requires refund of all premiums paid 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 either the division invested in either the Fidelity VIP Money Market Portfolio or the Neuberger Berman AMT Limited Maturity Bond Portfolio for automatic transfer. Each period, we automatically transfer the amount you select from your chosen source division to one or more other variable divisions. 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 any one division is 1% of the total amount you transfer to all divisions you select. You must transfer at least $100 for each dollar cost averaging transfer. Dollar cost averaging may occur on the same day of the month either monthly, quarterly, semi-annually, or annually. Unless you tell us otherwise, dollar cost averaging automatically takes place monthly, on the 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. You may have both dollar cost averaging and automatic rebalancing at the same time. The dollar cost averaging division from which your transfer will be taken cannot be included in your automatic rebalancing program. CHANGING DOLLAR COST AVERAGING You may change your dollar cost averaging program one time per policy year. If you have telephone privileges, you may make changes to the dollar cost averaging program by telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 42. TERMINATING DOLLAR COST AVERAGING You may cancel dollar cost averaging by sending satisfactory notice to our customer service center. We must receive it at least five days before the next dollar cost averaging date. Dollar cost averaging will terminate if: 1. you specify a termination date; or 2. your balance remaining in the division from which your dollar cost averaging transfers are taken reaches a dollar amount you set; or 3. on any dollar cost averaging date, the amount in the division from which you want to make a transfer is equal to or less than the amount to be transferred. We will transfer the remaining amount and dollar cost averaging ends. AUTOMATIC REBALANCING Automatic rebalancing provides you with a method for maintaining a consistent approach to investing account values over time, and simplifying the process of asset allocation by dividing amounts among the investment options you have chosen. 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 divisions to match your pre-set automatic rebalancing allocation percentages. After the transfers, the ratio of your account value in each division to your total account value for all divisions included in automatic rebalancing matches the automatic rebalancing allocation percentage for that division. This action rebalances the amounts in the investment divisions that do not match your set allocation. This happens if an investment division outperforms other divisions for that time period. - -------------------------------------------------------------------------------- Strategic Advantage II 34 You may choose the automatic rebalancing feature on your application or later by completing our customer service form. Automatic rebalancing may occur on the same day of the month either monthly, quarterly, semi-annually, or annually. If you do not specify, automatic rebalancing will occur quarterly. If you choose automatic rebalancing on your policy application, the first transfer occurs on the date you select (after your free look period if your state requires return of all premiums paid during the free look period). If you elect this feature after your policy date, we process the first transaction on the date you have requested. If you requested no date, processing is on the last valuation date of the calendar quarter we receive your notice at our customer service center. When you choose automatic rebalancing allocations, you may choose up to eighteen total investment divisions. SEE MAXIMUM NUMBER OF INVESTMENT DIVISIONS, PAGE 19. You may have both automatic rebalancing and dollar cost averaging at the same time. The division from which your dollar cost averaging transfers are taken cannot be included in your automatic rebalancing allocating program. You may not include the loan division in your automatic rebalancing allocations. 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 33. If you have automatic rebalancing and the guaranteed minimum death benefit and you ask for an allocation which does not meet the guaranteed minimum death benefit diversification requirements, we will notify you that the allocation needs to be changed and ask you for revised instructions. TERMINATING AUTOMATIC REBALANCING You may terminate automatic rebalancing at any time, as long as we receive your notice of termination at least five days before the next automatic rebalancing date. If you have the guaranteed minimum death benefit and you terminate the automatic rebalancing feature, you still must meet the diversification requirements of your net account value for the guarantee period to continue. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27. POLICY LOANS You may borrow against your policy at any time after the first monthly processing date by using your policy as security for a loan, or as otherwise required by law. The amount you borrow is called a policy loan. Your policy loan is: 1. the total amount you borrow from your policy; plus 2. any policy loan interest that is capitalized when due; minus 3. policy loan repayments you make. Unless state law requires differently, any new policy loan you take must be at least $100. The maximum amount 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. 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 telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 42. Based on our administrative system, we may have other rules for policy loans. For example, we may require that your loan request be for a dollar amount rather than a percentage to be taken from a specific division. Loan interest charges on your policy loan accrue daily at an annual interest rate of 4.75%. Interest is due in arrears on each policy anniversary. If you do not pay your interest when it is due, we add it to your policy loan on your policy anniversary. If you request an additional loan, we add the amount you request to your existing outstanding policy loan. This way, there is only one loan outstanding on your policy at any time. You may repay all or part of your policy loan at any time while your policy is in force. We assume that any payments you make, other than your scheduled - -------------------------------------------------------------------------------- Strategic Advantage II 35 premiums, are policy loan repayments. You must tell us otherwise if you want us to consider additional payments as premiums. When you request a loan you may specify one investment division from which the loan will be taken. If you do not specify one, the loan will be taken proportionately from each active investment division you have. When you take a policy loan, we transfer an amount equal to your policy loan amount from the variable and the guaranteed interest divisions in the same proportion they represent of your total net account value to the loan division. We follow this same process for loan interest in the amount due at your policy anniversary. We credit the loan division with interest at an annual rate of 4%. The loan division is part of our general account, separate from the guaranteed interest division. When we make transfers to the loan division, we redeem sufficient units of the variable divisions to cover the amount of the loan which you take from the variable account. Unless you tell us otherwise, we deduct the amount transferred from each division in the same proportion that your account value in that division has to your net account value immediately before the loan transaction. We determine the amounts in each division as of the valuation date when we receive your loan request. Policy loans may cause your policy to lapse if your net account value is not enough to pay all deductions each month. SEE LAPSE, PAGE 37. Any policy loans you take may have tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 56. LOAN REPAYMENT We transfer the amount of interest credited to the loan division for a policy year from the loan division on your policy anniversary. When you make a loan repayment, we transfer an amount equal to your repayment from the loan division up to the amount of your policy loan. Unless you tell us otherwise, we allocate these transfers among the variable divisions and the guaranteed interest division in the same proportion as your current premium allocation. LOANS AND YOUR BENEFITS Taking a loan decreases the amount you have in the variable divisions. 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. This means that the benefits under your policy may be affected. The loan is a first lien on your policy. This means we deduct your outstanding policy loan and accrued loan interest from the death benefit payable and the cash surrender value payable on surrender. Failure to repay your loan may affect the guaranteed minimum death benefit feature and the length of time your policy remains in force. The policy lapses (FOR EXCEPTIONS, SEE SPECIAL CONTINUATION PERIOD, PAGE 22 AND GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27) when the account value minus policy loans and accrued loan interest is not enough to cover your monthly deductions. If your policy lapses with a loan outstanding, you may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 56. If you use the continuation of coverage feature and you have a policy loan, loan interest continues to accrue. If you do not make loan payments your policy could lapse. If you do not repay your policy loan, we deduct the outstanding policy loan amount and accrued loan interest from the death benefits payable, or the cash surrender value payable upon surrender. PARTIAL WITHDRAWALS You may request a partial withdrawal on any valuation date after your first policy anniversary by contacting our customer service center. If you request partial withdrawals 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 partial withdrawal request must be in writing. SEE TELEPHONE PRIVILEGES, PAGE 42. You may take only one partial withdrawal per policy year. We may set rules on partial withdrawals, based - -------------------------------------------------------------------------------- Strategic Advantage II 36 on our administrative system. For example, we may require that you specify a dollar amount rather than a percentage to be taken from a specific division. The minimum partial withdrawal you may take is $100. The maximum partial withdrawal you may take is the amount which leaves $500 as your net account value. If you request a withdrawal of more than this maximum, we require you to surrender your policy. When you take a partial withdrawal, we deduct your withdrawal amount plus a service fee from your account value. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 47. Partial withdrawals may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 56. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1 If you selected death benefit option 1, and if 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 the stated death benefit. Any additional amounts you withdraw will reduce your stated death benefit by the amount of the withdrawal. 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 because your account value is reduced. 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. 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, 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 54. We require a minimum stated death benefit and a minimum target death benefit to issue your policy. You are not allowed to take a partial withdrawal if it reduces your stated death benefit or target death benefit below this minimum. SEE GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS, PAGE 54. PARTIAL WITHDRAWAL MECHANICS Unless you tell us otherwise, we will make a partial withdrawal from the guaranteed interest division and the variable divisions in the same proportion that each division has to your net account value immediately before your withdrawal. The amount withdrawn from the guaranteed interest division may not be for more than your total withdrawal multiplied by the ratio of your account value in the guaranteed interest division to your total net account value immediately before the partial withdrawal transaction. We will send a new schedule page for your policy showing the effect of your withdrawal if there is any change to your stated death benefit or your target death benefit. To make this change, we may ask that you return the policy to our customer service center. Your withdrawal and any reductions in the death benefits are effective as of the valuation date on which we receive your request. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 56. LAPSE Your insurance coverage continues as long as your net account value is enough to pay all deductions each month. Lapse does not apply if either the guaranteed minimum death benefit or the special continuation period is in effect and you have met all requirements. SEE SPECIAL CONTINUATION PERIOD, PAGE 22, AND GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27. After the insured person reaches age 100 and if the continuation of coverage feature is active, the policy could lapse even though there are no further monthly - -------------------------------------------------------------------------------- Strategic Advantage II 37 deductions. If there is an outstanding policy loan, your policy will lapse if the loan plus the accrued interest owed is more than the account value. GRACE PERIOD Your policy enters the 61-day lapse grace period if, on a monthly processing date: 1. your net account value is zero (or less); and 2. the three-year special continuation period has expired, or you have not paid the required special continuation period premium; and 3. the guaranteed minimum death benefit has expired or terminated. We notify you that the policy is in a grace period at least 30 days before the grace period ends. We provide this notice to you, or a person to whom you have assigned your policy, at the last address in our records. We notify you of the required premium payment necessary to prevent your policy from lapsing. This amount is generally the amount of 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 pay death proceeds to your beneficiary(ies) with reductions for policy loans, accrued loan interest, and monthly deductions owed. No lapse notice will be sent to you if the guaranteed minimum death benefit is going to lapse. If we receive your payment of the required amount before the end of the grace period, we apply it to your account value in the same manner as your other premium payments, then we take the overdue deductions from your account balance. If you do not pay the full amount we request within the 61-day grace period, your policy and all of its riders lapse without value. We then withdraw your remaining account balance from the variable divisions and the guaranteed interest division. We deduct amounts which you owe us and inform you that the policy has ended. IF YOU HAVE THE GUARANTEED MINIMUM DEATH BENEFIT IN EFFECT After the special continuation period has ended, and if the guaranteed minimum death benefit is in effect, your policy's stated death benefit will not lapse during the guarantee period. This is true even if your net account value is not enough to cover all of the deductions from your account value on any monthly processing date. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 27. The guaranteed minimum death benefit does not protect benefits you may have under riders attached to your policy. Nor does it protect any amount of the base death benefit which is more than the stated death benefit. These benefits lapse if on any monthly processing date, your policy net account value is not enough to pay all monthly deductions from your account value (unless your policy is in the three-year special continuation period and your account value is more than the interest due on your loan). While the guaranteed minimum death benefit applies, we reduce your account value by monthly deductions, but not below zero. We permanently waive monthly deductions during the guarantee period which would reduce your account value below zero. The guaranteed minimum death benefit terminates if your policy does not meet the monthly premium or diversification tests. If your guaranteed minimum death benefit terminates, the normal test for lapse then resumes. SEE REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD, PAGE 27. - -------------------------------------------------------------------------------- Strategic Advantage II 38 LAPSE SUMMARY
SPECIAL CONTINUATION PERIOD GUARANTEED MINIMUM DEATH BENEFIT =========================================================== =========================================================== IF YOU MEET THE IF YOU DO NOT MEET THE IF YOU MEET THE IF YOU DO NOT MEET THE REQUIREMENTS REQUIREMENTS REQUIREMENTS REQUIREMENTS Your policy does not lapse if Your policy enters the grace Your policy does not lapse if Your policy enters the grace you do not have enough net period if your net account you do not have enough net period if your net account account value to pay the value is not enough to pay account value to pay the value is not enough to pay monthly charges. The the monthly charges, or if monthly charges. However, the monthly charges, or if charges are delayed until the your loan interest due is if you have any riders, they your loan interest due is earlier of: 1) the date you more than your net account lapse after the grace period more than your net account have enough net account value. If you do not pay and only your base coverage value. If you do not pay value to cover the monthly enough premium to cover remains in force. Charges enough premium to cover charge, or 2) until the end of the past due monthly for your base coverage are the past due monthly the special continuation charges and interest due, then deducted each month to charges and interest due, period. plus the monthly charges the extent that there is plus the monthly charges and interest due through the sufficient net account value and interest due through the end of the grace period (at to pay these charges. If end of the grace period (at the end of the following two there is not sufficient net the end of the following two months), your policy lapses. account value to pay a months), your policy lapses. charge, it is permanently waived.
REINSTATEMENT If you do not pay enough premium before the end of the grace period, your policy lapses. You may still reinstate your policy and its riders (other than the guaranteed minimum death benefit) within five years after the grace period ends. Unless state law requires differently, we will reinstate your policy and riders if: 1. you have not surrendered your policy for its net cash surrender value; 2. you provide satisfactory evidence to us that the insured person (and any people insured under your riders) is still insurable according to our normal rules of underwriting for your type of policy; and 3. we receive enough premium from you to keep your policy and its riders in force from the beginning to the end of the grace period and for two months after the reinstatement date. Reinstatement is effective 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 in effect at the time of reinstatement for the age of the insured person are adjusted to reflect the time since the lapse. We apply the net premiums received after reinstatement according to the premium allocation instructions in effect at the start of the grace period, unless you tell us otherwise. SURRENDER You may surrender your policy for its net cash surrender value any time while the insured person is living. You do this by sending a written request and your policy or a lost policy form to our customer service center. Your policy net cash surrender value is your cash surrender value, minus policy loans you have taken including accrued loan interest. We compute your net cash surrender value as of the valuation date we receive your surrender request and policy at our customer service center. All insurance coverage ends on the date we receive your surrender request and policy. - -------------------------------------------------------------------------------- Strategic Advantage II 39 We do not pro-rate or add back charges and expenses deducted from your account value which we deducted on the monthly anniversary before the date your surrender is processed. A surrender of your policy may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 56, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 56. GENERAL POLICY PROVISIONS FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD You have the right to examine your policy. If for any reason you do not want it, you may return your policy to us or your registered representative within the period shown in the policy. If you return your policy to us within your state's specified time limit, we will consider it canceled as of your policy date. If you cancel your policy during this free look period, you will receive a refund as determined under state law. Generally, there are two types of free look refunds. Some states require a return of all premiums paid while others permit payment of the account value plus a refund of all charges deducted. Your policy will specify what free look refund applies in your state. The type of free look refund allowed in your state will affect when your initial net premium and any additional net premiums we receive from you before the end of the free look period are invested into the variable divisions you selected. Your state may require us to return the premiums you have paid if you cancel your policy during the free look period. In this case, that portion of your initial net premium and any net premium we receive from you during the free look period that you have allocated to the variable divisions will then be held in the division investing in the Fidelity Money Market Portfolio for 15 days after we issue your policy (five days deemed delivery time plus a typical free look period of 10 days), unless state law requires otherwise, if: o you made a premium payment before we issued your policy; and o you have provided all information and documents we have requested. At the end of 15 days, your account value will be allocated among your chosen variable divisions, based on your most recent premium allocation instructions. Your state may require us to return your account value plus a refund of all charges deducted during the free look period. In this case, that portion of your initial net premium that you have allocated to the variable divisions will then be invested according to your most recent premium allocation instructions on the date we issue your policy if: o you made a premium payment before we issued your policy; o you have provided all information and documents we have requested; and o your state permits us to return the account value plus a refund of all charges deducted. Amounts you allocated to the guaranteed interest division will be invested into that division when we issue your policy if you have made a premium payment and have no outstanding information or document requests from us. Once we have applied your net premium to your selected investment divisions, you may transfer funds between investment divisions and activate policy investment features such as automatic rebalancing or dollar cost averaging. YOUR POLICY The entire contract between you and us is the combination of: o your policy; o a copy of your original application and any applications for benefit increases or decreases; o all of your riders; o endorsements; o 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 us your policy, we attach these items to your policy and return it to you. Otherwise, you need to attach them to your policy. Unless there is fraud, we consider all statements made in an application to be representations and not guarantees. We use no statement to deny a claim, unless it is in an application. A president or an officer of our company and our secretary or assistant secretary must sign all changes - -------------------------------------------------------------------------------- Strategic Advantage II 40 or amendments we make to your policy. No other person may change the terms or conditions of your policy. AGE We issue your policy at the insured person's age stated in your policy schedule. This is based on the insured person's age as of the nearest birthday 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 and shown in the schedule. OWNERSHIP The original owner is the person named as the owner in the policy application. The owner can exercise all rights and receive the benefits during the insured person's lifetime. This includes the right to change the owner, beneficiaries, or method 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 beneficiary(ies) receive death proceeds only if there is no surviving primary beneficiary(ies). If more than one beneficiary(ies) survives the insured person, they share the death proceeds equally, unless you have told us otherwise. If none of your policy beneficiaries has survived the insured person, we pay the death proceeds to you, or to your estate as owner. Once you tell us who the beneficiary(ies) is/are, we keep this information on file. You may name a new beneficiary during the insured person's lifetime. We pay the death proceeds to the most recent beneficiary(ies) whom you have most recently named and which we have on record. We do not make multiple payments. COLLATERAL ASSIGNMENT You may assign your policy as security 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) were 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 while the insured person is alive for two years from your policy date, we will not question the validity of the statements in your application. After your policy has been in force while the insured person is alive for two years from the effective date of any new segment or from the effective date of an increase in any other benefit, we will not contest the statements in your application for the new segment or other benefit increase. After this policy has been in force while the insured person is alive for two years from the effective date of any reinstatement, we will not contest the statements in your application for reinstatement. MISSTATEMENTS OF AGE OR GENDER If the insured person's age or gender has been misstated, we adjust the death benefit. We adjust death benefits 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 otherwise required by state law. If unisex cost of insurance rates apply, we do not make any adjustments for a misstatement of gender. SUICIDE If the insured person commits suicide, while that insured person is sane or insane within two years of your policy date unless otherwise required by state law, we limit death benefits to: 1. the total of all premiums paid to the time of death; minus - -------------------------------------------------------------------------------- Strategic Advantage II 41 2. the amount of outstanding policy loans and accrued loan interest; minus 3. any partial withdrawals you have taken. If the insured person has been changed, and the new insured person dies by suicide within two years of the change date, we then limit the death benefit to: 1. your net account value as of the change date; plus 2. the premiums you paid since the change date; minus 3. the sum of any increases in policy loans, accrued loan interest, and partial withdrawals taken 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 we make is equal to the cost of insurance and monthly expense charges which were deducted for such increase. TRANSACTION PROCESSING Generally, within seven days of when we receive all information required to process a payment, we pay: o death proceeds; o net cash surrender value upon surrender; o partial withdrawals; and o loan proceeds. We may delay processing these transactions if: o the NYSE is closed for trading; o trading on the NYSE is restricted by the SEC; o there is an emergency so that it is not reasonably possible to sell securities in the variable divisions or to determine the value of an investment division's assets; or o a governmental body with jurisdiction over the separate account allows suspension by its order. Any SEC rules and regulations that apply determine whether or not these conditions exist. We execute transfers among the variable divisions as of the valuation date of our receipt of your request at our customer service center. We determine death proceeds as of the insured person's date of death. The death proceeds are not affected by changes in the value of the variable divisions after the insured person's death. We pay interest at our stated rate (or at a higher rate if required by law) from the insured person's date of death to the date of payment. We may delay payment from our guaranteed interest division for up to six months, unless state law requires otherwise, of: o surrender proceeds; o withdrawal amounts; or o loan amounts. We pay interest at our declared rate (or at a higher rate if required by law) from the date we receive the request if we delay payment more than 30 days. NOTIFICATION AND CLAIMS PROCEDURES Except for certain authorized telephone requests, we must receive in writing any election, designation, change, assignment or request made by the owner. You must use a form acceptable to us. We are not liable for actions taken before we receive and record the written notice. We may require you to return your policy for policy change, or at the time of surrender. If the insured person dies while your policy is in force, please let us or your registered representative know as soon as possible. We will immediately send you instructions on how to make a claim. As proof of the deceased insured person's death, we may require you to provide proof of the deceased insured person's age, and a certified copy of the deceased insured person's death certificate. The beneficiary(ies) and the deceased insured person's next of kin may need to sign authorization forms. These forms allow us to get information about the deceased insured person. This information may include medical records of doctors and hospitals used by the deceased insured person. TELEPHONE PRIVILEGES If your policy was delivered on or after May 1, 1999, telephone privileges are automatically provided to - -------------------------------------------------------------------------------- Strategic Advantage II 42 you and your agent or registered representative, unless you tell us otherwise. If you do not wish to have this feature, decline it on the application or contact our customer service center. If your policy was delivered before May 1, 1999, you may choose telephone privileges by completing our customer service form and returning it to our customer service center. Telephone privileges allow you or your agent or registered representative, if applicable, to call our customer service center to: o make transfers; o change premium allocations; o change features in your dollar cost averaging and automatic rebalancing programs; o partial withdrawals; or o request a policy loan. Our customer service center uses reasonable procedures to make sure that instructions received by telephone are genuine. These procedures may include: 1. requiring some form of personal identification; 2. providing written confirmation of any transactions; and 3. tape recording telephone calls. By accepting automatic telephone privileges, you authorize us to record your telephone calls to us. If we use reasonable procedures to confirm instructions, we are not liable for losses due to unauthorized or fraudulent instructions. We may discontinue this privilege at any time. NON-PARTICIPATION Your policy does not participate in the surplus earnings of Security Life. DISTRIBUTION OF THE POLICIES The principal underwriter (distributor) for our policies is ING America Equities, Inc. 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. for acting as the principal underwriter under a distribution agreement. We sell our policies through registered representatives of other broker-dealers including, but not limited to: 1. VESTAX Securities Corporation, a subsidiary of ING America Insurance Holdings, Inc.; 2. Locust Street Securities, Inc., an affiliate of Security Life of Denver Insurance Company; 3. Multi-Financial Services, Inc., an affiliate of Security Life of Denver Insurance Company; and 4. IFG Network Securities, Inc., a subsidiary of Investors Financial Group, Inc., which is a subsidiary of ING America Insurance Holdings, Inc. These broker-dealers have entered into selling agreements with us. They are registered with the SEC and the NASD. Under these selling agreements, we pay a distribution allowance to broker-dealers, who then pay commissions to the registered representative who sells this policy. During the first policy year, the distribution allowance may be up to 15% of the target premium that you paid and 3% of premiums that you paid over your first target premium. For policy years two through ten, the distribution allowance may be up to 12% of the target premium and 3% of premiums you have paid over the target premium. For policy years after the tenth, the distribution allowance may equal up to 3% of the premiums you have paid. Broker-dealers may receive annual renewal payments of up to 0.15% of the net account value beginning in the sixth year of your policy. Compensation arrangements vary among broker-dealers and depend on particular circumstances. In addition to the above-described compensation, we may pay: o override payments; o expense allowances; o bonuses; o special marketing fees; o wholesaler fees and marketing allowances; and o training allowances. - -------------------------------------------------------------------------------- Strategic Advantage II 43 Under our sales incentive programs, as permitted by law, registered representatives may receive other compensation such as: o expense-paid trips; o expense-paid educational seminars; and o merchandise. We pay all distribution and other allowances from our own resources which includes sales charges deducted from premiums. ADVERTISING PRACTICES AND SALES LITERATURE We may use advertisements and sales literature to promote this product, including: o articles on variable life insurance and other information published in business or financial publications; 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 divisions. But past performance is not indicative of future performance of the investment divisions or the policies and is not reflective of the actual investment experience of individual policyowners. We may feature certain investment divisions and their managers, as well as describe asset levels and sales volumes for our products. 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 elect to have the beneficiary(ies) receive the death proceeds other than in one payment. If you make this election, you must do so 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. You may take your net cash surrender value in other than one payment. The investment performance of the variable divisions 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. A periodic payment must be at least $20. Currently, these alternate payment options are available if the proceeds are $2,000 or more. Option I: PAYOUTS FOR A DESIGNATED PERIOD: Payout payments may be made on a monthly, quarterly, semi-annual, or annual basis. These payments may last for a period from five to thirty years. The installment dollar amounts are equal except for any excess interest. Settlement Option Table I in your policy shows the amount of the first monthly payout for each $1,000 of account value applied. Option II: LIFE INCOME WITH PAYOUTS GUARANTEED FOR A DESIGNATED PERIOD: Payout payments may be made on a monthly, quarterly, semi-annual, or annual basis. We make these payments throughout the lifetime of the person receiving the payment, or if longer for guaranteed periods of five, ten, fifteen, or twenty years. You may choose the length of time to receive the guaranteed payments. If you choose a longer guaranteed period, this will decrease the amount of your periodic payments. The installment dollar amounts are equal except for any excess interest. The Settlement Option Table II in your policy shows the amount of the first monthly payout for each $1,000 of account value applied. This option is available only for the ages shown in this table. Option III: HOLD AT INTEREST: Amounts may be left on deposit with us to be paid at the death of the person you choose to receive the payment, or at a chosen earlier date. We will pay interest at our declared rate on any unpaid balance (or at a higher rate if required by law). You may choose interest to be accumulated or be paid on a monthly, quarterly, semi-annual, or annual basis. You may not leave money on deposit for more than 30 years. - -------------------------------------------------------------------------------- Strategic Advantage II 44 Option IV: PAYOUTS OF A DESIGNATED AMOUNT: Payouts will be made until proceeds, including interest, are exhausted. Interest is at a rate we declare (or at a higher rate as required by law). Payout payment choices are on a monthly, quarterly, semi-annual, or annual basis. Option V: OTHER: You, as owner, may ask us to apply money under any options we offer at the time we pay the benefit. The beneficiary(ies) or other person (successor to the beneficiary(ies)) who has the right to receive payments may name someone else to receive amounts that we would otherwise pay to the beneficiary's(ies') estate if he/she/they die(s). The person who has the right to receive payment may name another person, at any time. Designating another person to receive payment may have income, gift or estate tax consequences. Consult a professional tax adviser before making this designation. We must approve an arrangement that involves someone who is to receive payment who is not a human being (for example, a corporation). We must approve a situation involving a person who is to receive payment while acting on behalf of another, called a fiduciary. We base the details of all arrangements on our rules at the time the arrangements are effective. This includes rules on the: o minimum amount we pay under an option; o minimum amounts for installment payments; o withdrawal rights; o right to receive payments over time, which we may offer as a lump sum payment; o naming of people who have the right to receive payment and their successors; and o proof of age and survival. ADMINISTRATIVE INFORMATION ABOUT THE POLICY VOTING PRIVILEGES We invest the variable divisions' assets in shares of investment portfolios. We are the legal owner of the shares held in the variable account and we have the right to vote on certain issues. Among other things, we may vote on issues described in the fund's current prospectus, or issues requiring a vote by shareholders under the Investment Company Act of 1940. Even though we own the shares, we give you the opportunity to tell us how to vote the number of shares attributable to your account value. We count fractional shares. If you have a voting interest, we send you proxy material and a form on which to give us your voting instructions. Each investment portfolio's shares have the right to one vote. The votes of all investment portfolios are cast together on a collective basis, except on issues for which the interests of the portfolios differ. In these cases, voting is done on a portfolio-by-portfolio basis. Examples of issues that require a portfolio-by- portfolio vote are: 1. changes in the fundamental investment policy of a particular investment portfolio; or 2. approval of an investment advisory agreement. We vote the shares in accordance with your instructions at meetings of investment portfolio shareholders. We vote any investment portfolio shares that are not attributable to policies, and any investment portfolio shares for which the owner does not give us instructions, the same way we vote as if we did receive owner instructions. We reserve the right to vote investment portfolio shares without getting instructions from policy owners if the federal securities laws, regulations, or their interpretations change to allow this. You may only instruct us on matters relating to the investment portfolios corresponding to divisions in which you have invested assets as of the record date set by the investment portfolio's Board for the portfolio's shareholders meeting. We determine the number of investment portfolio shares in each division that we attribute to your policy by dividing your account value allocated to that division by the net asset value of one share of the matching investment portfolio. - -------------------------------------------------------------------------------- Strategic Advantage II 45 MATERIAL CONFLICTS We are required to track events to identify any material conflicts arising from using investment portfolios for both variable life and variable annuity separate accounts. The boards of the investment portfolios, Security Life, and other insurance companies participating in the investment portfolios, have this same duty. There may be a material conflict if: o state insurance law or federal income tax law changes; o investment management of an investment portfolio changes; or o voting instructions given by owners of variable life insurance policies and variable annuity contracts differ. The investment portfolios may sell shares to certain qualified pension and retirement plans qualifying under Code Section 401. These include cash or deferred arrangements under Code Section 401(k). Therefore, there is a possibility that a material conflict may arise between the interests of owners in general, or between certain classes of owners, and these retirement plans or participants in these retirement plans. If there is a material conflict, we have the duty to determine appropriate action, including removing the portfolios involved from our variable investment options. We may take other action to protect policy owners. This could mean delays or interruptions of the variable operations. When state insurance regulatory authorities require us, 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 the 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 divisions. We cast votes credited to amounts in the variable divisions, but not credited to policies in the same proportion as votes cast by owners. RIGHT TO CHANGE OPERATIONS Subject to state limitations, we may from time to time make any of the following changes to our separate account: 1. Change the investment objective. 