-----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, P0KQh6HJzQWVS1aKTsIo99+uy28dIrdZKeNRnbkHJcCsbHYnSP/vQz2uyrzcki3V lYqrIDjijjJtGXa1yuEF+w== 0000917677-00-000005.txt : 20000203 0000917677-00-000005.hdr.sgml : 20000203 ACCESSION NUMBER: 0000917677-00-000005 CONFORMED SUBMISSION TYPE: S-6/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20000202 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: S-6/A SEC ACT: SEC FILE NUMBER: 333-90577 FILM NUMBER: 520228 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 S-6/A 1 CBVUL As filed with the Securities and Exchange Commission on February 2, 2000. Registration No. 333-90577 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 Pre-Effective Amendment No. 2 ----------------- SECURITY LIFE SEPARATE ACCOUNT L1 (Exact Name of Trust) SECURITY LIFE OF DENVER INSURANCE COMPANY (Name of Depositor) 1290 Broadway Denver, Colorado 80203-5699 (Address of Depositor's Principal Executive Offices) Copy to: GARY W. WAGGONER, ESQ. KIMBERLY J. SMITH, ESQ. Security Life of Denver Insurance Company Sutherland Asbill & Brennan LLP 1290 Broadway 1275 Pennsylvania Avenue, NW Denver, Colorado 80203-5699 Washington, D.C. 20004-2415 (202) 383-0314 (Name and Address of Agent for Service) ---------------------------- Title of securities being registered: Corporate Benefits variable life insurance policies. Approximate date of proposed public offering: as soon as practicable after the effective date of this Registration Statement. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Form V-112-00 SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 333-90577) 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 Division; Charges and Deductions; 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 Policy; General Policy Provisions; The Guaranteed Interest Division 11, 12 Security Life Separate Account L1 13 Policy Summary; Charges and Deductions; Group or Sponsored Arrangements or Corporate Purchasers ii Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 14, 15 Policy Summary; Free Look Period; General Policy Provisions; Applying for a Policy 16 Premiums; Allocation of Net Premiums; How We Calculate Accumulation Unit Values For Each Division 17 Payment; Surrender; Partial Withdrawals 18 Policy Summary; Tax Considerations; Detailed Information about the Policy; Security Life Separate Account L1 19 Reports to Owners; Notification and Claims Procedures; Performance Information (Appendix B) 20 See 10(g) & 10(a) 21 Policy Loans 22 Policy Summary; Premiums; Grace Period; Security Life Separate Account L1; Detailed Information about the Policy 23 Inapplicable 24 Inapplicable 25 Security Life of Denver Insurance Company 26 Inapplicable 27, 28, 29, 30 Security Life of Denver Insurance Company 31, 32, 33, 34 Inapplicable 35 Inapplicable 36 Inapplicable iii 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 Division; How We Calculate Accumulation Unit Values 45 Inapplicable 46 Partial Withdrawals; Detailed Information about the Policy 47, 48, 49, 50 Inapplicable 51 Detailed Information about the Policy 52 Determining the Value in the Variable Division; Right to Change Operations 53(a) Tax Considerations 53(b), 54, 55 Inapplicable 56, 57, 58 Inapplicable 59 Financial Statements iv As filed with the Securities and Exchange Commission on February 1, 2000. Registration No. 333-90577 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 Pre-Effective Amendment No. 2 ----------------- SECURITY LIFE SEPARATE ACCOUNT L1 (Exact Name of Trust) SECURITY LIFE OF DENVER INSURANCE COMPANY (Name of Depositor) 1290 Broadway Denver, Colorado 80203-5699 (Address of Depositor's Principal Executive Offices) Copy to: GARY W. WAGGONER, ESQ. KIMBERLY J. SMITH, ESQ. Security Life of Denver Insurance Company Sutherland Asbill & Brennan LLP 1290 Broadway 1275 Pennsylvania Avenue, NW Denver, Colorado 80203-5699 Washington, D.C. 20004-2415 (202) 383-0314 (Name and Address of Agent for Service) ---------------------------- Title of securities being registered: Corporate Benefits variable life insurance policies. Approximate date of proposed public offering: as soon as practicable after the effective date of this Registration Statement. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Form V-112-00 SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 333-90577) 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 Division; Charges and Deductions; 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 Policy; General Policy Provisions; The Guaranteed Interest Division 11, 12 Security Life Separate Account L1 13 Policy Summary; Charges and Deductions; Group or Sponsored Arrangements or Corporate Purchasers ii Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 14, 15 Policy Summary; Free Look Period; General Policy Provisions; Applying for a Policy 16 Premiums; Allocation of Net Premiums; How We Calculate Accumulation Unit Values For Each Division 17 Payment; Surrender; Partial Withdrawals 18 Policy Summary; Tax Considerations; Detailed Information about the Policy; Security Life Separate Account L1 19 Reports to Owners; Notification and Claims Procedures; Performance Information (Appendix B) 20 See 10(g) & 10(a) 21 Policy Loans 22 Policy Summary; Premiums; Grace Period; Security Life Separate Account L1; Detailed Information about the Policy 23 Inapplicable 24 Inapplicable 25 Security Life of Denver Insurance Company 26 Inapplicable 27, 28, 29, 30 Security Life of Denver Insurance Company 31, 32, 33, 34 Inapplicable 35 Inapplicable 36 Inapplicable iii 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 Division; How We Calculate Accumulation Unit Values 45 Inapplicable 46 Partial Withdrawals; Detailed Information about the Policy 47, 48, 49, 50 Inapplicable 51 Detailed Information about the Policy 52 Determining the Value in the Variable Division; Right to Change Operations 53(a) Tax Considerations 53(b), 54, 55 Inapplicable 56, 57, 58 Inapplicable 59 Financial Statements iv Prospectus CORPORATE BENEFITS 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 and deductions beginning on page 40 in this prospectus. You should read this prospectus and keep it for future reference. A prospectus for each underlying fund portfolio must accompany and should be read together with this prospectus. This policy is not available in all jurisdictions. This policy is not offered in any jurisdiction where this type of offering is not legal. Depending on the state where it is issued, policy features may vary. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. Replacing your existing life insurance policy(ies) with this policy may not be beneficial to you. Your Policy o is a flexible premium variable universal life insurance policy o is issued by Security Life of Denver Insurance Company o is designed primarily for use on a multi1-life basis when the insured people share a common employment or business relationship 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 options and the guaranteed interest division based on your instructions o are invested in shares of the underlying investment portfolios under each variable investment option and o can be invested in up to eighteen investment options over the policy's lifetime. YOUR ACCOUNT VALUE o is the sum of your holdings in the variable division, the guaranteed interest division and the loan division o has no guaranteed minimum cash value under the variable division. The value varies with the value of the underlying investment portfolio o has a minimum guaranteed rate of return if you have an amount in the guaranteed interest division and o is subject to various expenses and charges. DEATH PROCEEDS o are paid if the policy is in force when the insured person dies o are equal to the death benefit minus an outstanding policy loan, accrued loan interest and unpaid charges incurred before the insured person dies o are calculated under your choice of options; * Option 1- a fixed minimum death benefit * Option 2- a stated death benefit plus your account value * Option 3- a stated death benefit plus the sum of the premiums we receive minus partial withdrawals and o are generally not federally income taxed if your policy continues to meet the federal income tax definition of life insurance. NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS LIFE INSURANCE POLICY IS NOT A BANK DEPOSIT OR OBLIGATION, FEDERALLY INSURED, OR BACKED BY ANY BANK OR GOVERNMENTAL AGENCY. DATE OF PROSPECTUS: _____________ ___, 2000 Form V-112-00 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 - -------------------------------------------------------------------------------- Corporate Benefits 2 TABLE OF CONTENTS POLICY SUMMARY.................................................................4 Your Policy...............................................................4 Free Look Period..........................................................4 Your Policy Premiums......................................................4 Charges and Deductions....................................................5 Fees and Expenses of the Investment Portfolios............................6 Variable Division.........................................................8 Policy Values.............................................................8 Transfers of Account Value................................................9 Special Policy Features...................................................9 Policy Modification, Termination and Continuation Features.............................................................10 Death Benefits...........................................................10 Tax Considerations.......................................................10 INFORMATION ABOUT SECURITY LIFE, THE SEPARATE ACCOUNT AND THE INVESTMENT OPTIONS.......................................................11 Security Life of Denver Insurance Company................................11 Security Life Separate Account L1........................................11 Investment Portfolio Objectives..........................................12 The Guaranteed Interest Division.........................................16 Maximum Number of Investment Options.....................................17 DETAILED INFORMATION ABOUT THE POLICY...................................................................17 Applying for a Policy....................................................17 Temporary Insurance......................................................18 Premiums.................................................................18 Premium Payments Affect Your Coverage....................................20 Death Benefits...........................................................20 Adjustable Term Insurance Rider..........................................24 Special Features.........................................................25 Policy Values............................................................26 Transfers of Account Value...............................................28 Dollar Cost Averaging....................................................28 Automatic Rebalancing....................................................29 Policy Loans.............................................................30 Partial Withdrawals......................................................31 Lapse....................................................................32 Reinstatement............................................................33 Surrender................................................................33 General Policy Provisions................................................33 Free Look Period.....................................................33 Your Policy..........................................................34 Age ................................................................34 Ownership............................................................34 Beneficiary(ies).....................................................34 Collateral Assignment................................................34 Incontestability.....................................................35 Misstatements of Age or Gender.......................................35 Suicide..............................................................35 Transaction Processing...............................................35 Notification and Claims Procedures...................................36 Telephone Privileges.................................................36 Non-participation....................................................36 Distribution of the Policies.........................................36 Advertising Practices and Sales Literature...........................37 Settlement Provisions................................................37 Administrative Information About the Policy..............................38 CHARGES AND DEDUCTIONS........................................................40 Deductions from Premiums.................................................40 Deferred Sales Charge....................................................40 Monthly Deductions from Account Value....................................41 Policy Transaction Fees..................................................42 Group or Sponsored Arrangements or Corporate Purchasers...........................................................43 Other Charges............................................................44 TAX CONSIDERATIONS............................................................44 Tax Status of the Policy.................................................44 Diversification Requirements.............................................44 Tax Treatment of Policy Death Benefits...................................45 Modified Endowment Contracts.............................................45 Multiple Policies........................................................45 Distributions Other than Death Benefits from Modified Endowment Contracts.........................................45 Distributions Other than Death Benefits from Policies That Are Not Modified Endowment Contracts...................46 Investment in the Policy.................................................46 Policy Loans.............................................................46 Section 1035 Exchanges...................................................46 Tax-exempt Policy Owners.................................................46 Possible Tax Law Changes.................................................46 Changes to Comply with the Law...........................................46 Other....................................................................47 ILLUSTRATIONS.................................................................48 ADDITIONAL INFORMATION........................................................62 Directors and Officers...................................................62 Regulation...............................................................64 Legal Matters............................................................64 Legal Proceedings........................................................64 Experts..................................................................64 Registration Statement...................................................64 FINANCIAL STATEMENTS..........................................................66 APPENDIX A...................................................................200 APPENDIX B...................................................................201 - -------------------------------------------------------------------------------- Corporate Benefits 3 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. 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 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 This policy is available only to groups of ten or more insured people. Generally, we require a minimum total group first year premium of at least $250,000. However, depending on underwriting circumstances, we may reduce the minimum total group first year premium in some cases. We generally require a minimum target death benefit of $50,000 per policy. We may reduce the minimum target death benefit if the average target death benefit at policy issuance for the group is at least $50,000. SEE POLICY ISSUANCE, PAGE 17. Your policy provides life insurance protection on the insured person. The policy includes the basic policy, applications, and riders or endorsements. As long as the policy remains in force, we pay a death benefit at the death of the insured person. While your policy is in force, you may access your policy value by taking loans or partial withdrawals. You may also surrender your policy for its surrender value. When the insured person reaches age 100, the policy can be surrendered or continued under the continuation of coverage option. SEE CONTINUATION OF COVERAGE, PAGE 26. We designed this policy 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. Life insurance is not a short-term investment. You should evaluate your need for life insurance coverage and this policy's long-term investment potential and risks before purchasing a policy. FREE LOOK PERIOD Within limits as specified by state law, you have the right to examine your policy and return it for a refund of the premium payments we receive or the account value if you are not satisfied for any reason. The policy is then void. SEE FREE LOOK PERIOD, PAGE 33. 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; and o sufficient to keep your policy in force. 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 riders in force. The amount of premium you pay affects the length of time your policy stays in force. SEE PREMIUMS, PAGE 18. ALLOCATION OF NET PREMIUMS This policy has premium-based charges which are subtracted from your payments. We add the balance, or the net premium, to your policy based on your investment instructions. You may allocate the net premium among one or more variable investment options and the guaranteed interest division. You may not invest in more than eighteen investment options, including the guaranteed interest division, over the life of your policy. SEE MAXIMUM NUMBER OF INVESTMENT OPTIONS, PAGE 17. We apply the net premium payments 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. - -------------------------------------------------------------------------------- Corporate Benefits 4 You need to allocate your premium to your investment choices in percentages that are whole numbers and which total 100%. SEE ALLOCATION OF NET PREMIUMS, PAGE 19. CHARGES AND DEDUCTIONS DEDUCTIONS FROM PREMIUMS We make the following deductions from each premium payment you make: 1. Tax charges -- In the first policy or segment year, we deduct a charge of 2.5% of premiums for state and local taxes up to target premium. In subsequent years, we deduct 2.5% of all premiums we receive. In the first policy or segment year, we deduct the charge of 1.5% of premiums up to target premium to cover our estimated cost of the federal income tax treatment of deferred acquisition costs. In subsequent years, we currently deduct 1.5% of premiums you make. These charges may increase. SEE TAX CHARGES, PAGE 40. 2. Sales charge -- We deduct a percentage of each premium to cover a portion of our expenses in selling your policy. This charge is 2% of premiums we receive in the first policy or segment year up to target premium. Thereafter, this charge is 0.5% of the premiums we receive. This charge is a guaranteed maximum. SEE DEDUCTIONS FROM PREMIUMS, PAGE 40. DEFERRED SALES CHARGE The deferred sales charge is based on a percentage of the premiums that you pay during the first ten policy or segment years. It is deducted from the account value at the beginning of each policy year for seven years after a year in which a premium payment is made. A deferred sales charge is calculated for premiums paid for each policy segment. This charge is a guaranteed maximum. SEE DEFERRED SALES CHARGE, PAGE 40, AND CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 23. Policy or | Deferred Sales Charge | Segment | (% of Premium)* | Year When --------------------------- Deducted at Premium | up to in Excess | Beginning of Payment | Target of Target | Policy or are Made | Premium Premium | Segment Years - -------------| ----------------------- | ------------- | | 1 | 2% 1% | 2 - 8 2 | 1.75% N/A | 3 - 9 3 | 1.75% N/A | 4 - 10 4 | 1.75% N/A | 5 - 11 5 | 0.5% N/A | 6 - 12 6 | 0.5% N/A | 7 - 13 7 | 0.5% N/A | 8 - 14 8 | 0.5% N/A | 9 - 15 9 | 0.5% N/A | 10 - 16 10 | 0.5% N/A | 11 - 17 * THESE ARE THE PERCENTAGES USED TO DETERMINE THE ANNUAL DEDUCTION. ONCE DETERMINED, THE ANNUAL DEDUCTION IS MADE ONCE EACH YEAR FOR SEVEN YEARS. MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE We deduct the following charges from your account value at the beginning of each policy month. The charges shown are guaranteed maximums unless we disclose otherwise. 1. Monthly administrative charge-- $12 per month for the first policy year, then $6 per month for each policy year beyond that. 2. 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. It may change over time. 3. Mortality and Expense Risk Charge -- we assess a mortality and expense risk charge of 0.01667% per month (0.20% annually) against the variable investment options. This charge compensates us for mortality and expense risks under the policies. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 41. 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. The charges shown are guaranteed maximums. SEE POLICY TRANSACTION FEES, PAGE 42. - -------------------------------------------------------------------------------- Corporate Benefits 5 1. Partial withdrawal fee-- $25. 2. Transfer fee-- We allow twelve free transfers among investment options per policy year. For each transfer beyond that, a $10 fee may apply. 3. Illustrations-- You may request one free illustration per policy year. For each illustration beyond that, a $25 fee applies. 4. Premium Allocation Change -- You may make twelve free premium allocation changes per policy year. For each premium allocation change beyond that, a $25 fee applies. 5. Continuation of Coverage Fee -- We will charge a one-time $200 administrative fee when the insured person turns age 100 to activate continued coverage. FEES AND EXPENSES OF THE INVESTMENT PORTFOLIOS The separate account purchases shares of the investment portfolios, or series, 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. - -------------------------------------------------------------------------------- Corporate Benefits 6 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 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%/2/ VIP Overseas Portfolio 0.74% 0.17% 0.91% NA 0.91%/2/ FIDELITY VARIABLE INSURANCE PRODUCTS FUND II VIP II Index 500 Portfolio 0.24% 0.11% 0.35% 0.07% 0.28%/3/ GCG TRUST /4/ Equity Income Portfolio 0.98% 0.00% 0.98% NA 0.98% Growth Portfolio 1.08% 0.01% 1.09% NA 1.09% Hard Assets Portfolio 0.98% 0.02% 1.00% NA 1.00% Limited Maturity Bond Portfolio 0.60% 0.00% 0.60% NA 0.60% Liquid Asset Portfolio 0.59% 0.00% 0.59% NA 0.59% Mid-Cap Growth Portfolio 0.94% 0.01% 0.95% NA 0.95% Research Portfolio 0.94% 0.00% 0.94% NA 0.94% Total Return Portfolio 0.94% 0.04% 0.98% 0.01%/5/ 0.97% INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund 0.75% 0.42% 1.17%/6/ 0.24%/7/ 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%/6/ 10.80%/8/ 1.87% NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST /9/ 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%/6/ 0.31%/10/ 1.30% Worldwide Real Estate Fund 1.00% 4.32% 5.32%/6/ 4.43%/11/ 0.89%
/1/ The 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 variable investment options 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 variable investment options. For a more complete description of the portfolios' costs and expenses, see the prospectuses for the portfolios. /2/ 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 and 0.89% for Overseas portfolio. - -------------------------------------------------------------------------------- Corporate Benefits 7 /3/ 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%. /4/ Directed Services, Inc. ("DSI") serves as the overall manager of the GCG Trust. The fee shown is a management fee. Fees decline as the total assets of certain combined portfolios increase. DSI provides or procures at its own expense, the services necessary for the operation of the portfolios. DSI does not bear the expense of brokerage fees and other transactional expenses for securities, taxes (if any) paid by a portfolio, interest on borrowing, fees and expenses of the independent trustees, and extraordinary expenses, such as litigation or indemnification expenses. The GCG Trust pays DSI for its services a monthly fee based on the annual rates of the average daily net assets of the investment portfolios. DSI (and not the GCG Trust) in turn pays each portfolio manager a monthly fee for managing the assets of the portfolios. More detailed information about each portfolio's management fees and expenses can be found in the prospectus of the GCG Trust. You should read this prospectus before investing. /5/ DSI is currently reimbursing expenses to maintain total expenses at 0.97% for the Total Return Portfolio. Without this reimbursement, and based on actual reimbursements for the fiscal year ended December 31, 1998, total expenses for this portfolio would have been 0.98%. This agreement to reimburse may end at any time. /6/ Certain expenses of the Fund are being voluntarily absorbed by the Funds. /7/ 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. /8/ 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. /9/ 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. /10/ Van Eck Associates Corporation (the "Advisor") absorbed 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%. The Adviser has voluntarily agreed to limit the Worldwide Emerging Markets Fund's total annual operating expenses to 1.30% of the Fund's average daily net assets. /11/ 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%. VARIABLE DIVISION If you invest in the variable investment options, depending on market conditions, you may make or lose money. These variable investment options are described in the prospectuses for the underlying investment portfolios. SEE OBJECTIVES OF THE INVESTMENT PORTFOLIOS, PAGE 12. POLICY VALUES Your account value is the amount you have in the guaranteed interest division, plus the amount you - -------------------------------------------------------------------------------- Corporate Benefits 8 have in each variable investment option. If you have an outstanding policy loan, 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 separate 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 investment options; 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 account value. Partial withdrawals may reduce the amount of base death benefit. Your net account value is equal to the account value minus the amount of your outstanding policy loans and accrued loan interest, if any. Your surrender value is the same as your net account value. YOUR ACCOUNT VALUE IN THE VARIABLE DIVISION Accumulation units are the way we measure value in the variable division. Accumulation unit value is the value of a unit of a variable investment option on the valuation date. Each variable investment option has a different accumulation unit value. SEE DETERMINING THE VALUE IN THE VARIABLE DIVISION, PAGE 27. On each valuation date, we determine the accumulation unit values. The accumulation unit value for each variable investment option reflects the investment performance of the underlying investment portfolio during the valuation period. Each accumulation unit value reflects asset-based charges under the policy, and the expenses of the investment portfolios. SEE DETERMINING THE VALUE IN THE VARIABLE DIVISION, PAGE 27 AND HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION, PAGE 27. TRANSFERS OF ACCOUNT VALUE You may make up to twelve free transfers among the variable investment options or to the guaranteed interest division per policy year. We may charge $10 for each transfer over twelve you make in a policy year. This charge does not apply to automatic rebalancing or dollar cost averaging transfers. There are restrictions on transfers from the guaranteed interest division. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 28. SPECIAL POLICY FEATURES DESIGNATED DEDUCTION OPTION You may designate one deduction investment option from which we will take your monthly deductions and your deferred sales charge. SEE DESIGNATED DEDUCTION OPTION, PAGE 25. DOLLAR COST AVERAGING Dollar cost averaging is a systematic plan of transferring account values to selected variable investment options. It is intended to protect your policy's value from short-term price fluctuations. However, dollar cost averaging does not assure a profit, nor does it protect against a loss in a declining market. Dollar cost averaging is free. SEE DOLLAR COST AVERAGING, PAGE 28. AUTOMATIC REBALANCING Automatic rebalancing periodically reallocates your net account value among the investment options to maintain your specified distribution of account value among those investment options. Automatic rebalancing is free. SEE AUTOMATIC REBALANCING, PAGE 29. LOANS You may take loans against your policy's net account value. We charge an annual loan interest rate of 3.25%. We credit an annual interest rate of 3% on amounts held in the loan division as collateral for your loan. SEE POLICY LOANS, PAGE 30. 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 - -------------------------------------------------------------------------------- Corporate Benefits 9 reduce your account value. SEE PARTIAL WITHDRAWALS, PAGE 31. 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 26. SURRENDER You may surrender your policy at any time while the insured person is living. We calculate your 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 33. LAPSE In general, insurance coverage continues as long as your policy's net account value is enough to pay the monthly deductions. SEE LAPSE, PAGE 32. 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 you had a policy loan existing when coverage ended, we will reinstate it with accrued loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 33. 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 and you do not choose continuation of coverage, you must surrender your policy and we will pay the net account value. Your policy then ends. SEE POLICY MATURITY, PAGE 26. 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 26. 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 on your policy 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. There is no minimum stated death benefit to issue a policy. Generally, there is a minimum target death benefit of $50,000 per policy. SEE DEATH BENEFITS, PAGE 20. You may change your stated death benefit amount while your policy is in force, subject to certain restrictions. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 23. 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 44. - -------------------------------------------------------------------------------- Corporate Benefits 10 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, a loan against or secured by the policy may cause income taxation. A penalty tax may be imposed on a distribution from a modified endowment contract as well. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 45. In recent years, Congress has adopted new rules relating to life insurance owned by businesses. Any business contemplating the purchase of a new policy or a change in an existing policy should consult a tax adviser. You should consult a qualified legal or tax adviser before you purchase your policy. INFORMATION ABOUT SECURITY LIFE, THE SEPARATE ACCOUNT AND THE INVESTMENT OPTIONS SECURITY LIFE OF DENVER INSURANCE COMPANY Security Life of Denver Insurance Company ("Security Life") is a stock life insurance company organized under the laws of the State of Colorado in 1929. Our headquarters are located at 1290 Broadway, Denver, Colorado 80203-5699. We are admitted to do business in the District of Columbia and all states except New York. At the close of 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. SECURITY LIFE SEPARATE ACCOUNT L1 SEPARATE ACCOUNT STRUCTURE We established Security Life Separate Account L1 (the "separate account") on November 3, 1993, under Colorado's insurance law. It is a unit investment trust, registered with the SEC under the Investment Company Act of 1940. The SEC does not supervise our management of the separate account or Security Life. The separate account is a separate investment account. We keep the separate account assets separate from our general account and other separate accounts. It is used to support our variable life insurance policies and for other purposes allowed by law and regulation. We may offer other variable life insurance contracts with different benefits and charges that invest in the separate account. We do not discuss these contracts in this prospectus. The separate account may invest in other securities not available for the policy described in this prospectus. The general account contains all of our assets other than those held in the separate account or other separate accounts. The company owns all the assets in the separate account. We credit gains to or charge losses against the separate account without regard to performance - -------------------------------------------------------------------------------- Corporate Benefits 11 of other investment accounts. ORDER OF SEPARATE ACCOUNT LIABILITIES State law provides that we may not charge general account liabilities against separate account assets equal to its reserves and other liabilities. This means that in the event we were ever to become insolvent, the separate account assets will be used first to pay separate account policy claims. Only if assets remain in the separate account after these claims have been satisfied can these assets be used to pay other policy owners and our creditors. The separate account may have liabilities from assets credited to other variable life policies offered by the separate account. If the assets of the separate account are greater than required reserves and policy liabilities, we may transfer the excess to our general account. INVESTMENT OPTIONS Investment options include the variable and the guaranteed interest divisions, but not the loan division. The separate account has several variable investment options. Each variable investment option invests in shares of a matching investment portfolio. Each investment portfolio has its own investment objective. This means that the investment performance of a policy depends on the performance of the investment portfolios you choose. These investment portfolios are not available directly to individual investors. They are available only 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, other than the GCG Trust, is not associated with us. Currently, some variable investment options invest in a portfolio of the GCG Trust. Directed Services, Inc. ("DSI") serves as the manager to each portfolio of the GCG Trust. The GCG Trust and DSI have retained several portfolio managers to manage the assets of each portfolio of the GCG Trust. The investment portfolios sell shares to separate accounts of insurance companies. These insurance companies may or may not be affiliated with us. This is known as "shared funding." Investment portfolios may sell shares as the underlying investment for both variable annuity and variable life insurance contracts. This process is known as "mixed funding." The investment portfolios may sell shares to certain qualified pension and retirement plans that qualify under Section 401 of the Internal Revenue Code ("IRC"). As a result, a material conflict of interest may arise between insurance companies, owners of different types of contracts and retirement plans, or their participants. If there is a material conflict, we will consider what should be done, including removing the investment portfolio from the separate account. There are certain risks with mixed and shared funding, and with selling shares to qualified pension and retirement plans. See the investment portfolios' prospectuses. INVESTMENT PORTFOLIO OBJECTIVES Each investment portfolio has a different investment objective that it tries to achieve by following its own investment strategy. The objectives and policies of each investment portfolio affect its return and its risks. With this prospectus, you must receive the current prospectus for each investment portfolio. We summarize the investment objectives for each investment portfolio here. You should read each investment portfolio prospectus. Certain investment portfolios offered under this policy have investment objectives and policies similar to other funds managed by the portfolio's investment adviser. The investment results of a portfolio may be higher or lower than those of other funds managed by the same adviser. There is no assurance, and no representation is made, that the investment results of any investment portfolio will be comparable to those of another fund managed by the same investment adviser. Some investment portfolio advisers (or their affiliates) may pay us compensation for servicing, administration or other expenses. Currently, these advisers include AIM Advisors, Inc.; Fidelity Management & Research Company; Fred Alger Management, Inc.; Directed Services, Inc.; INVESCO Funds Group, Inc.; Neuberger Berman Management, Inc. and Van Eck Associates - -------------------------------------------------------------------------------- Corporate Benefits 12 Corporation. The amount of compensation is usually based on the aggregate assets of the investment portfolio from contracts that we issue or administer. Some advisers 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 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. 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 Overseas Portfolio -- seeks long-term growth of capital. - -------------------------------------------------------------------------------- Corporate Benefits 13 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 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. GCG TRUST The GCG Trust is an open-end management investment company whose shares are available to separate accounts funding variable insurance contracts offered by the company's affiliates, Golden American Life Insurance Company, First Golden Life Insurance Company of New York and Equitable Life Insurance Company of Iowa. The GCG Trust also sells its shares to separate accounts of other insurance companies not affiliated with Security Life. Pending Securities and Exchange Commission approval, shares of the GCG Trust may also be sold to certain qualified pension and retirement plans. Currently, some variable investment options invest in a portfolio of the GCG Trust. Directed Services, Inc. ("DSI"), an affiliate, serves as the manager to each portfolio of the GCG Trust. The GCG Trust and DSI have retained several portfolio managers to manage the assets of each portfolio of the GCG Trust. DSI also serves as the distributor to the GCG Trust. The following variable investment options invest in designated portfolios of the GCG Trust: Equity Income Portfolio -- seeks substantial dividend income as well as long-term growth of capital. Invests primarily in common stocks of well-established companies paying above-average dividends. Sub-advised by T. Rowe Price Associates, Inc. Growth Portfolio -- seeks capital appreciation. Invests primarily in common stocks of growth companies that have favorable relationships between price/earnings ratios and growth rates in sectors offering the potential for above-average returns. Sub-advised by Janus Capital Corporation. Hard Assets Portfolio -- seeks long-term capital appreciation. Invests primarily in hard asset securities. Hard asset companies produce a commodity which the portfolio manager is able to price on a daily or weekly basis. Sub-advised by Baring International Investment Limited (an affiliate). Limited Maturity Bond Portfolio -- seeks highest current income consistent with low risk to principal and liquidity. Also seeks to enhance its total return through capital appreciation when market factors, such as falling interest rates and rising bond prices, indicate that capital appreciation may be available without significant risk to principal. Invests primarily in diversified limited maturity debt securities with average maturity dates of five years or shorter and in no cases more than seven years. Sub-advised by ING Investment Management, LLC (an affiliate). Liquid Asset Portfolio -- seeks high level of current income consistent with the preservation of capital and liquidity. Invests primarily in obligations of the U.S. Government and its agencies and instrumentalities, bank obligations, commercial paper and short-term corporate debt securities. All securities will mature in less than one year. Sub-advised by ING Investment Management, LLC (an affiliate). Mid-Cap Growth Portfolio -- seeks long-term growth of capital. Invests primarily in equity securities of companies with medium market capitalization which the portfolio manager believes have above-average growth potential. Sub-advised by Massachusetts Financial Services Company. - -------------------------------------------------------------------------------- Corporate Benefits 14 Research Portfolio -- seeks long-term growth of capital and future income. Invests primarily in common stocks or securities convertible into common stocks of companies believed to have better than average prospects for long-term growth. Sub-advised by Massachusetts Financial Services Company. Total Return Portfolio -- seeks above-average income (compared to a portfolio entirely invested in equity securities) consistent with the prudent employment of capital. Invests primarily in a combination of equity and fixed income securities. Sub-advised by Massachusetts Financial Services Company. 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." - -------------------------------------------------------------------------------- Corporate Benefits 15 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 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. 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 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 premium 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 premium you allocate to - -------------------------------------------------------------------------------- Corporate Benefits 16 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 OPTIONS You may invest in a total of eighteen investment options over the lifetime of your policy. Investment options include the variable and the guaranteed interest divisions, but not the loan division. As an example, if you have had funds in seventeen variable investment options and the guaranteed interest division (or eighteen variable investment options), these are the only investment options to which you may later add or transfer funds. You may want to use fewer investment options in the early years of your policy, so that you can invest in other investment options in the future. If you invest in eighteen variable investment options, you will not be able to invest in the guaranteed interest division. DETAILED INFORMATION ABOUT THE POLICY This prospectus describes our standard Corporate Benefits variable universal life insurance policy. There may be differences in the policy because of state requirements where we issue your policy. We will describe any such differences in your policy. The illustrations beginning on page 50 show how the policies work. APPLYING FOR A POLICY You purchase this variable universal life policy by submitting an application to us. On the policy date, the insured person must be no less than 15 years of age and 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. SEE AGE, PAGE 34. 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. This policy is available only to groups of ten or more insured people. Generally, we require a minimum total group first year premium of at least $250,000. However depending on underwriting circumstances, we may reduce the minimum total group first year premium in some cases. We generally require a minimum target death benefit of $50,000 per policy. We may reduce the minimum target death benefit so long as the average target death benefit at policy issuance for the group or sponsored arrangement is at least $50,000. Our underwriting and reinsurance procedures in effect at the time you apply limit the maximum stated and target death benefit. POLICY ISSUANCE Before we issue a policy or apply your net premium to your policy, we require satisfactory evidence of insurability of the insured person and payment of your initial premium. This evidence may include completion of all underwriting and issue requirements. The investment date is the first date we apply net premium we have received 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 - -------------------------------------------------------------------------------- Corporate Benefits 17 policy. It must be equal to at least the sum of the scheduled premiums which are due from your policy date through your investment date. If we receive your initial premium after we approve your policy for issue and the issue requirements have been met, the investment date is the date we receive your initial premium. 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. The policy date is determined one of three ways: 1. the date you designate on your application, subject to our approval; or 2. the back-date of the policy to save age, subject to our approval and state law. 3. If there is no designated date or back-date, the policy date is: o the date all underwriting and administrative requirements have been met if we have received your initial premium before we issue your policy; or o the date we receive your initial premium if we receive your initial premium after we approve your policy for issue. DEFINITION OF LIFE INSURANCE The federal income tax definition of life insurance is the cash value accumulation test. SEE TAX STATUS OF THE POLICY, PAGE 44. 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 all requirements are met. Temporary coverage begins when: 1. you have completed and signed our binding limited life insurance coverage form; 2. we receive and accept a premium payment of at least your scheduled premium (selected on your application); and 3. part I of the application is completed. Temporary coverage ends on the earliest of: o the date we return your premium payments; o five days after we mail notice of termination to the address on your application; o the date your policy coverage starts; o the date we refuse to issue 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 (planned) premium (within our limits) when you apply for your policy. The scheduled premium, shown in your policy and schedule, is the amount you choose to pay over a stated time period. THIS AMOUNT MAY OR MAY NOT BE ENOUGH TO KEEP YOUR POLICY IN FORCE. You may receive premium reminder notices for the scheduled premium on a monthly, quarterly, semiannual or annual basis. You are not required to pay the scheduled premium. - -------------------------------------------------------------------------------- Corporate Benefits 18 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. UNSCHEDULED PREMIUM PAYMENTS Generally speaking, you may make unscheduled premium payments at any time, however: 1. We may limit the amount of your unscheduled premium payments that would result in an increase in the base death benefit amount required by the federal income tax law definition of life insurance. We may require satisfactory evidence that the insured person is insurable at the time that you make the unscheduled premium payment if the death benefit is increased due to your unscheduled premium payments; 2. We may require proof that the insured person is insurable if your unscheduled premium payment will cause the net amount at risk to increase; and 3. We will return premium payments which are greater than the "seven-pay" limit for your policy if your payment would cause your policy to become a modified endowment contract, unless you have acknowledged in writing the new modified endowment contract status for your policy. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 45 AND CHANGES TO COMPLY WITH THE LAW, PAGE 46. If you have an outstanding policy loan and you make an unscheduled payment, we will consider this payment a loan repayment, unless you tell us otherwise. If your payment is a loan repayment, we do not take out tax or sales charges. TARGET PREMIUM Target premiums are not based on your scheduled premium. Target premiums are actuarially determined using the age, sex and premium class of the insured person. In general, the target premium is higher for men than women. It generally is lower for younger insured people than for older people. It is directly related to the stated death benefit at issue. The target premium is used in determining the sale charge, deferred sales charge and commissions. You are not required to pay the target premium. If you pay less, the amount may or may not be enough to keep your policy in force. 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 18. ALLOCATION OF NET PREMIUMS The net premium is the balance remaining after we take tax and sales charges (excluding the deferred sales charge) from your premium payment. We add the net premium to your account value according to your instructions. We apply the initial net premium 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) we approve your policy for issue. All amounts you designated for the guaranteed interest division will be allocated to that division on the investment date. If your state requires return of your premium during the free look period, we invest amounts you have designated for the variable division in the GCG Trust Liquid Asset Portfolio for a period ending on the earlier of your state's free look period plus: o five days from mailing (deemed delivery time); or o the date the policy was delivered to you, so long as we receive notice of the delivery date on our delivery receipt at our Customer Service Center before the end of the deemed delivery time plus free look period. At the end of this time period, we will allocate that amount among your chosen variable investment options, based on your most recent premium allocation instructions. If your state provides for return of account value during the free look period or no free look period, we invest amounts you designated for the variable division directly into your selected variable investment options. We allocate 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 - -------------------------------------------------------------------------------- Corporate Benefits 19 whole numbers totaling 100%. You may invest in a maximum of eighteen investment options over the lifetime of your policy. SEE MAXIMUM NUMBER OF INVESTMENT DIVISIONS, PAGE 17. 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 option pro rata to the amount in each option. If you change your designated deduction option from which monthly deductions and the deferred sales charge are deducted, we consider this a premium allocation change for which there may be a charge. SEE DESIGNATED DEDUCTION OPTION, PAGE 25 AND POLICY TRANSACTION FEES, PAGE 42. PREMIUM PAYMENTS AFFECT YOUR COVERAGE Your coverage lasts only as long as your net account value is enough to pay the monthly and annual charges and your account value is more than your outstanding policy loan plus accrued loan interest. If these conditions are no longer met, your policy will enter the 61-day grace period and you must make a premium payment to avoid lapse. SEE LAPSE, PAGE 32, AND GRACE PERIOD, PAGE 32. 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 we receive are greater than the "seven-pay" limit. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 45. 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 policy. When we issue your policy, we base the initial insurance coverage on the instructions in your application. 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 target death benefit may be no less than $50,000 to issue your policy. There is no minimum required stated 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 24. - -------------------------------------------------------------------------------- Corporate Benefits 20 DEATH BENEFIT SUMMARY THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES, INCREASES OR DECREASES IN STATED OR TARGET DEATH BENEFIT AND THAT PARTIAL WITHDRAWALS ARE LESS THAN THE PREMIUM WE RECEIVE.
