-----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, HxanZYnJwyO6nx/zaUwajpuodp1O9UcezXAJfgc7L2V5OIj2JdEsBW+fy0xZjRNj J3APSz0KbEkG4DoDUNl53A== 0000917677-00-000044.txt : 20000428 0000917677-00-000044.hdr.sgml : 20000428 ACCESSION NUMBER: 0000917677-00-000044 CONFORMED SUBMISSION TYPE: S-6/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20000427 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: 333-34402 FILM NUMBER: 610758 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 SBVUL PROSPECTUS + As filed with the Securities and Exchange Commission on April 27, 2000. Registration No. 333-34402 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 Pre-Effective Amendment No. 1 ----------------- SECURITY LIFE SEPARATE ACCOUNT L1 (Exact Name of Trust) SECURITY LIFE OF DENVER INSURANCE COMPANY (Name of Depositor) 1290 Broadway Denver, Colorado 80203-5699 (Address of Depositor's Principal Executive Offices) Copy to: GARY W. WAGGONER, ESQ. KIMBERLY J. SMITH, ESQ. Security Life of Denver Insurance Company Sutherland Asbill & Brennan LLP 1290 Broadway 1275 Pennsylvania Avenue, NW Denver, Colorado 80203-5699 Washington, D.C. 20004-2415 (202) 383-0314 (Name and Address of Agent for Service) ---------------------------- Title of securities being registered: Strategic Benefit variable life insurance policies. Approximate date of proposed public offering: as soon as practicable after the effective date of this Registration Statement. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 333-34402) Cross-Reference Table Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 1, 2 Cover; Security Life of Denver Insurance Company; Security Life Separate Account L1 3 Inapplicable 4 Security Life of Denver Insurance Company 5, 6 Security Life Separate Account L1 7 Inapplicable 8 Financial Statements 9 Inapplicable 10(a), (b), (c), (d), (e) Policy Summary; Policy Values, Determining Values in the Variable Divisions; Charges and Deductions; Surrender; Partial Withdrawals; Guaranteed Interest Division; Transfers of Account Value; Right to Exchange Policy; Lapse; Reinstatement; Premiums 10(f) Voting Privileges; Right to Change Operations 10(g), (h) Right to Change Operations 10(i) Tax Considerations; Detailed Information about the Policy; General Policy Provisions; Guaranteed Interest Division 11, 12 Security Life Separate Account L1 13 Policy Summary; Charges and Deductions; and Group or Sponsored Arrangements, or Corporate Purchasers ii Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 14, 15 Policy Summary; Free Look Period; General Policy Provisions; Applying for a Policy 16 Premiums; Allocation of Net Premiums; How We Calculate Accumulation Unit Values 17 Premium Payments Affect Your Coverage; Surrender; Partial Withdrawals 18 Policy Summary; Tax Considerations; Detailed Information about the Policy; Security Life Separate Account L1; 19 Reports to Owners; Notification and Claims Procedures; Performance Information (Appendix B) 20 See 10(g) & 10(a) 21 Policy Loans 22 Policy Summary; Premiums; Grace Period; Security Life Separate Account L1; Detailed Information about the Policy 23 Inapplicable 24 Inapplicable 25 Security Life of Denver Insurance Company 26 Inapplicable 27, 28, 29, 30 Security Life of Denver Insurance Company 31, 32, 33, 34 Inapplicable 35 Inapplicable 36 Inapplicable iii Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 37 Inapplicable 38, 39, 40, 41(a) General Policy Provisions; Distribution of the Policies; Security Life of Denver Insurance Company 41(b), 41(c), 42, 43 Inapplicable 44 Determining Values in the Variable Divisions; How We Calculate Accumulation Unit Values 45 Inapplicable 46 Partial Withdrawals; Detailed Information about the Policy 47, 48, 49, 50 Inapplicable 51 Detailed Information about the Policy 52 Determining Values in the Variable Divisions; Right to Change Operations 53(a) Tax Considerations 53(b), 54, 55 Inapplicable 56, 57, 58 Inapplicable 59 Financial Statements iv Prospectus STRATEGIC BENEFIT LIFE INSURANCE A FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY issued by SECURITY LIFE OF DENVER INSURANCE COMPANY AND SECURITY LIFE SEPARATE ACCOUNT L1 Consider carefully the policy charges and deductions beginning on page 40 in this prospectus. You should read this prospectus and keep it for future reference. A prospectus for each underlying fund portfolio must accompany and should be read together with this prospectus. This policy is not available in all jurisdictions. This policy is not offered in any jurisdiction where this type of offering is not legal. Depending on the state where it is issued, policy features may vary. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. Replacing your existing life insurance policy(ies) with this policy may not be beneficial to you. YOUR POLICY o is a flexible premium variable universal life insurance policy o is issued by Security Life of Denver Insurance Company o is designed primarily for use on a multi-life basis when the insured people share a common employment or business relationship o is returnable by you during the free look period or right to examine policy period if you are not satisfied. YOUR POLICY PREMIUM PAYMENTS o are flexible, so the premium amount and frequency may vary o are allocated to variable investment options and the guaranteed interest division based on your instructions o are invested in shares of the underlying investment portfolios under each variable investment option o can be invested in up to eighteen investment options over the policy's lifetime. YOUR ACCOUNT VALUE o is the sum of your holdings in the variable division, the guaranteed interest division and the loan division o has no guaranteed minimum value under the variable division. The value varies with the value of the underlying investment portfolio o has a minimum guaranteed rate of return if you have an amount in the guaranteed interest division o is subject to specified expenses and charges. DEATH PROCEEDS o are paid if the policy is in force when the insured person dies o are equal to the death benefit minus an outstanding policy loan, accrued loan interest and unpaid charges incurred before the insured person dies o are calculated under your choice of options * Option 1- a fixed minimum death benefit * Option 2- a stated death benefit plus your account value * Option 3- a stated death benefit plus the sum of the premiums we receive minus partial withdrawals o are generally not federally income taxed if your policy continues to meet the federal income tax definition of life insurance. NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS LIFE INSURANCE POLICY IS NOT A BANK DEPOSIT OR OBLIGATION, FEDERALLY INSURED, OR BACKED BY ANY BANK OR GOVERNMENT AGENCY. DATE OF PROSPECTUS: MAY 1, 2000 ISSUED BY: Security Life of Denver UNDERWRITTEN BY: ING America Equities, Inc. Insurance Company 1290 Broadway Security Life Center Denver, CO 80203-5699 1290 Broadway (303) 860-2000 Denver, CO 80203-5699 (800) 525-9852 THROUGH ITS: Security Life Separate Account L1 ADMINISTERED BY: Customer Service Center P.O. Box 173888 Denver, CO 80217-3888 (800) 848-6362 - -------------------------------------------------------------------------------- Strategic Benefit 2 TABLE OF CONTENTS POLICY SUMMARY.................................................................4 Your Policy..............................................................4 Free Look Period.........................................................4 Your Premium Payments....................................................4 Charges and Deductions...................................................5 Guaranteed Interest Division.............................................6 Variable Division........................................................6 Policy Values............................................................8 Transfers of Account Value...............................................8 Special Policy Features..................................................8 Policy Modification, Termination and Continuation Features............................................................9 Death Benefits...........................................................9 Tax Considerations.......................................................9 INFORMATION ABOUT SECURITY LIFE, THE SEPARATE ACCOUNT AND THE INVESTMENT OPTIONS......................................................12 Security Life of Denver Insurance Company...............................12 Security Life Separate Account L1.......................................12 Investment Portfolio Objectives.........................................13 Guaranteed Interest Division............................................18 Maximum Number of Investment Options....................................19 DETAILED INFORMATION ABOUT THE POLICY..................................................................19 Applying for a Policy...................................................19 Temporary Insurance.....................................................19 Policy Issuance.........................................................19 Premiums................................................................20 Premium Payments Affect Your Coverage...................................21 Death Benefits..........................................................22 Adjustable Term Insurance Rider.........................................26 Special Features........................................................27 Policy Values...........................................................28 Transfers of Account Value..............................................29 Dollar Cost Averaging...................................................30 Automatic Rebalancing...................................................31 Policy Loans............................................................31 Partial Withdrawals.....................................................32 Lapse...................................................................34 Reinstatement...........................................................34 Surrender...............................................................34 General Policy Provisions...............................................35 Free Look Period...................................................35 Your Policy........................................................35 Guaranteed Issue...................................................35 Age ..............................................................35 Ownership..........................................................35 Beneficiary(ies)...................................................35 Collateral Assignment..............................................36 Incontestability...................................................36 Misstatements of Age or Gender.....................................36 Suicide............................................................36 Transaction Processing.............................................36 Notification and Claims Procedures.................................37 Telephone Privileges...............................................37 Non-participation..................................................37 Distribution of the Policies.......................................37 Advertising Practices and Sales Literature .............................................................37 Settlement Provisions..............................................38 Administrative Information About the Policy.............................38 CHARGES AND DEDUCTIONS........................................................40 Deductions from Premiums................................................40 Monthly Deductions from Account Value...................................41 Policy Transaction Fees.................................................42 Other Charges...........................................................43 Group or Sponsored Arrangements and Corporate Purchasers.........................................................43 TAX CONSIDERATIONS............................................................43 Tax Status of the Policy................................................43 Diversification Requirements............................................44 Tax Treatment of Policy Death Benefits..................................44 Modified Endowment Contracts............................................45 Multiple Policies.......................................................45 Distributions Other than Death Benefits from Modified Endowment Contracts.......................................45 Distributions Other than Death Benefits from Policies That Are Not Modified Endowment Contracts..........................................................45 Investment in the Policy................................................46 Policy Loans............................................................46 Section 1035 Exchanges..................................................46 Tax-exempt Policy Owners................................................46 Possible Tax Law Changes................................................46 Changes to Comply with the Law..........................................46 Other...................................................................47 ILLUSTRATIONS.................................................................48 ADDITIONAL INFORMATION........................................................54 Directors and Officers..................................................54 Regulation..............................................................55 Legal Matters...........................................................55 Legal Proceedings.......................................................55 Experts.................................................................55 Registration Statement..................................................55 FINANCIAL STATEMENTS..........................................................56 APPENDIX A...................................................................157 APPENDIX B...................................................................158 - -------------------------------------------------------------------------------- Strategic Benefit 3 POLICY SUMMARY YOUR POLICY This policy is available only to groups of ten or more insured people. This policy is for use on a multi-life basis where the insured people share a common employment or business relationship. The policy may be owned by an individual corporation, trust, association or similar entity. SEE POLICY ISSUANCE, PAGE 19. Your policy provides life insurance protection on the insured person. The policy includes the basic policy, applications, and riders or endorsements. As long as the policy remains in force, we pay a death benefit at the death of the insured person. While your policy is in force, you may access your policy value by taking loans or partial withdrawals. You may also surrender your policy for its surrender value. When the insured person reaches age 100 you may surrender the policy or continue it under the continuation of coverage option. SEE CONTINUATION OF COVERAGE, PAGE 27. Life insurance is not a short-term investment. You should evaluate your need for life insurance coverage and this policy's long-term investment potential and risks before purchasing a policy. FREE LOOK PERIOD Within limits specified by state law, you have the right to examine your policy and return it for a refund of all premiums we have received or the account value if you are not satisfied for any reason. The policy is then void. SEE FREE LOOK PERIOD, PAGE 34. YOUR PREMIUM PAYMENTS The policy is a flexible premium policy because the amount and frequency of the premium payments you make may vary within limits. You must make premium payments: o for us to issue your policy; and o sufficient to keep your policy in force. The amount of premium you pay affects the length of time your policy stays in force. SEE PREMIUMS, PAGE 20. ALLOCATION OF NET PREMIUMS This policy has premium-based charges which are subtracted from your payments. We add the balance, or the net premium, to your policy based on your investment instructions. You may allocate the net premium among one or more variable investment options and the guaranteed interest division. SEE ALLOCATION OF NET PREMIUMS, PAGE 21. The following table summarizes the policy charges and fees. For details on these charges, SEE CHARGES AND DEDUCTIONS, PAGE 40. - -------- This summary highlights some important points about your policy. The policy is more fully described in the attached, complete prospectus. Please read it carefully. "We," "us," "our" and the "company" refer to Security Life of Denver Insurance Company. "You" and "your" refer to the policy owner. The owner is the individual, entity, partnership, representative or party who may exercise all rights over the policy and receive the policy benefits during the insured people's lifetimes. State variations are covered in a special policy form used in that state. This prospectus provides a general description of the policy. Your actual policy and any riders are the controlling documents. If you would like to review a copy of the policy and riders, contact our customer service center or your agent/ registered representative. - -------------------------------------------------------------------------------- Strategic Benefit 4 CHARGES AND DEDUCTIONS
- ------------------------------------ ----------------------------- ------------------------------------------------- CHARGE WHEN DEDUCTED AMOUNT DEDUCTED ==================================== ============================= ================================================= Initial Sales Charge From each premium payment 0.5% of premium received in policy or segment received after the end of years 2 and later policy year one - ------------------------------------ ----------------------------- ------------------------------------------------- Tax Charges From each premium payment o 2.5% of premium up to target premium o State and local taxes received in the first policy or segment year. 2.5% of all premium payments in years 2 o Estimated federal tax and later treatment of deferred o 1.5% of premium up to target premium acquisition costs in the first policy or segment year. 1.5% of all premium payments in years 2 and later These charges are not guaranteed maximum rates. ==================================== ============================= ================================================= Mortality & Expense Risk Charge Monthly from account value o 0.07083% of the variable division account value during policy years 1 through 10 (equivalent annual rate of 0.85%) o 0.05000% of the variable division account value during policy years 11 through 20 (equivalent annual rate of 0.60%) o 0.00417% of the variable division account value during policy year 21 and later (equivalent annual rate of 0.05%) - ------------------------------------ ----------------------------- ------------------------------------------------- Monthly Administrative Charge Monthly from account value $12 per month for first policy year and $6 per month thereafter - ------------------------------------ ----------------------------- ------------------------------------------------- Cost of Insurance Charge Monthly from account value Varies based on net amount at risk. See your policy schedule pages ==================================== ============================= ================================================= Partial Withdrawal Fee On Transaction date from Up to $25 account value - ------------------------------------ ----------------------------- ------------------------------------------------- Transfer Fee On Transaction date from Twelve free transfers per policy year, then $10 account value per transfer - ------------------------------------ ----------------------------- ------------------------------------------------- Illustrations On Transaction date from One free illustration per policy year, then $25 account value per illustration - ------------------------------------ ----------------------------- ------------------------------------------------- Premium Allocation Change On Transaction date from Twelve free premium allocation changes per account value policy year, then $25 per change ==================================== ============================= ================================================= Deferred Sales Charge From account value at the o 1.75% of premium received in the first beginning of each policy or policy or segment year up to target premium segment year in years 2 through 8 o 1.60% of premium received in the first policy or segment year, in excess of target premium - -------------------------------------------------------------------------------- Strategic Benefit 5 - ------------------------------------ ----------------------------- ------------------------------------------------- CHARGE WHEN DEDUCTED AMOUNT DEDUCTED ==================================== ============================= ================================================= ==================================== ============================= ================================================= Continuation of Coverage Policy anniversary nearest One-time $200 administrative fee. younger insured person's 100th birthday from account value ==================================== ============================= ================================================= Investment Portfolio Expenses From portfolio assets, See detailed list on next page. included in daily unit value - ------------------------------------ ----------------------------- -------------------------------------------------
GUARANTEED INTEREST DIVISION The guaranteed interest division guarantees principal and is part of our general account. Amounts you direct into the guaranteed interest division are credited with interest at a fixed rate. SEE GUARANTEED INTEREST DIVISION, PAGE 18. VARIABLE DIVISION If you invest in the variable investment options, you may make or lose money depending on market conditions. The variable investment options are described in the prospectuses for the underlying investment portfolios. Each investment portfolio has its own investment objective. SEE OBJECTIVES OF THE INVESTMENT PORTFOLIOS, PAGE 13. The separate account purchases shares of the investment portfolios at net asset value. This price reflects investment management fees and other direct expenses that are deducted from the portfolio assets as described in the following table. The fees and expenses are shown in both gross amounts and net amounts shown after any expenses or fees have been voluntarily absorbed by the investment portfolio advisers. The information in this table was provided to us by the portfolios, and we have not independently verified it. These expenses are not direct charges against variable division assets or reductions from contract values; rather these expenses are included in computing each underlying portfolio's net asset value, which is the share price used to calculate the unit values of the variable investment options. For a more complete description of the portfolios' costs and expenses, see the prospectuses for the portfolios. - -------------------------------------------------------------------------------- Strategic Benefit 6 INVESTMENT PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)
Fees and Investment Total Expenses Total Net Management 12-b-1 Other Portfolio Waived or Portfolio Portfolio Fees Fees Expenses Expenses Reimbursed Expenses --------- ---- ---- -------- -------- ---------- -------- AIM VARIABLE INSURANCE FUNDS AIM V.I. Capital Appreciation Fund 0.62% NA 0.11% 0.73% NA 0.73% - --------------------------------------------------------------------------------------------------------------------------- AIM V.I. Government Securities Fund/1/ 0.50% NA 0.40% 0.90% NA 0.90% - --------------------------------------------------------------------------------------------------------------------------- THE ALGER AMERICAN FUND Alger American Small Capitalization 0.85% NA 0.05% 0.90% NA 0.90% Portfolio - --------------------------------------------------------------------------------------------------------------------------- FIDELITY VARIABLE INSURANCE PRODUCTS FUND VIP Growth Portfolio service class/2/ 0.58% 0.10% 0.09% 0.77% 0.02% 0.77% - --------------------------------------------------------------------------------------------------------------------------- VIP Overseas Portfolio service class/2/ 0.73% 0.10% 0.18% 1.01% 0.03% 1.01% - --------------------------------------------------------------------------------------------------------------------------- GCG TRUST/3/ Equity Income Portfolio 0.96% NA 0.00% 0.96% NA 0.96% - --------------------------------------------------------------------------------------------------------------------------- Growth Portfolio 1.04% NA 0.00% 1.04% NA 1.04% - --------------------------------------------------------------------------------------------------------------------------- Hard Assets Portfolio 0.96% NA 0.00% 0.96% NA 0.96% - --------------------------------------------------------------------------------------------------------------------------- Limited Maturity Bond Portfolio 0.56% NA 0.01% 0.57% NA 0.57% - --------------------------------------------------------------------------------------------------------------------------- Liquid Assets Money Market 0.56% NA 0.00% 0.56% NA 0.56% - --------------------------------------------------------------------------------------------------------------------------- Mid-Cap Growth Portfolio 0.91% NA 0.00% 0.91% NA 0.91% - --------------------------------------------------------------------------------------------------------------------------- Research Portfolio 0.91% NA 0.00% 0.91% NA 0.91% - --------------------------------------------------------------------------------------------------------------------------- Total Return Portfolio 0.91% NA 0.00% 0.91% NA 0.91% - --------------------------------------------------------------------------------------------------------------------------- INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund /4/ 0.75% NA 0.44% 1.19% 0.02% 1.17% - --------------------------------------------------------------------------------------------------------------------------- INVESCO VIF-High Yield Fund/5/ 0.60% NA 0.48% 1.08% 0.01% 1.07% - --------------------------------------------------------------------------------------------------------------------------- INVESCO VIF-Small Company Growth Fund /6/ 0.75% NA 3.35% 4.10% 2.39% 1.71% - --------------------------------------------------------------------------------------------------------------------------- MERRILL LYNCH Balanced Capital Focus Fund/7/ 0.60% NA 0.11% 0.71% NA 0.71% - --------------------------------------------------------------------------------------------------------------------------- Basic Value Focus Fund - class B share 0.60% 0.15% 0.06% 0.81% NA 0.81% - --------------------------------------------------------------------------------------------------------------------------- Global Growth Focus Fund/7/ 0.75% NA 0.12% 0.87% NA 0.87% - --------------------------------------------------------------------------------------------------------------------------- Index 500 Fund 0.30% NA 0.05% 0.35% NA 0.35% - --------------------------------------------------------------------------------------------------------------------------- Small Cap Value Focus Fund - class B share 0.75% 0.15% 0.06% 0.96% NA 0.96% - --------------------------------------------------------------------------------------------------------------------------- VAN ECK WORLDWIDE INSURANCE TRUST Worldwide Bond Fund 1.00% NA 0.22% 1.22% NA 1.22% - --------------------------------------------------------------------------------------------------------------------------- Worldwide Emerging Markets Fund/8/ 1.00% NA 0.54% 1.54% 0.20% 1.34% - --------------------------------------------------------------------------------------------------------------------------- Worldwide Real Estate Fund/9/ 1.00% NA 2.23% 3.23% 1.79% 1.44% - --------------------------------------------------------------------------------------------------------------------------- SECURITY LIFE OF DENVER INSURANCE COMPANY Guaranteed Interest Division NA NA NA NA NA NA
/1/ Included in "Other Expenses" of the AIM V.I. Government Securities Portfolio is 0.10% of interest expense. - -------------------------------------------------------------------------------- Strategic Benefit 7 /2/ Each Fidelity Service class fund currently pays .10% of its average net assets as a 12-b-1 fee. This fee could vary; but cannot exceed .25%. The total Net Portfolio Expenses presented are before Fidelity absorbed a portion of the portfolio and custodian expenses for some portfolios with brokerage commissions and uninvested cash balances. After the fee absorption, the total net portfolio expenses would be 0.75% for the VIP Growth Portfolio and 0.98% for the VIP Overseas Portfolio. /3/ The GCG Trust pays Directed Services Inc. ("DSI") a monthly management fee based on the annual rates of the average daily net assets of the investment portfolios. DSI in turn pays the portfolio managers monthly fees for managing the assets of the portfolios. /4/ INVESCO absorbed a portion of VIF-Equity Income Fund's "Other Expenses" and "Total Portfolio Expenses." After this absorption, these expenses are 0.42% and 1.17% respectively. /5/ INVESCO absorbed a portion of VIF-High Yield Fund's "Other Expenses" and "Total Portfolio Expenses." After this absorption, these expenses are 0.47% and 1.07% respectively. /6/ INVESCO absorbed a portion of VIF-Small Company Growth Fund's "Other Expenses" and "Total Portfolio Expenses" After this absorption, these expenses were 0.95% and 1.706% respectively. /7/ Expenses are annualized. /8/ Van Eck Associates Corporation absorbed expenses exceeding 1.30% of the Fund's average daily assets, effective May 13, 1999. /9/ Van Eck Associates Corporation absorbed certain expenses exceeding 1.50%. The Fund's expenses were also reduced by a fee arrangement based on cash balances left on deposit with the custodian and a directed brokerage arrangement where the fund directs certain portfolio trades to a broker that, in turn, pays a portion of the fund's expenses. POLICY VALUES Your account value is the amount you have in the guaranteed interest division, plus the amount you have in each variable investment option. If you have an outstanding policy loan, your account value includes the amount in the loan division. SEE POLICY VALUES, PAGE 8. YOUR ACCOUNT VALUE IN THE VARIABLE DIVISION Accumulation units are the way we measure value in the variable division. Accumulation unit value is the value of a unit of a variable investment option on a valuation date. Each variable investment option has a different accumulation unit value. SEE DETERMINING THE VALUE IN THE VARIABLE DIVISION, PAGE 28. The accumulation unit value for each variable investment option reflects the investment performance of the underlying investment portfolio during the valuation period. Each accumulation unit value reflects asset-based charges under the policy and the expenses of the investment portfolios. SEE DETERMINING THE VALUE IN THE VARIABLE DIVISION, PAGE 28 AND HOW WE CALCULATE ACCUMULATION UNIT VALUES, PAGE 29. TRANSFERS OF ACCOUNT VALUE You may make twelve free transfers among the variable investment options or to the guaranteed interest division each policy year. We charge $10 for each transfer over twelve you make in a policy year. There are restrictions on transfers from the guaranteed interest division. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 29. SPECIAL POLICY FEATURES DESIGNATED DEDUCTION OPTION You may designate one investment option from which we will deduct all your monthly and deferred sales charges. SEE DESIGNATED DEDUCTION OPTION, PAGE 27. DOLLAR COST AVERAGING Dollar cost averaging is a systematic plan of transferring account values to selected investment options. It is intended to protect your policy's value from short-term price fluctuations. However, dollar cost averaging does not assure a profit, nor does it protect against a loss in a declining market. Dollar cost averaging is free. SEE DOLLAR COST AVERAGING, PAGE 30. AUTOMATIC REBALANCING Automatic rebalancing periodically reallocates your net account value among your selected investment options to maintain your specified distribution of account value among those investment options. Automatic rebalancing is free. SEE AUTOMATIC REBALANCING, PAGE 31. - -------------------------------------------------------------------------------- Strategic Benefit 8 LOANS You may take a loan against your policy's net account value. We charge an annual loan interest rate of 3.25%. We credit an annual interest rate of 3% on amounts held in the loan division as collateral for your loan. A loan may have tax consequences. SEE POLICY LOANS, PAGE 31 AND TAX CONSIDERATIONS, PAGE 43. PARTIAL WITHDRAWALS You may withdraw part of your net account value any time after your first policy year. You may make only one partial withdrawal per policy year. Partial withdrawals may reduce your policy's death benefit and will reduce your account value. Partial withdrawals may have tax consequences. SEE PARTIAL WITHDRAWALS, PAGE 32 AND TAX CONSIDERATIONS, PAGE 43. POLICY MODIFICATION, TERMINATION AND CONTINUATION FEATURES RIGHT TO EXCHANGE POLICY For 24 months after the policy date you may exchange your policy for a guaranteed policy, unless state law requires differently. There is no charge for this exchange. SEE RIGHT TO EXCHANGE POLICY, PAGE 27. SURRENDER You may surrender your policy for its surrender value at any time while the insured person is living. All insurance coverage ends on the date we receive your request. SEE SURRENDER, PAGE 34. LAPSE In general, insurance coverage continues as long as your policy's net account value is enough to pay the monthly deductions. SEE LAPSE, PAGE 33. REINSTATEMENT You may reinstate your policy and rider within five years of its lapse if you still own the policy and the insured person is still insurable. You will need to pay required reinstatement premiums. If you had a policy loan when coverage ended, we will reinstate it with accrued loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 34. POLICY MATURITY If the insured person is living on the policy anniversary nearest the date when the insured person reaches age 100 (the maturity date) and you do not choose continuation of coverage, you must surrender your policy and we will pay the net account value. Your policy then ends. SEE POLICY MATURITY, PAGE 27. CONTINUATION OF COVERAGE If the insured person is living at age 100 and the policy is in force, you may choose the continuation of coverage feature. If this feature becomes effective, we will deduct a one-time administrative fee of $200 and keep your policy in force. SEE CONTINUATION OF COVERAGE, PAGE 27. DEATH BENEFITS After the insured person's death, we pay death proceeds to the beneficiary(ies) if your policy is still in force. Depending on the death benefit option you have chosen and whether or not you have coverage under an adjustable term insurance rider, your policy's death benefit may vary. Generally, we require a minimum target death benefit of $50,000 per policy. SEE DEATH BENEFITS, PAGE 22. TAX CONSIDERATIONS Under current federal income tax law, death benefits of life insurance policies generally are not subject to income tax. In order for this treatment to apply, the policy must qualify as a life insurance contract. We believe it is reasonable to conclude that the policy will qualify as a life insurance contract. SEE TAX STATUS OF THE POLICY, PAGE 43. Assuming the policy qualifies as a life insurance contract, under current federal income tax law, your account value earnings are generally not subject to income tax as long as they remain within your policy. However depending on circumstances, the following events may cause taxable consequences for you: o partial withdrawals; o surrender; or o lapse. - -------------------------------------------------------------------------------- Strategic Benefit 9 In addition to the events listed above, if your policy is a modified endowment contract, a loan against or secured by the policy may cause income taxation. A penalty tax may be imposed on a distribution from a modified endowment contract as well. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 45. In recent years, Congress has adopted new rules relating to life insurance owned by businesses. Any business contemplating the purchase of a new policy or a change in an existing policy should consult a tax adviser. You should consult a qualified legal or tax adviser before you purchase your policy. - -------------------------------------------------------------------------------- Strategic Benefit 10 HOW THE POLICY WORKS YOUR PREMIUM You make a premium ----------------------------> payment o initial sales charge o tax charges <---------------------------- NET PREMIUM We allocate the net premium to the investment options you choose | | ----------------------------------------- | | \/ \/ GUARANTEED VARIABLE INVESTMENT INVESTMENT PORTFOLIOS The investment INTEREST DIVISION OPTIONS The variable investment manager deducts Amounts you allocate Amounts you allocate are <-- options invest in investment are held in our general account held in our separate account --> investment portfolios ------> management fees | | and other ----------------------------------------- portfolio expenses | | LAON DIVISION | Amount set aside to <-------------| Monthly Deductions o cost of insurance secure a policy loan | ---------------------> charge | | o monthly administrativ | | charge \/ | o mortality and expense ACCUMULATED VALUE | risk charge The total value of your --| policy | | | Transaction Fees o partial withdrawal fee |---------------------> o transfer fee | o illustration fee | o premium allocation | change charge | o continuation of | coverage administrative fee | | | | | | Annual Fee ---------------------> o deferred sales charge Years 2 - 8