2. Offer additional divisions which will invest in portfolios we find appropriate for policies we issue. 3. Eliminate variable divisions. 4. Combine two or more variable divisions. 5. Substitute a new investment portfolio for a portfolio in which the division currently invests. A substitution may become necessary if, in our judgment: o a portfolio no longer suits the purposes of your policy; o there is a change in laws or regulations; o there is a change in a portfolio's investment objectives or restrictions; o the portfolio is no longer available for investment; or o another reason we deem a substitution is appropriate. 6. Transfer assets related to your policy class to another separate account. 7. Withdraw the separate account from registration under the 1940 Act. 8. Operate the separate account as a management investment company under the 1940 Act. 9. Cause one or more divisions to invest in a mutual fund other than, or in addition to, the investment portfolios. 10. Stop selling these policies. 11. End any employer or plan trustee agreement with us under the agreement's terms. 12. Limit or eliminate any voting rights for the separate account. 13. Make any changes required by the 1940 Act, or its rules or regulations. We will not make a change until it is effective with the SEC and approved by the appropriate state insurance departments, if necessary. We will notify you of changes. If you then wish to transfer the amount you have in the affected division to another variable division, or to the guaranteed interest - -------------------------------------------------------------------------------- Strategic Advantage II 46 division, you may do so free of charge. Just notify us at our customer service center. REPORTS TO OWNERS At the end of each policy year we send a report to you that shows: o your total net policy death benefit (your stated death benefit plus adjustable term insurance rider death benefit, if any); o your account value; o your policy loans, if any, plus accrued interest; o your net cash surrender value; o information about the variable divisions; and o your account transactions during the previous year showing net premiums, transfers, deductions, loans, or withdrawals. We also send semi-annual reports with financial information on the investment portfolios, including a list of the investment holdings of each portfolio to you. We send confirmation notices to you throughout the year for certain policy transactions. CHARGES, DEDUCTIONS AND REFUNDS The amount of a charge may not exactly correspond to the cost incurred by us to provide the service or benefits associated with the particular policy. Many charges are not at "cost". For example, the sales charges may not cover all of the sales and distribution expenses actually incurred by us. Proceeds from other charges, including the mortality and expense risk charge or cost of insurance charges, may be used in part to cover such expenses. DEDUCTIONS FROM PREMIUMS We consider any payment we receive to be a premium if the insured person is not yet age 100, and you do not have an outstanding loan. After we deduct certain expenses from your premium payment, we add the remaining net premium to your account value. TAX CHARGES We pay state and local taxes in almost all states. These taxes vary in amount from state to state and may vary from jurisdiction to jurisdiction within a state. Currently, state and local taxes range from 0.5% to 5% with some states not imposing these types of taxes. We currently deduct an amount equal to 2.5% of each premium payment you make to cover these taxes. The 2.5% rate approximates the average tax rate we expect to pay in all states. We also currently deduct an amount equal to 1.5% of each premium payment you make to cover our estimated costs for the federal income tax treatment of deferred acquisition costs. This cost is determined solely by the amount of life insurance premiums we receive. We reserve the right to increase or decrease your premium expense charge for taxes as a result of changes in the tax law, within limits set by state law. We also reserve the right to increase or decrease your premium expense charge for the federal income tax treatment of deferred acquisition costs based on any change in that cost to us. SALES CHARGE We deduct a percentage from each of your premium payments to compensate us for the costs we incur in selling the policies. We base the deducted percentage on the amount of premium you have paid and the number of years since the policy date or an increase in your coverage. For each of the first ten policy years, this charge equals 12% of the premiums you have paid up to the target premium and 3% of premiums you have paid in excess of the target premium. After the tenth policy year, the sales charge is 3% of all premiums you have paid. Target premiums are not based on the scheduled premium. Target premiums are actuarially determined based on the age, sex and premium class of the insured person. The target premium for your policy and any segments added since the policy date are listed in the schedule we will provide to you. SEE PREMIUMS, PAGE 21. These premium deductions are a part of the total sales charge. To determine your applicable sales charge, premiums you pay after an increase in stated death benefit are allocated to your policy segments in the same proportion as the guideline annual premium (defined by federal income tax law) for each segment - -------------------------------------------------------------------------------- Strategic Advantage II 47 bears to the total guideline annual premium for your stated death benefit. The sales charge covers the costs of distribution, preparing our sales literature, promotional expenses, and other direct and indirect expenses. The amount charged is not specifically related to sales expenses in a particular year. We may reduce or waive the sales charge for certain group or sponsored arrangements or for corporate purchasers. DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT MORTALITY AND EXPENSE RISK CHARGE We deduct a charge each day for the mortality and expense risks we assume. This charge is 0.002055% per day of the amount you have in the variable divisions. This is an annual rate of 0.75%. 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 divisions are greater than the amount we estimated when we set these charges. The mortality and expense risk charge does not apply to your account value which is invested in the guaranteed interest division or the loan division. MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE We deduct charges from your account value on each monthly processing date. On or before November 1, 1999, we will make available to you the option to designate a single withdrawal investment division from which we will take your monthly deductions. You may designate a withdrawal investment division at policy application or at a later time. You may choose to have us withdraw the monthly deduction from the guaranteed interest division or the variable divisions in which you have amounts. You may not use the loan division as your designated withdrawal investment division from which to deduct monthly deductions. If you do not choose a withdrawal investment division from which to deduct monthly deductions, or if the amount you have in your designated withdrawal investment division is not enough to cover the monthly deductions, these charges are taken from the variable and guaranteed interest divisions in the same proportion that your account value in each division has to your total net account value as of the monthly processing date. If you change your designated withdrawal investment division from which monthly deductions are deducted, we may consider this a premium allocation change for which there may be a charge. SEE POLICY TRANSACTION FEES, PAGE 50. DIVISIONS FROM WHICH WE DEDUCT CHARGES
MONTHLY CHARGES: COST OF INSURANCE CHARGES, RIDER CHARGES, LOANS AND ADMINISTRATION FEES TRANSACTION FEES PARTIAL WITHDRAWALS - ----------- ----------------------------------------- ---------------------------- ----------------------------------- CHOICE May choose one withdrawal investment Proportionally among May choose any withdrawal division, including guaranteed interest variable divisions and investment division or combination division when this option is available guaranteed interest division of investment divisions, subject to requirements - ----------- ----------------------------------------- --------------------------- ----------------------------------- DEFAULT Proportionally among variable divisions Proportionally among Proportionally among variable and guaranteed interest division variable divisions and divisions and guaranteed interest guaranteed interest division division
- -------------------------------------------------------------------------------- Strategic Advantage II 48 POLICY CHARGE The initial policy charge is $10 per month for the first three years of your policy. This charge compensates us for such costs as: o application processing; o medical examinations; o establishment of policy records; and o insurance underwriting costs. MONTHLY ADMINISTRATIVE CHARGE For this policy, we charge a per month administrative charge of $3 plus $0.025 per $1,000 for the greater of the stated death benefit, or the target death benefit. The per $1,000 charge is currently limited to $30 per month. 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 under the policy, including the expected cost of paying death proceeds that are more than your account value at the insured person's death. We base the cost of insurance charge rates on the insured person's age, gender, ratings and premium class on the policy for each segment date, or on the date you add a base coverage segment. The cost of insurance charge is equal to 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 the amount of your account value after we deduct your policy and rider charges due on that date, other cost of insurance charges for the base death benefit, adjustable term insurance rider and waiver of cost of insurance rider. If your base death benefit at the beginning of a month increases (due to requirements of the federal income tax law definition of life insurance), the net amount at risk for your base death benefit for that month also increases. Similarly, the net amount at risk for your adjustable term insurance rider decreases. This means that the amount of your cost of insurance charge varies from month to month with changes in your net amount at risk, changes in the death benefit and with the increasing age of the insured person. We allocate the net amount at risk to any segments in the same proportion that each segment has to the total stated death benefit for all coverage segments as of the monthly processing date. We apply unisex rates where appropriate under the law. This currently includes the State of Montana and policies purchased by employers and employee organizations in connection with employment-related insurance or benefit programs. Separate cost of insurance rates apply to: o each segment of the base death benefit; and o your adjustable term insurance rider. These rates are never more than the guaranteed maximum rates shown in your policy; however, they may change from time to time. The guaranteed maximum rates are based on the 1980 Commissioner's Standard Ordinary Sex Distinct Mortality Table. The maximum rates for the initial and any new segment will be printed in the schedule which we will provide to you. There are no cost of insurance charges after the insured person reaches age 100. GUARANTEED ISSUE We may offer policies on a guaranteed issue basis for certain group or sponsored arrangements. When this happens, we issue these policies up to a preset face amount with reduced evidence of insurability requirements. Guaranteed issue policies may carry a different mortality risk to us compared with policies that are fully underwritten. So, we may charge different cost of insurance rates for guaranteed issue policies. The cost of insurance rates under these circumstances may depend on the: o issue age of the insured people; o risk class of the insured people; o size of the group; and o total premium the group pays. Generally, most guaranteed issued policies have higher overall charges for insurance than a similar - -------------------------------------------------------------------------------- Strategic Advantage II 49 underwritten policy issued in the standard nonsmoker, or standard smoker class. This means that the insured person in a group or sponsored arrangement could get individually underwritten insurance coverage at a lower overall cost. CHARGES FOR ADDITIONAL BENEFITS On each monthly processing date, we deduct the cost of additional benefits under your riders. SEE ADDITIONAL BENEFITS, PAGE 28. CHANGES IN MONTHLY CHARGES Changes we make in the cost of insurance charges or charges for additional benefits are for a class of insured persons. We base the new charge on changes in expectations about: o investment earnings; o mortality; o the time policies remain in effect; o expenses; and o taxes. New monthly charges will never be more than the guaranteed maximum rates shown in your policy. 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 will charge a one-time administrative fee of $200. This charge compensates us for maintaining and servicing your policy until the death of the insured person. We then no longer charge you a monthly administrative fee. POLICY TRANSACTION FEES We also charge fees for certain transactions you may make under your policy. We take 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 We charge a service fee of $25 against your account value for each partial withdrawal you take to cover our costs. SEE PARTIAL WITHDRAWALS, PAGE 36. TRANSFERS There is a $25 fee for each additional transfer over twelve per policy year to cover our costs. If you include multiple transfers in one transfer request, it counts as one transfer. There is no transfer fee if you are transferring your account value into the guaranteed interest division under the right to exchange feature in your policy. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 33, AND RIGHT TO EXCHANGE POLICY, PAGE 30. ILLUSTRATIONS The first policy illustration you request in a policy year is free. After that, we may charge a fee of up to $25 for each additional policy illustration you request. PREMIUM ALLOCATION CHANGE You may make five free premium allocation changes per policy year. After the five free premium allocation changes, we charge you $25 for each additional premium allocation change per policy year. PERSISTENCY REFUND Where state law allows us, we pay long-term policy owners a persistency refund. Each month your policy remains in force after your tenth policy anniversary, we credit your account value with a refund. This refund equals 0.6% of your account value on an annual basis. On a monthly basis, this equals 0.05%. We do not guarantee that we will pay a persistency refund on the guaranteed interest division. If applicable, we add the persistency refund to the variable and guaranteed interest divisions, but not the loan division, in the same proportion that your account value in each division has to your net account value as of the monthly processing date. If we pay a persistency refund on the guaranteed interest division, we will pay it to you if your policy is in the continuation of coverage period. - -------------------------------------------------------------------------------- Strategic Advantage II 50 Here are two examples of how the persistency refund may affect your account value each month: EXAMPLE 1: YOUR POLICY HAS NO LOAN: o account value = $10,000 (all in the variable divisions) o monthly persistency refund rate = .0005 o persistency refund = 10,000 x .0005 = $5.00 Before After Persistency Persistency Refund Refund ------ ------ Variable divisions $10,000.00 $10,005.00 EXAMPLE 2: YOUR POLICY DOES HAVE A LOAN: o account value = $10,000 o account value in the variable divisions = $6,000 o account value in the loan division = $4,000 o monthly persistency refund rate = .0005 o persistency refund = 10,000 x .0005 = $5.00 Before After Persistency Persistency Refund Refund ------ ------ Variable divisions $6,000.00 $6,005.00 Loan $4,000.00 $4,000.00 REFUND OF SALES CHARGES If you surrender your policy within the first two policy years and your policy has not lapsed, we will refund a portion of the sales charges we previously deducted from the premiums you have paid. In the first policy year, the amount of the refund is guaranteed to be at least 5% of the premiums you have paid. In the second policy year, the refund is guaranteed to be at least 2.5% of the premiums you have paid in the first policy year. The refund of sales charge is guaranteed only for the first two policy years. FEES AND EXPENSES OF THE INVESTMENT PORTFOLIOS The variable 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. The following table describes these investment management fees and other direct expenses of the investment portfolios. 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. - -------------------------------------------------------------------------------- Strategic Advantage II 51
INVESTMENT PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS) /1/ Fees and Investment Total Expenses Total Net Management Other Portfolio Waived or Portfolio Portfolio Fees Expenses Expenses Reimbursed Expenses AIM VARIABLE INSURANCE FUNDS, INC. AIM V.I. Capital Appreciation Fund 0.62% 0.05% 0.67% NA 0.67% AIM V.I. Government Securities Fund 0.50% 0.26% 0.76% NA 0.76% THE ALGER AMERICAN FUND Alger American Growth Portfolio 0.75% 0.04% 0.79% NA 0.79% Alger American Leveraged AllCap Portfolio 0.85% 0.11%/2/ 0.96% NA 0.96% Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84% NA 0.84% Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89% NA 0.89% FIDELITY VARIABLE INSURANCE PRODUCTS FUND VIP Growth Portfolio 0.59% 0.09% 0.68% NA 0.68%/4/ VIP Money Market Portfolio 0.20% 0.10% 0.30% NA 0.30% VIP Overseas Portfolio 0.74% 0.17% 0.91% NA 0.91%/4/ FIDELITY VARIABLE INSURANCE PRODUCTS FUND II VIP II Asset Manager Portfolio 0.54% 0.10% 0.64% NA 0.64%/4/ VIP II Index 500 Portfolio 0.24% 0.11% 0.35% 0.07% 0.28%/5/ INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund (formerly VIF-Industrial Income Portfolio) 0.75% 0.42% 1.17%/3/ 0.24%/6/ 0.93% INVESCO VIF-High Yield Fund 0.60% 0.47% 1.07% NA 1.07% INVESCO VIF-Small Company Growth Fund 0.75% 11.92% 12.67%/3/ 10.80%/7/ 1.87% INVESCO VIF-Total Return Fund 0.75% 0.49% 1.24%/3/ 0.07%/8/ 1.17% INVESCO VIF-Utilities Fund 0.60% 1.24% 1.84%/3/ 0.76%/9/ 1.08% NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Growth Portfolio 0.83% 0.09% 0.92% NA 0.92% Limited Maturity Bond Portfolio 0.65% 0.11% 0.76% NA 0.76% Partners Portfolio 0.78% 0.06% 0.84% NA 0.84% VAN ECK WORLDWIDE INSURANCE TRUST Worldwide Bond Fund 1.00% 0.15% 1.15% NA 1.15% Worldwide Emerging Markets Fund 1.00% 0.61% 1.61%/3/ 0.11%/10/ 1.50% Worldwide Hard Assets Fund 1.00% 0.20% 1.20%/3/ NA/11/ 1.20% Worldwide Real Estate Fund 1.00% 4.32% 5.32%/3/ 4.43%/12/ 0.89%
/1/ The preceding portfolio expense information was provided to us by the portfolios, and we have not independently verified such information. These portfolio expenses are not direct charges against division assets or reduction from contract values; rather these portfolio expenses are taken into consideration in computing each underlying portfolio's net asset value, which is the share price used to calculate the unit values of the divisions. For a more complete description of the portfolios' costs and expenses, see the prospectuses for the portfolios. /2/ Included in other expenses of the Alger American Leveraged AllCap Portfolio is 0.03% of interest expense. /3/ Certain expenses of the Fund are being voluntarily absorbed by the Funds. - -------------------------------------------------------------------------------- Strategic Advantage II 52 /4/ A Portion of the brokerage commissions that certain funds pay was used to reduce fund expenses. In addition, certain funds have entered into arrangements with their custodian whereby credits realized, as a result of uninvested cash balances were used to reduce custodian expenses. Including these reductions, the total portfolio expenses presented in the table would have been 0.66% for Growth Portfolio, 0.89% for Overseas portfolio and 0.63% for Asset Manager Portfolio. /5/ FMR agreed to reimburse a portion of Index 500 Portfolio's expenses during the period. Without this reimbursement, the funds' total portfolio expenses would have been 0.35%. /6/ Certain expenses of the VIF-Equity Income Fund (formerly VIF-Industrial Income Fund) are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Equity Income Fund's "Other Expenses" and "Total Portfolio Expenses" were 0.18% and 0.93% respectively. This commitment can be changed at any time following consultation with the board of directors. /7/ Certain expenses of the VIF-Small Company Growth Fund are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Small Company Growth Fund's "Other Expenses" and "Total Portfolio Expenses" were 1.12% and 1.87% respectively. This commitment can be changed at any time following consultation with the board of directors. /8/ Certain expenses of the VIF-Total Return Fund are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Total Return Fund's "Other Expenses" and "Total Portfolio Expenses" were 0.42% and 1.17% respectively. This commitment can be changed at any time following consultation with the board of directors. /9/ Certain expenses of the VIF-Utilities Fund are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Utilities Fund's "Other Expenses" and "Total Portfolio Expenses" were 0.48% and 1.08% respectively. This commitment can be changed at any time following consultation with the board of directors. /10/ Van Eck Associates Corporation (the "Advisor") assumed expenses exceeding 1.50% of the Fund's average daily net assets. Due to this arrangement, the actual expenses incurred were "Total Portfolio Expenses" of 1.50%. /11/ The Fund's "Other Expenses" were 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. Due to this arrangement the actual expenses incurred were "Other Expenses" of 0.16% and "Total Portfolio Expenses" of 1.16%. /12/ Van Eck Associates Corporation (the "Advisor") waived its management fees and assumed certain expenses for the period January 1, 1998 to February 28, 1998. The Advisor also assumed expenses exceeding 1.00% of the Fund's average daily net assets for the period March 1,1998 to December 31, 1998. 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. Due to this arrangement the actual expenses incurred were "Investment Management Fees" of 0.00%, "Other Expenses" of 0.89% and "Total Portfolio Expenses" of 0.89%. /13/ Neuberger Berman Advisers Management Trust (the "Trust") is divided into portfolios ("Portfolios"), each of which invests all of its net investable assets in a corresponding series ("Series") of Advisers Managers Trust. The figures reported under "Investment Management and Administration Fees" include the aggregate of the administration fees paid by the Portfolio and the management fees paid by its corresponding Series. Similarly, the "Other Expenses" includes all other expenses of the Portfolio and its corresponding Series. See "Expenses" in the Trust's Prospectus. Expenses may reflect expense reimbursement. NBMI has undertaken to reimburse certain operating expenses, including compensation of NBMI and excluding taxes, interest, extraordinary expense, brokerage commissions and transaction costs, that exceed, in the aggregate, 1% of the Portfolios' average daily net asset value. These expense reimbursement policies are subject to termination upon 60 days written notice to the Portfolios. - -------------------------------------------------------------------------------- Strategic Advantage II 53 GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS Individuals, corporations or other institutions may purchase this policy. For group or sponsored arrangements (including employees of Security Life of Denver, its affiliates and appointed sales agents), corporate purchasers, or special exchange programs which we may offer from time to time, we may reduce or waive the: o administrative charge; o minimum stated death benefit; o minimum target death benefit; o minimum annual premium; o target premium; o sales charges; o cost of insurance charges; or o other charges normally assessed. We can reduce or waive these items due to expected economies under a group or sponsored arrangement or with a corporate purchaser. Group arrangements include those in which there is a trustee, an employer or an association. The group either purchases policies covering a group of individuals on a group basis or endorses 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. Our sales, administration and mortality costs generally vary with the size and stability of the group, among other factors. We take all these factors into account when we reduce charges. A group or sponsored arrangement must meet certain requirements to qualify for reduced charges. We make reductions to charges based on our rules in effect when we approve a policy application form. We may change these rules from time to time. Sponsored arrangements or corporations may have different group premium payments and premium requirements. We will not be unfairly discriminatory in any variation in the administrative charge, or other charges, fees and privileges. These variations are based on differences in costs or services. OTHER CHARGES Under current law, we pay no tax on investment income and capital gains included in variable life insurance policy reserves. This means that no charge is currently made to any variable division for our federal income taxes. If the tax law changes and we have federal income tax chargeable to the variable divisions, we may make such a charge in the future. In most states, we must pay state and local taxes. If these taxes increase, we may charge for such taxes. TAX CONSIDERATIONS The following summary provides a general description of the federal income tax considerations associated with the policy and does not purport to be complete or to cover all tax situations. This discussion is not intended as tax advice. Counsel or other competent tax advisers should be consulted for more complete information. This discussion is based upon our understanding of the present federal income tax laws. No representation is made as to the likelihood of continuation of the present federal income tax laws or as to how they may be interpreted by the Internal Revenue Service. TAX STATUS OF THE POLICY This policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the policy shall be construed in a manner which is consistent with that design. In order to qualify as a life insurance contract for federal income tax purposes and to receive the tax treatment normally accorded life insurance contracts under federal tax law, a policy must satisfy certain requirements which are set forth in Internal Revenue Code Section 7702. However, there is very little guidance, with respect to policies issued on a substandard basis. Nevertheless, we believe it is reasonable to conclude that our policies satisfy the applicable requirements. If it is subsequently determined that a policy does not satisfy the applicable requirements, we will take appropriate and reasonable steps to bring the policy into compliance with such requirements and we reserve the right to restrict policy transactions or modify your policy in order to do so. Section 7702 provides that if one of two alternate tests is met, a policy will be treated as a life insurance policy for federal income tax purposes. These tests are referred to as the "cash value accumulation test" and the "guideline premium/cash value corridor test." - -------------------------------------------------------------------------------- Strategic Advantage II 54 Under the cash value accumulation test, there is no limit to the amount that may be paid in premiums as long as there is enough death benefit in relation to account value at all times. The death benefit at all times must be at least equal to an actuarially determined factor, depending on the insured person's age, sex, and premium class at any point in time, multiplied by the account value. SEE APPENDIX A, PAGE 173, FOR A TABLE OF THE CASH VALUE ACCUMULATION TEST FACTORS. The guideline premium/cash value corridor test provides for a maximum premium in relation to the death benefit, and a minimum "corridor" of death benefit in relation to account value. In most situations, the death benefit that results from the guideline premium/cash value corridor test will ultimately be less than the amount of death benefit required under the cash value accumulation test. SEE APPENDIX B, PAGE 176, FOR A TABLE OF THE GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST FACTORS. This policy allows the owner to choose, at the time of application, which of these tests we will apply to the policy. A choice of tests is irrevocable. Regardless of which test is chosen, we will at all times assure that the policy meets the statutory definition which qualifies the policy as life insurance for federal income tax purposes. In addition, as long as the policy remains in force, increases in account value as a result of interest or investment experience will not be subject to federal income tax unless and until there is a distribution from the policy, such as a partial withdrawal or loan. SEE TAX TREATMENT OF POLICY DEATH BENEFITS, PAGE 55. DIVERSIFICATION REQUIREMENTS In addition to meeting the Code Section 7702 tests, Code Section 817(h) requires separate account investments, such as our variable 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 division 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 divisions' 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 variable 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 variable 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 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 loans are taken from or secured by a policy, the tax consequences depend on whether or not the policy is a "modified endowment contract." - -------------------------------------------------------------------------------- Strategic Advantage II 55 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 paid 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: 1. All distributions other than death benefits, including distributions upon surrender and withdrawals, from a modified endowment contact will be treated first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. 2. Loans taken from or secured by a policy classified as a modified endowment contract are treated as distributions and taxed first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. 3. A 10% additional income tax penalty may be imposed on the distribution amount subject to income tax. Consult a tax adviser to determine whether or not you may be subject to this penalty tax. DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS Distributions other than death benefits from a policy that is not classified as a modified endowment contract are generally treated first as a recovery of the policy owner's investment in the policy. Only after the recovery of all investment in the policy, is there taxable income. However, certain distributions which must be made in order to enable the policy to continue to qualify as a life insurance contract for federal income tax purposes, if policy benefits are reduced during the first fifteen policy years, may be treated in whole or in part as ordinary income subject to tax. Loans from or secured by a policy that is not a modified endowment contract are generally not treated as distributions. Finally, neither distributions from, nor loans 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. Before taking out a policy loan, you should consult a tax adviser as to the tax consequences. - -------------------------------------------------------------------------------- Strategic Advantage II 56 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. We will give you advance notice of this change. The tax law limits the amount we can charge for mortality costs and other expenses used to calculate whether your policy qualifies as life insurance for federal income tax purposes. We must base these calculations on reasonable mortality charges and other charges reasonably expected to be paid. The Treasury issued proposed regulations on what it considers reasonable mortality charges. We believe that the charges used for your policy should meet the Treasury's current requirement for "reasonableness." We reserve the right to make changes to the mortality charges if future regulations have standards which make changes necessary in order to continue to qualify your policy as life insurance for federal income tax purposes. Additionally, assuming that you do not want your policy to be or to become a modified endowment contract, we include a policy endorsement under which we have the right to amend your policy, including riders. We do this to attempt to enable your policy to continue to meet the seven-pay test for federal income tax purposes. If the policy premium you pay is more than the seven-pay limit, we have the right to remove any excess premium or to make any appropriate adjustments to your policy's account value and death benefit. It is not clear, however, whether we can take effective action pursuant to this endorsement under all possible circumstances to prevent a policy that has exceeded the premium limitation from being classified as a modified endowment contract. Any increase in your death benefit will cause an increase in your cost of insurance charges. OTHER Policy owners may use our policies in various arrangements, including: o qualified plans; o non-qualified deferred compensation or salary continuance plans; o split dollar insurance plans; o executive bonus plans; o retiree medical benefit plans; and o other plans. The tax consequences of these plans may vary depending on the particular facts and circumstances of each arrangement. If you want to use any of your policies in this type of arrangement, you should consult a qualified tax adviser regarding the tax issues of your particular arrangement. - -------------------------------------------------------------------------------- Strategic Advantage II 57 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 Advantage II 58 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES, AND ACCUMULATED PREMIUMS The following tables are intended to show how the policy works. This includes how benefits and values can vary over a long period of time. Each table also compares these values with total premiums paid with interest. The policies illustrated include:
Definition Death of Life Stated Target Smoker Benefit Insurance Death Death Gender Age Status Option Test Benefit Premium Benefit - ------ --- ------ ------ ---- ------- ------- ------- Male 45 Non-smoker 1 CVAT 300,000 $5,750 300,000 Preferred Male 45 Non-smoker 1 CVAT 150,000 $5,750 300,000 Preferred Male 45 Non-smoker 1 GP 300,000 $5,750 300,000 Preferred
The tables show how death benefits, account values, and cash 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 or unisex rates. These illustrations assume there are no policy loans. We illustrate premium payments as if they were made at the beginning of the year. The third column of each table shows what would happen if an amount equal to the assumed premiums earned interest, after taxes, of 5% compounded annually. The net investment return on your policy is lower than the gross investment return on the variable divisions. This is due to the mortality and expense risk charge, and the portfolio charge for management fees and portfolio expenses. We show the effect of the net investment return in the in the amounts for death benefits, account values and cash surrender values. The tables reflect annual investment management fees of 0.6643% 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, 1998. We assume other portfolio expenses at the rate of 0.2531% of the portfolios' average daily net assets. This is an average of all the portfolios' other expenses for the year ending December 31, 1998 after any absorption by investment portfolio managers has been made. The average of all portfolios' total expenses is 0.9174%. Actual fees vary by portfolio. The portfolio fees and expenses used in the illustrations are the net amounts shown after absorption of fees and expenses by the portfolio's investment manager. Absent such reimbursement, the fees and expenses used in the illustrations would be higher. The tables assume that the current expense reimbursement arrangements will continue. However, they may not continue. - -------------------------------------------------------------------------------- Strategic Advantage II 59 The effect of these portfolio charges and expenses, and mortality and expense risk charges results in a net rate of return of: o (1.66)% on a 0% gross rate of return; o 4.30% on a 6% gross rate of return; and o 10.25% on a 12% gross rate of return. The tables assume that charges have been deducted including deductions for premiums, cost of insurance rider charges, monthly deductions and administrative and sales charges. The tables show charges at our current rates which includes a persistency refund. The tables also show charges at the maximum rates we guarantee in our policies. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 48. The tables reflect that we do not currently charge against the variable account for state or federal taxes. If we charge for the taxes in the future, it will take a higher gross rate of return than the rates shown to produce the same death benefits, account values, and cash surrender values. If we are asked to do so, we will give you a comparable personal illustration based on: o the insured person's age and gender; o standard premium class assumptions; o initial stated death benefit; o the chosen death benefit option; o scheduled premiums consistent with your policy form; and o special features elected on your policy. At issue, we deliver an individualized illustration showing the scheduled premium you chose and the insured person's actual risk class. After we issue the policy, if you ask us to, we will give you an illustration of future policy benefits. We base these hypothetical future benefits on both guaranteed and current cost factor assumptions and actual account value. - -------------------------------------------------------------------------------- Strategic Advantage II 60 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 1 5750 6038 3176 3463 300000 3651 3938 300000 3413 3700 300000 2 5750 12377 6205 6349 300000 7580 7724 300000 6878 7022 300000 3 5750 19033 9085 9085 300000 11813 11813 300000 10391 10391 300000 4 5750 26022 11932 11932 300000 16506 16506 300000 14076 14076 300000 5 5750 33361 14615 14615 300000 21571 21571 300000 17806 17806 300000 6 5750 41067 17130 17130 300000 27047 27047 300000 21578 21578 300000 7 5750 49157 19457 19457 300000 32957 32957 300000 25373 25373 300000 8 5750 57653 21581 21581 300000 39340 39340 300000 29177 29177 300000 9 5750 66573 23482 23482 300000 46231 46231 300000 32972 32972 300000 10 5750 75939 25137 25137 300000 53673 53673 300000 36736 36736 300000 15 5750 130281 32780 32780 300000 108425 108425 300000 59455 59455 300000 20 5750 199636 31419 31419 300000 198768 198768 344266 81269 81269 300000 25 5750 288152 14342 14342 300000 337843 337843 523657 98151 98151 300000 30 5750 401125 -- -- 300000 542005 542005 762058 102309 102309 300000 AGE 65 5750 215655 29524 29524 300000 222335 222335 376190 85183 85183 300000