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, benefit plus the sum of all multiplied by the appropriate or the account value multiplied premiums we receive minus factor from the definition of life by the appropriate factor from partial withdrawals you have insurance factors. the definition of life insurance taken, or the account value factors. multiplied by the appropriate factor from the definition of life insurance factors. 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 we receive 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 we receive 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 we receive 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 we receive minus partial withdrawals you have taken, 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 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. - -------------------------------------------------------------------------------- Corporate Benefit 21 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. DEATH BENEFIT OPTIONS You have a choice of three death benefit options: option 1, option 2 or option 3 (described below). You may choose death benefit option 3 only prior to the issue of your policy. Your choice may result in your 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. SEE CHANGES IN DEATH BENEFIT OPTIONS, PAGE 22 AND SEE CONTINUATION OF COVERAGE, 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. 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. 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. Under option 2, investment performance is reflected in your insurance coverage. Under death benefit option 3, the base death benefit is the greater of: 1. your stated death benefit plus the sum of all premiums we receive 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. 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; and o the insured person's gender. 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. If the insured person is 100 years of age or older and the continuation of coverage feature is in effect, only death benefit option 1 is available. CHANGES IN DEATH BENEFIT OPTIONS You may request a change in your death benefit option after the policy date and before the continuation of coverage feature. A death benefit option change applies to your entire stated or base death benefit. You may change from death benefit option 1 to option 2, or from option 2 to option 1. You may also change from death benefit option 3 to option 1. You may not change from death benefit option 1 to option 3, or option 2 to option 3, or option 3 to option 2. You may choose death benefit option 3 only prior to the issue of your policy. Your death benefit option change is effective on your next monthly processing date after we accept and approve your requested change, so long as at least - -------------------------------------------------------------------------------- Corporate Benefits 22 five days remain before your monthly processing date. If fewer than five days remain before your monthly processing date, your death benefit option change is effective on your next monthly processing date. 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 charge applies to your entire stated or base death benefit. Changing your death benefit option may reduce or increase your target death benefit, as well as your stated death benefit. 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. We may not allow a change to your death benefit option if it reduces the target death benefit below the minimum we require to issue your policy. On the effective date of your option change, your stated death benefit is changed as follows: Change Change Stated Death Benefit From To Following Change: ---- -- ---------------- Option 1 Option 2 your stated death benefit before the change minus your account value as of the effective date of the change. Option 2 Option 1 your stated death benefit before the change plus your account value as of the effective date of the change. Option 3 Option 1 your stated death benefit before the change plus (a) the sum of the premiums we receive, minus (b) partial withdrawals you have taken as of the effective date of the change. We increase or decrease your stated death benefit to keep the net amount at risk the same on the date of your death benefit option change. 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 41. If you change your death benefit option, we adjust the stated death benefit for each of your segments by allocating your account value to each benefit segment. For example, if you change from death benefit option 1 to option 2, your stated death benefit is decreased by the amount of your account value allocation to that segment. If you change from death benefit option 2 to option 1, your stated death benefit is increased by the amount allocated to that segment. We do not adjust the target premium when you change your death benefit option. Death benefit options 2 and 3 are not available during the continuation of coverage period. SEE CONTINUATION OF COVERAGE, PAGE 26. CHANGES IN DEATH BENEFIT AMOUNTS You may increase the target or stated death benefit while your policy is in force and before the policy anniversary when the insured person turns age 75. 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 death benefit. The request is effective as of the next monthly processing date after we receive your request and approve it. On the monthly processing date, we deduct the monthly deductions from your account value. 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. 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 if it will disqualify your policy as life insurance under federal income tax law. If we disapprove a change for any reason, we provide you with a notice of our decision. SEE TAX CONSIDERATIONS, PAGE 44. If you decrease your death benefit, you may not decrease your target death benefit below the minimum we require to issue your policy. There may be tax consequences as a result of a decrease in your death benefit. SEE TAX STATUS OF THE POLICY, PAGE 44 AND MODIFIED ENDOWMENT CONTRACTS, PAGE 45. - -------------------------------------------------------------------------------- Corporate Benefits 23 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 once in a policy year. The initial death benefit segment, 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 sales charge; o a new deferred sales charge; o new cost of insurance charges, guaranteed and current; o a new incontestability period; o a new suicide exclusion period; and o a new target premium. 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 and deferred sales charge, premiums you pay after an increase are applied to your policy segments in the same proportion as the target premiums for each segment bears to the sum of the target premium for all segments. For each coverage segment, your schedule shows your target premiums. We allocate the net amount at risk among segments in the same proportion that each segment bears to the total 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. A rider changes benefits under your policy. 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. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 23. 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 sum of the premiums we receive minus partial withdrawals you have taken; or b. the account value multiplied by the appropriate factor from the death benefit corridor factors in the policy. For example, under option 1, assume your base death benefit increases as a result of an increase in your - -------------------------------------------------------------------------------- Corporate Benefits 24 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 23. Alternately, it is possible that the amount of your stated death benefit may be zero, with all coverage under you adjustable term insurance. Using the same example, if the stated death benefit is zero, the adjustable term insurance would be $250,000. 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 and base decreases may reduce the amount of your target death benefit. SEE PARTIAL WITHDRAWALS, PAGE 31, AND CHANGES IN DEATH BENEFIT OPTIONS, PAGE 22. 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 41. The only charge for this coverage is the cost of insurance charge. The total charge that you pay may be less if you have coverage under an adjustable term insurance rider instead of the base death benefit. If the target death benefit is increased by you after the rider is issued, we use the same cost of insurance rate schedule for the entire coverage for this rider. These rates are based on the original premium class even though satisfactory new evidence of insurability is given to us for the increased schedule. Not all policy features apply to the adjustable term insurance rider. Under this rider, there is no surrender value and a policy loan is not available. The adjustable term insurance rider does not contribute to the policy account value nor to investment performance under your policy. The adjustable term insurance rider provides benefits only at the insured person's death. SPECIAL FEATURES DESIGNATED DEDUCTION OPTION You may designate a deduction investment option from which we will take your monthly charges and your deferred sales charge. You may make this designation at policy application or later. You may not use the loan division as your designated deduction option. If you do not choose a designated deduction option, or if the amount in your designated deduction option is not enough to cover the monthly deductions and deferred sales charge, these charges are taken from the variable and guaranteed interest divisions in the same proportion that your account value in each has to your total net account value as of the monthly processing date. If you change the designated deduction option, we consider this a premium allocation change for which there may be a charge. SEE POLICY TRANSACTION FEES, PAGE 42. - -------------------------------------------------------------------------------- Corporate Benefits 25 RIGHT TO EXCHANGE POLICY During the first 24 months after your policy date, you have the right to exchange your policy for a guaranteed policy, unless state law requires differently. To do this, we transfer the amount you have in the variable division to the guaranteed interest division. We allocate all of your future net premiums to the guaranteed interest division. We do not allow any future payments or transfers to the variable division after you exercise this right. We will not charge you for this exchange. SEE THE GUARANTEED INTEREST DIVISION, PAGE 16. POLICY MATURITY If the insured person reaches age 100 and you do not want 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. CONTINUATION OF COVERAGE The continuation of coverage feature allows your insurance coverage to continue beyond when the insured person reaches age 100. If you 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 the adjustable term insurance rider and the target death benefit becomes the stated death benefit; o convert death benefit option 2 or option 3 to death benefit option 1, if applicable; and o terminate investment features. The adjustable term insurance rider then terminates. 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 until the insured person's death, unless the policy lapses or is surrendered. However, we deduct no further cost of insurance charges and your monthly deductions cease. SEE CONTINUATION OF COVERAGE ADMINISTRATIVE FEE, PAGE 43. Your net account value may not be transferred into the variable division 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 you have outstanding policy loans, interest continues to accrue. If you fail to make sufficient loan 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 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. All other consequences of surrender apply. SEE SURRENDER, PAGE 33. The continuation of coverage feature may not be available in all states. If a state has approved this feature, it is automatic and you do not need to take any action to activate it. The tax consequences of coverage continuing beyond when the insured person reaches age 100 are uncertain. You should consult a tax adviser as to those consequences. POLICY VALUES ACCOUNT VALUE Your account value is the total amount you have in the guaranteed interest division, the variable division, and the loan division. Your account value reflects: o net premiums; o deductions for charges; o partial withdrawals; o investment performance of the variable investment options; o interest earned on the amount you have in the guaranteed interest division; and o interest earned on the amount 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, if any. Your - -------------------------------------------------------------------------------- Corporate Benefits 26 surrender value is the same as your net account value. DETERMINING THE VALUE IN THE VARIABLE DIVISION The amounts included in the variable division are measured by accumulation units and accumulation unit values. The value of a variable investment option is the accumulation unit value for that option times the number of accumulation units you own in that option. Each variable investment option has a different accumulation unit value. You purchase accumulation units whenever you allocate premium or make transfers to a variable investment option. This includes transfers from the loan division. The valuation date is each date for which the net asset value of the investment portfolio shares and unit values of the variable investment options are determined. Valuation dates are each day the New York Stock Exchange and the company's customer service center are open for business, except for days on which a corresponding investment portfolio does not value its shares, or any other day as required by law. Our customer service center may not be open for business on: New Year's Day, Martin Luther King, Jr.'s Birthday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving, Christmas Day and the day before or after Christmas. We redeem accumulation units: o when you take a partial withdrawal; o when amounts are transferred from a variable investment option (including transfers to the loan division); o for the monthly deductions from your account value; o for policy transaction charges; o on surrender; and o to pay the death benefit after the insured person dies. We calculate the number of variable investment option accumulation units purchased or redeemed by: 1. dividing the dollar amount of your transaction by: 2. the accumulation unit value calculated at the close of business on the valuation date of the transaction. The accumulation unit value is the value determined as of each valuation date. The accumulation unit value of each variable investment option varies with the investment performance of the underlying portfolio. It reflects: o investment income; o realized and unrealized capital gains and losses; and o investment portfolio expenses. SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES, PAGE 27. The date of a transaction is the date we receive your premium or transaction request at our customer service center, so long as the date of receipt is a valuation date. 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 investment option goes up or down depending on investment performance. FOR AMOUNTS IN THE VARIABLE INVESTMENT OPTIONS, THERE IS NO GUARANTEED MINIMUM CASH VALUE. HOW WE CALCULATE ACCUMULATION UNIT VALUES We determine accumulation unit values on each valuation date. We generally set the accumulation unit value for a variable investment option at $10 when the investment option is first opened. After that, the accumulation unit value on any valuation date is: 1. the accumulation unit value for the preceding valuation date multiplied by 2. the accumulation experience factor for that variable investment option for the valuation period. Every valuation period begins at 4:00 p.m. Eastern time on a valuation date and ends at 4:00 p.m. Eastern time on the next valuation date. - -------------------------------------------------------------------------------- Corporate Benefits 27 We calculate an accumulation experience factor for each variable investment option every valuation date as follows: 1. We take the share value of the underlying portfolio shares in the variable investment option 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 investment option at the close of business on the previous valuation date. TRANSFERS OF ACCOUNT VALUE You may make up to twelve free transfers among the variable investment options, or the guaranteed interest division, in each policy year. You may not make transfers until after your free look period ends if your state requires a refund of premium during the free look period. We do not limit your number of transfers, but we may charge a $10 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 not make transfers during the continuation of coverage period. You may make transfer requests in writing, or by telephone if you have telephone privileges, to our customer service center. Your transfer takes effect on the valuation date we receive your request. The minimum amount you may transfer is $100. This minimum does not need to come from one investment option or be transferred to one investment option as long as the total amount you transfer is at least $100. However, if the amount remaining in a variable investment option is less than $100 when you make a transfer request, we transfer the entire amount out of that variable investment option. EXCESSIVE TRADING Excessive trading activity can disrupt investment portfolio management strategies and increase portfolio expenses by causing: o increased trading and transaction costs; o disruption of planned investment strategies; o forced and unplanned portfolio turnover; o lost opportunity costs; and o 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 Transfers into the guaranteed interest division are not restricted. You may transfer from the guaranteed interest division only in the first 30 days of each policy year. Transfer requests received within 30 days before your policy anniversary 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. DOLLAR COST AVERAGING If your policy has at least $10,000 invested in either the Liquid Asset Portfolio, or the 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. - -------------------------------------------------------------------------------- Corporate Benefits 28 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 investment options each period, you purchase more units in an investment option 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 one day 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 we receive 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 investment option invested in either the Liquid Asset Portfolio or the Limited Maturity Bond Portfolio for automatic transfer. Each period, we automatically transfer the amount you select from your chosen source investment option to one or more other variable investment options. You may not make transfers to or from the guaranteed interest division or the loan division under dollar cost averaging. The minimum percentage you may transfer to any one investment option is 1% of the total amount you transfer to all investment options 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 investment option from which your dollar cost averaging transfers are taken cannot be included in your automatic rebalancing allocation 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 36. TERMINATING DOLLAR COST AVERAGING You may cancel dollar cost averaging by sending satisfactory notice to our customer service center. We must receive it at least one day before the next dollar cost averaging date. Dollar cost averaging will terminate if: 1. you specify a termination date; or 2. your balance remaining in the investment option 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 investment option 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 investment options to match your pre-set automatic rebalancing allocation percentages. After the transfers, the ratio of your account value in each investment option to your total account value for all investment options included in automatic rebalancing matches the automatic rebalancing allocation percentage for that investment option. This action rebalances the amounts in the investment options that do not match your set allocation. This happens if an investment option outperforms other investment options for that time period. - -------------------------------------------------------------------------------- Corporate Benefits 29 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 on the last valuation date of a calendar quarter. 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 we receive 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. You may have both automatic rebalancing and dollar cost averaging at the same time. The investment option from which your dollar cost averaging transfers are taken cannot be included in your automatic rebalancing allocation 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 28. TERMINATING AUTOMATIC REBALANCING You may terminate automatic rebalancing at any time, as long as we receive your notice of termination at least one day before the next automatic rebalancing date. POLICY LOANS You may borrow 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, a new policy loan 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 or 13 monthly deductions if you take a loan within thirty days before your next policy anniversary. Your request for a policy loan must be directed to our customer service center. If you have telephone privileges, you may request a policy loan for less than $25,000 by telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 36. When you request a loan you may specify one investment option from which the loan will be taken. If you do not specify one, the loan will be taken proportionately from each active investment option you have. When you take a policy loan, we transfer an amount equal to your policy loan from the specified investment option proportionately or from the variable and the guaranteed interest divisions to the loan division. We follow this same process for loan interest due at your policy anniversary. 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. Loan interest charges on your policy loan accrue daily at an annual interest rate of 3.25%. Interest is due in arrears on each policy anniversary. If you do not pay your interest when it is due, we add it to your policy loan. 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. 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 32. - -------------------------------------------------------------------------------- Corporate Benefits 30 Policy loans may have tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 45, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 46. LOAN REPAYMENT You may repay all or part of your policy loan at any time. We assume that any payments you make, other than scheduled premiums, are policy loan repayments. You must tell us otherwise if you want additional payments to be premium payments. When you make a loan repayment, we transfer an amount equal to your repayment from the loan division to the variable investment options and the guaranteed interest division in the same proportion as your current premium allocation, unless you tell us otherwise. LOANS AND YOUR BENEFITS Taking a loan decreases the amount you have in the investment options. Accruing loan interest will change your net account value as compared to what it would have been if you did not take a loan. Even if you repay your loan, it has a permanent effect on your account value. The benefits under your policy may be affected. The loan is a first lien on your policy. If you do not repay your policy loan, we deduct your outstanding policy loan and accrued loan interest from the death benefit payable, the surrender value payable. The policy lapses 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 45, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 46. 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. PARTIAL WITHDRAWALS You may request a partial withdrawal on any valuation date after your first policy anniversary by contacting our customer service center. You make a partial withdrawal when you withdraw part of your net account value. If your request is by telephone, the partial withdrawal must be for an amount less than $25,000 and may not cause a decrease in your death benefit; otherwise, your request must be in writing. SEE TELEPHONE PRIVILEGES, PAGE 36. You may take only one partial withdrawal per policy year. The minimum partial withdrawal you may take is $100. The maximum partial withdrawal you may take is the amount which leaves $500 as your net account value. If you request a withdrawal of more than this maximum, we require you to surrender your policy. When you take a partial withdrawal, we deduct your withdrawal amount plus any service fee from your account value. SEE CHARGES, PAGE 40. Partial withdrawals may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 45, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 46. 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. Otherwise amounts you withdraw will reduce your stated death benefit by the amount of the withdrawal unless your policy death benefit has been increased due to the federal income tax definition of life insurance. If your policy death benefit has been increased due to the federal income tax definition of life insurance at the time of the partial withdrawal, then at least part of your partial withdrawal may be made without reducing your stated death benefit. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 2 If you have selected death benefit option 2, a partial withdrawal does not reduce your stated death benefit or target death benefit. However, we reduce the total - -------------------------------------------------------------------------------- Corporate Benefits 31 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 and your partial withdrawal is less than the total of premiums we receive less the total of your prior partial withdrawals, then your stated death benefit will not be reduced. However, your total death benefit will be reduced by at least the amount of your partial withdrawal. If your partial withdrawal is more than the amount of premiums we receive less the total of your prior partial withdrawals, then the excess is treated in the same manner as partial withdrawals under death benefit option 1. SEE PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1, PAGE 31. 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 and if you withdraw an amount that is no greater than the amount that reduces your account value to a level which no longer requires your base death benefit to be increased to qualify as life insurance for federal income tax law purposes. SEE TAX STATUS OF THE POLICY, PAGE 44. We require a minimum target death benefit to issue your policy. You are not allowed to take a partial withdrawal if it reduces your target death benefit below this minimum. SEE GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS, PAGE 43. PARTIAL WITHDRAWAL MECHANICS Unless you tell us otherwise, we will make a partial withdrawal from the guaranteed interest division and the variable division in the same proportion that each 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. Or, 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 45, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 46. LAPSE Your insurance coverage continues as long as your net account value is enough to pay all deductions each month. In any policy year, if you have an outstanding policy loan, your policy will lapse if the loan plus the accrued interest owed is more than the account value. After the insured person reaches age 100 if the continuation of coverage feature is active, the policy could lapse if there is an outstanding policy loan even though there are no further monthly deductions. GRACE PERIOD Your policy enters the 61-day lapse grace period if, on a monthly processing date your net account value is zero (or less). 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 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 any policy loan balance, accrued loan interest, and monthly deductions owed. - -------------------------------------------------------------------------------- Corporate Benefits 32 If we receive payment of the required amount before the end of the grace period, we apply it to your account value in the same manner as your other premium payments, then we take the overdue deductions from your account balance. If you do not pay the full amount required within the 61-day grace period, your policy (and rider) lapse without value. We then withdraw your remaining account balance from the variable and guaranteed interest divisions. We deduct amounts you owe us and inform you that the policy has ended. REINSTATEMENT If you do not pay enough premium before the end of the grace period, your policy lapses. You may reinstate your policy and rider within five years after the grace period ends. Unless state law requires differently, we will reinstate your policy and rider if: 1. you have not surrendered your policy for its surrender value; 2. you provide satisfactory evidence to us that the insured person is still insurable according to our normal rules of underwriting; and 3. we receive enough premium from you to keep your policy and rider in force from the beginning to the end of the grace period and for two months after the reinstatement date. Reinstatement is effective as of the monthly processing date following our approval of your reinstatement application. If you had a policy loan when coverage ended, we reinstate it with accrued loan interest to the date of lapse. The cost of insurance charges 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 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 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. We compute your 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. SEE POLICY VALUES, PAGE 8. 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 45, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 46. GENERAL POLICY PROVISIONS FREE LOOK PERIOD You have the right to examine your policy. The right to examine your policy (or free look period) starts on the date you receive 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 by state law. Generally, there are two types of free look refunds. Some states require a return of all premiums received while others require 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 the initial net premium and additional net premiums we receive before the end of the free look period are invested into the variable investment options. SEE ALLOCATION OF NET PREMIUMS, PAGE 19. - -------------------------------------------------------------------------------- Corporate Benefits 33 YOUR POLICY Some groups under this policy may choose to use a master policy with policy certificates, rather than a series of individual policies. The entire contract between you and us is the combination of: o the policy (or certificate); o a copy of your original application and any applications for benefit increases or decreases; o the adjustable term insurance rider; o endorsements; o schedule pages; and o reinstatement applications. If you make a change to your coverage, we give you a copy of your changed application and new schedules. If you send 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 or amendments we make to your policy. No other person may change the terms or conditions of your policy. GUARANTEED ISSUE We only offer this policy on a guaranteed issue basis. We issue these policies up to a preset face amount with evidence of insurability requirements. 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 birth date to the policy date. We determine the insured person's age at any given time by adding the number of completed policy years to the age calculated at issue and shown in the schedule. At issue of your policy, the insured person must be no less than age 15 and no more than age 85. OWNERSHIP The original owner is the person named as the owner in the policy application. The owner can exercise all rights and receive 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 whom 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) was made an irrevocable beneficiary(ies) under an earlier assignment) are subject to the assignment. It is your responsibility to make sure the assignment is valid. - -------------------------------------------------------------------------------- Corporate Benefits 34 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 premium payments we receive to the time of death; minus 2. the amount of outstanding policy loan amounts 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 we receive since the change date; minus 3. the sum of any increases in policy loan amounts, 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 surrender value; o partial withdrawals; and o loan proceeds. We may delay processing these transactions if: o the NYSE is closed for trading; o trading on the NYSE is restricted by the SEC; o there is an emergency so that it is not reasonably possible to sell securities in the variable investment options or to determine the value of a variable investment option's assets; or o a governmental body with jurisdiction over the separate account allows suspension by its order. SEC rules and regulations determine whether or not these conditions exist. We execute transfers among the variable investment options as of the valuation date of our receipt of your request at our customer service center. We determine death proceeds as of the insured person's date of death. The death proceeds are not affected by subsequent changes in the value of the variable investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 35 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 certain policy changes or if you surrender it. 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 Telephone privileges are automatically provided to you and your agent or registered representative, unless you decline it on the application or contact our customer service center. Telephone privileges allow you or your agent/registered representative, if applicable, to call our customer service center to: o make transfers; o change premium allocations; o change features in your dollar cost averaging and automatic rebalancing programs; o request partial withdrawals; or o request a policy loan. Our customer service center uses reasonable procedures to make sure that instructions received by telephone are genuine. These procedures may include: 1. requiring some form of personal identification; 2. providing written confirmation of any transactions; and 3. tape recording telephone calls. By accepting automatic telephone privileges, you authorize us to record your telephone calls 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, an indirect affiliate of Security Life of Denver Insurance Company; 2. Locust Street Securities, Inc., an indirect affiliate of Security Life of Denver Insurance Company; 3. Multi-Financial Securities Corp., an indirect affiliate of Security Life of Denver Insurance Company; and 4. IFG Network Securities, Inc., an indirect affiliate of Security Life of Denver Insurance Company. - -------------------------------------------------------------------------------- Corporate Benefits 36 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 12% of the target premium that we receive. For policy years two through four, the distribution allowance may be up to 10% of the target premium. For policy years five through ten, the distribution allowance may equal up to 2% of the target premiums we receive. After the tenth policy year, there is no distribution allowance. Broker-dealers may receive annual renewal payments of 0.20% of the net account value for the first twenty years of your policy and 0.10% of net account value each year thereafter. Compensation arrangements vary among broker-dealers and depend on particular circumstances. In addition to the above-described compensation, we may pay wholesaler fees and training allowances. We pay distribution and other allowances from our 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 options. Past performance is not indicative of future performance of the investment options or the policies and is not reflective of the actual investment experience of policyowners. We may feature certain investment options and their managers, as well as describe asset levels and sales volumes 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 surrender value in other than one payment. The investment performance of the variable investment options does not affect payments under these settlement options. Instead, interest accrues at a fixed rate based on the option you choose. Payment options are subject to our rules at the time you make your selection. 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 Option II: LIFE INCOME WITH PAYOUTS GUARANTEED FOR A DESIGNATED PERIOD Option III: HOLD AT INTEREST Option IV: PAYOUTS OF A DESIGNATED AMOUNT Option V: OTHER: OPTIONS WE OFFER AT THE TIME WE PAY THE BENEFIT. 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: - -------------------------------------------------------------------------------- Corporate Benefits 37 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 investment option's assets in shares of investment portfolios. We are the legal owner of the shares held in the separate account and we have the right to vote on certain issues. Among other things, we may vote on issues described in the fund's current prospectus, or issues requiring a vote by shareholders under the Investment Company Act of 1940. Even though we own the shares, we give you the opportunity to tell us how to vote the number of shares attributable to your 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 instruct us only 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 variable investment option that we attribute to your policy by dividing your account value allocated to that variable investment option by the net asset value of one share of the matching investment portfolio. MATERIAL CONFLICTS We are required to track events to identify any material conflicts arising from using investment portfolios for both variable life and variable annuity separate accounts. The boards of the investment portfolios, Security Life, and other insurance companies participating in the investment portfolios, have this same duty. There may be a material conflict if: o state insurance law or federal income tax law changes; o investment management of an investment portfolio changes; or o voting instructions given by owners of variable life insurance policies and variable annuity contracts differ. The investment portfolios may sell shares to certain qualified pension and retirement plans qualifying under Code Section 401. These include cash or deferred arrangements under Code Section 401(k). Therefore, there is a possibility that a material conflict may arise between the interests of owners in general, or between certain classes of owners, and these retirement plans or participants in these retirement plans. If there is a material conflict, we have the duty to determine appropriate action, including removing the portfolios involved from our variable investment options. We may take other action to protect policy owners. This could mean delays or interruptions of the variable operations. - -------------------------------------------------------------------------------- Corporate Benefits 38 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 investment options. We cast votes credited to amounts in the variable investment options, but not credited to policies in the same proportion as votes cast by owners. RIGHT TO CHANGE OPERATIONS Subject to state limitations, we may from time to time make any of the following changes to our separate account: 1. Change the investment objective. 2. Offer additional variable investment options which will invest in portfolios we find appropriate for policies we issue. 3. Eliminate variable investment options. 4. Combine two or more variable investment options. 5. Substitute a new investment portfolio for an existing portfolio. A substitution may become necessary if, in our judgment: o a portfolio no longer suits the purposes of your policy; o there is a change in laws or regulations; o there is a change in a portfolio's investment objectives or restrictions; o the portfolio is no longer available for investment; or o another reason we deem a substitution is appropriate. 6. Transfer assets related to your policy class to another separate account. 7. Withdraw the separate account from registration under the 1940 Act. 8. Operate the separate account as a management investment company under the 1940 Act. 9. Cause one or more variable investment options to invest in a mutual fund other than, or in addition to, the investment portfolios. 10. Stop selling these policies. 11. End any employer or plan trustee agreement with us under the agreement's terms. 12. Limit or eliminate any voting rights for the separate account. 13. Make any changes required by the 1940 Act, or its rules or regulations. We will not make a change until it is effective with the SEC and approved by the appropriate state insurance departments, if necessary. We will notify you of changes. If you wish to transfer the amount you have in the affected investment option to another variable investment option, or to the guaranteed interest division, you may do so free of charge. Just notify us at our customer service center. REPORTS TO OWNERS At the end of each policy year we send a report to you that shows: o your total net policy death benefit (your stated death benefit plus adjustable term insurance rider death benefit, if any); o your account value; o your policy loan if any, plus accrued interest; o your surrender value; o information about the variable investment options; and o your account transactions during the previous year showing net premiums, transfers, deductions, loan amounts or withdrawals. We also send semi-annual reports with financial information on the investment portfolios, including a list of the investment holdings of each portfolio, to you. We send confirmation notices to you throughout the year for certain policy transactions. - -------------------------------------------------------------------------------- Corporate Benefits 39 CHARGES AND DEDUCTIONS The amount of a charge may not correspond to the cost incurred by us to provide the service or benefits associated with the particular policy. 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 policy 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% to 5%. In the first policy or segment year, we deduct 2.5% of each premium payment you make up to target premium to cover these taxes. In subsequent years, we deduct 2.5% of all premium payments you make. This charge approximates the average tax rate we expect to pay. In the first policy or segment year, we deduct 1.5% of each premium payment you make up to target premium. In subsequent years, we deduct 1.5% of all premiums you pay to cover our estimated costs for the federal income tax treatment of deferred acquisition costs. This cost is determined solely by a portion of the amount of life insurance premiums we receive. We reserve the right to increase or decrease 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. In the first policy or segment year this charge is 2% of the premiums you pay up to target premium. Each year thereafter, we deduct 0.5% of all premium payments we receive. The sales charge helps to cover 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. DEFERRED SALES CHARGE We deduct an annual deferred sales charge that is a percentage of your premium payments in each of the first ten policy or segment years. The charge is deducted from your account value on each of the seven policy or segment anniversaries following the year of the premium payment. Each policy segment has its own deferred sales charge. We allocate your premium payments among policy segments to determine the deferred sales charges under your policy if you have more than one segment. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 23. The deferred sales charge compensates us for a portion of the costs we incur in selling the policies. - -------------------------------------------------------------------------------- Corporate Benefits 40 Policy or | Deferred Sales Charge | Segment | (% of Premium)* | Year When --------------------------- Deducted at Premium | up to in Excess | Beginning of Payment | Target of Target | Policy or are Made | Premium Premium | Segment Years - -------------| ----------------------- | ------------- | | 1 | 2% 1% | 2 - 8 2 | 1.75% N/A | 3 - 9 3 | 1.75% N/A | 4 - 10 4 | 1.75% N/A | 5 - 11 5 | 0.5% N/A | 6 - 12 6 | 0.5% N/A | 7 - 13 7 | 0.5% N/A | 8 - 14 8 | 0.5% N/A | 9 - 15 9 | 0.5% N/A | 10 - 16 10 | 0.5% N/A | 11 - 17 * THESE ARE THE PERCENTAGES USED TO DETERMINE THE ANNUAL DEDUCTION. ONCE DETERMINED, THE ANNUAL DEDUCTION IS MADE ONCE EACH YEAR FOR SEVEN YEARS. DEFERRED SALES CHARGE EXAMPLE (BASED ON TWO YEARS OF PREMIUM PAYMENTS) Assume a policy has: o a target premium of $8,000; o premium payments of $10,000 in each of the first two years; and o no change in death benefit. The $10,000 premium payment for the first year incurs a deferred sales charge of $180 each year for years two through eight: 2% of premium up to target plus 1% of premium payments over target [.02 x $8,000 + (.01 x $2,000) = $180]. The $10,000 premium payment for the second year incurs a deferred sales charge of $140 each year for years three through nine: 1.75% of all premium [.0175 x $8,000 = $140]. The deferred sales charge deduction is made on the monthly processing date at the policy (or segment) anniversary. Deferred Total Policy or Deferred Sales Charge Deferred Segment Sales Charge on Second Sales Charge Year of on First Year Year Deducted at Premium Premium Premium Policy Payments Of $10,000 Of $10,000 Anniversary -------- ---------- ---------- ----------- 1 2 $180 $180 3 $180 $140 $320 4 $180 $140 $320 5 $180 $140 $320 6 $180 $140 $320 7 $180 $140 $320 8 $180 $140 $320 9 $140 $140 10 MONTHLY DEDUCTIONS FROM ACCOUNT VALUE We deduct charges from your account value on each monthly processing date. MORTALITY AND EXPENSE RISK CHARGE We deduct a charge each month for the mortality and expense risks we assume. This charge is 0.01667% per month (0.20% annually) of the amount you have in the variable investment options on the monthly processing date. This charge is deducted as a separate charge which appears on your confirmation. The mortality risk we assume is that insured people, as a group, may live less time than we estimated. We assume risk that expenses we incur in issuing and administering the policies and in operating the variable investment options are greater than the amount we estimated when we set these charges. MONTHLY ADMINISTRATIVE CHARGE For this policy, we charge an administrative charge of $12 per month for the first policy year and $6 per month for each policy year beyond that. The monthly administrative charge is designed to compensate us for ongoing costs such as: o premium billing and collections; o claim processing; o policy transactions; o record keeping; o reporting and communications with policy owners; and o other expenses and overhead. COST OF INSURANCE CHARGE The cost of insurance charge compensates us for the ongoing costs of providing insurance coverage under the policy, including the expected cost of paying - -------------------------------------------------------------------------------- Corporate Benefits 41 death proceeds that are more than your account value at the insured person's death. The cost of insurance rates may depend on the: o issue ages of the insured people in the group; o risk class of the insured people in the group; o size of the group; and o total premium the group pays. 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 charges due on that date, other than cost of insurance charges for the base death benefit and adjustable term 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 each segment of the base death benefit and 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 for base coverage 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. This may result in higher cost of insurance charges than those that would apply if the policy were on an individual instead of group basis. 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 cost of insurance charges will never be more than the guaranteed maximum rates shown in your policy. 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 deduct a service fee of $25 of the amount you request from your account value for each partial withdrawal you take to cover our costs. SEE PARTIAL WITHDRAWALS, PAGE 31. TRANSFERS There may be a $10 fee for each additional transfer over twelve per policy year to cover our costs. If you include multiple transfers in one request, it counts as one transfer. There is no transfer fee if you are exercising the right to exchange feature in your policy. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 28, AND RIGHT TO EXCHANGE POLICY, PAGE 26. ILLUSTRATIONS The first policy illustration you request in a policy year is free. After that, we charge a fee of up to $25 for each additional policy illustration you request. - -------------------------------------------------------------------------------- Corporate Benefits 42 PREMIUM ALLOCATION CHANGE You may make twelve free premium allocation changes per policy year. After the twelve free premium allocation changes, we may charge you $25 for each additional premium allocation change per policy year. If you change your designated withdrawal investment option, we consider this a premium allocation charge for which there may be a charge. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 41. CONTINUATION OF COVERAGE ADMINISTRATIVE FEE When the insured person reaches age 100, if your policy has not been surrendered, the continuation of coverage period begins. We 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 charge. DIVISIONS FROM WHICH WE DEDUCT CHARGES, LOANS AND PARTIAL WITHDRAWALS