- -------------------------------------------------------------------------------- Strategic Benefit 11 INFORMATION ABOUT SECURITY LIFE, THE SEPARATE ACCOUNT AND THE INVESTMENT OPTIONS SECURITY LIFE OF DENVER INSURANCE COMPANY Security Life of Denver Insurance Company ("Security Life") is a stock life insurance company organized under the laws of the State of Colorado in 1929. Our headquarters are located at 1290 Broadway, Denver, Colorado 80203-5699. We are admitted to do business in the District of Columbia and all states except New York. At the close of 1999, the company and its consolidated subsidiaries had over $184.2 billion of life insurance in force. As of December 31, 1999, our total assets were over $11.3 billion, and our shareholder's equity was over $899 million. We have a complete line of life insurance products, including: o annuities; o individual life; o group life; o pension products; and o market life reinsurance. Security Life is a wholly owned indirect subsidiary of ING Groep, N.V. ("ING"). ING is one of the world's three largest diversified financial services organizations. ING is headquartered in Amsterdam, The Netherlands. It has consolidated assets over $495 billion on a Dutch (modified U.S.) generally accepted accounting principles basis, as of December 31, 1999. The principal underwriter and distributor for our policies is ING America Equities, Inc. ING America Equities is a stock corporation organized under the laws of the State of Colorado in 1993. It is a wholly owned subsidiary of Security Life and is a registered broker-dealer with the SEC and the NASD. ING America Equities, Inc. is located at 1290 Broadway, Denver, Colorado 80203-5699. SECURITY LIFE SEPARATE ACCOUNT L1 SEPARATE ACCOUNT STRUCTURE We established Security Life Separate Account L1 (the "separate account") on November 3, 1993, under Colorado's insurance law. It is a unit investment trust, registered with the SEC under the Investment Company Act of 1940. The SEC does not supervise our management of the separate account or Security Life. The separate account is used to support our variable life insurance policies and for other purposes allowed by law and regulation. We may offer other variable life insurance contracts with different benefits and charges that invest in the separate account. We do not discuss these contracts in this prospectus. The separate account may invest in other securities not available for the policy described in this prospectus. The company owns all the assets in the separate account. We credit gains to and charge losses against the separate account without regard to performance of other investment accounts. ORDER OF SEPARATE ACCOUNT LIABILITIES State law provides that we may not charge general account liabilities against the separate account's assets equal to its reserves and other liabilities. This means that if we ever became insolvent, the separate account assets will be used first to pay separate account policy claims. Only if separate account assets remain after these claims have been satisfied can these assets be used to pay other policy owners and creditors. The separate account may have liabilities from assets credited to other variable life policies offered by the separate account. If the assets of the separate account are greater than required reserves and policy liabilities, we may transfer the excess to our general account. INVESTMENT OPTIONS Investment options include the variable and the guaranteed interest divisions, but not the loan division. The separate account has several variable investment options which invest in shares of underlying investment portfolios. The investment performance of a policy depends on the performance of the investment portfolios you choose. - -------------------------------------------------------------------------------- Strategic Benefit 12 INVESTMENT PORTFOLIOS Each of the investment portfolios is a separate series of an open-end management investment company. The investment company receives investment advice from a registered investment adviser who, other than the GCG Trust, is not associated with us. The investment portfolios sell shares to separate accounts of insurance companies. These insurance companies may or may not be affiliated with us. This is known as "shared funding." Investment portfolios may sell shares as the underlying investment for both variable annuity and variable life insurance contracts. This process is known as "mixed funding." The investment portfolios may sell shares to certain qualified pension and retirement plans that qualify under Section 401 of the Internal Revenue Code ("IRC"). As a result, a material conflict of interest may arise between insurance companies, owners of different types of contracts and retirement plans, or their participants. If there is a material conflict, we will consider what should be done, including removing the investment portfolio from the separate account. There are certain risks with mixed and shared funding, and with selling shares to qualified pension and retirement plans. See the investment portfolios' prospectuses. INVESTMENT PORTFOLIO OBJECTIVES Each investment portfolio has a different investment objective that it tries to achieve by following its own investment strategy. The objectives and policies of each investment portfolio affect its return and its risks. With this prospectus, you must receive the current prospectus for each investment portfolio. We summarize the investment objectives for each investment portfolio here. You should read each investment portfolio prospectus. Certain investment portfolios offered under this policy have investment objectives and policies similar to other funds managed by the portfolio's investment adviser. The investment results of a portfolio may be higher or lower than those of other funds managed by the same adviser. There is no assurance, and no representation is made, that the investment results of any investment portfolio will be comparable to those of another fund managed by the same investment adviser. Some investment portfolio advisers (or their affiliates) may pay us compensation for distribution, servicing or administration expenses. These advisers include AIM Advisors, Inc.; Fidelity Management & Research Company; Fred Alger Management, Inc.; Directed Services, Inc.; INVESCO Funds Group, Inc. Merrill Lynch Asset Management, L.P. and Van Eck Associates Corporation. The amount of compensation is usually based on the aggregate assets of the investment portfolio from contracts that we issue or administer. Some advisers, including our affiliates, may pay us more than others. - -------------------------------------------------------------------------------- Strategic Benefit 13
- ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT PORTFOLIOS' OBJECTIVES - ------------------------------------ ------------------------------ ---------------------------------------------------------- Variable Investment Option Investment Company/ Adviser/ Investment Objective and/or Principal Investment Strategy Manager/ Sub-Adviser - ------------------------------------ ------------------------------ ---------------------------------------------------------- AIM V.I. Capital Appreciation Fund Investment Company: Seeks growth of capital through investment in common AIM Variable Insurance Funds stocks. Investment Adviser: A I M Advisors, Inc. - ------------------------------------ ------------------------------ ---------------------------------------------------------- AIM V.I. Government Securities Fund Investment Company: Seeks to achieve high current income consistent with AIM Variable Insurance Funds reasonable concern for safety of principal. Investment Adviser: A I M Advisors, Inc. - ------------------------------------ ------------------------------ ---------------------------------------------------------- Alger American Small Capitalization Investment Company: Seeks long-term capital appreciation by focusing on Portfolio The Alger American Fund small, fast-growing companies that offer innovative Investment Adviser: products, services or technologies to a rapidly Fred Alger Management, Inc. expanding marketplace. Under normal circumstances, the portfolio invests primarily in the equity securities of small capitalization companies. A small capitalization company is one that has a market capitalization within the range of the Russell 2000 Growth Index or the S&P SmallCap 600 Index. - ------------------------------------ ------------------------------ ---------------------------------------------------------- VIP Growth Portfolio Investment Company: Fidelity Seeks capital appreciation by investing in common stocks Variable Insurance Products of companies that it believes have above-average growth Fund potential, either domestic or foreign issuers. Investment Manager: Fidelity Management & Research Company - ------------------------------------ ------------------------------ ---------------------------------------------------------- VIP Overseas Portfolio Investment Company: Fidelity Seeks long-term growth of capital by investing at least Variable Insurance Products 65% of total assets in foreign securities. Fund Investment Manager: Fidelity Management & Research Company - ------------------------------------ ------------------------------ ---------------------------------------------------------- Equity Income Portfolio Investment Company: Seeks substantial dividend income as well as long-term GCG Trust growth of capital. Invests primarily in common stocks Investment Manager: of well established companies paying above-average Directed Services, Inc. dividends. Portfolio Manager: T. Rowe Price Associates, Inc. - ------------------------------------ ------------------------------ ---------------------------------------------------------- - -------------------------------------------------------------------------------- Strategic Benefit 14 - ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT PORTFOLIOS' OBJECTIVES - ------------------------------------ ------------------------------ ---------------------------------------------------------- Variable Investment Option Investment Company/ Adviser/ Investment Objective and/or Principal Investment Strategy Manager/ Sub-Adviser - ------------------------------------ ------------------------------ ---------------------------------------------------------- Growth Portfolio Investment Company: Seeks capital appreciation. Invests primarily in common GCG Trust stocks of growth companies that have favorable Investment Manager: relationships between price/earnings ratios and growth Directed Services, Inc. rates in sectors offering the potential for Portfolio Manager: above-average returns. Janus Capital Corporation - ------------------------------------ ------------------------------ ---------------------------------------------------------- Hard Assets Portfolio Investment Company: Seeks long-term capital appreciation. Invests primarily GCG Trust in hard asset securities. Hard asset companies produce Investment Manager: a commodity. Directed Services, Inc. Portfolio Manager: Baring International Investment Limited (an affiliate) - ------------------------------------ ------------------------------ ---------------------------------------------------------- Limited Maturity Bond Portfolio Investment Company: Seeks highest current income consistent with low risk to GCG Trust principal and liquidity. Also seeks to enhance its Investment Manager: total return through capital appreciation when market Directed Services, Inc. factors, such as falling interest rates and rising bond Portfolio Manager: prices, indicate that capital appreciation may be ING Investment Management, available without significant risk to principal. L.L.C. Invests primarily in diversified limited maturity debt (an affiliate) securities with average maturity dates of five years or shorter and generally no more than seven years. - ------------------------------------ ------------------------------ ---------------------------------------------------------- Liquid Asset Portfolio Investment Company: Seeks high level of current income consistent with the GCG Trust preservation of capital and liquidity. An investment in Investment Manager: the Fund is not insured or guaranteed by the Federal Directed Services, Inc. Deposit Insurance Corporation or any other government Portfolio Manager: agency. Although the Fund seeks to preserve the value ING Investment Management, of your investment at $1.00 per share, it is possible to LLC lose money by investing in the Fund. (an affiliate) - ------------------------------------ ------------------------------ ---------------------------------------------------------- Mid-Cap Growth Portfolio Investment Company: Seeks long-term growth of capital. Invests primarily in GCG Trust equity securities of companies with medium market Investment Manager: capitalization which the portfolio manager believes have Directed Services, Inc. above-average growth potential. Portfolio Manager: Massachusetts Financial Services Company - ------------------------------------ ------------------------------ ---------------------------------------------------------- - -------------------------------------------------------------------------------- Strategic Benefit 15 - ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT PORTFOLIOS' OBJECTIVES - ------------------------------------ ------------------------------ ---------------------------------------------------------- Variable Investment Option Investment Company/ Adviser/ Investment Objective and/or Principal Investment Strategy Manager/ Sub-Adviser - ------------------------------------ ------------------------------ ---------------------------------------------------------- GCG Trust Invests 80% in common stocks or securities convertible Investment Manager: into common stocks of companies believed to have better Directed Services, Inc. than average prospects for long-term growth, expected Portfolio Manager: earnings or cash flow. Massachusetts Financial Services Company - ------------------------------------ ------------------------------ ---------------------------------------------------------- Total Return Portfolio Investment Company: Seeks above-average income (compared to a portfolio GCG Trust entirely invested in equity securities) consistent with Investment Manager: the prudent employment of capital. Invests primarily in Directed Services, Inc. a combination of equity and fixed income securities. Portfolio Manager: Massachusetts Financial Services Company - ------------------------------------ ------------------------------ ---------------------------------------------------------- VIF-Equity Income Fund Investment Company: INVESCO Seeks high current income, with growth of capital as a Variable Investment Funds, secondary objective by investing at least 65% of its Inc. assets in dividend-paying common and preferred stocks. Investment Adviser: The rest of the fund's assets are invested in debt INVESCO Funds Group, Inc. securities, and lower-grade debt securities. Sub-Advisor: INVESCO Capital Management, Inc. - ------------------------------------ ------------------------------ ---------------------------------------------------------- VIF-High Yield Fund Investment Company: INVESCO Seeks to provide a high level of current income by Variable Investment Funds, investing substantially all of its assets in lower-rated Inc. debt securities and preferred stock, including Investment Manager: securities issued by foreign companies. INVESCO Funds Group, Inc. Sub-Advisor: INVESCO Capital Management, Inc. - ------------------------------------ ------------------------------ ---------------------------------------------------------- VIF-Small Company Growth Fund Investment Company: INVESCO Seeks long-term capital growth by investing at least 65% Variable Investment Funds, of its assets in equity securities of companies with Inc. market capitalizations of $2 billion or less. The Investment Manager: remainder of the fund's assets can be invested in a wide INVESCO Funds Group, Inc. range of securities that may or may not be issued by Sub-Advisor: small companies. INVESCO Capital Management, Inc. - ------------------------------------ ------------------------------ ---------------------------------------------------------- - -------------------------------------------------------------------------------- Strategic Benefit 16 - ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT PORTFOLIOS' OBJECTIVES - ------------------------------------ ------------------------------ ---------------------------------------------------------- Variable Investment Option Investment Company/ Adviser/ Investment Objective and/or Principal Investment Strategy Manager/ Sub-Adviser - ------------------------------------ ------------------------------ ---------------------------------------------------------- Research Portfolio Investment Company: Seeks long-term growth of capital and future income. Basic Value Focus Investment Company: Merrill Seeks capital appreciation and, secondarily, income by Lynch Variable Series Funds, investing in securities, primarily equities, that Inc. management of the Fund believes are undervalued and Investment Adviser: therefore represent basic investment value. The Fund Merrill Lynch Asset seeks special opportunities in securities that are Management, L.P. selling at a discount either from book value or historical price-earnings ratios, or seem capable of recovering from temporarily out-of-favor considerations. Particular emphasis is placed on securities which provide an above-average dividend return and sell at a below-average price/earnings ratio. - ------------------------------------ ------------------------------ ---------------------------------------------------------- Balanced Capital Focus Investment Company: Merrill Seeks to achieve the highest total investment return Lynch Variable Series Funds, consistent with prudent risk. To do this, management of Inc. the Fund uses a flexible "fully managed" investment Investment Adviser: policy that shifts the emphasis among equity, debt Merrill Lynch Asset (including money market), and convertible securities. Management, L.P. - ------------------------------------ ------------------------------ ---------------------------------------------------------- Global Growth Focus Investment Company: Merrill Seeks long-term growth of capital. The Fund invests in a Lynch Variable Series Funds, diversified portfolio of equity securities of issuers Inc. located in various countries and the United States, Investment Adviser: placing particular emphasis on companies that have Merrill Lynch Asset exhibited above-average growth rates in earnings. Management, L.P. Because a substantial portion of the Fund's assets may be invested on an international basis, contract owners should be aware of certain risks, such as fluctuations in foreign exchange rates, future political and economic developments, different legal systems, and the possible imposition of exchange controls or other foreign government laws or restrictions. An investment in the Fund may be appropriate only for long-term investors who can assume the risk of loss of principal, and do not seek current income. - ------------------------------------ ------------------------------ ---------------------------------------------------------- Index 500 Investment Company: Merrill Seeks investment results that, before expenses, Lynch Variable Series Funds, correspond to the aggregate price and yield performance Inc. of the Standard & Poor's 500 Composite Stock Price Index Investment Adviser: (the "S&P 500 Index"). Merrill Lynch Asset Management, L.P. - ------------------------------------ ------------------------------ ---------------------------------------------------------- Small Cap Value Focus Investment Company: Merrill Seeks long-term growth of capital by investing in a Lynch Variable Series Funds, diversified portfolio of securities, primarily common Inc. stocks, of relatively small companies that management of Investment Adviser: the Merrill Variable Funds believes have special Merrill Lynch Asset investment value, and of emerging growth companies Management, L.P. regardless of size. Companies are selected by management on the basis of their long-term potential for expanding their size and profitability or for gaining increased market recognition for their securities. Current income is not a factor in the selection of securities. - ------------------------------------ ------------------------------ ---------------------------------------------------------- - -------------------------------------------------------------------------------- Strategic Benefit 17 - ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT PORTFOLIOS' OBJECTIVES - ------------------------------------ ------------------------------ ---------------------------------------------------------- Variable Investment Option Investment Company/ Adviser/ Investment Objective and/or Principal Investment Strategy Manager/ Sub-Adviser - ------------------------------------ ------------------------------ ---------------------------------------------------------- Worldwide Bond Fund Investment Company: Seeks high total return--income plus capital Van Eck Worldwide Insurance appreciation--by investing globally, primarily in a Trust variety of debt securities. Investment Adviser and Manager: Van Eck Associates Corporation - ------------------------------------ ------------------------------ ---------------------------------------------------------- Worldwide Emerging Markets Fund Investment Company: Seeks long-term capital appreciation by investing in Van Eck Worldwide Insurance equity securities in emerging markets around the world. Trust Investment Adviser and Manager: Van Eck Associates Corporation - ------------------------------------ ------------------------------ ---------------------------------------------------------- Worldwide Real Estate Fund Investment Company: Seeks high total return by investing in equity Van Eck Worldwide Insurance securities of companies that own significant real estate Trust or that principally do business in real estate. Investment Adviser and Manager: Van Eck Associates Corporation - ------------------------------------ ------------------------------ ----------------------------------------------------------
GUARANTEED INTEREST DIVISION You may allocate all or a part of your net premium and transfer your net account value into the guaranteed interest division. The guaranteed interest division guarantees principal and is part of our general account. It pays interest at a fixed rate that we declare. The general account contains all of our assets other than those held in the separate account (variable investment options) or other separate accounts. The general account supports our non-variable insurance and annuity obligations. We have not registered interests in the guaranteed interest division under the Securities Act of 1933. Also, we have not registered the guaranteed interest division or the general account as an investment company under the Investment Company Act of 1940 (because of exemptive and exclusionary provisions). This means that the general account, the guaranteed interest division and its interests are generally not subject to regulation under these Acts. The SEC staff has not reviewed the disclosures in this prospectus relating to the general account and the guaranteed interest division. These disclosures, however, may be subject to certain requirements of the federal securities law regarding accuracy and completeness of statements made. The amount you have in the guaranteed interest division is all of the net premium you allocate to that division, plus transfers you make to the guaranteed interest division, plus interest earned. Amounts you transfer out of or withdraw from the guaranteed interest division reduce this amount. It is also reduced by deductions for charges from your account value allocated to the guaranteed interest division. We declare the interest rate that applies to all amounts in the guaranteed interest division. This interest rate is never less than the minimum guaranteed interest rate of 3% and will be in effect for at least twelve months. Interest compounds daily at an effective annual rate that equals the declared - -------------------------------------------------------------------------------- Strategic Benefit 18 rate. We credit interest to the guaranteed interest division on a daily basis. We pay interest regardless of the actual investment performance of our account. We bear all of the investment risk for the guaranteed interest division. MAXIMUM NUMBER OF INVESTMENT OPTIONS You may invest in a total of eighteen investment options over the life of your policy. Investment options include the guaranteed interest division, all of the variable investment options, but not the loan division. As an example, if you have had funds in seventeen variable investment options and the guaranteed interest division, these are the only investment options to which you may later add or transfer funds. However, you could still take a policy loan and access the loan division. You may want to use fewer investment options in the early years of your policy, so that you can invest in other investment options in later years. If you invest in eighteen variable investment options, you will not be able to invest in the guaranteed interest division. DETAILED INFORMATION ABOUT THE POLICY This prospectus describes our standard Strategic Benefit variable universal life insurance policy. There may be differences in the policy because of state requirements where we issue your policy. We will describe any such differences in your policy. The illustrations beginning on page 50 show how the policies work. APPLYING FOR A POLICY You purchase this variable universal life policy by submitting an application. The insured person is the person on whose life we issue a policy and upon whose death we pay death proceeds. On the policy date, the insured person must be at least 15 years of age and no older than age 85. We may back-date the policy up to six months to allow the insured person to give proof of a younger age for the purposes of your policy. SEE AGE, PAGE 35. TEMPORARY INSURANCE If you apply and qualify, we may issue temporary insurance in an amount equal to the face amount of insurance for which you applied. The maximum amount of temporary insurance for binding limited life insurance coverage is $3 million, which includes other in-force coverage you may have with us. Temporary coverage begins when: o you have completed and signed our binding limited life insurance coverage form and o we receive and accept a premium payment of at least your scheduled premium (selected on your application) and o part I of the application is complete. Temporary coverage ends on the earliest of: o the date we return your premium payments or o five days after we mail notice of termination to the address on your application or o the date your policy coverage starts or o the date we refuse to issue a policy based on your application or o 90 days after you sign our binding limited life insurance coverage form. There is no death benefit under the temporary insurance agreement if: o there is a material misrepresentation in your answers on the binding limited life insurance coverage form or o there is a material misrepresentation in statements on your application or o the person or persons intended to be the insured people die by suicide or self-inflicted injury or o the bank does not honor your premium check. POLICY ISSUANCE Before we issue a policy we require satisfactory evidence of insurability of the insured person and payment of your initial premium. This evidence may include completion of underwriting and issue requirements. The policy date shown on your policy schedule - -------------------------------------------------------------------------------- Strategic Benefit 19 determines: o monthly processing dates. o policy months. o policy years. o policy anniversaries. It is not affected by the date you receive the policy. The policy date may be different from the date we receive your first premium payment. If the policy date is earlier, we charge monthly deductions from the policy date unless specified otherwise in your contract. The policy date is determined one of three ways: 1. the date you designate on your application, subject to our approval; or 2. the back-date of the policy to save age, subject to our approval and state law; or 3. If there is no designated date or back-date, the policy date is: o the date all underwriting and administrative requirements have been met if we receive your initial premium before we issue your policy; or o the date we receive your initial premium if it is after we approve your policy for issue. DEFINITION OF LIFE INSURANCE The federal income tax definition of life insurance for this policy is the cash value accumulation test. SEE TAX STATUS OF THE POLICY, PAGE 43. PREMIUMS You may choose the amount and frequency of premium payments, within limits. We consider payments we receive to be premium payments if you do not have an outstanding policy loan and your policy is not in the continuation of coverage period. After we deduct certain charges from your premium payment, we add the remaining net premium to your policy. SCHEDULED PREMIUMS Your premiums are flexible. You may select your scheduled (planned) premium (within our limits) when you apply for your policy. The scheduled premium, shown in your policy and schedule, is the amount you choose to pay over a stated time period. THIS AMOUNT MAY OR MAY NOT BE ENOUGH TO KEEP YOUR POLICY IN FORCE. You may receive premium reminder notices for the scheduled premium on a quarterly, semiannual or annual basis. You are not required to pay the scheduled premium. You may choose to pay your premium by electronic funds transfer each month. This payment method is not available for your initial premium. Your financial institution may charge for this service. You can change the amount of your scheduled premium within our minimum and maximum limits at any time. If you fail to pay your scheduled premium or if you change the amount of your scheduled premium, your policy performance will be affected. UNSCHEDULED PREMIUM PAYMENTS Generally speaking, you may make unscheduled premium payments at any time, however: o we may limit the amount of your unscheduled premium payments that would result in an increase in the base death benefit amount required by the federal income tax law definition of life insurance. We may require satisfactory evidence that the insured person is insurable at the time of your unscheduled payment if the death benefit is increased as a result of it; o we may require proof that the insured person is insurable if your unscheduled premium payment will cause the net amount at risk to increase; and o we will return premium payments which are greater than the "seven-pay" limit for your policy if they would cause your policy to become a modified endowment contract, unless you have acknowledged in writing the new modified endowment contract status for your policy. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 45 AND CHANGES TO COMPLY WITH THE LAW, PAGE 46. If you have an outstanding policy loan and you make an unscheduled payment, we will consider it a loan repayment, unless you tell us otherwise. If your payment is a loan repayment, we do not deduct tax or sales charges. TARGET PREMIUM - -------------------------------------------------------------------------------- Strategic Benefit 20 Target premium is not based on your scheduled premium. Target premium is actuarially determined based on the age, gender, rating and premium class of the insured person. The target premium is used in determining your initial sales charge, deferred sales charge and the sales compensation we pay. It may or may not be enough to keep your policy in force. You are not required to pay the target premium and there is no penalty for paying more or less. The target premium for your policy and additional segments are listed in the policy schedule we provide to you. SEE PREMIUMS, PAGE 20. INVESTMENT DATE AND ALLOCATION OF NET PREMIUMS The net premium is the balance remaining after we deduct tax and sales charges from your premium payment. Insurance coverage does not begin until we receive your initial premium. Your initial premium is the first premium we receive and apply to your policy. It must be at least the amount of your scheduled premiums from your policy date through your investment date. The investment date is the first date we apply net premium to your policy. We apply the initial net premium to your policy after: a) we have received the required amount of premium; and b) all issue requirements have been received by our customer service center; and c) we have approved your policy for issue. Amounts you designate for the guaranteed interest division will be allocated to that division on the investment date. If your state requires return of your premium during the free look period, we initially invest amounts you have designated for the variable division in the GCG Trust Liquid Asset Portfolio. We later transfer these amounts from the Liquid Asset Portfolio to your selected variable investment options, based on your most recent premium allocation instructions, at the earlier of the following dates: o five days after we mailed your policy plus your state free look period has ended; or o we have received a policy delivery receipt showing you have received your policy plus your state free look period has ended. If your state provides for return of account value during the free look period (or no free look period), we invest amounts you designated for the variable division directly into your selected variable investment options. We allocate all later premium payments to your policy on the valuation date of receipt. We use your most recent premium allocation instructions. Your instructions must specify percentages that are whole numbers totaling 100% and which use no more than eighteen investment options over the life of your policy. SEE MAXIMUM NUMBER OF INVESTMENT DIVISIONS, PAGE 19. You may make twelve free premium allocation changes per year. After the twelve free premium allocation changes, we charge you $25 for each additional allocation change per policy year. If you change your designated deduction option, we consider it a premium allocation change for which there may be a charge. SEE DESIGNATED DEDUCTION OPTION, PAGE 27 AND POLICY TRANSACTION FEES, PAGE 42. PREMIUM PAYMENTS AFFECT YOUR COVERAGE Your coverage lasts only as long as your net account value is enough to pay the monthly and annual charges and your account value is more than your outstanding policy loan plus accrued loan interest. If these conditions are not met, your policy will enter the 61-day grace period and you must make a premium payment to avoid lapse. SEE LAPSE, PAGE 33, AND GRACE PERIOD, PAGE 34. MODIFIED ENDOWMENT CONTRACTS There are special federal income tax rules for distributions from life insurance policies which are "modified endowment contracts." These rules apply to policy loans, surrenders, and partial withdrawals. Whether or not these rules apply depends upon whether or not the premiums we receive are greater than the "seven-pay" limit. If we find that your scheduled premium causes your policy to be a modified endowment contract on your policy date, we will require you to acknowledge that you know the policy is a modified endowment contract. We will issue your policy based on the scheduled premium you selected. If you do not want your policy to be issued as a modified endowment contract, you may reduce your scheduled premium to - -------------------------------------------------------------------------------- Strategic Benefit 21 a level which does not cause your policy to be a modified endowment contract. We will then issue your policy based on the revised scheduled premium. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 45. DEATH BENEFITS You decide the amount of insurance you need, now and in the future. You can combine the long-term advantages of permanent life insurance base coverage with the flexibility and short-term advantages of term life insurance. Both permanent and term life insurance are available with one policy. Generally we require a minimum group first year premium of at least $250,000. However, depending on underwriting circumstances, we may reduce the minimum group first year premium in some cases. We do not require a minimum base death benefit amount, however we generally require a minimum target death benefit of $50,000 per policy. We may reduce this minimum if the average initial target death benefit for the group is at least $50,000. It may be to your economic advantage to include part of your insurance coverage under the adjustable term insurance rider. Both the cost of insurance under the adjustable term insurance rider and the cost of insurance for the base death benefit are deducted monthly from your account value and generally increase with the age of the insured person. Use of the adjustable term insurance rider may reduce sales compensation but may increase the monthly cost of insurance. SEE ADJUSTABLE TERM INSURANCE RIDER, PAGE 26. Death benefits are valued as of the date of death of the insured person. - -------------------------------------------------------------------------------- Strategic Benefit 22 DEATH BENEFIT SUMMARY THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES, INCREASES OR DECREASES IN STATED OR TARGET DEATH BENEFIT AND THAT PARTIAL WITHDRAWALS ARE LESS THAN PREMIUM RECEIVED.