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE WHICH WERE USED TO CALCULATE THE ABOVE VALUES. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage II 61 PROSPECT: INSURED'S NAME: MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 1 5750 6038 4327 4902 300000 4875 5450 300000 4601 5176 300000 2 5750 12377 8463 9225 300000 10124 10886 300000 9277 10039 300000 3 5750 19033 12450 12967 300000 15828 16346 300000 14072 14590 300000 4 5750 26022 16427 16427 300000 22181 22181 300000 19133 19133 300000 5 5750 33361 20290 20290 300000 29140 29140 300000 24365 24365 300000 6 5750 41067 24044 24044 300000 36772 36772 300000 29778 29778 300000 7 5750 49157 27692 27692 300000 45152 45152 300000 35383 35383 300000 8 5750 57653 31236 31236 300000 54362 54362 300000 41192 41192 300000 9 5750 66573 34678 34678 300000 64490 64490 300000 47212 47212 300000 10 5750 75939 38029 38029 300000 75646 75646 300000 53467 53467 300000 15 5750 130281 56683 56683 300000 158537 158537 311049 93460 93460 300000 20 5750 199636 70971 70971 300000 293983 293983 509179 141980 141980 300000 25 5750 288152 79925 79925 300000 511374 511374 792629 202466 202466 313822 30 5750 401125 81770 81770 300000 858572 858572 1207153 276450 276450 388689 AGE 65 5750 215655 73213 73213 300000 329663 329663 557790 152965 152965 300000
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage II 62 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $150000 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $150000 ANNUAL PREMIUM: $5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 1 5750 6038 3173 3461 300000 3648 3936 300000 3410 3698 300000 2 5750 12377 6201 6345 300000 7575 7719 300000 6873 7017 300000 3 5750 19033 9078 9078 300000 11804 11804 300000 10384 10384 300000 4 5750 26022 11922 11922 300000 16493 16493 300000 14065 14065 300000 5 5750 33361 14602 14602 300000 21554 21554 300000 17791 17791 300000 6 5750 41067 17114 17114 300000 27024 27024 300000 21559 21559 300000 7 5750 49157 19438 19438 300000 32929 32929 300000 25349 25349 300000 8 5750 57653 21558 21558 300000 39304 39304 300000 29149 29149 300000 9 5750 66573 23455 23455 300000 46187 46187 300000 32938 32938 300000 10 5750 75939 25106 25106 300000 53618 53618 300000 36695 36695 300000 15 5750 130281 32718 32718 300000 108292 108292 300000 59364 59364 300000 20 5750 199636 31305 31305 300000 198523 198523 343842 81084 81084 300000 25 5750 288152 14137 14137 300000 337469 337469 523076 97788 97788 300000 30 5750 401125 -- -- 300000 541441 541441 761266 101573 101573 300000 AGE 65 5750 215655 29395 29395 300000 222068 222068 375738 84971 84971 300000
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE WHICH WERE USED TO CALCULATE THE ABOVE VALUES. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage II 63 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $150000 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $150000 ANNUAL PREMIUM: $5750.00 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 1 5750 6038 4347 4922 300000 4896 5471 300000 4621 5196 300000 2 5750 12377 8533 9295 300000 10202 10963 300000 9351 10113 300000 3 5750 19033 12580 13098 300000 15979 16496 300000 14212 14730 300000 4 5750 26022 16623 16623 300000 22419 22419 300000 19349 19349 300000 5 5750 33361 20553 20553 300000 29477 29477 300000 24663 24663 300000 6 5750 41067 24374 24374 300000 37220 37220 300000 30162 30162 300000 7 5750 49157 28082 28082 300000 45717 45717 300000 35852 35852 300000 8 5750 57653 31676 31676 300000 55045 55045 300000 41740 41740 300000 9 5750 66573 35154 35154 300000 65290 65290 300000 47829 47829 300000 10 5750 75939 38522 38522 300000 76552 76552 300000 54136 54136 300000 15 5750 130281 57150 57150 300000 160078 160078 314072 94317 94317 300000 20 5750 199636 71412 71412 300000 296497 296497 513532 143099 143099 300000 25 5750 288152 80340 80340 300000 515445 515445 798940 203938 203938 316103 30 5750 401125 82155 82155 300000 865129 865129 1216371 278245 278245 391213 AGE 65 5750 215655 73650 73650 300000 332432 332432 562476 154149 154149 300000
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage II 64 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 GUIDELINE PREMIUM TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 1 5750 6038 3176 3463 300000 3651 3938 300000 3413 3700 300000 2 5750 12377 6205 6349 300000 7580 7724 300000 6878 7022 300000 3 5750 19033 9085 9085 300000 11813 11813 300000 10391 10391 300000 4 5750 26022 11932 11932 300000 16506 16506 300000 14076 14076 300000 5 5750 33361 14615 14615 300000 21571 21571 300000 17806 17806 300000 6 5750 41067 17130 17130 300000 27047 27047 300000 21578 21578 300000 7 5750 49157 19457 19457 300000 32957 32957 300000 25373 25373 300000 8 5750 57653 21581 21581 300000 39340 39340 300000 29177 29177 300000 9 5750 66573 23482 23482 300000 46231 46231 300000 32972 32972 300000 10 5750 75939 25137 25137 300000 53673 53673 300000 36736 36736 300000 15 5750 130281 32780 32780 300000 108425 108425 300000 59455 59455 300000 20 5750 199636 31419 31419 300000 199551 199551 300000 81269 81269 300000 25 5750 288152 14342 14342 300000 359273 359273 416757 98151 98151 300000 30 5750 401125 -- -- 300000 623807 623807 667474 102309 102309 300000 AGE 65 5750 215655 29524 29524 300000 224831 224831 300000 85183 85183 300000
THE EXPENSE CHARGES AND COST OF INSURANCE RATES WILL NEVER BE GREATER THAN THOSE WHICH WERE USED TO CALCULATE THE ABOVE VALUES. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENT RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage II 65 PROSPECT: INSURED'S NAME: MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE STRATEGIC ADVANTAGE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 GUIDELINE PREMIUM TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 1 5750 6038 4327 4902 300000 4875 5450 300000 4601 5176 300000 2 5750 12377 8463 9225 300000 10124 10886 300000 9277 10039 300000 3 5750 19033 12450 12967 300000 15828 16346 300000 14072 14590 300000 4 5750 26022 16427 16427 300000 22181 22181 300000 19133 19133 300000 5 5750 33361 20290 20290 300000 29140 29140 300000 24365 24365 300000 6 5750 41067 24044 24044 300000 36772 36772 300000 29778 29778 300000 7 5750 49157 27692 27692 300000 45152 45152 300000 35383 35383 300000 8 5750 57653 31236 31236 300000 54362 54362 300000 41192 41192 300000 9 5750 66573 34678 34678 300000 64490 64490 300000 47212 47212 300000 10 5750 75939 38029 38029 300000 75646 75646 300000 53467 53467 300000 15 5750 130281 56683 56683 300000 158545 158545 300000 93460 93460 300000 20 5750 199636 70971 70971 300000 298264 298264 363882 141980 141980 300000 25 5750 288152 79925 79925 300000 531375 531375 616395 202570 202570 300000 30 5750 401125 81770 81770 300000 919428 919428 983788 282139 282139 301889 AGE 65 5750 215655 73213 73213 300000 335977 335977 403172 152965 152965 300000
THE CURRENT COST OF INSURANCE RATES ARE SUBJECT TO CHANGE. ACCOUNT VALUES WILL VARY FROM THOSE ILLUSTRATED IF ACTUAL RATES DIFFER FROM THOSE ASSUMED. CURRENT MORTALITY CHARGE RATES ARE BASED ON CURRENT MORTALITY EXPERIENCE AND ARE NOT DEPENDENT UPON FUTURE IMPROVEMENTS IN UNDERLYING MORTALITY. THE HYPOTHETICAL GROSS RATES OF RETURN SHOWN ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED AS A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS AND POLICY CHARGES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE GUARANTEED INTEREST DIVISION AND THE INVESTMENT EXPERIENCE OF THE DIVISIONS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL GROSS INVESTMENTS RETURNS CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. THE DEATH BENEFIT, ACCOUNT VALUE AND CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES OF RETURN AVERAGED 0.00%, 12.00% AND 6.00% OVER A PERIOD OF YEARS BUT VARIED ABOVE OR BELOW THAT AVERAGE DURING THE PERIOD. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN A DIFFERENT FREQUENCY THAN SHOWN. - -------------------------------------------------------------------------------- Strategic Advantage II 66 ADDITIONAL INFORMATION DIRECTORS AND OFFICERS Set forth below is information regarding the directors and principal officers of Security Life of Denver Insurance Company. Security Life's address, and the business address of each person named, except as noted with one or two asterisks (*/**), is Security Life Center, 1290 Broadway, Denver, Colorado 80203-5699. The business address of each person denoted with one asterisk (*) is ING North America Insurance Corporation, 5780 Powers Ferry Road, Atlanta, Georgia 30327-4390. The business address of each person denoted with two asterisks (**) is Security Life of Denver Insurance Company, 9140 Arrowpoint Blvd., Suite 400, Charlotte, North Carolina 28273. Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Stephen M. Christopher Chairman, President and Chief Executive Officer Thomas F. Conroy Director, President, Security Life Reinsurance Michael W. Cunningham* Director, Executive Vice President Linda B. Emory* Director James L. Livingston, Jr. Executive Vice President and Chief Operating Officer Jeffrey R. Messner Executive Vice President and Chief Marketing Officer Jess A. Skriletz President, ING Institutional Markets John R. Barmeyer* Senior Vice President, Chief Legal Officer Wayne D. Bidelman Senior Vice President, CCRC Eugene L. Copeland Senior Vice President and General Counsel, Security Life Reinsurance and ING Institutional Markets Arnold A. Dicke Senior Vice President, Chief Actuary, ING Reinsurance Carol D. Hard Senior Vice President, Variable Products Philip R. Kruse Senior Vice President Charles LeDoyen** Senior Vice President, Structured Settlements Timothy P. McCarthy Senior Vice President, Marketing Services - -------------------------------------------------------------------------------- Strategic Advantage II 67 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Gregory G. McGreevey Senior Vice President, New Products and Market Development, ING Institutional Markets Jeffery W. Seel* Senior Vice President, Chief Investment Officer Lawrence D. Taylor Senior Vice President, Chief Actuary Louis N. Trapolino Senior Vice President, Distribution William D. Tyler* Senior Vice President, Chief Information Officer Katherine Anderson Vice President, Chief Product Actuary Carole A. Baumbusch Vice President, Special Projects Evelyn A. Bentz Vice President, M Financial Sales Thomas Kirby Brown, Jr. Vice President, Operations, ING Institutional Markets Douglas W. Campbell Vice President, Agency Sales Daniel S. Clements Vice President and Chief Underwriter Stanley F. Eckert Vice President, National Marketing Shari A. Enger Vice President -- Controller Larry D. Erb Vice President, Information Technology Martha K. Evans Vice President, Variable Operations Fitz Fisher Vice President, Information Technology Deborah B. Holden* Vice President, Corporate Benefits Brian Holland Vice President, Sales and International Risk Management Kenneth R. Kiefer** Vice President, Operations, Structured Settlements Richard D. King Vice President, Medical Director Stephen F. Kraysler Vice President, Structured Reinsurance - -------------------------------------------------------------------------------- Strategic Advantage II 68 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- C. Lynn McPherson* Vice President Sue A. Miskie Vice President, Corporate Services David S. Pendergrass* Vice President and Treasury Officer Stephen R. Pryde Vice President, Administration Christiaan M. Rutten Vice President, Structured Reinsurance Casey J. Scott Vice President, National Marketing Alan C. Singer Vice President, Customer Relations and Regulatory Compliance Mark A. Smith Vice President, Insurance Services Jerome M. Strop Vice President, Strategic Marketing Gary W. Waggoner Vice President, General Counsel and Corporate Secretary Amy L. Winsor Vice President and Treasurer William Wojciechowski* Vice President, CCRC Eric G. Banta Assistant Secretary Roger O. Beebe Actuarial Officer Marsha K. Crest Agency Administration Officer Kim M. Curley Appointed Actuary John B. Dickinson Actuarial Officer Relda A. Fleshman Deputy General Counsel Shirley A. Knarr Actuarial Officer Glen E. Stark Actuarial Officer William J. Wagner Actuarial Officer - -------------------------------------------------------------------------------- Strategic Advantage II 69 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 variable account, and we do not expect to incur significant losses from such actions. ING America Equities, Inc., the principal underwriter and distributor of the policy, is not engaged in any litigation of any material nature. EXPERTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and the financial statements of the Security Life Separate Account L1 at December 31, 1998, and for each of the three years in the period ended December 31, 1998, 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 Lawrence D. Taylor, F.S.A., M.A.A.A., who is Senior Vice President 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 Variable Account and the variable life insurance policy described in this prospectus with the SEC. The Registration Statement, which is required by the Securities Act of 1933, includes additional information that is not required in this prospectus under the rules and regulations of the SEC. The additional information may be obtained from the SEC's principal office in Washington, DC. There is a charge for this material. - -------------------------------------------------------------------------------- Strategic Advantage II 70 FINANCIAL STATEMENTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, are prepared in accordance with generally accepted accounting principles and start on page 73. The financial statements included for the Security Life Separate Account L1 at December 31, 1998 and for each of the three years in the period ended December 31, 1998, are prepared in accordance with generally accepted accounting principles and represent those divisions that had commenced operations by that date. The consolidated financial statements of Security Life and Subsidiaries, as well as the financial statement included for the Security Life Separate Account L1 referred to above have been audited by Ernst & Young LLP. The consolidated financial statements of Security Life and Subsidiaries should be distinguished from the financial statements of the Security Life Separate Account L1 and should be considered only as bearing upon the ability of Security Life and Subsidiaries to meet its obligations under the policies. They should not be considered as bearing upon the investment experience of the divisions of Security Life Separate Account L1. - -------------------------------------------------------------------------------- Strategic Advantage II 71 [THIS PAGE INTENTIONALLY LEFT BLANK] - -------------------------------------------------------------------------------- Strategic Advantage II 72 Consolidated Financial Statements Security Life of Denver Insurance Company and Subsidiaries Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Strategic Advantage II 73 Security Life of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ...............................................75 Audited Consolidated Financial Statements Consolidated Balance Sheets ..................................................76 Consolidated Statements of Income ............................................78 Consolidated Statements of Comprehensive Income...............................79 Consolidated Statements of Stockholder's Equity ..............................80 Consolidated Statements of Cash Flows ........................................81 Notes to Consolidated Financial Statements ...................................83 - -------------------------------------------------------------------------------- Strategic Advantage II 74 [Logo of Ernst & Young LLP appears here] 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, 1998 and 1997, 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, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security Life of Denver Insurance Company and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Denver, Colorado /s/ Ernst & Young LLP April 5, 1999 - -------------------------------------------------------------------------------- Strategic Advantage II 75 Security Life of Denver Insurance Company and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)
DECEMBER 31 1998 1997 -------------------------------- Assets Investments (Notes 2 and 3): Fixed maturities, at fair value (amortized cost: 1998--$3,383,582; 1997--$3,007,012) $ 3,503,530 $3,152,355 Equity securities, at fair value (cost: 1998--$6,761; 1997--$6,754) 8,400 8,019 Mortgage loans on real estate 784,108 576,620 Investment real estate, at cost, less accumulated depreciation (1998--$706; 1997--$667) 1,740 1,767 Policy loans 925,623 875,405 Other long-term investments 17,671 14,307 Short-term investments 747 55,466 -------------------------------- Total investments 5,241,819 4,683,939 Cash 31,644 22,299 Accrued investment income 52,440 49,726 Reinsurance recoverable: Paid benefits 11,364 11,170 Unpaid benefits 24,312 14,988 Prepaid reinsurance premiums (Note 8) 3,329,901 2,744,863 Deferred policy acquisition costs (DPAC) 778,126 682,905 Property and equipment, at cost, less accumulated depreciation (1998--$25,981; 1997--$22,925) 36,141 37,943 Federal income tax recoverable (Note 9) -- 5,722 Indebtedness from related parties 4,339 2,443 Other assets 113,019 87,298 Separate account assets (Note 6) 423,474 263,035 -------------------------------- Total assets $10,046,579 $8,606,331 ================================
- -------------------------------------------------------------------------------- Strategic Advantage II 76
DECEMBER 31 1998 1997 ----------------------------------------- Liabilities and stockholder's equity Liabilities: Future policy benefits: Life and annuity reserves $ 4,857,141 $4,328,577 Guaranteed investment contracts 3,210,012 2,634,654 Policyholders' funds 81,064 82,291 Advance premiums 272 365 Accrued dividends and dividends on deposit 21,268 21,129 Policy and contract claims 130,100 103,525 ----------- ---------- Total future policy benefits 8,299,857 7,170,541 Accounts payable and accrued expenses 108,165 99,335 Indebtedness to related parties 13,755 7,704 Long-term debt to related parties (Note 10) 100,000 75,000 Accrued interest on long-term debt to related parties (Note 10) 5,387 5,128 Other liabilities 109,593 61,424 Federal income taxes payable (Note 9) 106 -- Deferred federal income taxes (Note 9) 60,062 53,829 Separate account liabilities (Note 6) 423,474 263,035 ----------- ---------- Total liabilities 9,120,399 7,735,996 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 315,722 315,722 Retained earnings 563,553 500,795 Accumulated other comprehensive income 44,025 50,938 ----------- ---------- Total stockholder's equity 926,180 870,335 ----------- ---------- Total liabilities and stockholder's equity $10,046,579 $8,606,331 =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 77 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Income (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------------- Revenues: Traditional life insurance premiums $ 120,675 $ 122,429 $ 118,200 Universal life and investment product charges 229,226 217,108 202,081 Reinsurance premiums assumed 431,267 446,434 339,335 ----------- ----------- --------- 781,168 785,971 659,616 Reinsurance premiums ceded (143,211) (124,815) (117,880) ----------- ----------- --------- 637,957 661,156 541,736 Net investment income 361,996 340,898 312,121 Net realized gains on investments 10,818 28,645 4,770 Other revenues 11,771 6,743 526 ----------- ----------- --------- 1,022,542 1,037,442 859,153 Benefits and expenses: Benefits: Traditional life insurance: Death benefits 239,921 299,305 235,828 Other benefits 77,209 79,849 71,939 Universal life and investment contracts: Interest credited to account balances 236,136 217,614 186,908 Death benefits incurred in excess of account balances 63,103 73,260 54,004 Increase in future policy benefits 102,875 72,685 121,946 Reinsurance recoveries (84,506) (98,376) (80,276) Product conversions 10,578 7,014 16,379 ----------- ----------- --------- 645,316 651,351 606,728 Expenses: Commissions 49,569 46,516 25,846 Insurance operating expenses 125,194 89,075 69,580 Amortization of deferred policy acquisition costs 105,639 116,495 94,685 ----------- ----------- --------- 925,718 903,437 796,839 ----------- ----------- --------- Income before federal income taxes 96,824 134,005 62,314 Federal income taxes (Note 9) 34,066 47,019 21,876 ----------- ----------- --------- Net income $ 62,758 $ 86,986 $ 40,438 =========== =========== =========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 78 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Comprehensive Income (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------------- Net income $ 62,758 $ 86,986 $ 40,438 -------- -------- -------- Other comprehensive income: Unrealized gains (losses) on securities: Net change in unrealized holding gains (losses), net of tax (11,251) 28,367 (25,294) Reclassification adjustment for realized gains included in net income, net of tax (5,010) (4,601) (2,422) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 7,236 (37,522) 13,461 Reclassification effect on DPAC of realized gains and losses included in net income, net of tax 3,075 5,976 -- Net change in pension liability, net of tax (963) -- -- -------- -------- -------- Total other comprehensive income (6,913) (7,780) (14,255) -------- -------- -------- Comprehensive income $ 55,845 $ 79,206 $ 26,183 ======== ======== ========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 79 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Stockholder's Equity (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------- 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 $ 302,722 $ 297,422 Capital contributions -- 13,000 5,300 --------- --------- --------- Balance at end of year $ 315,722 $ 315,722 $ 302,722 ========= ========= ========= Accumulated other comprehensive income: Net unrealized gains on investments: Balance at beginning of year $ 50,938 $ 58,718 $ 72,973 Unrealized gains (losses) on securities: Change in unrealized gains (losses), net of tax (16,261) 23,766 (27,716) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 10,311 (31,546) 13,461 --------- --------- --------- Balance at end of year 44,988 50,938 58,718 Accumulated net pension liability: Balance at beginning of year -- -- -- Net change in pension liability, net of tax (963) -- -- --------- --------- --------- Balance at end of year (963) -- -- --------- --------- --------- Total accumulated other comprehensive income $ 44,025 $ 50,938 $ 58,718 ========= ========= ========= Retained earnings: Balance at beginning of year $ 500,795 $ 413,809 $ 373,371 Net income 62,758 86,986 40,438 --------- --------- --------- Balance at end of year $ 563,553 $ 500,795 $ 413,809 ========= ========= ========= Total stockholder's equity $ 926,180 $ 870,335 $ 778,129 ========= ========= =========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 80 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 -------------------------------------------------- Operating activities Net income $ 62,758 $ 86,986 $ 40,438 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits 874,765 995,632 585,581 Net decrease (increase) in federal income taxes 12,061 (12,317) 78,668 Increase (decrease) in accounts payable and accrued expenses 55,361 21,033 (1,361) Increase in accrued interest on long-term debt 259 1,428 3,676 Increase in accrued investment income (2,714) (4,300) (7,294) (Increase) decrease in reinsurance recoverable (9,518) 3,733 (5,214) Increase in prepaid reinsurance premiums (585,038) (793,851) (336,053) Net realized investment gains (10,818) (28,645) (4,770) Depreciation and amortization expense 3,174 3,630 3,857 Policy acquisition costs deferred (184,993) (174,374) (152,299) Amortization of deferred policy acquisition costs 105,639 116,495 94,685 Increase in accrual for postretirement benefits 675 557 484 Other, net (7,053) 43,538 (15,539) --------- --------- --------- Net cash provided by operating activities 314,558 259,545 284,859 INVESTING ACTIVITIES Securities available-for-sale: Sales: Fixed maturities 5,015,989 2,279,598 334,482 Equity securities 2,251 648 4,198 Maturities--fixed maturities 274,463 410,632 727,937 Purchases: Fixed maturities (5,670,994) (2,919,145) (1,522,369) Equity securities (2,089) (2,561) (428) Sale, maturity or repayment of investments: Mortgage loans on real estate 51,235 38,756 18,102 Investment real estate -- -- 1,354 Other long-term investments 10,678 2,002 --
- -------------------------------------------------------------------------------- Strategic Advantage II 81 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (continued) (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ---------------------------------------------- Investing activities (continued) Purchase or issuance of investments: Mortgage loans on real estate $(259,945) $(163,528) $(186,228) Investment real estate (13) (35) -- Policy loans, net (50,218) (80,094) (41,071) Other long-term investments (14,042) (5,248) 809 Short-term investments, net 55,115 (48,447) 3,942 Additions to property and equipment (1,418) (2,687) (4,482) Disposals of property and equipment 68 145 2,389 --------- --------- --------- Net cash used by investing activities (588,920) (489,964) (661,365) FINANCING ACTIVITIES Increase in indebtedness to related parties 29,156 5,217 42,206 Cash contributions from parent -- 13,000 5,300 Receipts from interest sensitive products credited to policyholder account balances 505,728 555,223 434,726 Return of policyholder account balances on interest sensitive policies (251,177) (334,543) (123,949) --------- --------- --------- Net cash provided by financing activities 283,707 238,897 358,283 --------- --------- --------- Net increase (decrease) in cash 9,345 8,478 (18,223) Cash at beginning of year 22,299 13,821 32,044 --------- --------- --------- Cash at end of year $ 31,644 $ 22,299 $ 13,821 ========= ========= =========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 82 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements December 31, 1998 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and operations, after intercompany eliminations, of Security Life of Denver Insurance Company (Security Life) and its wholly-owned subsidiaries: Midwestern United Life Insurance Company (Midwestern United); First ING Life Insurance Company of New York (First ING); First Secured Mortgage Deposit Corporation; and ING America Equities, Inc. NATURE OF OPERATIONS Security Life of Denver Insurance Company and its subsidiaries (the Company) is a wholly-owned subsidiary of ING America Insurance Holdings, Inc. (ING America). The Company focuses on two markets, the advanced market and reinsurance to other insurers. The life insurance products offered for the advanced market include wealth transfer and estate planning, executive benefits, charitable giving and corporate owned life insurance. These products include traditional life, interest sensitive life, universal life and variable life. Operations are conducted almost entirely on the general agency basis and the Company is presently licensed in all states (approved for reinsurance only in New York), the District of Columbia and the Virgin Islands. In the reinsurance market, the Company offers financial security to clients through a mix of total risk management and traditional life insurance services. The significant accounting policies followed by the Company that materially affect the financial statements are summarized below: BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) which, as to the insurance companies included in the consolidation, differ from statutory accounting practices prescribed or permitted by state insurance regulatory authorities. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - -------------------------------------------------------------------------------- Strategic Advantage II 83 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES During June 1996, the Financial Accounting Standards Board (FASB) issued Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Also in 1996, the FASB issued Statement No. 127, which delayed certain provisions of FAS 125 dealing with transactions such as securities lending, repurchase and dollar repurchase agreements until 1998. The portion of FAS 125 that became effective in 1997 requires the entity to recognize financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The application of the new rules did not have a material impact on the financial statements of the Company. Effective January 1, 1996, the Company adopted FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the valuation for long-lived assets that are identified for disposal. Adoption of this standard resulted in an insignificant impact to net income and stockholder's equity. 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. - -------------------------------------------------------------------------------- Strategic Advantage II 84 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. The implementation of this Statement is required for years beginning after June 15, 1999, and upon the initial application of the Statement 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 2000, 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 and reevaluates such designation as of each balance sheet date. The Company does not hold any securities classified as held-to-maturity or trading securities. Debt securities and marketable equity securities are classified as available-for- sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, and deferred policy acquisition cost adjustments, reported net of tax as a component of other comprehensive income in stockholder's equity. - -------------------------------------------------------------------------------- Strategic Advantage II 85 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 classified as held-to-maturity or available-for- sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in net investment income as earned. Mortgage loans are carried at the unpaid balances less an allowance for credit losses. Investment real estate is carried at cost, less accumulated depreciation. Policy loans are carried at unpaid balances. Derivatives are accounted for on the same basis as the asset hedged. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains on investments. The cost of securities sold is based on the specific identification method. RECOGNITION OF PREMIUM REVENUES Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, are recognized as revenue when due. Revenues for universal life insurance policies and for investment products consist of policy charges for the cost of insurance, 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 - -------------------------------------------------------------------------------- Strategic Advantage II 86 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) expected gross margins from surrender charges, investments, mortality, and expenses. This amortization is adjusted retrospectively when estimates of current or future gross margins to be realized from a group of products are revised. Deferred policy acquisition costs are adjusted to reflect changes that would have been necessary if unrealized investment gains and losses related to available-for-sale securities had been realized. The Company has reflected those adjustments in the asset balance with the offset as a direct adjustment to 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 3.80% to 7.81% during 1998, 4.60% to 7.81% during 1997, and 4.60% to 7.45% during 1996. 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 benefitted, using the same assumptions and factors used to amortize deferred policy acquisition costs. - -------------------------------------------------------------------------------- Strategic Advantage II 87 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 $5,816,000 and $6,074,000 at December 31, 1998 and 1997, respectively. Participating business approximates .2% of the Company's ordinary life insurance in force and 1.4% of premium income. Earnings for participating insurance are based on the actual earnings of the participation block of policies. Expenses and taxes are allocated based on the amount of participating insurance in force. Investment income is allocated based on the yield of the participating investment portfolio. The amount of dividends to be paid is determined annually by the Board of Directors. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales. Dividends of $3,233,000, $3,377,000, and $3,307,000 were incurred in 1998, 1997, and 1996, respectively. FEDERAL INCOME TAXES Deferred federal income taxes have been provided or credited to reflect significant temporary differences between income reported for tax and financial reporting purposes using reasonable assumptions. - -------------------------------------------------------------------------------- Strategic Advantage II 88 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 $10,121,000; $10,110,000; and $1,016,000 for 1998, 1997, and 1996, respectively. GUARANTY FUND ASSESSMENTS Insurance companies are assessed the costs of funding the insolvencies of other insurance companies by the various state guaranty associations, generally based on the amount of premium companies collect in that state. The Company accrues the cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in each state. The Company reduces the accrual by credits allowed in some states to reduce future premium taxes by a portion of assessments in that state. RECLASSIFICATIONS Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. - -------------------------------------------------------------------------------- Strategic Advantage II 89 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, 1998 and 1997:
December 31, 1998 --------------------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------- (Dollars in Thousands) 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 ========== ======== ======= ==========
- -------------------------------------------------------------------------------- Strategic Advantage II 90 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED)
December 31, 1997 ------------------------------------------------------ Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------ (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 51,387 $ 1,629 $ 39 $ 52,977 States, municipalities and political subdivisions 43,185 1,023 128 44,080 Public utilities securities 151,642 5,030 1,216 155,456 Debt securities issued by foreign governments 3,272 -- -- 3,272 Corporate securities 1,147,380 48,001 6,539 1,188,842 Mortgage-backed securities 1,165,376 89,539 6,661 1,248,254 Other asset-backed securities 443,473 13,285 584 456,174 Redeemable preferred stocks -- -- -- -- Derivatives hedging fixed maturities (Note 3) 1,297 3,118 1,115 3,300 ---------- -------- ------- ---------- Total fixed maturities 3,007,012 161,625 16,282 3,152,355 Preferred stocks (nonredeemable) 3,368 67 122 3,313 Common stocks 3,386 1,446 126 4,706 ---------- -------- ------- ---------- Total equity securities 6,754 1,513 248 8,019 ---------- -------- ------- ---------- Total $3,013,766 $163,138 $16,530 $3,160,374 ========== ======== ======= ==========
- -------------------------------------------------------------------------------- Strategic Advantage II 91 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, 1998, 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 $ 18,024 $ 18,156 Due after one year through five years 187,198 183,735 Due after five years through ten years 695,842 702,563 Due after ten years 714,609 740,418 ---------- ---------- 1,615,673 1,644,872 Mortgage-backed securities 1,132,058 1,200,295 Other asset-backed securities 635,539 651,929 Derivatives 312 6,434 ---------- ---------- Total available-for-sale $3,383,582 $3,503,530 ========== ========== Changes in unrealized gains (losses) on investments in available-for-sale securities for the years ended December 31, 1998, 1997 and 1996 are summarized as follows (in thousands): 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) ========= ======= ========= - -------------------------------------------------------------------------------- Strategic Advantage II 92 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 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 ========= ======= ========= December 31, 1996 ------------------------------------------ Fixed Equity Total ------------------------------------------ Gross unrealized gains $ 140,089 $ 822 $ 140,911 Gross unrealized (losses) (30,493) (376) (30,869) --------- ------- --------- Net unrealized gains 109,596 446 110,042 Deferred income tax (38,359) (157) (38,516) --------- ------- --------- Net unrealized gains after taxes 71,237 289 71,526 Less: Balance at beginning of year 99,389 (147) 99,242 --------- ------- --------- Change in net unrealized gains (losses) $ (28,152) $ 436 $ (27,716) ========= ======= ========= As part of its overall investment management strategy, the Company has entered into agreements to purchase $79,175,000 in mortgage loans as of December 31, 1998. These agreements were settled during 1999. The Company had no agreements to sell securities at December 31, 1998. - -------------------------------------------------------------------------------- Strategic Advantage II 93 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): 1998 1997 1996 --------------------------------------------- Fixed maturities $ 278,227 $ 259,936 $ 240,931 Mortgage loans on real estate 47,567 40,908 29,143 Policy loans 58,016 56,087 52,205 Other investments 2,911 3,159 2,197 --------- --------- --------- 386,721 360,090 324,476 Investment expenses (24,725) (19,192) (12,355) --------- --------- --------- Net investment income $ 361,996 $ 340,898 $ 312,121 ========= ========= ========= Net realized gains (losses) on investments for the years ended December 31 are summarized as follows (in thousands): 1998 1997 1996 ---------------------------------------------- Fixed maturities $ 9,691 $ 27,717 $4,540 Equity securities 168 (57) 79 Real estate and other 959 985 151 ------- -------- ------ Net realized gains on investments $10,818 $ 28,645 $4,770 ======= ======== ====== During 1998, 1997 and 1996, fixed maturities and marketable equity securities available- for-sale were sold with fair values at the date of sale of $5,018,240,000; $2,281,886,000 and $334,482,000, respectively. Gross gains of $44,314,000; $41,017,000 and $7,248,000 and gross losses of $34,455,000; $13,357,000 and $2,629,000 were realized on those sales in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, bonds with an amortized cost of $29,081,000 and $28,434,000, respectively, were on deposit with various state insurance departments to meet regulatory requirements. - -------------------------------------------------------------------------------- Strategic Advantage II 94 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into interest rate and currency contracts, including swaps, caps, floors, and options, to reduce and manage risks which include the risk of a change in the value, yield, price, cash flows, exchange rates or quantity of, or a degree of exposure with respect to assets, liabilities, or future cash flows which the Company has acquired or incurred. Hedge accounting practices are supported by cash flow matching, scenario testing and duration matching. Interest rate swap agreements generally involve the exchange of fixed and floating interest payments over the life of the agreement without an exchange of the underlying principal amount. Currency swap agreements generally involve the exchange of local and foreign currency payments over the life of the agreements without an exchange of the underlying principal amount. Interest rate cap and interest rate floor agreements owned entitle the Company to receive payments to the extent reference interest rates exceed or fall below strike levels in the contracts based on the notional amounts. Premiums paid for the purchase of interest rate contracts are included in other assets and are being amortized to interest expense over the remaining terms of the contracts or in a manner consistent with the financial instruments being hedged. Amounts paid or received, if any, from such contracts are included in interest expense or income. Accrued amounts payable to or receivable from counterparties are included in other liabilities or assets. Gains and losses as a result of early terminations of interest rate contracts are amortized to investment income over the remaining term of the items being hedged to the extent the hedge is considered to be effective; otherwise, they are recognized upon termination. Interest rate contracts that are matched or otherwise designated to be associated with other financial instruments are recorded at fair value if the related financial instruments mature, are sold, or are otherwise terminated or if the interest rate contracts cease to be effective hedges. The Company manages the potential credit exposure from interest rate contracts through careful evaluation of the counterparties' credit standing, collateral agreements, and master netting agreements. The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate contracts; however, the Company does not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in such contacts. - -------------------------------------------------------------------------------- Strategic Advantage II 95 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, 1998 and 1997 (in thousands): 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 ---------- ------- ------- ------- 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 -- -- -- ---------- ------- ------- ------- Total derivatives $3,329,619 $ 312 $ 6,434 $ 6,434 ========== ======= ======= ======= - -------------------------------------------------------------------------------- Strategic Advantage II 96 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, 1997 ----------------------------------------------- Notional Amortized Fair Balance Amount Cost Value Sheet ---------------------------------------------- Interest rate contracts: Swaps $ 913,630 $ (185) $ (625) $ (625) Swaps-affiliates 879,745 185 1,429 1,429 ---------- ------- ------- ------- Total swaps 1,793,375 -- 804 804 Caps owned 760,000 986 766 766 ---------- ------- ------- ------- Total caps owned 760,000 986 766 766 Floors owned 354,000 311 1,730 1,730 Floors owned-affiliates -- -- -- -- ---------- ------- ------- ------- Total floors owned 354,000 311 1,730 1,730 Options owned 384,300 6,192 4,312 4,312 Options owned-affiliates 384,300 (6,192) (4,312) (4,312) ---------- ------- ------- ------- Total options owned 768,600 -- -- -- ---------- ------- ------- ------- Total derivatives $3,675,975 $ 1,297 $ 3,300 $ 3,300 ========== ======= ======= ======= 4. CONCENTRATIONS OF CREDIT RISK At December 31, 1998, the Company held less-than-investment-grade bonds classified as available-for-sale with a carrying value and market value of $277,793,000. These holdings amounted to 7.9% 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, 1998, the Company's mortgages involved a concentration of properties located in Florida (15.5%), Texas (9.7%), and Georgia (7.5%). The remaining mortgages relate to properties located in 35 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 $16,068,000. - -------------------------------------------------------------------------------- Strategic Advantage II 97 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):