MONTHLY CHARGES: COST OF INSURANCE CHARGES, ADMINISTRATIVE FEES AND ANNUAL DEDUCTION OF POLICY LOANS AND DEFERRED SALES CHARGE TRANSACTION FEES PARTIAL WITHDRAWALS - -------------- ------------------------------------- ------------------------------------- --------------------------------- CHOICE May choose designated Proportionally among variable May choose any investment deduction option, including and guaranteed interest divisions option or combination of guaranteed interest division investment options, subject to requirements - -------------- ------------------------------------- ------------------------------------- ---------------------------------- DEFAULT Proportionally among variable Proportionally among variable Proportionally among variable and guaranteed interest divisions and guaranteed interest divisions and guaranteed interest divisions
GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS Groups of individuals, corporations or other institutions may purchase this policy. For some group or sponsored arrangements we may reduce or waive the: o administrative charge; o minimum target death benefit; o target premium; o sales charges; o cost of insurance charges; or o other charges normally assessed. These arrangements include sales to employees and certain family members of employees of Security Life of Denver, its affiliates and appointed sales agents and special exchange programs we may offer. We can reduce or waive these items due to expected economies based on the characteristics of the 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 may either purchase policies covering a group of individuals or endorse a policy to a group of individuals. Sponsored arrangements include those in which an employer or association allows us to offer policies to its employees or members on an individual basis. Our sales, administration and mortality costs generally vary with the size and stability of the group, among other factors which we take into account when we reduce charges. We make reductions to charges based on our rules in effect when we approve a policy application. We may change these rules from time to time. We will not be unfairly discriminatory in the variation in the administrative charge, or other charges, fees and privileges. These variations are based on differences in costs or services. - -------------------------------------------------------------------------------- Corporate Benefits 43 OTHER CHARGES Under current law, we pay no tax on investment income and capital gains included in variable life insurance policy reserves. This means that no charge is currently made to any variable investment option for our federal income taxes. If the tax law changes and we have federal income tax chargeable to the variable investment options, we may make such a charge in the future. 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 72. However, there is very little guidance, as to how these requirements are to be applied. 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. Specifically this policy must meet the requirements of the "cash value accumulation test" as specified in Code Section 7702. Under the cash value accumulation test, there is no limit to the amount that may be paid in premiums as long as there is enough death benefit in relation to account value at all times. The death benefit at all times must be at least equal to an actuarially determined factor, depending on the insured person's age and sex at any point in time, multiplied by the account value. SEE APPENDIX A, PAGE 140, FOR A TABLE OF THE CASH VALUE ACCUMULATION TEST FACTORS. We will at all times assure that the policy meets the statutory definition which qualifies the policy as life insurance for federal income tax purposes. In addition, as long as the policy remains in force, increases in account value as a result of interest or investment experience will not be subject to federal income tax unless and until there is a distribution from the policy, such as a partial withdrawal or loan. SEE TAX TREATMENT OF POLICY DEATH BENEFITS, PAGE 45. DIVERSIFICATION REQUIREMENTS In addition to meeting the Code Section 7702 tests, Code Section 817(h) requires separate account investments, such as our separate account, to be adequately diversified. The Treasury has issued regulations which set the standards for measuring the adequacy of any diversification. To be adequately diversified, each variable investment option must meet certain tests. If your variable life policy is not adequately diversified under these regulations, it is not treated as life insurance under Code Section 7702. You would then be subject to federal income tax on your policy income as you earn it. Our variable investment options' investment portfolios have promised they will meet the diversification standards that apply to your policy. In certain circumstances, you, as owner of a variable life insurance contract, may be considered the owner for federal income tax purposes of the separate account assets used to support your contract. Any income and gains from the separate account assets are includable in the gross income from your policy under these circumstances. The IRS has stated in published rulings that a variable contract owner is considered the owner of separate account assets if the contract owner has "indicia of ownership" in those assets. "Indicia of ownership" includes the ability to exercise investment control over the assets. Your ownership rights under your policy are similar to, but different in some ways from those described - -------------------------------------------------------------------------------- Corporate Benefits 44 by the IRS in rulings in which it determined that policy owners are not owners of separate account assets. For example, you have flexibility in allocating your premium payments and in your policy values. These differences could result in the IRS treating you as the owner of a pro rata share of the separate account assets. We do not know what standards will be set forth in the future, if any, in Treasury regulations or rulings. We reserve the right to modify your policy, as necessary, to try to prevent you from being considered the owner of a pro rata share of the separate account assets, or to otherwise qualify your policy for favorable tax treatment. The following discussion assumes that the policy will qualify as a life insurance contract for federal income tax purposes. TAX TREATMENT OF POLICY DEATH BENEFITS We believe that the death benefit under a policy is generally excludable from the gross income of the beneficiary(ies) under section 101(a)(1) of the Code. However, there are exceptions to this general rule. Additionally, federal and local transfer, estate inheritance, and other tax consequences of ownership or receipt of policy proceeds depend on the circumstances of each policy owner or beneficiary(ies). A tax adviser should be consulted about these consequences. Generally, the policy owner will not be taxed on any of the policy cash value until there is a distribution. When distributions from a policy occur, or when a loan is taken from or secured by a policy, the tax consequences depend on whether or not the policy is a "modified endowment contract." Special rules also apply if you are subject to the alternative minimum tax. You should consult a tax adviser if you are subject to the alternative minimum tax. MODIFIED ENDOWMENT CONTRACTS Under the Internal Revenue Code, certain life insurance contracts are classified as "modified endowment contracts," and are given less favorable tax treatment than other life insurance contracts. Due to the flexibility of the policies as to premiums and benefits, the individual circumstances of each policy will determine whether or not it is classified as a modified endowment contract. The rules are too complex to be summarized here, but generally depend on the amount of premiums we receive during the first seven policy years. Certain changes in a policy after it is issued could also cause it to be classified as a modified endowment contract. A current or prospective policy owner should consult with a competent adviser to determine whether or not a policy transaction will cause the policy to be classified as a modified endowment contract. MULTIPLE POLICIES All modified endowment contracts that are issued by us (or our affiliates) to the same policy owner during any calendar year are treated as one modified endowment contract for purposes of determining the amount includable in the policy owner's income when a taxable distribution occurs. DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS Once a policy is classified as a modified endowment contract, the following tax rules apply both prospectively and to any distributions made in the prior two years: 1. All distributions other than death benefits, including distributions upon surrender and withdrawals, from a modified endowment contact will be treated first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. 2. Loan amounts taken from or secured by a policy classified as a modified endowment contract are treated as distributions and taxed first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. 3. A 10% additional income tax penalty may be imposed on the distribution amount subject to income tax. Consult a tax adviser to determine whether or not you may be subject to this penalty tax. - -------------------------------------------------------------------------------- Corporate Benefits 45 DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS Distributions other than death benefits from a policy that is not classified as a modified endowment contract are generally treated first as a recovery of the policy owner's investment in the policy. Only after the recovery of all investment in the policy, is there taxable income. However, certain distributions which must be made in order to enable the policy to continue to qualify as a life insurance contract for federal income tax purposes, if policy benefits are reduced during the first fifteen policy years, may be treated in whole or in part as ordinary income subject to tax. Loan amounts from or secured by a policy that is not a modified endowment contract are generally not treated as distributions. Finally, neither distributions from, nor loan amounts from or secured by, a policy that is not a modified endowment contract are subject to the 10% additional income tax. INVESTMENT IN THE POLICY Your investment in the policy is generally the total of your aggregate premiums. When a distribution is taken from the policy other than a policy loan, your investment in the policy is reduced by the amount of the distribution that is tax free. POLICY LOANS In general, interest on a policy loan will not be deductible. Moreover, the tax consequences associated with a low cost loan such as the loan available in the policy are uncertain. Before taking out a policy loan, you should consult a tax adviser as to the tax consequences. 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 mortality charge used to calculate whether your policy qualifies as life insurance for federal income tax purposes. We must base these calculations on reasonable mortality charges expected to be paid. The Treasury issued proposed regulations on what it considers reasonable mortality charges. We believe that the charges used for your policy should meet the Treasury's current requirement for "reasonableness." We reserve the right to make changes to the mortality charges used in the calculation if future regulations have standards - -------------------------------------------------------------------------------- Corporate Benefits 46 which make changes necessary in order to continue to qualify your policy as life insurance for federal income tax purposes. Additionally, assuming that you do not want your policy to be or to become a modified endowment contract, we include a policy endorsement under which we have the right to amend your policy, including riders. We do this to attempt to enable your policy to continue to meet the seven-pay test for federal income tax purposes. If the policy premium you pay is more than the seven-pay limit, we have the right to remove any excess premium or to make any appropriate adjustments to your policy's account value and death benefit. It is not clear, however, whether we can take effective action pursuant to this endorsement under all possible circumstances to prevent a policy that has exceeded the premium limitation from being classified as a modified endowment contract. Any increase in your death benefit will cause an increase in your cost of insurance charges. OTHER Policy owners may use our policies in various arrangements, including: o qualified plans; o non-qualified deferred compensation or salary continuance plans; o split dollar insurance plans; o executive bonus plans; o retiree medical benefit plans; and o other plans. The tax consequences of these plans may vary depending on the particular facts and circumstances of each arrangement. If you want to use any of your policies in this type of arrangement, you should consult a qualified tax adviser regarding the tax issues of your particular arrangement. In recent years, Congress has adopted new rules relating to life insurance owned by businesses. Any business contemplating the purchase of a new policy or a change in an existing policy should consult a tax adviser. The IRS requires us to withhold income taxes from any portion of the amounts individuals receive in a taxable transaction. We do not withhold income taxes if you elect in writing not to have withholding apply. If the amount withheld for you is insufficient to cover income taxes, you may have to pay income taxes and possibly penalties later. The transfer of the policy or designation of a beneficiary may have federal, state, and/or local transfer and inheritance tax consequences, including the imposition of gift, estate, and generation-skipping transfer taxes. For example, the transfer of the policy to, or the designation as a beneficiary of, or the payment of proceeds to a person who is assigned to a generation which is two or more generations below the generation assignment of the policy owner may have generation skipping transfer tax consequences under federal tax law. The individual situation of each policy owner or beneficiary will determine the extent, if any, to which federal, state, and local transfer and inheritance taxes may be imposed and how ownership or receipt of policy proceeds will be treated for purposes of federal, state and local estate, inheritance, generation skipping and other taxes. YOU SHOULD CONSULT QUALIFIED LEGAL OR TAX ADVISERS FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL, AND OTHER TAX CONSIDERATIONS. - -------------------------------------------------------------------------------- Corporate Benefits 47 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES, AND ACCUMULATED PREMIUMS The following tables are intended to show how the policy works including how benefits and values can vary over time. Each table compares these values with total premiums we receive with interest. The policies illustrated use the following assumptions: Definition Death of Life Stated Target Smoker* Benefit Insurance Death Death Gender Age Status Option Test Benefit Premium Benefit - ------ --- ------ ------ ---- ------- ------- ------- Male 35 Non-smoker 1 CVAT $251,206 $10,000 $251,206 Male 35 Non-smoker 1 CVAT $125,603 $10,000 $251,206 Male 45 Non-smoker 1 CVAT $180,526 $10,000 $180,526 Male 45 Non-smoker 1 CVAT $90,263 $10,000 $180,526 Male 55 Non-smoker 1 CVAT $131,692 $10,000 $131,692 Male 55 Non-smoker 1 CVAT $65,846 $10,000 $131,692 * "Smoker" includes the use of cigarettes, cigars, pipes, chewing tobacco, nicotine chewing gum or patch, snuff or any other tobacco or nicotine-based product. The tables show how death benefits, account values, and surrender values of a hypothetical policy could vary over an extended period of time, assuming the variable divisions had constant hypothetical gross annual investment returns of 0%, 6%, or 12% over the periods indicated in each table. Values would differ from those shown in the tables if the annual investment returns were not constant. The amounts shown would differ if we had used female, unisex or smoker rates. 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 division as a result of the portfolio charge for management fees and portfolio expenses. We show the effect of the net investment return in the amounts for death benefits, account values and surrender values. The tables reflect annual investment management fees of 0.78% 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 0.13% 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 0.91%. 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 absorption, the total average investment management fees, average other portfolio expenses and the average of all portfolios' total expenses used in the illustrations would have been higher (0.78%, 0.82% and 1.60%, respectively). The tables - -------------------------------------------------------------------------------- Corporate Benefits 48 assume that the current expense reimbursement arrangements will continue. However, they may not continue through 1999. The effect of these portfolio charges and expenses results in a net rate of return of: o (0.91)% on a 0% gross rate of return; o 5.09% on a 6% gross rate of return; and o 11.09% on a 12% gross rate of return. The tables assume that charges have been deducted including deductions from premiums, cost of insurance rider charges, monthly deductions and annual deferred sales charge, mortality and expense risk charge, administrative and sales charges. The tables show charges at our current rates. The tables also show charges at the maximum rates we guarantee in our policies. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 41. The tables reflect that we do not currently charge against the separate account for state or federal taxes. If we charge for the taxes in the future, it will take a higher gross rate of return than the rates shown to produce the same death benefits, account values, and surrender values. If we are asked to do so, we will give you a comparable personal illustration based on: o each insured person's age and gender; o standard premium class assumptions; o initial stated death benefit; o the chosen death benefit option; o scheduled premiums consistent with your policy form; and o special features elected on your policy. For individual policies, at issue we deliver an individualized illustration showing the scheduled premium you chose and the insured person's actual risk class. This Corporate Benefits policy is issued only to groups. For this policy, we deliver an illustration similar to the individualized illustration. However, this illustration shows a single life scheduled premium and risk class that is representative of the particular group covered by this policy. We base these hypothetical future benefits on both guaranteed and current cost factor assumptions and actual account value. - -------------------------------------------------------------------------------- Corporate Benefits 49 PROSPECT: INSURED PERSON'S NAME MALE 35 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $251,206 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 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 10000 10500 8646 8646 251206 9731 9731 251206 9188 9188 251206 2 10000 21525 17206 17206 251206 20531 20531 251206 18836 18836 251206 3 10000 33101 25481 25481 251206 32300 32300 251206 28756 28756 251206 4 10000 45256 33472 33472 251206 45145 45145 251206 38962 38962 251206 5 10000 58019 41177 41177 251206 59186 59186 251206 49466 49466 251206 6 10000 71420 48722 48722 251206 74695 74695 256876 60416 60416 251206 7 10000 85491 56105 56105 251206 91706 91706 305380 71832 71832 251206 8 - 89766 53853 53853 251206 99834 99834 322063 73694 73694 251206 9 - 94254 51754 51754 251206 108962 108962 340505 75807 75807 251206 10 - 98967 49781 49781 251206 119159 119159 360813 78160 78160 251206 15 - 126309 40779 40779 251206 189104 189104 491480 93044 93044 251206 20 - 161206 29770 29770 251206 299375 299375 672396 110947 110947 251206 25 - 205744 13798 13798 251206 468796 468796 919778 131192 131192 257399 30 - 262588 - - - 725522 725522 1256604 153523 153523 265901 AGE 65 - 275717 - - - 790314 790314 1337212 158143 158143 267577
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 50 PROSPECT: INSURED PERSON'S NAME MALE 35 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $251,206 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 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 10000 10500 9040 9040 251206 10149 10149 251206 9594 9594 251206 2 10000 21525 18002 18002 251206 21424 21424 251206 19680 19680 251206 3 10000 33101 26691 26691 251206 33731 33731 251206 30074 30074 251206 4 10000 45256 35110 35110 251206 47182 47182 251206 40791 40791 251206 5 10000 58019 43261 43261 251206 61903 61903 251206 51848 51848 251206 6 10000 71420 51271 51271 251206 78170 78170 268826 63392 63392 251206 7 10000 85491 59138 59138 251206 96120 96120 320079 75447 75447 251238 8 - 89766 57413 57413 251206 105357 105357 339883 78013 78013 251669 9 - 94254 55890 55890 251206 115795 115795 361860 80903 80903 252822 10 - 98967 54540 54540 251206 127530 127530 386162 84106 84106 254672 15 - 126309 49471 49471 251206 209968 209968 545708 104455 104455 271479 20 - 161206 44363 44363 251206 346271 346271 777724 130277 130277 292602 25 - 205744 37995 37995 251206 568847 568847 1116078 161866 161866 317581 30 - 262588 28827 28827 251206 928214 928214 1607666 199796 199796 346047 AGE 65 - 275717 26466 26466 251206 1022742 1022742 1730480 208195 208195 352266
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 51 PROSPECT: INSURED PERSON'S NAME MALE 35 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $125,603 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $125,603 ANNUAL PREMIUM: $10,000 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 10000 10500 8876 8876 251206 9993 9993 251206 9434 9434 251206 2 10000 21525 17413 17413 251206 20803 20803 251206 19074 19074 251206 3 10000 33101 25747 25747 251206 32674 32674 251206 29073 29073 251206 4 10000 45256 33877 33877 251206 45748 45748 251206 39459 39459 251206 5 10000 58019 41818 41818 251206 60167 60167 251206 50262 50262 251206 6 10000 71420 49634 49634 251206 76153 76153 261891 61574 61574 251206 7 10000 85491 57321 57321 251206 93709 93709 312051 73422 73422 251206 8 - 89766 55381 55381 251206 102464 102464 330547 75764 75764 251206 9 - 94254 53528 53528 251206 112225 112225 350702 78331 78331 251206 10 - 98967 51693 51693 251206 123021 123021 372507 81069 81069 251206 15 - 126309 42152 42152 251206 195743 195743 508736 97174 97174 252556 20 - 161206 29851 29851 251206 309902 309902 696039 116285 116285 261176 25 - 205744 11874 11874 251206 485297 485297 952152 137692 137692 270152 30 - 262588 - - 251206 751075 751075 1300861 161149 161149 279110 AGE 65 - 275717 - - 251206 818152 818152 1384313 166002 166002 280875
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 52 PROSPECT: INSURED PERSON'S NAME MALE 35 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $125,603 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $125,603 ANNUAL PREMIUM: $10,000 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 10000 10500 9340 9340 251206 10486 10486 251206 9913 9913 251206 2 10000 21525 18353 18353 251206 21857 21857 251206 20070 20070 251206 3 10000 33101 27178 27178 251206 34367 34367 251206 30631 30631 251206 4 10000 45256 35817 35817 251206 48140 48140 251206 41615 41615 251206 5 10000 58019 44273 44273 251206 63314 63314 251206 53043 53043 251206 6 10000 71420 52608 52608 251206 80106 80106 275485 65002 65002 251206 7 10000 85491 60821 60821 251206 98665 98665 328553 77515 77515 258125 8 - 89766 59464 59464 251206 108603 108603 350355 80588 80588 259977 9 - 94254 58255 58255 251206 119762 119762 374255 83957 83957 262364 10 - 98967 57130 57130 251206 132197 132197 400293 87567 87567 265154 15 - 126309 52249 52249 251206 218184 218184 567061 109183 109183 283768 20 - 161206 47033 47033 251206 359839 359839 808198 136192 136192 305888 25 - 205744 40578 40578 251206 591155 591155 1159845 169234 169234 332037 30 - 262588 31359 31359 251206 964632 964632 1670743 208909 208909 361830 AGE 65 - 275717 28994 28994 251206 1062873 1062873 1798380 217694 217694 368338
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 53 PROSPECT: INSURED PERSON'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $180,526 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 10000 10500 8378 8378 180526 9447 9447 180526 8912 8912 180526 2 10000 21525 16663 16663 180526 19926 19926 180526 18262 18262 180526 3 10000 33101 24661 24661 180526 31343 31343 180526 27869 27869 180526 4 10000 45256 32377 32377 180526 43812 43812 180526 37753 37753 180526 5 10000 58019 39812 39812 180526 57457 57457 180526 47929 47929 180526 6 10000 71420 47095 47095 180526 72564 72564 183006 58553 58553 180526 7 10000 85491 54222 54222 180526 89102 89102 218211 69649 69649 180526 8 - 89766 51674 51674 180526 96676 96676 229896 71155 71155 180526 9 - 94254 49237 49237 180526 105154 105154 243011 72874 72874 180526 10 - 98967 46868 46868 180526 114583 114583 257352 74784 74784 180526 15 - 126309 34840 34840 180526 178231 178231 349689 86705 86705 180526 20 - 161206 18061 18061 180526 275554 275554 477260 100180 100180 180526 25 - 205744 - - - 419906 419906 650854 114168 114168 180526 30 - 262588 - - - 629963 629963 885728 128550 128550 180741 AGE 65 - 169267 13634 13634 180526 300116 300116 507796 102937 102937 180526
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 54 PROSPECT: INSURED PERSON'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $180,526 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 10000 10500 9009 9009 180526 10116 10116 180526 9562 9562 180526 2 10000 21525 17925 17925 180526 21339 21339 180526 19599 19599 180526 3 10000 33101 26557 26557 180526 33578 33578 180526 29930 29930 180526 4 10000 45256 34908 34908 180526 46946 46946 180526 40572 40572 180526 5 10000 58019 42983 42983 180526 61573 61573 180526 51544 51544 180526 6 10000 71420 50910 50910 180526 77729 77729 196032 62996 62996 180526 7 10000 85491 58689 58689 180526 95528 95528 233949 74951 74951 183555 8 - 89766 56860 56860 180526 104579 104579 248690 77403 77403 184065 9 - 94254 55221 55221 180526 114792 114792 265285 80168 80168 185267 10 - 98967 53740 53740 180526 126257 126257 283574 83230 83230 186935 15 - 126309 47695 47695 180526 206255 206255 404673 102560 102560 201223 20 - 161206 40527 40527 180526 336259 336259 582400 126446 126446 219004 25 - 205744 30022 30022 180526 543840 543840 842952 154662 154662 239726 30 - 262588 12712 12712 180526 870627 870627 1224101 187277 187277 263312 AGE 65 - 169267 38766 38766 180526 370455 370455 626810 131734 131734 222894
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 55 PROSPECT: INSURED PERSON'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $90,263 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $90,263 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 10000 10500 8573 8573 180526 9671 9671 180526 9122 9122 180526 2 10000 21525 16794 16794 180526 20113 20113 180526 18420 18420 180526 3 10000 33101 24807 24807 180526 31575 31575 180526 28056 28056 180526 4 10000 45256 32616 32616 180526 44217 44217 180526 38067 38067 180526 5 10000 58019 40245 40245 180526 58198 58198 180526 48500 48500 180526 6 10000 71420 47764 47764 180526 73756 73756 186012 59453 59453 180526 7 10000 85491 55170 55170 180526 90808 90808 222388 70965 70965 180526 8 - 89766 52900 52900 180526 98971 98971 235354 72934 72934 180526 9 - 94254 50662 50662 180526 108040 108040 249680 75090 75090 180526 10 - 98967 48372 48372 180526 118018 118018 265068 77371 77371 180526 15 - 126309 35278 35278 180526 184073 184073 361151 90460 90460 180526 20 - 161206 16248 16248 180526 284601 284601 492930 105333 105333 182437 25 - 205744 - - - 433707 433707 672246 121314 121314 188037 30 - 262588 - - - 650683 650683 914860 137595 137595 193459 AGE 65 - 169267 11210 11210 180526 309972 309972 524472 108459 108459 183513
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 56 PROSPECT: INSURED PERSON'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $90,263 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $90,263 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 10000 10500 9308 9308 180526 10452 10452 180526 9880 9880 180526 2 10000 21525 18274 18274 180526 21770 21770 180526 19987 19987 180526 3 10000 33101 27040 27040 180526 34211 34211 180526 30485 30485 180526 4 10000 45256 35612 35612 180526 47901 47901 180526 41393 41393 180526 5 10000 58019 43991 43991 180526 62980 62980 180526 52736 52736 180526 6 10000 71420 52244 52244 180526 79659 79659 200900 64602 64602 180526 7 10000 85491 60371 60371 180526 98064 98064 240158 77014 77014 188608 8 - 89766 58912 58912 180526 107811 107811 256375 79970 79970 190168 9 - 94254 57590 57590 180526 118738 118738 274404 83207 83207 192290 10 - 98967 56337 56337 180526 130895 130895 293991 86670 86670 194661 15 - 126309 50505 50505 180526 214361 214361 420577 107223 107223 210371 20 - 161206 43276 43276 180526 349493 349493 605321 132213 132213 228992 25 - 205744 32774 32774 180526 565262 565262 876156 161734 161734 250687 30 - 262588 15578 15578 180526 904939 904939 1272344 195859 195859 275377 AGE 65 - 169267 41510 41510 180526 385038 385038 651484 137746 137746 233065
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 57 PROSPECT: INSURED PERSON'S NAME MALE 55 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $131,692 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 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 10000 10500 7875 7875 131692 8914 8914 131692 8394 8394 131692 2 10000 21525 15652 15652 131692 18803 18803 131692 17195 17195 131692 3 10000 33101 23146 23146 131692 29584 29584 131692 26235 26235 131692 4 10000 45256 30365 30365 131692 41383 41383 131692 35540 35540 131692 5 10000 58019 37316 37316 131692 54346 54346 131692 45140 45140 131692 6 10000 71420 44129 44129 131692 68784 68784 131692 55201 55201 131692 7 10000 85491 50809 50809 131692 84569 84569 157637 65771 65771 131692 8 - 89766 47734 47734 131692 91274 91274 165936 66693 66693 131692 9 - 94254 44674 44674 131692 98751 98751 175184 67767 67767 131692 10 - 98967 41576 41576 131692 107029 107029 185375 68968 68968 131692 15 - 126309 23590 23590 131692 161929 161929 250990 76207 76207 131692 20 - 161206 - - - 242661 242661 341181 82212 82212 131692 25 - 205744 - - - 356652 356652 463291 82847 82847 131692 30 - 262588 - - - 516089 516089 628596 68762 68762 131692 AGE 65 - 103915 38406 38406 131692 116169 116169 196558 70297 70297 131692
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 58 PROSPECT: INSURED PERSON'S NAME MALE 55 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $131,692 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 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 10000 10500 8854 8854 131692 9953 9953 131692 9403 9403 131692 2 10000 21525 17619 17619 131692 20998 20998 131692 19275 19275 131692 3 10000 33101 26100 26100 131692 33047 33047 131692 29437 29437 131692 4 10000 45256 34299 34299 131692 46211 46211 131692 39902 39902 131692 5 10000 58019 42218 42218 131692 60625 60625 131692 50692 50692 131692 6 10000 71420 49986 49986 131692 76546 76546 146356 61960 61960 131692 7 10000 85491 57608 57608 131692 94038 94038 175288 73729 73729 137430 8 - 89766 55591 55591 131692 102716 102716 186738 75968 75968 138110 9 - 94254 53725 53725 131692 112476 112476 199532 78489 78489 139240 10 - 98967 51977 51977 131692 123393 123393 213717 81276 81276 140770 15 - 126309 43763 43763 131692 198571 198571 307785 98646 98646 152902 20 - 161206 32004 32004 131692 317597 317597 446542 119305 119305 167743 25 - 205744 12724 12724 131692 503646 503646 654237 143066 143066 185842 30 - 262588 - - - 791826 791826 964444 170105 170105 207188 AGE 65 - 103915 50334 50334 131692 135578 135578 229398 84337 84337 142697
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 59 PROSPECT: INSURED PERSON'S NAME MALE 55 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $65,846 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $65,846 ANNUAL PREMIUM: $10,000 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 10000 10500 8000 8000 131692 9065 9065 131692 8532 8532 131692 2 10000 21525 15637 15637 131692 18824 18824 131692 17197 17197 131692 3 10000 33101 23061 23061 131692 29541 29541 131692 26168 26168 131692 4 10000 45256 30278 30278 131692 41399 41399 131692 35494 35494 131692 5 10000 58019 37332 37332 131692 54601 54601 131692 45255 45255 131692 6 10000 71420 44302 44302 131692 69429 69429 132749 55571 55571 131692 7 10000 85491 51196 51196 131692 85669 85669 159687 66508 66508 131692 8 - 89766 48311 48311 131692 92897 92897 168888 67844 67844 131692 9 - 94254 45337 45337 131692 100890 100890 178979 69303 69303 131692 10 - 98967 42170 42170 131692 109634 109634 189886 70820 70820 131692 15 - 126309 21915 21915 131692 166349 166349 257842 78870 78870 131692 20 - 161206 - - - 249297 249297 350511 85621 85621 131692 25 - 205744 - - - 366418 366418 475976 87160 87160 131692 30 - 262588 - - - 530231 530231 645822 72050 72050 131692 AGE 65 - 103915 38764 38764 131692 119184 119184 201659 72392 72392 131692
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 60 PROSPECT: INSURED PERSON'S NAME MALE 55 NON-SMOKER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $65,846 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $65,846 ANNUAL PREMIUM: $10,000 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 10000 10500 9153 9153 131692 10288 10288 131692 9720 9720 131692 2 10000 21525 17966 17966 131692 21428 21428 131692 19663 19663 131692 3 10000 33101 26583 26583 131692 33679 33679 131692 29991 29991 131692 4 10000 45256 35002 35002 131692 47166 47166 131692 40723 40723 131692 5 10000 58019 43227 43227 131692 62037 62037 131692 51886 51886 131692 6 10000 71420 51325 51325 131692 78477 78477 150048 63575 63575 131692 7 10000 85491 59301 59301 131692 96569 96569 180005 75793 75793 141277 8 - 89766 57660 57660 131692 105937 105937 192593 78527 78527 142762 9 - 94254 56122 56122 131692 116400 116400 206494 81512 81512 144601 10 - 98967 54614 54614 131692 127996 127996 221689 84689 84689 146682 15 - 126309 46710 46710 131692 206501 206501 320077 103208 103208 159973 20 - 161206 35076 35076 131692 330299 330299 464401 124841 124841 175526 25 - 205744 16123 16123 131692 523808 523808 680426 149722 149722 194489 30 - 262588 - - - 823542 823542 1003074 178038 178038 216851 AGE 65 - 103915 53127 53127 131692 140831 140831 238285 88065 88065 149006
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 variable investment options of the separate account and the guaranteed interest division and the investment experience of the investment options. 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. - -------------------------------------------------------------------------------- Corporate Benefits 61 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, ING Reinsurance International Michael W. Cunningham* Director, Executive Vice President Mark A. Tullis* Director P. Randall Lowery* Director Jess A. Skriletz Chief Executive Officer and General Manager, ING Reinsurance and ING Institutional Markets Gregory G. McGreevey President, ING Institutional Markets Jerome J. Cwiok* Executive Vice President and Chief Operating Officer James L. Livingston, Jr. Executive Vice President and Chief Actuary Jeffrey R. Messner Executive Vice President and Chief Marketing Officer 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, ING Reinsurance Arnold A. Dicke Senior Vice President, Chief Actuary, ING Reinsurance Charles LeDoyen** Senior Vice President, Structured Settlements Terry L. Morrison Senior Vice President, New Business Operations Jeffery W. Seel* Senior Vice President, Chief Investment Officer Mark A. Smith Senior Vice President, Insurance Services - -------------------------------------------------------------------------------- Corporate Benefits 62 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Lawrence D. Taylor Senior Vice President, Product Management William D. Tyler* Senior Vice President, Chief Information Officer Gary W. Waggoner Vice President, General Counsel and Corporate Secretary - -------------------------------------------------------------------------------- Corporate Benefits 63 REGULATION We are regulated and supervised by the Division of Insurance of the Department of Regulatory Agencies of the State of Colorado which periodically examines our financial condition and operations. In addition, we are subject to the insurance laws and regulations in every jurisdiction in which we do business. As a result, the provisions of this policy may vary somewhat from jurisdiction to jurisdiction. We are required to submit annual statements, including financial statements, of our operations and finances to the insurance departments of the various jurisdictions in which we do business to determine solvency and compliance with state insurance laws and regulations. We are also subject to various federal securities laws and regulations. LEGAL MATTERS The legal matters in connection with the policy described in this prospectus have been passed on by the General Counsel of Security Life. Sutherland Asbill & Brennan LLP has provided advice on certain matters relating to the federal securities laws. LEGAL PROCEEDINGS Security Life, as an insurance company, is ordinarily involved in litigation. We do not believe that any current litigation is material to Security Life's ability to meet its obligations under the policy or to the separate account, and we do not expect to incur significant losses from such actions. ING America Equities, Inc., the principal underwriter and distributor of the policy, is not engaged in any litigation of any material nature. EXPERTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries at December 31, 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. Other financial statements included in the prospectus are unaudited. Actuarial matters in this prospectus have been examined by James L. Livingston, Jr., F.S.A., M.A.A.A., who is Executive Vice President and Chief Actuary of Security Life. His opinion on actuarial matters is filed as an exhibit to the Registration Statement we filed with the SEC. REGISTRATION STATEMENT We have filed a Registration Statement relating to the separate account and the variable life insurance policy described in this prospectus with the SEC. The Registration Statement, which is required by the Securities Act of 1933, includes additional information that is not required in this prospectus under the rules and regulations of the SEC. The additional information may be obtained from the SEC's principal office in Washington, DC. There is a charge for this material. - -------------------------------------------------------------------------------- Corporate Benefits 64 INDEX OF SPECIAL TERMS The following special terms are used in this prospectus. We explain each term on the page(s) listed in the body of this prospectus and in the summary, if applicable: Account value..................................................................8 Accumulation unit.............................................................27 Accumulation unit value.......................................................27 Adjustable term insurance rider...............................................20 Age...........................................................................34 Base death benefit............................................................21 Beneficiary(ies)..............................................................10 Customer service center........................................................2 Death proceeds................................................................22 Free look period..............................................................33 General account...............................................................11 Guaranteed interest division..................................................16 Initial premium...............................................................18 Insured person................................................................17 Investment date...............................................................17 Investment options............................................................12 Loan division..................................................................9 Monthly processing date.......................................................23 Net account value..............................................................9 Net amount at risk.............................................................9 Net premium...................................................................19 Owner.........................................................................34 Partial withdrawal............................................................31 Policy........................................................................17 Policy date...................................................................18 Policy loan...................................................................30 Portfolios....................................................................12 Rider.........................................................................24 Scheduled premium.............................................................18 Segment.......................................................................24 Separate account..............................................................11 Smoker........................................................................48 Stated death benefit..........................................................17 Target death benefit..........................................................24 Target premium................................................................19 Total death benefit...........................................................24 Transaction date..............................................................27 Valuation date.................................................................9 Valuation period..............................................................27 Variable division.............................................................12 - -------------------------------------------------------------------------------- Corporate Benefits 65 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 67. 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 statements included for the Security Life Separate Account L1 referred to above have been audited by Ernst & Young LLP. The consolidated financial statements of Security Life and Subsidiaries should be distinguished from the financial statements of the Security Life Separate Account L1 and should be considered only as bearing upon the ability of Security Life and Subsidiaries to meet its obligations under the policies. They should not be considered as bearing upon the investment experience of the divisions of Security Life Separate Account L1. - -------------------------------------------------------------------------------- Corporate Benefits 66 Consolidated Financial Statements Security Life of Denver Insurance Company and Subsidiaries Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Corporate Benefits 67 Consolidated Financial Statements Security Life of Denver Insurance Company and Subsidiaries Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Corporate Benefits 67 Security Life of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ..............................................69 Audited Consolidated Financial Statements Consolidated Balance Sheets .................................................70 Consolidated Statements of Income ...........................................72 Consolidated Statements of Comprehensive Income..............................73 Consolidated Statements of Stockholder's Equity .............................74 Consolidated Statements of Cash Flows .......................................75 Notes to Consolidated Financial Statements ..................................77 - -------------------------------------------------------------------------------- Corporate Benefits 68 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. /s/ Ernst & Young LLP Denver, Colorado April 5, 1999 - -------------------------------------------------------------------------------- Corporate Benefits 69 Security Life of Denver Insurance Company and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)