=============================================================================================================================== Option 1 Option 2 Option 3 =============================================================================================================================== Stated Death The amount of policy death The amount of policy death The amount of policy death benefit at Benefit benefit at issue, not including benefit at issue, not including issue, not including rider coverage. rider coverage. This amount rider coverage. This amount This amount stays level throughout the stays level throughout the life stays level throughout the life life of the policy. of the policy. of the policy. - ------------------------------------------------------------------------------------------------------------------------------- Base Death Benefit The greater of the stated death The greater of the stated death The greater of the stated death benefit benefit or the account value benefit plus the account value, plus the sum of all premiums we receive multiplied by the appropriate or the account value multiplied minus partial withdrawals you have factor from the definition of by the appropriate factor from taken, or the account value multiplied life insurance factors. the definition of life by the appropriate factor from the insurance factors. definition of life insurance factors. - ------------------------------------------------------------------------------------------------------------------------------- Target Death Stated death benefit plus Stated death benefit plus Stated death benefit plus adjustable Benefit adjustable term insurance rider adjustable term insurance rider term insurance rider benefit. This benefit. This amount remains benefit. This amount remains amount remains level throughout the level throughout the life of level throughout the life of life of the policy. the policy. the policy. - ------------------------------------------------------------------------------------------------------------------------------- Total Death The greater of the target death The greater of the target death The greater of the target death benefit Benefit benefit or the base death benefit plus the account value, plus the sum of all premiums we receive benefit. or the base death benefit. minus partial withdrawals you have taken, or the base death benefit. - ------------------------------------------------------------------------------------------------------------------------------- Adjustable Term The adjustable term insurance The adjustable term insurance The adjustable term insurance rider Insurance Rider rider benefit is the total rider benefit is the total benefit is the total death benefit Benefit death benefit minus base death death benefit minus the base minus the base death benefit, but not benefit, but not less than death benefit, but not less less than zero. If the account value zero. If the account value than zero. If the account multiplied by the death benefit multiplied by the death benefit value multiplied by the death corridor factor is greater than the corridor factor is greater than benefit corridor factor is stated death benefit plus the sum of the stated death benefit, the greater than the stated death all premiums we receive minus partial adjustable term insurance benefit plus the account value, withdrawals you have taken, the benefit will decrease. It will the adjustable term insurance adjustable term insurance rider benefit decrease so that the base death rider benefit will decrease. will decrease. It will decrease so benefit plus the adjustable It will decrease so that the that the sum of the base death benefit term insurance rider benefit is base death benefit plus the plus the adjustable term insurance not greater than the target adjustable term insurance rider rider benefit is not greater than the death benefit. If the base benefit is not greater than the target death benefit plus the sum of death benefit becomes greater target death benefit plus the all premiums we receive minus partial than the target death benefit, account value. If the base withdrawals you have taken. If the the adjustable term insurance death benefit becomes greater base death benefit becomes greater than rider benefit is zero. than the target death benefit the target death benefit plus the sum plus the account value, the of all premiums we receive minus adjustable term insurance rider partial withdrawals you have taken, the benefit is zero. adjustable term insurance rider benefit is zero. ===============================================================================================================================
- -------------------------------------------------------------------------------- Strategic Benefit 23 BASE DEATH BENEFIT Your base death benefit can be different from your stated death benefit as a result of: o your choice of death benefit option; o a change in your death benefit option; o increases or decreases to the stated death benefit. Federal income tax law requires that your death benefit be at least as much as your account value multiplied by a factor defined by law. This factor is based on the insured person's age and gender. SEE APPENDIX A, PAGE 157. As long as your policy is in force, we will pay the death proceeds to your beneficiary(ies) after the insured person dies. The beneficiary(ies) is(are) the person (people) you name to receive the death proceeds from your policy. The death proceeds are: o your base death benefit; plus o rider benefits; minus o your outstanding policy loan with accrued loan interest; minus o outstanding policy charges incurred before the insured person's death. There could be outstanding policy charges if the insured dies while your policy is in the grace period. DEATH BENEFIT OPTIONS You have a choice of three death benefit options: option 1, option 2 or option 3 (described below). You may choose death benefit option 3 only prior to the issue of your policy. Your choice may result in your base death benefit being greater than your stated death benefit. You may change your death benefit option after the first policy anniversary and before the continuation of coverage feature begins. SEE CHANGES IN DEATH BENEFIT OPTIONS, PAGE 24 AND CONTINUATION OF COVERAGE, PAGE 27. Under death benefit option 1, your base death benefit is the greater of: o your stated death benefit on the date of the insured person's death; or o your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A. Under option 1 positive investment performance is generally reflected in a reduced net amount at risk which lowers your policy's total cost of insurance charges. Option 1 offers insurance coverage that is a set amount with potentially lower cost of insurance charges over time. Under death benefit option 2, your base death benefit is the greater of: o your stated death benefit plus your account value on the date of the insured person's death; or o your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A. Under option 2, investment performance is reflected in your insurance coverage. Under death benefit option 3, the base death benefit is the greater of: o your stated death benefit plus the sum of all premiums we receive minus partial withdrawals you have taken under your policy; or o your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A. Under option 3, the base death benefit generally will increase as you pay premiums, and decrease if you take partial withdrawals. In no event will your base death benefit be less than your stated death benefit. Death benefit options 2 and 3 are not available during the continuation of coverage period. If you select option 2 or 3 on your policy, it automatically converts to death benefit option 1 when the continuation of coverage period begins. SEE CONTINUATION OF COVERAGE, PAGE 27. CHANGES IN DEATH BENEFIT OPTIONS You may request a change in your death benefit option at any time before the continuation of coverage period. A death benefit option change applies to your entire stated or base death benefit. Changing your death benefit option may reduce or increase your target death benefit, as well as your stated death benefit. Your death benefit option change is effective on your next monthly processing date after we approve it, so long as at least one day remains before your monthly processing date. If less than one day remains before your monthly processing date, your death benefit - -------------------------------------------------------------------------------- Strategic Benefit 24 option change is effective on your second following monthly processing date. After we approve your request, we send a new policy schedule page to you. You should attach it to your policy. Or, we may ask you to return your policy to our customer service center so that we can make this change for you. We may not allow a change to your death benefit option if it reduces the target death benefit below the minimum we require to issue your policy. You may change from death benefit option 1 to option 2, from option 2 to option 1, or from option 3 to option 1. YOU MAY NOT CHANGE FROM DEATH BENEFIT OPTION 1 OR 2 TO OPTION 3, OR FROM OPTION 3 TO OPTION 2. For you to change from death benefit option 1 to option 2, we may require proof that the insured person is insurable under our normal rules of underwriting. On the effective date of your option change, your stated death benefit is changed as follows: Change Change Stated Death Benefit From To Following Change: ---- -- ---------------- Option 1 Option 2 your stated death benefit before the change minus your account value as of the effective date of the change. Option 2 Option 1 your stated death benefit before the change plus your account value as of the effective date of the change. Option 3 Option 1 your stated death benefit before the change plus the sum of the premiums we receive, minus partial withdrawals you have taken as of the effective date of the change. We increase or decrease your stated death benefit to keep the net amount at risk the same on the date of your death benefit option change. There is no change to the amount of coverage under your adjustable term insurance rider. SEE COST OF INSURANCE CHARGE, PAGE 41. If you change your death benefit option, we adjust the stated death benefit for each of your segments by allocating your account value to each benefit segment. For example, if you change from death benefit option 1 to option 2, your stated death benefit is decreased by the amount of your account value allocation to that segment. If you change from death benefit option 2 to option 1, your stated death benefit is increased by the amount allocated to that segment. Changing your death benefit option may have tax consequences. Consult your tax adviser before making a change. CHANGES IN DEATH BENEFIT AMOUNTS Contact your agent/registered representative or our customer service center to request an increase or decrease in death benefit. The change is effective as of the next monthly processing date after we approve your request. Your requested change must be for at least $1,000. After we make your requested change, we will send you a new schedule page. Keep it with your policy. Or we may ask you to send your policy to us so that we can make the change for you. We may not approve a requested change if it will disqualify your policy as life insurance under federal income tax law. If we disapprove a change for any reason, we provide you with a notice of our decision. SEE TAX CONSIDERATIONS, PAGE 43. You may request a decrease in the stated death benefit only after your first policy anniversary. If you decrease your death benefit, you may not decrease your target death benefit below the minimum we require to issue your policy. There may be tax consequences as a result of a decrease in your death benefit. SEE TAX STATUS OF THE POLICY, PAGE 43 AND MODIFIED ENDOWMENT CONTRACTS, PAGE 45. Requested reductions in the death benefit amount will first decrease the target death benefit. We decrease your stated death benefit only after your adjustable term insurance rider coverage is reduced to zero. If you have more than one segment, we divide decreases in stated death benefit among your benefit segments pro rata unless state law requires differently. You may increase your target or stated death benefit after your first policy anniversary and before the - -------------------------------------------------------------------------------- Strategic Benefit 25 monthly processing date when the insured person turns age 85. You must provide satisfactory evidence that the insured person is still insurable in order to increase your death benefit. Unless you tell us differently, we assume a request to increase your target death benefit is also a request for an increase to the stated death benefit. Thus, the amount of your adjustable term insurance rider will not change. You may change your target death benefit once in a policy year. The initial death benefit segment, or first segment, is the stated death benefit on the effective date of your policy. An increase in the stated death benefit (other than one caused by an option change) will create a new segment. The segment year begins on the segment effective date and ends one year later. Once we create a new segment, it is permanent unless state law requires differently. Each new segment may have: o a new sales charge; o a new deferred sales charge; o new cost of insurance charges, guaranteed and current; o a new incontestability period; o a new suicide exclusion period; and o a new target premium. Premiums you pay after an increase are applied to your policy segments in the same proportion as the target premium for each segment bears to the sum of the target premium for all segments. For each coverage segment, your schedule shows your target premium which is used to determine your initial sales charge and deferred sales charge. ADJUSTABLE TERM INSURANCE RIDER You may increase your death proceeds by adding an adjustable term insurance rider to your policy. This rider enables you to schedule the death benefit based on anticipated needs. As the name suggests, the adjustable term insurance rider adjusts over time to maintain your desired level of coverage. You specify a target death benefit when you apply for this rider. The target death benefit can be level for the life of your policy or scheduled to change at the beginning of a policy year(s). SEE DEATH BENEFITS, PAGE 22. The adjustable term insurance rider death benefit is the difference between your target death benefit and your base death benefit. The death benefit automatically adjusts daily as your base death benefit changes. Total death benefit depends on which death benefit option is in effect: OPTION 1: If option 1 is in effect, the total death benefit is the greater of: a. the target death benefit; or b. the account value multiplied by the appropriate factor from the death benefit corridor factors in the policy. OPTION 2: If option 2 is in effect, the total death benefit is the greater of: a. the target death benefit plus the account value; or b. the account value multiplied by the appropriate factor from the death benefit corridor factors in the policy. OPTION 3: If option 3 is in effect, the total death benefit is the greater of: a. the target death benefit plus the sum of the premiums we receive minus partial withdrawals you have taken; or b. the account value multiplied by the appropriate factor from the death benefit corridor factors in the policy. For example, under option 1, assume your base death benefit changes as a result of changes in your account value. The adjustable term insurance rider adjusts to provide death proceeds equal to your target death benefit in each year: Base Death Target Death Adjustable Term Benefit Benefit Insurance Rider Amount ------- ------- ---------------------- $201,500 $250,000 $48,500 202,500 250,000 47,500 202,250 250,000 47,750 It is possible that the amount of your adjustable term insurance may be zero if your base death benefit increases enough. Using the same example, if the base death benefit under your policy grew to $250,000 or more, the adjustable term insurance - -------------------------------------------------------------------------------- Strategic Benefit 26 coverage would be zero. Even when the adjustable term insurance is reduced to zero, your rider remains in effect until you remove it from your policy. Therefore, if later the base death benefit drops below your target death benefit, the adjustable term insurance rider coverage reappears to maintain your target death benefit. You may change the target death benefit schedule after it is issued, based on our rules. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 25. We may deny future, scheduled increases to your target death benefit if you cancel a scheduled change, or if you ask for an unscheduled decrease in your target death benefit. Partial withdrawals, changes from death benefit option 1 to option 2 and base decreases may reduce the amount of your target death benefit. SEE PARTIAL WITHDRAWALS, PAGE 32, AND CHANGES IN DEATH BENEFIT OPTIONS, PAGE 24. There is no defined premium for a given amount of adjustable term insurance coverage. Instead, we deduct a monthly cost of insurance charge from your account value. The cost of insurance for this rider is calculated as the monthly cost of insurance rate for the rider coverage multiplied by the adjustable term death benefit in effect that month. The cost of insurance rates will be determined by us from time to time. They are based on the issue age, gender, rating and premium class of the person insured, as well as the length of time since your policy date. The monthly guaranteed maximum cost of insurance rates for this rider will be in your policy. SEE COST OF INSURANCE CHARGE, PAGE 41. The only charge for this coverage is the cost of insurance charge. The total charges that you pay may be less if you have greater coverage under an adjustable term insurance rider rather than base death benefit. If the target death benefit is increased by you after the rider is issued, we use the same cost of insurance rate schedule for the entire coverage for this rider. These rates are based on the original rating even though new evidence of insurability is given to us for the increased schedule. Not all policy features apply to the adjustable term insurance rider. Under this rider, there is no surrender value and a policy loan is not available. The adjustable term insurance rider does not contribute to the policy account value nor to investment performance under your policy. The adjustable term insurance rider provides benefits only at the insured person's death. SPECIAL FEATURES DESIGNATED DEDUCTION OPTION You may designate an investment option from which we will take your monthly charges and deferred sales charge. You may make this designation at any time. You may not use the loan division as your designated deduction option. If you do not choose a designated deduction option, or if the amount in your designated deduction option is not enough to cover deductions and charges, the charges will be taken from the variable and guaranteed interest divisions in the same proportion that your account value in each has to your total net account value as of the monthly processing date. If you change your designated deduction option, we consider it a premium allocation change for which there may be a charge. SEE POLICY TRANSACTION FEES, PAGE 42. RIGHT TO EXCHANGE POLICY During the first 24 months after your policy date, you have the right to exchange your policy for a guaranteed policy, unless state law requires differently. We transfer the amount you have in the variable division to the guaranteed interest division. We allocate all future net premiums to the guaranteed interest division. We do not allow future payments or transfers to the variable division after you exercise this right. We will not charge you for this exchange. SEE GUARANTEED INTEREST DIVISION, PAGE 18. POLICY MATURITY If the insured person reaches age 100 and you do not want the continuation of coverage feature, you may surrender your policy for the net account value. Your policy then ends. Some part of this payment may be taxable. You should consult your tax adviser. CONTINUATION OF COVERAGE The continuation of coverage feature allows your insurance coverage to continue beyond policy maturity. If you allow the continuation of coverage feature to become effective, we: - -------------------------------------------------------------------------------- Strategic Benefit 27 o transfer your net account value (excluding the amount in the loan division) into the guaranteed interest division; o charge a one-time $200 administrative fee to your policy to cover future expenses; o terminate the adjustable term insurance rider and the target death benefit becomes the stated death benefit; o convert death benefit option 2 or option 3 to death benefit option 1, if applicable; and o terminate investment features. Your insurance coverage continues until the insured person's death, unless your policy lapses or is surrendered. However, we accept no more premium payments, deduct no further charges and your monthly deductions cease. SEE CONTINUATION OF COVERAGE ADMINISTRATIVE FEE, PAGE 42. Your net account value may not be transferred into the variable division during the continuation of coverage period, but you may take policy loans or partial withdrawals. If you have an outstanding policy loan, interest continues to accrue. If you fail to make sufficient loan or loan interest payments, it is possible that the loan balance plus accrued interest may become greater than your account value and cause your policy to lapse. To avoid lapse, you may repay loans and make loan interest payments during the continuation of coverage period. If you wish to stop coverage after the continuation of coverage feature begins, you may surrender your policy and receive the net account value. All other consequences of surrender apply. SEE SURRENDER, PAGE 34. The continuation of coverage feature is not available in all states. If a state has approved this feature, it is automatic and you do not need to take any action to activate it. The tax consequences of coverage continuing beyond when the insured person reaches age 100 are uncertain. You should consult a tax adviser as to those consequences. POLICY VALUES ACCOUNT VALUE Your account value is the total amount you have in the guaranteed interest division, the variable division, and the loan division. Your account value reflects: o net premiums applied; o charges deducted; o withdrawals taken; o investment performance of the variable investment options; o interest earned on the guaranteed interest division; and o interest earned on the loan division. NET ACCOUNT VALUE Your policy's net account value is your account value minus the amount of your outstanding policy loan and accrued loan interest, if any. Your surrender value is the same as your net account value. DETERMINING THE VALUE IN THE VARIABLE DIVISION The amounts in the variable division are measured by accumulation units and accumulation unit values. The value of a variable investment option is the accumulation unit value for that option multiplied by the number of accumulation units you own in that option. The accumulation unit value is the value determined on each valuation date. The accumulation unit value of each variable investment option varies with the investment performance of the underlying portfolio. It reflects: o investment income; o realized and unrealized gains and losses; and o investment portfolio expenses. Each variable investment option has a different accumulation unit value. A valuation date is one on which the net asset value of the investment portfolio shares and unit values of the variable investment options are determined. Valuation dates are each day the New York Stock Exchange and the company's customer service center are open for business, except for days on which a corresponding investment portfolio does not value its shares, or any other day as required by law. Each valuation date ends at 4 p.m. Eastern Time. Our customer service center may not be open for business on: New Year's Day, Martin Luther King, Jr.'s birthday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving, Christmas Day and the day before or after Christmas. - -------------------------------------------------------------------------------- Strategic Benefit 28 You purchase accumulation units when you allocate premium or make transfers to a variable investment option. This includes transfers from the loan division. We redeem accumulation units: o when you take a partial withdrawal; o when amounts are transferred from a variable investment option (including transfers to the loan division); o for the monthly deductions from your account value; o for policy transaction charges; o when you surrender your policy; and o to pay the death proceeds. To calculate the number of accumulation units purchased or redeemed we: o divide the dollar amount of your transaction by: o the accumulation unit value calculated at the close of business on the valuation date of the transaction. SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES, PAGE 29. The date of a transaction is the date we receive your premium or transaction request at our customer service center, so long as the date of receipt is a valuation date. We use the accumulation unit value which is next calculated after we receive your premium or transaction request and we use the number of accumulation units attributable to your policy on the date of receipt. We take monthly deductions from your account value as of the monthly processing date. If your monthly processing date is not a valuation date, the monthly deduction is processed on the next valuation date. The value of amounts allocated to the variable investment option goes up or down depending on investment performance. FOR AMOUNTS IN THE VARIABLE INVESTMENT OPTIONS, THERE IS NO GUARANTEED MINIMUM CASH VALUE. HOW WE CALCULATE ACCUMULATION UNIT VALUES We determine accumulation unit values on each valuation date. We generally set the accumulation unit value for a variable investment option at $10 when the investment option is first opened. After that, the accumulation unit value on any valuation date is: o the accumulation unit value for the preceding valuation date multiplied by o the accumulation experience factor for that variable investment option for the valuation period. Every valuation period begins at 4:00 p.m. Eastern time on a valuation date and ends at 4:00 p.m. Eastern time on the next valuation date. We calculate an accumulation experience factor for each variable investment option every valuation date as follows: o We take the share value of the underlying portfolio shares in the variable investment option as reported to us by the investment portfolio managers as of the close of business on that valuation date. o We add dividends or capital gain distributions declared per share and reinvested by the investment portfolio on the date that the share value is affected. If applicable, we subtract a charge for taxes from this amount. o We divide the remaining amount by the value of the shares in the underlying investment portfolio for the variable investment option at the close of business on the previous valuation date. TRANSFERS OF ACCOUNT VALUE You may make twelve free transfers among the variable investment options, or the guaranteed interest division, in each policy year. You may not make transfers until after your free look period ends if your state requires a refund of premium during the free look period. We do not limit your number of transfers, but we charge a $10 fee for each transfer after the first twelve in a policy year. We do not include transfers for automatic rebalancing or dollar cost averaging toward your twelve free transfers. You may not make transfers during the continuation of coverage period. SEE POLICY TRANSACTION FEES, PAGE 42 AND CONTINUATION OF COVERAGE, PAGE 27. You may make transfer requests in writing, or by telephone if you have telephone privileges, to our customer service center. Your transfer takes effect on the valuation date we receive your request. The - -------------------------------------------------------------------------------- Strategic Benefit 29 minimum amount you may transfer is $100. This minimum does not need to come from one investment option or be transferred to one investment option as long as the total amount you transfer is at least $100. However, if the amount remaining in a variable investment option is less than $100 when you make a transfer request, we transfer the entire amount out of that variable investment option. EXCESSIVE TRADING Excessive trading activity can disrupt investment portfolio management strategies and increase portfolio expenses by causing: o increased trading and transaction costs; o disruption of planned investment strategies; o forced and unplanned portfolio turnover; o lost opportunity costs; and o large asset swings that decrease the portfolio's ability to provide maximum investment return to all policyowners. In response to excessive trading, we may place restrictions or refuse transfers made by third-party agents acting on behalf of owners such as a market timing service. We will refuse or place restrictions on transfers when we determine, in our sole discretion, that transfers are harmful to the investment portfolios, or to policyowners as a whole. GUARANTEED INTEREST DIVISION TRANSFERS Transfers into the guaranteed interest division are not restricted. You may transfer from the guaranteed interest division only in the first 30 days of each policy year. Transfer requests received within 30 days before your policy anniversary will occur on your policy anniversary. A request received by us within 30 days after your policy anniversary is effective as of the valuation date we receive it. Transfer requests made at any other time will not be processed. Transfers from the guaranteed interest division in each policy year are limited to the largest of: o 25% of your guaranteed interest division balance at the time of your first transfer or withdrawal out of it in that policy year; o the sum of the amounts you have transferred and withdrawn from the guaranteed interest division in the prior policy year; or o $100. DOLLAR COST AVERAGING You can elect dollar cost averaging if your policy has at least $10,000 invested in a qualifying source portfolio, either the Liquid Asset Portfolio or the Limited Maturity Bond Portfolio. The main goal of dollar cost averaging is to protect your policy values from short-term price changes. DOLLAR COST AVERAGING DOES NOT ASSURE A PROFIT NOR DOES IT PROTECT YOU AGAINST A LOSS IN A DECLINING MARKET. This systematic plan of transferring account values is intended to reduce the risk of investing too much when the price of a portfolio's shares is high. It also reduces the risk of investing too little when the price of an investment portfolio's shares is low. Since you transfer the same dollar amount to these investment options each period, you purchase more units when the unit value is low, and you purchase fewer units when the unit value is high. You may add dollar cost averaging to your policy at any time. The first dollar cost averaging date must be at least one day after we receive your dollar cost averaging request. Dollar cost averaging begins after the end of your free look period if your state requires a refund of all premium during the free look period. With dollar cost averaging, you designate either a dollar amount, or a percentage of your account value, for automatic transfer from a qualifying source portfolio. Each period, we automatically transfer the amount you select from your chosen source portfolio to one or more other variable investment options. You may not make transfers to or from the guaranteed interest division or the loan division under dollar cost averaging. The minimum percentage you may transfer to one investment option is 1% of the total amount you transfer. You must transfer at least $100 on each dollar cost averaging transfer date. Dollar cost averaging may occur on the same day of the month on a monthly, quarterly, semi-annual or annual basis. Unless you tell us otherwise, dollar cost averaging automatically takes place monthly, on your monthly processing date. We do not count dollar cost averaging transfers toward your twelve free transfers per policy year. There is no charge for this feature. - -------------------------------------------------------------------------------- Strategic Benefit 30 You may have both dollar cost averaging and automatic rebalancing at the same time. However, your dollar cost averaging source portfolios cannot be included in your automatic rebalancing program. CHANGING DOLLAR COST AVERAGING You may change your dollar cost averaging program once per policy year. If you have telephone privileges, you may change the program by telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 37. TERMINATING DOLLAR COST AVERAGING You may cancel dollar cost averaging by sending satisfactory notice to our customer service center. We must receive it at least one day before the next dollar cost averaging date. Dollar cost averaging will terminate on the date: o you specify; or o your balance in the source portfolio reaches a dollar amount you set; or o the amount in the source portfolio is equal to or less than the amount to be transferred. We will transfer the remaining amount and end dollar cost averaging. AUTOMATIC REBALANCING Automatic rebalancing is a method of maintaining a consistent approach to investing account value over time, and simplifying the process of asset allocation among your chosen investment options. Transfers made for automatic rebalancing do not count toward your twelve free transfers per policy year. There is no charge for this feature. If you choose this feature, on each rebalancing date we transfer amounts among the investment options to match your pre-set automatic rebalancing allocation. After the transfer, the ratio of your account value in each investment option to your total account value for all investment options included in automatic rebalancing matches the automatic rebalancing allocation percentage you set for that investment option. This action rebalances the amounts in the investment options that do not match your set allocation. This mismatch can happen if an investment option outperforms other investment options for that time period. You may choose automatic rebalancing on your application or later by completing our customer service form. Automatic rebalancing may occur on the same day of the month on a monthly, quarterly, semi-annual or annual basis. If you do not specify a frequency, automatic rebalancing will occur quarterly. The first transfer occurs on the date you select (after your free look period ends if your state requires return of premium during the free look period). If you do not request a date, processing is on the last valuation date of the calendar quarter in which we receive your request. You may have both automatic rebalancing and dollar cost averaging at the same time. However, the source portfolios for your dollar cost averaging cannot be included in your automatic rebalancing program. You may not include the loan division. CHANGING AUTOMATIC REBALANCING You may change your allocation percentages for automatic rebalancing at any time. Your allocation change is effective on the valuation date that we receive it at our customer service center. If you reduce the amount allocated to the guaranteed interest division, it is considered a transfer from that division. You must meet the requirements for the maximum transfer amount and time limitations on transfers from the guaranteed interest division. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 29. TERMINATING AUTOMATIC REBALANCING You may terminate automatic rebalancing at any time, as long as we receive your notice of termination at least one day before the next automatic rebalancing date. POLICY LOANS You may borrow from your policy at any time after the first monthly processing date by using your policy as security for a loan, or as otherwise required by law. The amount you borrow (policy loan) is: o the total amount you borrow; plus o loan interest that is capitalized when due; minus o loan repayments you make. Unless state law requires differently, a new policy loan must be at least $100. The maximum amount - -------------------------------------------------------------------------------- Strategic Benefit 31 you can borrow on any valuation date, unless required differently by state law, is your net account value minus the monthly deductions to your next policy anniversary or 13 monthly deductions if you take a loan within thirty days before your next policy anniversary. Your request for a policy loan must be directed to our customer service center. If you have telephone privileges, you may request a policy loan for less than $25,000 by telephone. SEE TELEPHONE PRIVILEGES, PAGE 37. When you request a loan you may specify one investment option from which the loan will be taken. If you do not specify one, the loan will be taken proportionately from each active investment option you have, including the guaranteed interest division. When you take a policy loan, we transfer an amount equal to your policy loan from the specified investment option or proportionately from the variable and the guaranteed interest divisions to the loan division. We follow this same process for loan interest due at your policy anniversary. The loan division is part of our general account, specifically designed to hold collateral for policy loans and interest. We credit the loan division with interest at an annual rate of 3%. Loan interest charges on your policy loan accrue daily at an annual interest rate of 3.25%. Interest is due in arrears on each policy anniversary. If you do not pay it when it is due, we add it to your policy loan balance. If you request an additional loan, we add the new loan amount to your existing policy loan. This way, there is only one loan outstanding on your policy at any time. LOAN REPAYMENT You may repay your policy loan at any time. We assume that payments you make, other than scheduled premiums, are policy loan repayments. You must tell us if you want additional payments to be premium payments. When you make a loan repayment, we transfer an amount equal to your repayment from the loan division to the variable investment options and the guaranteed interest division in the same proportion as your current premium allocation, unless you tell us otherwise. EFFECTS OF A POLICY LOAN Taking a loan decreases the amount you have in the investment options. Accruing loan interest will change your net account value as compared to what it would have been if you did not take a loan. Even if you repay your loan, it has a permanent effect on your account value. The benefits under your policy may be affected. The loan is a first lien on your policy. If you do not repay your policy loan, we deduct your outstanding policy loan and accrued loan interest from the death proceeds or the surrender value payable. A policy loan may cause your policy to lapse if your account value minus your policy loan balance and accrued loan interest is not enough to cover your monthly deductions. Policy loans may have tax consequences. If your policy lapses with a loan outstanding, you may have further tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 45, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 45. If you use the continuation of coverage feature and you have a policy loan, loan interest continues to accrue. PARTIAL WITHDRAWALS You may request a partial withdrawal to be processed on any valuation date after your first policy anniversary by contacting our customer service center. You make a partial withdrawal when you withdraw part of your net account value. If your request is by telephone, the partial withdrawal must be for an amount less than $25,000 and may not cause a decrease in your death benefit. Otherwise, your request must be in writing. SEE TELEPHONE PRIVILEGES, PAGE 37. You may take only one partial withdrawal per policy year. The minimum partial withdrawal amount is $100. The maximum partial withdrawal you may take is the amount which leaves $500 as your net account value. If you request a withdrawal of more than this maximum, we require you to surrender your policy or reduce the withdrawal. When you take a partial withdrawal, we deduct your withdrawal - -------------------------------------------------------------------------------- Strategic Benefit 32 amount plus a service fee from your account value. SEE CHARGES, PAGE 40. Partial withdrawals do not reduce the stated death benefit if your base death benefit has been increased to qualify your policy as life insurance under the federal income tax laws and if you withdraw an amount that is no greater than the amount that reduces your account value to a level which no longer requires your base death benefit to be increased to qualify as life insurance for federal income tax law purposes. SEE TAX STATUS OF THE POLICY, PAGE 43. We require a minimum target death benefit to issue your policy. You are not allowed to take a partial withdrawal if it reduces your target death benefit below this minimum. SEE GROUP OR SPONSORED ARRANGEMENTS AND CORPORATE PURCHASERS, PAGE 43. PARTIAL WITHDRAWAL MECHANICS We will make a partial withdrawal from the guaranteed interest division and the variable investment options in the same proportion that each has to your net account value immediately before your withdrawal or, you may select one investment option from which your partial withdrawal will be taken. If you select the guaranteed interest division, however, the amount withdrawn from it may not be more than your total withdrawal multiplied by the ratio of your account value in the guaranteed interest division to your total net account value immediately before the partial withdrawal transaction. Partial withdrawals may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 45, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 45. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1 If you selected death benefit option 1, no more than fifteen years have passed since your policy date and the insured person is not yet age 81, you may make a partial withdrawal of up to the greater of 10% of your account value, or 5% of your stated death benefit without decreasing your stated death benefit. Otherwise amounts you withdraw will reduce your stated death benefit by the amount of the withdrawal unless your policy death benefit has been increased to satisfy the federal income tax definition of life insurance. If your policy death benefit has been increased to satisfy the federal income tax definition of life insurance then at least part of your partial withdrawal may be made without reducing your stated death benefit. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 2 If you have selected death benefit option 2, a partial withdrawal does not reduce your stated death benefit or target death benefit. However, we reduce the total death benefit by at least the partial withdrawal amount. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 3 If you have selected death benefit option 3 and your partial withdrawal is less than the total of premiums we received minus the total of your prior partial withdrawals, then your stated death benefit will not be reduced. However, your total death benefit will be reduced by at least the amount of your partial withdrawal. If your partial withdrawal is more than the amount of premiums we received minus the total of your prior partial withdrawals, then a two step process is used: 1. Your withdrawal of the amount that makes premiums paid minus all partial withdrawals equal to zero is taken; then 2. The excess withdrawal amount you requested will reduce your stated death benefit if: o the excess amount is greater than 10% of your account value after step 1 above; or o the excess amount is greater than 5% of your stated death benefit; or o more than 15 years have passed since your policy date; or o the insured person is 81 years of age or older. STATED DEATH BENEFIT AND TARGET DEATH BENEFIT REDUCTIONS Generally, we reduce the stated death benefit by the amount of the partial withdrawal. A partial withdrawal may reduce your target death benefit. - -------------------------------------------------------------------------------- Strategic Benefit 33 LAPSE Your insurance coverage continues as long as your net account value is enough to pay your deductions each month. If you have an outstanding policy loan, your policy will lapse if the loan plus accrued interest is more than your account value. Thus, during the continuation of coverage period, the policy could lapse if there is an outstanding policy loan even though there are no further monthly deductions. GRACE PERIOD Your policy enters a 61-day lapse grace period if, on a monthly processing date your net account value is zero (or less). We notify you that your policy is in a grace period at least 30 days before it ends. We send this notice to you (or a person to whom you have assigned your policy) at your last known address in our records. We notify you of the premium payment necessary to prevent your policy from lapsing. This amount generally is the past due charges, plus the amount that covers your estimated monthly policy and rider deductions for the next two months. If the insured person dies during the grace period, we do pay death proceeds to your beneficiary(ies) with reductions for your policy loan balance, accrued loan interest, and monthly deductions owed. If we receive payment of the required amount before the end of the grace period, we apply it to your account value in the same manner as your other premium payments. We then deduct the overdue amounts from your account balance. If you do not pay the full amount within the 61-day grace period, your policy (and rider) lapse without value. We withdraw your remaining account balance from the variable and guaranteed interest divisions. We deduct amounts you owe us and inform you that your policy has ended. REINSTATEMENT If you do not pay enough premium before the end of the grace period, your policy lapses. You may still reinstate your policy and rider within five years of the end of the grace period. Unless state law requires differently, we will reinstate your policy and rider if: o you are the owner and you have not surrendered your policy; o you provide satisfactory evidence that the insured person is still insurable according to our normal rules of underwriting; and o we receive enough premium to keep your policy and rider in force from the beginning to the end of the grace period and for two months after the reinstatement date. Reinstatement is effective as of the monthly processing date following our approval of your reinstatement application. If you had a policy loan when coverage ended, we reinstate it with accrued loan interest to the date of lapse. The cost of insurance charges at the time of reinstatement are adjusted to reflect the time since the lapse. We apply net premiums received after reinstatement according to your most recent premium allocation instructions which may be those in effect at the start of the grace period. SURRENDER You may surrender your policy for its surrender value any time while the insured person is living. You will need to send a written request and your policy or a lost policy form to our customer service center. We compute your surrender value (net account value) as of the valuation date we receive your surrender request and policy. All insurance coverage ends on the date we receive your surrender request and policy. SEE POLICY VALUES, PAGE 8 AND SETTLEMENT PROVISIONS, PAGE 38. We do not pro-rate or add back charges or expenses which we deducted before your surrender to your account value. You may elect to have your surrender value paid as other than one payment. SEE SETTLEMENT PROVISIONS, PAGE 38. A surrender of your policy may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 45, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 45. - -------------------------------------------------------------------------------- Strategic Benefit 34 GENERAL POLICY PROVISIONS FREE LOOK PERIOD You have the right to examine your policy and return it (for any reason) to us within the period shown in the policy. The right to examine your policy (also called free look period) starts on the date you receive it. If you return your policy to us within your state's specified time limit, we cancel it as of your policy date. If you cancel your policy during this free look period, you will receive a refund as determined by state law. Generally, there are two types of free look refunds: o some states require a return of all premiums received; and o others require payment of account value plus a refund of all charges deducted. Your policy will specify what type of free look refund applies in your state. The type of free look refund will affect when premium we receive before the end of the free look period is invested into the variable investment options. SEE ALLOCATION OF NET PREMIUMS, PAGE 21. YOUR POLICY Some groups under this policy may choose to use a master policy with policy certificates, rather than a series of individual policies. The contract between you and us is the combination of: o the policy (or certificate); o a copy of your original application and any applications for benefit increases or decreases; o the adjustable term insurance rider; o endorsements; o schedule pages; and o reinstatement applications. If you make a change to your coverage, we give you a copy of your changed application and new schedules. If you send your policy to us, we attach these items to your policy and return it to you. Otherwise, you need to attach them to your policy. Unless there is fraud, we consider all statements made in an application to be representations and not guarantees. We use no statement to deny a claim, unless it is in an application. A president or another officer of our company and our secretary or assistant secretary must sign all changes or amendments to your policy. No other person may change its terms or conditions. GUARANTEED ISSUE We offer this policy only on a guaranteed issue basis, up to a preset face amount with evidence of insurability. AGE We issue your policy at the insured person's age (stated in your policy schedule) based on the nearest birth date to the policy date. We determine the insured person's age at any given time by adding the number of completed policy years to the age calculated at issue. At issue, the insured person must be no less than age 15 and no more than age 85. OWNERSHIP The original owner is the person named as the owner in the policy application. The owner can exercise all rights and receive benefits during the life of the insured person. This includes the right to change the owner, beneficiaries, or method designated to pay proceeds. As a matter of law, all rights of ownership are limited by the rights of any person who has been assigned rights under the policy, and any irrevocable beneficiary(ies). You may name a new owner by giving us written notice. The effective date of the change to the new owner is the date the prior owner signs the notice. However, we will not be liable for any action we take before a change is recorded at our customer service center. A change in ownership may cause the prior owner to recognize taxable income on gain under the policy. BENEFICIARY(IES) You, as owner, name the beneficiary(ies) when you apply for your policy. The primary beneficiary(ies) who survives the insured person receives the death proceeds. Other surviving beneficiaries receive death proceeds only if there is no surviving primary beneficiary(ies). If more than one beneficiary(ies) survives the insured person, they share the death proceeds equally, unless you specify otherwise. If none of your policy beneficiaries has survived the - -------------------------------------------------------------------------------- Strategic Benefit 35 insured person, we pay the death proceeds to you or to your estate, as owner. You may name a new beneficiary(ies) during the insured person's lifetime. We pay death proceeds to the beneficiary(ies) whom you have most recently named and whom we have on record. We do not make payments to multiple sets of beneficiaries. COLLATERAL ASSIGNMENT You may assign your policy by sending written notice to us. After we record the assignment, your rights as owner and the beneficiary's(ies') rights (unless the beneficiary(ies) was made an irrevocable beneficiary(ies) under an earlier assignment) are subject to the assignment. It is your responsibility to make sure the assignment is valid. INCONTESTABILITY After your policy has been in force and the insured person is alive for two years from your policy date, and from the effective date of any new segment or an increase in any other benefit, we will not question the validity of statements in your applicable application. MISSTATEMENTS OF AGE OR GENDER If the insured person's age or gender has been misstated, we adjust the death benefit. We adjust it to the amount which would have been purchased for the insured person's correct age and gender. We base the adjusted death benefit on the cost of insurance charges deducted from your account value on the last monthly processing date before the insured person's death, or as required by state law. If unisex cost of insurance rates apply, we do not make adjustments for a misstatement of gender. SUICIDE If the insured person commits suicide, while sane or insane within two years of your policy date, unless otherwise required by state law, we limit the death benefit to: 1. the total of all premium payments we receive to the time of death; minus 2. the outstanding policy loan balance and accrued loan interest; minus 3. partial withdrawals taken. If the person insured under the policy changed, and the new insured person dies by suicide within two years of the change date, we limit the death benefit to: 1. your net account value as of the change date; plus 2. the premiums we received since the change; minus 3. increases in the policy loan balance, accrued loan interest, and partial withdrawals since the change date. We make a limited payment to the beneficiary(ies) for a new segment or other increase if the insured person commits suicide, while sane or insane within two years of the effective date of a new segment, or within two years of an increase in any other benefit, unless otherwise required by state law. The limited payment is equal to the cost of insurance and monthly expense charges which were deducted for the increase. TRANSACTION PROCESSING Generally, within seven days of when we receive all information required to process a payment, we pay: o death proceeds; o surrender value; o partial withdrawals; and o loan proceeds. We may delay processing these transactions if: o the NYSE is closed for trading; o trading on the NYSE is restricted by the SEC; o there is an emergency so that it is not reasonably possible to sell securities in the variable investment options or to determine the value of a variable investment option's assets; or o a governmental body with jurisdiction over the separate account allows suspension by its order. SEC rules and regulations determine whether or not these conditions exist. We execute transfers among the variable investment options as of the valuation date of our receipt of your request at our customer service center. We determine death proceeds as of the date of the - -------------------------------------------------------------------------------- Strategic Benefit 36 insured person's death. The death proceeds are not affected by subsequent changes in the value of the variable investment options. We may delay payment from our guaranteed interest division for up to six months, unless law requires otherwise, of surrender proceeds, withdrawal amounts or loan amounts. If we delay payment more than 30 days, we pay interest at our declared rate (or at a higher rate if required by law) from the date we receive your complete request. NOTIFICATION AND CLAIMS PROCEDURES Except for certain authorized telephone requests, we must receive any election, designation, change, assignment or request in writing from the owner. You must use a form acceptable to us. We are not liable for actions taken before we receive and record your notice. We may require you to return your policy for certain policy changes or if you surrender it. If the insured person dies while your policy is in force, please let us know as soon as possible. We will send you instructions on how to make a claim. As proof of the deceased insured person's death, we may require proof of the deceased insured person's age, and a certified copy of the death certificate. The beneficiary(ies) and the deceased insured person's next of kin may need to sign authorization forms. These forms allow us to get information such as medical records from doctors and hospitals used by the deceased insured person. TELEPHONE PRIVILEGES Telephone privileges are automatically provided to you and your agent/registered representative unless you decline it on the application or contact our customer service center. Telephone privileges allow you or your agent/registered representative to call our customer service center to: o make transfers; o change premium allocations; o change your dollar cost averaging and automatic rebalancing programs; o request partial withdrawals; or o request a policy loan. Our customer service center uses reasonable procedures to make sure that instructions received by telephone are genuine. These procedures may include: o requiring personal identification; o providing written confirmation of transactions; and o tape recording telephone calls. By accepting telephone privileges, you authorize us to record your telephone calls with us. If we use reasonable procedures to confirm instructions, we are not liable for losses from unauthorized or fraudulent instructions. We may discontinue this privilege at any time. NON-PARTICIPATION Your policy does not participate in the surplus earnings of Security Life. DISTRIBUTION OF THE POLICIES The principal underwriter (distributor) for our policies is ING America Equities, Inc. ING America Equities, Inc. is a wholly owned subsidiary of Security Life. It is registered as a broker-dealer with the SEC and the NASD. We pay ING America Equities, Inc. under a distribution agreement. We sell this policy exclusively through insurance licensed registered representatives of certain unaffiliated broker-dealers including Merrill Lynch, Pierce Fenner & Smith Incorporated. These broker-dealers have entered into selling agreements with us. Under the selling agreement, we pay a distribution allowance to the broker-dealer, who pays commissions to the agent/registered representative who sells the policy. During the first policy or segment year, the distribution allowance is 5% of the premium we receive up to the target premium. There is no distribution allowance paid on premium received above target in the first policy or segment year or on any premium received after the first policy or segment year. In addition, we make annual renewal payments to the broker-dealer based on a percentage of each policy's net account value (trails). These payments are 1.00% in policy years one through ten, 0.75% in policy years eleven through twenty, and 0.20% in all later years. We also pay wholesaler fees, marketing and training allowances. We pay allowances from our resources which includes sales charges deducted from premiums. - -------------------------------------------------------------------------------- Strategic Benefit 37 ADVERTISING PRACTICES AND SALES LITERATURE We may use advertisements and sales literature to promote this product, including: o articles on variable life insurance and other information published in business or financial publications; o indices or rankings of investment securities; and o comparisons with other investment vehicles, including tax considerations. We may use information regarding the past performance of the variable investment options. Past performance is not indicative of future performance of the investment options or the policies and is not reflective of the actual investment experience of policyowners. We may feature certain investment options and their managers, as well as describe asset levels and sales volumes. We may refer to past, current, or prospective economic trends and investment performance or other information we believe may be of interest to our customers. SETTLEMENT PROVISIONS You may take your surrender value in other than one payment. Likewise, you may elect to have the beneficiary(ies) receive the death proceeds other than in one payment, if you make this election during the insured person's lifetime. If you have not made this election, the beneficiary(ies) may do so within 60 days after we receive proof of the insured person's death. The investment performance of the variable investment options does not affect payments under these settlement options. Instead, interest accrues at a fixed rate based on the option you choose. Payment options are subject to our rules at the time you make your selection. Currently periodic payment must be at least $20 and the total proceeds must be $2,000 or more. OPTION I: PAYOUTS FOR A DESIGNATED PERIOD OPTION II: LIFE INCOME WITH PAYOUTS GUARANTEED FOR A DESIGNATED PERIOD OPTION III: HOLD AT INTEREST OPTION IV: PAYOUTS OF A DESIGNATED AMOUNT OPTION V: OTHER OPTIONS WE OFFER AT THE TIME WE PAY THE BENEFIT ADMINISTRATIVE INFORMATION ABOUT THE POLICY VOTING PRIVILEGES We invest the variable investment option's assets in shares of investment portfolios. We are the legal owner of the shares held in the separate account and we have the right to vote on certain issues. Among other things, we may vote on issues described in the fund's current prospectus, or issues requiring a vote by shareholders under the Investment Company Act of 1940. Even though we own the shares, we give you the opportunity to tell us how to vote the number of shares attributable to your policy. We count fractional shares. If you have a voting interest, we send you proxy material and a form on which to give us your instructions. Each investment portfolio share has the right to one vote. The votes of all investment portfolio shares are cast together on a collective basis, except on issues for which the interests of the portfolios differ. In these cases, voting is done on a portfolio-by-portfolio basis. Examples of issues that require a portfolio-by-portfolio vote are changes in the fundamental investment policy of a particular investment portfolio or approval of an investment advisory agreement. We vote the shares in accordance with your instructions at meetings of investment portfolio shareholders. We vote any investment portfolio shares that are not attributable to policies and any investment portfolio shares for which the owner does not give us instructions in the same way we vote as if we did receive owner instructions. We reserve the right to vote investment portfolio shares without getting instructions from policy owners if the federal securities laws, regulations, or their interpretations change to allow this. You may instruct us only on matters relating to the investment portfolios corresponding to those in which you have invested assets as of the record date - -------------------------------------------------------------------------------- Strategic Benefit 38 set by the investment portfolio's Board for the meeting. We determine the number of investment portfolio shares in each variable investment option for your policy by dividing your account value in that option by the net asset value of one share of the matching investment portfolio. MATERIAL CONFLICTS We are required to track events to identify material conflicts arising from using investment portfolios for both variable life and variable annuity separate accounts. The boards of the investment portfolios, Security Life, and other insurance companies participating in the investment portfolios, have this same duty. There may be a material conflict if: o state insurance law or federal income tax law changes; o investment management of an investment portfolio changes; or o voting instructions given by owners of variable life insurance policies and variable annuity contracts differ. The investment portfolios may sell shares to certain qualified pension and retirement plans qualifying under Code Section 401. These include cash or deferred arrangements under Code Section 401(k). Therefore, there is a possibility that a material conflict may arise between the interests of owners in general, or between certain classes of owners, and these retirement plans or participants in these retirement plans. If there is a material conflict, we have the duty to determine appropriate action, including removing the portfolios involved from our variable investment options. We may take other action to protect policy owners. This could mean delays or interruptions of the variable operations. When state insurance regulatory authorities require it, we may ignore voting instructions relating to changes in an investment portfolio's adviser or its investment policies. If we do ignore voting instructions, we give you a summary of our actions in our next semi-annual report to owners. Under the Investment Company Act of 1940, we must get your approval for certain actions involving our separate account. In this case, you have one vote for every $100 of value you have in the variable division. We cast votes credited to amounts in the variable division, but not credited to policies, in the same proportion as votes cast by owners. RIGHT TO CHANGE OPERATIONS Subject to state limitations, we may from time to time make any of the following changes to our separate account: o change the investment objective; o offer additional variable investment options which will invest in portfolios we find appropriate; o eliminate variable investment options; o combine two or more variable investment options; o substitute a new investment portfolio for an existing portfolio. A substitution may become necessary if, in our judgment: a) a portfolio no longer suits the purposes of this policy; b) there is a change in laws or regulations; c) there is a change in a portfolio's investment objectives or restrictions; d) the portfolio is no longer available for investment; or e) there is another reason we deem a substitution is appropriate; o transfer assets related to your policy to another separate account; o withdraw the separate account from registration under the 1940 Act; o operate the separate account as a management investment company under the 1940 Act; o cause one or more variable investment options to invest in a mutual fund other than, or in addition to, the investment portfolios; o stop selling these policies; o end an employer or plan trustee agreement with us under the agreement's terms; o limit or eliminate voting rights for the separate account; or o make changes required by the 1940 Act, or its rules or regulations. We will not make a change until it is effective with the SEC and approved by the appropriate state insurance departments, if necessary. We will notify you of changes. If you wish to transfer the amount you have in the affected investment option to another variable investment option, or to the guaranteed interest division, you may do so free of charge. Just notify us at our customer service center. REPORTS TO OWNERS At the end of each policy year we send a report to - -------------------------------------------------------------------------------- Strategic Benefit 39 you that shows: o your total net policy death benefit (your stated death benefit plus adjustable term insurance rider death benefit, if any); o your account value; o your policy loan, if any, plus accrued interest; o your surrender value; o information about the variable investment options; and o your account transactions during the policy year showing net premiums, transfers, deductions, loan amounts and withdrawals. We also send semi-annual reports with financial information on the investment portfolios, including a list of the investment holdings of each portfolio, to you. We send confirmation notices to you throughout the year for certain policy transactions. CHARGES AND DEDUCTIONS The amount of a charge may not correspond to the cost incurred by us to provide the service or benefit. For example, the sales charges may not cover all of our sales and distribution expenses. Some proceeds from other charges, including the mortality and expense risk charge or cost of insurance charges, may be used to cover such expenses. DEDUCTIONS FROM PREMIUMS We treat payments we receive as premium payments if the insured person is not yet age 100 and you do not have an outstanding policy loan. After we deduct certain expenses from your payment, we add the remaining net premium to your policy. INITIAL SALES CHARGE AND DEFERRED SALES CHARGE We deduct charges based on the amount of premium we receive each year your policy or segment is in effect. The sales charge (and deferred sales charge) helps cover our costs of distribution, preparing sales literature, promotion expenses and other direct and indirect expenses to sell the policy. During the first policy or segment year, we do not deduct an initial sales charge from your premium payments. However, these payments will be used to calculate the deferred sales charge which is deducted at the beginning of policy or segment years two through eight. The amount of this annual deduction is 1.75% of premium paid during policy or segment year one, up to your policy's target premium (in your policy schedule pages), plus 1.60% of premium paid during policy or segment year one in excess of target. This deferred sales charge deduction ends after policy or segment year eight. Thus, first policy or segment year premiums, up to target, are subject to the highest rate of sales charge, equivalent to 12.25% over seven years (1.75% per year times 7 years). During your second policy or segment year, and in each year thereafter, we deduct 0.5% of all premium payments we receive before we apply the premium to your policy. This deduction is the policy initial sales charge. Premium payments from which we deduct a sales charge are not subject to the deferred sales charge. SALES CHARGES AS A PREMIUM PERCENTAGE OF PAID PREMIUM WHEN DEDUCTED - -------------------- ------------------- ----------------------- policy/segment 1.75%* beginning of year 1 up to policy/segment target years 2 - 8 - -------------------- ------------------- ----------------------- policy/segment 1.6%* beginning of year 1 in policy/segment excess of years 2 - 8 target - -------------------- ------------------- ----------------------- policy/segment 