December 31 1998 1997 --------------------------------------- ---------------------------------- Qualified Post- Qualified Post- Plan SERP Retirement Plan SERP Retirement --------------------------------------- ---------------------------------- Projected benefit obligation $ (38,685) $ (8,320) $ (8,949) $(37,801) $(9,154) $ (7,590) Less plan assets at fair value 47,230 -- -- 40,150 -- -- ---------- ----------- --------- -------- ------- -------- Plan assets in excess (deficient) of projected benefit obligation $ 8,545 $ (8,320) $ (8,949) $ 2,349 $(9,154) $ (7,590) ========== =========== ========= ======== ======= ======== Net asset (liability) $ 1,240 $ (4,918) $ (12,044) $ 1,322 $(4,135) $(11,369) ========== =========== ========= ======== ======= ========
As of December 31, 1998 and 1997, the Company recognized an additional minimum net liability on the SERP of $1,482,000 and $3,848,000, 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, net of tax. - -------------------------------------------------------------------------------- Strategic Advantage II 98 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):
1998 1997 1996 -------------------------------- --------------------------------- ---------------------------------- Qualified Post- Qualified Post- Qualified Post- Plan SERP Retirement Plan SERP Retirement Plan SERP Retirement -------------------------------- --------------------------------- ---------------------------------- Net periodic pension expense $ 82 $1,109 $893 $607 $1,502 $755 $ 390 $1,109 $669 Employer contributions -- 325 218 -- 317 198 -- 320 Not available Plan participants' contributions -- -- 77 -- -- 71 -- -- Not available Benefits paid 890 325 296 811 317 268 1,466 320 187
The information for employer and plan participant contributions to the postretirement plan for 1996 is not readily available. Assumptions used in accounting for the defined benefit plans as of December 31, 1998, 1997, and 1996 were as follows: 1998 1997 1996 ------------------------- Weighted-average discount rate 6.75% 7.25% 7.50% Rate of increase in compensation level 4.00% 4.25% 4.50% Expected long-term rate of return on assets 9.50% 9.50% 9.50% Plan assets of the defined benefit plans at December 31, 1998 are invested primarily in U.S. government securities, corporate bonds, mutual funds, mortgage loans, money market funds and common stock. 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 9.75% graded to 5.25% over 9 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, 1998 by $1,015,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1998 by $136,000. 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, 1998 by $(862,000) and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1998 by $(113,000). - -------------------------------------------------------------------------------- Strategic Advantage II 99 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 6.75% at December 31, 1998 and 7.50% at December 31, 1997 and December 31, 1996. 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 1998, and $9,500 for both 1997 and 1996. 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 $1,343,000 for 1998, $1,211,000 for 1997, and $1,143,000 for 1996. Plan assets of the Savings Plan at December 31, 1998 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 $27.8 million and $26.6 million at December 31, 1998 and 1997, respectively. 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 fees charged for administration services and mortality risk. - -------------------------------------------------------------------------------- Strategic Advantage II 100 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, $4,993,000 and $6,151,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 8. REINSURANCE The Company is involved in both ceded and assumed reinsurance with other companies for the purpose of diversifying risk and limiting exposure on larger risks. As of December 31, 1998, the Company's retention limit for acceptance of risk on life insurance policies had been set at various levels up to $1,500,000. Reinsurance premiums, commissions, and expense reimbursements related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reserves are based on the terms of the reinsurance contracts, and are consistent with the risks assumed. To the extent that the assuming companies become unable to meet their obligations under these treaties, the Company remains contingently liable to its policyholders for the portion 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 arising from similar geographic regions, activities, or economic characteristics of the reinsurers. The use of reinsurance pools with retrocessionaires 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, 1998, $2.7 billion of an affiliate's invested assets were held in trust pursuant to these agreements. - -------------------------------------------------------------------------------- Strategic Advantage II 101 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):
1998 1997 ------------------------------------------------------------ Policy Policy Deposits Liabilities Deposits Liabilities ------------------------------------------------------------ Direct (nonaffiliated) $ 2,773,952 $ 3,112,460 $ 1,673,471 $2,527,957 Assumed from Life Insurance Company of Georgia -- 97,552 35,000 106,698 ----------- ----------- ----------- --------- 2,773,952 3,210,012 1,708,471 2,634,655 Ceded to Columbine Life Insurance Company (2,547,743) (2,696,409) (1,479,371) (2,231,118) Ceded to Life Insurance Company of Georgia (225,083) (512,477) (116,100) (403,537) Ceded to First Columbine Life Insurance Company (1,126) (1,126) -- -- ----------- ----------- ----------- --------- Net $ -- $ -- $ 113,000 $ -- =========== =========== =========== ==========
Ceded GIC policy liabilities totaling $3,210 and $2,635 million as of December 31, 1998 and 1997, respectively, are classified as part of prepaid reinsurance premiums. During 1998 and 1997, 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 generally accepted accounting principles, 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, with the exception of First ING. The affiliated companies that join in the filing of the consolidated federal income tax return have an agreement for the allocation of taxes between members that join in the consolidated return. The agreement specifies that the separate return payable or the separate return receivable of each member will be the federal income tax payable or receivable that the member would have had for the period had it filed a separate return. - -------------------------------------------------------------------------------- Strategic Advantage II 102 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 1998 1997 ------------------------ Deferred tax liabilities: Deferred policy acquisition costs $(272,970) $(239,678) Unrealized gains/losses (42,556) (51,312) --------- --------- Total deferred tax liabilities (315,526) (290,990) Deferred tax assets: Benefit reserves and surplus relief 102,177 111,610 Tax-basis deferred policy acquisition costs 83,836 71,241 Investment income 13,712 13,459 Unearned investment income -- 9,208 Nonqualified deferred compensation 14,667 14,129 Postretirement employee benefits 2,501 3,979 Separate accounts 18,775 8,571 Other, net 19,796 4,964 --------- --------- Total deferred tax assets 255,464 237,161 --------- --------- Net deferred tax liabilities $ (60,062) $ (53,829) ========= ========= The components of federal income tax expense consist of the following (in thousands): December 31 1998 1997 1996 --------------------------------- Current $24,111 $37,542 $10,340 Deferred 9,955 9,477 11,536 ------- ------- ------- Federal income tax expense $34,066 $47,019 $21,876 ======= ======= ======= The Company's effective income tax rate did not vary significantly from the statutory federal income tax rate. - -------------------------------------------------------------------------------- Strategic Advantage II 103 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 (receipts) of $18,283,000 during 1998, $55,468,000 during 1997, and $(61,467,000) during 1996 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, 1998. 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, 1998, the Company accrued interest of $5,387,000. 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 $5,387,000; $5,096,000; and $3,644,000 for the years ended December 31, 1998, 1997, and 1996, respectively. - -------------------------------------------------------------------------------- Strategic Advantage II 104 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 5.41%, are as follows (in thousands): Total YEAR Payments - --------------------------------------------------------- 2000 $ 25,946 2001 25,946 2002 25,946 2003 25,946 2004 25,946 -------- Total 129,730 Less imputed interest (29,730) -------- Present value of payments $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, 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 unknown whether the State of Colorado will adopt Codification. - -------------------------------------------------------------------------------- Strategic Advantage II 105 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, 1998, the Company exceeded all minimum RBC requirements. Combined capital and surplus, determined in accordance with statutory accounting practices (SAP), was $386,607,000 and $403,239,000 at December 31, 1998 and 1997, respectively. Combined net income, determined in accordance with SAP, was $11,712,000; $22,261,000; and $9,141,000 for the years ended December 31, 1998, 1997, and 1996, 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, 1998. Additionally, the amount of dividends which can be paid by each company to its stockholder without prior approval of the various state insurance departments is generally limited to the greater of 10% of statutory surplus or the statutory net gain from operations. - -------------------------------------------------------------------------------- Strategic Advantage II 106 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Life insurance liabilities that contain mortality risk and all nonfinancial instruments are excluded from disclosure requirements. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. - -------------------------------------------------------------------------------- Strategic Advantage II 107 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, 1998 and 1997 are summarized below (in thousands):
December 31, 1998 December 31, 1997 ----------------------------- ------------------------------ Carrying Carrying Amount Fair Value Amount Fair Value ----------------------------- ------------------------------ Assets Fixed maturities (Note 2) $3,503,530 $3,503,530 $3,152,355 $3,152,355 Equity securities (Note 2) 8,400 8,400 8,019 8,019 Mortgage loans 784,108 832,629 576,620 630,019 Policy loans 925,623 925,623 875,405 875,405 Short-term investments 747 747 55,466 55,466 Cash 31,644 31,644 22,299 22,299 Indebtedness from related parties 4,339 4,339 2,443 2,443 Separate account assets 423,474 423,474 263,035 263,035 LIABILITIES Supplemental contracts without life contingencies 3,966 3,966 4,240 4,240 Other policyholder funds left on deposit 98,638 98,638 99,545 99,545 Individual and group annuities, net of reinsurance 87,096 86,007 43,313 43,077 Indebtedness to related parties 13,755 13,755 7,704 7,704 Long-term debt to related parties 100,000 100,000 75,000 75,000 Accrued interest on long-term debt to related parties 5,387 5,387 5,128 5,128 Separate account liabilities 423,474 423,474 263,035 263,035
- -------------------------------------------------------------------------------- Strategic Advantage II 108 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 4.5% - 14.0% over the total portfolio. The fair values of equity securities are based on quoted market prices. MORTGAGE LOANS: Estimated market values for commercial real estate loans are generated using a discounted cash flow approach. Loans in good standing are discounted using interest rates determined by U.S. Treasury yields on December 31 and spreads implied by independent published surveys. The same is applied on new loans with similar characteristics. The amortizing features of all loans are incorporated in the valuation. Where data on option features is available, option values are determined using a binomial valuation method, and are incorporated into the mortgage valuation. Restructured loans are valued in the same manner; however, these are discounted at a greater spread to reflect increased risk. All residential loans are valued at their outstanding principal balances, which approximate their fair values. POLICY LOANS: The carrying amounts reported in the balance sheets for these financial instruments approximate their fair values. DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet derivative financial instruments (caps and floors) and off-balance-sheet derivative financial instruments (swaps) are based on broker/dealer valuations or on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties' credit standing. - -------------------------------------------------------------------------------- Strategic Advantage II 109 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 $66,480,000 and $1,000,000 in 1998 and 1997, 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 assets had a value of $433,689,000 and $493,757,000 at December 31, 1998 and 1997, respectively. Under synthetic guaranteed investment contracts, the synthetic issuer may assume interest rate risk on individual plan participant initiated withdrawals from stable value options of 401(k) plans. Approximately 85% of the synthetic guaranteed investment contract book values are on a participating basis and have a credited interest rate reset mechanism which passes such interest rate risk to plan participants. LETTERS OF CREDIT The Company is the beneficiary of letters of credit totaling $197,254,000 which have a market value to the Company of $0 and two lines of credit totaling $284,471,000 which have a market value to the Company of $0 (see Note 14). 13. COMMITMENTS AND CONTINGENCIES The Company is a party to pending or threatened lawsuits arising from the normal conduct of its business. Due to the climate in insurance and business litigation, suits against the Company sometimes include substantial additional claims, consequential damages, punitive damages and other similar types of relief. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a material adverse effect on the Company's financial position or interfere with its operations. - -------------------------------------------------------------------------------- Strategic Advantage II 110 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) In 1998, the Company established an accrued liability of $40,000,000 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. No such litigation reserve was established in 1997. 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 $144,471,000 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, 1999. The amount of funds available under this line is reduced by borrowings of certain affiliates also party to the agreement. There were no outstanding borrowings under either of these agreements at December 31, 1998 or 1997. The weighted-average balance outstanding of short-term debt was $37.5 million during 1998. The weighted-average interest rate paid on this debt during 1998 was 5.63% (see Note 12). The Company is the beneficiary of letters of credit totaling $197,254,000 that were established in accordance with the terms of reinsurance agreements. Such letters of credit are unconditional, irrevocable, and provide for automatic renewal for the following year at December 31. The letters were unused during both 1998 and 1997. 15. YEAR 2000 (UNAUDITED) The Company has initiated a program to prepare its computer systems and applications for the year 2000. This program includes all systems utilized by the Company as well as the systems of other companies that interface with the Company. The Company has completed modification and preliminary testing of portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated at approximately $6.4 million. To date the Company has incurred approximately $2.6 million for the above activities. Accordingly, the Company does not expect the amounts required for this project to have a material effect on its financial position. - -------------------------------------------------------------------------------- Strategic Advantage II 111 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. YEAR 2000 (UNAUDITED) (CONTINUED) The project is estimated to be completed no later than June 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, and conversions to new software, the Year 2000 will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, it could have a material impact on the operations of the Company. The Company has initiated formal communications and interface testing plans with all of its suppliers and customers to determine the extent to which its interface systems are vulnerable to those third parties' failure to have their systems Year 2000 compatible and will act accordingly to prevent operational disruptions. - -------------------------------------------------------------------------------- Strategic Advantage II 112 Financial Statements Security Life Separate Account L1 of Security Life of Denver Insurance Company Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Strategic Advantage II 113 Security Life Separate Account L1 Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ..............................................115 Audited Financial Statements Statement of Net Assets .....................................................116 Statements of Operations ....................................................123 Statements of Changes in Net Assets .........................................142 Notes to Financial Statements ...............................................161 - -------------------------------------------------------------------------------- Strategic Advantage II 114 [Logo of Ernst & Young LLP appears here] Report of Independent Auditors Policyholders Security Life Separate Account L1 of Security Life of Denver Insurance Company We have audited the accompanying statement of net assets of Security Life Separate Account L1 (comprising, respectively, the Neuberger Berman Advisers Management Trust (comprising the Limited Maturity Bond, Growth, Government Income and Partners Divisions) ("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, Industrial Income, High Yield, Utilities and Small Company Growth Divisions) ("INVESCO"), the Van Eck Worldwide Trust (comprising the Worldwide Balanced, 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, 1998, and the related statements of operations and changes in net assets for each of the three years in the period then ended. These financial statements are the responsibility of the Separate Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1998, 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, 1998, and the results of its operations and changes in its net assets for each of the three years in the period then ended, in conformity with generally accepted accounting principles. Denver, Colorado /s/ Ernst & Young LLP April 5, 1999 - -------------------------------------------------------------------------------- Strategic Advantage II 115 Security Life Separate Account L1 Statement of Net Assets December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ----------------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ------------ ----------- ----------- ------------ ----------- ---------- ---------- Net assets $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ =========== =========== ============ =========== ========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ------------ ----------- ----------- ------------ ----------- ---------- ---------- TOTAL POLICYHOLDER RESERVES $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ =========== =========== ============ =========== ========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 116 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
NB ------------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------- ----------------- --------------- --------------- ------------- Assets Investments in mutual funds at market value (Note C) $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ------------ -------------- ------------ ----------- ----------- Net assets $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ============ ============== ============ =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ------------ -------------- ------------ ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ============ ============== ============ =========== =========== Number of division units outstanding (Note G) 1,245,559.121 447,486.376 -- 986,298.018 ============== ============ =========== =========== Value per divisional unit $ 12.51 $ 20.17 $ -- $ 22.78 ============== ============ =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 117 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Alger ------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ---------------------------------------------------------- ------------ Assets Investments in mutual funds at market value (Note C) $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 ----------- ----------- ---------- ----------- ---------- Net assets $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 =========== =========== ========== =========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 ----------- ----------- ---------- ----------- ---------- TOTAL POLICYHOLDER RESERVES $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 =========== =========== ========== =========== ========== Number of division units outstanding (Note G) 838,692.418 402,532.472 923,696.066 221,642.446 =========== ========== =========== ========== Value per divisional unit $ 18.49 $ 22.91 $ 24.80 $ 30.69 =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 118 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Fidelity ---------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ---------------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 600,255.213 1,293,480.338 1,429,659.907 1,526,404.399 3,215,990.519 =========== =========== =========== =========== =========== Value per divisional unit $ 17.05 $ 25.44 $ 14.40 $ 12.06 $ 26.79 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 119 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
INVESCO ---------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ---------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 450,557.216 473,616.752 486,858.648 110,379.616 67,506.441 =========== =========== =========== =========== =========== Value per divisional unit $ 17.99 $ 22.92 $ 16.19 $ 18.49 $ 11.09 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 120 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Van Eck ----------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bond Markets Estate ----------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 0.000 132,513.824 18,656.317 67,354.295 8,765.232 =========== =========== =========== =========== =========== Value per divisional unit $ 0.00 $ 8.10 $ 11.03 $ 6.85 $ 8.70 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 121 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- Assets Investments in mutual funds at market value (Note C) $3,800,153 $1,204,436 $2,595,717 ---------- ---------- ---------- Net assets $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $3,800,153 $1,204,436 $2,595,717 ---------- ---------- ---------- TOTAL POLICYHOLDER RESERVES $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== Number of division units outstanding (Note G) 105,457.867 246,150.062 ========== ========== Value per divisional unit $ 11.42 $ 10.55 ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 122 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ------------------------------------------------------------------------------------- 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 =========== =========== =========== =========== ========== ========= ========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 123 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
NB ------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners ------------------------------------------------------------------------- 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 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 124 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Alger ------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ------------------------------------------------------------------------- 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 OPERATIONS $11,837,754 $ 1,939,738 $1,879,001 $ 6,098,636 $1,920,379 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 125 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Fidelity --------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 --------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 126 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
INVESCO ------------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ------------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 127 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Van Eck ----------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bond Markets Estate ----------------------------------------------------------------------------------------- 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) ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 128 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- Investment income Dividends from mutual funds $ 97,737 $ 27,109 $ 70,628 Less valuation period deductions (Note B) 13,888 3,056 10,832 ---------- ---------- ---------- Net investment income (loss) 83,849 24,053 59,796 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 158,686 115,910 42,776 ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 242,535 $ 139,963 $ 102,572 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 129 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck --------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 130 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
NB -------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners -------------------------------------------------------------------------- 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 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 131 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
Alger ------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ------------------------------------------------------------------------ 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 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 132 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
Fidelity ---------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ---------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 133 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
INVESCO --------------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities --------------------------------------------------------------------------- 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 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 134 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997 Van Eck ------------------------------------------ Total Worldwide Worldwide Van Eck Balanced Hard Assets ------------------------------------------ INVESTMENT INCOME Dividends from mutual funds $ 21,903 $ 9,006 $ 12,897 Less valuation period deductions (Note B) 7,743 3,329 4,414 ---------- ---------- ---------- Net investment income (loss) 14,160 5,677 8,483 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 381 41,907 (41,526) ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 14,541 $ 47,584 $ (33,043) ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 135 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1996
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck -------------------------------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 1,183,779 $ 292,143 $ 56,842 $ 593,973 $ 238,653 $ 2,168 Less valuation period deductions (Note B) 241,127 50,116 44,898 128,637 14,752 2,724 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 942,652 242,027 11,944 465,336 223,901 (556) ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 3,077,159 643,752 458,973 1,834,000 100,274 40,160 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,019,811 $ 885,779 $ 470,917 $ 2,299,336 $ 324,175 $ 39,604 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 136 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
NB -------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners -------------------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 292,143 $ 127,305 $ 76,287 $ 35,420 $ 53,131 Less valuation period deductions (Note B) 50,116 13,218 9,400 8,882 18,616 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 242,027 114,087 66,887 26,538 34,515 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 643,752 (45,891) 42,460 4,310 642,873 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 885,779 $ 68,196 $ 109,347 $ 30,848 $ 677,388 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 137 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
Alger --------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap --------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 56,842 $ 7,668 $ 10,435 $ 37,109 $ 1,630 Less valuation period deductions (Note B) 44,898 18,457 7,398 16,087 2,956 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 11,944 (10,789) 3,037 21,022 (1,326) ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 458,973 66,527 99,334 250,014 43,098 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 470,917 $ 55,738 $ 102,371 $ 271,036 $ 41,772 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 138 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
Fidelity ------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ------------- ------------- -------------- ------------- -------------- ------------- Investment income Dividends from mutual funds $ 593,973 $ 9,800 $ 109,786 $ 27,966 $ 246,349 $ 200,072 Less valuation period deductions (Note B) 128,637 3,818 25,455 16,972 35,006 47,386 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 465,336 5,982 84,331 10,994 211,343 152,686 ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 -- 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 -- 1,161,135 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 1,834,000 70,973 283,096 272,764 -- 1,207,167 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,299,336 $ 76,955 $ 367,427 $ 283,758 $ 211,343 $ 1,359,853 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 139 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
INVESCO ----------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities ----------------------------------------------------------------------- Investment income Dividends from mutual funds $ 238,653 $ 25,285 $ 93,816 $ 114,676 $ 4,876 Less valuation period deductions (Note B) 14,752 3,402 4,272 6,357 721 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 223,901 21,883 89,544 108,319 4,155 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 100,274 39,220 23,847 29,428 7,779 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 324,175 $ 61,103 $ 113,391 $ 137,747 $ 11,934 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 140 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996 Van Eck ---------------------------------------- Total Worldwide Worldwide Van Eck Balanced Hard Assets ---------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 2,168 $ 169 $ 1,999 Less valuation period deductions (Note B) 2,724 1,304 1,420 ---------- ---------- ---------- Net investment income (loss) (556) (1,135) 579 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 40,160 22,327 17,833 ---------- ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 39,604 $ 21,192 $ 18,412 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 141 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM -------------------------------------------------------------------------------------------- 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 ============ =========== =========== ============ =========== ========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 142 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
NB ----------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------- --------------- ------------- --------------- --------------- 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 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 143 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Alger ---------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ---------------------------------------------------------------------------- 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 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 144 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Fidelity ------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 5,972,694 $ 745,317 $ $ 886,122 $ 713,205 $ 1,147,434 2,480,616 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 145 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
INVESCO ------------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ------------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 146 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Van Eck ------------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bonds Markets Estate ------------------------------------------------------------------------------------------- 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 -- -- -- -- -- -- Surrenders (15,198) (3,105) (11,871) -- -- (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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 147 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 83,849 $ 24,053 $ 59,796 Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 ---------- ---------- ---------- Increase (decrease) in net assets from operations 242,535 139,963 102,572 ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 1,864,458 329,635 1,534,823 Cost of insurance and administrative charges (78,728) (28,940) (49,788) Benefit payments -- -- -- Surrenders (1,407) (1,407) -- Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 1,773,295 765,185 1,008,110 Other -- -- -- ---------- ---------- ---------- Increase (decrease) from principal transactions 3,557,618 1,064,473 2,493,145 ---------- ---------- ---------- Total increase (decrease) in net assets 3,800,153 1,204,436 2,595,717 Net assets at beginning of year -- -- -- ---------- ---------- ---------- Net assets at end of year $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 148 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck ------------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 149 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
NB ------------------------------------------------------------------------ Total Limited Government NB Maturity Bond Growth Income Partners ------------------------------------------------------------------------ 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 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 150 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
Alger ------------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap -------------------------------------------------------------------------- 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 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 151 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
Fidelity ----------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ----------------------------------------------------------------------------------------- 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 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 152 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
INVESCO ------------------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities --------------- --------------- --------------- --------------- --------------- 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 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 153 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997 Van Eck -------------------------------------- Worldwide Total Worldwide Hard Van Eck Balanced Assets ---------- ---------- ---------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 14,160 $ 5,677 $ 8,483 Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ---------- ---------- ---------- Increase (decrease) in net assets from operations 14,541 47,584 (33,043) ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 254,716 65,167 189,549 Cost of insurance and administrative charges (91,222) (44,774) (46,448) Benefit payments -- -- -- Surrenders (11,563) (7,995) (3,568) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 541,748 (120) 541,868 Other (4,153) (319) (3,834) ---------- ---------- ---------- Increase (decrease) from principal transactions 689,526 11,959 677,567 ---------- ---------- ---------- Total increase (decrease) in net assets 704,067 59,543 644,524 Net assets at beginning of year 594,031 327,805 266,226 ---------- ---------- ---------- Net assets at end of year $1,298,098 $ 387,348 $ 910,750 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 154 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1996
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck ----------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 942,652 $ 242,027 $ 11,944 $ 465,336 $ 223,901 $ (556) Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 ------------ ----------- ----------- ----------- ----------- ----------- Increase in net assets from operations 4,019,811 885,779 470,917 2,299,336 324,175 39,604 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 44,534,972 2,246,849 2,646,310 38,833,137 609,861 198,815 Cost of insurance and administrative charges (2,843,666) (378,501) (531,589) (1,733,703) (158,637) (41,236) Benefit payments (9,641) -- (9,457) (184) -- -- Surrenders (139,851) (10,863) (32,300) (89,374) (5,730) (1,584) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (905,917) 3,446,134 6,535,350 (13,409,127) 2,217,943 303,783 Other (25,415) 4,193 (1,186) (29,113) 1,108 (417) ------------ ----------- ----------- ----------- ----------- ----------- Increase from principal transactions 40,610,482 5,307,812 8,607,128 23,571,636 2,664,545 459,361 ------------ ----------- ----------- ----------- ----------- ----------- Total increase in net assets 44,630,293 6,193,591 9,078,045 25,870,972 2,988,720 498,965 Net assets at beginning of year 13,226,534 4,345,755 2,278,044 5,528,643 979,026 95,066 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 57,856,827 $10,539,346 $11,356,089 $31,399,615 $ 3,967,746 $ 594,031 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 155 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
NB --------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 242,027 $ 114,087 $ 66,887 $ 26,538 $ 34,515 Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 885,779 68,196 109,347 30,848 677,388 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,246,849 317,539 634,087 372,680 922,543 Cost of insurance and administrative charges (378,501) (74,422) (101,596) (56,065) (146,418) Benefit payments -- -- -- -- -- Surrenders (10,863) (1,157) (2,385) (48) (7,273) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 3,446,134 398,684 433,683 368,389 2,245,378 Other 4,193 (272) (579) 41 5,003 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 5,307,812 640,372 963,210 684,997 3,019,233 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 6,193,591 708,568 1,072,557 715,845 3,696,621 Net assets at beginning of year 4,345,755 1,783,508 763,157 832,469 966,621 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $10,539,346 $ 2,492,076 $1,835,714 $ 1,548,314 $4,663,242 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 156 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