SEPTEMBER 30 DECEMBER 31 1999 1998 1997 ----------------------------------------------------------- (Unaudited) ASSETS Investments (Notes 2 and 3): Fixed maturities, at fair value (amortized cost of $3,615,488, $3,383,582 and $3,007,012 respectively) $3,515,341 $ 3,503,530 $3,152,355 Equity securities, at fair value (cost of $5,074, $6,761 and $6,754, respectively) 5,915 8,400 8,019 Mortgage loans on real estate 917,129 784,108 576,620 Investment real estate, at cost, less accumulated depreciation of $556,$706 and $667, respectively 1,033 1,740 1,767 Policy loans 925,721 925,623 875,405 Other long-term investments 18,201 17,671 14,307 Short-term investments 27,958 747 55,466 ----------------------------------------------------------- Total investments 5,411,298 5,241,819 4,683,939 Cash 40,719 31,644 22,299 Accrued investment income 77,687 52,440 49,726 Reinsurance recoverable: Paid benefits 22,925 11,364 11,170 Unpaid benefits 32,897 24,312 14,988 Prepaid reinsurance premiums (Note 8) 3,571,315 3,329,901 2,744,863 Deferred policy acquisition costs (DPAC) 826,369 778,126 682,905 Property and equipment, at cost, less accumulated depreciation of $26,147, $25,981 and $22,925, respectively 34,508 36,141 37,943 Federal income tax recoverable (Note 9) 32,060 - 5,722 Deferred tax assets 6,860 - - Indebtedness from related parties 5,113 4,339 2,443 Other assets 189,015 113,019 87,298 Separate account assets (Note 6) 512,189 423,474 263,035 ----------------------------------------------------------- Total assets $10,762,955 $10,046,579 $8,606,331 ===========================================================
- -------------------------------------------------------------------------------- Corporate Benefits 70
SEPTEMBER 30 DECEMBER 31 1999 1998 1997 ----------------------------------------------------------- (Unaudited) LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Future policy benefits: Life and annuity reserves $ 5,097,013 $ 4,857,141 $4,328,577 Guaranteed investment contracts 3,613,312 3,210,012 2,634,654 Policyholders' funds 90,025 81,064 82,291 Advance premiums 196 272 365 Accrued dividends and dividends on deposit 27,280 21,268 21,129 Policy and contract claims 147,686 130,100 103,525 ----------------------------------------------------------- Total future policy benefits 8,975,512 8,299,857 7,170,541 Accounts payable and accrued expenses 107,276 108,165 99,335 Indebtedness to related parties 21,344 13,755 7,704 Long-term debt to related parties (Note 10) 100,000 100,000 75,000 Accrued interest on long-term debt to related parties (Note 10) 9,653 5,387 5,128 Other liabilities 213,521 109,593 61,424 Federal income taxes payable (Note 9) - 106 - Deferred federal income taxes (Note 9) - 60,062 53,829 Separate account liabilities (Note 6) 512,189 423,474 263,035 ----------------------------------------------------------- Total liabilities 9,939,495 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 2,880 Additional paid-in capital 315,722 315,722 315,722 Retained earnings 597,385 563,553 500,795 Accumulated other comprehensive income (92,527) 44,025 50,938 ----------------------------------------------------------- Total stockholder's equity 823,460 926,180 870,335 ----------------------------------------------------------- Total liabilities and stockholder's equity $10,762,955 $10,046,579 $8,606,331 ===========================================================
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 71 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Income (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 1999 1998 1997 1996 ------------------------------------------------------------------ (Unaudited) Revenues: Traditional life insurance premiums $ 79,526 $ 120,675 $ 122,429 $118,200 Universal life and investment product charges 186,444 229,226 217,108 202,081 Reinsurance premiums assumed 389,463 431,267 446,434 339,335 ------------------------------------------------------------------ 655,433 781,168 785,971 659,616 Reinsurance premiums ceded (113,971) (143,211) (124,815) (117,880) ------------------------------------------------------------------ 541,462 637,957 661,156 541,736 Net investment income 296,973 361,996 340,898 312,121 Net realized gains (losses) on investments (26,374) 10,818 28,645 4,770 Other revenues 2,640 11,771 6,743 526 ------------------------------------------------------------------ 814,701 1,022,542 1,037,442 859,153 Benefits and expenses: Benefits: Traditional life insurance: Death benefits 244,240 239,921 299,305 235,828 Other benefits 83,932 77,209 79,849 71,939 Universal life and investment contracts: Interest credited to account balances 193,542 236,136 217,614 186,908 Death benefits incurred in excess of account balances 80,398 63,103 73,260 54,004 Increase in future policy benefits 53,654 102,875 72,685 121,946 Reinsurance recoveries (106,888) (84,506) (98,376) (80,276) Product conversions 2,247 10,578 7,014 16,379 ------------------------------------------------------------------ 551,125 645,316 651,351 606,728 Expenses: Commissions 60,213 49,569 46,516 25,846 Insurance operating expenses 63,672 125,194 89,075 69,580 Amortization of deferred policy acquisition costs 87,349 105,639 116,495 94,685 ------------------------------------------------------------------ 762,359 925,718 903,437 796,839 ------------------------------------------------------------------ Income before federal income taxes 52,342 96,824 134,005 62,314 Federal income taxes (Note 9) 18,510 34,066 47,019 21,876 ------------------------------------------------------------------ Net income $ 33,832 $ 62,758 $ 86,986 $ 40,438 ==================================================================
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 72 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Comprehensive Income (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 1999 1998 1997 1996 ------------------------------------------------------------------ (Unaudited) Net income $ 33,832 $62,758 $86,986 $40,438 ----------------------------------------------------------------- Other comprehensive income (loss): Unrealized gains (losses) on securities: Net change in unrealized holding gains (losses), net of tax (151,530) (11,251) 28,367 (25,294) Reclassification adjustment for realized gains included in net income, net of tax 7,216 (5,010) (4,601) (2,422) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 8,133 7,236 (37,522) 13,461 Reclassification effect on DPAC of realized gains and losses included in net income, net of tax (371) 3,075 5,976 - Net change in pension liability, net of tax - (963) - - ----------------------------------------------------------------- Total other comprehensive income (loss) (136,552) (6,913) (7,780) (14,255) ----------------------------------------------------------------- Comprehensive income (loss) $(102,720) $55,845 $79,206 $26,183 =================================================================
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 73 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Stockholder's Equity (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 1999 1998 1997 1996 ------------------------------------------------------------------ (Unaudited) Common stock: Balance at beginning and end of period $ 2,880 $ 2,880 $ 2,880 $ 2,880 ================================================================= Additional paid-in capital: Balance at beginning of period $315,722 $315,722 $302,722 $297,422 Capital contributions - - 13,000 5,300 ----------------------------------------------------------------- Balance at end of period $315,722 $315,722 $315,722 $302,722 ================================================================= Accumulated other comprehensive income (loss): Net unrealized gains (losses) on investments: Balance at beginning of period $ 44,988 $ 50,938 $ 58,718 $ 72,973 Unrealized gains (losses) on securities: Change in unrealized gains (losses), net of tax (144,314) (16,261) 23,766 (27,716) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 7,762 10,311 (31,546) 13,461 ----------------------------------------------------------------- Balance at end of period (91,564) 44,988 50,938 58,718 Accumulated net pension liability: Balance at beginning of period (963) - - - Net change in pension liability, net of tax - (963) - - ----------------------------------------------------------------- Balance at end of period (963) (963) - - ----------------------------------------------------------------- Total accumulated other comprehensive income (loss) $(92,527) $ 44,025 $ 50,938 $ 58,718 ================================================================= Retained earnings: Balance at beginning of period $563,553 $500,795 $413,809 $373,371 Net income 33,832 62,758 86,986 40,438 ----------------------------------------------------------------- Balance at end of period $597,385 $563,553 $500,795 $413,809 ================================================================= Total stockholder's equity $823,460 $926,180 $870,335 $778,129 =================================================================
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 74 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 1999 1998 1997 1996 ------------------------------------------------------------------ (Unaudited) OPERATING ACTIVITIES Net income $ 33,832 $ 62,758 $ 86,986 $ 40,438 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits 556,093 874,765 995,632 585,581 Net decrease (increase) in federal income taxes (98,982) 12,061 (12,317) 78,668 Increase (decrease) in accounts payable and accrued expenses 89,983 55,361 21,033 (1,361) Increase in accrued interest on long-term debt 4,266 259 1,428 3,676 Increase in accrued investment income (25,247) (2,714) (4,300) (7,294) (Increase) decrease in reinsurance recoverable (20,146) (9,518) 3,733 (5,214) Increase in prepaid reinsurance premiums (241,414) (585,038) (793,851) (336,053) Net realized investment losses (gains) 26,513 (10,818) (28,645) (4,770) Depreciation and amortization expense 1,713 3,174 3,630 3,857 Policy acquisition costs deferred (124,167) (184,993) (174,374) (152,299) Amortization of deferred policy acquisition costs 87,349 105,639 116,495 94,685 Increase in accrual for postretirement benefits (506) 675 557 484 Other, net 17,372 (7,053) 43,538 (15,539) ----------------------------------------------------------------- Net cash provided by operating activities 310,653 314,558 259,545 284,859 INVESTING ACTIVITIES Securities available-for-sale: Sales: Fixed maturities 2,005,376 5,015,989 2,279,598 334,482 Equity securities 1,747 2,251 648 4,198 Maturities--fixed maturities 154,269 274,463 410,632 727,937 Purchases: Fixed maturities (2,428,189) (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 29,618 51,235 38,756 18,102 Investment real estate 1,109 - - 1,354 Other long-term investments 4,312 10,678 2,002 -
- -------------------------------------------------------------------------------- Corporate Benefits 75 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (continued) (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 1999 1998 1997 1996 ------------------------------------------------------------------ (Unaudited) INVESTING ACTIVITIES (CONTINUED) Purchase or issuance of investments: Mortgage loans on real estate $ (163,968) $ (259,945) $ (163,528) $ (186,228) Investment real estate (1) (13) (35) - Policy loans, net (98) (50,218) (80,094) (41,071) Other long-term investments (4,855) (14,042) (5,248) 809 Short-term investments, net (27,215) 55,115 (48,447) 3,942 Additions to property and equipment (59) (1,418) (2,687) (4,482) Disposals of property and equipment - 68 145 2,389 ----------------------------------------------------------------- Net cash used by investing activities (427,954) (588,920) (489,964) (661,365) FINANCING ACTIVITIES Increase in indebtedness to related parties 6,814 29,156 5,217 42,206 Cash contributions from parent - - 13,000 5,300 Receipts from interest sensitive products credited to policyholder account balances 317,897 505,728 555,223 434,726 Return of policyholder account balances on interest sensitive policies (198,335) (251,177) (334,543) (123,949) ----------------------------------------------------------------- Net cash provided by financing activities 126,376 283,707 238,897 358,283 ----------------------------------------------------------------- Net increase (decrease) in cash 9,075 9,345 8,478 (18,223) Cash at beginning of period 31,644 22,299 13,821 32,044 ----------------------------------------------------------------- Cash at end of period $ 40,719 $ 31,644 $ 22,299 $ 13,821 =================================================================
See accompanying notes. - ------------------------------------------------------------------------------ Corporate Benefits 76 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (Information subsequent to December 31, 1998 is unaudited) 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. - ------------------------------------------------------------------------------ Corporate Benefits 77 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. - ------------------------------------------------------------------------------ Corporate Benefits 78 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. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which delayed the effective date of Statement 133 until June 15, 2000. Upon the initial application of Statement 133 all derivatives are required to be recognized in the balance sheet as either assets or liabilities and measured at fair value. The Company plans to adopt this Statement during 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. - ------------------------------------------------------------------------------ Corporate Benefits 79 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 expected - ------------------------------------------------------------------------------ Corporate Benefits 80 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 benefited, using the same assumptions and factors used to amortize deferred policy acquisition costs. - ------------------------------------------------------------------------------ Corporate Benefits 81 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. - ------------------------------------------------------------------------------ Corporate Benefits 82 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. UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying consolidated balance sheet at September 30, 1999 and the consolidated statements of income, stockholder's equity, comprehensive income, and cash flows for the nine-month period ended September 30, 1999 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consists solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full respective year. - ------------------------------------------------------------------------------ Corporate Benefits 83 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 =======================================================================
- ------------------------------------------------------------------------------ Corporate Benefits 84 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 =======================================================================
- -------------------------------------------------------------------------------- Corporate Benefits 85 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) ============== ============== ============= - -------------------------------------------------------------------------------- Corporate Benefits 86 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. - -------------------------------------------------------------------------------- Corporate Benefits 87 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. - -------------------------------------------------------------------------------- Corporate Benefits 88 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. - -------------------------------------------------------------------------------- Corporate Benefits 89 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 ================ =============== =============== ===============
- -------------------------------------------------------------------------------- Corporate Benefits 90 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. - -------------------------------------------------------------------------------- Corporate Benefits 91 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 ogligation $ 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. - -------------------------------------------------------------------------------- Corporate Benefits 92 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 - -------------------------------------------------------------------------------- Corporate Benefits 93 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) interest cost components of net periodic postretirement benefit cost for 1998 by $(113,000). 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. - -------------------------------------------------------------------------------- Corporate Benefits 94 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. - -------------------------------------------------------------------------------- Corporate Benefits 95 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. - -------------------------------------------------------------------------------- Corporate Benefits 96 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. - -------------------------------------------------------------------------------- Corporate Benefits 97 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. - -------------------------------------------------------------------------------- Corporate Benefits 98 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 PAYMENTS YEAR ----------------------------------------- ----------------- 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. - -------------------------------------------------------------------------------- Corporate Benefits 99 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. - -------------------------------------------------------------------------------- Corporate Benefits 100 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. - -------------------------------------------------------------------------------- Corporate Benefits 101 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 AMOUNT FAIR VALUE 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
- -------------------------------------------------------------------------------- Corporate Benefits 102 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. - -------------------------------------------------------------------------------- Corporate Benefits 103 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. - -------------------------------------------------------------------------------- Corporate Benefits 104 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) Security Life of Denver Insurance Company is aware of the computer problems that may exist surrounding the Year 2000. Senior management is committed to ensuring that information processing and delivery systems will be Year 2000 compliant before December 31, 1999. The project team implemented the Year 2000 project plan which included the analysis, remediation and testing of the in-house source code. The Company followed normal project management methodology, including communication with senior management on a monthly and as-needed basis and allocated sufficient funds to ensure Year 2000 processing capabilities. On June 28, 1999, the analysis, remediation and system testing phases of the plan were completed. Precautionary testing will continue throughout 1999. - -------------------------------------------------------------------------------- Corporate Benefits 105 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. YEAR 2000 (UNAUDITED) (CONTINUED) Security Life has developed a contingency plan with established manual procedures that senior management believes will allow the Company to continue to do business in the event its systems do not perform as expected. However, there is no assurance Security Life's efforts will be successful, or that interaction with other service providers will not impact its services. - -------------------------------------------------------------------------------- Corporate Benefits 106 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 - -------------------------------------------------------------------------------- Corporate Benefits 107 Security Life Separate Account L1 Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ..............................................109 Audited Financial Statements Statement of Net Assets .....................................................110 Statements of Operations ....................................................117 Statements of Changes in Net Assets .........................................136 Notes to Financial Statements ...............................................155 - -------------------------------------------------------------------------------- Corporate Benefits 108 [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 - -------------------------------------------------------------------------------- Corporate Benefits 109 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. - -------------------------------------------------------------------------------- Corporate Benefits 110 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. - -------------------------------------------------------------------------------- Corporate Benefits 111 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. - -------------------------------------------------------------------------------- Corporate Benefits 112 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. - -------------------------------------------------------------------------------- Corporate Benefits 113 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. - -------------------------------------------------------------------------------- Corporate Benefits 114 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. - -------------------------------------------------------------------------------- Corporate Benefits 115 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. - -------------------------------------------------------------------------------- Corporate Benefits 116 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. - -------------------------------------------------------------------------------- Corporate Benefits 117 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. - -------------------------------------------------------------------------------- Corporate Benefits 118 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. - -------------------------------------------------------------------------------- Corporate Benefits 119 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. - -------------------------------------------------------------------------------- Corporate Benefits 120 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. - -------------------------------------------------------------------------------- Corporate Benefits 121 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. - -------------------------------------------------------------------------------- Corporate Benefits 122 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. - -------------------------------------------------------------------------------- Corporate Benefits 123 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. - -------------------------------------------------------------------------------- Corporate Benefits 124 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. - -------------------------------------------------------------------------------- Corporate Benefits 125 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. - -------------------------------------------------------------------------------- Corporate Benefits 126 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. - -------------------------------------------------------------------------------- Corporate Benefits 127 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. - -------------------------------------------------------------------------------- Corporate Benefits 128 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. - -------------------------------------------------------------------------------- Corporate Benefits 129 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. - -------------------------------------------------------------------------------- Corporate Benefits 130 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. - -------------------------------------------------------------------------------- Corporate Benefits 131 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. - -------------------------------------------------------------------------------- Corporate Benefits 132 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. - -------------------------------------------------------------------------------- Corporate Benefits 133 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. - -------------------------------------------------------------------------------- Corporate Benefits 134 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. - -------------------------------------------------------------------------------- Corporate Benefits 135 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. - -------------------------------------------------------------------------------- Corporate Benefits 136 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. - -------------------------------------------------------------------------------- Corporate Benefits 137 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. - -------------------------------------------------------------------------------- Corporate Benefits 138 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 $2,480,616 $ 886,122 $ 713,205 $ 1,147,434 Net realized gains (losses) on investments 6,403,348 20,247 1,534,000 298,379 -- 4,550,722 Net unrealized gains (losses) on investments 15,230,082 315,702 4,444,805 707,398 -- 9,762,177 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations 27,606,124 1,081,266 8,459,421 1,891,899 713,205 15,460,333 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 92,335,231 2,713,832 8,443,426 5,709,711 55,421,815 20,046,447 Cost of insurance and administrative charges (8,200,381) (490,838) (1,358,671) (939,010) (1,769,895) (3,641,967) Benefit payments (259,989) -- (8,890) (8,379) (240,733) (1,987) Surrenders (8,654,377) (652,157) (2,494,098) (438,536) (2,335,262) (2,734,324) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (25,231,056) 1,440,884 1,798,160 2,169,798 (48,429,964) 17,790,066 Other 54,208 7,219 (14,128) (29,375) 39,827 50,665 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 50,043,636 3,018,940 6,365,799 6,464,209 2,685,788 31,508,900 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 77,649,760 4,100,206 14,825,220 8,356,108 3,398,993 46,969,233 Net assets at beginning of year 90,636,169 6,137,073 18,074,922 12,225,779 15,013,259 39,185,136 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 139 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. - -------------------------------------------------------------------------------- Corporate Benefits 140 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. - -------------------------------------------------------------------------------- Corporate Benefits 141 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. - -------------------------------------------------------------------------------- Corporate Benefits 142 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. - -------------------------------------------------------------------------------- Corporate Benefits 143 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. - -------------------------------------------------------------------------------- Corporate Benefits 144 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. - -------------------------------------------------------------------------------- Corporate Benefits 145 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. - -------------------------------------------------------------------------------- Corporate Benefits 146 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. - -------------------------------------------------------------------------------- Corporate Benefits 147 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. - -------------------------------------------------------------------------------- Corporate Benefits 148 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. - -------------------------------------------------------------------------------- Corporate Benefits 149 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. - -------------------------------------------------------------------------------- Corporate Benefits 150 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. - -------------------------------------------------------------------------------- Corporate Benefits 151 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. - -------------------------------------------------------------------------------- Corporate Benefits 152 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. - -------------------------------------------------------------------------------- Corporate Benefits 153 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. - -------------------------------------------------------------------------------- Corporate Benefits 154 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 - -------------------------------------------------------------------------------- Corporate Benefits 155 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 - -------------------------------------------------------------------------------- Corporate Benefits 156 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. - -------------------------------------------------------------------------------- Corporate Benefits 157 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. - -------------------------------------------------------------------------------- Corporate Benefits 158 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 ================= =================
- -------------------------------------------------------------------------------- Corporate Benefits 159 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. - -------------------------------------------------------------------------------- Corporate Benefits 160 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. - -------------------------------------------------------------------------------- Corporate Benefits 161 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
- -------------------------------------------------------------------------------- Corporate Benefits 162 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
- -------------------------------------------------------------------------------- Corporate Benefits 163 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
- -------------------------------------------------------------------------------- Corporate Benefits 164 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 ============ =========== =========== =========== ============
- -------------------------------------------------------------------------------- Corporate Benefits 165 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. - -------------------------------------------------------------------------------- Corporate Benefits 166 Financial Statements - Unaudited Security Life Separate Account L1 of Security Life of Denver Insurance Company Nine months ended September 30, 1999 - -------------------------------------------------------------------------------- Corporate Benefits 167 Security Life Separate Account L1 Financial Statements - Unaudited Nine months ended September 30, 1999 CONTENTS Financial Statements - Unaudited Statement of Net Assets .....................................................169 Statement of Operations .....................................................176 Statement of Changes in Net Assets ..........................................183 Notes to Financial Statements ...............................................190 - -------------------------------------------------------------------------------- Corporate Benefits 168 Security Life Separate Account L1 Statement of Net Assets (Unaudited) September 30, 1999
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) $408,389,528 $47,839,833 $76,536,852 $234,421,699 $37,761,399 $3,989,478 $7,840,267 ------------- ------------ ------------ ------------- ------------ ----------- ----------- Net assets $408,389,528 $47,839,833 $76,536,852 $234,421,699 $37,761,399 $3,989,478 $7,840,267 ============= ============ ============ ============= ============ =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $408,389,528 $47,839,833 $76,536,852 $234,421,699 $37,761,399 $3,989,478 $7,840,267 ------------- ------------ ------------ ------------- ------------ ----------- ----------- TOTAL POLICYHOLDER RESERVES $408,389,528 $47,839,833 $76,536,852 $234,421,699 $37,761,399 $3,989,478 $7,840,267 ============= ============ ============ ============= ============ =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 169 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999
NB ----------------------------------------------------------- TOTAL LIMITED NB MATURITY BOND GROWTH PARTNERS -------------- -------------- ------------ -------------- ASSETS Investments in mutual funds at market value (Note C) $47,839,833 $13,068,057 $9,619,934 $25,151,842 ------------- ------------- ------------ -------------- Net assets $47,839,833 $13,068,057 $9,619,934 $25,151,842 ============= ============== ============ ============== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $47,839,833 $13,068,057 $9,619,934 $25,151,842 ------------- -------------- ------------ -------------- TOTAL POLICYHOLDER RESERVES $47,839,833 $13,068,057 $9,619,934 $25,151,842 ============= ============== ============ ============== Number of division units outstanding (Note G) 1,039,622.674 473,888.373 1,125,362.057 ============== ============ ============== Value per divisional unit $12.57 $20.30 $22.35 ============== ============ ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 170 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999
ALGER -------------------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------- -------------- ------------ -------------- ------------- ASSETS Investments in mutual funds at market value (Note C) $76,536,852 $19,498,480 $12,472,535 $31,328,893 $13,236,944 ------------- -------------- ------------ ------------- ------------- Net assets $76,536,852 $19,498,480 $12,472,535 $31,328,893 $13,236,944 ============= ============== ============ ============== ============= POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $76,536,852 $19,498,480 $12,472,535 $31,328,893 $13,236,944 ------------- -------------- ------------ -------------- ------------- TOTAL POLICYHOLDER RESERVES $76,536,852 $19,498,480 $12,472,535 $31,328,893 $13,236,944 ============= ============== ============ ============== ============= Number of division units outstanding (Note G) 969,591.252 521,645.131 1,155,621.285 341,422.339 ============== ============ ============== ============= Value per divisional unit $20.11 $23.91 $27.11 $38.77 ============== ============ ============== =============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 171 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999
FIDELITY -------------------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 -------------- ------------ ------------- ------------- ------------- ------------- ASSETS Investments in mutual funds at market value (Note C) $234,421,699 $10,482,357 $42,362,233 $26,565,028 $34,894,073 $120,118,008 -------------- ------------ ------------- ------------- ------------- ------------- Net assets $234,421,699 $10,482,357 $42,362,233 $26,565,028 $34,894,073 $120,118,008 ============== ============ ============= ============= ============= ============= POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $234,421,699 $10,482,357 $42,362,233 $26,565,028 $34,894,073 $120,118,008 -------------- ------------ ------------- ------------- ------------- ------------- TOTAL POLICYHOLDER RESERVES $234,421,699 $10,482,357 $42,362,233 $26,565,028 $34,894,073 $120,118,008 ============== ============ ============= ============== ============= ============= Number of division units outstanding (Note G) 605,216.916 1,505,409.839 1,623,779.218 2,804,989.794 4,294,530.144 ============ ============= ============= ============= ============= Value per divisional unit $17.32 $28.14 $16.36 $12.44 $27.97 ============ ============= ============= ============= =============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 172 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999
INVESCO ----------------------------------------------------------------------------------------- TOTAL TOTAL INDUSTRIAL SMALL COMPANY INVESCO RETURN INCOME HIGH YIELD UTILITIES GROWTH -------------- ------------- ------------ ------------- ------------- -------------- ASSETS Investments in mutual funds at market value (Note C) $37,761,399 $10,081,573 $13,672,547 $8,460,163 $3,283,833 $2,263,283 -------------- ------------- ------------ ------------- ------------- -------------- Net assets $37,761,399 $10,081,573 $13,672,547 $8,460,163 $3,283,833 $2,263,283 ============== ============= ============ ============= ============= ============== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $37,761,399 $10,081,573 $13,672,547 $8,460,163 $3,283,833 $2,263,283 -------------- ------------- ------------ ------------- ------------- -------------- TOTAL POLICYHOLDER RESERVES $37,761,399 $10,081,573 $13,672,547 $8,460,163 $3,283,833 $2,263,283 ============== ============= ============ ============= ============= ============== Number of division units outstanding (Note G) 587,846.822 564,281.758 498,536.417 166,522.972 158,826.877 ============= ============ ============= ============= ============== Value per divisional unit $17.15 $24.23 $16.97 $19.72 $14.25 ============= ============ ============= ============= ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 173 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999
VAN ECK ----------------------------------------------------------------------- WORLDWIDE WORLDWIDE WORLDWIDE TOTAL HARD WORLDWIDE EMERGING REAL VAN ECK ASSETS BOND MARKETS ESTATE ---------- ------------- ------------- ------------- -------------- ASSETS Investments in mutual funds at market value (Note C) $3,989,478 $1,953,938 $433,186 $1,345,900 $256,454 ---------- ------------- ------------- ------------- -------------- Net assets $3,989,478 $1,953,938 $433,186 $1,345,900 $256,454 ========== ============= ============= ============= ============== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $3,989,478 $1,953,938 $433,186 $1,345,900 $256,454 ---------- ------------- ------------- ------------- -------------- TOTAL POLICYHOLDER RESERVES $3,989,478 $1,953,938 $433,186 $1,345,900 $256,454 ========== ============= ============= ============= ============== Number of division units outstanding (Note G) 206,329.250 41,934.753 154,879.171 29,109.421 ============= ============= ============= ============== Value per divisional unit $9.47 $10.33 $8.69 $8.81 ============= ============= ============= ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 174 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999 AIM --------------------------------------- TOTAL CAPITAL GOVERNMENT AIM APPRECIATION SECURITIES ----------- ---------------- ---------- ASSETS Investments in mutual funds at market value (Note C) $7,840,267 $3,053,235 $4,787,032 ------------ ------------- ------------ Net assets $7,840,267 $3,053,235 $4,787,032 ============ ============= ============ POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $7,840,267 $3,053,235 $4,787,032 ------------ ------------- ------------ TOTAL POLICYHOLDER RESERVES $7,840,267 $3,053,235 $4,787,032 ============ ============= ============ Number of division units outstanding (Note G) 252,333.471 462,515.169 ============= ============ Value per divisional unit $12.10 $10.35 ============= ============ See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 175 Security Life Separate Account L1 Statement of Operations (Unaudited) Nine months ended September 30, 1999
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS NB ALGER FIDELITY INVESCO VAN ECK AIM ------------ ------------ ----------- ----------- ----------- -------- ----------- INVESTMENT INCOME Dividends from mutual funds $16,941,715 $2,123,919 $7,325,481 $7,461,489 - $30,826 - Less valuation period deductions (Note B) 2,046,339 273,318 384,719 1,140,818 $196,400 18,383 $32,701 ------------ ------------ ----------- ----------- ----------- -------- ----------- Net investment income (loss) 14,895,376 1,850,601 6,940,762 6,320,671 (196,400) 12,443 (32,701) ------------ ------------ ----------- ----------- ----------- -------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 13,909,102 (135,889) 3,847,712 9,196,782 916,656 60,896 22,945 Net unrealized gains (losses) on investments (10,871,813) (2,235,009) (4,536,943) (4,797,945) 321,114 299,818 77,152 ------------ ------------ ----------- ----------- ----------- -------- ----------- Net realized and unrealized gains (losses) on investments 3,037,289 (2,370,898) (689,231) 4,398,837 1,237,770 360,714 100,097 ------------ ------------ ----------- ----------- ----------- -------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $17,932,665 ($520,297) $6,251,531 $10,719,508 $1,041,370 $373,157 $67,396 ============ ============ =========== =========== =========== ======== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 176 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999
NB ----------------------------------------------------------- TOTAL LIMITED NB MATURITY BOND GROWTH PARTNERS ------------- ------------- ------------- -------------- INVESTMENT INCOME Dividends from mutual funds $2,123,919 $911,596 $453,085 $759,238 Less valuation period deductions (Note B) 273,318 83,757 49,751 139,810 ------------- ------------- ------------- -------------- Net investment income (loss) 1,850,601 827,839 403,334 619,428 ------------- ------------- ------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments (135,889) (253,335) (271,898) 389,344 Net unrealized gains (losses) on investments (2,235,009) (517,057) (40,207) (1,677,745) ------------- ------------- ------------- -------------- Net realized and unrealized gains (losses) on investments (2,370,898) (770,392) (312,105) (1,288,401) ------------- ------------- ------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ($520,297) $57,447 $91,229 ($668,973) ============= ============= ============= ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 177 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999
ALGER -------------------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------- -------------- ------------ -------------- ------------- INVESTMENT INCOME Dividends from mutual funds $7,325,481 $2,200,048 $1,636,538 $2,764,203 $724,692 Less valuation period deductions (Note B) 384,719 97,314 61,293 165,157 60,955 ------------- -------------- ------------ -------------- ------------- Net investment income (loss) 6,940,762 2,102,734 1,575,245 2,599,046 663,737 ------------- -------------- ------------ -------------- ------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 3,847,712 (254,740) 155,044 1,688,880 2,258,528 Net unrealized gains (losses) on investments (4,536,943) (358,981) (1,323,462) (2,152,621) (701,879) ------------- -------------- ------------ -------------- ------------- Net realized and unrealized gains (losses) on investments (689,231) (613,721) (1,168,418) (463,741) 1,556,649 ------------- -------------- ------------ -------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $6,251,531 $1,489,013 $406,827 $2,135,305 $2,220,386 ============= ============== ============ ============== =============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 178 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999
FIDELITY ------------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ----------- ----------- ------------ ----------- ----------- ------------ INVESTMENT INCOME Dividends from mutual funds $7,461,489 $798,528 $3,508,501 $820,014 $830,711 $1,503,735 Less valuation period deductions (Note B) 1,140,818 61,269 217,300 131,693 126,634 603,922 ----------- ----------- ------------ ----------- ----------- ------------ Net investment income (loss) 6,320,671 737,259 3,291,201 688,321 704,077 899,813 ----------- ----------- ------------ ----------- ----------- ------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 9,196,782 114,141 6,110,588 276,971 - 2,695,082 Net unrealized gains (losses) on investments (4,797,945) (685,209) (5,671,895) 2,098,113 - (538,954) ----------- ----------- ------------ ----------- ----------- ------------ Net realized and unrealized gains (losses) on investments 4,398,837 (571,068) 438,693 2,375,084 - 2,156,128 ----------- ----------- ------------ ----------- ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $10,719,508 $166,191 $3,729,894 $3,063,405 $704,077 $3,055,941 =========== =========== ============ =========== =========== ============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 179 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999