0.5% upon receipt of years 2+ payment - -------------------- ------------------- ----------------------- * THESE ARE THE PERCENTAGES USED TO DETERMINE THE ANNUAL DEDUCTION. ONCE DETERMINED, THE ANNUAL DEDUCTION IS MADE ONCE EACH YEAR FOR SEVEN YEARS. SALES CHARGE EXAMPLE (BASED ON TWO YEARS OF PREMIUM PAYMENTS) Assume a policy has a target premium of $8,000. Premium payments of $10,000 are made in each of the first two years and there has been no change in death benefit. The $10,000 premium payment for the first year incurs an annual deferred sales charge of $172 deducted in years two through eight: 1.75% of premium up to target plus 1.6% of premium payments over target [.0175 x $8,000 + (.016 x $2,000) = $172]. - -------------------------------------------------------------------------------- Strategic Benefit 40 The deferred sales charge deduction is made on the monthly processing date at the policy (or segment) anniversary. The $10,000 premium payment for the second year incurs a sales charge of $50 when it is received: 0.5% of all premium [.005 x $10,000 = $50]. Deducted Deferred Sales Sales Charge During Policy Charge on First on Second Year or Segment Year Premium Premium Year Of $10,000 Of $10,000 - --------------------- -------------------- --------------------- 1 $0 $0 2 $172 $50 3 $172 $0 4 $172 $0 5 $172 $0 6 $172 $0 7 $172 $0 8 $172 $0 9 $0 $0 TAX CHARGES We pay state and local taxes in almost all states. These taxes vary in amount from state to state and may vary from jurisdiction to jurisdiction within a state. Currently, state and local taxes range from 0% to 5%. In the first policy or segment year, we deduct 2.5% of each premium payment up to target premium to cover these taxes. In subsequent years, we deduct 2.5% of all premium payments. This charge approximates the average tax rate we expect to pay. To cover our estimated costs for the federal income tax treatment of deferred acquisition costs, we deduct 1.5% of each premium payment up to target premium in the first policy or segment year. In subsequent years, we deduct 1.5% of all premiums. This cost is determined solely by a portion of the amount of life insurance premiums we receive. We reserve the right to increase or decrease this charge for state and local taxes if there are changes in the tax law, within limits set by state law. We also reserve the right to increase or decrease the charge for the federal income tax treatment of deferred acquisition costs based on any change in that cost to us. MONTHLY DEDUCTIONS FROM ACCOUNT VALUE We deduct charges from your account value on each monthly processing date. MORTALITY AND EXPENSE RISK CHARGE We deduct a charge each month for the mortality and expense risks we assume. The mortality risk we assume is that insured people, as a group, may live less time than we estimated. We assume risk that expenses we incur in issuing and administering the policies and in operating the variable investment options are greater than the amount we estimated when we set these charges. This charge is based on the length of time your policy has been in effect and the amount you have in the variable investment options on the monthly processing date. PERCENT OF VARIABLE DIVISION ACCOUNT VALUE MONTHLY EQUIVALENT POLICY YEAR CHARGE ANNUAL RATE - --------------------- -------------------- --------------------- 1 - 10 0.07083% 0.85% 11 - 20 0.05000% 0.60% 21+ 0.00417% 0.05% MONTHLY ADMINISTRATIVE CHARGE We deduct an administrative charge of $12 per month for the first policy year and $6 per month for each policy year beyond that. The monthly administrative charge is designed to compensate us for ongoing costs such as: o premium billing and collections; o claim processing; o policy transactions; o record keeping; o reporting and communications with policy owners; and o other expenses and overhead. COST OF INSURANCE CHARGE The cost of insurance charge compensates us for the ongoing costs of providing insurance coverage, including the expected cost of paying death benefits that could be more than your account value. The cost of insurance rates may depend on the characteristics of the group of insured people, such as ages, risk class, size of the group and the total premium the group pays. - -------------------------------------------------------------------------------- Strategic Benefit 41 The cost of insurance charge is our current monthly cost of insurance rate times the net amount at risk for each portion of your death benefit. We calculate the net amount at risk monthly, at the beginning of each policy month. For the base death benefit, the net amount at risk is calculated using the difference between the current base death benefit and your account value. We determine your account value after we deduct your policy charges due on that date, other than cost of insurance charges. If your base death benefit at the beginning of a month increases (as a requirement of the federal income tax law definition of life insurance), the net amount at risk for your base death benefit for that month also increases. Because your target death benefit did not change, the net amount at risk for your adjustable term insurance rider decreases. The amount of your cost of insurance charge varies from month to month as a result of changes in your net amount at risk, changes in the death benefit and the increasing age of the insured person. We allocate the net amount at risk to all segments in the same proportion that each segment has to the total stated death benefit for all coverage as of the monthly processing date. We apply unisex rates where appropriate under the law. This currently includes the State of Montana and policies purchased by employers and employee organizations in connection with employment-related insurance or benefit programs. Separate cost of insurance rates apply to each segment of the base death benefit and your adjustable term insurance rider. Your cost of insurance rates may change from time to time however, they are never more than the guaranteed maximum rates shown in your policy. The guaranteed maximum rates for base coverage are based on the 1980 Commissioner's Standard Ordinary Sex Distinct Mortality Table. The maximum rates for the initial and each new segment will be printed in your schedule pages. This type of group policy may result in higher cost of insurance charges than those that would apply if the policy were on an individual basis. POLICY TRANSACTION FEES We charge fees for certain transactions you may make under your policy. We deduct these fees from the variable and the guaranteed interest divisions in the same proportion that your account value in each division has to your net account value immediately after the transaction. PARTIAL WITHDRAWALS To cover our costs, we deduct a service fee of up to $25 from your account value for each partial withdrawal you take. SEE PARTIAL WITHDRAWALS, PAGE 32. TRANSFERS There is a $10 fee for each additional transfer over twelve per policy year to cover our costs. If you include multiple transfers in one request, it counts as one transfer. There is no transfer fee if you are exercising the right to exchange in your policy. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 29, AND RIGHT TO EXCHANGE POLICY, PAGE 27. ILLUSTRATIONS The first policy illustration you request in a policy year is free. After that, we charge a fee of up to $25 for each additional policy illustration. PREMIUM ALLOCATION CHANGE You may make five free premium allocation changes per policy year. After five, we charge you $25 for each additional premium allocation change. If you change your designated withdrawal investment option, we consider it a premium allocation charge for which there may be a charge. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 41. CONTINUATION OF COVERAGE ADMINISTRATIVE FEE When the insured person reaches age 100, if your policy has not been surrendered, the continuation of coverage period begins. We charge a one-time administrative fee of $200. We then no longer charge you monthly charges. This charge compensates us for maintaining and servicing your policy until the death of the insured person. - -------------------------------------------------------------------------------- Strategic Benefit 42 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
OTHER CHARGES Under current law, we pay no tax on investment income and capital gains included in variable life insurance policy reserves. So, no charge is made to any variable investment option for our federal income taxes. If the tax law changes and we have federal income tax chargeable to the variable investment options, we may make such a charge in the future. GROUP OR SPONSORED ARRANGEMENTS AND CORPORATE PURCHASERS Only groups of individuals, corporations or other institutions may purchase this policy. These group arrangements include those in which there is a trustee, an employer or an association. The group may either purchase policies covering a group of individuals or endorse a policy to a group of individuals. Sponsored arrangements include those in which an employer or association allows us to offer policies to its employees or members on an individual basis. Based on the group underwriting, we may reduce or waive the: o administrative charge; o minimum target death benefit; o target premium; o sales charges; o cost of insurance charges; or o other charges normally assessed. We can reduce or waive these items due to expected economies based on the characteristics of the group. Our sales, administration and mortality costs generally vary with the size and stability of the group, among other factors which we take into account when we reduce charges. We make reductions to charges based on our rules in effect when we approve a policy application. We may change these rules from time to time. We will not be unfairly discriminatory in the variation in the administrative charge, or other charges, fees and privileges. These variations are based on differences in costs or services. TAX CONSIDERATIONS The following summary provides a general description of the federal income tax considerations associated with the policy and does not purport to be complete or to cover all tax situations. This discussion is not intended as tax advice. Counsel or other competent tax advisers should be consulted for more complete information. This discussion is based upon our understanding of the present federal income tax laws. No representation is made as to the likelihood of continuation of the present federal income tax laws or as to how they may be interpreted by the Internal Revenue Service. TAX STATUS OF THE POLICY This policy is designed to qualify as a life insurance - -------------------------------------------------------------------------------- Strategic Benefit 43 contract under the Internal Revenue Code. All terms and provisions of the policy shall be construed in a manner which is consistent with that design. In order to qualify as a life insurance contract for federal income tax purposes and to receive the tax treatment normally accorded life insurance contracts under federal tax law, a policy must satisfy certain requirements which are set forth in Internal Revenue Code Section 7702. While there is little guidance as to how these requirements are applied, we believe it is reasonable to conclude that our policies satisfy the applicable requirements. If it is subsequently determined that a policy does not satisfy the applicable requirements, we will take appropriate and reasonable steps to bring the policy into compliance with such requirements and we reserve the right to restrict policy transactions or modify your policy in order to do so. Specifically this policy must meet the requirements of the "cash value accumulation test" as specified in Code Section 7702. Under the cash value accumulation test, there is no limit to the amount that may be paid in premiums as long as there is enough death benefit in relation to account value at all times. The death benefit at all times must be at least equal to an actuarially determined factor, depending on the insured person's age and sex at any point in time, multiplied by the account value. SEE APPENDIX A, PAGE 157, FOR A TABLE OF THE CASH VALUE ACCUMULATION TEST FACTORS. We will at all times assure that the policy meets the statutory definition which qualifies the policy as life insurance for federal income tax purposes. In addition, as long as the policy remains in force, increases in account value as a result of interest or investment experience will not be subject to federal income tax unless and until there is a distribution from the policy, such as a partial withdrawal or loan. SEE TAX TREATMENT OF POLICY DEATH BENEFITS, PAGE 44. DIVERSIFICATION REQUIREMENTS In addition to meeting the Code Section 7702 tests, Code Section 817(h) requires separate account investments, such as our separate account, to be adequately diversified. The Treasury has issued regulations which set the standards for measuring the adequacy of any diversification. To be adequately diversified, each variable investment option must meet certain tests. If your variable life policy is not adequately diversified under these regulations, it is not treated as life insurance under Code Section 7702. You would then be subject to federal income tax on your policy income as you earn it. Our variable investment options' investment portfolios have promised they will meet the diversification standards that apply to your policy. In certain circumstances, you, as owner of a variable life insurance contract, may be considered the owner for federal income tax purposes of the separate account assets used to support your contract. Any income and gains from the separate account assets are includable in the gross income from your policy under these circumstances. The IRS has stated in published rulings that a variable contract owner is considered the owner of separate account assets if the contract owner has "indicia of ownership" in those assets. "Indicia of ownership" includes the ability to exercise investment control over the assets. Your ownership rights under your policy are similar to, but different in some ways from, those described by the IRS in rulings in which it determined that policy owners are not owners of separate account assets. For example, you have flexibility in allocating your premium payments and in your policy values. These differences could result in the IRS treating you as the owner of a pro rata share of the separate account assets. We do not know what standards will be set forth in the future, if any, in Treasury regulations or rulings. We reserve the right to modify your policy, as necessary, to try to prevent you from being considered the owner of a pro rata share of the separate account assets, or to otherwise qualify your policy for favorable tax treatment. The following discussion assumes that the policy will qualify as a life insurance contract for federal income tax purposes. TAX TREATMENT OF POLICY DEATH BENEFITS We believe that the death benefit under a policy is generally excludable from the gross income of the beneficiary(ies) under section 101(a)(1) of the Code. However, there are exceptions to this general rule. Additionally, federal and local transfer, estate inheritance, and other tax consequences of ownership or receipt of policy proceeds depend on the circumstances of each policy owner or beneficiary(ies). A tax adviser should be consulted - -------------------------------------------------------------------------------- Strategic Benefit 44 about these consequences. Generally, the policy owner will not be taxed on any of the policy cash value until there is a distribution. When distributions from a policy occur, or when a loan is taken from or secured by a policy, the tax consequences depend on whether or not the policy is a "modified endowment contract." Special rules also apply if you are subject to the alternative minimum tax. You should consult a tax adviser if you are subject to the alternative minimum tax. MODIFIED ENDOWMENT CONTRACTS Under the Internal Revenue Code, certain life insurance contracts are classified as "modified endowment contracts," and are given less favorable tax treatment than other life insurance contracts. Due to the flexibility of the policies as to premiums and benefits, the individual circumstances of each policy will determine whether or not it is classified as a modified endowment contract. The rules are too complex to be summarized here, but generally depend on the amount of premiums we receive during the first seven policy years. Certain changes in a policy after it is issued could also cause it to be classified as a modified endowment contract. A current or prospective policy owner should consult with a competent adviser to determine whether or not a policy transaction will cause the policy to be classified as a modified endowment contract. MULTIPLE POLICIES All modified endowment contracts that are issued by us (or our affiliates) to the same policy owner during any calendar year are treated as one modified endowment contract for purposes of determining the amount includable in the policy owner's income when a taxable distribution occurs. DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS Once a policy is classified as a modified endowment contract, the following tax rules apply both prospectively and to any distributions made in the prior two years: o All distributions other than death benefits, including distributions upon surrender and withdrawals, from a modified endowment contact will be treated first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. o Loan amounts taken from or secured by a policy classified as a modified endowment contract are treated as distributions and taxed first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. o A 10% additional income tax penalty may be imposed on the distribution amount subject to income tax. Consult a tax adviser to determine whether or not you may be subject to this penalty tax. If a policy becomes a modified endowment contract, distributions that occur during the policy year will be taxed as distributions from a modified endowment contract. In addition, distributions from a policy within two years before it becomes a modified endowment contact will be taxed in this manner. This means that a distribution made from a policy that is not a modified endowment contract could later become taxable as a distribution from a modified endowment contract. DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS Distributions other than death benefits from a policy that is not classified as a modified endowment contract are generally treated first as a recovery of the policy owner's investment in the policy. Only after the recovery of all investment in the policy, is there taxable income. However, certain distributions which must be made in order to enable the policy to continue to qualify as a life insurance contract for federal income tax purposes, if policy benefits are reduced during the first fifteen policy years, may be treated in whole or in part as ordinary income subject to tax. Loan amounts from or secured by a policy that is not a modified endowment contract are generally not treated as distributions. Finally, neither distributions - -------------------------------------------------------------------------------- Strategic Benefit 45 from, nor loan amounts from or secured by, a policy that is not a modified endowment contract are subject to the 10% additional income tax. INVESTMENT IN THE POLICY Your investment in the policy is generally the total of your aggregate premiums. When a distribution is taken from the policy other than a policy loan, your investment in the policy is reduced by the amount of the distribution that is tax free. POLICY LOANS In general, interest on a policy loan will not be deductible. Moreover, the tax consequences associated with a low cost loan such as the loan available in the policy are uncertain. Before taking out a policy loan, you should consult a tax adviser as to the tax consequences. If a loan from a policy is outstanding when the policy is canceled or lapses, then the amount of the outstanding indebtedness will be added to the amount treated as a distribution from the policy and will be taxed accordingly. SECTION 1035 EXCHANGES Code Section 1035 generally provides that no gain or loss shall be recognized on the exchange of one life insurance policy for another life insurance policy, or for an endowment or annuity contract. We accept 1035 exchanges with outstanding loans. Special rules and procedures apply to Section 1035 exchanges. If you wish to take advantage of Section 1035, you should consult your tax adviser. TAX-EXEMPT POLICY OWNERS Special rules may apply to a policy that is owned by a tax-exempt entity. Tax-exempt entities should consult their tax adviser regarding the consequences of purchasing and owning a policy. These consequences could include an effect on the tax-exempt status of the entity and the possibility of the unrelated business income tax. POSSIBLE TAX LAW CHANGES Although the likelihood of legislative action is uncertain, there is always the possibility that the tax treatment of the policy could be changed by legislation or otherwise. You should consult a tax adviser with respect to legislative developments and their effect on the policy. CHANGES TO COMPLY WITH THE LAW So that your policy continues to qualify as life insurance under the Code, we reserve the right to refuse to accept all or part of your premium payments, or to change your death benefit. We may refuse to allow you to make partial withdrawals that would cause your policy to fail to qualify as life insurance. We also may: o make changes to your policy or its riders; or o take distributions from your policy to the degree that we deem necessary to qualify your policy as life insurance for tax purposes. If we make any change of this type, it applies the same way to all affected policies. The tax law limits the mortality charge used to calculate whether your policy qualifies as life insurance for federal income tax purposes. We must base these calculations on reasonable mortality charges expected to be paid. The Treasury issued proposed regulations on what it considers reasonable mortality charges. We believe that the mortality charges used for your policy should meet the Treasury's current requirement for "reasonableness." We reserve the right to make changes to the mortality charges used in the calculation if future regulations have standards which make changes necessary in order to continue to qualify your policy as life insurance for federal income tax purposes. Additionally, assuming that you do not want your policy to be or to become a modified endowment contract, we include a policy endorsement under which we have the right to amend your policy, including riders. We do this to attempt to enable your policy to continue to meet the seven-pay test for federal income tax purposes. If the policy premium you pay is more than the seven-pay limit, we have the right to remove any excess premium or to make any appropriate adjustments to your policy's account value and death benefit. It is not clear, however, whether we can take effective action pursuant to this endorsement under all possible circumstances to - -------------------------------------------------------------------------------- Strategic Benefit 46 prevent a policy that has exceeded the premium limitation from being classified as a modified endowment contract. Any increase in your death benefit will cause an increase in your cost of insurance charges. OTHER Policy owners may use our policies in various arrangements, including: o qualified plans; o non-qualified deferred compensation or salary continuance plans; o split dollar insurance plans; o executive bonus plans; o retiree medical benefit plans; and o other plans. The tax consequences of these plans may vary depending on the particular facts and circumstances of each arrangement. If you want to use any of your policies in this type of arrangement, you should consult a qualified tax adviser regarding the tax issues of your particular arrangement. In recent years, Congress has adopted new rules relating to life insurance owned by businesses. Any business contemplating the purchase of a new policy or a change in an existing policy should consult a tax adviser. The IRS requires us to withhold income taxes from any portion of the amounts individuals receive in a taxable transaction. We do not withhold income taxes if you elect in writing not to have withholding apply. If the amount withheld for you is insufficient to cover income taxes, you may have to pay income taxes and possibly penalties later. The transfer of the policy or designation of a beneficiary may have federal, state, and/or local transfer and inheritance tax consequences, including the imposition of gift, estate, and generation-skipping transfer taxes. For example, the transfer of the policy to, or the designation as a beneficiary of, or the payment of proceeds to a person who is assigned to a generation which is two or more generations below the generation assignment of the policy owner may have generation skipping transfer tax consequences under federal tax law. The individual situation of each policy owner or beneficiary will determine the extent, if any, to which federal, state, and local transfer and inheritance taxes may be imposed and how ownership or receipt of policy proceeds will be treated for purposes of federal, state and local estate, inheritance, generation skipping and other taxes. YOU SHOULD CONSULT QUALIFIED LEGAL OR TAX ADVISERS FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL, AND OTHER TAX CONSIDERATIONS. - -------------------------------------------------------------------------------- Strategic Benefit 47 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:
Death Stated Scheduled Target Smoker* Benefit Death Annual Death Gender Age Status Option Benefit Premium Benefit - ------ --- ------ ------ ------- ------- ------- Male 45 Nonsmoker 1 $180,526 $10,000 $180,526 Male 45 Nonsmoker 1 $90,263 $10,000 $180,526
* "Smoker" includes the use of cigarettes, cigars, pipes, chewing tobacco, nicotine chewing gum or patch, snuff or any other tobacco or nicotine-based product. The tables show how death benefits, account values, and surrender values of a hypothetical policy could vary over an extended period of time, assuming the variable divisions had constant hypothetical gross annual investment returns of 0%, 12% or 6% over the periods indicated in each table. Values would differ from those shown in the tables if the annual investment returns were not constant. The amounts shown would differ if we had used female, unisex or smoker rates. We illustrate premium payments as if they were made at the beginning of the year. The third column of each table shows what would happen if an amount equal to the assumed premiums earned interest, after taxes, of 5% compounded annually. These illustrations assume there are no policy loans. The net investment return on your policy is lower than the gross investment return on the variable division as a result of the portfolio charge for management fees and portfolio expenses. We show the effect of the net investment return in the amounts for death benefits, account values and surrender values. The tables reflect annual investment management fees of 0.71% of the portfolios' aggregate average daily net assets. This hypothetical rate is a simple average of the investment advisory fees applying to the investment portfolios for the year ending December 31, 1999. We assume other portfolio expenses at the rate of 0.24% of the portfolios' average daily net assets. This is an average of all the portfolios' other expenses for the year ending December 31, 1999, after expense reimbursements or waivers by investment portfolio managers have been made. The average of all portfolios' total expenses is 0.95%. Actual fees vary by portfolio. The portfolio fees and expenses used in the illustrations are the net amounts shown after expense reimbursements or waivers by the portfolio's investment manager. Absent such expense reimbursements or waivers, the total average investment management fees, average other portfolio expenses and the average of all portfolios' total expenses used in the illustrations would have been higher (0.76%, 0.37% and 1.13%, respectively). The tables assume that the current expense reimbursement arrangements will continue. However, they may not continue through 2000. The effect of these portfolio charges and expenses results in a net rate of return of: o (0.95)% on a 0% gross rate of return; o 11.05% on a 12% gross rate of return; and o 5.05% on a 6% gross rate of return. - -------------------------------------------------------------------------------- Strategic Benefit 48 The tables assume that charges have been deducted including deductions from premiums, cost of insurance rider charges, monthly deductions and annual deferred sales charge, mortality and expense risk charge, administrative and sales charges. The tables show charges at our current rates. The tables also show charges at the maximum rates we guarantee in our policies. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 41. The tables reflect that we do not currently charge against the separate account for state or federal taxes. If we charge for the taxes in the future, it will take a higher gross rate of return than the rates shown to produce the same death benefits, account values, and surrender values. This Strategic Benefit policy is issued only to groups. For this policy, we generally deliver an illustration which shows a single life scheduled premium and risk class representative of the particular group covered by this policy. We base these hypothetical future benefits on both guaranteed and current cost factor assumptions and actual account value. However, if we are asked to do so, we will provide personal illustrations based on: o each insured person's age and gender; o standard premium class assumptions; o initial stated death benefit; o the chosen death benefit option; o scheduled premiums consistent with the policy form; and o special features elected on each policy. - -------------------------------------------------------------------------------- Strategic Benefit 49 PROSPECT: INSURED PERSON'S NAME MALE 45 NONSMOKER PRESENTED BY: SECURITY LIFE STRATEGIC BENEFIT VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $180,526 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 8514 8514 180526 9600 9600 180526 9057 9057 180526 2 10000 21525 16704 16704 180526 19983 19983 180526 18311 18311 180526 3 10000 33101 24725 24725 180526 31409 31409 180526 27934 27934 180526 4 10000 45256 32584 32584 180526 43996 43996 180526 37950 37950 180526 5 10000 58019 40282 40282 180526 57873 57873 180526 48380 48380 180526 6 10000 71420 47823 47823 180526 73187 73187 184579 59248 59248 180526 7 10000 85491 55207 55207 180526 89880 89880 220116 70577 70577 180526 8 -- 89766 52982 52982 180526 97624 97624 232151 72371 72371 180526 9 -- 94254 50856 50856 180526 106202 106202 245433 74355 74355 180526 10 -- 98967 48640 48640 180526 115483 115483 259374 76348 76348 180526 15 -- 126309 36305 36305 180526 176658 176658 346602 87532 87532 180526 20 -- 161206 18948 18948 180526 267222 267222 462829 98907 98907 180526 25 -- 205744 -- -- -- 409525 409525 634763 113013 113013 180526 30 -- 262588 -- -- -- 617891 617891 868754 127556 127556 180526 AGE 65 -- 169267 14553 14553 180526 291371 291371 493000 101684 101684 180526
The expense charges and cost of insurance rates will never be greater than those which were used to calculate the above values. The hypothetical gross rates of return shown are illustrative only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors, including selected investment allocations and investment experience. No representation is made that these hypothetical gross investment returns can be achieved or sustained over any period of time. The death benefit, account value and cash surrender value for a policy would be different from those shown if the actual gross annual rates of return averaged 0.00%, 12.00% and 6.00% over a period of years but varied above or below that average during the period. They would also be different if premiums were paid in a different frequency than shown. - -------------------------------------------------------------------------------- Strategic Benefit 50 PROSPECT: INSURED PERSON'S NAME MALE 45 NONSMOKER PRESENTED BY: SECURITY LIFE STRATEGIC BENEFIT VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $180,526 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 180526 10278 10278 180526 9716 9716 180526 2 10000 21525 17979 17979 180526 21411 21411 180526 19661 19661 180526 3 10000 33101 26635 26635 180526 33659 33659 180526 30010 30010 180526 4 10000 45256 35125 35125 180526 47139 47139 180526 40779 40779 180526 5 10000 58019 43452 43452 180526 61981 61981 180526 51991 51991 180526 6 10000 71420 51623 51623 180526 78317 78317 197515 63666 63666 180526 7 10000 85491 59637 59637 180526 96249 96249 235715 75823 75823 185691 8 -- 89766 58104 58104 180526 105442 105442 250740 78521 78521 186723 9 -- 94254 56743 56743 180526 115714 115714 267415 81495 81495 188334 10 -- 98967 55375 55375 180526 126976 126976 285188 84571 84571 189947 15 -- 126309 48862 48862 180526 204089 204089 400422 102804 102804 201702 20 -- 161206 40891 40891 180526 325948 325948 564543 124152 124152 215032 25 -- 205744 31122 31122 180526 531339 531339 823576 153041 153041 237214 30 -- 262588 15701 15701 180526 859540 859540 1208514 187240 187240 263259 AGE 65 -- 169267 39231 39231 180526 359606 359606 608453 129525 129525 219157
The current cost of insurance rates are subject to change. Account values will vary from those illustrated if actual rates differ from those assumed. Current mortality charge rates are based on current mortality experience and are not dependent upon future improvements in underlying mortality. The hypothetical gross rates of return shown are illustrative only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors, including selected investment allocations and investment experience. No representation is made that these hypothetical gross investment returns can be achieved or sustained over any period of time. The death benefit, account value and cash surrender value for a policy would be different from those shown if the actual gross annual rates of return averaged 0.00%, 12.00% and 6.00% over a period of years but varied above or below that average during the period. They would also be different if premiums were paid in a different frequency than shown. - -------------------------------------------------------------------------------- Strategic Benefit 51 PROSPECT: INSURED PERSON'S NAME MALE 45 NONSMOKER PRESENTED BY: SECURITY LIFE STRATEGIC BENEFIT VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $90,263 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $90,263 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 8608 8608 180526 9711 9711 180526 9160 9160 180526 2 10000 21525 16693 16693 180526 19996 19996 180526 18311 18311 180526 3 10000 33101 24601 24601 180526 31303 31303 180526 27818 27818 180526 4 10000 45256 32338 32338 180526 43782 43782 180526 37716 37716 180526 5 10000 58019 39930 39930 180526 57583 57583 180526 48050 48050 180526 6 10000 71420 47385 47385 180526 72865 72865 183766 58851 58851 180526 7 10000 85491 54700 54700 180526 89537 89537 219277 70147 70147 180526 8 -- 89766 52380 52380 180526 97259 97259 231282 71901 71901 180526 9 -- 94254 50124 50124 180526 105804 105804 244513 73833 73833 180526 10 -- 98967 47744 47744 180526 115050 115050 258403 75768 75768 180526 15 -- 126309 34037 34037 180526 175994 175994 345300 86526 86526 180526 20 -- 161206 14389 14389 180526 266217 266217 461087 97134 97134 180526 25 -- 205744 -- -- -- 407982 407982 632372 109742 109742 180526 30 -- 262588 -- -- -- 615561 615561 865479 121309 121309 180526 AGE 65 -- 169267 9337 9337 180526 290274 290274 491144 99680 99680 180526