Alger --------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap --------------------------------------------------------------------- Increase (decrease) in net assets OPERATIONS Net investment income (loss) $ 11,944 $ (10,789) $ 3,037 $ 21,022 $ (1,326) Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 470,917 55,738 102,371 271,036 41,772 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,646,310 792,375 410,528 1,189,559 253,848 Cost of insurance and administrative charges (531,589) (209,010) (92,306) (193,812) (36,461) Benefit payments (9,457) (4,658) -- -- (4,799) Surrenders (32,300) (7,839) (10,926) (9,795) (3,740) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 6,535,350 2,581,122 1,649,714 1,717,965 586,549 Other (1,186) (3,605) 587 1,213 619 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 8,607,128 3,148,385 1,957,597 2,705,130 796,016 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 9,078,045 3,204,123 2,059,968 2,976,166 837,788 Net assets at beginning of year 2,278,044 1,127,985 275,087 838,012 36,960 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $11,356,089 $ 4,332,108 $2,335,055 $ 3,814,178 $ 874,748 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 157 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
Fidelity ----------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ----------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 465,336 $ 5,982 $ 84,331 $ 10,994 $ 211,343 $ 152,686 Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 -- 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 -- 1,161,135 ------------ ----------- ----------- ----------- ----------- ----------- Increase in net assets from operations 2,299,336 76,955 367,427 283,758 211,343 1,359,853 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 38,833,137 202,285 1,158,382 537,007 36,012,540 922,923 Cost of insurance and administrative charges (1,733,703) (59,703) (298,466) (145,781) (938,219) (291,534) Benefit payments (184) -- -- -- -- (184) Surrenders (89,374) (973) (9,215) (8,511) (56,983) (13,692) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (13,409,127) 1,199,005 4,485,230 2,637,971 (28,785,556) 7,054,223 Other (29,113) 277 (47) (13) (27,783) (1,547) ------------ ----------- ----------- ----------- ----------- ----------- Increase from principal transactions 23,571,636 1,340,891 5,335,884 3,020,673 6,203,999 7,670,189 ------------ ----------- ----------- ----------- ----------- ----------- Total increase in net assets 25,870,972 1,417,846 5,703,311 3,304,431 6,415,342 9,030,042 Net assets at beginning of year 5,528,643 127,491 1,346,108 970,698 1,880,324 1,204,022 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 31,399,615 $ 1,545,337 $ 7,049,419 $ 4,275,129 $ 8,295,666 $10,234,064 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 158 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
INVESCO ---------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities ---------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 223,901 $ 21,883 $ 89,544 $ 108,319 $ 4,155 Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 324,175 61,103 113,391 137,747 11,934 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 609,861 199,674 243,848 121,818 44,521 Cost of insurance and administrative charges (158,637) (45,283) (55,233) (48,934) (9,187) Benefit payments -- -- -- -- -- Surrenders (5,730) (2,038) (2,171) (1,386) (135) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 2,217,943 506,505 810,269 750,404 150,765 Other 1,108 943 (126) 277 14 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 2,664,545 659,801 996,587 822,179 185,978 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 2,988,720 720,904 1,109,978 959,926 197,912 Net assets at beginning of year 979,026 153,563 259,639 545,475 20,349 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $ 3,967,746 $ 874,467 $1,369,617 $ 1,505,401 $ 218,261 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 159 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996 Van Eck ----------------------------------------- Total Worldwide Worldwide Van Eck Balanced Hard Assets ----------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ (556) $ (1,135) $ 579 Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 ---------- ---------- ---------- Increase in net assets from operations 39,604 21,192 18,412 ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 198,815 135,181 63,634 Cost of insurance and administrative charges (41,236) (29,480) (11,756) Benefit payments -- -- -- Surrenders (1,584) (1,584) -- Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 303,783 126,152 177,631 Other (417) (468) 51 ---------- ---------- ---------- Increase from principal transactions 459,361 229,801 229,560 ---------- ---------- ---------- Total increase in net assets 498,965 250,993 247,972 Net assets at beginning of year 95,066 76,812 18,254 ---------- ---------- ---------- Net assets at end of year $ 594,031 $ 327,805 $ 266,226 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Advantage II 160 Security Life Separate Account L1 Notes to Financial Statements December 31, 1998 NOTE A. ORGANIZATION Security Life Separate Account L1 (the "Separate Account") was established by resolution of the Board of Directors of Security Life of Denver Insurance Company (the "Company") on November 3, 1993. The Separate Account is organized as a unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940. The Separate Account supports the operations of the FirstLine and Strategic Advantage Variable Universal Life ("FirstLine and Strategic Advantage") policies offered by the Company. The Separate Account may be used to support other variable life policies as they are offered by the Company. The assets of the Separate Account are the property of the Company. However, the portion of the Separate Account's assets attributable to the policies will not be used to satisfy liabilities arising out of any other operations of the Company. As of December 31, 1998, the Separate Account offered twenty-three investment divisions available to the policyholders, each of which invests in an independently managed mutual fund portfolio ("Fund"). The Funds are as follows: PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS) Neuberger Berman Management Incorporated (NB) Neuberger Berman Limited Maturity Bond Portfolio Neuberger Berman Growth Portfolio Neuberger Berman Partners Portfolio Fred Alger Management, Inc. (Alger) Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Fidelity Management & Research Company (Fidelity) Fidelity Investments VIP II Asset Manager Portfolio Fidelity Investments VIP Growth Portfolio Fidelity Investments VIP Overseas Portfolio Fidelity Investments VIP Money Market Portfolio Fidelity Investments VIP II Index 500 Portfolio - -------------------------------------------------------------------------------- Strategic Advantage II 161 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 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 Real Estate Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Bond 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 Real Estate Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Bond Portfolio AIM Advisors, Inc. (AIM) AIM VI - Capital Appreciation Portfolio AIM VI - Government Securities Portfolio INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Small Company Growth Portfolio - -------------------------------------------------------------------------------- Strategic Advantage II 162 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE A. ORGANIZATION (CONTINUED) The FirstLine and FirstLine policies allow the policyholders to specify the allocation of their net premium to the various Funds. They can also transfer their account values among the Funds. The FirstLine and Strategic Advantage products also provide the policyholders the option to allocate their net premiums, or to transfer their account values, to a Guaranteed Interest Division ("GID") in the Company's general account. The GID guarantees a rate of interest to the policyholder, and it is not variable in nature. Therefore, it is not included in these Separate Account statements. NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements of the Separate Account have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting principles followed by the Separate Account and the methods of applying those principles are presented below or in the footnotes which follow: INVESTMENT VALUATION--The investments in shares of the Funds are valued at the closing net asset value (market value) per share as determined by the Funds on the day of measurement. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--The investments in shares of the Funds are accounted for on the date the order to buy or sell is confirmed. Dividend income and distributions of capital gains are recorded on the ex-dividend date. Realized gains and losses from sales transactions are reported using the first-in, first-out ("FIFO") method of accounting for cost. The difference between cost and current market value of investments owned on the day of measurement is recorded as unrealized gain or loss on investment. VALUATION PERIOD DEDUCTIONS--Charges are made directly against the assets of the Separate Account divisions and are reflected daily in the computation of the unit values of the divisions. - -------------------------------------------------------------------------------- Strategic Advantage II 163 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, 1998, 1997 and 1996 were $1,740,661; $813,630 and $241,127, respectively. POLICYHOLDER RESERVES--Policyholder reserves are recorded in the Separate Account at the aggregate account values of the policyholders invested in the Separate Account divisions. To the extent that benefits to be paid to the policyholders exceed their account values, the Company will contribute additional funds to the benefit proceeds. - -------------------------------------------------------------------------------- Strategic Advantage II 164 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, 1998, 1997 and 1996 were $14,458,798; $8,284,944 and $2,843,666, respectively. Dividends made by the Funds are reinvested in the Funds. The following is a summary of Fund shares owned as of December 31, 1998:
Number Net Value of Asset of Shares Cost of FUND Shares Value at Market Shares - ---------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 1,127,232.206 $13.82 $ 15,578,349 $ 15,334,595 Growth 343,330.535 $26.29 9,026,160 8,510,696 Government Income -- $11.14 -- -- Partners 1,186,647.771 $18.93 22,463,242 22,570,797 Fred Alger Management, Inc.: American Small Capitalization 352,589.754 $43.97 15,503,371 14,851,950 American MidCap Growth 319,369.785 $28.87 9,220,207 7,858,579 American Growth 430,357.281 $53.22 22,903,614 18,608,688 American Leveraged AllCap 194,880.482 $34.90 6,801,329 5,293,171 Fidelity Management & Research Co.: Asset Manager 563,726.801 $18.16 10,237,279 9,501,494 Growth 733,232.497 $44.87 32,900,142 26,845,882 Overseas 1,026,528.069 $20.05 20,581,887 19,913,166 Money Market 18,412,252.400 $1.00 18,412,252 18,412,252 Index 500 609,942.422 $141.25 86,154,369 70,067,500 INVESCO Funds Group, Inc.: Total Return 488,861.727 $16.58 8,105,328 7,814,990 Industrial Income 583,181.351 $18.61 10,853,005 10,163,306 High Yield 696,358.875 $11.32 7,882,782 8,752,765 Utilities 114,789.679 $17.78 2,040,960 1,727,429 Small Company Growth 64,989.440 $11.52 748,678 674,581 Van Eck Associates Corporation: Worldwide Balanced -- $12.03 -- -- Worldwide Hard Assets 116,712.440 $9.20 1,073,755 1,517,809 Worldwide Bond 16,759.491 $12.28 205,807 201,853 Worldwide Emerging Markets 64,769.133 $7.12 461,156 414,017 Worldwide Real Estate 7,995.940 $9.54 76,281 76,310 AIM Advisors, Inc.: Capital Appreciation 47,795.065 $25.20 1,204,436 1,085,211 Government Securities 232,175.030 $11.18 2,595,717 2,560,855 ----------------- ----------------- Total $305,030,106 $272,757,896 ================= =================
- -------------------------------------------------------------------------------- Strategic Advantage II 165 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE C. INVESTMENTS (CONTINUED) For the year ended December 31, 1998, the cost of purchases (plus reinvested dividends) and sales of investments are as follows:
Beginning End FUND of Year Purchases Sales of Year - ------------------------------------------------------------------------------------------------------------------ Neuberger Berman Management Inc.: Limited Maturity Bond $6,490,167 $11,289,258 ($2,444,830) $15,334,595 Growth 4,895,677 7,029,074 (3,414,055) 8,510,696 Government Income 833,365 137,502 (970,867) -- Partners 11,515,832 13,300,529 (2,245,564) 22,570,797 Fred Alger Management, Inc.: American Small Capitalization 10,791,047 8,512,969 (4,452,066) 14,851,950 American MidCap Growth 4,680,691 5,007,799 (1,829,911) 7,858,579 American Growth 8,426,205 12,330,367 (2,147,884) 18,608,688 American Leveraged AllCap 2,939,669 4,357,148 (2,003,646) 5,293,171 Fidelity Management & Research Co.: Asset Manager 5,638,123 5,278,809 (1,415,438) 9,501,494 Growth 16,477,099 23,941,147 (13,572,364) 26,845,882 Overseas 12,237,937 23,905,882 (16,230,653) 19,913,166 Money Market 14,300,455 74,696,311 (70,584,514) 18,412,252 Index 500 32,789,297 45,050,855 (7,772,652) 70,067,500 INVESCO Funds Group, Inc.: Total Return 2,812,500 5,585,718 (583,228) 7,814,990 Industrial Income 5,602,678 5,964,437 (1,403,809) 10,163,306 High Yield 4,793,052 10,924,985 (6,965,272) 8,752,765 Utilities 1,129,569 919,214 (321,354) 1,727,429 Small Company Growth -- 775,726 (101,145) 674,581 Van Eck Associates Corporation: Worldwide Balanced 364,193 72,504 (436,697) -- Worldwide Hard Assets 959,451 1,175,104 (616,746) 1,517,809 Worldwide Bond -- 222,604 (20,751) 201,853 Worldwide Emerging Markets -- 771,909 (357,892) 414,017 Worldwide Real Estate -- 95,356 (19,046) 76,310 AIM Advisors, Inc. Capital Appreciation -- 1,174,137 (88,926) 1,085,211 Government Securities -- 2,744,143 (183,288) 2,560,855 --------------- ------------ -------------- ------------ Total $147,677,007 $265,263,487 ($140,182,598) $272,757,896 =============== ============ ============== ============
Aggregate proceeds from sales of investments for the year ended December 31, 1998 were $148,718,872. - -------------------------------------------------------------------------------- Strategic Advantage II 166 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE D. OTHER POLICY DEDUCTIONS The FirstLine and FirstLine products provide for certain deductions for sales and tax loads from premium payments received from the policyholders and for surrender charges and taxes from amounts paid to policyholders. Such deductions are taken before the purchase of divisional units or after the redemption of divisional units of the Separate Account. Such deductions are not included in the Separate Account financial statements. NOTE E. POLICY LOANS The FirstLine and FirstLine policies allow the policyholders to borrow against their policies by using them as collateral for a loan. At the time of borrowing against the policies, an amount equal to the loan amount is transferred from the Separate Account divisions to a Loan Division in the Company's General Account to secure the loan. As payments are made on the policy loan, amounts are transferred back from the Loan Division to the Separate Account divisions. Interest is credited to the balance in the Loan Division at a fixed rate. The Loan Division is not variable in nature and is not included in these Separate Account statements. NOTE F. FEDERAL INCOME TAXES The Separate Account is not taxed separately because the operations of the Separate Account are part of the total operations of the Company. The Company is taxed as a life insurance company under the Internal Revenue Code. The Separate Account is not taxed as a "Regulated Investment Company" under subchapter "M" of the Internal Revenue Code. - -------------------------------------------------------------------------------- Strategic Advantage II 167 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, 1998:
(Decrease) for Outstanding Increase Withdrawals Outstanding At Beginning for Payments and Other At End Division of Year Received Deductions of Year - ----------------------------------------------------------------------------------------------------------- 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 Industrial 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
- -------------------------------------------------------------------------------- Strategic Advantage II 168 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:
(Decrease) for Outstanding Increase Withdrawals Outstanding At Beginning for Payments and Other At End Division of Year Received Deductions of Year - -------------------------------------------------------------------------------------------------------------- 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 Industrial 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
- -------------------------------------------------------------------------------- Strategic Advantage II 169 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED) The following schedule summarizes the changes in divisional units for the year ended December 31, 1996:
(Decrease) for Outstanding Increase Withdrawals Outstanding at Beginning or Payments and Other at End Division of Year Received Deductions of Year - -------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 162,009.578 57,300.933 (584.620) 218,725.891 Growth 60,162.107 74,132.806 (726.930) 133,567.983 Government Income 77,187.706 65,930.987 (345.290) 142,773.403 Partners 73,535.288 203,456.199 (1,099.030) 275,892.457 Fred Alger Management, Inc.: American Small Capitalization 80,027.266 218,770.486 (1,724.430) 297,073.322 American MidCap Growth 19,692.860 131,814.883 (1,027.270) 150,480.473 American Growth 69,805.233 214,057.614 (1,687.560) 282,175.287 American Leveraged AllCap 2,494.731 51,210.999 (661.260) 53,044.470 Fidelity Management & Research Co.: Asset Manager 11,627.088 112,576.840 (295.760) 123,908.168 Growth 102,248.988 369,855.299 (1,818.620) 470,285.667 Overseas 93,906.733 275,584.696 (1,543.320) 367,948.109 Money Market 178,653.159 3,174,656.740 (2,599,601.930) 753,707.969 Index 500 91,903.027 551,031.963 (2,044.340) 640,890.650 INVESCO Funds Group, Inc.: Total Return 12,602.664 52,659.359 (771.540) 64,490.483 Industrial Income 20,026.102 67,339.104 (329.850) 87,035.356 High Yield 45,708.358 63,646.889 (356.140) 108,999.107 Utilities 1,879.859 16,197.511 (68.880) 18,008.490 Van Eck Associates Corporation: Worldwide Balanced 7,739.274 22,412.363 (342.850) 29,808.787 Worldwide Hard Assets 1,765.913 20,257.020 (56.840) 21,966.093
- -------------------------------------------------------------------------------- Strategic Advantage II 170 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE H. NET ASSETS Net assets at December 31, 1998 consisted of the following:
Accumulated Net Accumulated Net Realized Unrealized Investment Gains Gains Principal Income (Losses) On (Losses) On Division Transactions (Loss) Investments Investments Net Assets - ------------------------------------------------------------------------------------------------------------------------------ Neuberger Berman Management Inc.: Limited Maturity Bond $ 14,798,256 $ 554,555 $ (18,215) $ 243,753 $ 15,578,349 Growth 7,028,181 1,750,191 (267,675) 515,463 9,026,160 Government Income (197,709) 219,245 (21,536) - - Partners 19,164,868 2,232,497 1,173,430 (107,553) 22,463,242 Fred Alger Management, Inc.: American Small Capitalization 12,782,408 1,740,285 329,258 651,420 15,503,371 American MidCap Growth 6,729,922 570,025 558,634 1,361,626 9,220,207 American Growth 15,328,177 2,102,491 1,178,019 4,294,927 22,903,614 American Leveraged AllCap 4,597,430 102,339 593,403 1,508,157 6,801,329 Fidelity Management & Research Co.: Asset Manager 8,511,070 928,642 61,784 735,783 10,237,279 Growth 21,880,758 2,745,144 2,220,029 6,054,211 32,900,142 Overseas 17,959,130 1,286,196 667,842 668,719 20,581,887 Money Market 16,762,206 1,650,046 - - 18,412,252 Index 500 63,645,284 1,521,424 4,900,792 16,086,869 86,154,369 INVESCO Funds Group, Inc.: Total Return 7,241,724 359,909 213,358 290,337 8,105,328 Industrial Income 8,730,383 941,544 491,379 689,699 10,853,005 High Yield 7,183,287 1,366,993 202,483 (869,981) 7,882,782 Utilities 1,554,382 45,485 127,560 313,533 2,040,960 Small Company Growth 682,064 (586) (6,898) 74,098 748,678 Van Eck Associates Corporation: Worldwide Balanced (94,857) 49,411 45,446 - - Worldwide Hard Assets 1,509,491 144,822 (136,502) (444,056) 1,073,755 Worldwide Bond 201,935 (212) 130 3,954 205,807 Worldwide Emerging Markets 517,189 (1,736) (101,436) 47,139 461,156 Worldwide Real Estate 78,370 (225) (1,836) (28) 76,281 AIM Advisors, Inc.: Capital Appreciation 1,064,475 24,052 (3,314) 119,223 1,204,436 Government Securities 2,493,145 59,796 7,914 34,862 2,595,717 ------------ ----------- ----------- ----------- ------------ Total $240,151,569 $20,392,333 $12,214,049 $32,272,155 $305,030,106 ============ =========== =========== =========== ============
- -------------------------------------------------------------------------------- Strategic Advantage II 171 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE I. YEAR 2000 (UNAUDITED) The Company has initiated a program to prepare the Company's computer systems and applications for the year 2000. This program includes all systems utilized by the Company as well as the systems of other companies that interface with the Company. The Company has completed an assessment and is in the process of modifying portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. Accordingly, the Company does not expect the amounts required for this project to have a material effect on its financial position. The project is estimated to be completed no later than June 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, and conversions to new software, the Year 2000 will not pose significant operational problems for its computer software systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, it could have a material impact on the operations of the Company. The Company has initiated formal communications and interface testing plans with all of its suppliers and customers to determine the extent to which its interface systems are vulnerable to those third parties' failure to have their systems Year 2000 compatible and will act accordingly to prevent operational disruptions. - -------------------------------------------------------------------------------- Strategic Advantage II 172 APPENDIX A FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY
Attained | Attained | Attained Age Male Female Unisex | Age Male Female Unisex | Age Male Female Unisex --- ---- ------ ------ | --- ---- ------ ------ | --- ---- ------ ------ | | 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
- -------------------------------------------------------------------------------- Strategic Advantage II 173 APPENDIX A -- ENHANCED ENHANCED DEATH BENEFIT CORRIDOR FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY
Attained Male or Unisex Attained Male or Unisex Age Unisex 100/0 (I) Female 80/20 (II) Age Unisex 100/0 (I) Female 80/20 (II) | 0 11.727 14.234 12.149 | 36 3.920 4.586 4.037 1 11.785 14.209 12.194 | 37 3.793 4.437 3.906 2 11.458 13.815 11.857 | 38 3.670 4.293 3.780 3 11.128 13.417 11.515 | 39 3.553 4.154 3.658 4 10.803 13.023 11.178 | 40 3.439 4.021 3.541 5 10.481 12.635 10.845 | 41 3.330 3.894 3.429 6 10.161 12.253 10.514 | 42 3.226 3.771 3.322 7 9.844 11.875 10.187 | 43 3.125 3.654 3.218 8 9.530 11.505 9.863 | 44 3.028 3.541 3.119 9 9.221 11.141 9.545 | 45 2.936 3.432 3.023 10 8.918 10.784 9.233 | 46 2.846 3.328 2.931 11 8.623 10.436 8.928 | 47 2.761 3.227 2.843 12 8.338 10.098 8.634 | 48 2.678 3.129 2.758 13 8.066 9.771 8.353 | 49 2.599 3.035 2.676 14 7.808 9.455 8.085 | 50 2.522 2.945 2.597 15 7.564 9.150 7.831 | 51 2.449 2.858 2.522 16 7.335 8.857 7.592 | 52 2.378 2.774 2.449 17 7.118 8.575 7.364 | 53 2.311 2.693 2.379 18 6.911 8.302 7.148 | 54 2.246 2.615 2.312 19 6.713 8.038 6.939 | 55 2.184 2.540 2.248 20 6.521 7.782 6.737 | 56 2.125 2.468 2.187 21 6.334 7.534 6.540 | 57 2.068 2.398 2.128 22 6.150 7.293 6.347 | 58 2.014 2.330 2.071 23 5.969 7.059 6.158 | 59 1.962 2.265 2.017 24 5.791 6.831 5.971 | 60 1.912 2.201 1.965 25 5.615 6.611 5.788 | 61 1.864 2.139 1.915 26 5.441 6.396 5.608 | 62 1.818 2.079 1.867 27 5.271 6.188 5.431 | 63 1.774 2.022 1.821 28 5.104 5.986 5.258 | 64 1.732 1.967 1.777 29 4.940 5.791 5.089 | 65 1.692 1.914 1.735 30 4.781 5.601 4.925 | 66 1.654 1.863 1.695 31 4.626 5.418 4.765 | 67 1.617 1.815 1.657 32 4.476 5.241 4.610 | 68 1.583 1.769 1.620 33 4.330 5.069 4.459 | 69 1.550 1.724 1.585 34 4.188 4.902 4.314 | 70 1.518 1.681 1.552 35 4.052 4.742 4.173 | | |
- -------------------------------------------------------------------------------- Strategic Advantage II 174 APPENDIX A -- ENHANCED (CONT.) ENHANCED DEATH BENEFIT CORRIDOR FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY Attained Male or Unisex Age Unisex 100/0 (I) Female 80/20 (II) 71 1.503 1.655 1.535 72 1.488 1.631 1.519 73 1.475 1.607 1.504 74 1.462 1.585 1.490 75 1.451 1.564 1.477 76 1.441 1.545 1.466 77 1.432 1.527 1.455 78 1.424 1.510 1.445 79 1.416 1.495 1.436 80 1.409 1.480 1.428 81 1.378 1.440 1.395 82 1.348 1.402 1.363 83 1.319 1.366 1.333 84 1.291 1.332 1.304 85 1.265 1.300 1.276 86 1.241 1.270 1.250 87 1.217 1.241 1.225 88 1.194 1.214 1.201 89 1.172 1.188 1.178 90 1.151 1.163 1.155 91 1.141 1.150 1.144 92 1.131 1.137 1.133 93 1.120 1.125 1.122 94 1.109 1.112 1.110 95 1.097 1.098 1.097 96 1.083 1.084 1.084 97 1.069 1.069 1.069 98 1.054 1.054 1.054 99 1.040 1.040 1.040 100 1.000 1.000 1.000 - -------------------------------------------------------------------------------- Strategic Advantage II 175 APPENDIX B FACTORS FOR THE GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST FOR A LIFE INSURANCE POLICY
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 2.50 25 2.50 50 1.85 75 1.05 1 2.50 26 2.50 51 1.78 76 1.05 2 2.50 27 2.50 52 1.71 77 1.05 3 2.50 28 2.50 53 1.64 78 1.05 4 2.50 29 2.50 54 1.57 79 1.05 5 2.50 30 2.50 55 1.50 80 1.05 6 2.50 31 2.50 56 1.46 81 1.05 7 2.50 32 2.50 57 1.42 82 1.05 8 2.50 33 2.50 58 1.38 83 1.05 9 2.50 34 2.50 59 1.34 84 1.05 10 2.50 35 2.50 60 1.30 85 1.05 11 2.50 36 2.50 61 1.28 86 1.05 12 2.50 37 2.50 62 1.26 87 1.05 13 2.50 38 2.50 63 1.24 88 1.05 14 2.50 39 2.50 64 1.22 89 1.05 15 2.50 40 2.50 65 1.20 90 1.05 16 2.50 41 2.43 66 1.19 91 1.04 17 2.50 42 2.36 67 1.18 92 1.03 18 2.50 43 2.29 68 1.17 93 1.02 19 2.50 44 2.22 69 1.16 94 1.01 20 2.50 45 2.15 70 1.15 95 1.00 21 2.50 46 2.09 71 1.13 96 1.00 22 2.50 47 2.03 72 1.11 97 1.00 23 2.50 48 1.97 73 1.09 98 1.00 24 2.50 49 1.91 74 1.07 99 1.00 100 1.00
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage II 176 APPENDIX B -- ENHANCED ENHANCED DEATH BENEFIT CORRIDOR FACTORS FOR THE GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST FOR A LIFE INSURANCE POLICY
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 2.500 25 2.500 50 1.850 75 1.103 1 2.500 26 2.500 51 1.780 76 1.113 2 2.500 27 2.500 52 1.710 77 1.124 3 2.500 28 2.500 53 1.640 78 1.134 4 2.500 29 2.500 54 1.570 79 1.145 5 2.500 30 2.500 55 1.500 80 1.155 6 2.500 31 2.500 56 1.460 81 1.145 7 2.500 32 2.500 57 1.420 82 1.134 8 2.500 33 2.500 58 1.380 83 1.124 9 2.500 34 2.500 59 1.340 84 1.113 10 2.500 35 2.500 60 1.300 85 1.103 11 2.500 36 2.500 61 1.280 86 1.092 12 2.500 37 2.500 62 1.260 87 1.082 13 2.500 38 2.500 63 1.240 88 1.071 14 2.500 39 2.500 64 1.220 89 1.061 15 2.500 40 2.500 65 1.200 90 1.050 16 2.500 41 2.430 66 1.190 91 1.040 17 2.500 42 2.360 67 1.180 92 1.030 18 2.500 43 2.290 68 1.170 93 1.020 19 2.500 44 2.220 69 1.160 94 1.010 20 2.500 45 2.150 70 1.150 95 1.000 21 2.500 46 2.090 71 1.141 96 1.000 22 2.500 47 2.030 72 1.132 97 1.000 23 2.500 48 1.970 73 1.123 98 1.000 24 2.500 49 1.910 74 1.113 99 1.000 100 1.00
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage II 177 APPENDIX C PERFORMANCE INFORMATION POLICY PERFORMANCE The following hypothetical illustrations demonstrate how the actual investment experience of each division of the variable account affects the cash surrender value, account value and death benefit of a policy. These hypothetical illustrations are based on the actual historical return of each portfolio as if a policy had been issued on the date indicated. Each portfolio's annual total return is based on the total return calculated for each fiscal year. These annual total return figures reflect the net portfolio's management fees after any voluntary waiver and other operating expenses but do not reflect the policy level or variable account asset-based charges and deductions, which if reflected, would result in lower total return figures than those shown. The illustrations are based on the payment of a $5,750 annual premium, paid at the beginning of each year, for a hypothetical policy with a $300,000 face amount, the cash value accumulation test, death benefit option 1, issued to a preferred, non-smoker male, age 45. In each case, it is assumed that all premiums are allocated to the division illustrated for the period shown. The benefits are calculated for a specific date. The amount and timing of premium payments and the use of other policy features, such as policy loans, would affect individual policy benefits. The amounts shown for the cash surrender values, account values and death benefits take into account the charges against premiums, current cost of insurance and monthly deductions, the daily charge against the variable account for mortality and expense risks, and each portfolio's charges and expenses. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 47. This prospectus also contains illustrations based on assumed rates of return. SEE ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE 59. - -------------------------------------------------------------------------------- Strategic Advantage II 178 HYPOTHETICAL ILLUSTRATIONS Non-smoker Male Age 45 Cash Value Accumulation Test Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- AIM V.I. CAPITAL APPRECIATION FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 2.50% 5,058 4,483 300,000 12/31/95 35.69% 12,661 11,899 300,000 12/31/96 17.58% 19,364 18,846 300,000 12/31/97 13.51% 26,077 26,077 300,000 12/31/98 19.30% 35,941 35,941 300,000 AIM V.I. GOVERNMENT SECURITIES FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (3.73)% 4,773 4,198 300,000 12/31/95 15.56% 10,528 9,766 300,000 12/31/96 2.29% 14,705 14,188 300,000 12/31/97 8.16% 19,825 19,825 300,000 12/31/98 7.66% 25,711 25,711 300,000 ALGER AMERICAN GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 4.14% 5,132 4,557 300,000 12/31/91 40.39% 13,187 12,426 300,000 12/31/92 12.38% 19,105 18,587 300,000 12/31/93 22.47% 27,843 27,843 300,000 12/31/94 1.45% 32,298 32,298 300,000 12/31/95 36.37% 49,506 49,506 300,000 12/31/96 13.35% 60,439 60,439 300,000 12/31/97 25.75% 80,718 80,718 300,000 12/31/98 48.07% 124,944 124,944 300,000 ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 12.04% 5,494 4,919 300,000 12/31/97 19.68% 11,743 10,981 300,000 12/31/98 57.83% 24,488 23,970 300,000 The assumptions underlying these values are described in Performance Information, page 178. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage II 179 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 45 Cash Value Accumulation Test Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- ALGER AMERICAN MIDCAP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (1.54)% 4,873 4,298 300,000 12/31/95 44.45% 13,183 12,421 300,000 12/31/96 11.90% 19,019 18,501 300,000 12/31/97 15.01% 26,031 26,031 300,000 12/31/98 30.30% 39,225 39,225 300,000 ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 64.48% 7,898 7,323 300,000 12/31/90 8.71% 13,309 12,547 300,000 12/31/91 57.54% 26,896 26,378 300,000 12/31/92 3.55% 31,517 31,517 300,000 12/31/93 13.28% 40,239 40,239 300,000 12/31/94 (4.38)% 42,162 42,162 300,000 12/31/95 44.31% 66,510 66,510 300,000 12/31/96 4.18% 73,096 73,096 300,000 12/31/97 11.39% 85,434 85,434 300,000 12/31/98 15.53% 102,774 102,774 300,000 FIDELITY VIP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 31.51% 6,385 5,810 300,000 12/31/90 (11.73)% 9,575 8,813 300,000 12/31/91 45.51% 19,455 18,938 300,000 12/31/92 9.32% 25,203 25,203 300,000 12/31/93 19.37% 34,925 34,925 300,000 12/31/94 (0.02)% 38,816 38,816 300,000 12/31/95 35.36% 57,855 57,855 300,000 12/31/96 14.71% 70,647 70,647 300,000 12/31/97 23.48% 91,745 91,745 300,000 12/31/98 39.49% 132,946 132,946 300,000 The assumptions underlying these values are described in Performance Information, page 178. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage II 180 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 45 Cash Value Accumulation Test Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- FIDELITY VIP MONEY MARKET PORTFOLIO Year Annual Total Cash Surrender Account Death Ended Return * Value Value Benefit 12/31/89 9.12% 5,360 4,785 300,000 12/31/90 8.04% 10,505 9,743 300,000 12/31/91 6.09% 15,219 14,702 300,000 12/31/92 3.90% 19,564 19,564 300,000 12/31/93 3.23% 24,373 24,373 300,000 12/31/94 4.25% 29,548 29,548 300,000 12/31/95 5.87% 35,409 35,409 300,000 12/31/96 5.41% 41,348 41,348 300,000 12/31/97 5.51% 47,571 47,571 300,000 12/31/98 5.46% 54,036 54,036 300,000 FIDELITY VIP OVERSEAS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 26.28% 6,145 5,570 300,000 12/31/90 (1.67)% 10,374 9,612 300,000 12/31/91 8.00% 15,348 14,831 300,000 12/31/92 (10.72)% 16,888 16,888 300,000 12/31/93 37.35% 28,879 28,879 300,000 12/31/94 1.72% 33,381 33,381 300,000 12/31/95 9.74% 40,901 40,901 300,000 12/31/96 13.15% 50,595 50,595 300,000 12/31/97 11.56% 60,587 60,587 300,000 12/31/98 12.81% 72,448 72,448 300,000 FIDELITY VIP II ASSET MANAGER PORTFOLIO Year Annual Total Cash Surrender Account Death Ended Return * Value Value Benefit 12/31/90 6.72% 5,250 4,675 300,000 12/31/91 22.56% 11,717 10,955 300,000 12/31/92 11.71% 17,360 16,842 300,000 12/31/93 21.23% 25,455 25,455 300,000 12/31/94 (6.09)% 27,646 27,646 300,000 12/31/95 16.96% 36,998 36,998 300,000 12/31/96 14.60% 46,851 46,851 300,000 12/31/97 20.65% 61,118 61,118 300,000 12/31/98 15.05% 74,543 74,543 300,000 The assumptions underlying these values are described in Performance Information, page 178. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage II 181 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 45 Cash Value Accumulation Test Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- FIDELITY VIP II INDEX 500 PORTFOLIO Year Annual Total Cash Surrender Account Death Ended Return * Value Value Benefit 12/31/93 9.74% 5,388 4,813 300,000 12/31/94 1.04% 9,886 9,124 300,000 12/31/95 37.19% 18,777 18,259 300,000 12/31/96 22.82% 27,523 27,523 300,000 12/31/97 32.82% 41,961 41,961 300,000 12/31/98 28.31% 58,889 58,889 300,000 INVESCO VIF-EQUITY INCOME FUND (formerly VIF-Industrial Income Portfolio) Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 29.25% 6,281 5,706 300,000 12/31/96 22.28% 12,944 12,182 300,000 12/31/97 28.17% 21,451 20,933 300,000 12/31/98 15.30% 28,885 28,885 300,000 INVESCO VIF-HIGH YIELD FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 19.76% 5,847 5,272 300,000 12/31/96 16.59% 11,861 11,099 300,000 12/31/97 17.33% 18,390 17,873 300,000 12/31/98 1.42% 22,288 22,288 300,000 INVESCO VIF-SMALL COMPANY GROWTH FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 16.38% 5,692 5,117 300,000 INVESCO VIF-TOTAL RETURN FUND Year Annual Total Cash Surrender Account Death Ended Return * Value Value Benefit 12/31/95 22.79% 5,985 5,410 300,000 12/31/96 12.18% 11,586 10,824 300,000 12/31/97 22.91% 18,919 18,402 300,000 12/31/98 9.56% 24,675 24,675 300,000 The assumptions underlying these values are described in Performance Information, page 178. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage II 182 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 45 Cash Value Accumulation Test Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- INVESCO VIF-UTILITIES FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 9.08% 5,358 4,783 300,000 12/31/96 12.76% 10,940 10,179 300,000 12/31/97 23.41% 18,204 17,686 300,000 12/31/98 25.48% 27,411 27,411 300,000 NEUBERGER BERMAN GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 29.47% 6,291 5,716 300,000 12/31/90 (8.19)% 9,853 9,091 300,000 12/31/91 29.73% 17,724 17,207 300,000 12/31/92 9.54% 23,369 23,369 300,000 12/31/93 6.79% 29,264 29,264 300,000 12/31/94 (4.99)% 31,521 31,521 300,000 12/31/95 31.73% 46,735 46,735 300,000 12/31/96 9.14% 55,123 55,123 300,000 12/31/97 29.01% 75,945 75,945 300,000 12/31/98 15.53% 91,863 91,863 300,000 NEUBERGER BERMAN LIMITED MATURITY BOND PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 10.77% 5,435 4,860 300,000 12/31/90 8.32% 10,612 9,851 300,000 12/31/91 11.34% 16,080 15,563 300,000 12/31/92 5.18% 20,709 20,709 300,000 12/31/93 6.63% 26,400 26,400 300,000 12/31/94 (0.15)% 30,299 30,299 300,000 12/31/95 10.94% 37,951 37,951 300,000 12/31/96 4.31% 43,551 43,551 300,000 12/31/97 6.74% 50,469 50,469 300,000 12/31/98 4.39% 56,496 56,496 300,000 NEUBERGER BERMAN PARTNERS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 36.47% 6,612 6,037 300,000 12/31/96 29.57% 14,113 13,351 300,000 12/31/97 31.25% 23,486 22,969 300,000 12/31/98 4.21% 28,188 28,188 300,000 The assumptions underlying these values are described in Performance Information, page 178. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage II 183 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 45 Cash Value Accumulation Test Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- VAN ECK WORLDWIDE BOND FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 11.25% 5,457 4,882 300,000 12/31/91 18.39% 11,579 10,817 300,000 12/31/92 (5.25)% 14,627 14,109 300,000 12/31/93 7.79% 19,673 19,673 300,000 12/31/94 (1.32)% 23,392 23,392 300,000 12/31/95 17.30% 32,144 32,144 300,000 12/31/96 2.53% 36,928 36,928 300,000 12/31/97 2.38% 41,696 41,696 300,000 12/31/98 12.75% 51,254 51,254 300,000 VAN ECK WORLDWIDE EMERGING MARKETS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 26.82% 6,170 5,595 300,000 12/31/97 (11.61)% 9,399 8,637 300,000 12/31/98 (34.15)% 8,814 8,297 300,000 VAN ECK WORLDWIDE HARD ASSETS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/91 (2.93)% 4,810 4,235 300,000 12/31/92 (4.09)% 8,858 8,096 300,000 12/31/93 64.83% 20,842 20,324 300,000 12/31/94 (4.78)% 23,229 23,229 300,000 12/31/95 10.99% 30,273 30,273 300,000 12/31/96 18.04% 40,426 40,426 300,000 12/31/97 (1.67)% 43,502 43,502 300,000 12/31/98 (30.93)% 32,531 32,531 300,000 VAN ECK WORLDWIDE REAL ESTATE FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 (11.35)% 4,426 3,851 300,000 The assumptions underlying these values are described in Performance Information, page 178. *These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Advantage II 184 PART II UNDERTAKING TO FILE REPORTS Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 4, 1995 (File No. 33-88148). UNDERTAKING REGARDING INDEMNIFICATION Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 4, 1995 (File No. 33-88148). UNDERTAKING REQUIRED BY SECTION 26(E)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED Security Life of Denver Insurance Company represents that the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by the Company. CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following papers and documents: The facing sheet. Cross-Reference table. The prospectuses. Strategic Advantage Strategic Advantage II 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: Lawrence D. Taylor (See Exhibit 6.B). Ernst & Young, L.L.P. (See Exhibit 7.A). Sutherland Asbill & Brennan, LLP(See Exhibit 7.B). - -------------------------------------------------------------------------------- Strategic Advantage II - 1 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./6/ (2) Not Applicable. (3) (a) Security Life of Denver Distribution Agreement./6/ (b) Specimen Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Compensation Schedules. /5/ (i) Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Paine Webber Incorporated. /1/ (c) Commission Schedule for Policies./5/ (4) Not Applicable. (5) (a) Specimen Variable Universal Life Insurance Policy (Form No. 1197 (VUL)). /1/ (i) Specimen Variable Universal Life Insurance Policy issued in Maryland. (Form No. 1197 (VUL)- MD-5/97). /1/ (ii) Specimen Variable Universal Life Insurance Policy issued in Massachusetts. (Form No. 1197 (VUL)-MA-5/97). /1/ (iii) Specimen Variable Universal Life Insurance Policy issued in Texas. (Form No. 1197 (VUL)-TX- 5/97). /1/ (iv) Specimen Variable Universal Life Insurance Policy (Form No. 2501 (VUL)-7/97). /2/ (v) Specimen Variable Universal Life Insurance Policy (Form No. 2503 (VUL)-6/98). (b) Adjustable Term Insurance Rider (Form No. R2000-3/96). /1/ (c) Right to Exchange Rider (Form No. R-1504)./7/ (d) Waiver of Cost of Insurance Rider (Form No. R-1505)./7/ (e) Waiver of Specified Premium Total Disability Rider (Form No. R-1506)./7/ (f) Aviation Exclusion Rider (Form No. S-9622)./7/ (6) (a) Security Life of Denver's Restated Articles of Incorporation./6/ (b-g) Amendments to Articles of Incorporation through June 12, 1987./6/ (h) Security Life of Denver's By-Laws./6/ (i) Bylaws of Security Life of Denver Insurance Company (Restated with Amendments through September 30, 1997)./4/ (7) Not Applicable. (8) (a) Addendum to Sales Agreement./6/ (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. /5/ (ii) Sales Agreement by and among The Alger American Fund, Fred Alger Management, Inc., and Security Life of Denver Insurance Company. /6/ (iii) Sales Agreement by and among Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, and Security Life of Denver Insurance Company. /6/ (iv) Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. /6/ (v) Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. /6/ (vi) Participation Agreement among INVESCO Variable Investment Funds, Inc., INVESCO Funds Group, Inc., and Security Life of Denver Insurance Company. /6/ (vii) Participation Agreement between Van Eck Investment Trust and the Trust's investment adviser, - -------------------------------------------------------------------------------- Strategic Advantage II - 2 Van Eck Associates Corporation, and Security Life of Denver Insurance Company. /6/ (b)(i) First Amendment to Fund Participation Agreement between Security Life of Denver, Van Eck Investment Trust and Van Eck Associates Corporation. /5/ (ii) Second Amendment to Participation Agreement between Security Life of Denver, Van Eck Worldwide Insurance Trust and Van Eck Associates Corporation. /5/ (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. /5/ (iv) First Amendment to Participation Agreement by and among The Alger American Fund, Fred Alger Management, Inc., Security Life of Denver Insurance Company. /6/ (v) First Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. /6/ (vi) Second Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. /6/ (vii) First Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. /6/ (viii)Second Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. /6/ (ix) First Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc. /6/ (x) Third Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./7/ (xi) Third Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./7/ (c) (i) Service Agreement between Fred Alger Management, Inc. and Security Life of Denver Insurance Company./6/ (ii) Expense Allocation Agreement between A I M Advisors, Inc., A I M Distributors, Inc. and Security Life of Denver./7/ (iii) Service Agreement between INVESCO Funds Group, Inc. and Security Life of Denver Insurance Company./7/ (iv) Service Agreement between Neuberger & Berman Management Incorporated and Security Life of Denver Insurance Company./7/ (v) Service Agreement between Fidelity Investments Institutional Operations Company, Inc. and Security Life of Denver Insurance Company./7/ (vi) Side Letter between Van Eck Worldwide Insurance Trust and Security Life of Denver./7/ (d) Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation. /6/ (e) Amendment to Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation. /6/ (9) Not Applicable. (10) (a) Specimen Variable Life Insurance Application (Form No. Q-2006-9/97). /2, 4/ (b) Specimen Variable Life Insurance Application (Form No. Q-1155-98). /3, 4/ (c) Specimen Variable Life Insurance Application (Form No. Q-2006-9/97). /5/ (i) Variable Life Application Insert./7/ (ii) Binding Limited Life Insurance Coverage Form./7/ (iii) Automatic Telephone Privileges Sticker./7/ 2. Included as Exhibit 1.A(5) above. 