INVESCO ----------------------------------------------------------------------------------- SMALL TOTAL TOTAL INDUSTRIAL COMPANY INVESCO RETURN INCOME HIGH YIELD UTILITIES GROWTH ------------- ------------- ------------- ------------- --------- ------------ INVESTMENT INCOME Dividends from mutual funds - - - - - - Less valuation period deductions (Note B) $196,400 $52,259 $69,936 $48,767 $16,883 $8,555 ------------- ------------- ------------- ------------- --------- ------------ Net investment income (loss) (196,400) (52,259) (69,936) (48,767) (16,883) (8,555) ------------- ------------- ------------- ------------- --------- ------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 916,656 282,794 423,686 (191,447) 298,134 103,489 Net unrealized gains (losses) on investments 321,114 (720,172) 195,085 636,457 (165,901) 375,645 ------------- ------------- ------------- ------------- --------- ------------ Net realized and unrealized gains (losses) on investments 1,237,770 (437,378) 618,771 445,010 132,233 479,134 ------------- ------------- ------------- ------------- --------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,041,370 ($489,637) $548,835 $396,243 $115,350 $470,579 ============= ============= ============= ============= ========= ============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 180 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999
VAN ECK ----------------------------------------------------------------- WORLDWIDE WORLDWIDE WORLDWIDE TOTAL HARD WORLDWIDE EMERGING REAL VAN ECK ASSETS BOND MARKETS ESTATE ----------- ----------- ------------ ----------- ------------ INVESTMENT INCOME Dividends from mutual funds $30,826 $16,585 $12,446 - $1,795 Less valuation period deductions (Note B) 18,383 8,697 1,849 $6,909 928 ----------- ----------- ------------ ----------- ------------ Net investment income (loss) 12,443 7,888 10,597 (6,909) 867 ----------- ----------- ------------ ----------- ------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 60,896 (325,719) (6,324) 391,099 1,840 Net unrealized gains (losses) on investments 299,818 531,534 (21,361) (205,448) (4,907) ----------- ----------- ------------ ----------- ------------ Net realized and unrealized gains (losses) on investments 360,714 205,815 (27,685) 185,651 (3,067) ----------- ----------- ------------ ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $373,157 $213,703 ($17,088) $178,742 ($2,200) =========== =========== ============ =========== ============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 181 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999 AIM --------------------------------------------- TOTAL CAPITAL GOVERNMENT AIM APPRECIATION SECURITIES -------------- -------------- -------------- INVESTMENT INCOME Dividends from mutual funds - - - Less valuation period deductions (Note B) $32,701 $11,381 $21,320 -------------- -------------- -------------- Net investment income (loss) (32,701) (11,381) (21,320) -------------- -------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 22,945 29,983 (7,038) Net unrealized gains (losses) on investments 77,152 99,305 (22,153) -------------- -------------- -------------- Net realized and unrealized gains (losses) on investments 100,097 129,288 (29,191) -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $67,396 $117,907 ($50,511) ============== ============== ============== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 182 Security Life Separate Account L1 Statement of Changes in Net Assets (Unaudited) Nine months ended September 30, 1999
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) $14,895,376 $1,850,601 $6,940,762 $6,320,671 ($196,400) $12,443 ($32,701) Net realized gains (losses) on investments 13,909,102 (135,889) 3,847,712 9,196,782 916,656 60,896 22,945 Net unrealized gains (losses) on investments (10,871,813) (2,235,009) (4,536,943) (4,797,945) 321,114 299,818 77,152 ------------ ------------ ----------- ------------ ------------ ---------- ------------ Increase (decrease) in net assets from operations 17,932,665 (520,297) 6,251,531 10,719,508 1,041,370 373,157 67,396 ------------ ------------ ----------- ------------ ------------ ---------- ------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 110,942,823 6,925,705 12,949,887 77,880,480 9,878,594 1,039,893 2,268,264 Cost of insurance and administrative charges (14,797,978) (1,647,897) (2,733,031) (8,219,106) (1,820,827) (122,396) (254,721) Benefit payments (519,243) - - (519,243) - - - Surrenders (12,100,319) (1,404,466) (2,698,139) (5,903,232) (1,465,154) (28,634) (600,694) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 1,848,227 (2,584,204) 8,363,932 (7,896,857) 519,983 891,599 2,553,774 Other 53,247 3,241 (25,849) 74,220 (23,320) 18,860 6,095 ------------ ------------ ----------- ------------ ------------ ---------- ------------ Increase (decrease) from principal transactions 85,426,757 1,292,379 15,856,800 55,416,262 7,089,276 1,799,322 3,972,718 ------------ ------------ ----------- ------------ ------------ ---------- ------------ Total increase (decrease) in 103,359,422 772,082 22,108,331 66,135,770 8,130,646 2,172,479 4,040,114 net assets Net assets at beginning of 305,030,106 47,067,751 54,428,521 168,285,929 29,630,753 1,816,999 3,800,153 period ------------ ------------ ----------- ------------ ------------ ---------- ------------ Net assets at end of period $408,389,528 $47,839,833 $76,536,852 $234,421,699 $37,761,399 $3,989,478 $7,840,267 ============ ============ =========== ============ ============ ========== ============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 183 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999
NB ----------------------------------------------------------- TOTAL LIMITED NB MATURITY BOND GROWTH PARTNERS ------------- ------------- ------------- -------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $1,850,601 $827,839 $403,334 $619,428 Net realized gains (losses) on investments (135,889) (253,335) (271,898) 389,344 Net unrealized gains (losses) on investments (2,235,009) (517,057) (40,207) (1,677,745) ------------- ------------- ------------- -------------- Increase (decrease) in net assets from operations (520,297) 57,447 91,229 (668,973) ------------- ------------- ------------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 6,925,705 1,882,305 1,428,513 3,614,887 Cost of insurance and administrative charges (1,647,897) (426,622) (276,240) (945,035) Benefit payments - - - - Surrenders (1,404,466) (1,000,100) (125,647) (278,719) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (2,584,204) (3,045,474) (516,834) 978,104 Other 3,241 22,152 (7,247) (11,664) ------------- ------------- ------------- -------------- Increase (decrease) from principal transactions 1,292,379 (2,567,739) 502,545 3,357,573 ------------- ------------- ------------- -------------- Total increase (decrease) in 772,082 (2,510,292) 593,774 2,688,600 net assets Net assets at beginning of period 47,067,751 15,578,349 9,026,160 22,463,242 ------------- ------------- ------------- -------------- Net assets at end of period $47,839,833 $13,068,057 $9,619,934 $25,151,842 ============= ============= ============= ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 184 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999
ALGER -------------------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------- -------------- ------------ ------------- -------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $6,940,762 $2,102,734 $1,575,245 $2,599,046 $663,737 Net realized gains (losses) on investments 3,847,712 (254,740) 155,044 1,688,880 2,258,528 Net unrealized gains (losses) on investments (4,536,943) (358,981) (1,323,462) (2,152,621) (701,879) ------------- -------------- ------------ ------------- -------------- Increase (decrease) in net assets from operations 6,251,531 1,489,013 406,827 2,135,305 2,220,386 ------------- -------------- ------------ ------------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 12,949,887 3,095,456 2,456,242 5,358,862 2,039,327 Cost of insurance and administrative charges (2,733,031) (686,623) (472,644) (1,156,906) (416,858) Benefit payments - - - - - Surrenders (2,698,139) (916,830) (246,128) (985,915) (549,266) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,363,932 1,057,181 1,130,939 3,097,863 3,077,949 Other (25,849) (43,088) (22,908) (23,930) 64,077 ------------- -------------- ------------ ------------- -------------- Increase (decrease) from principal transactions 15,856,800 2,506,096 2,845,501 6,289,974 4,215,229 ------------- -------------- ------------ ------------- -------------- Total increase (decrease) in 22,108,331 3,995,109 3,252,328 8,425,279 6,435,615 net assets Net assets at beginning of period 54,428,521 15,503,371 9,220,207 22,903,614 6,801,329 ------------- -------------- ------------ ------------- -------------- Net assets at end of period $76,536,852 $19,498,480 $12,472,535 $31,328,893 $13,236,944 ============= ============== ============ ============= ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 185 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999
FIDELITY --------------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ------------ ----------- ----------- ------------ ------------ ------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $6,320,671 $737,259 $3,291,201 $688,321 $704,077 $899,813 Net realized gains (losses) on investments 9,196,782 114,141 6,110,588 276,971 - 2,695,082 Net unrealized gains (losses) on investments (4,797,945) (685,209) (5,671,895) 2,098,113 - (538,954) ------------ ----------- ----------- ------------ ------------ ------------- Increase (decrease) in net assets from operations 10,719,508 166,191 3,729,894 3,063,405 704,077 3,055,941 ------------ ----------- ----------- ------------ ------------ ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 77,880,480 2,465,876 6,610,837 4,280,132 41,327,338 23,196,297 Cost of insurance and administrative charges (8,219,106) (451,606) (1,371,050) (775,628) (1,547,061) (4,073,761) Benefit payments (519,243) - - - (519,243) - Surrenders (5,903,232) (611,510) (665,962) (1,152,367) (1,149,832) (2,323,561) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (7,896,857) (1,322,166) 1,133,206 546,846 (22,310,341) 14,055,598 Other 74,220 (1,707) 25,166 20,753 (23,117) 53,125 ------------ ----------- ----------- ------------ ------------ ------------- Increase (decrease) from principal transactions 55,416,262 78,887 5,732,197 2,919,736 15,777,744 30,907,698 ------------ ----------- ----------- ------------ ------------ ------------- Total increase (decrease) in 66,135,770 245,078 9,462,091 5,983,141 16,481,821 33,963,639 net assets Net assets at beginning of 168,285,929 10,237,279 32,900,142 20,581,887 18,412,252 86,154,369 period ------------ ----------- ----------- ------------ ------------ ------------- Net assets at end of period $234,421,699 $10,482,357 $42,362,233 $26,565,028 $34,894,073 $120,118,008 ============ =========== =========== ============ ============ =============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 186 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999
INVESCO ------------------------------------------------------------------------------------- SMALL TOTAL TOTAL INDUSTRIAL COMPANY INVESCO RETURN INCOME HIGH YIELD UTILITIES GROWTH ------------- ------------- ------------- ------------- ----------- ------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) ($196,400) ($52,259) ($69,936) ($48,767) ($16,883) ($8,555) Net realized gains (losses) on investments 916,656 282,794 423,686 (191,447) 298,134 103,489 Net unrealized gains (losses) on investments 321,114 (720,172) 195,085 636,457 (165,901) 375,645 ------------- ------------- ------------- ------------- ----------- ------------ Increase (decrease) in net assets from operations 1,041,370 (489,637) 548,835 396,243 115,350 470,579 ------------- ------------- ------------- ------------- ----------- ------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 9,878,594 3,952,616 3,467,604 1,336,363 782,410 339,601 Cost of insurance and administrative charges (1,820,827) (579,891) (678,755) (354,536) (141,851) (65,794) Benefit payments - - - - - - Surrenders (1,465,154) (205,183) (302,722) (119,092) (819,566) (18,591) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 519,983 (693,682) (187,353) (686,420) 1,304,087 783,351 Other (23,320) (7,978) (28,067) 4,823 2,443 5,459 ------------- ------------- ------------- ------------- ----------- ------------ Increase (decrease) from principal transactions 7,089,276 2,465,882 2,270,707 181,138 1,127,523 1,044,026 ------------- ------------- ------------- ------------- ----------- ------------ Total increase (decrease) in 8,130,646 1,976,245 2,819,542 577,381 1,242,873 1,514,605 net assets Net assets at beginning of 29,630,753 8,105,328 10,853,005 7,882,782 2,040,960 748,678 period ------------- ------------- ------------- ------------- ----------- ------------ Net assets at end of period $37,761,399 $10,081,573 $13,672,547 $8,460,163 $3,283,833 $2,263,283 ============= ============= ============= ============= =========== ============
See accompanying notes - -------------------------------------------------------------------------------- Corporate Benefits 187 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999
VAN ECK ------------------------------------------------------------------- WORLDWIDE WORLDWIDE WORLDWIDE TOTAL HARD WORLDWIDE EMERGING REAL VAN ECK ASSETS BOND MARKETS ESTATE ------------ ----------- ----------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $12,443 $7,888 $10,597 ($6,909) $867 Net realized gains (losses) on investments 60,896 (325,719) (6,324) 391,099 1,840 Net unrealized gains (losses) on investments 299,818 531,534 (21,361) (205,448) (4,907) ------------ ----------- ----------- ------------- ------------- Increase (decrease) in net assets from operations 373,157 213,703 (17,088) 178,742 (2,200) ------------ ----------- ----------- ------------- ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 1,039,893 373,568 213,261 292,969 160,095 Cost of insurance and administrative charges (122,396) (63,579) (12,138) (38,335) (8,344) Benefit payments - - - - - Surrenders (28,634) (23,333) - (839) (4,462) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 891,599 364,250 41,907 450,879 34,563 Other 18,860 15,574 1,437 1,328 521 ------------ ----------- ----------- ------------- ------------- Increase (decrease) from principal transactions 1,799,322 666,480 244,467 706,002 182,373 ------------ ----------- ----------- ------------- ------------- Total increase (decrease) in 2,172,479 880,183 227,379 884,744 180,173 net assets Net assets at beginning of 1,816,999 1,073,755 205,807 461,156 76,281 period ------------ ----------- ----------- ------------- ------------- Net assets at end of period $3,989,478 $1,953,938 $433,186 $1,345,900 $256,454 ============ =========== =========== ============= =============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 188 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999 AIM --------------------------------------------- TOTAL CAPITAL GOVERNMENT AIM APPRECIATION SECURITIES -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) ($32,701) ($11,381) ($21,320) Net realized gains (losses) on investments 22,945 29,983 (7,038) Net unrealized gains (losses) on investments 77,152 99,305 (22,153) -------------- -------------- -------------- Increase (decrease) in net assets from operations 67,396 117,907 (50,511) -------------- -------------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,268,264 1,133,728 1,134,536 Cost of insurance and administrative charges (254,721) (145,653) (109,068) Benefit payments - - - Surrenders (600,694) (17,852) (582,842) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 2,553,774 757,045 1,796,729 Other 6,095 3,624 2,471 -------------- -------------- -------------- Increase (decrease) from principal transactions 3,972,718 1,730,892 2,241,826 -------------- -------------- -------------- Total increase (decrease) in 4,040,114 1,848,799 2,191,315 net assets Net assets at beginning of 3,800,153 1,204,436 2,595,717 period -------------- -------------- -------------- Net assets at end of period $7,840,267 $3,053,235 $4,787,032 ============== ============== ============== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits 189 Security Life Separate Account L1 Notes to Financial Statements (Unaudited) September 30, 1999 NOTE A. ORGANIZATION Security Life Separate Account L1 (the "Separate Account") was established by resolution of the Board of Directors of Security Life of Denver Insurance Company (the "Company") on November 3, 1993. The Separate Account is organized as a unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940. The Separate Account supports the operations of the FirstLine Variable Universal Life, Strategic Advantage Variable Universal Life and Variable Survivor Universal Life ("Variable Universal Life Policies") 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 September 30, 1999, the Separate Account offered twenty-three investment divisions available to the policyholders, each of which invests in an independently managed mutual fund portfolio ("Fund"). The Funds are as follows: PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS) Neuberger Berman Management Incorporated (NB) Neuberger Berman Limited Maturity Bond Portfolio Neuberger Berman Growth Portfolio Neuberger Berman Partners Portfolio Fred Alger Management, Inc. (Alger) Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Fidelity Management & Research Company (Fidelity) Fidelity Investments VIP II Asset Manager Portfolio Fidelity Investments VIP Growth Portfolio Fidelity Investments VIP Overseas Portfolio Fidelity Investments VIP Money Market Portfolio Fidelity Investments VIP II Index 500 Portfolio - -------------------------------------------------------------------------------- Corporate Benefits 190 Security Life Separate Account L1 (Unaudited) 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 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 The Variable Universal Life Policies allow the policyholders to specify the allocation of their net premium to the various Funds. They can also transfer their account values among the Funds. The Variable Universal Life Policies also provide the policyholders the option to allocate their net premiums, or to transfer their account values, to a Guaranteed Interest Division ("GID") in the Company's general account. The GID guarantees a rate of interest to the policyholder, and it is not variable in nature. Therefore, it is not included in these Separate Account statements. - -------------------------------------------------------------------------------- Corporate Benefits 191 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements of the Separate Account have been prepared on the basis of generally accepted accounting principles ("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. - -------------------------------------------------------------------------------- Corporate Benefits 192 Security Life Separate Account L1 (Unaudited) 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 charged for the nine months ended September 30, 1999 was $2,046,339. 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. - -------------------------------------------------------------------------------- Corporate Benefits 193 Security Life Separate Account L1 (Unaudited) 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 nine months ended September 30, 1999 was $14,797,978. Dividends made by the Funds are reinvested in the Funds. The following is a summary of Fund shares owned as of September 30, 1999:
NUMBER NET VALUE OF ASSET OF SHARES COST OF FUND SHARES VALUE AT MARKET SHARES - -------------------------------------------- ---------------- --------- -------------- ----------------- Neuberger Berman Management Inc.: Limited Maturity Bond 990,754.879 $13.19 $13,068,057 $13,341,360 Growth 383,569.926 $25.08 9,619,934 9,144,677 Partners 1,393,453.900 $18.05 25,151,842 26,937,142 Fred Alger Management, Inc.: American Small Capitalization 463,366.913 $42.08 19,498,480 19,206,039 American MidCap Growth 486,069.128 $25.66 12,472,535 12,434,368 American Growth 592,004.793 $52.92 31,328,893 29,186,588 American Leveraged AllCap 320,042.146 $41.36 13,236,944 12,430,665 Fidelity Management & Research Co.: Asset Manager 610,859.913 $17.16 10,482,357 10,431,780 Growth 952,602.490 $44.47 42,362,233 41,979,868 Overseas 1,208,050.382 $21.99 26,565,028 23,798,192 Money Market 34,894,073.120 $1.00 34,894,073 34,894,073 Index 500 823,628.676 $145.84 120,118,008 104,570,094 INVESCO Funds Group, Inc.: Total Return 634,061.153 $15.90 10,081,573 10,511,407 Industrial Income 690,881.639 $19.79 13,672,547 12,787,764 High Yield 709,150.330 $11.93 8,460,163 8,693,689 Utilities 172,198.950 $19.07 3,283,833 3,136,203 Small Company Growth 152,102.322 $14.88 2,263,283 1,813,540 Van Eck Associates Corporation: Worldwide Hard Assets 183,640.729 $10.64 1,953,938 1,866,458 Worldwide Bond 39,669.059 $10.92 433,186 450,594 Worldwide Emerging Markets 148,063.782 $9.09 1,345,900 1,504,209 Worldwide Real Estate 26,966.790 $9.51 256,454 261,390 AIM Advisors, Inc.: Capital Appreciation 113,756.899 $26.84 3,053,235 2,834,706 Government Securities 434,001.049 $11.03 4,787,032 4,774,323 ------------ ------------- Total $408,389,528 $386,989,129 ============ =============
- -------------------------------------------------------------------------------- Corporate Benefits 194 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE C. INVESTMENTS (CONTINUED) For the nine months ended September 30, 1999, 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 $15,334,595 $4,863,022 ($6,856,257) $13,341,360 Growth 8,510,696 2,921,295 (2,287,314) 9,144,677 Partners 22,570,797 6,832,674 (2,466,329) 26,937,142 Fred Alger Management, Inc.: American Small Capitalization 14,851,950 9,680,757 (5,326,668) 19,206,039 American MidCap Growth 7,858,579 5,128,822 (553,033) 12,434,368 American Growth 18,608,688 14,479,402 (3,901,502) 29,186,588 American Leveraged AllCap 5,293,171 11,199,357 (4,061,863) 12,430,665 Fidelity Management & Research Co.: Asset Manager 9,501,494 5,409,681 (4,479,395) 10,431,780 Growth 26,845,882 49,460,163 (34,326,177) 41,979,868 Overseas 19,913,166 12,428,649 (8,543,623) 23,798,192 Money Market 18,412,252 83,637,874 (67,156,053) 34,894,073 Index 500 70,067,500 38,943,047 (4,440,453) 104,570,094 INVESCO Funds Group, Inc.: Total Return 7,814,990 4,595,765 (1,899,348) 10,511,407 Industrial Income 10,163,306 4,303,132 (1,678,674) 12,787,764 High Yield 8,752,765 2,641,428 (2,700,504) 8,693,689 Utilities 1,727,429 2,282,360 (873,586) 3,136,203 Small Company Growth 674,581 1,581,087 (442,128) 1,813,540 Van Eck Associates Corporation: Worldwide Hard Assets 1,517,809 1,870,712 (1,522,063) 1,866,458 Worldwide Bond 201,853 327,317 (78,576) 450,594 Worldwide Emerging Markets 414,017 4,479,244 (3,389,052) 1,504,209 Worldwide Real Estate 76,310 280,045 (94,965) 261,390 AIM Advisors, Inc. Capital Appreciation 1,085,211 2,087,719 (338,224) 2,834,706 Government Securities 2,560,855 4,762,021 (2,548,553) 4,774,323 ------------- ------------ --------------- ------------- Total $272,757,896 $274,195,573 ($159,964,340) $386,989,129 ============= ============ =============== =============
Aggregate proceeds from sales of investments for the nine months ended September 30, 1999 were $173,873,442. - -------------------------------------------------------------------------------- Corporate Benefits 195 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE D. OTHER POLICY DEDUCTIONS The Variable Universal Life Policies provide for certain deductions for sales and tax loads from premium payments received from the policyholders and for surrender charges and taxes from amounts paid to policyholders. Such deductions are taken before the purchase of divisional units or after the redemption of divisional units of the Separate Account. Such deductions are not included in the Separate Account financial statements. NOTE E. POLICY LOANS The Variable Universal Life Policies allow the policyholders to borrow against their policies by using them as collateral for a loan. At the time of borrowing against the policies, an amount equal to the loan amount is transferred from the Separate Account divisions to a Loan Division in the Company's General Account to secure the loan. As payments are made on the policy loan, amounts are transferred back from the Loan Division to the Separate Account divisions. Interest is credited to the balance in the Loan Division at a fixed rate. The Loan Division is not variable in nature and is not included in these Separate Account statements. NOTE F. FEDERAL INCOME TAXES The Separate Account is not taxed separately because the operations of the Separate Account are part of the total operations of the Company. The Company is taxed as a life insurance company under the Internal Revenue Code. The Separate Account is not taxed as a "Regulated Investment Company" under subchapter "M" of the Internal Revenue Code. - -------------------------------------------------------------------------------- Corporate Benefits 196 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS The following schedule summarizes the changes in divisional units for the nine months ended September 30, 1999:
(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 1,245,559.121 319,332.671 (525,269.118) 1,039,622.674 Growth 447,486.376 125,919.627 (99,517.630) 473,888.373 Partners 986,298.018 257,003.976 (117,939.937) 1,125,362.057 Fred Alger Management, Inc.: American Small Capitalization 838,692.418 394,407.340 (263,508.506) 969,591.252 American MidCap Growth 402,532.472 148,230.643 (29,117.984) 521,645.131 American Growth 923,696.066 438,134.681 (206,209.462) 1,155,621.285 American Leveraged AllCap 221,642.446 292,852.027 (173,072.134) 341,422.339 Fidelity Management & Research Co.: Asset Manager 600,255.213 267,313.961 (262,352.258) 605,216.916 Growth 1,293,480.338 1,654,759.376 (1,442,829.875) 1,505,409.839 Overseas 1,429,659.907 765,975.800 (571,856.489) 1,623,779.218 Money Market 1,526,404.399 6,748,481.247 (5,469,895.852) 2,804,989.794 Index 500 3,215,990.519 1,324,678.050 (246,138.425) 4,294,530.144 INVESCO Funds Group, Inc.: Total Return 450,557.216 253,716.704 (116,427.098) 587,846.822 Industrial Income 473,616.752 178,044.695 (87,379.689) 564,281.758 High Yield 486,858.648 158,273.720 (146,595.951) 498,536.417 Utilities 110,379.616 115,690.556 (59,547.200) 166,522.972 Small Company Growth 67,506.441 136,205.871 (44,885.435) 158,826.877 Van Eck Associates Corporation: Worldwide Hard Assets 132,513.824 205,152.684 (131,337.258) 206,329.250 Worldwide Bond 18,656.317 30,172.136 (6,893.700) 41,934.753 Worldwide Emerging Markets 67,354.295 498,961.101 (411,436.225) 154,879.171 Worldwide Real Estate 8,765.232 31,025.290 (10,681.101) 29,109.421 AIM Advisors, Inc. Capital Appreciation 105,457.867 177,801.435 (30,925.831) 252,333.471 Government Securities 246,150.062 461,371.899 (245,006.792) 462,515.169
- -------------------------------------------------------------------------------- Corporate Benefits 197 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE H. NET ASSETS Net assets at September 30, 1999 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 $12,562,603 $1,060,309 ($281,553) ($273,302) $13,068,057 Growth 8,793,027 627,076 (275,425) 475,256 9,619,934 Partners 25,178,621 851,608 906,913 (1,785,300) 25,151,842 Fred Alger Management, Inc.: American Small Capitalization 17,061,250 2,257,234 (112,445) 292,441 19,498,480 American MidCap Growth 10,432,084 1,605,541 396,745 38,165 12,472,535 American Growth 24,617,360 2,618,200 1,951,027 2,142,306 31,328,893 American Leveraged AllCap 9,195,995 648,266 2,586,404 806,279 13,236,944 Fidelity Management & Research Co.: Asset Manager 9,355,520 920,583 155,678 50,576 10,482,357 Growth 31,627,570 3,555,730 6,796,617 382,316 42,362,233 Overseas 22,063,364 1,088,395 646,434 2,766,835 26,565,028 Money Market 33,253,155 1,640,918 - - 34,894,073 Index 500 100,251,140 1,273,803 3,045,152 15,547,913 120,118,008 INVESCO Funds Group, Inc.: Total Return 10,115,714 36,014 359,679 (429,834) 10,081,573 Industrial Income 11,796,930 418,112 572,722 884,783 13,672,547 High Yield 7,933,708 597,561 162,419 (233,525) 8,460,163 Utilities 2,735,480 10,273 390,449 147,631 3,283,833 Small Company Growth 1,718,607 (8,555) 103,489 449,742 2,263,283 Van Eck Associates Corporation: Worldwide Hard Assets 2,149,636 16,934 (300,111) 87,479 1,953,938 Worldwide Bond 446,321 10,597 (6,324) (17,408) 433,186 Worldwide Emerging Markets 1,120,018 (6,909) 391,099 (158,308) 1,345,900 Worldwide Real Estate 258,684 866 1,840 (4,936) 256,454 AIM Advisors, Inc.: Capital Appreciation 2,816,104 (11,381) 29,983 218,529 3,053,235 Government Securities 4,802,681 (21,320) (7,038) 12,709 4,787,032 ============= ============= ============== ============ ============= Total $350,285,572 $19,189,855 $17,513,754 $21,400,347 $408,389,528 ============= ============= ============== ============ =============
- -------------------------------------------------------------------------------- Corporate Benefits 198 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE I. YEAR 2000 (UNAUDITED) Security Life of Denver Insurance Company is aware of the computer problems that may exist surrounding the Year 2000. Our senior management is committed to ensuring that information processing and delivery systems will be Year 2000 compliant before December 31, 1999. Our project team continues to implement the Year 2000 project plan which includes the analysis, remediation and testing of our in-house source code. 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. Funds have been allocated for these efforts, and we are confident we have sufficient resources to ensure Year 2000 processing capabilities. The analysis, remediation and system testing phases of the plan were completed by June 28, 1999. We will continue to do precautionary testing throughout 1999. However, there is no assurance Security Life will be successful, or that interaction with other service providers will not impact our services. - -------------------------------------------------------------------------------- Corporate Benefits 199 APPENDIX A FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY
Male | Male | Male Attained or Unisex Unisex |Attained or Unisex Unisex | Attained or Unisex Unisex Age 100/0 Female 80/20 | Age 100/0 Female 80/20 | Age 100/0 Female 80/20 --- ----- ------ ----- | --- ----- ------ ----- | --- ----- ------ ----- 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
- -------------------------------------------------------------------------------- Corporate Benefits 200 APPENDIX B PERFORMANCE INFORMATION POLICY PERFORMANCE The following hypothetical illustrations demonstrate how the actual investment experience of each variable investment option of the separate account affects the cash surrender value, account value and death benefit of a policy. These hypothetical illustrations are based on the actual historical return of each portfolio as if a policy had been issued on the date indicated. Each portfolio's annual total return is based on the total return calculated for each fiscal year. These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions, which if reflected, would result in lower total return figures than those shown. The illustrations are based on the payment of a $5,750 annual premium, received at the beginning of each year, for a hypothetical policy with a $300,000 face amount death benefit Option 1, issued on a nonsmoker male, Age 45. It is assumed that all premiums are allocated to the variable investment option illustrated for the period shown. The benefits are calculated for a specific date. The amount and timing of premium payments and the use of other policy features, such as policy loans, would affect individual policy benefits. The amounts shown for the cash surrender values, account values and death benefits take into account the charges against premiums, current cost of insurance and monthly deductions, the daily charge against the separate account for mortality and expense risks, and each portfolio's charges and expenses. SEE CHARGES, PAGE 40. This prospectus also contains illustrations based on assumed rates of return. SEE ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE 48. Past performance is not an indication of future results. Actual investment results may be more or less than those shown in the hypothetical illustrations. - -------------------------------------------------------------------------------- Corporate Benefits 201 HYPOTHETICAL ILLUSTRATIONS Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- AIM VI CAPITAL APPRECIATION FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1994 2.50% 5,131 5,131 300,000 1995 35.69% 13,809 13,809 300,000 1996 17.58% 21,973 21,973 300,000 1997 13.51% 30,308 30,308 300,000 1998 19.30% 41,638 41,638 300,000 AIM VI GOVERNMENT SECURITIES FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1994 -3.73% 4,808 4,808 300,000 1995 15.56% 11,360 11,360 300,000 1996 2.29% 16,588 16,588 300,000 1997 8.16% 23,050 23,050 300,000 1998 7.66% 29,742 29,742 300,000 ALGER AMERICAN GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1990 4.14% 5,216 5,216 300,000 1991 40.39% 14,413 14,413 300,000 1992 12.38% 21,671 21,671 300,000 1993 22.47% 32,348 32,348 300,000 1994 1.45% 37,441 37,441 300,000 1995 36.37% 57,266 57,266 300,000 1996 13.35% 69,935 69,935 300,000 1997 25.75% 93,461 93,461 300,000 1998 48.07% 145,016 145,016 335,131 ALGER AMERICAN MIDCAP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1994 -1.54% 4,921 4,921 300,000 1995 44.45% 14,410 14,410 300,000 1996 11.90% 21,575 21,575 300,000 1997 15.01% 30,254 30,254 300,000 1998 30.30% 45,429 45,429 300,000 The assumptions underlying these values are described in Performance Information, page 201. *These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Corporate Benefits 202 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1989 64.48% 8,354 8,354 300,000 1990 8.71% 14,528 14,528 300,000 1991 57.54% 30,643 30,643 300,000 1992 3.55% 36,602 36,602 300,000 1993 13.28% 46,650 46,650 300,000 1994 -4.38% 48,877 48,877 300,000 1995 44.31% 77,017 77,017 300,000 1996 4.18% 84,752 84,752 300,000 1997 11.39% 99,306 99,306 300,000 1998 15.53% 119,862 119,862 300,000 FIDELITY VIP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1989 31.51% 6,637 6,637 300,000 1990 -11.73% 10,251 10,251 300,000 1991 45.51% 22,069 22,069 300,000 1992 9.32% 29,287 29,287 300,000 1993 19.37% 40,444 40,444 300,000 1994 -0.02% 44,915 44,915 300,000 1995 35.36% 66,859 66,859 300,000 1996 14.71% 81,698 81,698 300,000 1997 23.48% 106,351 106,351 300,000 1998 39.49% 154,612 154,612 347,259 FIDELITY VIP OVERSEAS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1989 26.28% 6,365 6,365 300,000 1990 -1.67% 11,171 11,171 300,000 1991 8.00% 17,320 17,320 300,000 1992 -10.72% 19,644 19,644 300,000 1993 37.35% 33,336 33,336 300,000 1994 1.72% 38,474 38,474 300,000 1995 9.74% 47,081 47,081 300,000 1996 13.15% 58,205 58,205 300,000 1997 11.56% 69,836 69,836 300,000 1998 12.81% 83,772 83,772 300,000 The assumptions underlying these values are described in Performance Information, page 201. *These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Corporate Benefits 203 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 FIDELITY VIP II INDEX 500 PORTFOLIO Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 1993 9.74% 5,506 5,506 300,000 1994 1.04% 10,616 10,616 300,000 1995 37.19% 21,296 21,296 300,000 1996 22.82% 31,981 31,981 300,000 1997 32.82% 48,605 48,605 300,000 1998 28.31% 68,184 68,184 300,000 GCG TRUST EQUITY INCOME PORTFOLIO Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 1990 4.74% 5,247 5,247 300,000 1991 20.02% 12,332 12,332 300,000 1992 1.88% 17,510 17,510 300,000 1993 11.13% 24,712 24,712 300,000 1994 -1.18% 28,923 28,923 300,000 1995 18.93% 39,781 39,781 300,000 1996 8.77% 48,084 48,084 300,000 1997 17.44% 61,601 61,601 300,000 1998 8.26% 71,438 71,438 300,000 GCG TRUST GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1997 15.69% 5,815 5,815 300,000 1998 45.36% 15,800 15,800 300,000 GCG TRUST HARD ASSETS PORTFOLIO Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 1990 -13.84% 4,284 4,284 300,000 1991 4.70% 9,729 9,729 300,000 1992 -9.81% 13,134 13,134 300,000 1993 49.93% 26,864 26,864 300,000 1994 2.53% 32,221 32,221 300,000 1995 10.69% 40,656 40,656 300,000 1996 33.17% 60,102 60,102 300,000 1997 6.22% 68,451 68,451 300,000 1998 -29.58% 51,183 51,183 300,000 The assumptions underlying these values are described in Performance Information, page 201. *These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Corporate Benefits 204 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 GCG TRUST LIMITED MATURITY BOND PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1990 7.87% 5,409 5,409 300,000 1991 11.27% 11,601 11,601 300,000 1992 4.84% 17,258 17,258 300,000 1993 6.20% 23,339 23,339 300,000 1994 -1.19% 27,564 27,564 300,000 1995 11.72% 35,835 35,835 300,000 1996 4.32% 41,990 41,990 300,000 1997 6.67% 49,423 49,423 300,000 1998 6.86% 57,494 57,494 300,000 GCG TRUST LIQUID ASSET PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1990 7.75% 5,403 5,403 300,000 1991 5.66% 11,000 11,000 300,000 1992 3.13% 16,355 16,355 300,000 1993 2.64% 21,624 21,624 300,000 1994 3.89% 27,211 27,211 300,000 1995 5.51% 33,457 33,457 300,000 1996 5.01% 39,773 39,773 300,000 1997 5.07% 46,348 46,348 300,000 1998 5.13% 53,324 53,324 300,000 GCG TRUST MID-CAP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1995 29.23% 6,519 6,519 300,000 1996 20.68% 13,934 13,934 300,000 1997 19.67% 22,517 22,517 300,000 1998 42.61% 38,912 38,912 300,000 GCG TRUST RESEARCH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1995 36.58% 6,901 6,901 300,000 1996 23.37% 14,720 14,720 300,000 1997 20.12% 23,546 23,546 300,000 1998 40.94% 39,902 39,902 300,000 The assumptions underlying these values are described in Performance Information, page 201. *These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Corporate Benefits 205 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 GCG TRUST TOTAL RETURN PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1995 24.51% 6,273 6,273 300,000 1996 13.70% 12,839 12,839 300,000 1997 20.89% 21,426 21,426 300,000 1998 19.29% 31,211 31,211 300,000 INVESCO VIF EQUITY INCOME FUND Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 1995 29.25% 6,520 6,520 300,000 1996 22.28% 14,123 14,123 300,000 1997 28.17% 24,372 24,372 300,000 1998 15.30% 33,554 33,554 300,000 INVESCO VIF HIGH YIELD FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1995 19.76% 6,027 6,027 300,000 1996 16.59% 12,883 12,883 300,000 1997 17.33% 20,840 20,840 300,000 1998 1.42% 25,909 25,909 300,000 INVESCO VIF SMALL COMPANY GROWTH FUND Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 1998 16.38% 5,851 5,851 300,000 NEUBERGER BERMAN AMT PARTNERS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1995 36.47% 6,895 6,895 300,000 1996 29.57% 15,461 15,461 300,000 1997 31.25% 26,719 26,719 300,000 1998 4.21% 32,749 32,749 300,000 The assumptions underlying these values are described in Performance Information, page 201. *These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Corporate Benefits 206 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 VAN ECK WORLDWIDE BOND FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1990 11.25% 5,585 5,585 300,000 1991 18.39% 12,562 12,562 300,000 1992 -5.25% 16,489 16,489 300,000 1993 7.79% 22,863 22,863 300,000 1994 -1.32% 27,058 27,058 300,000 1995 17.30% 37,045 37,045 300,000 1996 2.53% 42,505 42,505 300,000 1997 2.38% 47,950 47,950 300,000 1998 12.75% 59,020 59,020 300,000 VAN ECK WORLDWIDE EMERGING MARKETS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1996 26.82% 6,393 6,393 300,000 1997 -11.61% 10,050 10,050 300,000 1998 -34.15% 9,755 9,755 300,000 VAN ECK WORLDWIDE REAL ESTATE FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1998 -11.35% 4,413 4,413 300,000 The assumptions underlying these values are described in Performance Information, page 201. *These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Corporate Benefits 207 PART II UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. UNDERTAKING REGARDING INDEMNIFICATION Please refer to the Articles of Incorporation listed as Exhibits 1.A(6)(a) and 1.A(6)(b-g) and the By-Laws listed as Exhibits 1.A(6)(h) and 1.A(6)(h)(i). Security Life of Denver's (the "corporation") Certificate of Incorporation and bylaws provide that the corporation shall have every power and duty of indemnification of directors, officers, employees and agents, without limitation, provided by the laws of the state of Colorado. Under Colorado law, the corporation has the power to indemnify such persons against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed action, suit or proceeding, if such person acted in good faith and in a manner which that person reasonably believed to be in or not opposed to the best interest of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. In the case of actions by or in the right of the corporation, such indemnification cannot be made where such person is adjudged liable to the corporation, except pursuant to a court order. The corporation is required to indemnify directors, officers, employees and agents against expense actually and reasonably incurred in connection with actions where such persons have been successful on the merits or otherwise in defense of such actions. Insofar as indemnification for liability arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the securities and Exchange commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling preceding, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. UNDERTAKING REQUIRED BY SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED Security Life of Denver Insurance Company represents that the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by the Company. CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following papers and documents: The facing sheet. Cross-Reference table. - -------------------------------------------------------------------------------- Corporate Benefits II - 1 The prospectus. The undertaking to file reports. The undertaking regarding indemnification. The undertaking required by Section 26(e)2(A) of the Investment Company Act of 1940, as amended. The signatures. Written consents of the following persons: James L. Livingston, Jr. (See Exhibit 6B). Ernst & Young, L.L.P. (See Exhibit 7A). Sutherland Asbill & Brennan LLP (See Exhibit 7B). The following exhibits: 1.A (1) Resolution of the Executive Committee of the Board of Directors of Security Life of Denver Insurance Company ("Security Life of Denver") authorizing the establishment of the Registrant. /1/ (2) Not Applicable. (3) (a) Security Life of Denver Distribution Agreement./1/ (i) Amendment to Security Life of Denver Insurance Company Distribution Agreement./6/ (b) Amendment to Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Compensation Schedule. (c) Commission Schedule for Policies. (4) Not Applicable. (5) (a) Specimen Corporate Benefits Variable Universal Life Insurance Policy (Form No. 2505(VUL)-2/00). (b) Adjustable Term Insurance Rider (Form No. R2006-3/00)./5/ (c) Certificate of Insurance./5/ (6) (a) Security Life of Denver's Restated Articles of Incorporation. /1/ (b-g) Amendments to Articles of Incorporation through June 12, 1987./1/ (h) Security Life of Denver's By-Laws./1/ (i) Bylaws of Security Life of Denver Insurance Company (Restated with Amendments through September 30, 1997)./2/ (7) Not Applicable. (8) (a) Participation Agreements (i) Participation Agreement by and among AIM Variable Insurance Funds, Inc., Life Insurance Company, on Behalf of Itself and its Separate Accounts and Name of Underwriter of Variable Contracts and Policies./3/ (ii) Sales Agreement by and among The Alger American Fund, Fred Alger Management, Inc., and Security Life of Denver Insurance Company./1/ (iii) Sales Agreement by and among Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, and Security Life of Denver Insurance Company./1/ (iv) Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./1/ - -------------------------------------------------------------------------------- Corporate Benefits II - 2 (v) Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./1/ (vi) Participation Agreement among INVESCO Variable Investment Funds, Inc., INVESCO Funds Group, Inc., and Security Life of Denver Insurance Company./1/ (vii) Participation Agreement between Van Eck Investment Trust and the Trust's investment adviser, Van Eck Associates Corporation, and Security Life of Denver Insurance Company./1/ (viii) Specimen Participation Agreement among Security Life of Denver Insurance Company, the GCG Trust, and Directed Services, Inc. (b) (i) Third Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc./4/ (ii) Fourth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./4/ (iii) Fourth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./4/ (iv) Amendment No. 2 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc./4/ (v) Fourth Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc./6/ (vi) Amendment No. 3 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc./6/ (vii) Fifth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./6/ (viii) Fifth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./6/ (9) Not Applicable. (10) Specimen Guaranteed Issue Variable Life Insurance Application with Corporate Benefits Insert and Guaranteed Issue Binding Limited Life Insurance Coverage Form (Form Nos. Q2009-11/97 and Q-1112 B-6/98). 2. Included as Exhibit 1.A(5) above. 3.A Opinion and consent of Gary W. Waggoner as to securities being registered./5/ 4. Not Applicable. 5. Not Applicable. 6.B Opinion and consent of James L. Livingston, Jr. 