The expense charges and cost of insurance rates will never be greater than those which were used to calculate the above values. The hypothetical gross rates of return shown are illustrative only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors, including selected investment allocations and investment experience. No representation is made that these hypothetical gross investment returns can be achieved or sustained over any period of time. The death benefit, account value and cash surrender value for a policy would be different from those shown if the actual gross annual rates of return averaged 0.00%, 12.00% and 6.00% over a period of years but varied above or below that average during the period. They would also be different if premiums were paid in a different frequency than shown. - -------------------------------------------------------------------------------- Strategic Benefit 52 PROSPECT: INSURED PERSON'S NAME MALE 45 NONSMOKER PRESENTED BY: SECURITY LIFE STRATEGIC BENEFIT VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $90,263 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $90,263 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------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 9350 9350 180526 10499 10499 180526 9924 9924 180526 2 10000 21525 18180 18180 180526 21662 21662 180526 19886 19886 180526 3 10000 33101 26839 26839 180526 33943 33943 180526 30251 30251 180526 4 10000 45256 35332 35332 180526 47461 47461 180526 41039 41039 180526 5 10000 58019 43664 43664 180526 62344 62344 180526 52270 52270 180526 6 10000 71420 51838 51838 180526 78724 78724 198541 63965 63965 180526 7 10000 85491 59856 59856 180526 96705 96705 236830 76142 76142 186471 8 -- 89766 58326 58326 180526 105950 105950 251948 78860 78860 187528 9 -- 94254 56961 56961 180526 116272 116272 268704 81846 81846 189147 10 -- 98967 55591 55591 180526 127589 127589 286564 84937 84937 190768 15 -- 126309 49061 49061 180526 205076 205076 402359 103250 103250 202577 20 -- 161206 41075 41075 180526 327527 327527 567277 124692 124692 215967 25 -- 205744 31295 31295 180526 533915 533915 827568 153709 153709 238249 30 -- 262588 15860 15860 180526 863709 863709 1214375 188058 188058 264410 AGE 65 -- 169267 39413 39413 180526 361348 361348 611401 130089 130089 220111
The current cost of insurance rates are subject to change. Account values will vary from those illustrated if actual rates differ from those assumed. Current mortality charge rates are based on current mortality experience and are not dependent upon future improvements in underlying mortality. The hypothetical gross rates of return shown are illustrative only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors, including selected investment allocations and investment experience. No representation is made that these hypothetical gross investment returns can be achieved or sustained over any period of time. The death benefit, account value and cash surrender value for a policy would be different from those shown if the actual gross annual rates of return averaged 0.00%, 12.00% and 6.00% over a period of years but varied above or below that average during the period. They would also be different if premiums were paid in a different frequency than shown. - -------------------------------------------------------------------------------- Strategic Benefit 53 ADDITIONAL INFORMATION DIRECTORS AND OFFICERS Security Life's address and the business address of each director and principal officer named, except as noted with one or two asterisks (*/**), is Security Life Center, 1290 Broadway, Denver, Colorado 80203-5699. The business address of each person with one asterisk (*) is ING North America Insurance Corporation, 5780 Powers Ferry Road, Atlanta, Georgia 30327-4390. The business address of each person with two asterisks (**) is Security Life of Denver Insurance Company, 9140 Arrowpoint Blvd., Suite 400, Charlotte, North Carolina 28273. Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Stephen M. Christopher Chairman, President and Chief Executive Officer Jess A. Skriletz Director, Chief Executive Officer and General Manager, ING Reinsurance and ING Institutional Markets Michael W. Cunningham* Director, Executive Vice President Mark A. Tullis* Director P. Randall Lowery* Director Thomas F. Conroy President, ING Reinsurance International Gregory G. McGreevey President, ING Institutional Markets Jerome J. Cwiok* Executive Vice President and Chief Operating Officer James L. Livingston, Jr. Executive Vice President, CFO and Chief Actuary Jeffrey R. Messner Executive Vice President and Chief Marketing Officer John R. Barmeyer* Senior Vice President, ING US Legal Services Peter Bell Senior Vice President, Risk Selection and Medical Director, ING Reinsurance Wayne D. Bidelman Senior Vice President, CCRC R. Thomas Daniel* Senior Vice President, Marketing Arnold A. Dicke Senior Vice President and Chief Actuary, ING Reinsurance Charles E. LeDoyen** Senior Vice President, Structured Settlements Terry L. Morrison Senior Vice President, New Business Operations Derek J. Reynolds* Senior VP and Chief Information Officer Jeffrey W. Seel* Senior Vice President, Chief Investment Officer Mark A. Smith Senior Vice President, Insurance Services Lawrence D. Taylor Senior Vice President, Product Management William D. Tyler* Senior Vice President, Chief Information Officer Gretta Ytterbo Senior Vice President, ING US Legal Services Gary W. Waggoner Vice President, General Counsel and Corporate Secretary - -------------------------------------------------------------------------------- Strategic Benefit 54 REGULATION We are regulated and supervised by the Division of Insurance of the Department of Regulatory Agencies of the State of Colorado which periodically examines our financial condition and operations. In addition, we are subject to the insurance laws and regulations in every jurisdiction in which we do business. As a result, the provisions of this policy may vary somewhat from jurisdiction to jurisdiction. We are required to submit annual statements, including financial statements, of our operations and finances to the insurance departments of the various jurisdictions in which we do business to determine solvency and compliance with state insurance laws and regulations. We are also subject to various federal securities laws and regulations. LEGAL MATTERS The legal matters in connection with the policy described in this prospectus have been passed on by the General Counsel of Security Life. Sutherland Asbill & Brennan LLP has provided advice on certain matters relating to the federal securities laws. LEGAL PROCEEDINGS Security Life, as an insurance company, is ordinarily involved in litigation. We do not believe that any current litigation is material to Security Life's ability to meet its obligations under the policy or to the separate account, and we do not expect to incur significant losses from such actions. ING America Equities, Inc., the principal underwriter and distributor of the policy, is not engaged in any litigation of any material nature. EXPERTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, and the financial statements of the Security Life Separate Account L1 at December 31, 1999, and for each of the three years in the period ended December 31, 1999, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. Actuarial matters in this prospectus have been examined by James L. Livingston, Jr., F.S.A., M.A.A.A., who is Executive Vice President, CFO and Chief Actuary of Security Life. His opinion on actuarial matters is filed as an exhibit to the Registration Statement we filed with the SEC. REGISTRATION STATEMENT We have filed a Registration Statement relating to the separate account and the variable life insurance policy described in this prospectus with the SEC. The Registration Statement, which is required by the Securities Act of 1933, includes additional information that is not required in this prospectus under the rules and regulations of the SEC. The additional information may be obtained from the SEC's principal office in Washington, DC. There is a charge for this material. - -------------------------------------------------------------------------------- Strategic Benefit 55 FINANCIAL STATEMENTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, are prepared in accordance with accounting principles generally accepted in the United States and start on page 57. The financial statements included for the Security Life Separate Account L1 at December 31, 1999 and for each of the three years in the period ended December 31, 1999, are prepared in accordance with accounting principles generally accepted in the United States and represent those divisions that had commenced operations by that date. The consolidated financial statements of Security Life and Subsidiaries, as well as the financial statements included for the Security Life Separate Account L1 referred to above have been audited by Ernst & Young LLP. The consolidated financial statements of Security Life and Subsidiaries should be distinguished from the financial statements of the Security Life Separate Account L1 and should be considered only as bearing upon the ability of Security Life and Subsidiaries to meet its obligations under the policies. They should not be considered as bearing upon the investment experience of the divisions of Security Life Separate Account L1. - -------------------------------------------------------------------------------- Strategic Benefit 56 Consolidated Financial Statements Security Life of Denver Insurance Company and Subsidiaries Years ended December 31, 1999, 1998 and 1997 with Report of Independent Auditors - -------------------------------------------------------------------------------- Strategic Benefit 57 Security Life of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1999, 1998 and 1997 CONTENTS Report of Independent Auditors ...............................................59 Audited Consolidated Financial Statements Consolidated Balance Sheets ..................................................60 Consolidated Statements of Income ............................................62 Consolidated Statements of Comprehensive Income...............................63 Consolidated Statements of Stockholder's Equity ..............................64 Consolidated Statements of Cash Flows ........................................65 Notes to Consolidated Financial Statements ...................................67 - -------------------------------------------------------------------------------- Strategic Benefit 58 Report of Independent Auditors Board of Directors and Stockholder Security Life of Denver Insurance Company We have audited the accompanying consolidated balance sheets of Security Life of Denver Insurance Company (a wholly owned subsidiary of ING America Insurance Holdings, Inc.) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security Life of Denver Insurance Company and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP April 14, 2000 - -------------------------------------------------------------------------------- Strategic Benefit 59 Security Life of Denver Insurance Company and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)
DECEMBER 31 1999 1998 ------------ --------------- ASSETS Investments (Notes 2 and 3): Fixed maturities, at fair value (amortized cost: 1999--$3,649,485; 1998--$3,383,582) $ 3,486,939 $ 3,503,530 Equity securities, at fair value (cost: 1999--$5,161; 1998--$6,761) 7,944 8,400 Mortgage loans on real estate 1,006,443 784,108 Investment real estate, at cost, less accumulated depreciation (1999--$561; 1998--$706) 1,028 1,740 Policy loans 961,586 925,623 Other long-term investments 37,284 17,671 Short-term investments 186,917 747 ------------ --------------- Total investments 5,688,141 5,241,819 Cash 48,630 31,644 Accrued investment income 78,866 52,440 Reinsurance recoverable: Paid benefits 19,738 11,364 Unpaid benefits 28,060 24,312 Prepaid reinsurance premiums (Note 8) 3,666,882 3,329,901 Deferred policy acquisition costs (DPAC) 982,713 778,126 Property and equipment, at cost, less accumulated depreciation (1999--$28,522; 1998--$25,981) 34,704 36,141 Federal income tax recoverable (Note 9) 27,663 - Indebtedness from related parties 33,220 4,339 Other assets 134,913 113,019 Separate account assets (Note 6) 644,975 423,474 ------------ --------------- Total assets $11,388,505 $10,046,579 ============ ===============
- -------------------------------------------------------------------------------- Strategic Benefit 60
DECEMBER 31 1999 1998 -------------------- -------------------- LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Future policy benefits: Life and annuity reserves $ 5,313,006 $ 4,857,141 Guaranteed investment contracts 3,885,219 3,210,012 Policyholders' funds 79,648 81,064 Advance premiums 192 272 Accrued dividends and dividends on deposit 21,603 21,268 Policy and contract claims 155,679 130,100 -------------------- -------------------- Total future policy benefits 9,455,347 8,299,857 Accounts payable and accrued expenses 126,857 108,165 Indebtedness to related parties 34,231 13,755 Long-term debt to related parties (Note 10) 100,000 100,000 Accrued interest on long-term debt to related parties (Note 10) 11,098 5,387 Other liabilities 98,225 109,593 Federal income taxes payable (Note 9) - 106 Deferred federal income taxes (Note 9) 18,679 60,062 Separate account liabilities (Note 6) 644,975 423,474 -------------------- -------------------- Total liabilities 10,489,412 9,120,399 Commitments and contingencies (Notes 8 and 13) Stockholder's equity (Note 11): Common stock, $20,000 par value: Authorized--149 shares Issued and outstanding--144 shares 2,880 2,880 Additional paid-in capital 345,722 315,722 Retained earnings 614,785 563,553 Accumulated other comprehensive income (loss) (64,294) 44,025 -------------------- -------------------- Total stockholder's equity 899,093 926,180 -------------------- -------------------- Total liabilities and stockholder's equity $11,388,505 $10,046,579 ==================== ====================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 61 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Income (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1999 1998 1997 ---------------- ---------------- ---------------- Revenues: Traditional life insurance premiums $ 104,133 $ 120,675 $ 122,429 Universal life and investment product charges 247,066 229,226 217,108 Reinsurance premiums assumed 526,563 431,267 446,434 ---------------- ---------------- ---------------- 877,762 781,168 785,971 Reinsurance premiums ceded (147,068) (143,211) (124,815) ---------------- ---------------- ---------------- 730,694 637,957 661,156 Net investment income 394,167 361,996 340,898 Net realized gains (losses) on investments (39,495) 10,818 28,645 Other revenues 18,304 11,771 6,743 ---------------- ---------------- ---------------- 1,103,670 1,022,542 1,037,442 Benefits and expenses: Benefits: Traditional life insurance: Death benefits 357,472 239,921 299,305 Other benefits 72,286 77,209 79,849 Universal life and investment contracts: Interest credited to account balances 258,167 236,136 217,614 Death benefits incurred in excess of account balances 95,444 63,103 73,260 Increase in future policy benefits 95,511 102,875 72,685 Reinsurance recoveries (127,238) (84,506) (98,376) Product conversions 3,701 10,578 7,014 ---------------- ---------------- ---------------- 755,343 645,316 651,351 Expenses: Commissions 81,539 49,569 46,516 Insurance operating expenses 91,172 125,194 89,075 Amortization of deferred policy acquisition costs 98,051 105,639 116,495 ---------------- ---------------- ---------------- 1,026,105 925,718 903,437 ---------------- ---------------- ---------------- Income before federal income taxes 77,565 96,824 134,005 Federal income taxes (Note 9) 26,333 34,066 47,019 ---------------- ---------------- ---------------- Net income $ 51,232 $ 62,758 $ 86,986 ================ ================ ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 62 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Comprehensive Income (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1999 1998 1997 ---------------- ---------------- ---------------- Net income $ 51,232 $ 62,758 $ 86,986 ---------------- ---------------- ---------------- Other comprehensive income: Unrealized gains (losses) on securities: Net change in unrealized holding gains (losses), net of tax (150,423) (11,251) 28,367 Reclassification adjustment for realized gains included in net income, net of tax (32,454) (5,010) (4,601) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 82,098 7,236 (37,522) Reclassification effect on DPAC of realized gains and losses included in net income, net of tax (7,073) 3,075 5,976 Net change in pension liability, net of tax (467) (963) - ---------------- ---------------- ---------------- Total other comprehensive income (loss) (108,319) (6,913) (7,780) ---------------- ---------------- ---------------- Comprehensive income (loss) $ (57,087) $ 55,845 $ 79,206 ================ ================ ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 63 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Stockholder's Equity (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1999 1998 1997 ================== ================= ================== Common stock: Balance at beginning and end of year $ 2,880 $ 2,880 $ 2,880 ================== ================= ================== Additional paid-in capital: Balance at beginning of year $315,722 $315,722 $302,722 Capital contributions 30,000 - 13,000 ------------------ ----------------- ------------------ Balance at end of year $345,722 $315,722 $315,722 ================== ================= ================== Accumulated other comprehensive income (loss): Net unrealized gains on investments: Balance at beginning of year $ 44,988 $ 50,938 $ 58,718 Unrealized gains (losses) on securities: Change in unrealized gains (losses), net of tax (182,877) (16,261) 23,766 Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 75,025 10,311 (31,546) ------------------ ----------------- ------------------ Balance at end of year (62,864) 44,988 50,938 Accumulated net pension liability: Balance at beginning of year (963) - - Net change in pension liability, net of tax (467) (963) - ------------------ ----------------- ------------------ Balance at end of year (1,430) (963) - ------------------ ----------------- ------------------ Total accumulated other comprehensive income (loss) $(64,294) $ 44,025 $ 50,938 ================== ================= ================== Retained earnings: Balance at beginning of year $563,553 $500,795 $413,809 Net income 51,232 62,758 86,986 ------------------ ----------------- ------------------ Balance at end of year $614,785 $563,553 $500,795 ================== ================= ================== Total stockholder's equity $899,093 $926,180 $870,335 ================== ================= ==================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 64 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1999 1998 1997 ----------------- ------------------- ------------------- OPERATING ACTIVITIES Net income $ 51,232 $ 62,758 $ 86,986 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits 624,769 874,765 995,632 Net (increase) decrease in federal income taxes (69,152) 12,061 (12,317) Increase in accounts payable and accrued expenses 6,088 55,361 21,033 Increase in accrued interest on long-term debt 5,711 259 1,428 Increase in accrued investment income (26,426) (2,714) (4,300) (Increase) decrease in reinsurance recoverable (12,122) (9,518) 3,733 Increase in prepaid reinsurance premiums (336,981) (585,038) (793,851) Net realized investment (gains) losses 39,495 (10,818) (28,645) Depreciation and amortization expense 2,567 3,174 3,630 Policy acquisition costs deferred (187,214) (184,993) (174,374) Amortization of deferred policy acquisition costs 98,049 105,639 116,495 Increase in accrual for postretirement benefits 769 675 557 Other, net 51,980 (7,053) 43,538 ----------------- ------------------- ------------------- Net cash provided by operating activities 248,765 314,558 259,545 INVESTING ACTIVITIES Securities available-for-sale: Sales: Fixed maturities 2,300,734 5,015,989 2,279,598 Equity securities 2,053 2,251 648 Maturities--fixed maturities 193,664 274,463 410,632 Purchases: Fixed maturities (2,816,711) (5,670,994) (2,919,145) Equity securities - (2,089) (2,561) Sale, maturity or repayment of investments: Mortgage loans on real estate 47,851 51,235 38,756 Investment real estate 1,109 - - Other long-term investments 70,790 10,678 2,002
- -------------------------------------------------------------------------------- Strategic Benefit 65 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (continued) (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1999 1998 1997 ----------------- ------------------- ------------------- Investing activities (continued) Purchase or issuance of investments: Mortgage loans on real estate $(271,686) $(259,945) $(163,528) Investment real estate - (13) (35) Policy loans, net (35,963) (50,218) (80,094) Other long-term investments (88,661) (14,042) (5,248) Short-term investments, net (186,174) 55,115 (48,447) Additions to property and equipment (1,247) (1,418) (2,687) Disposals of property and equipment 147 68 145 ----------------- ------------------- ------------------- Net cash used by investing activities (784,094) (588,920) (489,964) Financing activities (Decrease) increase in indebtedness to related parties (8,406) 29,156 5,217 Cash contributions from parent 30,000 - 13,000 Receipts from interest-sensitive products credited to policyholder account balances 829,493 505,728 555,223 Return of policyholder account balances on interest-sensitive policies (298,772) (251,177) (334,543) ----------------- ------------------- ------------------- Net cash provided by financing activities 552,315 283,707 238,897 ----------------- ------------------- ------------------- Net increase in cash 16,986 9,345 8,478 Cash at beginning of year 31,644 22,299 13,821 ----------------- ------------------- ------------------- Cash at end of year $ 48,630 $ 31,644 $ 22,299 ================= =================== ===================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 66 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and operations, after intercompany eliminations, of Security Life of Denver Insurance Company (Security Life) and its wholly owned subsidiaries: Midwestern United Life Insurance Company (Midwestern United); First ING Life Insurance Company of New York (First ING); First Secured Mortgage Deposit Corporation; Tailored Investment Notes Trust 1999-1 (Trust); and ING America Equities, Inc. NATURE OF OPERATIONS Security Life of Denver Insurance Company and its subsidiaries (the Company) is a wholly owned subsidiary of ING America Insurance Holdings, Inc. (ING America). The Company focuses on three markets, the advanced market, reinsurance to other insurers, and the investment products market. The life insurance products offered for the advanced market include wealth transfer and estate planning, executive benefits, charitable giving and corporate owned life insurance. These products include traditional life, interest-sensitive life, universal life and variable life. Operations are conducted almost entirely on the general agency basis and the Company is presently licensed in all states (approved for reinsurance only in New York), the District of Columbia and the Virgin Islands. In the reinsurance market, the Company offers financial security to clients through a mix of total risk management and traditional life insurance services. In the investment products market, the Company offers guaranteed investment contracts, funding agreements and Trust notes to institutional buyers. The significant accounting policies followed by the Company that materially affect the financial statements are summarized below: BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) which, as to the insurance companies included in the consolidation, differ from statutory accounting practices prescribed or permitted by state insurance regulatory authorities. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - -------------------------------------------------------------------------------- Strategic Benefit 67 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES During 1998, the Company adopted FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which standardizes the disclosure requirements for pension and other postretirement benefits. This Statement is effective for years beginning after December 15, 1997, with the restatement of disclosures for prior periods provided for comparative purposes, unless prior period information is not readily available. During 1998, the Company adopted FASB Statement No. 130, Reporting Comprehensive Income, which requires an entity to divide comprehensive income into net income and other comprehensive income in the period recognized. This Statement is effective for fiscal years beginning after December 15, 1997, with the restatement of prior period disclosures for comparative purposes. As a result of implementing this Statement, the Company has classified items of other comprehensive income by their nature in the statements of comprehensive income and the accumulated balance of other comprehensive income in the equity section of the balance sheet. This Statement affects the presentation of the financial statements, with no effect on the valuation of total stockholder's equity. During 1999, the Company adopted Statement of Position 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. This Statement is effective for fiscal years beginning after December 31, 1998 and requires a liability to be recognized for the future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and premiums written in each state. The Statement also requires that when it is probable a paid or accrued assessment will result in an amount that is recoverable from premium tax offsets or policy surcharges, an asset be recognized at the time the liability is recorded. Additional disclosures are also required, including the amount of the liability, the amount of the related asset for premium tax offsets or policy surcharges, the periods over which the assessments are expected to be paid, and the period over which the recorded premium tax offsets or policy surcharges are expected to be realized. Prior period financial statements presented for comparative purposes are not restated. The adoption of this Statement had no effect on the valuation of total stockholder's equity. - -------------------------------------------------------------------------------- Strategic Benefit 68 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PENDING ACCOUNTING STANDARDS During 1998, the FASB issued Statement No. 133, Accounting for Derivative Financial Instruments and Hedging Activities, which establishes a new model for accounting and reporting for derivatives and hedging activities. Statement 133 requires all derivatives to be recognized on the balance sheet and measured at fair value. Based on the type of hedging relationship (fair value, cash flow, or foreign currency), Statement 133 requires the recognition of offsetting changes in value or cash flows of both the derivative and the hedged item in earnings in the same period. Changes in the fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in Statement 133 are included in earnings in the period of change. During 1999, the FASB issued Statement 137 which delays the implementation of Statement 133 to years beginning after June 15, 2000. Upon the initial application of Statement 133, all derivatives are required to be recognized in the balance sheet as either assets or liabilities and measured at fair value. The Company plans to adopt this Statement during 2001, and the effect of implementation on the Company's financial statements has not yet been determined. INVESTMENTS Investments are presented on the following bases: The carrying value of fixed maturities depends on the classification of the security: securities held-to-maturity, securities available-for-sale, and trading securities. Management determines the appropriate classification of debt securities at the time of purchase. The Company does not hold any securities classified as held-to-maturity or trading securities. Debt securities and marketable equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, and deferred policy acquisition cost adjustments, reported net of tax as a component of other comprehensive income in stockholder's equity. - -------------------------------------------------------------------------------- Strategic Benefit 69 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in net investment income as earned. Mortgage loans are carried at the unpaid balances less an allowance for credit losses. Investment real estate is carried at cost, less accumulated depreciation. Policy loans are carried at unpaid balances. Derivatives hedging fixed maturity assets are reported on the balance sheet at market value with fixed maturity securities. Derivatives hedging liabilities are reported on the balance sheet at amortized cost with other investments. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains on investments. The cost of securities sold is based on the specific identification method. RECOGNITION OF PREMIUM REVENUES Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, are recognized as revenue when due. Revenues for universal life insurance policies and for investment products consist of policy charges for the cost of insurance, policy administration charges, and surrender charges assessed against policyholder account balances during the year. DEFERRED POLICY ACQUISITION COSTS Commissions, reinsurance allowances, and other costs of acquiring traditional life insurance, including reinsurance assumed, universal life insurance (including interest-sensitive products) and investment products that vary with and are primarily related to the production of new and renewal business, have been deferred. Traditional life insurance acquisition costs are being amortized using assumptions consistent with those used in computing policy benefit reserves. The period of amortization is normally over the premium-paying period. In the case of policies with no first-year premium, the period of amortization includes the first year, in addition to the premium-paying period. For universal life insurance and investment products, acquisition costs are being amortized generally in proportion to the present value (using the assumed crediting rate) of expected gross margins from surrender charges, investments, mortality, and expenses. This amortization is adjusted retrospectively when estimates of current or future gross margins to be realized from a group of products are revised. - -------------------------------------------------------------------------------- Strategic Benefit 70 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred policy acquisition costs are adjusted to reflect changes that would have been necessary if unrealized investment gains and losses related to available-for-sale securities had been realized. The Company has reflected those adjustments in the asset balance with the offset as a direct adjustment to accumulated other comprehensive income in stockholder's equity. FUTURE POLICY BENEFITS Benefit reserves for traditional life insurance products (other than reinsurance assumed) are computed using a net level premium method including assumptions as to investment yields, mortality, withdrawals and other assumptions based on Company and industry experience. These assumptions include provisions for adverse deviation and are modified as necessary to reflect anticipated trends. Reserve interest assumptions are those deemed appropriate at the time of policy issue, and range from 3% to 7.5%. Policy benefit claims are charged to expense in the year that the claims are incurred. Benefit reserves for reinsurance assumed are computed using pricing assumptions with provisions for adverse deviation. Benefits for level-term reinsurance assumed are computed to recognize profits in proportion with revenue. Benefit reserves for all other reinsurance assumed are computed to recognize profits in proportion to the coverage provided. Benefit reserves for universal life-type policies (including fixed premium interest-sensitive products) and investment products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred during the year in excess of related policy account balances. Interest crediting rates for universal life and investment products range from 3.51% to 7.61% during 1999, 3.80% to 7.81% during 1998, and 4.60% to 7.81% during 1997. Included in life and annuity reserves is an unearned revenue reserve that reflects the unamortized balance of excess heaped expense loads over ultimate renewal expense loads on universal life and investment products. These excess fees have been deferred and are being recognized in income over the periods benefited, using the same assumptions and factors used to amortize deferred policy acquisition costs. - -------------------------------------------------------------------------------- Strategic Benefit 71 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) POLICY AND CONTRACT CLAIMS The liabilities for unpaid claims include estimates of amounts due on reported claims and claims that have been incurred but were not reported as of December 31. Such estimates are based on actuarial projections applied to historical claim payment data and are considered reasonable and adequate to discharge the Company's obligations for claims incurred but unpaid as of December 31. PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Impairment losses are recorded when indicators of impairment are present and the estimated undiscounted cash flows are less than the assets' carrying value. Depreciation for major classes of assets is calculated on a straight-line basis. PARTICIPATING INSURANCE The Company accrues a liability for earnings on participating policies that cannot inure to the benefit of the Company's stockholder. The liability is determined based on earnings on participating policies in excess of 10% of profits on participating business before payment of policyholder dividends. The liability for these undistributed earnings was $5,497,000 and $5,816,000 at December 31, 1999 and 1998, respectively. Participating business approximates .2% of the Company's ordinary life insurance in force and 1.5% of premium income. Earnings for participating insurance are based on the actual earnings of the participation block of policies. Expenses and taxes are allocated based on the amount of participating insurance in force. Investment income is allocated based on the yield of the participating investment portfolio. The amount of dividends to be paid is determined annually by the Board of Directors. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales. Dividends of $3,424,000, $3,233,000, and $3,377,000 were incurred in 1999, 1998, and 1997, respectively. FEDERAL INCOME TAXES Deferred federal income taxes have been provided or credited to reflect significant temporary differences between income reported for tax and financial reporting purposes using reasonable assumptions. - -------------------------------------------------------------------------------- Strategic Benefit 72 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH FLOW INFORMATION Cash includes cash on hand and demand deposits. Included as a component of operating activities is interest paid of $2,672,000, $10,121,000, and $10,110,000 for 1999, 1998, and 1997, respectively. GUARANTY FUND ASSESSMENTS Insurance companies are assessed the costs of funding the insolvencies of other insurance companies by the various state guaranty associations, generally based on the amount of premium companies collect in that state. The Company accrues the cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in each state. The guaranty fund assessment liability at December 31, 1999 and 1998 was $17,644,000 and $13,338,000, respectively. The assessment is expected to be paid over the next five or more years. The related premium tax credit offsets are $15,339,000 and $11,891,000 at December 31, 1999 and 1998, respectively. The premium tax credit offsets are expected to be realized over the next five years. RECLASSIFICATIONS Certain amounts in the 1997 financial statements have been reclassified to conform to the 1999 and 1998 presentation. - -------------------------------------------------------------------------------- Strategic Benefit 73 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS The amortized cost and fair value of investments in fixed maturities and equity securities are as follows at December 31, 1999 and 1998:
DECEMBER 31, 1999 ------------------------------------------------------------------------ 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 $ 98,354 $ 42 $ 7,795 $ 90,601 States, municipalities and political subdivisions 21,412 - 4,408 17,004 Public utilities securities 276,742 272 19,532 257,482 Debt securities issued by foreign governments 452 - - 452 Corporate securities 1,431,446 4,131 77,293 1,358,284 Mortgage-backed securities 1,075,807 24,064 56,493 1,043,378 Other asset-backed securities 745,231 7,626 33,635 719,222 Redeemable preferred stocks - - - - Derivatives hedging fixed maturities (Note 3) 41 475 - 516 ----------------- ------------------ ----------------- ----------------- Total fixed maturities 3,649,485 36,610 199,156 3,486,939 Preferred stocks (nonredeemable) 2,651 329 24 2,956 Common stocks 2,510 2,573 95 4,988 ----------------- ------------------ ----------------- ----------------- Total equity securities 5,161 2,902 119 7,944 ----------------- ------------------ ----------------- ----------------- Total $3,654,646 $39,512 $199,275 $3,494,883 ================= ================== ================= =================
- -------------------------------------------------------------------------------- Strategic Benefit 74 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED)
DECEMBER 31, 1998 --------------------------------------------------------------------- Cost or Gross Gross amortized unrealized unrealized Fair cost gains losses value ----------------- ------------------ ----------------- ----------------- (Dollars in thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 166,611 $ 3,829 $ 589 $ 169,851 States, municipalities and political subdivisions 23,368 959 1,803 22,524 Public utilities securities 172,968 4,885 904 176,949 Debt securities issued by foreign governments 952 - - 952 Corporate securities 1,251,462 46,292 23,512 1,274,242 Mortgage-backed securities 1,132,058 75,159 6,922 1,200,295 Other asset-backed securities 635,539 19,968 3,578 651,929 Redeemable preferred stocks 312 42 - 354 Derivatives hedging fixed maturities (Note 3) 312 6,434 312 6,434 ----------------- ------------------ ----------------- ----------------- Total fixed maturities 3,383,582 157,568 37,620 3,503,530 Preferred stocks (nonredeemable) 4,251 6 52 4,205 Common stocks 2,510 1,780 95 4,195 ----------------- ------------------ ----------------- ----------------- Total equity securities 6,761 1,786 147 8,400 ----------------- ------------------ ----------------- ----------------- Total $3,390,343 $159,354 $37,767 $3,511,930 ================= ================== ================= =================
- -------------------------------------------------------------------------------- Strategic Benefit 75 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) The amortized cost and fair value of investments in fixed maturities at December 31, 1999, by contractual maturity, are shown in the following table (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. AMORTIZED COST FAIR VALUE --------------- -------------------- Available for sale: Due in one year or less $ 9,637 $ 9,174 Due after one year through five years 247,473 245,401 Due after five years through ten years 749,169 716,715 Due after ten years 822,127 752,532 --------------- -------------------- 1,828,406 1,723,822 Mortgage-backed securities 1,075,807 1,043,379 Other asset-backed securities 745,231 719,222 Derivatives 41 516 --------------- -------------------- Total available-for-sale $3,649,485 $3,486,939 =============== ==================== Changes in unrealized gains (losses) on investments in available-for-sale securities for the years ended December 31, 1999, 1998 and 1997 are summarized as follows (in thousands):
DECEMBER 31, 1999 -------------------------------------------------------------- Fixed Equity Total -------------------- -------------------- -------------------- Gross unrealized gains $ 36,610 $2,902 $ 39,512 Gross unrealized (losses) (199,156) (119) (199,275) -------------------- -------------------- -------------------- Net unrealized gains (losses) (162,546) 2,783 (159,763) Deferred income tax 56,891 (974) 55,917 -------------------- -------------------- -------------------- Net unrealized gains (losses) after taxes (105,655) 1,809 (103,846) Less: Balance at beginning of year 77,966 1,065 79,031 -------------------- -------------------- -------------------- Change in net unrealized gains (losses) $(183,621) $ 744 $(182,877) ==================== ==================== ====================
- -------------------------------------------------------------------------------- Strategic Benefit 76 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) DECEMBER 31, 1998 ---------------------------------------- Fixed Equity Total ---------- -------------- -------------- Gross unrealized gains $157,568 $1,786 $159,354 Gross unrealized (losses) (37,620) (147) (37,767) ---------- -------------- -------------- Net unrealized gains 119,948 1,639 121,587 Deferred income tax (41,982) (574) (42,556) ---------- -------------- -------------- Net unrealized gains after taxes 77,966 1,065 79,031 Less: Balance at beginning of year 94,470 822 95,292 ---------- -------------- -------------- Change in net unrealized gains (losses) $ (16,504) $ 243 $ (16,261) ========== ============== ============== DECEMBER 31, 1997 ---------------------------------------- Fixed Equity Total ---------- -------------- -------------- Gross unrealized gains $161,625 $1,513 $163,138 Gross unrealized (losses) (16,282) (248) (16,530) ---------- -------------- -------------- Net unrealized gains 145,343 1,265 146,608 Deferred income tax (50,873) (443) (51,316) ---------- -------------- -------------- Net unrealized gains after taxes 94,470 822 95,292 Less: Balance at beginning of year 71,237 289 71,526 ---------- -------------- -------------- Change in net unrealized gains (losses) $ 23,233 $ 533 $ 23,766 ========== ============== ============== As part of its overall investment management strategy, the Company has entered into agreements to purchase $140,600,000 in mortgage loans as of December 31, 1999. These agreements were settled during 2000. The Company had no agreements to sell securities at December 31, 1999. - -------------------------------------------------------------------------------- Strategic Benefit 77 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) Major categories of investment income for the years ended December 31 are summarized as follows (in thousands): 1999 1998 1997 ------------ -------------- --------------- Fixed maturities $288,694 $278,227 $259,936 Mortgage loans on real estate 66,687 47,567 40,908 Policy loans 60,284 58,016 56,087 Other investments 2,068 2,911 3,159 ------------ -------------- --------------- 417,733 386,721 360,090 Investment expenses (23,566) (24,725) (19,192) ------------ -------------- --------------- Net investment income $394,167 $361,996 $340,898 ============ ============== =============== Net realized gains (losses) on investments for the years ended December 31 are summarized as follows (in thousands): 1999 1998 1997 ------------ -------------- --------------- Fixed maturities $(41,679) $ 9,691 $27,717 Equity securities 142 168 (57) Real estate and other 2,042 959 985 ------------ -------------- --------------- Net realized gains (losses) on investments $(39,495) $10,818 $28,645 ============ ============== =============== During 1999, 1998 and 1997, fixed maturities and marketable equity securities available-for-sale were sold with fair values at the date of sale of $2,300,481,000, $5,018,240,000 and $2,281,886,000, respectively. Gross gains of $20,117,000, $44,314,000 and $41,017,000 and gross losses of $61,654,000, $34,455,000 and $13,357,000 were realized on those sales in 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, bonds with an amortized cost of $28,755,000 and $29,081,000, respectively, were on deposit with various state insurance departments to meet regulatory requirements. - -------------------------------------------------------------------------------- Strategic Benefit 78 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into interest rate and currency contracts, including swaps, caps, floors, and options, to reduce and manage risks, which include the risk of a change in the value, yield, price, cash flows, exchange rates or quantity of, or a degree of exposure with respect to, assets, liabilities, or future cash flows which the Company has acquired or incurred. Hedge accounting practices are supported by cash flow matching, scenario testing and duration matching. Interest rate swap agreements generally involve the exchange of fixed and floating interest payments over the life of the agreement without an exchange of the underlying principal amount. Currency swap agreements generally involve the exchange of local and foreign currency payments over the life of the agreements without an exchange of the underlying principal amount. Interest rate cap and interest rate floor agreements owned entitle the Company to receive payments to the extent reference interest rates exceed or fall below strike levels in the contracts based on the notional amounts. Premiums paid for the purchase of interest rate contracts are included in other assets and are being amortized to interest expense over the remaining terms of the contracts or in a manner consistent with the financial instruments being hedged. Amounts paid or received, if any, from such contracts are included in interest expense or income. Accrued amounts payable to or receivable from counterparties are included in other liabilities or assets. Gains and losses as a result of early terminations of interest rate contracts are amortized to investment income over the remaining term of the items being hedged to the extent the hedge is considered to be effective; otherwise, they are recognized upon termination. Interest rate contracts that are matched or otherwise designated to be associated with other financial instruments are recorded at fair value if the related financial instruments mature, are sold, or are otherwise terminated or if the interest rate contracts cease to be effective hedges. The Company manages the potential credit exposure from interest rate contracts through careful evaluation of the counterparties' credit standing, collateral agreements, and master netting agreements. The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate contracts; however, the Company does not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in such contacts. - -------------------------------------------------------------------------------- Strategic Benefit 79 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED) The table below summarizes the Company's interest rate contracts at December 31, 1999 and 1998 (in thousands): DECEMBER 31, 1999 ---------------------------------------------- Notional Amortized Fair Balance amount cost value sheet ---------- ---------- ----------- ----------- Interest rate contracts: Swaps $1,340,582 $ (125) $19,014 $ 311 Swaps--affiliates 1,034,535 125 (18,869) 125 ---------- ---------- ----------- ----------- Total swaps 2,375,117 - 145 436 Caps owned 50,525 80 17 40 Caps owned--affiliates 20,525 (39) (17) (40) ---------- ---------- ----------- ----------- Total caps owned 71,050 41 - - Floors owned 90,500 252 172 332 Floors owned--affiliates - - - - ---------- ---------- ----------- ----------- Total floors owned 90,500 252 172 332 Options owned 302,000 4,000 7,118 4,000 Options owned--affiliates 277,000 (3,210) (6,198) (3,210) ---------- ---------- ----------- ----------- Total options owned 579,000 790 920 790 ---------- ---------- ----------- ----------- Forwards owned 152,300 - 37 - Forwards owned--affiliates 144,300 - (32) - ---------- ---------- ----------- ----------- Total forwards owned 296,600 - 5 - ---------- ---------- ----------- ----------- Total derivatives $3,412,267 $1,083 $ 1,242 $1,558 ========== ========== =========== =========== - -------------------------------------------------------------------------------- Strategic Benefit 80 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED) DECEMBER 31, 1998 --------------------------------------------- Notional Amortized Fair Balance amount cost value sheet ------------ --------- ---------- ---------- Interest rate contracts: Swaps $ 767,873 $ (155) $(2,952) $(2,952) Swaps--affiliates 734,176 155 5,440 5,440 ------------ --------- ---------- ---------- Total swaps 1,502,049 - 2,488 2,488 Caps owned 560,000 312 11 11 Caps owned--affiliates - - - - ------------ --------- ---------- ---------- Total caps owned 560,000 312 11 11 Floors owned 422,485 (72) 3,768 3,768 Floors owned--affiliates 8,485 72 167 167 ------------ --------- ---------- ---------- Total floors owned 430,970 - 3,935 3,935 Options owned 418,300 5,268 2,664 2,664 Options owned--affiliates 418,300 (5,268) (2,664) (2,664) ------------ --------- ---------- ---------- Total options owned 836,600 - - - ------------ --------- ---------- ---------- Forwards owned - - - - Forwards owned--affiliates - - - - ------------ --------- ---------- ---------- Total forwards owned - - - - ------------ --------- ---------- ---------- Total derivatives $3,329,619 $ 312 $ 6,434 $ 6,434 ============ ========= ========== ========== 4. CONCENTRATIONS OF CREDIT RISK At December 31, 1999, the Company held less-than-investment-grade bonds classified as available-for-sale with a carrying value and market value of $319,122,000. These holdings amounted to 9.1% of the Company's investments in fixed maturity securities and 2.8% of total assets. The holdings of less-than-investment-grade bonds are widely diversified and of satisfactory quality based on the Company's investment policies and credit standards. At December 31, 1999, the Company's mortgages involved a concentration of properties located in Florida (15.2%), Texas (9.9%), and Georgia (6.2%). The remaining mortgages relate to properties located in 36 other states. The portfolio is well diversified, covering many different types of income-producing properties on which the Company has first mortgage liens. The maximum mortgage outstanding on any individual property is $24,076,000. - -------------------------------------------------------------------------------- Strategic Benefit 81 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 1999 1998 ------------------------------------------ ------------------------------------------ Qualified Post- Qualified Post- plan SERP retirement plan SERP retirement ------------- ------------- -------------- ------------- ----------- -------------- Projected benefit obligation $(36,352) $(11,803) $ (6,256) $(38,685) $(8,320) $ (8,949) Less plan assets at fair value 50,495 - - 47,230 - - ------------- ------------- -------------- ------------- ----------- -------------- Plan assets in excess (deficient) of projected benefit obligation $ 14,143 $(11,803) $ (6,256) $ 8,545 $(8,320) $ (8,949) ============= ============= ============== ============= =========== ============== Net asset (liability) $ 1,200 $ (6,501) $(12,813) $ 1,240 $(4,918) $(12,044) ============= ============= ============== ============= =========== ==============
As of December 31, 1999 and 1998, the Company recognized an additional minimum net liability on the SERP of $2,200,000 and $1,482,000, respectively, as this plan is unfunded and the actuarial present value of accumulated benefit obligation exceeds the net pension liability. Prior to 1998, the change in the additional minimum net liability was reported in net income. Beginning in 1998, the change in the additional minimum net liability is recorded net of tax as a component of other comprehensive income directly in stockholder's equity. - -------------------------------------------------------------------------------- Strategic Benefit 82 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):
1999 1998 1997 -------------------------------- --------------------------------- --------------------------------- Qualified Post- Qualified Post- Qualified Post- plan SERP retirement plan SERP retirement plan SERP retirement ---------- -------- ------------ ------------ -------- ----------- ------------- -------- ----------- Net periodic pension expense $ 40 $1,971 $1,236 $ 82 $1,109 $893 $607 $1,502 $755 Employer contributions - 387 467 - 325 218 - 317 198 Plan participants' contributions - - 94 - - 77 - - 71 Benefits paid 1,238 387 561 890 325 296 811 317 268
Assumptions used in accounting for the defined benefit plans as of December 31, 1999, 1998, and 1997 were as follows: 1999 1998 1997 -------- ----------- ------------ Weighted-average discount rate 8.00% 6.75% 7.25% Rate of increase in compensation level 5.00% 4.00% 4.25% Expected long-term rate of return on assets 9.25% 9.50% 9.50% Plan assets of the defined benefit plans at December 31, 1999 are invested primarily in U.S. government securities, corporate bonds, mutual funds, mortgage loans, money market funds and common stock. Certain of the Qualified Plan's investments are held in the ING-NA Master Trust, which was established in 1998 for the investment of assets of the Plan and several other ING-NA-sponsored retirement plans. The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) for the medical plan is 9.5% graded to 5.5% over eight years. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plan as of December 31, 1999 by $1,217,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1999 by $235,000. Decreasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plan as of December 31, 1999 by $(981,000) - -------------------------------------------------------------------------------- Strategic Benefit 83 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1999 by $(185,000). The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.00% at December 31, 1999, 6.75% at December 31, 1998 and 7.50% at December 31, 1997. Effective January 1, 2000, the Postretirement Benefit Plan was amended, causing the Company's current year projected benefit obligation to decrease. 401(K) PLAN The Security Life of Denver Insurance Company Savings Incentive Plan (the Savings Plan) is a defined contribution plan which is available to substantially all home office employees. Participants may make contributions to the plan through salary reductions up to a maximum of $10,000 for both 1999 and 1998, and $9,500 for 1997. Such contributions are not currently taxable to the participants. The Company matches 100% of the first 3% of participants' contributions, plus 50% of contributions which exceed 3% of participants' compensation, subject to a maximum matching percentage of 4 1/2% of the individual's salary. Company matching contributions were $1,423,000 for 1999, $1,343,000 for 1998, and $1,211,000 for 1997. Plan assets of the Savings Plan at December 31, 1999 are invested in a group deposit administration contract (the Contract) with the Company, various stock funds maintained by the Principal Financial Group, and loans to participants. The Contract is a policyholder liability of the Company and had a balance of $28.7 million and $27.8 million at December 31, 1999 and 1998, respectively. Effective January 1, 2000, the Plan was merged into the ING Savings Plan, a defined contribution plan sponsored by the Company's parent. 6. SEPARATE ACCOUNTS Separate account assets and liabilities represent funds segregated by the Company for the benefit of certain policy and contract holders who bear the investment risk. Revenues and expenses on the separate account assets and related liabilities equal the benefits paid to the separate account policy and contract holders, and are excluded from the amounts reported in the consolidated statements of income except for benefits paid in excess of policyholder account values and fees charged for surrender, administration services and mortality risk. - -------------------------------------------------------------------------------- Strategic Benefit 84 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. LEASES In 1997, the Company terminated a significant operating lease agreement relating to electronic data processing equipment due to outsourcing of computer operations. The Company incurred $4,819,000 in lease expense in 1997 related to that agreement prior to termination. The Company does not have any other significant lease obligations. Total rental expense for all equipment leases was approximately $0 for the years ended December 31, 1999 and 1998, and $4,993,000 for the year ended December 31, 1997. 8. REINSURANCE The Company is involved in both ceded and assumed reinsurance with other companies for the purpose of diversifying risk and limiting exposure on larger risks. As of December 31, 1999, the Company's retention limit for acceptance of risk on life insurance policies had been set at various levels up to $3,000,000. Reinsurance premiums, commissions, and expense reimbursements related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reserves are based on the terms of the reinsurance contracts, and are consistent with the risks assumed. To the extent that the assuming companies become unable to meet their obligations under these treaties, the Company remains contingently liable to its policyholders for the portion retroceded. Consequently, allowances are established for amounts deemed uncollectible. To minimize its exposure to significant losses from retrocessionaire insolvencies, the Company evaluates the financial condition of the retrocessionaire and monitors concentrations of credit risk. The use of reinsurance pools with more than 30 retrocessionaires from 10 different countries also minimizes the Company's exposure to significant losses from retrocessionaire insolvencies. The Company assumes and cedes, on a coinsurance basis, guaranteed investment contracts (GICs) to and from affiliates under common ownership. As of December 31, 1999, $3.3 billion of an affiliate's invested assets were held in trust pursuant to these agreements. - -------------------------------------------------------------------------------- Strategic Benefit 85 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):
1999 1998 ------------------------------ ------------------------------- Policy Policy Deposits liabilities Deposits liabilities ---------------- --------------- --------------- ---------------- Direct (nonaffiliated) $1,805,434 $3,787,729 $2,773,952 $3,112,460 Assumed from affiliate: Life Insurance Company of Georgia - 97,490 - 97,552 ---------------- --------------- --------------- ---------------- 1,805,434 3,885,219 2,773,952 3,210,012 Ceded to affiliates: Columbine Life Insurance Company (129,768) - (2,547,743) (2,696,409) Life Insurance Company of Georgia (683,100) (663,325) (225,083) (512,477) First Columbine Life Insurance Company (650,300) (2,888,079) (1,126) (1,126) ---------------- --------------- --------------- ---------------- Net $ 342,266 $ 333,815 $ - $ - ================ =============== =============== ================
Ceded GIC policy liabilities totaling $3,551 and $3,210 million as of December 31, 1999 and 1998, respectively, are classified as part of prepaid reinsurance premiums. During 1999 and 1998, the Company had ceded blocks of insurance under reinsurance treaties to provide funds for financial and other purposes. These reinsurance transactions, generally known as "financial reinsurance," represent financial arrangements and, in accordance with U.S. GAAP, are not reflected in the accompanying financial statements except for the risk fees paid to or received from reinsurers. Financial reinsurance has the effect of increasing current statutory surplus while reducing future statutory surplus as amounts are recaptured from reinsurers. During 1998, the Company entered into a new financial reinsurance contract with an affiliated company. 9. INCOME TAXES The Company files a consolidated federal income tax return with its parent and other U.S. affiliates and subsidiaries. The affiliated companies that join in the filing of the consolidated federal income tax return have an agreement for the allocation of taxes between members that join in the consolidated return. The agreement specifies that the separate return payable or the separate return receivable of each member will be the federal income tax payable or receivable that the member would have had for the period had it filed a separate return. - -------------------------------------------------------------------------------- Strategic Benefit 86 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): DECEMBER 31 1999 1998 ------------- --------------- Deferred tax liabilities: Deferred policy acquisition costs $(344,540) $(272,970) Unrealized gains/losses - (42,556) ------------- --------------- Total deferred tax liabilities (344,540) (315,526) Deferred tax assets: Benefit reserves and surplus relief 90,895 102,177 Tax-basis deferred policy acquisition costs 90,508 83,836 Investment income 22,201 13,712 Unrealized gains 55,917 - Nonqualified deferred compensation 14,181 14,667 Postretirement employee benefits 2,542 2,501 Separate accounts 26,961 18,775 Other, net 22,656 19,796 ------------- --------------- Total deferred tax assets 325,861 255,464 ------------- --------------- Net deferred tax liabilities $ (18,679) $ (60,062) ============= =============== The components of federal income tax expense consist of the following (in thousands): DECEMBER 31 1999 1998 1997 -------------- --------------- --------------- Current $ 9,399 $24,111 $37,542 Deferred 16,934 9,955 9,477 -------------- --------------- --------------- Federal income tax expense $26,333 $34,066 $47,019 ============== =============== =============== The Company's effective income tax rate did not vary significantly from the statutory federal income tax rate. - -------------------------------------------------------------------------------- Strategic Benefit 87 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) The Company had net income tax payments of $28,723,000 during 1999, $18,283,000 during 1998, and $55,468,000 during 1997 for current income tax payments and settlements of prior year returns. The Policyholder's Surplus Account is an accumulation of certain special deductions for income tax purposes and a portion of the "gains from operations" which were not subject to current taxation under the Life Insurance Tax Act of 1959. At December 31, 1984, the balance in this account for tax return purposes was approximately $70,800,000. The Tax Reform Act of 1984 provides that no further accumulations will be made in this account. If amounts accumulated in the Policyholder's Surplus Account exceed certain limits, or if distributions to the stockholder exceed amounts in the Stockholder's Surplus Account, to the extent of such excess amount or excess distributions, as determined for income tax purposes, amounts in the Policyholder's Surplus Account would become subject to income tax at rates in effect at that time. Should this occur, the maximum tax which would be paid at the current tax rate is $24,780,000. The Company does not anticipate any such action or foresee any events which would result in such tax; accordingly, a deferred tax liability has not been established. 10. LONG-TERM DEBT Long-term indebtedness to related parties for $100,000,000 represents the cumulative cash draws on a $100,000,000 commitment from ING America Insurance Holdings, Inc. through December 31, 1999. This subordinated note bears interest at a variable rate equal to the prevailing rate for 10-year U.S. Treasury Bonds plus 1/4% adjusted annually. The repayment of this note requires approval of the Commissioner of Insurance of the State of Colorado and is payable only out of surplus funds of the Company and only at such time as the surplus of the Company, after payment is made, does not fall below the prescribed level. The principal and interest is scheduled to be repaid in five annual installments beginning April 15, 2000 and continuing through April 15, 2004, with the option of prepaying any outstanding principal and accrued interest. As of December 31, 1999, the Company accrued interest of $11,098,000. Upon receiving approval from the Commissioner of Insurance of the State of Colorado, the Company made a $5,128,000 payment for accrued interest during 1998. The Company recognized interest expense of $5,711,000, $5,387,000, and $5,096,000 for the years ended December 31, 1999, 1998, and 1997, respectively. - -------------------------------------------------------------------------------- Strategic Benefit 88 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. LONG-TERM DEBT (CONTINUED) Future minimum payments, assuming a current effective interest rate of 6.65%, are as follows (in thousands): TOTAL YEAR PAYMENTS - ----------------------------------------- ------------------ 2000 $ 26,838 2001 26,838 2002 26,838 2003 26,838 2004 26,838 ------------------ Total 134,190 Less imputed interest (34,190) ------------------ Principal outstanding $100,000 ================== 11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES Security Life and its insurance subsidiaries prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by their state of domicile. "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, and from company to company within the state, and may change in the future. During 1998, the NAIC completed the process of codifying statutory accounting practices ("Codification"). Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that Security Life uses to prepare its statutory-basis financial statements. Codification will require adoption by the various states before it becomes the prescribed statutory basis of accounting for insurance companies domiciled within those states. Accordingly, before Codification becomes effective for Security Life, the State of Colorado must adopt Codification as the prescribed basis of accounting on which domestic insurers must report their statutory-basis results to the Insurance Department. At this time it is anticipated that the State of Colorado will adopt Codification. - -------------------------------------------------------------------------------- Strategic Benefit 89 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED) Prescribed statutory reserve methodology does not fully encompass universal life-type products. The NAIC, however, has promulgated a Model Regulation regarding Universal Life Reserves. The Colorado Division of Insurance has not adopted the regulation, but requires that reserves be held which are at least as great as those required by Colorado Statutes. The NAIC UL Model Regulation is used by the Company to provide reserves consistent with the principles of this article. Because the reserves satisfy the requirements prescribed by the State of Colorado for the valuation of universal life insurance, the Company is permitted to compute reserves in accordance with this model regulation. The NAIC prescribes Risk-Based Capital (RBC) requirements for life/health insurance companies. At December 31, 1999, the Company exceeded all minimum RBC requirements. Combined capital and surplus, determined in accordance with statutory accounting practices (SAP), was $434,983,000 and $386,607,000 at December 31, 1999 and 1998, respectively. Combined net income, determined in accordance with SAP, was $18,635,000, $11,712,000, and $22,261,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Security Life is required to maintain a minimum total statutory capital and surplus in the state of domicile of $1,500,000. Midwestern United is required to maintain minimum statutory capital of $200,000 and surplus of $250,000 in the state of domicile. First ING is required to maintain minimum statutory capital of $1,000,000 and paid-in surplus of at least 50% of paid-in capital in the state of domicile. Each company exceeded its respective minimum statutory capital and surplus requirements at December 31, 1999. Additionally, the amount of dividends which can be paid by each company to its stockholder without prior approval of the various state insurance departments is generally limited to the greater of 10% of statutory surplus or the statutory net gain from operations. - -------------------------------------------------------------------------------- Strategic Benefit 90 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Life insurance liabilities that contain mortality risk and all nonfinancial instruments are excluded from disclosure requirements. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. - -------------------------------------------------------------------------------- Strategic Benefit 91 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and fair values of the Company's financial instruments at December 31, 1999 and 1998 are summarized below (in thousands):
DECEMBER 31 1999 1998 ---------------------------------- --- ------------------------------------ Carrying Carrying amount Fair value amount Fair value ----------------------------------- ------------------------------------ ASSETS Fixed maturities (Note 2) $3,486,939 $3,486,939 $3,503,530 $3,503,530 Equity securities (Note 2) 7,944 7,944 8,400 8,400 Mortgage loans 1,006,443 975,436 784,108 832,629 Policy loans 961,586 961,586 925,623 925,623 Short-term investments 186,917 186,917 747 747 Cash 48,630 48,630 31,644 31,644 Indebtedness from related parties 33,220 33,220 4,339 4,339 Separate account assets 644,975 644,975 423,474 423,474 LIABILITIES Supplemental contracts without life contingencies 3,778 3,778 3,966 3,966 Other policyholder funds left on deposit 431,706 431,706 98,638 98,638 Individual and group annuities, net of reinsurance 149,089 152,824 87,096 86,007 Indebtedness to related parties 34,231 34,231 13,755 13,755 Long-term debt to related parties 100,000 100,000 100,000 100,000 Accrued interest on long-term debt to related parties 11,098 11,098 5,387 5,387 Separate account liabilities 644,975 644,975 423,474 423,474