3.A Opinion and Consent of Eugene L. Copeland as to securities being registered. /6/ B Opinion and Consent of Gary W. Waggoner as to securities being registered. /6/ 4. Not Applicable. - -------------------------------------------------------------------------------- Strategic Advantage II - 3 5. Not Applicable. 6.A Opinion and Consent of Shirley A. Knarr./4/ B Opinion and Consent of Lawrence D. Taylor. 7.A Consent of Ernst & Young, L.L.P. B Consent of Sutherland Asbill & Brennan LLP. 8. Not Applicable. 11. Issuance, Transfer and Redemption Procedures Memorandum. - ------------- /1/ Incorporated herein by reference to Post-Effective Amendment No. 2 to the form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on April 30, 1997 (File No. 33-88148). /2/ To be used on or before May 1, 1998. /3/ To be used on or before May 1, 1998, where Exhibit 1.A(10)(a)(i) has not been approved. /4/ Incorporated herein by reference to Post-Effective Amendment No. 3 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, 1997 (File No. 33-88148). /5/ Incorporated herein by reference to Post-Effective Amendment No. 4 to the form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on February 18, 1998 (File No. 33-88148). /6/ 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 April 17, 1998 (File No. 33-88148). /7/ Incorporated herein by reference to 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). - -------------------------------------------------------------------------------- Strategic Advantage II - 4 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, certify that they meet all the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under Securities Act of 1933 and have duly caused this Post- Effective Amendment No. 6 to the Registration Statement to be signed on their behalf by the undersigned, hereunto duly authorized, and their seal to be hereunto fixed and attested, all in the City and County of Denver and the State of Colorado on the 23rd day of April, 1999. 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 Advantage II - 5 Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 6 to the Registration Statement has been signed below by the following persons in the capacities with Security Life of Denver Insurance Company and on the date indicated. PRINCIPAL EXECUTIVE OFFICERS: /s/: Stephen M. Christopher - ---------------------------- Stephen M. Christopher President, Chief Executive Officer and Director /s/: Jim Livingston - ---------------------------- Jim Livingston Chief Operations Officer PRINCIPAL ACCOUNTING OFFICER: /s/ Shari A. Enger - ---------------------------- Shari A. Enger Vice President - Controller DIRECTORS: - ---------------------------- Thomas F. Conroy /s/ Linda B. Emory - ---------------------------- Linda B. Emory /s/ Michael W. Cunningham - ---------------------------- Michael W. Cunningham - -------------------------------------------------------------------------------- Strategic Advantage II - 6 EXHIBIT INDEX Exhibit No. Description of Exhibit - ----------- ---------------------- 1.A(5)(a)(v) Specimen Variable Universal Life Insurance Policy (Form No. 2503 (VUL)-6/98). 4.B Opinion and Consent of Lawrence D. Taylor. 7.A Consent of Ernst & Young L.L.P. B Consent of Sutherland Asbill & Brennan, LLP. 11. Issuance, Transfer and Redemption Procedures Memorandum - -------------------------------------------------------------------------------- Strategic Advantage II - 7 EX-1 2 POLICY FORM Exhibit 1.A(5)(a)(v) SECURITY LIFE OF DENVER INSURANCE COMPANY INSURED: JOHN DOE POLICY DATE: May 1, 1998 POLICY NUMBER: 65000001 INITIAL STATED DEATH BENEFIT: $100,000.00 [WE AGREE TO PAY the death benefit to the beneficiary upon the death of the insured while this policy is in force. WE ALSO AGREE to provide the other rights and benefits of the policy. These agreements are subject to the provisions of the policy.] [RIGHT TO EXAMINE PERIOD. You have the right to examine and return this policy within [10] days after receipt. The policy may be returned by delivering or mailing it to us at our Customer Service Center. Immediately upon return it will be deemed void as of the policy date. Upon return of the policy to us, we will refund all premiums paid.] In this policy "you" and "your" refer to the owner of the policy. "We", "us" and "our" refer to Security Life of Denver Insurance Company. /s/ Gary W. Waggoner /s/ Stephen M. Christopher Secretary President [THIS POLICY IS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.] [DEATH BENEFITS AND OTHER VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US UPON THE DEATH OF THE INSURED. THERE IS NO MATURITY DATE. FLEXIBLE PREMIUMS ARE PAYABLE BY YOU DURING THE LIFETIME OF THE INSURED UNTIL THE POLICY ANNIVERSARY NEAREST THE INSURED'S 100TH BIRTHDAY.] [ ] SECURITY LIFE OF DENVER INSURANCE COMPANY A Stock Company Customer Service Center P.O. Box 173888; Denver, Colorado 80217 Toll Free Number: 1(800) 848-6362 Form 2503 (VUL)-6/98 TABLE OF CONTENTS SCHEDULE.......................................................................5 DEFINITION OF TERMS............................................................6 INSURANCE COVERAGE PROVISIONS..................................................7 EFFECTIVE DATE OF COVERAGE.................................................7 BASE DEATH BENEFIT.........................................................7 CHANGE IN REQUESTED INSURANCE COVERAGE.....................................7 Requested Increases in Coverage..........................................8 Requested Decreases in Coverage..........................................8 Death Benefit Option Changes.............................................8 CONTINUATION OF COVERAGE AFTER AGE 100 ..................................8 PAYOUT OF PROCEEDS.........................................................9 PREMIUM PROVISIONS.............................................................9 INITIAL PREMIUM ALLOCATION.................................................9 SUBSEQUENT PREMIUM ALLOCATIONS............................................10 CHANGES TO PREMIUM ALLOCATIONS............................................10 SCHEDULED PREMIUMS........................................................10 UNSCHEDULED PREMIUMS......................................................10 NET PREMIUM...............................................................10 PREMIUM LIMITATION........................................................10 VARIABLE ACCOUNT PROVISION....................................................11 THE VARIABLE ACCOUNT......................................................11 VARIABLE ACCOUNT DIVISIONS................................................11 CHANGES WITHIN THE VARIABLE ACCOUNT.......................................11 GENERAL ACCOUNT PROVISIONS....................................................12 THE GENERAL ACCOUNT.......................................................12 GUARANTEED INTEREST DIVISION..............................................12 LOAN DIVISION.............................................................12 Form 2503 (VUL) - 6/98 Page 2 TRANSFER PROVISIONS...........................................................12 ACCOUNT VALUE PROVISIONS......................................................12 ACCOUNT VALUES ON THE INVESTMENT DATE.....................................13 ACCUMULATION UNIT VALUE...................................................13 ACCUMULATION EXPERIENCE FACTOR............................................13 ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT....................13 ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION.........................14 ACCOUNT VALUE OF THE LOAN DIVISION........................................14 MONTHLY DEDUCTION AND REFUND..................................................15 MONTHLY DEDUCTION.........................................................15 COST OF INSURANCE.........................................................15 PERSISTENCY REFUND........................................................15 LOAN PROVISIONS...............................................................16 POLICY LOANS..............................................................16 LOAN INTEREST.............................................................16 LOAN DIVISION.............................................................16 PARTIAL WITHDRAWAL PROVISIONS.................................................16 SURRENDER PROVISIONS..........................................................17 SURRENDER VALUE...........................................................17 BASIS OF COMPUTATIONS.....................................................17 FULL SURRENDERS...........................................................17 GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS........................18 GRACE PERIOD..............................................................18 THREE YEAR CONTINUATION PERIOD............................................18 GUARANTEE PERIOD......................................................... 19 TERMINATION...............................................................19 REINSTATEMENT.............................................................19 DEFERRAL OF PAYMENT.......................................................20 Form 2503 (VUL) - 6/98 Page 3 GENERAL POLICY PROVISIONS.....................................................20 THE POLICY................................................................20 AGE.......................................................................20 PROCEDURES................................................................21 OWNERSHIP.................................................................21 BENEFICIARIES.............................................................21 EXCHANGE RIGHT............................................................21 COLLATERAL ASSIGNMENT.....................................................21 INCONTESTABILITY..........................................................21 MISSTATEMENT OF AGE OR SEX................................................22 SUICIDE EXCLUSION.........................................................22 PERIODIC REPORTS..........................................................22 ILLUSTRATION OF BENEFITS AND VALUES.......................................22 NONPARTICIPATING..........................................................22 CUSTOMER SERVICE CENTER...................................................22 PAYOUTS OTHER THAN AS ONE SUM.................................................23 ELECTION..................................................................23 PAYOUT OPTIONS............................................................23 CHANGE AND WITHDRAWAL.....................................................23 EXCESS INTEREST...........................................................24 MINIMUM AMOUNTS...........................................................24 SUPPLEMENTARY POLICY......................................................24 INCOME PROTECTION.........................................................24 DEATH OF PRIMARY PAYEE....................................................24 PAYMENTS OTHER THAN MONTHLY...............................................24 SETTLEMENT OPTION TABLES......................................................25 Additional benefits or riders, if any, will be listed in the Schedule. The additional provisions will be inserted in the policy. Form 2503 (VUL) - 6/98 Page 4 SCHEDULE (Schedule Date: PolicyDate) POLICY INFORMATION Policy Number 65000001 Initial Stated Death Benefit $100,000.00 Insured JOHN DOE Death Benefit Option OPTION 1 Age And Sex 35, Male Minimum Annual Premium $365.76 Premium Class Non-Smoker Guarantee Period Annual Premium Policy Date May 1, 1998 Initial Scheduled Premium $1,600.00 Annually
Definition of Life Insurance Test Guideline Premium/Cash Value Corridor Test CUSTOMER SERVICE CENTER: P.O. Box 173888, Denver, Colorado 80217-3888 [Coverage will expire prior to the policy anniversary nearest the insured's 100th birthday if premiums are insufficient to continue coverage. Coverage will also be affected by Partial Withdrawals, Policy Loans, changes in the current cost of insurance rates, the actual credited interest rate for the Guaranteed Interest Division and the investment experience of the Variable Account.] [ ] Form 2503 (VUL) - 6/98 Page 5 SCHEDULE (CONTINUED) BENEFIT PROFILE
Segment Guideline Segment Benefit Issue Effective Annual Target Description Amount Age Date Premium Premium - --------------------------------- ------------- --------- --------------- -------------- ------------- Stated Death Benefit (Segment #1) $100,000.00 35 May 1, 1998 $1,445.24 $3,981.00
[ ] Form 2503 (VUL) - 6/98 Page 5A SCHEDULE (CONTINUED) EXPENSE CHARGES A. PREMIUM EXPENSE CHARGES (As a Percent of all premiums) - Premium expense charges will equal the sum of the following: 1. Sales Load: Premiums Paid Premiums Paid in Up to Segment Target Premium Excess of Segment Target Premium Years 1-10 12% 3% Years 11+ 3% 3% 2. State and Local Taxes: 2.5% 3. Federal Deferred Acquisition Cost Tax: [1.5%] [We reserve the right to increase or decrease the premium expense charges for taxes due to any change in tax law. We further reserve the right to increase or decrease the premium expense charges for federal deferred acquisition cost taxes due to any change in the cost to us.] B. MONTHLY EXPENSE CHARGES - Monthly expense charges will equal the sum of the following: Initial Policy Charge: $13 per month for the first 36 months $3 per month thereafter Monthly Administrative Charge: $0.025 per thousand of Stated Death Benefit (or Target Death Benefit, if greater), for all years. ANNUAL MORTALITY AND EXPENSE RISK CHARGE (Based on the percentage of assets in each Variable Account Division) [Mortality And Expense Risk Charge: 0.75%] Form 2503 (VUL) - 6/98 Page 5B SCHEDULE (CONTINUED) [POLICYHOLDER TRANSACTION CHARGES] [Requests for Sales Illustrations:]First illustration each year is free of charge; thereafter $25 for each illustration requested. Partial Withdrawal Service Fee: See below [Other Policy Transaction Charges: The charges for transfers divisions of the Variable Account or between the Guaranteed Interest Division and the Variable Account Divisions; charges for premium allocation changes; and charges for other Variable Account management functions are governed by the Prospectus in effect at the time of the transaction.] POLICY LOANS Policy Loan Interest Rate: 4.75% per year Guaranteed Interest Rate Credited to Loan Division: 4.00% per year Minimum Loan Amount: $100 Maximum Loan Amount: Refer to the Loan Provisions section PARTIAL WITHDRAWALS Minimum Partial Withdrawal Amount: $100 Maximum Partial Withdrawal Amount: Amount which will leave $500 as the Net Account Value Partial Withdrawal Service Fee: $25 Limit on Partial Withdrawals: One per policy year GUARANTEED INTEREST DIVISION [Guaranteed Interest Rate For Guaranteed Interest Division: 4.00% per year] Form 2503 (VUL) - 6/98 Page 5C SCHEDULE (CONTINUED) To comply with the Definition of Life Insurance Test you have elected, the policy's Base Death Benefit at any time will be at least equal to the Account Value times the appropriate factor from this table. DEFINITION OF LIFE INSURANCE DEATH BENEFIT FACTORS BASED ON GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR ATTAINED FACTOR AGE AGE AGE AGE - -------- -------- -------- -------- -------- -------- -------- --------- 0 2.50 25 2.50 50 1.85 75 1.05 1 2.50 26 2.50 51 1.78 76 1.05 2 2.50 27 2.50 52 1.71 77 1.05 3 2.50 28 2.50 53 1.64 78 1.05 4 2.50 29 2.50 54 1.57 79 1.05 5 2.50 30 2.50 55 1.50 80 1.05 6 2.50 31 2.50 56 1.46 81 1.05 7 2.50 32 2.50 57 1.42 82 1.05 8 2.50 33 2.50 58 1.38 83 1.05 9 2.50 34 2.50 59 1.34 84 1.05 10 2.50 35 2.50 60 1.30 85 1.05 11 2.50 36 2.50 61 1.28 86 1.05 12 2.50 37 2.50 62 1.26 87 1.05 13 2.50 38 2.50 63 1.24 88 1.05 14 2.50 39 2.50 64 1.22 89 1.05 15 2.50 40 2.50 65 1.20 90 1.05 16 2.50 41 2.43 66 1.19 91 1.04 17 2.50 42 2.36 67 1.18 92 1.03 18 2.50 43 2.29 68 1.17 93 1.02 19 2.50 44 2.22 69 1.16 94 1.01 20 2.50 45 2.15 70 1.15 95 1.00 21 2.50 46 2.09 71 1.13 96 1.00 22 2.50 47 2.03 72 1.11 97 1.00 23 2.50 48 1.97 73 1.09 98 1.00 24 2.50 49 1.91 74 1.07 99 1.00 100 and 1.00 older Form 2503 (VUL) - 6/98 Page 5D SCHEDULE (CONTINUED) [TABLE OF GUARANTEED RATES] Guaranteed Maximum Cost of Insurance Rates Per $1000 (Basic)
[Attained Monthly Cost of [Attained Monthly Cost of [Attained Monthly Cost of [Attained Monthly Cost of Age] Insurance Rate Age] Insurance Rate Age] Insurance Rate Age] Insurance Rate -------- --------------- -------- --------------- -------- --------------- -------- ---------------- 0 0.34845 26 0.14419 51 0.60870 76 5.91225 1 0.08917 27 0.14252 52 0.66377 77 6.46824 2 0.08251 28 0.14169 53 0.72636 78 7.04089 3 0.08167 29 0.14252 54 0.79730 79 7.64551 4 0.07917 30 0.14419 55 0.87326 80 8.30507 5 0.07501 31 0.14836 56 0.95591 81 9.03761 6 0.07167 32 0.15252 57 1.04192 82 9.86724 7 0.06667 33 0.15919 58 1.13378 83 10.80381 8 0.06334 34 0.16669 59 1.23235 84 11.82571 9 0.06167 35 0.17586 60 1.34180 85 12.91039 10 0.06084 36 0.18670 61 1.46381 86 14.03509 11 0.06417 37 0.20004 62 1.60173 87 15.18978 12 0.07084 38 0.21505 63 1.75809 88 16.36948 13 0.08251 39 0.23255 64 1.93206 89 17.57781 14 0.09584 40 0.25173 65 2.12283 90 18.82881 15 0.11085 41 0.27424 66 2.32623 91 20.14619 16 0.12585 42 0.29675 67 2.54312 92 21.57655 17 0.13919 43 0.32260 68 2.77350 93 23.20196 18 0.14836 44 0.34929 69 3.02328 94 25.28174 19 0.15502 45 0.37931 70 3.30338 95 28.27411 20 0.15836 46 0.41017 71 3.62140 96 33.10676 21 0.15919 47 0.44353 72 3.98666 97 41.68475 22 0.15752 48 0.47856 73 4.40599 98 58.01259 23 0.15502 49 0.51777 74 4.87280 99 83.33333 24 0.15169 50 0.55948 75 5.37793 25 0.14752
The rates shown are for a standard rate class. If the policy is based on a special rate class (other than standard), the maximum cost of insurance rates will be adjusted using the rating factor shown in the Benefit Profile of the Schedule for the special class. If the special rate class is a stated percentage increase, the maximum cost of insurance rates will be determined by multiplying the rates for a standard rate class shown above by the rating factor shown in the Benefit Profile of the Schedule. If the special rate class is a flat amount per $1,000, the maximum cost of insurance rates will be determined by adding the flat amount per $1,000 shown in the Benefit Profile of the Schedule to the rate per $1,000 for the standard rate class shown above. The rates shown above are based on the 1980 Commissioners' Standard Ordinary Male Smoker Composite Mortality Table (Male), age nearest birthday. Form 2503 (VUL) - 6/98 Page 5E DEFINITION OF TERMS ACCOUNT VALUE - The sum of the amounts allocated to the Divisions of the Variable Account and to the Guaranteed Interest Division, as well as any amount set aside in the Loan Division to secure a Policy Loan. ACCUMULATION UNIT - A unit of measurement used to calculate the Account Value in each Division of the Variable Account. ACCUMULATION UNIT VALUE - The value of an Accumulation Unit of each Division of the Variable Account. The Accumulation Unit Value is determined as of each Valuation Date. BASE DEATH BENEFIT - The Base Death Benefit is defined in the Base Death Benefit provision of the policy. CASH SURRENDER VALUE - The amount of your Account Value plus any refund of sales load due. CUSTOMER SERVICE CENTER - Our administrative office whose address is P.O. Box 173888, Denver, CO 80217. DIVISION(S) OF THE VARIABLE ACCOUNT - The investment options available, each of which invests in shares of one of the investment portfolios. GENERAL ACCOUNT - The account which contains all of our assets other than those held in the variable account or our other separate accounts. GUARANTEED INTEREST DIVISION - Part of our General Account to which a portion of the Account Value may be allocated and which provides guarantees of principal and interest. GUIDELINE ANNUAL PREMIUM - The premium used to calculate how Net Premium is allocated to each segment of Stated Death Benefit and to determine any persistency refund. INITIAL PERIOD - The Initial Period ends on the earlier of: a) the date this policy was delivered to you plus the Right to Examine Period, so long as we receive notice of the delivery date at our Customer Service Center before the date defined in (b), or (b) the date this policy is mailed from our Customer Service Center plus five days and the Right to Examine Period. INVESTMENT DATE -The date we allocate funds to your policy. We will allocate the initial Net Premium to your policy on the Valuation Date immediately following the latest of the date: (1) we receive the amount of premium required for coverage to begin; (2) we have approved the policy for issue; and (3) all issue requirements have been met and received in our Customer Service Center. LOAN DIVISION - Part of our General Account in which funds are set aside to secure any outstanding Policy Loan and accrued loan interest when due. MONTHLY PROCESSING DATE - The date each month on which the monthly deductions from the Account Value are due. The first Monthly Processing Date will be the policy date or the Investment Date, if later. Subsequent Monthly Processing Dates will be the same date as the policy date each month thereafter unless this is not a Valuation Date, in which case the Monthly Processing Date occurs on the next Valuation Date. NET ACCOUNT VALUE - The amount of the Account Value minus any Policy Loan and accrued loan interest. NET CASH SURRENDER VALUE - The amount of the Cash Surrender Value minus any Policy Loan and accrued loan interest. NET PREMIUM - The Net Premium equals the premium paid minus the premium expense charges shown in the Schedule. These charges are deducted from the premiums before the premium is applied to your Account Value. [PARTIAL WITHDRAWAL - The withdrawal of a portion of your Net Account Value from the policy. The Partial Withdrawal may reduce the amount of Base Death Benefit in force.] POLICY LOAN - The sum of amounts you have borrowed from your policy, increased by any Policy Loan interest capitalized when due, and reduced by any Policy Loan repayments. Form 2503 (VUL)-6/98 Page 6 [RIGHT TO EXAMINE PERIOD - The period of time within which the owner may examine the policy and return it for a refund.] [SCHEDULED PREMIUM - The premium amount which you specify on the application as the amount you intend to pay at fixed intervals over a specified period of time. Premiums may be paid on a quarterly, semiannual, or annual basis, as you determine. You need not pay the Scheduled Premium, and you may change it at any time. Also, within limits, you may pay less or more than the Scheduled Premium.] SEGMENT - The Stated Death Benefit shown on the Benefit Profile of the Schedule is the initial Segment, or Segment 1. Each increase in the Stated Death Benefit (other than an option change) is a new Segment. Each new Segment will be shown separately on the Benefit Profile of the Schedule. The first year for a Segment begins on the effective date of the Segment and ends one year later. Each subsequent year begins at the end of the prior Segment year. Each new Segment may be subject to new expense charges, cost of insurance charges and incontestability and suicide exclusion periods. STATED DEATH BENEFIT - The sum of the Segments under the policy. The Stated Death Benefit changes when there is an increase or a decrease or when a transaction on the policy causes it to change (for example, a partial withdrawal under an Option 1 Base Death Benefit may cause the Stated Death Benefit to change). TARGET DEATH BENEFIT - The Target Death Benefit for your policy is defined in the Adjustable Term Insurance Rider, if any, attached to the policy. VALUATION DATE - Each date as of which the net asset value of the shares of the investment portfolios and unit values of the Divisions are determined, Except for days that a Division's corresponding portfolio does not value its shares, a Valuation Date is any day: (a) The New York Stock Exchange ("NYSE") is open for trading and on which Security Life's Customer Service Center is open for business; or (b) as may be required by law. VALUATION PERIOD - The period which begins at 4:00 p.m. Eastern Time on Valuation Date and ends at 4:00 p.m. Eastern Time on the next succeeding Valuation Date. Form 2503 (VUL)-6/98 Page 6a INSURANCE COVERAGE PROVISIONS EFFECTIVE DATE OF COVERAGE [The policy date shown in the Schedule is the effective date for all coverage provided in the original application. The effective date is subject to the payment of the amount of premium required for coverage to begin and the acceptance of the policy by you during the continued insurability of all persons insured by this policy and any riders attached. The policy date is the date from which we measure policy years and determine the Monthly Processing Date. Monthly Processing Dates are the same calendar day of each month as the policy date unless this is not a Valuation Date in which case the Monthly Processing Date occurs on the next Valuation Date. A policy anniversary occurs each year on the same month and day as the policy date unless this is not a Valuation Date in which case the policy anniversary occurs on the next Valuation Date. The effective date for new Segments and additional benefits is shown in the Schedule.] BASE DEATH BENEFIT The Base Death Benefit will be, at any time, determined as follows: Option 1: Under Option 1, the Base Death Benefit is the greater of: (a) the Stated Death Benefit; or (b) your Account Value multiplied by the appropriate factor from the Definition of Life Insurance Factors shown in the schedule. Option 2: Under Option 2, the Base Death Benefit is the greater of: (a) the Stated Death Benefit plus the Account Value, or (b) your Account Value multiplied by the appropriate factor from the Definition of Life Insurance Factors shown in the schedule. The Stated Death Benefit and the death benefit option are shown in the Schedule. [This policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the policy shall be construed in a manner consistent with that design. The Base Death Benefit in force at any time shall not be less than the amount of insurance necessary to achieve such qualification under the applicable provisions of the Internal Revenue Code in existence at the time the policy is issued. We reserve the right to amend the policy or adjust the amount of insurance when required. We will send you a copy of any policy amendment.] CHANGE IN REQUESTED INSURANCE COVERAGE You may request that the insurance coverage be increased or decreased. Decreases are not allowed before the first policy anniversary. The change in coverage may not be for an amount less than $1,000. The effective date of the change will be the monthly anniversary immediately following the date your written application is approved by us. After any change to the Stated Death Benefit, you will receive an amended Schedule reflecting the change, the benefit under any riders, if applicable, the guaranteed cost of insurance rates, the Guideline Annual Premium, and the new target premium. REQUESTED INCREASES IN COVERAGE [Subject to our limits, you may request an increase in the Stated Death Benefit. An increase will become effective as of the monthly anniversary after we have approved your application for increase. You must provide evidence satisfactory to us that the insured is insurable according to our normal rules of underwriting for this type of policy. This evidence will include an application and may include required medical information. An Form 2503 (VUL)-6/98 Page 7 increase will consist of a new Segment of Stated Death Benefit. Each new Segment will result in a new sales load which will be deducted from the premium allocated to the new Segment. The new Segment may also be subject to new monthly expense charges, cost of insurance charges and incontestability and suicide exclusion periods.] REQUESTED DECREASES IN COVERAGE [After the first policy anniversary, you may request a decrease in the Stated Death Benefit. A decrease will be effective as of the monthly anniversary immediately following the date your written application is approved by us. A decrease will first reduce Adjustable Term Insurance Rider coverage, if any is attached to your policy, and will then reduce each of the Stated Death Benefit Segments in the same proportion as the Stated Death Benefit is reduced.] [The Stated Death Benefit after any change must equal at least the lesser of the Initial Stated Death Benefit or $50,000.] DEATH BENEFIT OPTION CHANGES [Beginning with the first policy anniversary and ending with the policy anniversary nearest the Insured's 100th birthday, you may request a change to the death benefit option. Changes must be requested at least 30 days prior to the policy anniversary. The change will be effective as of the policy anniversary. A death benefit option change applies to the entire Stated Death Benefit. For us to approve a change to the death benefit option from Option 1 to Option 2, you must submit evidence to us that the insured is insurable according to our normal rules of underwriting for this type of policy. This evidence will include an application and may include required medical information. We may not allow any change if it would reduce the Stated Death Benefit below the minimum we require to issue this policy at the time of reduction. After the effective date of the change, the Stated Death Benefit will be changed according to the following table:] OPTION CHANGE FROM TO STATED DEATH BENEFIT FOLLOWING CHANGE EQUALS: Option 1 Option 2 Stated Death Benefit prior to such change minus your Account Value as of the effective date of the change. Option 2 Option 1 Stated Death Benefit prior to such change plus your Account Value as of the effective date of the change. For purposes of death benefit option changes, your Account Value will be allocated to each Segment in the same proportion that the Segment bears to the Stated Death Benefit as of the effective date of the change. CONTINUATION OF COVERAGE AFTER AGE 100 If the policy is in force on the policy anniversary nearest the Insured's 100th birthday, the policy will continue pursuant to the terms of the policy, except: on this date: (1) if an Adjustable Term Insurance Rider (ATR) is attached to the policy, the Target Death Benefit defined in the ATR will become the Stated Death Benefit for the policy and the ATR will terminate; (2) All other riders attached to the policy will also terminate; (3) the portion of your Account Value invested in the divisions of the Variable Account will be transferred into the Guaranteed Interest Division and no further investment in the divisions of the Variable Account will be allowed;. and (4) If the death benefit option in force on the policy is Option 2, the policy will be converted to death benefit Option 1 in accordance with the procedures outlined in the Death Benefit Option Changes provision of the policy and no further changes will be allowed tn the death benefit option. Form 2503 (VUL)-6/98 Page 8 [After the policy anniversary nearest the Insured's 100th birthday, no further premiums will be accepted and no monthly deductions will be made. However, a one time administrative fee of $200 will be charged against the policy's Account. We will continue to credit interest to the Account Value. Policy loans and withdrawals continue to be available. Any existing policy loan will continue. Policy loan interest will continue to accrue. Payments on policy loans and policy loan interest will be accepted. The policy will enter the 61-day grace period if the surrender value is zero or less.] PAYOUT OF PROCEEDS The proceeds is the amount we will pay: a) upon surrender of the policy, or b) upon the death of the insured. The proceeds upon surrender of this policy will be the Net Cash Surrender Value. The insured's age is the age listed in the Schedule increased by the number of completed policy years since the policy date. The amount of proceeds payable upon the death of the insured will be the Base Death Benefit in effect on the date of the insured's death; plus any amounts payable from any additional benefits provided by rider; minus any outstanding Policy Loan including accrued but unpaid interest; minus any unpaid monthly deductions incurred prior to the date of the insured's death, plus any premiums received after the date of the insured's death. The calculation of the death benefit will be computed as of the date of the insured's death. [We will determine the amount of proceeds payable upon the death of the insured when we have received due proof of death satisfactory to us and any other information which is necessary to process the claim. Any proceeds we pay are subject to adjustments as provided in the Misstatement of Age or Sex, Suicide Exclusion and Incontestability provisions.] [We will pay proceeds in one sum unless you request an alternate form of payment. There are many possible methods of payment. The available payout options are described in the Payouts Other Than As One Sum provision. Contact us or your registered representative for additional information. Interest will be paid on the one sum death proceeds from the date of the insured's death to the date of payment, or until a payout option is selected. Interest will be at the rate we declare, or at any higher rate required by law.] [ ] PREMIUM PROVISIONS INITIAL PREMIUM ALLOCATION If the Initial Period has not ended on the Investment Date, Net Premium amounts designated for allocation to divisions of the Variable Account will be allocated to the money market division and any Net Premium amount designated for allocation to the Guaranteed Interest Division will be allocated to that division. On the Valuation Date immediately following the end of the Initial Period, the balance of the money market division will be transferred to the other divisions of the Variable Account according to the allocations shown in your latest instructions received at our Customer Service Center. The amounts allocated to the Guaranteed Interest Division will remain in that division. If the Initial Period has ended on the Investment Date, Net Premium amounts will be allocated to divisions of the Variable Account and/or Guaranteed Interest Division in accordance with the allocation shown in your latest instructions received at our Customer Service Center. Form 2503(VUL)-6/98 Page 9 SUBSEQUENT PREMIUM ALLOCATIONS After the initial premium allocation, all future scheduled and unscheduled premiums will be allocated to the Investment Divisions in accordance with the allocation shown in the latest instructions received at our Customer Service Center (unless you otherwise specify in writing) on the Valuation date immediately following our receipt of the premium at our Customer Service Center. CHANGES TO PREMIUM ALLOCATIONS [You may change your premium allocation in accordance with the instructions included in your annual policy prospectus. If the change causes a premium allocation charge to be incurred according to the Schedule, we will deduct a charge from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value of each Division bears to your Net Account Value. The amount of this charge is shown in the Schedule.] SCHEDULED PREMIUMS [The Scheduled Premium as shown in the Schedule may be paid while this policy is in force prior to the policy anniversary nearest the Insured's 100th birthday. You may increase or decrease the amount of the Scheduled Premium, subject to limits we may set and provisions in the Premium Limitation provision. Under conditions provided in the Grace Period provision and the Guarantee Period provision, you may be required to make premium payments to keep the policy in force. You may pay premiums on a monthly basis through an automated payment facility. All payment modes are subject to our minimum requirements for the payment mode selected.] UNSCHEDULED PREMIUMS [You may make unscheduled premium payments at any time the policy is in force prior to the policy anniversary nearest the Insured's 100th birthday, subject to the Premium Limitation provision. Unless you tell us otherwise, these premium payments will first be applied to reduce or pay off any existing Policy Loan and, as such, premium expense charges will not be deducted. We may limit the amount of such unscheduled premium payments if the payment would result in an increase in the Base Death Benefit. If the net amount at risk is increased as a result of an unscheduled premium, we may require evidence of insurability satisfactory to us that the insured is insurable according to our normal rules of underwriting for this type of policy. This evidence will include an application and may include required medical information. The net amount at risk is the difference between the Base Death Benefit and your Account Value.] NET PREMIUM The Net Premium equals the premium paid minus the premium expense charges shown in the Schedule. Premiums allocated to a new Segment will be subject to a new sales load. Premiums are allocated in the same proportion that the Guideline Annual Premium of each Segment bears to the sum of the Guideline Annual Premiums of all Segments. The Guideline Annual Premium for each Segment is shown in the Schedule. The target premium for each Segment is also shown in the Schedule. PREMIUM LIMITATION If the Definition of Life Insurance test used for your policy is the Guideline Premium/Cash Value Corridor Test, we will not accept any premium that causes your policy not to qualify as a life insurance policy under the Internal Revenue Code. No premium may be paid after the Insured's death. [ ] Form 2503(VUL)-6/98 Page 10 VARIABLE ACCOUNT PROVISION THE VARIABLE ACCOUNT [The Variable Account is an account established by us, pursuant to the laws of the State of Colorado, to separate the assets funding the benefits for the class of policies to which this policy belongs from the other assets of Security Life of Denver Insurance Company.] [The Variable Account is registered as a unit investment trust under the Investment Company Act of 1940. All income, gains and losses, whether or not realized, from assets allocated to the Variable Account are credited to or charged against the Variable Account without regard to income, gains or losses of our General Account. The assets of the Variable Account are our property but are separate from our