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./6/ - -------------------------------------------------------------------------------- Corporate Benefits II - 3 - --------------- /1/ Incorporated herein by reference to Post-Effective Amendment No. 7 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on April 27, 1998 (File No. 33-74190). /2/ Incorporated herein by reference to Post-Effective Amendment No. 5 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on October 29, 1998 (File No. 33-74190). /3/ Incorporated herein by reference to Post-Effective Amendment No. 6 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on March 2, 1998 (File No. 33-74190). /4/ Incorporated herein by reference to the Pre-Effective Amendment No. 2 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on May 10, 1999 (File No. 333-72753). /5/ Incorporated herein by reference to the Initial Registration to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on November 8, 1999 (File No. 333-90577). /6/ Incorporated herein by reference to the Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on December 3, 1999 (File No. 333-90577). - -------------------------------------------------------------------------------- Corporate Benefits 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, have duly caused this Registration Statement to be signed on their behalf by the undersigned, hereunto duly authorized, and their seal to be hereunto fixed and attested, all in the City and County of Denver and the State of Colorado on the 1st day of February, 2000. SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/ Stephen M. Christopher ----------------------------- Stephen M. Christopher President (Seal) ATTEST: /s/ Gary W. Waggoner - --------------------- Gary W. Waggoner SECURITY LIFE SEPARATE ACCOUNT L1 (Registrant) BY: SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/ Stephen M. Christopher ---------------------------- Stephen M. Christopher President (Seal) ATTEST: /s/ Gary W. Waggoner - --------------------- Gary W. Waggoner - -------------------------------------------------------------------------------- Corporate Benefits II - 5 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities with Security Life of Denver Insurance Company and on the date indicated. PRINCIPAL EXECUTIVE OFFICERS: /s/ Stephen M. Christopher - --------------------------- Stephen M. Christopher President, Chief Executive Officer and Director /s/ James L .Livingston, Jr. - ---------------------------- James L. Livingston, Jr. Executive Vice President and Chief Financial Officer PRINCIPAL ACCOUNTING OFFICER: /s/ Shari A. Enger - --------------------------- Shari A. Enger Vice President and Controller DIRECTORS: /s/ Thomas F. Conroy - --------------------------- Thomas F. Conroy /s/ Michael W. Cunningham - --------------------------- Michael W. Cunningham /s/ P. Randall Lowery - --------------------------- P. Randall Lowery - -------------------------------------------------------------------------------- Corporate Benefits II - 6 EXHIBIT INDEX Exhibit No. Description of Exhibit 1.A(3)(b) Amendment to Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Compensation Schedule. 1.A(3)(c) Commission Schedule for Policies. 1.A(5)(a) Corporate Benefits Variable Universal Life Insurance Policy (Form No. 2505(VUL)-2/00). 1.A(8)(a)(viii) Specimen Participation Agreement among Security Life of Denver Insurance Company, the GCG Trust and Directed Services, Inc. 1.A(10) Specimen Guaranteed Issue Variable Life Insurance Application with Corporate Benefits Insert and Guaranteed Issue Binding Limited Life Insurance Coverage Form (Form Nos. Q2009-11/97 and Q-1112 B-6/98). 6.B Opinion and consent of James L. Livingston, Jr. 7.A Consent of Ernst & Young L.L.P. B Consent of Sutherland Asbill & Brennan LLP. - -------------------------------------------------------------------------------- Corporate Benefits II - 7 EX-1 2 1.A(3)(B) AMDT TO B-D SELLING AGMT EXHIBIT 1.a(3)(b) AMENDMENT TO THE BROKER-DEALER SUPERVISORY AND SELLING AGREEMENT FOR VARIABLE CONTRACTS This Amendment is made by and among ING Security Life of Denver Insurance Company ("ING Security Life"), ING America Equities, Inc. ("INGAE") and Selling Broker-Dealer and Agency, collectively known as the Parties. WHEREAS, the Parties have executed a Broker-Dealer Supervisory and Selling Agreement for Variable Contracts ("the Agreement") which provides that Selling Broker-Dealer and Agency will enable and supervise its registered representatives to solicit and sell the Contracts issued by ING Security Life and distributed by INGAE. WHEREAS, the Agreement also provides for certain compensation to be paid to Selling Broker-Dealer or Agency for the sales of such Contracts, the Agreement is modified as follows: 1. The Schedule I, "Compensation Schedule to Selling Agreement for ING Security Life Corporate Benefits Variable Universal Life" is hereby added. This Amendment is effective ________________, and shall be deemed to be accepted by Broker-Dealer and Agency by ING Security Life and INGAE by submission of an application for the Corporate Benefits Variable Universal Life product by Selling Broker-Dealer or Agency on or after that date. SCHEDULE I COMPENSATION SCHEDULE TO SELLING AGREEMENT FOR SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE This Schedule is an attachment to the ING America Equities, Inc. ("ING America Equities") Selling Agreement by and among the parties pursuant to paragraph 17 of that Selling Agreement, effective as of ________, 2000, or the date that Selling Broker-Dealer submits an application for this product, whichever is later. The provisions of this Schedule shall apply only to ING Security Life Corporate Benefits Variable Universal Life policies solicited and issued while this Schedule is in effect. All compensation payable under this Schedule shall be subject to the terms and conditions contained herein at the time of issue of the policy by ING Security Life of Denver Insurance Company ("ING Security Life"). 1. Commission Structure: Commissions are payable on premiums paid in each year up to the target premium only. No commissions are paid on premium in excess of the target premium. Any time a new coverage segment is created, premiums allocated to that segment will be commissionable up to that segment's target premium. The commission rates as a percent of target premium are given in a table below. Policy Year of Coverage Commission Rate Segment 1 10% 2 - 4 8% 5 - 10 2% 11+ 0 Premiums received within 15 days prior to policy anniversary will result in the agent receiving commissions at the same rate as if the premium was paid on the anniversary date. If this product is sold with a maximum ATR coverage, the target premium could be zero which would result in no commissions payable other than the annual trail commission described in section 2, below. 2. Trail Commissions: as a percent of the net account value are paid. The trail commission is calculated monthly based on the net account value at the end of the prior month. It is paid at the end of the policy year, provided the policy remains in force at that time and is not subject to the grace period provisions. The trail commissions will continue when the insured lives past age 100 and the continuation of coverage feature is in force. The annual trail commission rates are given below. Annual trail commission rates as a percent of the net account value: Policy Year Trail Commission Rate 1 - 20 0.20% 21+ 0.10% 3. Riders: The Adjustable Term Insurance Rider has no target premium associated with it. 4. Commission Calculation: Commissions shall be calculated only on premium actually received and accepted by ING Security Life. Commissions shall be paid only on an earned basis. Outstanding loan amounts carried over are not considered commissionable premium. 5. Premium Allocation: If the Stated Death Benefit has been increased since the policy date, premiums received are allocated to the coverage segments in the same proportion that the commission target premium for each segment bears to the total commission target premium of the policy. 6. Death Benefit Increases: If a premium payment accompanies a request for a Stated Death Benefit increase or is received while a request is pending, the payment will be applied to the policy but commissions shall not be payable until the increase is effective. The commission shall then be payable based on the premium being allocated among all segments as it would normally and the new target premium after the increase. 7. Compensation Payments: Compensation on initial premium shall be due to the Selling Broker-Dealer at the time of the issuance of the policy and for all other premium payments at the time of the receipt and acceptance of premium by ING Security Life, except that the amount, if any, and the time of payment of compensation on stated death benefit increases, replacements, reissues, changes, conversions, exchanges, term renewals, term conversions, premiums paid in advance, policies issued on a "guaranteed issue" basis, policies requiring facultative reinsurance arrangements, and other special cases and programs shall be governed by ING Security Life's underwriting and administrative rules then in effect. The Compensation shall be payable to the Selling Broker-Dealer in accordance with the Schedule I in effect at the time of issue of the policy. 8. Commission Chargeback: In the event that a policy for which a commission has been paid is lapsed or surrendered by the Policy Owner or has a reduction of stated death benefit during the first three policy years, or is returned to ING Security Life for refund of premium during the Free Look Period as described in the policy, ING Security Life and ING America Equities shall require reimbursement from Selling Broker-Dealer as shown below. Policy Year Commission Chargeback 1 10% of first year premium up to target 2 6% of second year premium up to target 3 3% of third year premium up to target 4+ 0% If a premium payment for which a commission has been paid is refunded by ING Security Life, a reimbursement of the commission paid on the amount refunded will be due from the Selling Broker-Dealer. The reimbursement may be deducted by ING America Equities from the next, or any subsequent, commission payment to Selling Broker-Dealer. If the amount to be reimbursed exceeds compensation otherwise due, Selling Broker-Dealer shall promptly reimburse ING America Equities before the next commission cycle. 9. Internal Exchanges: Commissions on the exchange of any ING Security Life policy for Corporate Benefits Variable Universal Life, if any, will be paid in accordance with the exchange procedures in effect at ING Security Life on the date the exchange is completed. The commission rates and/or target premiums may be adjusted in accordance with the rules in effect at the time of the exchange. If the Representative responsible for the exchange is not the producer of the original policy, and the original producer is still active with ING Security Life, no commission will be payable to the Representative or the Selling Broker-Dealer. EX-2 3 1.A(3)(C) COMMISSION SCHEDULE EXHIBIT 1.a(3)(c) Commission Structure: Commissions are payable on premiums paid up to the target premium only. No commissions are paid on premium in excess of the target premium. Any time a new coverage segment is created, premiums allocated to that segment will be commissionable up to that segment's target premium. The commission rates as a percent of target premium are given in a table below. Policy Year of Coverage Commission Rate Over-Ride Allowance Segment 1 10% 2% 2 - 4 8% 2% 5 - 10 2% 0 11+ 0 0 Annual trail commission rates as a percent of the net account value: Policy Year Trail Commission Rate 1 - 20 0.20% 21+ 0.10% Commission Chargeback: In the event that a policy for which a commission has been paid is lapsed or surrendered by the Policy Owner or has a reduction of stated death benefit during the first three policy years, or is returned for refund of premium during the Free Look Period as described in the policy, reimbursement is required from Selling Broker-Dealer as shown below. Policy Year Commission Chargeback Override Chargeback 1 10% of first year premium up to target 2% 2 6% of second year premium up to target 0% 3 3% of third year premium up to target 0% 4+ 0% 0% EX-3 4 1.A(5)(A) POLICY Security Life of Denver EXHIBIT 1.A(5)(a) Insurance Company INSURED: JOHN DOE POLICY DATE: February 1, 2000 POLICY NUMBER: 67000001 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 or to your registered representative. 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. If this policy is a replacement policy as defined by state law where this policy is delivered, you have the right to examine and return this policy within 10 days after receipt. /s/ Gary W. Waggoner /s/ Stephen M. Christopher Secretary President 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. This policy is a FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY. This is a NON-PARTICIPATING 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 birth date. 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 2505 (VUL)-2/00 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..................................8 Requested Increases in Coverage..................................8 Requested Decreases in Coverage..................................8 Death Benefit Option Changes.....................................8 CONTINUATION OF COVERAGE AFTER AGE 100..................................9 PAYOUT OF PROCEEDS.....................................................10 PREMIUM PROVISIONS............................................................10 INITIAL PREMIUM ALLOCATION.............................................10 SUBSEQUENT PREMIUM ALLOCATION..........................................11 CHANGES TO PREMIUM ALLOCATION..........................................11 SCHEDULED PREMIUMS.....................................................11 UNSCHEDULED PREMIUMS...................................................11 NET PREMIUM............................................................11 PREMIUM LIMITATION.....................................................12 FAILURE TO PAY PREMIUM.................................................12 SEPARATE ACCOUNT PROVISIONS...................................................12 THE SEPARATE ACCOUNT...................................................12 SEPARATE ACCOUNT INVESTMENT OPTIONS....................................12 CHANGES WITHIN THE SEPARATE ACCOUNT....................................13 GENERAL ACCOUNT PROVISIONS....................................................14 THE GENERAL ACCOUNT....................................................14 GUARANTEED INTEREST DIVISION...........................................14 LOAN DIVISION..........................................................14 Form 2505 (VUL)-2/00 Page 2 TRANSFER PROVISIONS...........................................................14 ACCOUNT VALUE PROVISIONS......................................................14 ACCOUNT VALUES ON THE INVESTMENT DATE..................................15 ACCUMULATION UNIT VALUE................................................15 ACCUMULATION EXPERIENCE FACTOR.........................................15 ACCOUNT VALUE OF THE INVESTMENT OPTIONS OF THE SEPARATE ACCOUNT........16 ACCOUNT VALUE OF THE GUARANTEED INTEREST DIVISION......................16 ACCOUNT VALUE OF THE LOAN DIVISION.....................................17 DEDUCTIONS....................................................................17 MONTHLY DEDUCTION......................................................17 ANNUAL DEDUCTION (Deferred Sales Charge)...............................17 COST OF INSURANCE......................................................18 LOAN PROVISIONS...............................................................18 POLICY LOANS...........................................................18 LOAN INTEREST..........................................................19 LOAN DIVISION..........................................................19 PARTIAL WITHDRAWAL PROVISIONS.................................................19 SURRENDER PROVISIONS..........................................................21 SURRENDER VALUE........................................................21 BASIS OF COMPUTATIONS..................................................21 FULL SURRENDERS........................................................21 GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS........................21 GRACE PERIOD...........................................................21 TERMINATION............................................................22 REINSTATEMENT..........................................................22 DEFERRAL OF PAYMENT....................................................22 Form 2505 (VUL)-2/00 Page 3 GENERAL POLICY PROVISIONS.....................................................23 THE POLICY.............................................................23 CONTRACT CHANGES.......................................................23 PROCEDURES.............................................................23 OWNERSHIP..............................................................23 BENEFICIARIES..........................................................24 EXCHANGE RIGHT.........................................................24 COLLATERAL ASSIGNMENT..................................................24 INCONTESTABILITY.......................................................24 MISSTATEMENT OF AGE OR GENDER..........................................24 SUICIDE EXCLUSION......................................................25 PERIODIC REPORTS.......................................................25 ILLUSTRATION OF BENEFITS AND VALUES....................................25 NONPARTICIPATING.......................................................25 CUSTOMER SERVICE CENTER................................................25 PAYOUTS OTHER THAN AS ONE SUM.................................................25 ELECTION...............................................................25 PAYOUT OPTIONS.........................................................26 CHANGE AND WITHDRAWAL..................................................26 EXCESS INTEREST........................................................27 MINIMUM AMOUNTS........................................................27 SUPPLEMENTARY POLICY...................................................27 INCOME PROTECTION......................................................27 DEATH OF PRIMARY PAYEE.................................................27 PAYMENTS OTHER THAN MONTHLY............................................27 SETTLEMENT OPTION TABLES......................................................28 Additional benefits or riders, if any, will be listed in the Schedule. The additional provisions will be inserted in the policy. Form 2505 (VUL)-2/00 Page 4 SCHEDULE (Schedule Effective Date: February 1, 2000) POLICY INFORMATION Policy Number 67000001 Initial Stated Death Benefit $100,000.00 Adjustable Term Insurance Death Benefit $ 50,000.00* Policy Date February 1, 2000 Target Death Benefit $150,000.00** Insured JOHN DOE Additional Benefits: Issue Age and Gender 35, Male Adjustable Term Insurance Rider Death Benefit Option OPTION 1 Scheduled Premium $2,000.00 Annually
Definition of Life Insurance Test: Cash Value Accumulation Test Coverage will expire 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 rates for the Guaranteed Interest Division and the investment experience of the Separate Account. *This amount is the amount of adjustable term death benefit on the policy date. This death benefit will vary from time to time, and may depend on your account value. See the rider and policy for details. **This amount is the target death benefit on the policy date. It may change at the beginning of each policy year. See the schedule and rider for details. CUSTOMER SERVICE CENTER: P.O. Box 173888, Denver, Colorado 80217 Toll Free Number 1(800) 848-6362 Form 2505 (VUL)-2/00 Page 5 SCHEDULE (Continued) SEGMENT Benefit Profile (Schedule Effective Date: February 1, 2000) Description Segment Stated Death Segment Effective Segment Target Segment Premium Class Benefit Amount Date Premium Segment #1 $100,000 February 1, 2000 $3,981.00 Select Guaranteed Issue Non Smoker
ADDITIONAL BENEFITS: Adjustable Term Insurance Rider premium class or rating is the same as Segment #1 A segment is a block of death benefit coverage. The stated death benefit shown on the schedule page at issue is Segment #1. Additional segments may be added to the policy after issue to increase the death benefit. Each individual segment added to the policy has its own cost of insurance charges and expense charges as shown in the schedule. This is further defined in the Definition of Terms section of your policy. Form 2505 (VUL)-2/00 Page 5A EXPENSE CHARGES A. Premium Expense Charge. This charge will equal the sum of a sales charge plus a tax charge. See Net Premium provision for details. 1. Sales Charge:
Segment Year in Which Premium Segment Premium Received up to Segment Premium Received in Excess Received Segment Target Premium Of Segment Target Premium Segment Year 1 2.0% 0% Segment Years thereafter 0.5% 0.5%
2. Federal Deferred Acquisition Cost Tax Charge and Other Charges (Tax Charge):
Segment Year in Which Premium Segment Premium Received up to Segment Premium Received in Excess Received Segment Target Premium Of Segment Target Premium Segment Year 1 4.0% 0% Segment Years thereafter 4.0% 4.0%
We reserve the right to increase or decrease the tax charges due to any change in tax laws. We further reserve the right to increase or decrease the tax charge for federal deferred acquisition cost tax due to any change in cost to us. B. Monthly Expense Charge: The monthly expense charge will equal the following: Charge: $12 per month for the first 12 policy months; and $6 per month thereafter. Form 2505 (VUL)-2/00 Page 5B C. Annual Deduction:
Segment Year in Which Segment Percentage of Segment Premium Percentage of Segment Premium Segment Years of Premium Received Received up to Received in Excess Deduction Segment Target Premium* Of Segment Target Premium Segment Year 1 2.0% 1% 2 through 8 Segment Year 2 1.75% 0% 3 through 9 Segment Year 3 1.75% 0% 4 through 10 Segment Year 4 1.75% 0% 5 through 11 Segment Year 5 0.50% 0% 6 through 12 Segment Year 6 0.50% 0% 7 through 13 Segment Year 7 0.50% 0% 8 through 14 Segment Year 8 0.50% 0% 9 through 15 Segment Year 9 0.50% 0% 10 through 16 Segment Year 10 0.50% 0% 11 through 17 Segment Years 11+ 0% 0% N/A
*These are the percentages used to determine the segment annual deduction. This deduction will be made once each year for 7 years. ANNUAL MORTALITY AND EXPENSE RISK CHARGE Annual Mortality and Expense Risk Charge 0.20% per year (0.01667% per month) Form 2505 (VUL)-2/00 Page 5C POLICYHOLDER TRANSACTION CHARGES Requests for Sales Illustrations: We reserve the right to charge a $25 fee for each policy illustration over one illustration per policy year. Partial Withdrawal Service Fee: See below. Other Policy Transaction Charges: The charges for transfers between investment options of the Separate Account or between the Guaranteed Interest Division and the Separate Account investment options; charges for allocation changes; and charges for other Separate Account management functions are governed by the prospectus in effect at the time of the transaction. POLICY LOANS Policy Loan Interest Rate: 3.25% per year Guaranteed Interest Rate Credited To Loan Division: 3.00% per year Minimum Loan Amount: $100 Maximum Loan Amount: See 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: 3.00% per year Form 2505 (VUL)-2/00 Page 5D SCHEDULE (Continued) 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 CASH VALUE ACCUMULATION TEST DEATH BENEFIT FACTORS
Insured's Attained Factor Insured's Factor Insured's Factor Insured's Factor Age Attained Age Attained Age Attained Age 15 7.564 40 3.439 65 1.692 90 1.151 16 7.335 41 3.330 66 1.654 91 1.141 17 7.118 42 3.226 67 1.617 92 1.131 18 6.911 43 3.125 68 1.583 93 1.120 19 6.713 44 3.028 69 1.550 94 1.109 20 6.521 45 2.936 70 1.518 95 1.097 21 6.334 46 2.846 71 1.488 96 1.083 22 6.150 47 2.761 72 1.459 97 1.069 23 5.969 48 2.678 73 1.432 98 1.054 24 5.791 49 2.599 74 1.406 99 1.040 25 5.615 50 2.522 75 1.382 100 and older 1.000 26 5.441 51 2.449 76 1.359 27 5.271 52 2.378 77 1.338 28 5.104 53 2.311 78 1.318 29 4.940 54 2.246 79 1.299 30 4.781 55 2.184 80 1.281 31 4.626 56 2.125 81 1.264 32 4.476 57 2.068 82 1.248 33 4.330 58 2.014 83 1.233 34 4.188 59 1.962 84 1.218 35 4.052 60 1.912 85 1.205 36 3.920 61 1.864 86 1.193 37 3.793 62 1.818 87 1.181 38 3.670 63 1.774 88 1.171 39 3.553 64 1.732 89 1.160
Form 2505 (VUL)-2/00 Page 5E SCHEDULE (Continued) TABLE OF GUARANTEED RATES-Segment #1 Guaranteed Maximum Cost of Insurance Rates Per $1000 of Net Amount at Risk (These rates apply to the Base Policy.)
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 33.10677 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 guaranteed issue premium class with no substandard rating. If the policy has a substandard rating, the maximum cost of insurance rates will be adjusted using the rating factor shown in the Segment Benefit Profile of the Schedule. For a rating that is a stated percentage increase, the maximum cost of insurance rates will be determined by multiplying the rates for a guaranteed issue premium class shown above by the rating factor shown in the Segment Benefit Profile of the Schedule. For a rating that 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 Segment Benefit Profile of the Schedule to the rate per $1,000 for the guaranteed issue premium class shown above. The rates shown above are based on the 1980 Commissioners' Standard Ordinary Ultimate Smoker Composite Mortality Table (Male), age nearest birth date. Form 2505 (VUL)-2/00 Page 5F TABLE OF GUARANTEED RATES-Segment #1 Guaranteed Maximum Cost of Insurance Rates Per $1000 of Net Amount at Risk (Adjustable Term Insurance Rider)
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 0.43602 26 0.18003 51 0.76141 76 7.40104 1 0.11168 27 0.17837 52 0.82985 77 8.09839 2 0.10334 28 0.17753 53 0.90832 78 8.81706 3 0.10251 29 0.17837 54 0.99683 79 9.57498 4 0.09918 30 0.18003 55 1.09202 80 10.40294 5 0.09418 31 0.18587 56 1.19559 81 11.32260 6 0.09001 32 0.19087 57 1.30253 82 12.36434 7 0.08334 33 0.19921 58 1.41784 83 13.54176 8 0.07917 34 0.20838 59 1.54070 84 14.82576 9 0.07751 35 0.22005 60 1.67781 85 16.19045 10 0.07584 36 0.23339 61 1.83085 86 17.60542 11 0.08001 37 0.25006 62 2.00317 87 19.05982 12 0.08834 38 0.26924 63 2.19899 88 20.54615 13 0.10334 39 0.29092 64 2.41666 89 22.06903 14 0.12001 40 0.31510 65 2.65537 90 23.64710 15 0.13835 41 0.34262 66 2.90927 91 25.31065 16 0.15752 42 0.37097 67 3.18092 92 27.11674 17 0.17420 43 0.40350 68 3.46950 93 29.17188 18 0.18587 44 0.43686 69 3.78175 94 31.80363 19 0.19420 45 0.47439 70 4.13284 95 35.59424 20 0.19837 46 0.51276 71 4.53127 96 41.72906 21 0.19921 47 0.55447 72 4.98809 97 52.65466 22 0.19671 48 0.59869 73 5.51357 98 73.58341 23 0.19420 49 0.64709 74 6.09863 99 83.33333 24 0.19004 50 0.69966 75 6.73168 25 0.18420
The rates shown are for a guaranteed issue premium class with no substandard rating. If the policy has a substandard rating, the maximum cost of insurance rates will be adjusted using the rating factor shown in the Segment Benefit Profile of the Schedule. For a rating that is a stated percentage increase, the maximum cost of insurance rates will be determined by multiplying the rates for a guaranteed issue premium class shown above by the rating factor shown in the Segment Benefit Profile of the Schedule. For a rating that 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 Segment Benefit Profile of the Schedule to the rate per $1,000 for the guaranteed issue premium class shown above. The rates shown above are based on the 1980 Commissioners' Standard Ordinary Ultimate Smoker Composite Mortality Table (Male), age nearest birth date. Form 2505 (VUL)-2/00 Page 5G DEFINITION OF TERMS Account value - The sum of the amounts allocated to the investment options of the Separate 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 investment option of the Separate Account. Accumulation unit value - The value of an accumulation unit of each investment option of the Separate Account. The accumulation unit value is determined as of each valuation date. Age - The policy is issued at the age shown in the Schedule. Each issue age is the age nearest birthday on the policy date. Attained age - The insured's attained age is the issue age of the insured as shown in the Schedule, increased by the number of completed policy years. Base death benefit - The base death benefit is defined in the Base Death Benefit provision of the policy. Customer Service Center - Our administrative office whose address is P. O. Box 173888, Denver, CO 80217. General Account - The account that contains all of our assets other than those held in the Separate 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. 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 plus the Right to Examine Period. Form 2505 (VUL)-2/00 Page 6 Investment date -The first date we apply your net premium payment to your policy. We will allocate the initial net premium to your policy at the end of the valuation period during which the latest of the date on which the following requirements is satisfied for policy issuance: 1) we receive the amount of premium required for coverage to begin under the policy; 2) we have approved the policy for issue, and 3) all issue requirements have been met and received in our Customer Service Center. Investment options of the Separate Account - The investment options available, each of which invests in shares of one of the portfolios. 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. If that date is not a valuation date, monthly processing date will be the next calculated accumulation unit value. Net account value - The amount of the account value minus any policy loan and accrued loan interest. This is the same as your surrender value. Net premium - The net premium equals the premium received minus the premium expense charges shown in the Schedule. These charges are deducted from the premium 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. Right to Examine Period - The number of days after delivery during which you have a right to examine your policy. Scheduled premium - The premium amount that 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 monthly, 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 Segment Benefit Profile of the Schedule is the initial segment, or Segment #1. Each increase in the stated death benefit (other than due to an option change) is a new segment. Each new segment will be shown separately on the Segment 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 a new sales charge, new annual deduction, if any, new cost of insurance charges and new incontestability and suicide exclusion periods. Segment premium - The actual premium received allocated to existing segments. Premium is allocated in the same proportion that the segment target premium bears to the sum of all segment target premium. If there is only one segment target premium, the entire premium is allocated to the segment. Segment target premium is shown in the Schedule. As each segment has unique segment years, each segment premium is associated with a segment year. Form 2505 (VUL)-2/00 Page 6a 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). Surrender value - The amount of the account value minus any policy loan and accrued loan interest. This is the same amount as the net account value. 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 portfolios and unit values of the variable investment options are determined. Except for days that a variable investment option'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 a valuation date and ends at 4:00 p.m. Eastern Time on the next succeeding valuation date. INSURANCE COVERAGE PROVISIONS EFFECTIVE DATE The policy date shown in the Schedule is the effective date for all coverage provided in the original application. The policy date is the date from which we measure policy years and determine the monthly processing date. The first monthly processing date is the investment date. Future 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) The account value multiplied by the appropriate factor from the Death Benefit 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) The account value multiplied by the appropriate factor from the Death Benefit Factors shown in the Schedule. Option 3: Under Option 3, the base death benefit is the greater of: (a) The stated death benefit plus premiums received less partial withdrawals, or (b) The account value multiplied by the appropriate factor from the Death Benefit 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. Form 2505 (VUL)-2/00 Page 7 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 processing date 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, and the new target premium. Requested Increases in Coverage Subject to our limits, you may request an increase in the stated death benefit through attained age 75. An increase will become effective as of the monthly processing date immediately following the date your written application is approved by us. You must provide evidence satisfactory to us that the insured is insurable according to our normal rules of underwriting for the applicable premium class for this type of policy. This evidence will include an application and may include required medical information. An increase will consist of a new segment of stated death benefit . Each new segment will result in a new sales charge which will be deducted from the premium allocated to the new segment. The new segment may also be subject to new monthly expense charges, new annual deductions, new cost of insurance charges and new incontestability and suicide exclusion periods. Requested Decreases in Coverage After the first policy anniversary, you may request a decrease in the stated death benefit. We will limit the decrease such that, immediately after the requested decrease: (a) If there is no adjustable term insurance on the policy, the stated death benefit is at least $50,000. (b) If there is adjustable term insurance on the policy, the target death benefit is at least $50,000. A decrease will be effective as of the monthly processing date immediately following the date your written application is approved by us. A decrease will first reduce Adjustable Term Insurance Rider coverage, if 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. Death Benefit Option Changes Beginning with the first monthly processing date and ending with the policy anniversary nearest the insured's 100th birth date, you may request to change the death benefit option. This change will be effective as of the monthly processing date next following approval. A death benefit option change applies to the entire stated death benefit. We may not allow any change if it would reduce the target death benefit below the minimum we require to issue this policy at the time of reduction. Death benefit option changes from Option 1 to Option 3, from Option 2 to Option 3 and from Option 3 to Option 2 are not allowed. After the effective date of the change, the stated death benefit will be changed according to the following table: Form 2505 (VUL)-2/00 Page 8 OPTION CHANGE STATED DEATH BENEFIT FOLLOWING FROM TO THE OPTION 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. Option 3 Option 1 Stated death benefit prior to such change plus the sum of all the premiums paid minus all partial withdrawals taken prior to the effective date of the change. To determine the segment stated death benefit after an option change, your account value will be allocated to each segment in the same proportion that 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 birth date, the policy will continue pursuant to the terms of the policy. On this date, the following will occur: (a) The target death benefit on the policy anniversary nearest the insured's 100th birth date will then become the stated death benefit for the policy and any remaining death benefit in force under the Adjustable Term Insurance Rider will terminate. (b) All other riders, if any, attached to the policy also will terminate. (c) The portion of your account value invested in the investment options of the Separate Account will be transferred into the Guaranteed Interest Division and no further investment in the Separate Account will be allowed. (d) If the death benefit option in force on the policy is Option 2 or Option 3, 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. No further changes will be allowed to the death benefit option. After the policy anniversary nearest the insured's 100th birth date, no further premiums will be accepted and no monthly or annual deductions will be made. However, a one-time administrative fee of $200 will be charged against the policy's account value. We will continue to credit interest to the account value in the Guaranteed Interest Division. 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. If you do not want coverage to continue past the policy anniversary nearest the insured's 100th birth date, the policy may be surrendered at that time, or earlier. Form 2505 (VUL)-2/00 Page 9 PAYOUT OF PROCEEDS Proceeds refer to 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 account value. The amount of proceeds payable upon the death of the insured will be the base death benefit in effect on the date of 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 death. The calculation of the death proceeds 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 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, 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 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 investment option of the Separate Account will be allocated on the investment date to the Money Market Division and any net premium amount designated for allocation to the Guaranteed Interest Division will be allocated to that division. Any additional net premium amounts received after the investment date and before the end of the initial period will be allocated in the same manner as the initial net premium, at the end of the valuation period during which we receive the premium at our Customer Service Center. On the valuation date immediately following the end of the initial period, the balance of the amount in the Money Market Division will be transferred to other investment options of the Separate Account according to your allocations instructions. The amounts allocated to the Guaranteed Interest Division will remain in that division. If the initial period has ended on the investment date, initial net premium amounts will be allocated on the investment date to investment options of the Separate Account and/or to the Guaranteed Interest Division in accordance with your allocation instructions. Form 2505 (VUL)-2/00 Page 10 SUBSEQUENT PREMIUM ALLOCATIONS After the initial premium allocation, all future scheduled and unscheduled premiums will be allocated to the investment options of the Separate Account and to the Guaranteed Interest Division in accordance with your allocation instructions. This allocation will occur at the end of the valuation period during which we receive the premium at our Customer Service Center. CHANGES TO PREMIUM ALLOCATIONS You may change your premium allocation in accordance with 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 investment options of the Separate Account and from the Guaranteed Interest Division as described in the prospectus in effect at the time of the transaction. 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 birth date. You may increase or decrease the amount of the scheduled premium, subject to limits we may set and provisions in the Premium Limitation section. Under conditions provided in the Grace 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 birth date, subject to the Premium Limitation section. 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. NET PREMIUM The net premium equals the premium paid minus the premium expense charge shown in the Schedule. The premium expense charge is the sales charge plus the tax charge. Each time we receive a premium we determine the sales charge by multiplying the applicable sales charge percentage times the segment premium. There is a different sales charge percentage for the segment year in which the premium is received, for segment premium above the segment target premium and for segment premium below the segment target premium. Each time we receive a premium we determine the tax charge by multiplying the applicable tax charge percentage times the segment premium. There is a different tax charge percentage for the segment year in which the premium is received, for segment premium above the segment target premium and for segment premium below the segment target premium. Form 2505 (VUL)-2/00 Page 11 The Schedule shows: (1) the target premium for each segment; (2) the percentage sales charges; and (3) the tax percentage. Segment premium is defined in the Definition of Terms section of your policy. PREMIUM LIMITATION We will refund 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 death of the insured. No premium may be paid after the policy anniversary nearest the insured's 100th birth date. FAILURE TO PAY PREMIUM If you stop paying premiums prior to the policy anniversary nearest the insured's 100th birth date, your coverage may lapse. See your Grace Period provision for details. SEPARATE ACCOUNT PROVISIONS THE SEPARATE ACCOUNT The Separate 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 other assets of Security Life of Denver Insurance Company. The Separate 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 Separate Account are credited to or charged against the Separate Account without regard to income, gains or losses of our General Account. The assets of the Separate Account are our property but are separate from our General Account and our other Separate Accounts. That portion of the assets of the Separate Account which is equal to the reserves and other policy liabilities with respect to the Separate Account is not chargeable with liabilities arising out of any other business we may conduct or subject to creditor claims against us. SEPARATE ACCOUNT INVESTMENT OPTIONS The Separate Account is divided into investment options, each of which invests in a fund portfolio designed to meet the objectives of the investment option. The current eligible investment options are shown in your annual policy prospectus. We may, from time to time, add additional investment options. If we do, you may be permitted to select from these other investment options subject to the terms and conditions we may impose on those allocations. Form 2505 (VUL)-2/00 Page 12 We reserve the right to limit the number of options 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 SEPARATE 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 Separate Account: o Make additional investment options available. These investment options will invest in portfolios we find suitable for the policy. o Eliminate investment options from the Separate Account or combine 2 or more investment options. o Substitute a new portfolio for the portfolio in which an investment option 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 Separate Account, which we determine to be associated with the class of policies to which your policy belongs, to another Separate Account. o Withdraw the Separate Account from registration under the Investment Company Act of 1940. o Operate the Separate Account as a management investment company under the Investment Company Act of 1940. o Invest one or more investment options in a mutual fund other than, or in addition to, the portfolios. o Discontinue the sale of policies. o Terminate any employer or plan trustee agreement with us pursuant to its terms. o Restrict or eliminate any voting rights as to the Separate Account. o Make any changes required by the Investment Company Act of 1940 or the rules or regulations thereunder. Form 2505 (VUL)-2/00 Page 13 GENERAL ACCOUNT PROVISIONS THE GENERAL ACCOUNT The General Account holds all of our assets other than those held in the Separate 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 investment option to which you may allocate premiums or make transfers. The account value of the Guaranteed Interest Division is equal to amounts 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 a 12-month period. LOAN DIVISION The Loan Division is the account that is set aside to secure the policy loan, if any. See the Loan Provisions section for information. TRANSFER PROVISIONS After the initial premium allocation and until the policy anniversary nearest the insured's 100th birth date, your account value in each division may be transferred to any other investment option of the Separate Account or to the Guaranteed Interest Division upon your request. One transfer from the Guaranteed Interest Division into the investment options of the Separate Account 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. On the policy anniversary nearest the insured's 100th birth date, your account value in each investment option of the Separate Account will be transferred into the Guaranteed Interest Division and no further transfers will be allowed. ACCOUNT VALUE PROVISIONS The account value is the sum of the current amounts allocated to the investment options of the Separate Account and to the Guaranteed Interest Division plus your balance in the Loan Division. Form 2505 (VUL)-2/00 Page 14 The account value is based on the premiums paid, policy and rider charges assessed, loans and withdrawals taken, monthly deductions, premium expense charges, transaction charges, annual deductions, if any, and the investment experience or credited interest of the investment options or divisions 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 investment option of the Separate Account and the account value of the Guaranteed Interest Division as of the investment date is equal to: a) The allocation to each investment option of the Separate Account and to the Guaranteed Interest Division of the first net premium received; minus b) The portion of any monthly deductions allocated to each investment option of the Separate Account and to the Guaranteed Interest Division due on the investment date. ACCUMULATION UNIT VALUE The investment experience of an investment option of the Separate Account is determined as of each valuation date. We use an accumulation unit value to measure the experience of each of the Separate Account investment options during a valuation period. We generally set the accumulation unit value at $10 when each investment option is opened. The accumulation unit value for a valuation date equals the accumulation unit value for the preceding valuation date multiplied by the accumulation experience factor defined below for the valuation period ending on the valuation date. The number of units for a given transaction related to an investment option of the Separate 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 investment option of the Separate Account, the accumulation experience factor reflects the investment experience of the portfolio in which that option invests and the charges assessed against that investment option for a valuation period. The accumulation experience factor is calculated as follows: a) The net asset value of the portfolio in which that investment option 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 investment option invests during the current valuation period; minus c) A charge for taxes, if any. d) The result of (a), (b) and (c) is then divided by the net asset value of the portfolio in which that investment option invests as of the end of the preceding valuation period. Form 2505 (VUL)-2/00 Page 15 ACCOUNT VALUE OF THE INVESTMENT OPTIONS OF THE SEPARATE ACCOUNT On subsequent valuation dates after the investment date, your account value of each investment option of the Separate Account is calculated as follows: a) The number of accumulation units in an investment option as of the beginning of the current valuation period multiplied by that option's accumulation unit value for the current valuation period; plus b) Any additional net premiums allocated to that investment option during the current valuation period; plus c) Any account value transferred to or minus any account value transferred from the Separate Account during the current valuation period (including the applicable portion of any transfer fee); minus d) Any partial withdrawals allocated to the investment option and any applicable withdrawal service fees which are allocated to the Separate Account 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 investment options of the Separate Account during the current valuation period; minus f) The portion of the monthly deduction allocated to the investment options of the Separate Account, if a monthly processing date occurs during the current valuation period; minus g) The portion of the annual deduction, if any, as of the first monthly processing date for a segment year allocated to that investment option 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 Guaranteed Interest Division, if a monthly processing date occurs during the current valuation period; minus g) The portion of the annual deduction, if any, as of the first monthly processing date for a segment year allocated to the Guaranteed Interest Division during the valuation period. Form 2505 (VUL)-2/00 Page 16 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; 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 Separate Account and Guaranteed Interest Division according to your premium allocation then in effect. DEDUCTIONS MONTHLY DEDUCTIONS 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 riders in force under the policy; plus c) The monthly expense charges shown in the Schedule; plus d) The monthly equivalent of the annual mortality and expense risk charge shown in the Schedule; plus e) The policyholder transaction charges as described in the Schedule as applicable; plus The monthly deductions are allocated to the divisions of the Separate Account and Guaranteed Interest Division as described in the prospectus in effect at the time of the transaction. The monthly deductions are taken from your account value as of the monthly processing date. These deductions will display in periodic reports that we send you at least once per policy year. After the policy anniversary nearest the insured's 100th birth date no further monthly deductions will be made, except policy transaction charges incurred after this date. ANNUAL DEDUCTION (Deferred Sales Charge) At the end of each of the first ten segment years, we calculate a segment annual deduction for each segment by multiplying the applicable percentage from the Schedule times the segment premium received in the segment year. There is a different annual percentage for the segment year in which the premium is received, for the segment premium below the segment target premium and for the segment premium above the segment target premium. The segment annual deduction is deducted from the account value at the beginning of each of the next seven segment years. The first deduction is in the policy month immediately following the calculation. As the calculation is performed for each segment year in which a premium is received, the total annual deduction for a segment is the sum of up to seven segment annual deductions. Segment premium is defined in the Definition of Terms section of your policy. Form 2505 (VUL)-2/00 Page 17 The annual deduction is allocated to the investment options of the Separate Account and to the Guaranteed Interest Division as described in the prospectus in effect at the time of the transaction. The annual deduction will display in periodic reports that we send you at least once per policy year. After the policy anniversary nearest the insured's 100th birth date no further annual deductions will be made. COST OF INSURANCE The cost of insurance for the policy is the sum of the cost of insurance for all segments. A segment's cost of insurance is the cost of insurance rate for the premium class for the segment multiplied by the net amount at risk allocated to the segment. It is determined on a monthly basis. 