General Account and our other Variable Accounts. That portion of the assets of the Variable Account which is equal to the reserves and other policy liabilities with respect to the Variable Account is not subject to creditor claims against us.] VARIABLE ACCOUNT DIVISIONS [The Variable Account is divided into divisions, each of which invests in a series fund portfolio designed to meet the objectives of the division. The current eligible divisions are shown in your annual policy prospectus. We may, from time to time, add additional divisions. If we do, you may be permitted to select from these other divisions subject to the terms and conditions we may impose on those allocations.] We reserve the right to limit the number of divisions in which you may invest over the life of the policy. This limit, if any, will be listed in the updated policy prospectus provided to you each year. CHANGES WITHIN THE VARIABLE ACCOUNT [When permitted by law, and subject to any required notice to you and approval of the Securities and Exchange Commission ("SEC"), state regulatory authorities or policy owners, we may from time to time make the following changes to the Variable Account: o Make additional divisions available. These divisions will invest in investment portfolios we find suitable for the policy. o Eliminate divisions from the Variable Account, combine 2 or more divisions, or substitute a new portfolio for the portfolio in which a division invests. A substitution may become necessary if, in our judgment, a portfolio no longer suits the purposes of the policy. This may happen due to a change in laws or regulations, or a change in a portfolio's investment objectives or restrictions. This may also happen if the portfolio is no longer available for investment, or for some other reason, such as a declining asset base. o Transfer assets of the Variable Account , which we determine to be associated with the class of policies to which your policy belongs, to another Variable Account. o Withdraw the Variable Account from registration under the Investment Company Act of 1940.] o Operate the Variable Account as a management investment company under the Investment Company Act of 1940. o Cause one or more divisions to invest in a mutual fund other than or in addition to the portfolios. [o Discontinue the sale of policies.] Form 2503(VUL)-6/98 Page 11 [o Terminate any employer or plan trustee agreement with us pursuant to its terms.] [o Restrict or eliminate any voting rights as to the Variable Account.] [o Make any changes required by the Investment Company Act of 1940 or the rules or regulations thereunder.] GENERAL ACCOUNT PROVISIONS THE GENERAL ACCOUNT The General Account holds all of our assets other than those held in the Variable Account or our other separate accounts. The Guaranteed Interest Division is a part of our General Account. GUARANTEED INTEREST DIVISION [The Guaranteed Interest Division is another division to which you may allocate premium or make transfers. The Account Value of the Guaranteed Interest Division is equal to the Net Premium allocated to this division plus any earned interest minus deductions taken from this division. Interest is credited at the guaranteed rate shown in the schedule or may be credited at a higher rate. Any higher rate is guaranteed to be in effect for at least 12 months.] LOAN DIVISION The Loan Division is the account which is set aside to secure the Policy Loan, if any. See the Loan Provisions section for information. TRANSFER PROVISIONS [After the Initial Period and until the policy anniversary nearest the Insured's 100th birthday, your Account Value in each division may be transferred to any other division of the Variable Account or to the Guaranteed Interest Division upon your request. On the policy anniversary nearest the Insured's 100th birthday your account value in each division of the Variable Account will be transferred into the Guaranteed Interest Division and no further transfers will be allowed. One transfer from the Guaranteed Interest Division into the Variable Divisions may be made during the first 30 days of each policy year. Additional limitations, requirements and charges for transfers will be listed in and governed by your annual policy prospectus in effect at the time of the transfer. We reserve the right to modify these limitations, requirements, and charges from time to time.] ACCOUNT VALUE PROVISIONS The Account Value is the sum of the current amounts allocated to the divisions of the Variable Account and to the Guaranteed Interest Division plus your balance in the Loan Division. Form 2503(VUL)-6/98 Page 12 The Account Value is based on the amount and number of premiums paid, policy and rider charges assessed, loans and withdrawals taken, monthly deductions, premium expense charges, transaction charges, and the investment experience or credited interest of the division to which your Account Value is allocated. Your Net Account Value is equal to your Account Value minus any Policy Loan and accrued but unpaid loan interest. ACCOUNT VALUES ON THE INVESTMENT DATE The Account Value of each division of the Variable Account and the Guaranteed Interest Division as of the Investment Date is equal to: a) The allocation to that division of the first Net Premium paid; minus b) The portion of any monthly deductions due on the Investment Date allocated to that division. ACCUMULATION UNIT VALUE The investment experience of a division of the Variable Account is determined as of each Valuation Date. We use an Accumulation Unit Value to measure the experience of each of the Variable Account Divisions during a Valuation Period. We set the Accumulation Unit Value at $10 on the Valuation Date when the first investments in each division of the Variable Account are made. The Accumulation Unit Value for a Valuation Period equals the Accumulation Unit Value for the preceding Valuation Period multiplied by the Accumulation Experience Factor defined below for the Valuation Period. The number of units for a given transaction related to a division of the Variable Account as of a Valuation Date is determined by dividing the dollar value of that transaction by that division's Accumulation Unit Value for that date. ACCUMULATION EXPERIENCE FACTOR For each division of the Variable Account, the Accumulation Experience Factor reflects the investment experience of the portfolio in which that division invests and the charges assessed against that division for a Valuation Period. The Accumulation Experience Factor is calculated as follows: a) The net asset value of the portfolio in which that division invests as of the end of the current Valuation Period; plus b) The amount of any dividend or capital gains distribution declared and reinvested in the portfolio in which that division invests during the current Valuation Period; minus c) A charge for taxes, if any. [d) The result of (a), (b) and (c) divided by the net asset value of the portfolio in which that division invests as of the end of the preceding Valuation Period; minus] e) The daily equivalent of the annual mortality and expense risk charge shown in the Schedule for each day in the current Valuation Period. ACCOUNT VALUE OF THE DIVISIONS OF THE VARIABLE ACCOUNT On subsequent Valuation Dates after the Investment Date, your Account Value of each division of the Variable Account is calculated as follows: a) The number of Accumulation Units in that division as of the beginning of the current Valuation Period multiplied by that division's Accumulation Unit Value for the current Valuation Period; plus b) Any additional Net Premiums allocated to that division during the current Valuation Period; plus Form 2503(VUL)-6/98 Page 13 c) Any Account Value transferred to or minus any Account Value transferred from the Variable Division during the current Valuation Period (including the applicable portion of any transfer fee); minus d) Any Partial Withdrawals allocated to that division and any applicable withdrawal service fees which are allocated to the Variable division during the current Valuation Period; plus e) Any amounts released from the Loan Division as a result of a loan or loan interest payment, or minus amounts transferred to the Loan Division as a result of any loans which are allocated to the Variable Division during the current Valuation Period; minus f) The portion of the monthly deduction allocated to the Variable Division, if a Monthly Processing Date occurs during the current Valuation Period. ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION On Valuation Dates after the Investment Date, your Account Value of the Guaranteed Interest Division is calculated as follows: a) The Account Value of the Guaranteed Interest Division at the end of the preceding Valuation Period plus interest at the declared rate credited during the current Valuation Period; plus b) Any additional Net Premiums allocated to the Guaranteed Interest Division plus interest credited to these premiums during the current Valuation Period; plus c) Any account Value transferred to or minus any Account Value transferred from the Guaranteed Interest Division during the current Valuation Period (including the applicable portion of any transfer fee); minus d) Any Partial Withdrawals taken and any applicable withdrawal service fees which are allocated to the Guaranteed Interest Division during the current Valuation Period; plus e) Any amounts released from the Loan Division as a result of a loan or loan interest payment, or minus amounts transferred to the Loan division as a result of any loans which are allocated to the Guaranteed Interest Division during the current Valuation Period; minus f) The portion of the monthly deduction allocated to the division, if a Monthly Processing Date occurs during the current Valuation Period. ACCOUNT VALUE OF THE LOAN DIVISION On Valuation Dates after the Investment Date, your Account Value of the Loan Division is equal to: a) The Account Value of the Loan Division on the prior Valuation Date; plus b) Any interest credited to the Loan Division during the Valuation Period; plus c) An amount equal to any additional loans since the prior Valuation Date; minus d) Any loan repayments, including payment of loan interest in cash; plus e) The amount of accrued loan interest if the Valuation Date is a policy anniversary; minus f) The amount of interest credited to the Loan Division during the year if the Valuation Date is a policy anniversary. On policy anniversaries, any amount of interest credited to the Loan Division during the year is transferred from the Loan Division to the Variable Account and Guaranteed Interest Divisions according to your premium allocation then in effect. Form 2503(VUL)-6/98 Page 14 MONTHLY DEDUCTION AND REFUND MONTHLY DEDUCTION The monthly deduction is equal to: a) the cost of insurance charges for this policy; plus b) the monthly charges for any other additional benefits provided by rider; plus c) the monthly expense charges shown in the Schedule. The monthly deductions are allocated to the divisions of the Variable Account and Guaranteed Interest Division in the same proportion that your Account Value in the division bears to your Net Account Value as of the Monthly Processing Date. This deduction is taken from your Account Value as of the Monthly Processing Date. After the policy anniversary nearest the Insured's 100th birthday, no further monthly deductions will be made. COST OF INSURANCE [The cost of insurance is determined on a monthly basis for each Segment. Such cost is the monthly cost of insurance rate for the insured's premium class for each Segment multiplied by the net amount at risk. The net amount at risk is (a) minus (b) where:] a) is the Base Death Benefit for all Segments as of the Monthly Processing Date after the monthly deductions (other than cost of insurance charges for the Base Death Benefit, any Adjustable Term Insurance Rider and any Waiver of Monthly Deductions Rider), divided by 1 plus the monthly equivalent of the guaranteed interest rate for the Guaranteed Interest Division as shown in the Schedule; and b) is your Account Value as of the Monthly Processing Date after the monthly deductions (other than the cost of insurance for the Base Death Benefit, any Adjustable Term Insurance Rider and any Waiver of Monthly Deduction Rider). [The cost of insurance rates will be determined by us from time to time. They will be based on the sex and age as of the effective date of coverage, the duration since the coverage began and the premium class. Any change in rates will apply to all individuals of the same premium class and whose policies have been in effect for the same length of time. The rates will never exceed those rates shown in the Table of Guaranteed Rates in the Schedule as adjusted for any special premium class.] Each time there is a new Segment, the net amount at risk will be allocated to each Segment in the same proportion that Segment bears to the Stated Death Benefit. Different rates will apply to each Segment depending upon the premium class, the age as of the effective date of the increase and the duration since the effective date of the increase. PERSISTENCY REFUND [Each month, we will credit your Net Account Value with a persistency refund for each Segment of the Stated Death Benefit which remains in force after its 10th Segment year. (Such a Segment is referred to as a qualifying segment.) The monthly refund is equal to .0005 times the Account Value allocated to the Divisions of the Variable Account and the Loan Division times the sum of the persistency factors for the qualifying segments. The persistency factor for a qualifying segment equals: the qualifying segment's Guideline Annual Premium multiplied by the number of years the qualifying segment has been in force, divided by the sum of the Guideline Annual Premium for each qualifying and non-qualifying segment multiplied by the number of years such segment has been in force.] Form 2503(VUL)-6/98 Page 15 The persistency refund will be added to the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value in each division bears to your Net Account Value as of the Monthly Processing Date. LOAN PROVISIONS POLICY LOANS [You may obtain a policy loan after the first policy anniversary. The maximum amount you may borrow at any time equals the Net Account Value on the date of the loan request less all monthly deductions to the next policy anniversary. The policy loan is a first lien on your policy. The minimum amount you may borrow is shown in the Schedule. The outstanding policy loan amount is equal to the loan amount as of the beginning of the policy year plus new loans and minus loan repayments, plus accrued interest.] LOAN INTEREST [The annual policy loan interest rate is 4.75% as shown in the Schedule. If a loan is made, interest is due and payable at the end of the policy year. Thereafter, interest on the loan amount is due annually at the end of each policy year until the loan is repaid. If interest is not paid when due, it is added to the Policy Loan.] If the Policy Loan amount plus any accrued interest equals or exceeds the Account Value, a premium sufficient to keep this policy in force must be paid as provided in the Grace Period provision. LOAN DIVISION When a Policy Loan is taken or when interest is not paid in cash when due, an amount equal to the loan (or unpaid loan interest, respectively) is transferred from the divisions of the Variable Account and the Guaranteed Interest Division to the Loan Division to secure the loan. This amount will be deducted from the divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that your Account Value in each division bears to your Net Account Value as of the date the transfer is effective unless otherwise specified in your instructions to us. Your Account Value in the Loan Division will be credited with interest at the interest rate for the Loan Division shown in the Schedule. When a loan repayment is made an amount equal to the repayment is transferred from the Loan Division to the Guaranteed Interest Division and the divisions of the Variable Account in the same proportion as your current premium allocation unless you request a different allocation. PARTIAL WITHDRAWAL PROVISIONS You may apply for a partial withdrawal of your Account Value on any Monthly Processing Date after the first policy anniversary by writing to us at our Customer Service Center. The minimum and maximum partial withdrawal amounts are shown in the Schedule. When a partial withdrawal is made, the amount of the withdrawal plus a service fee is deducted from your Account Value. The amount of the service fee is shown in the Schedule. We limit the number of partial withdrawals in a policy year and this number is shown in the Schedule. The Stated Death Benefit is not reduced by a partial withdrawal taken when the Base Death Benefit has been increased to qualify your policy as life insurance under the Internal Revenue Code and the amount withdrawn is no greater than that which reduces your Account Value to the level which no longer requires the Base Death Benefit to be increased for Internal Revenue Code purposes. [For a policy under an Option 1 death benefit, the Stated Death Benefit is not reduced by a partial withdrawal in the circumstances described above. In addition, if no more than 15 years have elapsed since the policy date and the insured is not yet age 81, a partial withdrawal of an amount up to Form 2503(VUL)-6/98 Page 16 10% of your Account Value or, if greater, 5% of the Stated Death Benefit, calculated immediately before the partial withdrawal is taken will not reduce the Stated Death Benefit. Any additional amount withdrawn reduces your Stated Death Benefit by that additional amount.] For a policy under an Option 2 death benefit, a partial withdrawal does not reduce your Stated Death Benefit. Any reduction in death benefit or Account Value will occur as of the date the partial withdrawal occurs. No partial withdrawal will be allowed if the Stated Death Benefit remaining in force after any such partial withdrawal would be reduced below the lesser of the Initial Stated Death Benefit or $50,000. For a policy under an Option 2 death benefit, a partial withdrawal generally reduces the Base Death Benefit by the amount of the withdrawal. Under any death benefit option, if the Base Death Benefit has been increased in order to qualify your policy as a life insurance contract under the Internal Revenue Code, the partial withdrawal reduces the Base Death Benefit by an amount greater than the withdrawal. You may specify how much of the withdrawal you wish taken from each division of the Variable Account or from the Guaranteed Interest Division. You may not withdraw from the Guaranteed Interest Division more than the total withdrawal times the ratio of your Account Value in the Guaranteed Interest Division to your Net Account Value immediately prior to the withdrawal. Unless you indicate otherwise, we will make the withdrawal from the amounts in the Guaranteed Interest Division and the divisions of the Variable Account in the same proportion that your Account Value in each division bears to your Net Account Value immediately prior to the withdrawal. The withdrawal service fee is deducted from each Variable Division and the Guaranteed Interest Division in the same proportion that your Account Value of each division bears to your Net Account Value immediately after the withdrawal. We may send you a new Schedule to reflect the effect of the withdrawal if there is any change to the Stated Death Benefit. We may ask you to return your policy to our Customer Service Center to make this change. The withdrawal and the reductions in death benefits will be effective as of the Valuation Date after we received your request. SURRENDER PROVISIONS The Net Cash Surrender Value on any date will be your Account Value plus any refund of sales load due and minus any Policy Loan including accrued but unpaid loan interest. BASIS OF COMPUTATIONS [The Cash Surrender Value under the policy is not less than the minimum required as of the policy date by the state in which your policy was delivered. A detailed statement of the method of computation of policy values under the policy has been filed with the insurance department of the state in which the policy was delivered, if required.] FULL SURRENDERS [You may surrender your policy after the Right to Examine Period or at any time during the lifetime of the insured and receive the net Cash Surrender Value. We will compute the Net Cash Surrender Value as of the next Valuation Date after we receive both your request and the policy at our Customer Service Center. This policy will be canceled as of the date we receive your request, and there will be no further benefits under this policy.] Form 2503(VUL)-6/98 Page 17 If you surrender your policy within the first two policy years but after the Right to Examine Policy Period has ended, the Net Cash Surrender Value will include a refund of a portion of the sales load which was previously deducted from your premiums paid. In the first policy year, the refund is equal to 5% of the premium paid. In the second year, the refund is equal to 2.5% of the premium paid in the first policy year. GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS GRACE PERIOD If the following three conditions occur on a Monthly Processing Date, the policy will enter into the 61 day grace period: a) The Net Account Value is zero or less, and b) The three year continuation period described below has expired or the required premium for the three year continuation period has not been paid, and [c) the guarantee period defined below has expired or been terminated.] [We will give you a 61 day grace period from this Monthly Processing Date to make the required premium payment. The required premium payment then due must be paid to keep the policy in force. If this amount is not received in full by the end of the grace period, the policy will lapse without value. The required premium payment will be equal to past due charges plus an amount we expect to be sufficient to keep the policy and any riders in force for 2 months following the receipt of the required premium payment. If we receive at least the required premium payment during the grace period we will make deductions from the Net Premium payment for the past due amounts and apply any remaining amount as premium to the policy.] [Notice of the amount of the required premium payment will be mailed to you or any assignee at the last known address at least 30 days before the end of the grace period. If the insured dies during the grace period, we will deduct any overdue monthly deductions from the death proceeds of the policy.] THREE YEAR CONTINUATION PERIOD [During the first 3 policy years, your policy will remain in force regardless of the Net Account Value, if, on a Monthly Processing Date, the sum of your premiums paid minus the sum of your partial withdrawals, policy loans and accrued but unpaid policy loan interest is not less than the sum of the applicable minimum monthly premiums for each policy month starting with the first policy month to and including the policy month which begins on the current Monthly Processing Date. Each minimum monthly premium equals 1/12 of the minimum annual premium. The minimum annual premium is shown in the Schedule. We use this premium for each policy month until the effective date of a change in the Stated Death Benefit. If there is a change, the new Schedule will show the applicable minimum annual premium for subsequent policy years during the 3 year period.] Form 2503(VUL)-6/98 Page 18 [GUARANTEE PERIOD] [The policy will not terminate during the guarantee period even if the Net Account Value is zero except as provided below.] [Each monthly guarantee period premium equals 1/12 of the guarantee period annual premium. The guarantee period annual premium is shown in the Schedule. We use this premium for each policy year until the effective date of a change in the Stated Death Benefit. If there is a change, a new Schedule will show the applicable minimum guarantee period annual premium for subsequent policy years.] [The guarantee period will expire on the later of the 10th policy anniversary or the policy anniversary nearest the Insured's 65th birthday. The guarantee period will terminate prior to the guarantee period expiration date if, on any Monthly Processing Date: a) the actual premiums paid, minus the amount of any partial withdrawals and any policy loan including accrued but unpaid interest are less than b) the sum of the guarantee monthly premiums for each policy month starting with the first policy month to and including the policy month that begins on the current Monthly Processing Date.] [The guarantee period will also terminate if your Account Value, on any Monthly Processing Date, is not diversified according to the following rules: a) No more than 35% of your Net Account Value may be invested in any one division; and b) Your Net Account Value must be invested in at least 5 divisions.] [You will satisfy these diversification requirements if: (i) you are participating in the automatic rebalancing feature defined in and governed by the policy prospectus in effect on the policy effective date and your automatic rebalancing allocations comply with the diversifications specified above; or (ii) you elect dollar cost averaging and direct the resulting transfers into at least four other divisions with no more than 35% of any transfer being to any one division.] TERMINATION All coverage provided by this policy will end as of the earliest of: a) The date the policy is surrendered; b) The date of death of the insured; or c) The date the grace period ends without payment of the required premium. REINSTATEMENT [The policy may be reinstated within five years after the beginning of the grace period. The reinstatement will be effective as of the Monthly Processing Date on or next following the date we approve your written application.] We will reinstate the policy and any riders if the following conditions are met: a) You have not surrendered the policy for its Net Cash Surrender Value; b) You submit evidence satisfactory to us that the insured and those insured under any riders are still insurable according to our normal rules of underwriting for this type of policy; and Form 2503(VUL)-6/98 Page 19 [c) We receive payment of the amount of premium sufficient to keep the policy and any riders in force from the beginning of the grace period to the end of the expired grace period and for 2 months after the date of reinstatement. We will let you know, at the time you request reinstatement, the amount of premium needed for this purpose.] We will reinstate any policy loan, with accrued loan interest to the end of the grace period, which existed when coverage ended. Upon reinstatement, the Net Premium received minus past due amounts will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division according to the premium allocation percentages in effect at the start of the grace period or as directed by you in writing at the time of reinstatement. DEFERRAL OF PAYMENT [Requests for transfers, withdrawals, payment of proceeds for a full surrender will be mailed within 7 days of receipt of the request in a form acceptable to us. However, we may postpone the processing of any such Variable Account transactions for any of the following reasons: a) The NYSE is closed, other than customary weekend and holiday closings. b) Trading on the NYSE is restricted by the SEC. c) The SEC declares that an emergency exists as a result of which disposal of securities in the Variable Account is not reasonably practicable to determine your Account Value in the divisions. d) A governmental body having jurisdiction over the Variable Account by order permits such suspension.] Rules and regulations of the SEC, if any, are applicable and will govern as to whether conditions described in (b), (c), or (d) exist. [Death proceeds will be paid within 7 days of determination of the proceeds and are not subject to deferment. We may defer for up to 6 months payment of any surrender proceeds, withdrawal or loan amounts from the Guaranteed Interest Division.] GENERAL POLICY PROVISIONS THE POLICY [The policy, including the original application and applications for an increase, riders, endorsements, any Schedule pages, and any reinstatement applications make up the entire contract between you and us. A copy of the original application will be attached to the policy at issue. A copy of any application as well as a new Schedule will be attached or furnished to you for attachment to the policy at the time of any change in coverage. In the absence of fraud, all statements made in any application will be considered representations and not warranties. No statement will be used to deny a claim unless it is in an application.] AGE The policy is issued at the age shown in the Schedule. This is the insured's age nearest birthday on the policy date. The insured's age at any time is the age shown in the Schedule increased by the number of completed policy years. Form 2503(VUL)-6/98 Page 20 PROCEDURES We must receive any election, designation, assignment or any other change request you make in writing, except those specified on the application. It must be in a form acceptable to us. We may require a return of the policy for any change or for a full surrender. We are not liable for any action we take before we receive and record the written request at our Customer Service Center. [In the event of the death of the insured, please let us or our agent know as soon as possible. Claim procedure instructions will be sent to the beneficiary immediately. We may require proof of age and a certified copy of the death certificate. We may require the beneficiary and next of kin to sign authorizations as part of due proof. These authorization forms allow us to obtain information about the insured, including, but not limited to, medical records of physicians and hospitals used by the insured.] OWNERSHIP The original owner is the person named as the owner in the application. You, as the owner, can exercise all rights and receive the benefits during the insured's life. This includes the right to change the owner, beneficiaries, and methods for the payment of proceeds. All rights of the owner are subject to the rights of any assignee and any irrevocable beneficiary. You may name a new owner by sending written notice to us. The effective date of the change to the new owner will be the date you sign the notice. The change will not affect any payment made or action taken by us before recording the change at our Customer Service Center. BENEFICIARIES The primary beneficiary surviving the insured will receive any death proceeds which become payable. Surviving contingent beneficiaries are paid death proceeds only if no primary beneficiary has survived the insured. If more than one beneficiary in a class survives the insured, they will share the death proceeds equally, unless your designation provides otherwise. If there is no designated beneficiary surviving, you or your estate will be paid the death proceeds. The beneficiary designation will be on file with us or at a location designated by us. While you are living, you may name a new beneficiary. The effective date of the change will be the date the request was signed. We will pay proceeds to the most recent beneficiary designation on file. We will not be subject to multiple payments. EXCHANGE RIGHT [If, for any reason within the first 2 policy years, you want to exchange this policy for a policy in which values do not vary with the investment experience of the Variable Account, we will exchange this policy. This transfer will not be subject to the excess transfer charge. The exchange will be implemented by transferring your Account Value in all the Divisions of the Variable Account to the Guaranteed Interest Division and removing your future right to choose to allocate funds to the divisions of the Variable Account. We will require a return of this policy before this change will be processed.] COLLATERAL ASSIGNMENT [You may assign this policy as collateral security by written notice to us. Once it is recorded with us, the rights of the owner and beneficiary are subject to the assignment. It is your responsibility to make sure the assignment is valid.] INCONTESTABILITY [After this policy has been in force during the insured's life for 2 years from the policy date, we will not contest the statements in the application attached at issue.] Form 2503(VUL)-6/98 Page 21 After this policy has been in force during the insured's life for 2 years from the effective date of any new Segment or of an increase in any other benefit with respect to the insured, we will not contest the statements in the application for the new Segment or other increase. After this policy has been in force during the insured's life for 2 years from the effective date of any reinstatement, we will not contest the statements in the application for such reinstatement. MISSTATEMENT OF AGE OR SEX [If the age or sex of the insured has been misstated, the death benefit will be adjusted. The death benefit will be that which the cost of insurance which was deducted from your Account Value on the last Monthly Processing Date prior to the death of the insured would have purchased for the insured's correct age and sex.] SUICIDE EXCLUSION [If the insured commits suicide, while sane or insane, within [2] years of the policy date, we will make a limited payment to the beneficiary. We will pay in one sum the amount of all premiums paid to us during that time, minus any outstanding policy loan (including accrued but unpaid interest) and partial withdrawals. If the insured commits suicide, while sane or insane, within 2 years of the effective date of a new Segment or of an increase in any other benefit, we will make a limited payment to the beneficiary for the new Segment or other increase. This payment will equal the cost of insurance and any applicable monthly expense charges deducted for such increase.] PERIODIC REPORTS [We will send you at least once each year a report which shows the current Account Value, Cash Surrender Value and premium paid since the last report. The report will also show the allocation of your Account Value as of the date of the report and the amounts added to or deducted from your Account Value of each division since the last report. The report will include any other information that may be currently required by the Insurance supervisory official of the jurisdiction in which this policy is delivered.] [ ] ILLUSTRATION OF BENEFITS AND VALUES We will send you, upon written request, a hypothetical illustration of future death benefits and Account Values. This illustration will include the information as required by the laws or regulations where this policy is delivered. If you request more than one illustration during a policy year, we will charge a reasonable fee for each additional illustration. The maximum amount of this fee is shown in the Schedule. NONPARTICIPATING The policy does not participate in our surplus earnings. CUSTOMER SERVICE CENTER Our Customer Service Center is at the address shown in the Schedule. Unless you are otherwise notified: a) All requests and payments should be sent to us at our Customer Service Center; and b) All transactions are effective as of the Valuation Date the required information is received at our Customer Service Center. Form 2503(VUL)-6/98 Page 22 PAYOUTS OTHER THAN AS ONE SUM ELECTION During the insured's lifetime, you may elect that the beneficiary receive the proceeds upon death of the insured other than in one sum. If you have not made an election, the beneficiary may do so within 60 days after We receive due proof satisfactory to us of the insured's death. You may also elect to take the Net Cash Surrender Value of the policy upon its surrender other than in one sum. Satisfactory written request must be received at our Customer Service Center before payment can be made. A payee that is not a natural person may not be named without our consent. The various methods of settlement are shown below. PAYOUT OPTIONS [OPTION I. Payouts for a Designated Period. Payouts will be made in 1, 2, 4, or 12 installments per year as elected for a designated period, which may be 5 to 30 years. The installment dollar amounts will be equal except for any excess interest as described below. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table I.] [OPTION II. LIFE INCOME WITH PAYOUTS FOR DESIGNATED PERIOD. Payouts will be made in 1, 2, 4, or 12 installments per year throughout the payee's lifetime, or if longer, for a period of 5, 10, 15 or 20 years as elected. The installment dollar amounts will be equal except for any excess interest, as described below. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table II. This option is not available for ages not shown in the Table.] OPTION III. HOLD AT INTEREST. Amounts may be left on deposit with us to be paid upon the death of the payee or at any earlier date elected. Interest on any unpaid balance will be at the rate declared by us or at any higher rate required by law. Interest may be accumulated or paid in 1, 2, 4, or 12 installments per year, as elected. Money may not be left on deposit for more than 30 years. OPTION IV. PAYOUTS OF A DESIGNATED AMOUNT. Payouts will be made until proceeds, together with interest, which will be at the rate declared by us or at any higher rate required by law, are exhausted. Payouts will be made in 1, 2, 4, or 12 equal installments per year, as elected. OPTION V. OTHER. Settlement may be made in any other manner as agreed upon in writing between you (or the beneficiary) and us. CHANGE AND WITHDRAWAL You may change an election at any time before the death of the insured. If you have given the beneficiary the right to make changes or withdrawals, or if the beneficiary has elected the option, the beneficiary (as primary payee) may take the actions below. a) Changes may be made from Payout Options I, III, and IV to another option. b) Full withdrawals may be made under Payout Option III or IV. Partial Withdrawals of not less than $300 may be made under Payout Option III. c) Remaining installments under Payout Option I may be commuted at 3 1/2% interest and received in one sum. d) Changes in any contingent payee designation may be made. A written request must be sent to our Customer Service Center in writing to make a change or withdrawal. We also may require that you send in the Supplemental Policy. We may defer payment of commuted and withdrawable amounts for a period up to 6 months. Form 2503(VUL)-6/98 Page 23 EXCESS INTEREST [If we declare that payout options are to be credited with an interest rate above that guaranteed, it will apply to Payout Options I, II, III, and IV. The crediting of excess interest for one period does not guarantee the higher rate for other periods. Any declared interest rate will be in effect for at least 12 months.] MINIMUM AMOUNTS The minimum amount which may be applied under any option is $2,000. If the payments to the payee are ever less than $20, we may change the frequency of payments so as to result in payments of at least that amount. SUPPLEMENTARY POLICY When an option becomes effective, the policy will be surrendered in exchange for a Supplementary Policy. It will provide for the manner of settlement and rights of the payees. The Supplementary Policy's effective date will be the date of the insured's death or the date of other settlement. The first payment under Options I, II, and IV will be payable as of the effective date. The first interest payment under Option III will be made as of the end of the interest payment period elected. Subsequent payments will be made in accordance with the frequency of payment elected. The Supplementary Policy may not be assigned or payments made to another without our consent. INCOME PROTECTION Unless otherwise provided in the election, a payee does not have the right to commute, transfer or encumber amounts held or installments to become payable. To the extent provided by law, the proceeds, amount retained, and installments are not subject to any payee's debts, policies, or engagements. DEATH OF PRIMARY PAYEE Upon the primary payee's death, any payments certain under Option I or II, interest payments under Option III, or payments under Option IV will be continued to the contingent payee. Or, amounts may be released in one sum if permitted by the policy. The final payee will be the estate of the last to die of the primary payee and any contingent payee. PAYMENTS OTHER THAN MONTHLY The tables which follow show monthly installments for Options I and II. To arrive at annual, semiannual, or quarterly payments, multiply the appropriate figures by 11.813, 5.957 or 2.991 respectively. Factors for other periods certain or for other options which may be provided by mutual agreement will be provided upon reasonable request. Form 2503(VUL)-6/98 Page 24 SETTLEMENT OPTION TABLES SETTLEMENT OPTION TABLE I (Per $1,000 of Net Proceeds) NO. OF Monthly No. of Monthly YEARS PAYABLE Installments Years Payable Installments - ------------- ------------ ------------- ------------ 1 $84.65 16 6.76 2 43.05 17 6.47 3 29.19 18 6.20 4 22.27 19 5.97 5 18.12 20 5.75 6 15.35 21 5.56 7 13.38 22 5.39 8 11.90 23 5.24 9 10.75 24 5.09 10 9.83 25 4.96 11 9.09 26 4.84 12 8.46 27 4.73 13 7.94 28 4.63 14 7.49 29 4.53 15 7.10 30 4.45 Form 2503(VUL)-6/98 Page 25 SETTLEMENT OPTION TABLE II MALE ( Per $1,000 of Net Proceeds)