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, and any Adjustable Term Insurance Rider), divided by the result of 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 charges for the base death benefit and any Adjustable Term Insurance Rider). The net amount at risk will be allocated to a segment in the same proportion as that segment's stated death benefit bears to the sum of the stated death benefits for all segments. The cost of insurance rate for each segment will be determined by us from time to time. Different rates will apply to each segment. They will be based on the age and gender of the insured as of the effective date of segment coverage, the duration since the coverage began and the segment 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 for the segment as adjusted for any rating. These tables are in the Schedule. LOAN PROVISIONS POLICY LOANS You may obtain a policy loan on or after the first monthly processing date. 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, or 13 monthly deductions if you take a loan within the 30 day period before your 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. Form 2505 (VUL)-2/00 Page 18 LOAN INTEREST The annual policy loan interest rate is 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 and 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 investment options of the Separate Account and the Guaranteed Interest Division to the Loan Division to secure the loan. This amount will be deducted from the investment options of the Separate Account and the Guaranteed Interest Division in the same proportion that your account value in each investment option and in the Guaranteed Interest 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 investment options of the Separate Account in the same proportion as your current premium allocation unless you request a different allocation in writing. PARTIAL WITHDRAWAL PROVISIONS You may apply for a partial withdrawal from your account value on any monthly processing date after the first policy anniversary by contacting 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. This number is shown in the Schedule. The stated death benefit is reduced by the amount of the partial withdrawal unless one of the following exceptions applies. 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 not 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. Form 2505 (VUL)-2/00 Page 19 For a policy under an Option 1 death benefit, the stated death benefit is not reduced by a partial withdrawal: a) If no more than 15 years have elapsed since the policy date; b) If the insured is not yet age 81; and c) If the partial withdrawal taken is less than the greater of 10% of your account value or 5% of the stated death benefit, calculated immediately before the partial withdrawal. 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. For a policy under an Option 3 death benefit, a partial withdrawal reduces your stated death benefit by any amount of the partial withdrawal in excess of premiums paid, less prior withdrawals, to the date of the partial withdrawal. Any reduction in death benefit or account value will occur as of the date the partial withdrawal occurs. We will limit the amount of the partial withdrawal such that, immediately after the requested withdrawal: a) If there is no adjustable term insurance on the policy, the stated death benefit is at least $50,000. b) If there is adjustable term insurance on the policy, the target death benefit is at least $50,000. You may specify how much of the withdrawal you wish taken from each investment option of the Separate 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 investment options of the Separate Account in the same proportion that your account value in each investment option bears to your net account value immediately prior to the withdrawal. The withdrawal service fee deducted from your account value is deducted from each investment option and from the Guaranteed Interest Division as described in the prospectus in effect at the time of the transaction. 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 receive your request. Form 2505 (VUL)-2/00 Page 20 SURRENDER PROVISIONS SURRENDER VALUE The surrender value on any date will be your account value minus any policy loan including accrued but unpaid loan interest. BASIS OF COMPUTATIONS The 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 surrender value. We will compute the 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. Once you surrender this policy, it cannot be reinstated. GRACE PERIOD, TERMINATION AND REINSTATEMENT PROVISIONS GRACE PERIOD If the net account value is zero or less on a monthly processing date, the policy will enter a 61-day grace period: 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 receipt of the required premium payment. If we receive at least the required premium payment during the grace period, we will apply the net premium payment to the policy and make deductions for the past due amounts. 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 charges from the death proceeds of the policy. Form 2505 (VUL)-2/00 Page 21 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 the death of the insured; or c) The date the grace period ends without payment of the required premium. REINSTATEMENT The policy and its riders 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 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 the applicable underwriting class for this type of policy; and 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 that existed when coverage ended, with accrued loan interest to the end of the grace period. Upon reinstatement, the net premium received minus past due amounts will be allocated to the investment options of the Separate 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, policy loans or 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 Separate Account transactions for any of the following reasons: a) The New York Stock Exchange (NYSE) is closed, other than customary weekend and holiday closings. b) Trading on the NYSE is restricted by the Securities and Exchange Commission (SEC). c) The SEC declares that an emergency exists as a result of which disposal of securities in the Separate Account is not reasonably practicable to determine your account value in the investment options. d) A governmental body having jurisdiction over the Separate Account by order permits such suspension. Form 2505 (VUL)-2/00 Page 22 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 any increases, decreases, 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 or at delivery. 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. CONTRACT CHANGES All changes made by us must be signed by our president or an officer and by our secretary or assistant secretary. No other persons can change any of this policy's terms and conditions. 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 notify us, or our agent, as soon as possible. Upon notification to us, or our agent, instructions will be sent to you or 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 authorization forms as part of due proof. These authorization forms allow us to obtain information about the decedent, including, but not limited to, medical records of physicians and hospitals used by the decedent. Settlement will be made upon receipt of due proof of death. OWNERSHIP The original owner is the person or entity named as the owner in the application. You, as the owner, can exercise all rights and receive the benefits until the death of the insured. 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. Form 2505 (VUL)-2/00 Page 23 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. Until the death of the insured, 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 Separate Account, we will exchange this policy. The exchange will be implemented by transferring your account value in each Separate Account investment option into the Guaranteed Interest Division and removing your future right to choose to allocate funds to any investment option of the Separate Account. This transfer will not be subject to the excess transfer charge. 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. After this policy has been in force during the insured's life for 2 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 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 GENDER If the insured's age or gender 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 insured's death, would have purchased for the insured's correct age or gender. If the death benefit adjustment is made prior to death, the adjusted benefit will be to an equitable amount determined by us. This adjustment will reflect the death benefit for the correct age or gender. Form 2505 (VUL)-2/00 Page 24 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. Coverage under the policy and all riders will then terminate. 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. Coverage under that segment will then terminate. PERIODIC REPORTS We will send you, without charge, at least once each year a report that shows the current account value, cash surrender value and premiums 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 reserve the right to 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. PAYOUTS OTHER THAN AS ONE SUM ELECTION During the insured's lifetime, you may elect to have the beneficiary receive the proceeds 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 Form 2505 (VUL)-2/00 Page 25 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 described in the following Payout Options section. PAYOUT OPTIONS OPTION I. Payouts for a Designated Period. Payouts will be made in annual, semi-annual, quarterly or monthly 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 a Designated Period. Payouts will be made in annual, semi-annual, quarterly or monthly 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 available only for ages shown in the table. Payouts for Payout Option II will be determined by using the 1983 Individual Annuity Mortality Table for the appropriate gender at 3 1/2% interest. 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 annual, semi-annual, quarterly or monthly 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 supplementary policy. We may defer payment of commuted and withdrawable amounts for a period up to 6 months. Form 2505 (VUL)-2/00 Page 26 EXCESS INTEREST If we declare that Payout Options are to be credited with an interest rate above that guaranteed, that rate 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 a payout 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 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 that 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 that may be provided by mutual agreement will be provided upon reasonable request. Form 2505 (VUL)-2/00 Page 27 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 2505 (VUL)-2/00 Page 28 SETTLEMENT OPTION TABLE II Female ( Per $1,000 of Net Proceeds)
Age of Payee Monthly Age of Payee Monthly Nearest Birth Installment Nearest Birth Installments date When First date 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 2505 (VUL)-2/00 Page 29 SETTLEMENT OPTION TABLE II/Female (Continued) (Per $1,000 of Net Proceeds)
Age of Payee Monthly Age of Payee Monthly Nearest Birth Installment Nearest Birth Installments date When First date 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 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 2505 (VUL)-2/00 Page 30 SETTLEMENT OPTION TABLE II Male ( Per $1,000 of Net Proceeds)
Age of Payee Age of Payee Nearest Birth Nearest Birth date When First date When First Installment is Monthly Installment Installment is Monthly Installment 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 2505 (VUL)-2/00 Page 31 SETTLEMENT OPTION TABLE II/Male (Continued) (Per $1,000 of Net Proceeds)
Age of Payee Age of Payee Nearest Birth Nearest Birth date When First date When First Installment is Monthly Installment Installment is Monthly Installment 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 2505 (VUL)-2/00 Page 32 This Policy is a FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY This is a Non-Participating 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 birth date. To obtain information or make a complaint, contact Security Life of Denver Insurance Company at: Customer Service Center P. O. Box 173888 Denver, Colorado 80217 Toll Free Number: 1(800)848-6362 SECURITY LIFE OF DENVER INSURANCE COMPANY A Stock Company Form 2505 (VUL)-2/00 EX-4 5 1.A.(8)(A)(VIII) SPECIMEN PARTICIPATION AGMT DRAFT EXHIBIT 1.A(8)(a)(viii) FORM OF PARTICIPATION AGREEMENT ----------------------- AMONG SECURITY LIFE OF DENVER INSURANCE COMPANY, THE GCG TRUST, AND DIRECTED SERVICES, INC. THIS AGREEMENT, dated as of the _____ day of ________, 2000, by and among Security Life of Denver Insurance Company (the "Company"), a life insurance company organized under the laws of the State of Delaware, on its own behalf and on behalf of each separate account of the Company set forth on Schedule A hereto as may be amended from time to time (each such account hereinafter referred to as the "Account"), The GCG Trust (the "Fund"), a management investment company and business trust organized under the laws of the Commonwealth of Massachusetts, Directed Services, Inc.(the "Adviser" and the "Distributor), a corporation organized under the laws of the State of New York. WHEREAS, the Fund engages in business as an open-end management investment company and is available to act as the investment vehicle for separate accounts established for variable life insurance and variable annuity contracts (the "Variable Insurance Products") to be offered by insurance companies which have entered into participation agreements with the Fund, Adviser and Distributor ("Participating Insurance Companies"); WHEREAS, the shares of beneficial interest of the Fund are divided into several series of shares, each designated a "Portfolio" and representing the interest in a particular managed portfolio of securities and other assets; WHEREAS, the Fund has obtained an order from the Securities and Exchange Commission (the "SEC") granting Participating Insurance Companies and variable annuity and variable life insurance separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended, (the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, if and to the extent necessary to permit shares of the Fund to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies (the "Mixed and Shared Funding Exemptive Order"), and the parties to this Agreement agree to comply with the conditions or undertakings specified in the Mixed and Shared Funding Exemptive Order to the extent applicable to each such party; WHEREAS, the Fund is registered as an open-end management investment company under the 1940 Act and shares of the Portfolios are registered under the Securities Act of 1933, as amended (the "1933 Act"); WHEREAS, the Adviser, which serves as investment adviser to the Fund, is duly registered as an investment adviser under the federal Investment Advisers Act of 1940, as amended; WHEREAS, the Company has registered or will register certain variable annuity contracts (the "Contracts") under the 1933 Act; WHEREAS, the Account is a duly organized, validly existing segregated asset account, established by the Company under the insurance laws of the State of Delaware, to set aside and invest assets attributable to the Contracts; WHEREAS, the Company has registered the Account as a unit investment trust under the 1940 Act; WHEREAS, the Company has issued or will issue certain variable life insurance and/or variable annuity contracts supported wholly or partially by the Account (the "Contracts"), and said Contracts are listed in Schedule A hereto, as it may be amended from time to time by mutual written agreement; WHEREAS, the Distributor, which serves as distributor to the Fund, is registered as a broker dealer with the SEC under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares in the Portfolios listed in Schedule B hereto, as it may be amended from time to time by mutual written agreement (the "Designated Portfolios") on behalf of the Account to fund the aforesaid Contracts, and the Distributor is authorized to sell such shares to the Account at net asset value; NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund, the Adviser, and the Distributor agree as follows: ARTICLE I. Sale of Fund Shares ------------------- 1.1. The Fund agrees to sell to the Company those shares of the Designated Portfolios that each Account or the appropriate subaccount of each Account orders, executing such orders on a daily basis at the net asset value next computed after receipt and acceptance by the Fund or its designee of the order for the shares of the Fund. For purposes of this Section 1.1, the Company will be the designee of the Fund for receipt of such orders from each Account or the appropriate subaccount of each Account and receipt by such designee will constitute receipt by the Fund; provided that the Fund receives notice of such order by 10:00 a.m. Eastern Time on the next following business day ("T+1"). "Business Day" will mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the SEC. 1.2. The Company will pay for Fund shares on T+1 that an order to purchase Fund shares is made in accordance with Section 1.1 above. Payment will be in federal funds transmitted by wire. This wire transfer will be initiated by 12:00 p.m. Eastern Time. 1.3. The Fund agrees to make shares of the Designated Portfolios available indefinitely for purchase at the applicable net asset value per share by Participating Insurance Companies and their separate accounts on those days on which the Fund calculates its Designated Portfolio net asset value pursuant to rules of the SEC and the Fund shall use reasonable efforts to calculate such net asset value on each day the New York Stock Exchange is open for trading; provided, however, that the Board of - 2 - Trustees of the Fund (the "Fund Board") may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Fund Board, acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.4. On each Business Day on which the Fund calculates its net asset value, the Company will aggregate and calculate the net purchase or redemption orders for each Account or the appropriate subaccount of each Account maintained by the Fund in which contract owner assets are invested. Net orders will only reflect orders that the Company has received prior to the close of regular trading on the New York Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m., Eastern Time) on that Business Day. Orders that the Company has received after the close of regular trading on the NYSE will be treated as though received on the next Business Day. Each communication of orders by the Company will constitute a representation that such orders were received by it prior to the close of regular trading on the NYSE on the Business Day on which the purchase or redemption order is priced in accordance with Rule 22c-1 under the 1940 Act. Other procedures relating to the handling of orders will be in accordance with the prospectus and statement of information of the relevant Designated Portfolio or with oral or written instructions that the Distributor or the Fund will forward to the Company from time to time. 1.5. The Fund agrees that shares of the Fund will be sold only to Participating Insurance Companies and their separate accounts, qualified pension and retirement plans or such other persons as are permitted under applicable provisions of the Internal Revenue Code of 1986, as amended, (the "Internal Revenue Code"), and regulations promulgated thereunder, the sale to which will not impair the tax treatment currently afforded the Contracts. No shares of any Portfolio will be sold to the general public except as set forth in this Section 1.5. 1.6. The Fund agrees to redeem for cash, upon the Company's request, any full or fractional shares of the Fund held by the Company, executing such requests on a daily basis at the net asset value next computed after receipt and acceptance by the Fund or its agent of the request for redemption. For purposes of this Section 1.6, the Company will be the designee of the Fund for receipt of requests for redemption from each Account or the appropriate subaccount of each Account and receipt by such designee will constitute receipt by the Fund, provided the Fund receives notice of request for redemption by 10:00 a.m. Eastern Time on the next following Business Day. Payment will be in federal funds transmitted by wire to the Company's account as designated by the Company in writing from time to time, on the same Business Day the Fund receives notice of the redemption order from the Company. The Fund reserves the right to delay payment of redemption proceeds, but in no event may such payment be delayed longer than the period permitted by the 1940 Act. The Fund will not bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds; the Company alone will be responsible for such action. If notification of redemption is received after 10:00 a.m. Eastern Time, payment for redeemed shares will be made on the next following Business Day. 1.7. The Company agrees to purchase and redeem the shares of the Designated Portfolios offered by the then current prospectus of the Fund in accordance with the provisions of such prospectus. 1.8. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Purchase and redemption orders for Fund shares will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. - 3 - 1.9. The Fund will furnish same day notice (by telecopier, followed by written confirmation) to the Company of the declaration of any income, dividends or capital gain distributions payable on each Designated Portfolio's shares. The Company hereby elects to receive all such dividends and distributions as are payable on the Designated Portfolio shares in the form of additional shares of that Designated Portfolio. The Fund will notify the Company of the number of shares so issued as payment of such dividends and distributions. The Company reserves the right to revoke this election upon reasonable prior notice to the Fund and to receive all such dividends and distributions in cash. 1.10. The Fund will make the net asset value per share for each Designated Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated and will use its best efforts to make such net asset value per share available by 6:00 p.m., Eastern Time, but in no event later than 7:00 p.m., Eastern Time, each business day. 1.11. In the event adjustments are required to correct any error in the computation of the net asset value of the Fund's shares, the Fund or the Distributor will notify the Company as soon as practicable after discovering the need for those adjustments that result in an aggregate reimbursement of $150 or more to any one subaccount of each Account maintained by a Designated Portfolio unless notified otherwise by the Company (or, if greater, results in an adjustment of $10 or more to each contractowner's account). Any such notice will state for each day for which an error occurred the incorrect price, the correct price and, to the extent communicated to the Fund's shareholders, the reason for the price change. The Company may send this notice or a derivation thereof (so long as such derivation is approved in advance by the Distributor or the Adviser) to contractowners whose accounts are affected by the price change. The parties will negotiate in good faith to develop a reasonable method for effecting such adjustments. The Fund shall provide the Company, on behalf of the Account or the appropriate subaccount of each Account, with a prompt adjustment to the number of shares purchased or redeemed to reflect the correct share net asset value. 1.12. (a) The parties hereto acknowledge that the arrangement contemplated by this Agreement is not exclusive; the Fund's shares may be sold to other insurance companies (subject to Section 1.8 hereof) and the cash value of the Contracts may be invested in other investment companies, provided, however, that until this Agreement is terminated pursuant to Article X, the Company shall promote the Designated Portfolios on the same basis as other funding vehicles available under the Contracts and funding vehicles other than those listed on Schedule B to this Agreement may be available for the investment of the cash value of the Contracts. (b) The Company shall not, without prior notice to the Advisor and the Distributor (unless otherwise required by applicable law), take any action to operate the Account as a management investment company under the 1940 Act. (c) The Company shall not, without prior notice to the Advisor and the Distributor (unless otherwise required by applicable law), induce Contract owners to change or modify the Fund or change the Fund's distributor or investment adviser. (d) The Company shall not, without prior notice to the Fund, induce Contract owners to vote on any matter submitted for consideration by the shareholders of the Fund in a manner other than as recommended by the Board of Trustees of the Fund. - 4 - ARTICLE II. Representations and Warranties ------------------------------ 2.1. The Company represents and warrants that the Contracts are or will be registered under the 1933 Act and that the Contracts will be issued and sold in compliance with all applicable federal and state laws, including state insurance suitability requirements. The Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established each Account as a separate account under applicable state law and has registered the Account as a unit investment trust in accordance with the provisions of thin 1940 Act to serve as a segregated investment account for the Contracts, and that it will maintain such registration for so long as any Contracts are outstanding. The Company will amend the registration statement under the 1933 Act for the Contracts and the registration statement under the 1940 Act for the Account from time to time as required in order to effect the continuous offering of the Contracts or as may otherwise be required by applicable law. The Company will register and qualify the Contracts for sale in accordance with the securities laws of the various states only if and to the extent deemed necessary by the Company. 2.2. The Company represents that the Contracts are currently and at the time of issuance will be treated as endowment, annuity or life insurance contracts under applicable provisions of the Internal Revenue Code, and that it will make every effort to maintain such treatment and that it will notify the Fund and the Adviser immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.3. The Company represents and warrants that it will not purchase shares of the Designated Portfolios with assets derived from tax-qualified retirement plans except, indirectly, through Contracts purchased in connection with such plans. 2.4. The Fund represents and warrants that Fund shares of the Designated Portfolios sold pursuant to this Agreement will be registered under the 1933 Act and duly authorized for issuance in accordance with applicable law and that the Fund is and will remain registered under the 1940 Act for as long as such shares of the Designated Portfolios are outstanding. The Fund will amend the registration statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Fund will register and qualify the shares of the Designated Portfolios for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Fund. 2.5. The Fund represents that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.6. The Fund represents and warrants that in performing the services described in this Agreement, the Fund will comply with all applicable laws, rules and regulations. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies, objectives and restrictions) complies with the insurance laws and regulations of any state. The Fund and the Distributor agree that upon request they will use their best efforts to furnish the information required by state insurance laws so that the Company can obtain the authority needed to issue the Contracts in the various states. - 5 - 2.7. The Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it reserves the right to make such payments in the future. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1 the Fund undertakes to have its Fund Board formulate and approve any plan under Rule 12b-1 to finance distribution expenses in accordance with the 1940 Act. 2.8. The Distributor represents and warrants that it will distribute the Fund shares of the Designated Portfolios in accordance with all applicable federal and state securities laws including, without limitation, the 1933 Act, the 1934 Act and the 1940 Act. 2.9. The Fund represents that it is lawfully organized and validly existing under the laws of the Commonwealth of Massachusetts and that it does and will comply in all material respects with applicable provisions of the 1940 Act. 2.10. The Distributor represents and warrants that it is and will remain duly registered under all applicable federal and state securities laws and that it will perform its obligations for the Fund in accordance in all material respects with any applicable state and federal securities laws. 2.11. The Fund and the Distributor represent and warrant that all of their trustees, officers, employees, investment advisers, and other individuals/entities having access to the funds and/or securities of the Fund are and continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid bond includes coverage for larceny and embezzlement and is issued by a reputable bonding company. ARTICLE III. Prospectuses and Proxy Statements; Voting ----------------------------------------- 3.1. The Fund or the Distributor will provide the Company, at the Fund's or its affiliate's expense, with as many copies of the current Fund prospectus for the Designated Portfolios as the Company may reasonably request for distribution, at the Company's expense, to prospective contractowners and applicants. The Fund or the Distributor will provide, at the Fund's or its affiliate's expense, as many copies of said prospectus as necessary for distribution, at the Company's expense, to existing contractowners. The Fund or the Distributor will provide the copies of said prospectus to the Company or to its mailing agent. If requested by the Company in lieu thereof, the Fund or the Distributor will provide such documentation, including a computer diskette or a final copy of a current prospectus set in type at the Fund's or its affiliate's expense, and such other assistance as is reasonably necessary in order for the Company at least annually (or more frequently if the Fund prospectus is amended more frequently) to have the Fund's prospectus and the prospectuses of other mutual funds in which assets attributable to the Contracts may be invested printed together in one document, in which case the Fund or its affiliate will bear its reasonable share of expenses as described above, allocated based on the proportionate number of pages of the Fund's and other fund's respective portions of the document. 3.2. The Fund or the Distributor will provide the Company, at the Fund's or its affiliate's expense, with as many copies of the statement of additional information as the Company may reasonably request for distribution, at the Company's expense, to prospective contractowners and applicants. The Fund or the Distributor will provide, at the Fund's or its affiliate's expense, as many copies of said statement of additional information as necessary for distribution, at the Company's expense, to any existing contractowner who requests such statement or whenever state or federal law otherwise requires that such - 6 - statement be provided. The Fund or the Distributor will provide the copies of said statement of additional information to the Company or to its mailing agent. 3.3. The Fund or the Distributor, at the Fund's or its affiliate's expense, will provide the Company or its mailing agent with copies of its proxy material, if any, reports to shareholders and other communications to shareholders in such quantity as the Company will reasonably require. The Company will distribute this proxy material, reports and other communications to existing contract owners and tabulate the votes. 3.4. If and to the extent required by law the Company will: (a) solicit voting instructions from contractowners; (b) vote the shares of the Designated Portfolios held in the Account in accordance with instructions received from contractowners; and (c) vote shares of the Designated Portfolios held in the Account for which no timely instructions have been received, as well as shares it owns, in the same proportion as shares of such Designated Portfolio for which instructions have been received from the Company's contractowners; so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for variable contractowners. Except as set forth above, the Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. The Company will be responsible for assuring that each of its separate accounts participating in the Fund calculates voting privileges in a manner consistent with all legal requirements, including the Mixed and Shared Funding Exemptive Order. 3.5. The Fund will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular, the Fund either will provide for annual meetings (except insofar as the SEC may interpret Section 16 of the 1940 Act not to require such meetings) or, as the Fund currently intends to comply with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts described in Section 16(c) of that Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in accordance with the SEC's interpretation of the requirements of Section 16(a) with respect to periodic elections of trustees and with whatever rules the SEC may promulgate with respect thereto. ARTICLE IV. Sales Material and Information ------------------------------ 4.1. the Distributor will provide the Company on a timely basis with investment performance information for each Designated Portfolio in which the Company maintains a subaccount of the Account, including total return for the preceding calendar month and calendar quarter, the calendar year to date, and the prior one-year, five-year, and ten year (or life of the Fund) periods. The Company may, based on the SEC mandated information supplied by the Distributor, prepare communications for contractowners ("Contractowner Materials"). The Company will provide copies of all Contractowner Materials concurrently with their first use for the Distributor's internal recordkeeping purposes. It is understood that neither the Distributor nor any Designated Portfolio will be responsible for errors or omissions in, or the content of, Contractowner Materials except to the extent that the error or omission resulted from information provided by or on behalf of the Distributor or the Designated Portfolio. Any printed information that is furnished to the Company pursuant to this Agreement other than each Designated - 7 - Portfolio's prospectus or statement of additional information (or information supplemental thereto), periodic reports and proxy solicitation materials is the Distributor's sole responsibility and not the responsibility of any Designated Portfolio or the Fund. The Company agrees that the Portfolios, the shareholders of the Portfolios and the officers and governing Board of the Fund will have no liability or responsibility to the Company in these respects. 4.2. The Company will not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement, prospectus or statement of additional information for Fund shares, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in published reports for the Fund which are in the public domain or approved by the Fund or the Distributor for distribution, or in sales literature or other material provided by the Fund, Adviser or by the Distributor, except with permission of the Distributor. Any piece of sales literature or other promotional material intended to be used by the Company which requires the permission of the Distributor prior to use will be furnished by Company to the Distributor, or its designee, at least ten (10) business days prior to its use. No such material will be used if the Distributor reasonably objects to such use within five (5) business days after receipt. Nothing in this Section 4.2 will be construed as preventing the Company or its employees or agents from giving advice on investment in the Fund. 4.3. The Fund, the Adviser or the Distributor will furnish, or will cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company or its Account is named, at least ten (10) business days prior to its use. No such material will be used if the Company reasonably objects to such use within five (5) business days after receipt of such material. 4.4. The Fund, the Adviser and the Distributor will not give any information or make any representations or statements on behalf of the Company or concerning the Company, each Account, or the Contracts other than the information or representations contained in a registration statement, prospectus or statement of additional information for the Contracts, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in published reports for each Account or the Contracts which are in the public domain or approved by the Company for distribution to contractowners, or in sales literature or other material provided by the Company, except with permission of the Company. The Company agrees to respond to any request for approval on a prompt and timely basis. 4.5. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, statements of additions information, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, contemporaneously with the filing of such document with the SEC, the NASD or other regulatory authority. 4.6. The Company will provide to the Fund at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no action letters, and all amendments to any of the above, that relate to the Contracts or each Account, contemporaneously with the filing of such document with the SEC, the NASD or other regulatory authority. - 8 - 4.7. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media, (e.g., on-line networks such as the Internet or other electronic messages), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisements sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports, and proxy materials and any other material constituting sales literature or advertising under the NASD rules, the 1933 Act or the 1940 Act. 4.8. The Fund and the Distributor hereby consent to the Company's use of the names The GCG Trust, Directed Services, Inc., the portfolio names designated on Schedule B or other designated names as may be used from time to time in connection with the marketing of the Contracts, subject to the terms of Sections 4.1 and 4.2 of this Agreement. Such consent will terminate with the termination of this Agreement. ARTICLE V. Fees and Expenses ----------------- 5.1. The Fund, the Adviser and the Distributor will pay no fee or other compensation to the Company under this Agreement except if the Fund or any Designated Portfolio adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution expenses, then, subject to obtaining any required exemptive orders or other regulatory approvals, the Fund may make payments to the Company or to the underwriter for the Contracts if and in such amounts agreed to by the Fund in writing. 5.2. All expenses incident to performance by the Fund of this Agreement will be paid by the Fund to the extent permitted by law. The Fund will bear the expenses for the cost of registration and qualification of the Fund's shares; preparation and filing of the Fund's prospectus, statement of additional information and registration statement, proxy materials and reports; setting in type and printing the Fund's prospectus; setting in type and printing proxy materials and reports by it to contractowners (including the costs of printing a Fund prospectus that constitutes an annual report); the preparation of all statements and notices required by any federal or state law; all taxes on the issuance or transfer of the Fund's shares; any expenses permitted to be paid or assumed by the Fund pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act; and all other expenses set forth in Article III of this Agreement. ARTICLE VI. Diversification and Qualification --------------------------------- 6.1. The Adviser will ensure that the Fund will at all times invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable annuity contracts under the Internal Revenue Code and the regulations issued thereunder. Without limiting the scope of the foregoing, the Fund will comply with Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulation. In the event of a breach of this Article VI by the Fund, it will take all reasonable steps: (a) to notify the Company of such breach; and (b) to adequately diversify the Fund so as to achieve compliance within the grace period afforded by Treasury Regulation 1.817-5. - 9 - 6.2. The Fund represents that it is or will be qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provisions) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 6.3. The Company represents that the Contracts are currently, and at the time of issuance shall be, treated as life insurance or annuity insurance contracts, under applicable provisions of the Internal Revenue Code, and that it will make every effort to maintain such treatment, and that it will notify the Fund and the Distributor immediately upon having a reasonable basis for believing the Contracts have ceased to be so treated or that they might not be so treated in the future. The Company agrees that any prospectus offering a contract that is a "modified endowment contract" as that term is defined in Section 7702A of the Internal Revenue Code (or any successor or similar provision), shall identify such contract as a modified endowment contract. ARTICLE VII. Potential Conflicts ------------------- 7.1. The Fund Board will monitor the Fund for the existence of any material irreconcilable conflict between the interests of the Contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (f) a decision by an insurer to disregard the voting instructions of contract owners. The Fund Board shall promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. 7.2. The Company will report any potential or existing conflicts of which it is aware to the Fund Board. The Company will assist the Fund Board in carrying out its responsibilities under the Mixed and Shared Funding Exemptive Order, by providing the Fund Board with all information reasonably necessary for the Fund Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Fund Board whenever Contract owner voting instructions are disregarded. 7.3. If it is determined by a majority of the Fund Board, or a majority of its disinterested members, that a material irreconcilable conflict exists, the Company and other Participating Insurance Companies shall, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested Fund Board members), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (1) withdrawing the assets allocable to some or all of the separate accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; and (2) establishing a new registered management investment company or managed separate account. - 10 - 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the Account's investment in the Fund and terminate this Agreement with respect to each Account; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Fund Board. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice that this provision is being implemented, and until the end of that six month period the Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account within six months after the Fund Board informs the Company in writing that it has determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Fund Board. Until the end of the foregoing six month period, the Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.6. For purposes of Section 7.3 through 7.6 of this Agreement, a majority of the disinterested members of the Fund Board shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contract if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. In the event that the Fund Board determines that any proposed action does not adequately remedy any irreconcilable material conflict, then the Company will withdraw the Account's investment in the Fund and terminate this Agreement within six (6) months after the Fund Board informs the Company in writing of the foregoing determination; provided, however, that such withdrawal and termination shall be limited to the extent required by any such material irreconcilable conflict as determined by a majority of the disinterested members of the Fund Board. 7.7. If and to the extent the Mixed and Shared Funding Exemption Order or any amendment thereto contains terms and conditions different from Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement, then the Fund and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with the Mixed and Shared Funding Exemptive Order, and Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in the Mixed and Shared Funding Exemptive Order or any amendment thereto. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Mixed and Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Mixed and Shared Funding Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.5, 3.6, 7.1., 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the - 11 - extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. ARTICLE VIII. Indemnification --------------- 8.1. Indemnification By The Company ------------------------------ (a) The Company agrees to indemnify and hold harmless the Fund, the Adviser, the Distributor, and each person, if any, who controls or is associated with the Fund, the Adviser or the Distributor within the meaning of such terms under the federal securities laws and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 8.1) against any and all losses, claims, expenses, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or litigation (including reasonable legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement, prospectus or statement of additional information for the Contracts or contained in the Contracts or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the Fund, the Adviser or the Distributor for use in the registration statement, prospectus or statement of additional information for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or as a result of statements or representations by or on behalf of the Company or wrongful conduct of the Company or persons under its control, with respect to the sale or distribution of the Contracts or Fund shares; or (3) arise out of any untrue statement or alleged untrue statement of a material fact contained in the Fund registration statement, prospectus, statement of additional information or sales literature or other promotional material of the Fund (or amendment or supplement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make such statements not misleading in light of the circumstances in which they were made, if such a statement or omission was made in reliance upon and in conformity with information furnished to the Fund by or on behalf of the Company or persons under its control; or (4) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; or - 12 - (5) arise out of any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach by the Company of this Agreement; except to the extent provided in Sections 8.1(b) and 8.3 hereof. This indemnification will be in addition to any liability that the Company otherwise may have. (b) No party will be entitled to indemnification under Section 8.1(a) to the extent such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties promptly will notify the Company of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Fund shares or the Contracts or the operation of the Fund. 8.2. Indemnification By The Adviser, the Fund and the Distributor ------------------------------------------------------------ (a) The Adviser, the Fund and the Distributor, in each case solely to the extent relating to such party's responsibilities hereunder, agree to indemnify and hold harmless the Company and each person, if any, who controls or is associated with the Company within the meaning of such terms under the federal securities laws and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 8.2) against any and all losses, claims, expenses, damages, liabilities (including amounts paid in settlement with the written consent of the Adviser) or litigation (including reasonable legal and other expenses) to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Fund or sales literature or other promotional material of the Fund (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Adviser, the Distributor or the Fund by or on behalf of the Company for use in the registration statement, prospectus or statement of additional information for the Fund or in sales literature of the Fund (or any amendment or supplement thereto) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or as a result of statements or representations or wrongful conduct of the Adviser, the Fund or the Distributor or persons under the control of the Adviser, the Fund or the Distributor respectively, with respect to the sale of the Fund shares; or - 13 - (3) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, statement of additional information or sales literature or other promotional material covering the Contracts (or any amendment or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated or necessary to make such statement or statements not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the Adviser, the Fund or the Distributor or persons under the control of the Adviser, the Fund or the Distributor; or (4) arise as a result of any failure by the Fund, the Adviser or the Distributor to provide the services and furnish the materials under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the diversification requirements and procedures related thereto specified in Article VI of this Agreement); or (5) arise out of or result from any material breach of any representation and/or warranty made by the Adviser, the Fund or the Distributor in this Agreement, or arise out of or result from any other material breach of this Agreement by the Adviser the Fund or the Distributor; except to the extent provided in Sections 8.2(b) and 8.3 hereof. This indemnification will be in addition to any liability that the Fund, Adviser or the Distributor otherwise may have. (b) No party will be entitled to indemnification under Section 8.2(a) to the extent such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties will promptly notify the Adviser, the Fund and the Distributor of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Contracts or the operation of the account. 8.3. Indemnification Procedure ------------------------- Any person obligated to provide indemnification under this Article VIII ("Indemnifying Party" for the purpose of this Section 8.3) will not be liable under the indemnification provisions of this Article VIII with respect to any claim made against a party entitled to indemnification under this Article VIII ("Indemnified Party" for the purpose of this Section 8.3) unless such Indemnified Party will have notified the Indemnifying Party in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim will have been served upon such Indemnified Party (or after such party will have received notice of such service on any designated agent), but failure to notify the Indemnifying Party of any such claim will not relieve the Indemnifying Party from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of the indemnification provision of this Article VIII, except to the extent that the failure to notify results in the failure of actual notice to the Indemnifying Party and such Indemnifying Party is damaged solely as a result of failure to give such notice. In case any such action is brought against the Indemnified Party, the - 14 - Indemnifying Party will be entitled to participate, at its own expense, in the defense thereof. The Indemnifying Party also will be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Indemnifying Party to the Indemnified Party of the Indemnifying Party's election to assume the defense thereof, the Indemnified Party will bear the fees and expenses of any additional counsel retained by it, and the Indemnifying Party will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation, unless: (a) the Indemnifying Party and the Indemnified Party will have mutually agreed to the retention of such counsel; or (b) the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The Indemnifying Party will not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there is a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement will be entitled to the benefits of the indemnification contained in this Article VIII. The indemnification provisions contained in this Article VIII will survive any termination of this Agreement. ARTICLE IX. Applicable Law -------------- 9.1 This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of Delaware. 9.2 This Agreement shall be subject to the provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant (including, but not limited to, any Mixed and Shared Funding Exemptive Order) and the terms hereof shall be interpreted and construed in accordance therewith. If, in the future, the Mixed and Shared Funding Exemptive Order should no longer be necessary under applicable law, then Article VII shall no longer apply. ARTICLE X. Termination ----------- 10.1. This Agreement will terminate: (a) at the option of any party, with or without cause, with respect to some or all of the Designated Portfolios, upon sixty (60) days' advance written notice to the other parties or, if later, upon receipt of any required exemptive relief or orders from the SEC, unless otherwise agreed in a separate written agreement among the parties; or (b) at the option of the Company, upon receipt of the Company's written notice by the other parties, with respect to any Designated Portfolio if shares of the Designated Portfolio are not reasonably available to meet the requirements of the Contracts as determined in good faith by the Company; or (c) at the option of the Company, upon receipt of the Company's written notice by the other parties, with respect to any Designated Portfolio in the event any of the Designated Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or Federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by Company; or - 15 - (d) at the option of the Fund, upon receipt of the Fund's written notice by the other parties, upon institution of formal proceedings against the Company by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Contracts, the administration of the Contracts, the operation of the Account, or the purchase of the Fund shares, provided that the Fund determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Company's ability to perform its obligations under this Agreement; or (e) at the option of the Company, upon receipt of the Company's written notice by the other parties, upon institution of formal proceedings against the Fund, Adviser or the Distributor by the NASD, the SEC, or any state securities or insurance department or any other regulatory body, provided that the Company determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Fund's or the Distributor's ability to perform its obligations under this Agreement; or (f) at the option of the Company, upon receipt of the Company's written notice by the other parties, if the Fund ceases to qualify as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, or under any successor or similar provision, or if the Company reasonably and in good faith believes that the Fund may fail to so qualify; or (g) at the option of the Company, upon receipt of the Company's written notice by the other parties, with respect to any Designated Portfolio if the Fund fails to meet the diversification requirements specified in Article VI hereof or if the Company reasonably and in good faith believes the Fund may fail to meet such requirements; or (h) at the option of any party to this Agreement, upon written notice to the other parties, upon another party's material breach of any provision of this Agreement which material breach is not cured within thirty (30) days of said notice; or (i) at the option of the Company, if the Company determines in its sole judgment exercised in good faith, that either the Fund, the Adviser or the Distributor has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Company, such termination to be effective sixty (60) days' after receipt by the other parties of written notice of the election to terminate; or (j) at the option of the Fund or the Distributor, if the Fund or the Distributor respectively, determines in its sole judgment exercised in good faith, that the Company has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Fund or the Adviser, such termination to be effective sixty (60) days' after receipt by the other parties of written notice of the election to terminate; or (k) at the option of the Company or the Fund upon receipt of any necessary regulatory approvals and/or the vote of the contractowners having an interest in the Account (or any subaccount) to substitute the shares of another investment company for the corresponding Designated Portfolio shares of the Fund in accordance with the terms of the Contracts for which those Designated Portfolio shares had been selected to serve as the underlying investment media. - 16 - The Company will give sixty (60) days' prior written notice to the Fund of the date of any proposed vote or other action taken to replace the Fund's shares; or (l) at the option of the Company or the Fund upon a determination by a majority of the Fund Board, or a majority of the disinterested Fund Board members, that an irreconcilable material conflict exists among the interests of: (1) all contractowners of variable insurance products of all separate accounts; or (2) the interests of the Participating Insurance Companies investing in the Fund as set forth in Article VII of this Agreement; or (m) at the option of the Fund in the event any of the Contracts are not issued or sold in accordance with applicable federal and/or state law. Termination will be effective immediately upon such occurrence without notice. 10.2. Notice Requirement. No termination of this Agreement ------------------- will be effective unless and until the party terminating this Agreement gives prior written notice to all other parties of its intent to terminate, which notice will set forth the basis for the termination. 10.3. Effect of Termination. Notwithstanding any termination ---------------------- of this Agreement, the Fund and the Distributor will, at the option of the Company, continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement ( hereinafter referred to as "Existing Contracts.") . Specifically, without limitation, the owners of the Existing Contracts will be permitted to reallocate investments in the Portfolios (as in effect on such date), redeem investments in the Portfolios and/or invest in the Portfolios upon the making of additional purchase payments under the Existing Contracts. 10.4. Surviving Provisions. Notwithstanding any termination of --------------------- this Agreement, each party's obligations under Article VIII to indemnify other parties will survive and not be affected by any termination of this Agreement. In addition, each party's obligations under Section 12.7 will survive and not be affected by any termination of this Agreement. Finally, with respect to Existing Contracts, all provisions of this Agreement also will survive and not be affected by any termination of this Agreement. ARTICLE XI. Notices ------- 11.1. Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Fund: The GCG Trust c/o Myles Tashman Secretary 1475 Dunwoody Drive West Chester, PA 19380-1479 If to the Company: Security Life of Denver Insurance Company c/o General Counsel 1290 Broadway Denver, CO 80203-5699 - 17 - If to Adviser: Directed Services, Inc. c/o Myles Tashman Executive Vice President and General Counsel 1475 Dunwoody Drive West Chester, PA 19380-1479 If to Distributor: ING America Equities, Inc. c/o Chief Legal Officer 1290 Broadway Denver, CO 80203-5699 ARTICLE XII. Miscellaneous ------------- 12.1. All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the directors, trustees, officers, partners, employees, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. No Portfolio or series of the Fund will be liable for the obligations or liabilities of any other Portfolio or series. 12.2. The Fund, the Adviser and the Distributor acknowledge that the identities of the customers of the Company or any of its affiliates (collectively the "Company Protected Parties" for purposes of this Section 12.2), information maintained regarding those customers, and all computer programs and procedures or other information developed or used by the Company Protected Parties or any of their employees or agents in connection with the Company's performance of its duties under this Agreement are the valuable property of the Company Protected Parties. The Fund, the Adviser and the Distributor agree that if they come into possession of any list or compilation of the identities of or other information about the Company Protected Parties' customers, or any other information or property of the Company Protected Parties, other than such information as is publicly available or as may be independently developed or compiled by the Fund, the Adviser or the Distributor from information supplied to them by the Company Protected Parties' customers who also maintain accounts directly with the Fund, the Adviser or the Distributor, the Fund, the Adviser and the Distributor will hold such information or property in confidence and refrain from using, disclosing or distributing any of such information or other property except: (a) with the Company's prior written consent; or (b) as required by law or judicial process. The Company acknowledges that the identities of the customers of the Fund, the Adviser, the Distributor or any of their affiliates (collectively the "Adviser Protected Parties" for purposes of this Section 12.2), information maintained regarding those customers, and all computer programs and procedures or other information developed or used by the Adviser Protected Parties or any of their employees or agents in connection with the Fund's, the Adviser's or the Distributor's performance of their respective duties under this Agreement are the valuable property of the Adviser Protected Parties. The Company agrees that if it comes into possession of any list or compilation of the identities of or other information about the Adviser Protected Parties' customers, or any other information or property of the Adviser Protected Parties, other than such information as is publicly available or as may be independently developed or compiled by the Company from information supplied to them by the Adviser Protected Parties' customers who also maintain accounts directly with the Company, the Company will hold such information or property in confidence and refrain from using, disclosing or distributing any of such information or other property except: (a) with the Fund's, the Adviser's or the Distributor's prior written consent; or (b) as required by law or judicial process. Each party acknowledges that any breach of the agreements in this Section 12.2 would result in immediate and irreparable harm to the other parties for which there would be no adequate remedy at law and agree that in the event of such a breach, the other parties will be entitled to equitable relief by way of temporary and permanent injunctions, as well as such other relief as any court of competent jurisdiction deems appropriate. - 18 - 12.3. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 12.4. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together will constitute one and the same instrument. 12.5. If any provision of this Agreement will be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement will not be affected thereby. 12.6. This Agreement will not be assigned by any party hereto without the prior written consent of all the parties. 12.7. Each party to this Agreement will maintain all records required by law, including records detailing the services it provides. Such records will be preserved, maintained and made available to the extent required by law and in accordance with the 1940 Act and the rules thereunder. Each party to this Agreement will cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and will permit each other and such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. Upon request by the Fund or the Distributor, the Company agrees to promptly make copies or, if required, originals of all records pertaining to the performance of services under this Agreement available to the Fund or the Distributor, as the case may be. The Fund agrees that the Company will have the right to inspect, audit and copy all records pertaining to the performance of services under this Agreement pursuant to the requirements of any state insurance department. Each party also agrees to promptly notify the other parties if it experiences any difficulty in maintaining the records in an accurate and complete manner. This provision will survive termination of this Agreement. 12.8. Each party represents that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate or board action, as applicable, by such party and when so executed and delivered this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. 12.9. The parties to this Agreement may amend the schedules to this Agreement from time to time to reflect changes in or relating to the Contracts, the Accounts or the Designated Portfolios of the Fund or other applicable terms of this Agreement. 12.10. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights. [12.11. If Fund is a Mass business trust - The parties to this Agreement acknowledge and agree that all liabilities of the Fund arising, directly or indirectly, under this agreement, will be satisfied solely out of the assets of the Fund and that no trustee, officer, agent or holder of shares of beneficial interest of the Fund will be personally liable for any such liabilities. ] - 19 - IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be hereunder affixed hereto as of the date specified below: SECURITY LIFE OF DENVER INSURANCE COMPANY: By: __________________________ Title: _______________________ Date: ________________________ THE GCG TRUST: By: __________________________ Title: _______________________ Date: ________________________ DIRECTED SERVICES, INC : By: __________________________ Title: _______________________ Date: ________________________ ING AMERICA EQUITIES, INC. By: __________________________ Title: _______________________ Date: ________________________ - 20 - SCHEDULE A SECURITY LIFE OF DENVER INSURANCE COMPANY CONTRACTS AND SEPARATE ACCOUNT(S) CONTRACT(S): Variable Universal Life Contract SEPARATE ACCOUNT(S): Separate Account L1 of Security Life of Denver Insurance Company SCHEDULE B THE GCG TRUST DESIGNATED PORTFOLIOS PORTFOLIOS: Equity Income Series Fully Managed Series Limited Maturity Bond Series Hard Assets Series Real Estate Series All-Growth Series Liquid Asset Series Capital Appreciation Series Rising Dividends Series Emerging Markets Series Market Manager Series Value Equity Series Strategic Equity Series Small Cap Series Mid-Cap Growth Series Total Return Series Research Series Growth & Income Series Growth Series Global Fixed Income Series Growth Opportunities Series Developing World Series International Equity Series Value Equity Series Capital Fund Series Investors Fund Series Schedule Date: - 21 - EX-5 6 1.A(10) SPECIMEN APPLICATION Exhibit 1.A(10) [logo of ING Security Life] Security Life of Denver Insurance Company Variable Life Customer Service Center P.O. Box 173888 Denver, CO 80217-3885 1-800-848-6362 Fax: 303-860-2695 GUARANTEED ISSUE VARIABLE LIFE INSURANCE APPLICATION _ 1 |_| Check here if for PENSION or similar tax qualified plan. State plan type in Special Instructions. SECTION A - PROPOSED INSURED 2 Name (First Middle Last) Birthdate (Mo/Day/Yr) Birthstate Sex _ _ |_| M |_| F Home Address (Street, Apt. No.) City State Zip Code Social Security Number Home Phone ( ) Work Phone ( )
3a Occupation:________________________________ 3b Date of Hire:_____________ 4a Is Proposed Insured currently actively at work on a full time basis performing all duties of Proposed Insured's regular occupation, at Proposed Insured's customary place of employment for at least 30 hours per week? _ _ |_| Yes |_| No If "No" explain: ____________________________________________________________________________ 4b Has Proposed Insured: (1) been absent from work due to illness or medical treatment for a period of 5 business days or more within the last 90 days; or (2) been hospitalized for any reason during this same period? _ _ |_| Yes |_| No If "Yes" explain: ____________________________________________________________________________ 5 Has Proposed Insured used tobacco (cigarettes, cigars, chewing tobacco, pipe, nicotine substitutes, etc.) or any other substance containing nicotine within the last 12 months? _ _ |_| Yes |_| No If "Yes," what type and frequency? ____________________________________________________________________________ 6 Is this insurance to replace, or will it cause any change in, any existing life insurance or annuity on any person proposed for coverage? _ _ |_| Yes |_| No If "Yes" submit a completed replacement form with this application. SECTION B - OWNER (IF OTHER THAN PROPOSED INSURED) 7a Owner's Name and Address 7b Owner's Social Security Number (or Tax I.D. Number) 7c Owner's Relationship to Proposed Insured 1 Q2009-11/97 (Guaranteed Issue Application) SECTION C - BENEFICIARIES 8a Primary Beneficiary_______________________ Relationship to Insured_________ (or Trust information) Social Security Number (or Tax I.D. Number)________ 8b Contingent Beneficiary____________________ Relationship to Insured_________ (or Trust information) Social Security Number (or Tax I.D. Number)________ SECTION D - BILLING 9 Employer's Name and Address 10 Mailing address (for Premium Notices and Correspondence) 11 Payment Method: List bill 12 Premium Mode: SECTION E - PLAN INFORMATION - FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY 13 Product 14 Policy Issue Date (Mo/Day/Yr):________________________ 15 Guaranteed Issue Version 16 Unisex Version 17a Stated Death Benefit 17b Definition of Life Insurance Test: _ |_| Guideline Annual Premium Test _ |_| Cash Value Accumulation Test 17c Death Benefit Options: _ |_| Option 1 (Stated Death Benefit) _ |_| Option 2 (Stated Death Benefit plus account value) _ |_| Option 3 (Stated Death Benefit plus premiums paid minus withdrawals SECTION F - GUARANTEED MINIMUM DEATH BENEFIT OPTION 18 GUARANTEE PERIOD (SELECT ONE, IF OPTION DESIRED; OTHERWISE THERE WILL BE NO GUARANTEED PERIOD) _ _ |_| Later of ten years or proposed insured's age 65 |_| Lifetime of proposed insured Note: The Guarantee Period will terminate if: a. You fail to pay the required Guarantee Period Annual premium defined in your prospectus; or b. Your Account Value on any Monthly Processing date is not diversified according to the following rules: 1. No more than 35% of your Net Account Value may be invested in any one division; and 2. Your Net Account Value must be invested in at least FIVE divisions. You will satisfy these diversification requirements if: (i) you participate in the Automatic Rebalancing feature defined in and governed by the policy prospectus in effect at the time you elect the Guarantee Period 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. There may be other circumstances that will cause the Guarantee Period to terminate before its scheduled expiration date. See your prospectus for further information. 2 Q2009-11/97 (Guaranteed Issue Application) SECTION G - SUITABILITY 19 a. Have you, the Proposed Insured, and the Owner, if other than the Proposed Insured, received a current Prospectus dated ________________ for the Variable Life Insurance policy applied for and current prospectus _ _ for each of the Variable Account Divisions? |_| Yes |_| No b. DO YOU UNDERSTAND THAT UNDER THE POLICY APPLIED FOR THE AMOUNT OR DURATION OF THE DEATH BENEFIT MAY VARY UNDER SPECIFIED CONDITIONS; POLICY VALUES MAY INCREASE OR DECREASE IN ACCORDANCE WITH THE INVESTMENT EXPERIENCE OF INVESTMENT DIVISIONS IN A SEPARATE ACCOUNT, AND MAY INCREASE IN ACCORDANCE WITH THE INTEREST CREDITED IN THE GUARANTEED INTEREST DIVISION; AND THE AMOUNT PAYABLE AT THE FINAL POLICY DATE IS NOT GUARANTEED BUT IS DEPENDENT ON THE AMOUNT THEN IN THE ACCOUNT VALUE? _ _ |_| YES |_| NO c. Do you understand that any personalized illustrations received are based on hypothetical interest assumptions which may not be indicative of actual future investment experience of our Separate Account or of actual _ _ interest credited in our Guaranteed Interest Division? |_| Yes |_| No d. With this in mind, is the policy in accord with your insurance objectives _ _ and your anticipated financial needs? |_| Yes |_| No 20 Special Instructions HOME OFFICE CORRECTIONS (INSURANCE COMPANY USE ONLY) (NOT APPLICABLE IN NORTH DAKOTA, OREGON, PENNSYLVANIA, AND WEST VIRGINIA.) 3 Q2009-11/97 (Guaranteed Issue Application)
FRAUD WARNINGS (FOR ALL STATES EXCEPT OREGON) FOR APPLICANTS IN ALL STATES Any person who knowingly and with intent to injure, defraud, or deceive any insurance company, EXCEPT COLORADO, CONNECTICUT, files an application, statement or claim containing any false, incomplete, or misleading information PENNSYLVANIA AND VIRGINIA: may be guilty of insurance fraud. FOR APPLICANTS IN COLORADO: IT IS UNLAWFUL TO KNOWINGLY PROVIDE FALSE, INCOMPLETE, OR MISLEADING FACTS OR INFORMATION TO AN INSURANCE COMPANY FOR THE PURPOSE OF DEFRAUDING OR ATTEMPTING TO DEFRAUD THE COMPANY. PENALTIES MAY INCLUDE IMPRISONMENT, FINES, DENIAL OF INSURANCE, AND CIVIL DAMAGES. ANY INSURANCE COMPANY OR AGENT OF AN INSURANCE COMPANY WHO KNOWINGLY PROVIDES FALSE, INCOMPLETE, OR MISLEADING FACTS OR INFORMATION TO A POLICYHOLDER OR CLAIMANT FOR THE PURPOSE OF DEFRAUDING OR ATTEMPTING TO DEFRAUD THE POLICYHOLDER OR CLAIMANT WITH REGARD TO A SETTLEMENT OF AWARD PAYABLE FROM INSURANCE PROCEEDS SHALL BE REPORTED TO THE COLORADO DIVISION OF INSURANCE WITHIN THE DEPARTMENT OF REGULATORY AGENCIES. FOR APPLICANTS IN CONNECTICUT: Any person who knowingly and with intent to injure, defraud, or deceive any insurance company, files an application, statement or claim containing any false, incomplete, or misleading information may be guilty of insurance fraud as determined by a court of competent jurisdiction. FOR APPLICANTS IN PENNSYLVANIA: Any person who knowingly and with intent to defraud any insurance company or other person files an application for insurance or statement of claim containing any materially false information or conceals for the purpose of misleading, information concerning any fact material thereto commits a fraudulent insurance act, which is a crime and subjects such person to criminal and civil penalties. FOR APPLICANTS IN VIRGINIA: Any person who with intent to defraud, or knowing that he is facilitating a fraud against an insurer, submits an application, statement or files a claim containing false, or deceptive statement may have violated state law.
AGREEMENTS: All statements and answers in this application (which includes supplements and amendments) are true and complete to the best of my knowledge and belief. I also agree that: 1. The statements and answers in this application will be relied upon and form the basis of any insurance. 2. No information will be considered as having been given to Security Life unless it is written in this application. (THIS PARAGRAPH DOES NOT APPLY IN THE STATES OF ALASKA, MAINE, MISSOURI, OREGON, SOUTH CAROLINA, SOUTH DAKOTA AND WISCONSIN.) 3. No agent or any other unauthorized person can make or change any insurance contract or give up any of Security Life's rights or requirements. Any change must be in writing and signed by an officer of Security Life. 4. Security Life may amend this application by an appropriate notation in the space designated "Home Office Corrections" in order to correct errors or omissions or to conform the application with any policy that may be issued. The acceptance of the policy constitutes a ratification of such amendments. (THIS PARAGRAPH DOES NOT APPLY IN THE STATES OF NORTH DAKOTA, OREGON, PENNSYLVANIA, AND WEST VIRGINIA.) In those states, including Maryland, where change in amount, age at issue, classification, plan, premium, or benefit requires the written consent of the applicant, no change may be ratified except by a written acceptance. We reserve the right to make any changes required by law. 5. INSURANCE UNDER POLICY APPLIED FOR - EXCEPT AS MAY BE PRO- VIDED IN ANY COVERAGE PROVIDED BY A CONDITIONAL RECEIPT, NO POLICY OF INSURANCE WILL BE IN FORCE UNTIL (1) THE FIRST POLICY PREMIUM IS PAID AND (2) THE POLICY IS DELIVERED WHILE THE FACTS AND HEALTH CONDITION OF THE PROPOSED INSURED(S) ARE AS REPRESENTED IN THIS APPLICATION. WHEN THESE CONDITIONS ARE SATISFIED, THE POLICY AS DELIVERED WILL THEN TAKE EFFECT. 6. I certify, under penalty of perjury, that my social security/tax identification number(s) is shown and is correct and that I am not subject to back up withholding. 7. If the contract applied for is for a pension, profit-sharing, HR10, or other tax qualified plan, any policy issued shall not be transferable other than to the insurer, except as directed by the Plan Administrator. Other applicable provisions may be added to the contract. I know of nothing else affecting the risk. In addition to the Agreements above, I have read and agree to the information and agreements contained in Section 21, Special Instructions. - -> Signature of Proposed Insured________________________ -> Date______________ - -> Signature of Owner___________________________________ -> Date______________ (If other than Proposed Insured) - -> Name and Title of Owner______________________________________________________ (If owner is a business entity, print the business entity's name and the title of person signing.) - -> APPLICATION SIGNED BY PROPOSED INSURED OR OWNER (IF OTHER THAN PROPOSED INSURED) IN: -> STATE ____________ AGENT USE ONLY (Please print) Do you have knowledge or reason to believe that replacement of existing life _ _ insurance or annuity may be involved? |_| Yes |_| No If "Yes" please provide appropriate replacement forms. Signature of Agent/Registered Rep________________________________ Reg. Rep Number____________ % Split__________ Signature of Agent/Registered Rep________________________________ Reg. Rep Number____________ % Split__________ Signature of Agent/Registered Rep________________________________ Reg. Rep Number____________ % Split__________
________________________________________ _____________________________________ Name of Broker/Dealer/Branch/OSJ Name of Broker/Dealer/Branch/OSJ 4 Q2009-11/97 (Guaranteed Issue Application) [Logo of Security Life] Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203-5699 Guaranteed Issue Binding Limited Life Insurance Coverage For premium(s) received from the employer in connection with the following Guaranteed Issue Applications, Security Life provides a limited amount of life insurance coverage for a short time while it decides whether to issue and deliver the policy or certificate applied for. This coverage is subject to the terms and conditions set out below.
AMOUNT | AMOUNT PROPOSED PREMIUM OF LIMITED | PROPOSED PREMIUM OF LIMITED APP.# INSURED RECEIVED LIFE INS. | APP.# INSURED RECEIVED LIFE INS. - ----------------------------------------------------------------------------------------------------------------------------- ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________ ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________ ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________ ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________ ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________ ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________ ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________ ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________ ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________ ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________ ______ _________________________ ________ ___________ | ______ _________________________ ________ ___________
TERMS AND CONDITIONS AMOUNT OF COVERAGE If a Proposed Insured dies while this coverage is in effect, Security Life will pay the Amount of Limited Life Insurance on the Proposed Insured set out above. There is no premium waiver coverage. DATE COVERAGE BEGINS Coverage on the Proposed Insured under this agreement starts when a premium has been accepted while the Proposed Insured is currently engaged in active full-time work. Active full-time work is working at least 30 hours per week in a normal capacity with no hospitalizations and no absences from work due to illness or accident (except absences due to minor illnesses or accidents for no more than 5 total days during the 3-month period). DATE COVERAGE ENDS The coverage on the Proposed Insured will end automatically on the EARLIEST of the dates: o Security Life returns the premium(s) o Five days after Security Life mails a notice of termination to the owner's address on the Application; or o Coverage starts under any Security Life policy or certificate resulting from Application. Security Life may send the notice of return premium(s) at any time before delivery of the policy or certificate. There is no insurance coverage if: o The Proposed Insured dies by suicide, or self-inflicted injury; o The premium check is not honored; or o The Proposed Insured is not currently engaged in active full-time work at the time the premium is accepted. BENEFICIARY Any benefit will be paid to the beneficiary named in the application on the Proposed Insured. If death is before such an application is completed, it will be paid to (check one): _ |_| Proposed Insured's estate, or _ |_| Other __________________________________________________ Premiums for an application will be returned if: an application is not approved; or a benefit is paid under this coverage; or any condition of the Guaranteed Issue offer is not met. No agent can waive or modify this coverage in any way. - -------------------------------------------------------------------------------- No premium may be accepted if: o the Proposed Insured is not currently engaged in active full-time work; or o any condition of the Guaranteed Issue offer is not met. The amount of Limited Life Insurance shall be no more than the lesser of: the amount specified in the Guaranteed Issue offer; or $3 million. - -------------------------------------------------------------------------------- Agreed to on ______________________________, 19________ _____________________________________________(EMPLOYER) By ____________________________________________________ Print employer's name and have officer sign. Agent _________________________________________________ Q1112 B-6/98 HOME OFFICE COPY Initial Premium Allocation. Please allocate your Initial Premium to the Guaranteed Interest Division and/or among the Separate Account Divisions. Please use whole number percentages for each Division elected. You must allocate at least 1% of your Premium Allocation to each Division in which you elect to invest. The total must equal 100%. % GUARANTEED INTEREST DIVISION - -------- SEPARATE ACCOUNT INVESTMENT OPTIONS - -------------------------------------------------------------------------------- AIM INVESCO Van Eck % V.I. Government Securities % Equity Income % Worldwide Emerging Markets - --------- --------- --------- % V.I. Capital Appreciation % High Yield % Worldwide Bond - --------- --------- --------- % Utilities % Worldwide Real Estate --------- --------- Alger American % Total Return --------- % Small Capitalization % VIF Small Company Growth GCG Trust - --------- --------- % MidCap Growth % Growth - --------- --------- % Growth Neuberger Berman % Research - --------- --------- % Limited Maturity Bond % Equity Income --------- --------- Fidelity Investments % Partners Portfolio % MidCap Growth --------- --------- % Growth Portfolio % Hard Assets - --------- --------- % Overseas % Liquid Assets Money Market - --------- --------- % Index 500 % Limited Maturity Bond - --------- ---------
Automatic Telephone Privileges I acknowledge that my policy automatically will provide telephone transfer privileges and telephone allocation change privileges as described in the current prospectus to me as policy owner and to my agent/registered representative. I also agree that ING Security Life and its distributor will not be liable for any loss, damage, costs or expenses incurred in acting on telephone instructions reasonably believed to be authentic. ING Security Life may employ procedures which might include requiring forms of personal identification before accepting such telephone instructions. I understand that if I do not want myself or my agent/registered representative to have such telephone privileges, I must indicate so below. I also understand that once granted, such privilege can be revoked only upon receipt of signed, written instructions at ING Security Life. _ |_| I do not want telephone transfer or allocation privileges. _ |_| I do not want telephone transfer or allocation privileges granted to my agent/registered representative. (Guaranteed Issue Application) Insert Corporate Benefits EX-6 7 6.B OPINION & CONSENT OF J. LIVINGSTON EXHIBIT 6.B [Letterhead of Security Life here] February 1, 2000 Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203-5699 Re: Security Life Separate Account L1 Pre-Effective Amendment No. 2; SEC File No. 333-90577 Gentlemen: In my capacity as Executive Vice President and Chief Actuary of Security Life of Denver Insurance Company ("Security Life"), I have provided actuarial advice concerning: The preparation of Pre-Effective Amendment No. 2 to the Registration Statement on Form S-6 (File No. 333-90577) 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 corporate benefits variable universal life insurance policies; and The preparation of the policy forms for the corporate benefits variable universal life insurance policies described in Pre-Effective Amendment No. 2 (the "Policies"). It is my professional opinion that 1. The aggregate fees and charges under the Policies are reasonable in relation to the services rendered the expenses expected to be incurred and the risks assumed by Security Life. 2. The illustrations of death benefits, account value, cash surrender value, and total premiums paid plus interest at 5 percent shown in the Prospectus, based on the assumptions stated in the illustration are consistent with the provisions of the Policies. The rate structures of the Policies have not been designed so as to make the relationship between premiums and benefits, as shown in the illustrations included, appear to be correspondingly more favorable to prospective buyers than other illustrations which could have been provided at other combinations of ages, sex of the insured, death benefit option and amount, definition of life insurance test, premium class, and premium amounts. Insureds of other premium classes may have higher costs of insurance charges. 3. All other numerical examples shown in the Prospectus are consistent with the Policies and our other practices, and have not been designed to appear more favorable to prospective buyers than other examples which could have been provided. I hereby consent to the filing of this opinion as an Exhibit to Pre-Effective Amendment No. 2 to the Registration Statement and the use of my name under the heading "Experts" in the Prospectus. Sincerely, /s/ James L. Livingston, Jr. James L. Livingston, Jr., F.S.A., M.A.A.A. JLL:tls EX-7 8 7.A CONSENT OF E&Y 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 Pre-Effective Amendment No. 2 to the Registration Statement (Form S-6 No. 333-90577) and related Prospectus of Security Life of Denver Insurance Company and Security Life Separate Account L1 as filed with the Securities and Exchange Commission on February 2, 2000. /s/ ERNST & YOUNG LLP Denver, Colorado February 2, 2000 EX-8 9 7.B CONSENT OF SAB Exhibit 7.B [Sutherland Asbill & Brennan LLP] CONSENT OF SUTHERLAND ASBILL & BRENNAN LLP We consent to the reference to our firm in the prospectus included in Pre-Effective Amendment No. 2 to the Registration Statement on Form S-6 for Security Life Separate Account L1 (File No. 333-90577). 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. February 1, 2000 -----END PRIVACY-ENHANCED MESSAGE-----