Age of Payee Monthly Age of Payee Monthly Nearest Installment Nearest Installments Birthday When First Birthday When First Installment is Installment is Payable Payable - ------------------- ------------------------------------- ------------------- ------------------------------------- 5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years Male Certain Certain Certain Certain Male Certain Certain Certain Certain - ------------------- ------- -------- -------- -------- ------------------- ------- -------- -------- --------- 15 3.28 3.28 3.27 3.27 41 4.01 4.00 3.97 3.94 16 3.29 3.29 3.29 3.28 42 4.06 4.04 4.01 3.98 17 3.31 3.31 3.30 3.30 43 4.11 4.09 4.06 4.02 18 3.32 3.32 3.32 3.32 44 4.16 4.14 4.11 4.06 19 3.34 3.34 3.34 3.33 45 4.22 4.20 4.16 4.11 20 3.36 3.36 3.35 3.35 46 4.28 4.25 4.21 4.16 21 3.38 3.38 3.37 3.37 47 4.34 4.31 4.27 4.21 22 3.40 3.40 3.39 3.39 48 4.41 4.38 4.33 4.26 23 3.42 3.42 3.41 3.41 49 4.48 4.44 4.39 4.31 24 3.44 3.44 3.43 3.43 50 4.55 4.51 4.45 4.36 25 3.46 3.46 3.45 3.45 51 4.62 4.58 4.52 4.42 26 3.49 3.48 3.48 3.47 52 4.70 4.66 4.58 4.48 27 3.51 3.51 3.50 3.49 53 4.79 4.74 4.65 4.54 28 3.54 3.53 3.53 3.52 54 4.88 4.82 4.73 4.60 29 3.56 3.56 3.55 3.54 55 4.97 4.91 4.80 4.66 30 3.59 3.59 3.58 3.57 56 5.07 5.00 4.88 4.72 31 3.62 3.62 3.61 3.60 57 5.17 5.10 4.97 4.78 32 3.65 3.65 3.64 3.62 58 5.29 5.20 5.05 4.85 33 3.68 3.68 3.67 3.65 59 5.41 5.31 5.14 4.91 34 3.72 3.71 3.70 3.68 60 5.53 5.42 5.23 4.97 35 3.75 3.75 3.73 3.72 61 5.67 5.54 5.33 5.04 36 3.79 3.78 3.77 3.75 62 5.81 5.67 5.42 5.10 37 3.83 3.82 3.81 3.78 63 5.97 5.80 5.52 5.16 38 3.87 3.86 3.85 3.82 64 6.13 5.94 5.62 5.22 39 3.92 3.90 3.89 3.86 65 6.31 6.08 5.72 5.28 40 3.96 3.95 3.93 3.90
Form 2503(VUL)-6/98 Page 26 SETTLEMENT OPTION TABLE II/MALE (Continued) (Per $1,000 of Net Proceeds)
Age of Payee Age of Payee Nearest Birthday Nearest Birthday When First Monthly Installment When First Monthly Installment Installment is Installment is Payable Payable - --------------------- ------------------------------------ ------------------- -------------------------------------- 5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years Male Certain Certain Certain Certain Male Certain Certain Certain Certain - ------------------- ------- -------- -------- -------- ------------------- ------- -------- -------- --------- 66 6.49 6.23 5.82 5.33 91 14.64 9.64 7.09 5.75 67 6.69 6.38 5.92 5.38 92 15.00 9.68 7.10 5.75 68 6.90 6.54 6.02 5.43 93 15.34 9.72 7.10 5.75 69 7.12 6.71 6.12 5.48 94 15.68 9.75 7.10 5.75 70 7.35 6.87 6.21 5.52 95 16.00 9.78 7.10 5.75 71 7.60 7.05 6.30 5.55 96 16.30 9.80 7.10 72 7.86 7.22 6.39 5.59 97 16.59 9.81 7.10 73 8.13 7.40 6.47 5.62 98 16.86 9.82 7.10 74 8.42 7.57 6.55 5.64 99 17.11 9.83 7.10 75 8.72 7.75 6.62 5.66 100 17.33 9.83 7.10 76 9.04 7.92 6.69 5.68 101 17.53 9.83 77 9.37 8.09 6.75 5.70 102 17.69 9.83 78 9.72 8.26 6.81 5.71 103 17.82 9.83 79 10.08 8.42 6.86 5.72 104 17.92 9.83 80 10.44 8.57 6.90 5.73 105 18.00 9.83 81 10.82 8.71 6.94 5.74 106 18.05 82 11.21 8.85 6.97 5.74 107 18.08 83 11.59 8.97 7.00 5.75 108 18.10 84 11.99 9.09 7.02 5.75 109 18.11 85 12.38 9.20 7.04 5.75 110 18.11 86 12.76 9.29 7.05 5.75 87 13.15 9.38 7.07 5.75 88 13.53 9.46 7.08 5.75 89 13.91 9.53 7.08 5.75 90 14.28 9.59 7.09 5.75
[ ] Form 2503(VUL)-6/98 Page 27 SETTLEMENT OPTION TABLE II FEMALE ( Per $1,000 of Net Proceeds)
Age of Payee Monthly Age of Payee Monthly Nearest Installment Nearest Installments Birthday When First Birthday When First Installment is Installment is Payable Payable - ------------------- ------------------------------------- ------------------- -------------------------------------- 5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years Female Certain Certain Certain Certain Female Certain Certain Certain Certain - ------------------- ------- -------- -------- -------- ------------------- ------- -------- -------- --------- 15 3.19 3.19 3.19 3.19 41 3.76 3.76 3.75 3.73 16 3.20 3.20 3.20 3.20 42 3.80 3.80 3.78 3.77 17 3.22 3.22 3.21 3.21 43 3.84 3.84 3.82 3.81 18 3.23 3.23 3.23 3.23 44 3.88 3.88 3.86 3.84 19 3.24 3.24 3.24 3.24 45 3.93 3.92 3.91 3.88 20 3.26 3.26 3.26 3.25 46 3.98 3.97 3.95 3.92 21 3.27 3.27 3.27 3.27 47 4.03 4.02 4.00 3.97 22 3.29 3.29 3.29 3.28 48 4.08 4.07 4.05 4.01 23 3.31 3.30 3.30 3.30 49 4.13 4.12 4.10 4.06 24 3.32 3.32 3.32 3.32 50 4.19 4.18 4.15 4.11 25 3.34 3.34 3.34 3.33 51 4.25 4.24 4.21 4.16 26 3.36 3.36 3.35 3.35 52 4.32 4.30 4.26 4.21 27 3.38 3.38 3.37 3.37 53 4.38 4.36 4.33 4.27 28 3.40 3.40 3.39 3.39 54 4.46 4.43 4.39 4.32 29 3.42 3.42 3.41 3.41 55 4.53 4.51 4.46 4.38 30 3.44 3.44 3.43 3.43 56 4.61 4.58 4.53 4.44 31 3.46 3.46 3.46 3.45 57 4.70 4.66 4.60 4.51 32 3.49 3.48 3.48 3.48 58 4.79 4.75 4.68 4.57 33 3.51 3.51 3.51 3.50 59 4.88 4.84 4.76 4.64 34 3.54 3.54 3.53 3.52 60 4.99 4.93 4.84 4.70 35 3.57 3.56 3.56 3.55 61 5.09 5.03 4.93 4.77 36 3.60 3.59 3.59 3.58 62 5.21 5.14 5.02 4.84 37 3.63 3.62 3.62 3.61 63 5.33 5.25 5.12 4.91 38 3.66 3.65 3.65 3.64 64 5.46 5.37 5.21 4.98 39 3.69 3.69 3.68 3.67 65 5.60 5.50 5.31 5.05 40 3.73 3.72 3.71 3.70 66 5.75 5.63 5.42 5.12
Form 2503(VUL)-6/98 Page 28 SETTLEMENT OPTION TABLE II/FEMALE (Continued) (Per $1,000 of Net Proceeds)
Age of Payee Age of Payee Nearest Birthday Nearest Birthday When First Monthly Installment When First Monthly Installment Installment is Installment is Payable Payable - --------------------- ------------------------------------ ---------------- -------------------------------------- 5 Years 10 Years 15 Years 20 Years 5 Years 10 Years 15 Years 20 Years Female Certain Certain Certain Certain Female Certain Certain Certain Certain - ------------------- ------- -------- -------- -------- ---------------- ------- -------- -------- --------- 67 5.91 5.77 5.53 5.19 92 14.45 9.61 7.09 5.75 68 6.08 5.91 5.63 5.25 93 14.81 9.66 7.10 5.75 69 6.26 6.07 5.74 5.32 94 15.16 9.70 7.10 5.75 70 6.46 6.23 5.86 5.37 95 15.49 9.73 7.10 5.75 71 6.67 6.40 5.97 5.43 96 15.80 9.76 7.10 72 6.89 6.58 6.08 5.48 97 16.11 9.79 7.10 73 7.13 6.76 6.18 5.52 98 16.40 9.80 7.10 74 7.39 6.95 6.29 5.57 99 16.68 9.82 7.10 75 7.67 7.14 6.39 5.60 100 16.95 9.82 7.10 76 7.96 7.34 6.48 5.63 101 17.20 9.83 77 8.28 7.54 6.57 5.66 102 17.43 9.83 78 8.61 7.74 6.65 5.68 103 17.62 9.83 79 8.97 7.94 6.72 5.70 104 17.78 9.83 80 9.34 8.13 6.79 5.71 105 17.91 9.83 81 9.73 8.32 6.84 5.72 106 18.00 82 10.14 8.50 6.89 5.73 107 18.06 83 10.57 8.67 6.94 5.74 108 18.09 84 11.01 8.83 6.97 5.74 109 18.11 85 11.46 8.97 7.00 5.75 110 18.11 86 11.91 9.10 7.02 5.75 87 12.36 9.22 7.04 5.75 88 12.81 9.32 7.06 5.75 89 13.25 9.41 7.07 5.75 90 13.67 9.48 7.08 5.75 91 14.07 9.55 7.09 5.75
Form 2503(VUL)-6/98 Page 29 [THIS POLICY IS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY] DEATH BENEFITS AND OTHER VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THESE VALUES MAY INCREASE OR DECREASE BASED ON INVESTMENT EXPERIENCE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. DEATH BENEFITS ARE PAYABLE BY US UPON THE DEATH OF THE INSURED. THERE IS NO MATURITY DATE. FLEXIBLE PREMIUMS ARE PAYABLE BY YOU DURING THE LIFETIME OF THE INSURED UNTIL THE POLICY ANNIVERSARY NEAREST THE INSURED'S 100TH BIRTHDAY. SECURITY LIFE OF DENVER INSURANCE COMPANY A Stock Company [ ] CUSTOMER SERVICE CENTER P.O. Box 173888 Denver, Colorado 80217-3888 Toll Free Number: 1(800) 848-6362 Form 2503 (VUL)-6/98 EX-2 3 CONSENT LD TAYLOR EXHIBIT 6.B [LOGO OF SECURITY LIFE APPEARS HERE] April 23, 1999 Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203-5699 Re: Security Life Separate Account L1 Post-Effective Amendment No. 6; SEC File No. 33-88148 Gentlemen: In my capacity as Senior Vice President and Chief Actuary of Security Life of Denver Insurance Company ("Security Life"), I have provided actuarial advice concerning: The preparation of Post-Effective Amendment No. 6 to the Registration Statement on Form S-6 (File No. 33-88148) to be filed by Security Life and its Security Life Separate Account L1 (the "Separate Account") with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 with respect to the "Strategic Advantage" and "Strategic Advantage II" variable universal life insurance policies; and The preparation of the policy forms for the variable universal life insurance policies described in Post-Effective Amendment No. 6 (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 Post-Effective Amendment No. 6 to the Registration Statement and the use of my name under the heading "Experts" in the Prospectus. Sincerely, /s/ Lawrence D. Taylor Lawrence D. Taylor, F.S.A., M.A.A.A. LDT:tls EX-3 4 CONSENT ERNST & YOUNG 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 5, 1999 (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), in Post-Effective Amendment No. 6 to the Registration Statement (Form S-6 No. 33-88148) and related Prospectus of Security Life of Denver Insurance Company and Security Life Separate Account L1 dated May 1, 1999. /s/ ERNST & YOUNG LLP Denver, Colorado April 23, 1999 EX-4 5 CONSENT SUTHERLAND ASBILL Exhibit 7.B [Sutherland Asbill & Brennan LLP] CONSENT OF SUTHERLAND ASBILL & BRENNAN LLP We consent to the reference to our firm in each of the prospectuses included in Post-Effective Amendment No. 6 to the Registration Statement on Form S-6 for Security Life of Denver Separate Account L1 (File No. 33-88148). 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 23, 1999 EX-5 6 ITR MEMO Exhibit 11 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 certain of its individual 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. I. PROCEDURES RELATING TO ISSUANCE AND PURCHASE OF THE POLICIES A. Offering of the Policy The policy is offered only to individuals ("owners") who satisfy certain suitability standards. The policy may be purchased to acquire insurance on the life of a person (an "insured") in whom the owner has an insurable interest. Security Life requires satisfactory evidence of the insured's insurability, which may include a medical examination of the insured. The available issue ages are 0 through 85. Age is determined on the insured's age as of the birthday nearest the policy date. The minimum stated death benefit is $50,000. The stated death benefit is a dollar amount used to determine the death benefit under a policy. Acceptance of an application depends on Security Life's underwriting rules, and Security Life reserves the right to reject an application for any reason. If a policy has more than one owner (joint owners), then any transaction under the policy except for telephone transfers of account value will 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 Security Life's underwriting of the application. This original premium class applies to the initial stated death benefit. The current cost of insurance charge rate for a policy is based on the age at issue, sex, and premium class of the insured, and on the policy year, and therefore varies from time to time. Security Life currently places insureds in the following premium classes, based on underwriting: Standard Tobacco (ages 0-85); Standard Nontobacco (ages 20-85), or Preferred (ages 20-85). The preferred class is available only under policies with stated death benefit of $100,000 or more. Insureds may also be placed in a substandard rate class, which involves a higher mortality risk that the standard tobacco or standard nontobacco classes. 1 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 premiums 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. 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 will be determined based on Security Life's 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 nontobacco class are equal to or lower than guaranteed cost of insurance for an insured of the same age and sex in a standard tobacco class. Cost of insurance rates (whether guaranteed or current) for an insured in a standard nontobacco or tobacco class are generally lower than guaranteed cost of insurance for an insured of the same age and sex and tobacco status in a substandard class. The cost of insurance for the policy will not be the same for all owners. 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 actually 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. Although there will be no uniform cost of insurance charges for all insureds for a given stated death benefit 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 and/or rider benefits, and if the misstatement becomes known during the lifetime of the insured, then policy values will be adjusted to those based on the correct monthly deductions (reflecting 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 on such date, 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. The policy provides coverage on an insured named under the policy 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. Security Life guarantees that a policy will remain in force during the special continuation period, regardless of the sufficiency of the cash surrender value, if the sum of the premiums paid to date, less any partial cash surrenders and policy debt equals or exceeds the minimum monthly premium (shown in the policy) multiplied by the number of complete policy months since the policy date, including the current policy month. The special continuation period is three years following the policy date. 2 An extended minimum guaranteed period may be available under a Guaranteed Minimum Death Benefit Rider. The minimum monthly premium is calculated for each policy based on the age, sex and premium class of the insured, the requested stated death benefit and any supplemental and/or rider benefits. The minimum monthly premium may change due to changes made during a minimum guaranteed period to the stated death benefit, the death benefit option, ratings, and supplemental and/or rider benefits. Security Life will notify the owner of any increase in the minimum monthly premium. On or after one year from the policy date, the owner may request a reduction in the stated death benefit, by 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 amount of such excess above the premium limitations. The minimum amount of any decrease in stated death benefit is $1,000, and any decrease in stated death benefit will become effective on the monthly 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 after issue 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. Any 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 monthly date next following the date the request for the increase is received and approved, and the account value will be adjusted to the extent necessary to reflect a monthly deduction as of the effective date based on the increase in 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 will apply for purposes of determining the risk amount for each rate. When an increase in stated death benefit is requested, Company conducts underwriting before approving the increase (except as noted below) 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 3 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. For the purposes of determining the risk amount associated with a stated death benefit, Security Life will attribute the account value solely to the initial stated death benefit unless the account value exceeds the initial stated death benefit. If the account value exceeds the initial stated death benefit, the excess will be considered attributable to the increases in stated death benefit in the order of the increases. If there is a decrease in stated death benefit after an increase, a decrease is applied first to decrease any prior increases in stated death benefit, starting with the most recent increase and then each prior 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. C. Application and Payment Processing To purchase a policy, an application must be completed and submitted through an authorized Security Life agent. There is no minimum initial premium payment. An owner's policy coverage will become effective on the policy date. If an initial premium payment is submitted with the application, then the policy date is generally the date of approval of the owner's application. If the application is not accompanied by an initial premium payment, then the policy date will generally be the issue date and the investment date will be the valuation date on which the initial premium payment is received by Security life and the initial net premium is credited to the policy if received after the underwriting approval date. A valuation date is each day on which both the New York Stock Exchange and Security Life are open for business. The issue date is the date that Security Life has completed the review of the application, evaluated and determined underwriting approval and has printed the policy for mailing and delivery to the Registered Representative to deliver to the Policyowner. The initial premium does not have to be received for issuance to occur. The Policy Date is the date used to determine the monthly processing date, coverage effective date and policy anniversaries. This date may be the same as the issue and investment date but can also be a date requested by the Policyowner. The Policy Date is not generally determined by the receipt of the initial premium. The Investment Date is the date that Security Life allocates funds to be Policy. It is determined by the next valuation date following the date that we have received the initial premium, approved the policy for issue and have received all issue requirements. It is generally the same date as the policy and issue date. However, in cases of COD issues and the backdating of the policy date (up to six months) it is generally not the same date as the policy and issue date. 4 As provided for under state insurance law, the owner, to preserve insurance age, may be permitted to backdate the policy. In no case may the policy date be more than six months prior to the date the application was completed. Charges for the monthly deduction for the backdated period are deducted on the issue date. 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 initial net premium will be credited to the policy on the issue date if all outstanding delivery requirements are satisfied. For backdated policies, the initial net premium will be credited on the issue date. Planned periodic premiums and unscheduled premiums that are not underwritten will be credited to the policy and the net premiums will be invested to the requested divisions on the valuation date they are received by the home office. If an additional premium payment is rejected, Security Life will return the premium payment promptly, without any adjustment for investment experience. The policy date is the date from which policy months, years, and anniversaries are measured. A policy month is each one-month period beginning with a monthly date and ending with the day immediately preceding the next following monthly date. The monthly date is the same day as the policy date for each succeeding month. The monthly deduction is deducted on each monthly date. A policy year is each period of twelve months commencing with the policy date and ending immediately preceding the first annual date, or any following year commencing with an annual date and ending immediately preceding the next annual date. The annual date is the same day in each policy year as the policy date. 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, and is the date that the policy is issued. D. Allocation of Net Premiums On the investment date, the account value is equal to the initial net premium credited (initial premium payment less the premium expense charge), less any 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 variable account, the guaranteed interest division, and the loan account. The account value will vary to reflect the performance of the subdivisions to which amounts have been allocated, interest credited on amounts allocated to the guaranteed interest division, interest credited on amounts in the loan account, charges, transfers, partial cash surrenders, loans and loan repayments. The net account value is cash value minus any outstanding policy debt. Cash surrender value is account value minus any applicable surrender charge. When applying for a policy, the owner selects a plan for paying level premium payments at specified intervals, e.g., quarterly, semi-annually or annually, until the maturity date. If the 5 owner elects, Security Life will also arrange for payment of planned period premiums on a monthly basis under a pre-authorized payment arrangement. The owner is not required to pay premium payments in accordance with these plans; rather, the owner can pay more or less than planned or skip a planned periodic premium entirely. Currently, there is no minimum amount for each premium. Security Life may establish a minimum amount 90 days after Security Life sends the owner a written notice of such increase. Subject to certain limits (described below), the owner can change the amount and frequency of planned periodic premiums whenever the owner wishes by sending notice to the home office. However, Security Life reserves the right to limit the amount of a premium payment or the total premium payments paid. In the application, the owner specifies the percentage of net premium to be allocated to each subdivision and to the guaranteed interest division. Net premiums will generally be allocated to the subdivisions and to the guaranteed interest division on the valuation date that Security Life receives them in accordance with the allocations specified in the application or subsequent notice. Security Life will allocate all net premiums received before the end of the "free look" period (including the initial net premium) to the division corresponding to their request or the Fidelity VIP Money Market Division in premium refund states. For valuation states, the initial net premium is immediately allocated to the subdivisions requested. After the end of the "free look" period, the account value will be allocated to the subdivisions and to the guaranteed account based on the premium payment allocation percentages in the application. For this purpose, the end of the "free look" period is deemed to be 5 days plus the number of state required free look days after the date the policy is issued and mailed to the owner's Security Life agent for delivery. State guidelines regarding the allocation of the net initial premium varies as does the length of time for free look. Some states mandate that if an owner exercises his/her free look right he/she is entitled to a full premium refund. In these instances Security Life allocates the funds to the Fidelity Money Market division. Other states mandate that should the owner exercise his/her free look option he/she is entitled to receive the value of the fund allocations plus the policy charges deducted. In these instances Security Life allocates the net initial premium to the divisions elected on the application during the free look period but after the 5 day deemed delivery date. The net premium allocation percentages specified in the application will apply to subsequent premium payments until the owner changes the percentages. The minimum allocation percentage that an owner may specify for a subdivision or the guaranteed account is 1%, and allocation percentages must be whole numbers. The sum of allocations must equal 100%. Security Life reserves the right to limit the number of subdivisions (18) to which account value may be allocated. An owner can change the allocation percentages at any time, subject to the rules below, by sending notice to the home office or if telephone privileges are in effect, the request can be received by phone. The change will apply to all premium payments received with or after receipt of the owner's notice. 6 E. Exchange Program Security Life offers an exchange program for designated fixed-premium, inforce policies. Policyowners have the option to exchange these policies to a variable universal life product currently offered subject to eligibility and suitability requirements being met. Evidence of insurability will not be required if there is not a request for a death benefit increase. The exchange program requires that the target premium for the VUL equal the commissionable premium on the policy being replaced. The gross account value less any rider charges can be applied as the internal 1035 exchange amount for the new policy. Guidelines under Application and Payment Processing and Allocations of Net Premiums as stated above will be followed once the exchange application is received. F. 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 any 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 any requested increase in planned periodic premiums, or any unscheduled premium. Security Life also reserves the right to require satisfactory evidence of insurability prior to accepting any premium which increases the risk amount of the policy. No premium payment will be accepted after the maturity date. The owner may specify that a specific unscheduled premium payment is to be applied as a repayment of policy debt, if any. The payment of premiums may cause a policy to be a modified endowment contract under the Internal Revenue Code. If acceptance of a premium paid would, in Security Life's view, cause the policy to become a Modified Endowment Contract, then to the extent feasible Security Life will not accept that portion of the premium that would cause the policy to become a Modified Endowment Contract unless the owner confirms in writing the owner's intent to convert the policy to a Modified Endowment Contract. Security Life may return that portion of the payment pending receipt of instructions from the owner. 7 G. Policy Termination and Grace Period The policy terminates at the earliest of the end of the grace period, the surrender of the policy by the owner, the maturity date of the policy, or 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 date is less than the amount of the monthly deduction to be deducted on that date and the special continuation period is not in effect, the policy will be in default. In addition, if on a monthly date the cash value less any policy debt (the cash surrender value) exceeds the amount of the monthly deduction due for the following policy month, the policy will be in default whether or not the special continuation period is in effect. An owner, and any assignee of record, will be sent notice of the default. The special continuation period is during the first three policy years. If the special continuation period is in effect, Security Life guarantees that the client's policy will not lapse, regardless of its net cash surrender value, if on a monthly processing date the sum of all premiums paid minus partial withdrawals and loans is greater than or equal to the sum of minimum monthly premiums from the inception of the policy to the current date. At the end of the special continuation period the client must pay end premium to bring the net cash surrender value to zero plus the amount needed to pay the following two months' monthly deduction. If this is insufficient the policy will lapse. 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 a period of two additional months or a sufficient amount to avoid termination of the policy due to excessive loans. Security Life will send notice of the amount required to be paid during the grace period ("grace period premium payment") to the owner's last known address and the address of any assignee of record. The grace period will begin when the notice is sent. An owner's policy will remain in effect during the grace period. If the insured should die during the grace period and before the grace period premium payment is paid, the death benefit proceeds will still be payable to the beneficiary, although the amount paid will reflect a reduction for the monthly deductions due on or before the date of the insured's death (and for any policy debt). If the grace period premium payment has not been paid before the grace period ends, the policy will lapse. It will have no value and no benefits will be payable. The maturity date is the date when insurance coverage under the policy terminates and maturity benefit is paid. It is generally the insured's 100th birthday, and is shown in the policy. The maturity benefit is equal to the cash surrender value on the maturity date. H. 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 the payment of a necessary premium payment and submission of satisfactory evidence of insurability. 8 I. Repayment of a Loan An owner may repay all or part of policy debt at any time while the insured 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 give Security Life notice that a specific unscheduled premium made while a loan is outstanding is to be applied as a loan repayment. When a loan repayment is made, account value in the loan account in an amount equivalent to the repayment is transferred from the loan account to the subdivisions and the guaranteed account in accordance with the owner's current net premium allocation instructions. J. Policy Riders Supplemental and/or rider benefits may be available and, if so, may be added to the policy. Monthly charges for these benefits and/or riders, if any, will be deducted from the account value as part of the monthly deduction. The supplemental and/or rider benefits available with the policies provide fixed benefits that do not vary with the investment experience of the separate account. The following supplemental and/or rider benefits may be available: Adjustable Term Insurance Rider, Additional Insurance Rider, Right to Exchange Rider, Waiver of Cost of Insurance Rider, Waiver of Specified Premium Rider. The Right to Exchange Rider provides the right to exchange the policy for a new policy on the life of a substitute insured. Exercise of the right is subject to satisfactory evidence of insurability of the substitute insured, and may result in a cost or credit to the owner. The new policy can be any adjustable life insurance policy issued by Security Life at the time the exchange privilege is exercised. The policy date for the new policy will be a current policy date; the issue date for the new policy will be the date of exchange. The initial cash value under the new policy will be the same as the cash value of the policy on the date of the exchange. There is no cost for this rider, and there are no charges or other fees imposed under the policy or the new policy at the time of the exchange. For purposes of calculating any surrender charges subsequently imposed on the policy acquired by exchange, Security Life takes into account the number of policy years that the policy, and the policy acquired by exchange, have been in force. Additional rules and limits apply to these supplemental and/or rider benefits, and are set forth in the applicable endorsement or rider. II. TRANSFERS AMONG INVESTMENT DIVISIONS Several subdivisions of the Separate Account are available for allocation of Net Premiums paid under the policy, subject to certain limitations set forth in the policy. Each subdivision of the Separate Account invests its assets in shares or units of an underlying portfolio. Available subdivisions of the Separate Account currently invest in portfolios of AIM Variable Insurance Funds, Inc., The Alger American Fund, Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II, INVESCO Variable Investment Funds, Inc., Neuberger Berman 9 Advisors Management Trust, Van Eck Worldwide Insurance Trust. All Funds are registered under the Investment Company Act of 1940 as an open-end management investment company. Additional funds may be available for Security Life products 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 (except the loan account) from subdivisions investing in one portfolio to other subdivision(s) or to the guaranteed interest division, or transfer a part of an amount in the guaranteed interest to the subdivisions(s), subject to the following restrictions. The minimum transfer amount is the lesser of $100 or the entire amount in that subdivision or the guaranteed interest. A transfer request that would reduce the amount in a subdivision or the guaranteed interest division below $100 will be treated as a transfer request for the entire amount in that subdivision or the guaranteed interest division. With the exception of the Conversion Right (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 requested and received by Security Life. Currently, there is a 12 free transfer limit on the number of transfers that can be made between subdivisions or to the guaranteed interest division. Currently, Security Life assesses a transfer charge equal to $25 for each transfer during a policy year in excess of the first twelve transfers. The transfer charge will be deducted from the subdivisions or the guaranteed interest division from which the requested transfer is being made, on a pro-rata basis. Telephone transfers will be based upon instructions given by telephone, provided the appropriate election has been made at the time of application or proper authorization has been provided to Security Life. Security Life reserves the right to suspend telephone transfer privileges at any time, for any reason, if Security Life deems such suspension to be in the best interests of owners. During the first twenty-four policy months following the issue 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 Conversion Right by requesting that all or a portion of the variable account be transferred to the guaranteed interest division. Exercise of the Conversion Right is not subject to the transfer charge. Following the exercise of the Conversion Right, net premiums may not be allocated to the subdivisions of the variable account, and transfers of account value to the subdivisions will not be permitted. The other terms and conditions of the policy will continue to apply. Transfers may also be effected pursuant to any Dollar Cost Averaging Plan or Auto Rebalancing Plan elected by the owner from time to time and as described in the current prospectus for the policies. III. REDEMPTION PROCEDURES, SURRENDER AND RELATED TRANSACTIONS A. Surrender for Cash Surrender Value 10 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 charge may apply. A surrender request will be processed as of the valuation date the surrender notice and all required documents are received. Payment 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 later be reinstated. Security Life will make the payment of the cash and surrender value out of its general interest division and, at the same time, transfer assets from the Separate Account to its general interest division in an amount equal to the sum of account value (applicable to the policy) held in each subdivision of the Variable Account. 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 any supplemental and/or rider benefits, minus any outstanding Policy Loan including accrued but unpaid interest, minus any 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 any application for supplemental and/or rider benefits, and if the misstatement becomes known after the death of the insured, then the death benefit under the policy or such supplemental and/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. 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 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 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. The "Applicable Percentage" which is the AV on the date of death multiplied by the appropriate factor from the Definition of Life Insurance factors shown in the policy's appendix A or B. A table showing the Applicable Percentages for Attained Ages 0 to 95 is set forth in the policy. 11 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 30 days prior to a policy anniversary. After any changes, the specified amount must be at least $50,000. The effective date of the change will be the monthly date next following the day that Security life receives and accepts notice of the request for change. Security Life may require satisfactory evidence of insurability. When a change from Option 1 to Option 2 is made, the specified amount after the change is effected will be equal to the specified amount before the change less the account value on the effective date of the change. When a change from Option 2 to Option 1 is made, the specified amount after the change will be equal to the specified amount before the change is effected and the death benefit will be increased by the account value on the effective date of the change. Security Life will make payment of the death benefit proceeds out of its general account and, at the same time, will transfer the account value applicable to the policy out of the Separate Account to the general account. C. Policy Loan After the first policy year and while the insured is living, provided the policy is not in the grace period, the owner may borrow against the policy at any time by submitting notice to the home office. The minimum amount of any loan request is $100. The maximum loan amount is the net cash surrender value less monthly deductions to the next policy anniversary. Maximum loan amounts may be different if required by state law. Outstanding loans reduce the amount available for new loans. Loans will be processed as of the date the loan notice is received and approved. Loan proceeds generally will be sent to the owner within seven calendar days. Loan interest charges on a Policy Loan accrue daily at a compound annual interest rate of 4.75%. Interest is due in arrears on each policy anniversary. Outstanding loans (including unpaid interest added to the loan) plus accrued interest not yet due equals the policy debt. When a policy loan is made, an amount sufficient to secure the loan is transferred out of the variable account and the guaranteed account and into the policy's loan account. 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 transferred to the loan account. This transfer is made against the account value in each subdivision and the guaranteed account in proportion to the account value in each on the effective date of the loan, unless the owner specifies that transfers be made form specific subdivisions. an amount of account value equal to any due and unpaid loan interest which exceeds interest credited to the loan account will also be transferred to the loan account on each annual date. Such interest will be transferred from each subdivision and the guaranteed 12 account in the same proportion that account value in each subdivision and the guaranteed account 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 4%. D. Partial Withdrawals An owner may make partial cash surrenders under the policy at any time after the 1st policy anniversary subject to the conditions below. An owner must submit notice to the home office. Each partial cash surrender 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. As of the date Security life receives notice of a partial cash surrender request, the cash value will be reduced by the partial cash surrender amount. Unless the owner requests that a partial cash surrender be deducted from specified subdivisions, the partial cash surrender amount will be deducted from account value in the subdivisions and in the guaranteed account pro-rata in proportion to the account value in each. If death benefit Option 1 is in effect, Security life may reduce the specified amount. Security Life may reject a partial cash surrender request if the partial cash surrender would reduce the specified amount below $50,000, or if the partial cash surrender would cause the policy to fail to qualify as a life insurance contract under applicable tax laws, as interpreted by Security Life. Partial cash surrender requests will be processed as of the valuation date notice is received by Security Life, and generally will be paid within seven calendar days. E. Monthly Charges On each monthly 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 date. The monthly deduction consists of (1) cost of insurance charges ("cost of insurance charge"), (2) the monthly administrative charge (the "administrative charge"), and (3) any charges for supplemental and/or rider benefits ("supplemental and/or rider benefit charges". The monthly deduction is deducted from the subdivisions of the Variable Account and from the guaranteed interest division pro rata on the basis of the portion of account value in each. 13 EX-6 7 TRANSMITTAL LETTER [SUTHERLAND ASBILL & BRENNAN LLP] April 23, 1999 KIMBERLY J. SMITH DIRECT LINE: (202) 383-0314 Internet: ksmith@sablaw.com VIA EDGAR TRANSMISSION Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Security Life Separate Account L1 (File No. 33-88148) Commissioners: On behalf of Security Life of Denver Insurance Company and Security Life Separate Account L1 (the "Account"), we have attached for filing Post-Effective Amendment No. 6 (the "Amendment") to the Account's registration statement on Form S-6 for certain variable life insurance policies. The Amendment includes prospectuses for the Account's "Strategic Advantage' and "Strategic Advantage II" products. In reliance on a request made by the Company on March 19, 1999 (the "Template Request") pursuant to Rule 485(b)(1)(vii) under the Securities Act of 1933, as amended (the "1933 Act"), this Amendment is being filed pursuant to paragraph (b) of Rule 485 under the 1933 Act. As counsel who reviewed the Amendment, and in reliance on the Template Request relief, we represent that the Amendment does not contain disclosures which would otherwise render it ineligible to become effective pursuant to paragraph (b). If you have any questions or comments regarding the Amendment, please call the undersigned at 383-0314. Sincerely, /s/ Kimberly J. Smith Kimberly J. Smith Attachment cc: Anna Kautzman, Esq. Tamara Barkdoll, Esq. -----END PRIVACY-ENHANCED MESSAGE-----