- -------------------------------------------------------------------------------- Strategic Benefit 92 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying values of all other financial instruments approximate their fair values. The following methods and assumptions were used by the Company in estimating the "fair value" disclosures for financial instruments: FIXED MATURITIES AND EQUITY SECURITIES: The fair values for fixed maturities (including redeemable preferred stocks) are based on quoted market prices, where available. For fixed maturities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements and collateralized mortgage obligations and other mortgage derivative investments, are estimated by discounting expected future cash flows. The discount rates used vary as a function of factors such as yield, credit quality and maturity which fall within a range between 4.2% and 22.9% over the total portfolio. The fair values of equity securities are based on quoted market prices. MORTGAGE LOANS: Estimated market values for commercial real estate loans are generated using a discounted cash flow approach. Loans in good standing are discounted using interest rates determined by U.S. Treasury yields on December 31 and spreads implied by independent published surveys. The same is applied on new loans with similar characteristics. The amortizing features of all loans are incorporated in the valuation. Where data on option features is available, option values are determined using a binomial valuation method, and are incorporated into the mortgage valuation. Restructured loans are valued in the same manner; however, these are discounted at a greater spread to reflect increased risk. All residential loans are valued at their outstanding principal balances, which approximate their fair values. POLICY LOANS: The carrying amounts reported in the balance sheets for these financial instruments approximate their fair values. DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet derivative financial instruments (caps and floors) and off-balance-sheet derivative financial instruments (swaps) are based on broker/dealer valuations or on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties' credit standing. - -------------------------------------------------------------------------------- Strategic Benefit 93 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) OTHER INVESTMENT-TYPE INSURANCE CONTRACTS: The fair values of the Company's deferred annuity contracts are estimated based on the cash surrender value. The carrying values of other liabilities, including immediate annuities, dividend accumulations, supplementary contracts without life contingencies and premium deposits, approximate their fair values. OFF-BALANCE-SHEET INSTRUMENTS: The Company accepted additional deposits on existing synthetic guaranteed investment contracts in the amounts of $70,000,000 and $66,480,000 in 1999 and 1998, respectively, from trustees of 401(k) plans. Pursuant to the terms of these contracts, the trustees own and retain the assets related to these contracts. Such contracts had a value of $471,380,000 and $433,689,000 at December 31, 1999 and 1998, respectively. Under synthetic guaranteed investment contracts, the synthetic issuer may assume interest rate risk on individual plan participant initiated withdrawals from stable value options of 401(k) plans. Approximately 90% of the synthetic guaranteed investment contract book values are on a participating basis and have a credited interest rate reset mechanism which passes such interest rate risk to plan participants. LETTERS OF CREDIT: The Company is the beneficiary of letters of credit totaling $198,726,000 which have a market value to the Company of $0 and two lines of credit totaling $307,902,000 which have a market value to the Company of $0 (see Note 14). 13. COMMITMENTS AND CONTINGENCIES The Company is a party to pending or threatened lawsuits arising from the normal conduct of its business. Due to the climate in insurance and business litigation, suits against the Company sometimes include substantial additional claims, consequential damages, punitive damages and other similar types of relief. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a material adverse effect on the Company's financial position or interfere with its operations. - -------------------------------------------------------------------------------- Strategic Benefit 94 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company has an accrued liability of $38,000,000 at December 31, 1999 related to certain potential litigation similar to that faced by other major life insurers. This litigation relates to sales practices of interest-sensitive policies. The Company is vigorously defending its position in these cases. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a material adverse effect on the Company's financial position or interfere with its operations. 14. OTHER FINANCING ARRANGEMENTS The Company has a $167,902,000 line of credit issued by the Company's parent to provide short-term liquidity. The Company has an additional non-affiliated line of credit of $140,000,000, also to provide short-term liquidity, which expires July 31, 2000. The amount of funds available under this line is reduced by borrowings of certain affiliates also party to the agreement. The outstanding borrowings under these agreements were $16,200,000 and $0 at December 31, 1999 and 1998, respectively. The weighted-average balance outstanding of short-term debt was $13.1 million during 1999. The weighted-average interest rate paid on this debt during 1999 was 5.20% (see Note 12). The Company is the beneficiary of letters of credit totaling $198,726,000 that were established in accordance with the terms of reinsurance agreements. Such letters of credit are unconditional and irrevocable, and provide for automatic renewal for the following year at December 31. The letters were unused during both 1999 and 1998. - -------------------------------------------------------------------------------- Strategic Benefit 95 Financial Statements Security Life Separate Account L1 of Security Life of Denver Insurance Company Years ended December 31, 1999, 1998 and 1997 with Report of Independent Auditors - -------------------------------------------------------------------------------- Strategic Benefit 96 Security Life Separate Account L1 Financial Statements Years ended December 31, 1999, 1998 and 1997 CONTENTS Report of Independent Auditors ...............................................98 Audited Financial Statements Statement of Net Assets ......................................................99 Statement of Operations .....................................................106 Statement of Changes in Net Assets ..........................................126 Notes to Financial Statements ...............................................146 - -------------------------------------------------------------------------------- Strategic Benefit 97 Report of Independent Auditors Policyholders Security Life Separate Account L1 of Security Life of Denver Insurance Company We have audited the accompanying statement of net assets of Security Life Separate Account L1 of Security Life of Denver Insurance Company (comprising, respectively, the Neuberger Berman Advisers Management Trust (comprising the Limited Maturity Bond, Growth and Partners Divisions) ("NB"), the Alger American Fund (comprising the American Small Capitalization, American MidCap Growth, American Growth and American Leveraged AllCap Divisions) ("Alger"), the Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II (comprising the Asset Manager, Growth, Overseas, Money Market and Index 500 Divisions) ("Fidelity"), the INVESCO Variable Investment Funds, Inc. (comprising the Total Return, Equity Income, High Yield, Utilities and Small Company Growth Divisions) ("INVESCO"), the Van Eck Worldwide Trust (comprising the Worldwide Hard Assets, Worldwide Bond, Worldwide Emerging Markets and Worldwide Real Estate Divisions) ("Van Eck") and AIM Advisors, Inc. (comprising the Capital Appreciation and Government Securities Divisions) ("AIM")) as of December 31, 1999, and the related statements of operations and changes in net assets for each of the three years in the period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1999, by correspondence with the transfer agents. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Security Life Separate Account L1 at December 31, 1999, and the results of its operations and changes in its net assets for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP April 7, 2000 - -------------------------------------------------------------------------------- Strategic Benefit 98 Security Life Separate Account L1 Statement of Net Assets December 31, 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) $520,874,988 $53,597,588 $109,451,239 $294,325,533 $44,538,862 $6,258,525 $12,703,241 ------------- ------------ ------------- --------------- ------------- ------------ ------------- Total assets 520,874,988 53,597,588 109,451,239 294,325,533 44,538,862 6,258,525 12,703,241 ------------- ------------ ------------- --------------- ------------- ------------ ------------- LIABILITIES Due to (from) Security Life of (427,980) (99,394) (63,161) (120,210) (99,549) (45,652) (14) Denver ------------- ------------ ------------- --------------- ------------- ------------ ------------- Total Liabilities (427,980) (99,394) (63,161) (120,210) (99,549) (45,652) (14) ------------- ------------ ------------- --------------- ------------- ------------ ------------- Net assets $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255 ============= ============ ============= =============== ============= ============ ============= POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255 ------------- ------------ ------------- --------------- ------------- ------------ ------------- TOTAL POLICYHOLDER RESERVES $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255 ============= ============ ============= =============== ============= ============ =============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 99 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1999
NB -------------------------------------------------------------------------- Total Limited NB Maturity Bond Growth Partners ------------------ ------------------- --------------- ------------------- ASSETS Investments in mutual funds at market value (Note C) $53,597,588 $11,200,520 $13,066,321 $29,330,747 ------------------ ------------------- --------------- ------------------- Total assets 53,597,588 11,200,520 13,066,321 29,330,747 ------------------ ------------------- --------------- ------------------- LIABILITIES Due to (from) Security Life of Denver (99,394) (308) (9,833) (89,253) ------------------ ------------------- --------------- ------------------- Total Liabilities (99,394) (308) (9,833) (89,253) ------------------ ------------------- --------------- ------------------- Net assets $53,696,982 $11,200,828 $13,076,154 $29,420,000 ================== =================== =============== =================== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $53,696,982 $11,200,828 $13,076,154 $29,420,000 ------------------ ------------------- --------------- ------------------- TOTAL POLICYHOLDER RESERVES $53,696,982 $11,200,828 $13,076,154 $29,420,000 ================== =================== =============== =================== Number of divisional units outstanding (Note G) 889,159.604 434,338.368 1,212,133.448 =================== =============== =================== Value per divisional unit $12.60 $30.11 $24.27 =================== =============== ===================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 100 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 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) $109,451,239 $27,748,150 $17,280,636 $41,361,603 $23,060,850 ---------------- ------------------ --------------- ---------------- ----------------- Total assets 109,451,239 27,748,150 17,280,636 41,361,603 23,060,850 ---------------- ------------------ --------------- ---------------- ----------------- LIABILITIES Due to (from) Security Life of Denver (63,161) (31,605) (6,851) (21,895) (2,810) ---------------- ------------------ --------------- ---------------- ----------------- Total Liabilities (63,161) (31,605) (6,851) (21,895) (2,810) ---------------- ------------------ --------------- ---------------- ----------------- Net assets $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660 ================ ================== =============== ================ ================= POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660 ---------------- ------------------ --------------- ---------------- ----------------- TOTAL POLICYHOLDER RESERVES $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660 ================ ================== =============== ================ ================= Number of divisional units outstanding (Note G) 1,055,757.484 576,738.314 1,257,371.637 425,281.099 ================== =============== ================ ================= Value per divisional unit $26.31 $29.97 $32.91 $54.23 ================== =============== ================ =================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 101 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1999
FIDELITY --------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 --------------------------------------------------------------------------------------------- ASSETS Investments in mutual funds at market value (Note C) $294,325,533 $13,585,360 $58,152,709 $34,884,083 $34,799,038 $152,904,343 --------------------------------------------------------------------------------------------- Total assets 294,325,533 13,585,360 58,152,709 34,884,083 34,799,038 152,904,343 --------------------------------------------------------------------------------------------- LIABILITIES Due to (from) Security Life of Denver (120,210) (5,098) (5,121) (100,198) 1,630 (11,423) --------------------------------------------------------------------------------------------- Total Liabilities (120,210) (5,098) (5,121) (100,198) 1,630 (11,423) --------------------------------------------------------------------------------------------- Net assets $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766 ============================================================================================= POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766 --------------------------------------------------------------------------------------------- TOTAL POLICYHOLDER RESERVES $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766 ============================================================================================= Number of divisional units outstanding (Note G) 722,717.906 1,676,236.646 1,716,617.627 2,763,648.297 4,772,484.597 ================================================================================ Value per divisional unit $18.80 $34.70 $20.38 $12.59 $32.04 ================================================================================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 102 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1999
INVESCO --------------------------------------------------------------------------------------------- Small Total Total Equity Company INVESCO Return Income High Yield Utilities Growth --------------- -------------- -------------- -------------- --------------- -------------- ASSETS Investments in mutual funds at market value (Note C) $44,538,862 $10,386,525 $16,189,342 $9,419,547 $4,140,713 $4,402,735 --------------- -------------- -------------- -------------- --------------- -------------- Total assets 44,538,862 10,386,525 16,189,342 9,419,547 4,140,713 4,402,735 --------------- -------------- -------------- -------------- --------------- -------------- LIABILITIES Due to (from) Security Life of Denver (99,549) (125) (31,211) (1,130) (602) (66,481) --------------- -------------- -------------- -------------- --------------- -------------- Total Liabilities (99,549) (125) (31,211) (1,130) (602) (66,481) --------------- -------------- -------------- -------------- --------------- -------------- Net assets $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216 =============== ============== ============== ============== =============== ============== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216 --------------- -------------- -------------- -------------- --------------- -------------- TOTAL POLICYHOLDER RESERVES $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216 =============== ============== ============== ============== =============== ============== Number of divisional units outstanding (Note G) 602,187.614 621,047.937 536,863.946 189,409.984 212,503.210 ============== ============== ============== =============== ============== Value per divisional unit $17.25 $26.12 $17.55 $21.86 $21.03 ============== ============== ============== =============== ==============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 103 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 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) $6,258,525 $2,305,855 $335,746 $3,067,087 $549,837 ---------------- --------------- --------------- -------------- --------------- Total assets 6,258,525 2,305,855 335,746 3,067,087 549,837 ---------------- --------------- --------------- -------------- --------------- LIABILITIES Due to (from) Security Life of Denver (45,652) (223) 1,543 (46,972) - ---------------- --------------- --------------- -------------- --------------- Total Liabilities (45,652) (223) 1,543 (46,972) - ---------------- --------------- --------------- -------------- --------------- Net assets $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837 ================ =============== =============== ============== =============== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837 ---------------- --------------- --------------- -------------- --------------- TOTAL POLICYHOLDER RESERVES $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837 ================ =============== =============== ============== =============== Number of divisional units outstanding (Note G) 236,972.429 33,114.078 228,819.195 64,967.173 =============== =============== ============== =============== Value per divisional unit $9.73 $10.09 $13.61 $8.46 =============== =============== ============== ===============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 104 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1999 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities ------------ ------------ ------------- ASSETS Investments in mutual funds at market value (Note C) $12,703,241 $5,308,909 $7,394,332 ------------ ------------ ------------- Total assets 12,703,241 5,308,909 7,394,332 ------------ ------------ ------------- LIABILITIES Due to (from) Security Life of Denver (14) (13) (1) ------------ ------------ ------------- Total Liabilities (14) (13) (1) ------------ ------------ ------------- Net assets $12,703,255 $5,308,922 $7,394,333 ============ ============ ============= POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $12,703,255 $5,308,922 $7,394,333 ------------ ------------ ------------- TOTAL POLICYHOLDER RESERVES $12,703,255 $5,308,922 $7,394,333 ============ ============ ============= Number of divisional units outstanding (Note G) 323,846.032 715,905.149 ============ ============= Value per divisional unit $16.39 $10.33 ============ ============= See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 105 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1999
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ------------- ------------- ------------- ------------- ------------- ----------------------- INVESTMENT INCOME Dividends from mutual funds $18,884,169 $2,123,919 $ 7,325,481 $ 7,908,482 $1,183,695 $ 30,826 311,766 Less valuation period deductions (Note B) 2,908,885 371,218 557,411 1,629,301 272,130 27,814 51,011 ------------- ------------- ------------- ------------- ------------- ---------- ----------- Net investment income (loss) 15,975,284 1,752,701 6,768,070 6,279,181 911,565 3,012 260,755 ------------- ------------- ------------- ------------- ------------- ---------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 18,191,446 557,950 5,023,269 11,358,812 1,094,239 73,144 84,032 Net unrealized gains (losses) on investments 55,998,041 3,797,732 17,500,945 30,152,442 2,135,798 1,374,192 1,036,932 ------------- ------------- ------------- ------------- ------------- ---------- ----------- Net realized and unrealized gains (losses) on investments 74,189,487 4,355,682 22,524,214 41,511,254 3,230,037 1,447,336 1,120,964 ------------- ------------- ------------- ------------- ------------- ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $90,164,771 $6,108,383 $29,292,284 $47,790,435 $4,141,602 $1,450,348 $1,381,719 ============= ============= ============= ============= ============= ========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 106 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 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) 371,218 108,699 70,308 192,211 --------------------------------- ---------------- ---------------- Net investment income (loss) 1,752,701 802,897 382,777 567,027 --------------------------------- ---------------- ---------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 557,950 (293,615) 318,964 532,601 Net unrealized gains (losses) on investments 3,797,732 (423,477) 3,714,218 506,991 --------------------------------- ---------------- ---------------- Net realized and unrealized gains (losses) on investments 4,355,682 (717,092) 4,033,182 1,039,592 --------------------------------- ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $6,108,383 $ 85,805 $4,415,959 $1,606,619 ================================= ================ ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 107 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 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) 557,411 141,734 88,955 233,373 93,349 --------------- ------------------- ---------------- ---------------- ----------------- Net investment income (loss) 6,768,070 2,058,314 1,547,583 2,530,830 631,343 --------------- ------------------- ---------------- ---------------- ----------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 5,023,269 94,825 322,974 2,007,625 2,597,845 Net unrealized gains (losses) on investments 17,500,945 5,993,398 2,015,333 4,584,649 4,907,565 --------------- ------------------- ---------------- ---------------- ----------------- Net realized and unrealized gains (losses) on investments 22,524,214 6,088,223 2,338,307 6,592,274 7,505,410 --------------- ------------------- ---------------- ---------------- ----------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $29,292,284 $8,146,537 $3,885,890 $9,123,104 $8,136,753 =============== =================== ================ ================ =================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 108 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1999
FIDELITY --------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 --------------- ------------- --------------- -------------- --------------- -------------- INVESTMENT INCOME Dividends from mutual funds $ 7,908,482 $ 798,528 $ 3,508,501 $ 820,014 $1,277,704 $ 1,503,735 Less valuation period deductions (Note B) 1,629,301 83,646 308,868 188,207 188,211 860,369 --------------- ------------- --------------- -------------- --------------- -------------- Net investment income (loss) 6,279,181 714,882 3,199,633 631,807 1,089,493 643,366 --------------- ------------- --------------- -------------- --------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 11,358,812 122,474 7,459,882 553,230 - 3,223,226 Net unrealized gains (losses) on investments 30,152,442 316,538 3,509,953 8,740,414 - 17,585,537 --------------- ------------- --------------- -------------- --------------- -------------- Net realized and unrealized gains (losses) on investments 41,511,254 439,012 10,969,835 9,293,644 - 20,808,763 --------------- ------------- --------------- -------------- --------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $47,790,435 $1,153,894 $14,169,468 $9,925,451 $1,089,493 $21,452,129 =============== ============= =============== ============== =============== ==============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 109 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1999
INVESCO ----------------------------------------------------------------------------------------------- Total Total Equity Small Company INVESCO Return Income High Yield Utilities Growth --------------- --------------- --------------- ------------- ------------- ------------------ INVESTMENT INCOME Dividends from mutual funds $1,183,695 $ 276,071 $ 252,055 $618,531 $ 37,038 $ - Less valuation period deductions (Note B) 272,130 71,255 97,430 65,338 23,769 14,338 --------------- --------------- --------------- ------------- ------------- ------------------ Net investment income (loss) 911,565 204,816 154,625 553,193 13,269 (14,338) --------------- --------------- --------------- ------------- ------------- ------------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 1,094,239 286,623 506,767 (241,611) 304,911 237,549 Net unrealized gains (losses) on investments 2,135,798 (923,083) 965,264 379,005 179,598 1,535,014 --------------- --------------- --------------- ------------- ------------- ------------------ Net realized and unrealized gains (losses) on investments 3,230,037 (636,460) 1,472,031 137,394 484,509 1,772,563 --------------- --------------- --------------- ------------- ------------- ------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $4,141,602 $(431,644) $1,626,656 $690,587 $497,778 $1,758,225 =============== =============== =============== ============= ============= ==================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 110 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1999
VAN ECK ---------------------------------------------------------------------------------- Worldwide Total Worldwide Worldwide Emerging Worldwide Van Eck Hard Assets Bond Markets Real Estate --------------- --------------- --------------- ---------------- ---------------- INVESTMENT INCOME Dividends from mutual funds $ 30,826 $ 16,585 $ 12,446 - $ 1,795 Less valuation period deductions (Note B) 27,814 12,646 2,550 10,886 1,732 --------------- --------------- --------------- ---------------- ---------------- Net investment income (loss) 3,012 3,939 9,896 (10,886) 63 --------------- --------------- --------------- ---------------- ---------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 73,144 (313,009) (25,853) 410,384 1,622 Net unrealized gains (losses) on investments 1,374,192 592,123 (9,920) 809,962 (17,973) --------------- --------------- --------------- ---------------- ---------------- Net realized and unrealized gains (losses) on investments 1,447,336 279,114 (35,773) 1,220,346 (16,351) --------------- --------------- --------------- ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,450,348 $283,053 $(25,877) $1,209,460 $(16,288) =============== =============== =============== ================ ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 111 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1999 AIM -------------------------------------- Total Capital Government AIM Appreciation Securities ---------- ------------ -------------- INVESTMENT INCOME Dividends from mutual funds $ 311,766 $ 113,467 $ 198,299 Less valuation period deductions (Note B) 51,011 19,289 31,722 ---------- ------------ -------------- Net investment income (loss) 260,755 94,178 166,577 ---------- ------------ -------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 84,032 92,256 (8,224) Net unrealized gains (losses) on investments 1,036,932 1,257,369 (220,437) ---------- ------------ -------------- Net realized and unrealized gains (losses) on investments 1,120,964 1,349,625 (228,661) ---------- ------------ -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,381,719 $1,443,803 $(62,084) ========== ============ ============== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 112 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1998
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS NB ALGER FIDELITY INVESCO VAN ECK AIM -------------- ------------ ------------- -------------- ------------- ------------ ----------- INVESTMENT INCOME Dividends from mutual funds $17,747,833 $4,273,690 $ 4,617,072 $ 6,943,854 $1,625,860 $ 189,620 $ 97,737 Less valuation period deductions (Note B) 1,740,661 291,487 290,412 971,160 162,321 11,393 13,888 -------------- ------------ ------------- -------------- ------------- ------------ ----------- Net investment income (loss) 16,007,172 3,982,203 4,326,660 5,972,694 1,463,539 178,227 83,849 -------------- ------------ ------------- -------------- ------------- ------------ ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599 Net unrealized gains (losses) on investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087 -------------- ------------ ------------- -------------- ------------- ------------ ----------- Net realized and unrealized gains (losses) on investments 27,303,251 (1,975,813) 7,511,094 21,633,430 604,461 (628,607) 158,686 -------------- ------------ ------------- -------------- ------------- ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $43,310,423 $2,006,390 $11,837,754 $27,606,124 $2,068,000 $(450,380) $242,535 ============== ============ ============= ============== ============= ============ ===========
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 113 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
NB -------------------------------------------------------------------------------- Total Limited Government NB Maturity Growth Income Partners Bond --------------- --------------- --------------- --------------- --------------- INVESTMENT INCOME Dividends from mutual funds $4,273,690 $409,268 $1,579,109 $136,565 $2,148,748 Less valuation period deductions (Note B) 291,487 87,183 52,660 3,213 148,431 --------------- --------------- --------------- --------------- --------------- Net investment income (loss) 3,982,203 322,085 1,526,449 133,352 2,000,317 --------------- --------------- --------------- --------------- --------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 347,823 10,003 (264,148) (53,894) 655,862 Net unrealized gains (losses) on investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475) --------------- --------------- --------------- --------------- --------------- Net realized and unrealized gains (losses) on investments (1,975,813) 69,372 (345,724) (114,848) (1,584,613) --------------- --------------- --------------- --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $2,006,390 $391,457 $1,180,725 $ 18,504 $ 415,704 =============== =============== =============== =============== ===============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 114 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 $11,837,754 $1,939,738 $1,879,001 $6,098,636 $1,920,379 OPERATIONS ================ ================= =============== ================ ===============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 115 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
FIDELITY --------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 -------------- -------------- ------------- -------------- ------------ --------------- INVESTMENT INCOME Dividends from mutual funds $ 6,943,854 $ 808,986 $2,663,618 $1,015,626 $830,137 $ 1,625,487 Less valuation period deductions (Note B) 971,160 63,669 183,002 129,504 116,932 478,053 -------------- -------------- ------------- -------------- ------------ --------------- Net investment income (loss) 5,972,694 745,317 2,480,616 886,122 713,205 1,147,434 -------------- -------------- ------------- -------------- ------------ --------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 6,403,348 20,247 1,534,000 298,379 - 4,550,722 Net unrealized gains (losses) on investments 15,230,082 315,702 4,444,805 707,398 - 9,762,177 -------------- -------------- ------------- -------------- ------------ --------------- Net realized and unrealized gains (losses) on investments 21,633,430 335,949 5,978,805 1,005,777 - 14,312,899 -------------- -------------- ------------- -------------- ------------ --------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $27,606,124 $1,081,266 $8,459,421 $1,891,899 $713,205 $15,460,333 ============== ============== ============= ============== ============ ===============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 116 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
INVESCO ------------------------------------------------------------------------------------------- Total Total Equity Small Company INVESCO Return Income High Yield Utilities Growth ---------------- -------------- ------------ -------------- ------------- ---------------- INVESTMENT INCOME Dividends from mutual funds $1,625,860 $312,534 $ 514,174 $769,805 $ 29,058 $ 289 Less valuation period deductions (Note B) 162,321 40,898 60,678 49,140 10,730 875 ---------------- -------------- ------------ -------------- ------------- ---------------- Net investment income (loss) 1,463,539 271,636 453,496 720,665 18,328 (586) ---------------- -------------- ------------ -------------- ------------- ---------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 355,780 136,473 342,342 (151,382) 35,245 (6,898) Net unrealized gains (losses) on investments 248,681 73,689 359,519 (541,125) 282,500 74,098 ---------------- -------------- ------------ -------------- ------------- ---------------- Net realized and unrealized gains (losses) on investments 604,461 210,162 701,861 (692,507) 317,745 67,200 ---------------- -------------- ------------ -------------- ------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $2,068,000 $481,798 $1,155,357 $ 28,158 $336,073 $66,614 ================ ============== ============ ============== ============= ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 117 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
VAN ECK --------------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bond Markets Estate ----------------- -------------- --------------- -------------- -------------- ------------- INVESTMENT INCOME Dividends from mutual funds $ 189,620 $45,674 $ 143,946 $ - $ - $ - Less valuation period deductions (Note B) 11,393 1,050 8,170 212 1,736 225 ----------------- -------------- --------------- -------------- -------------- ------------- Net investment income (loss) 178,227 44,624 135,776 (212) (1,736) (225) ----------------- -------------- --------------- -------------- -------------- ------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments (260,570) 4,682 (162,110) 130 (101,436) (1,836) Net unrealized gains (losses) on investments (368,037) (23,403) (395,698) 3,953 47,140 (29) ----------------- -------------- --------------- -------------- -------------- ------------- Net realized and unrealized gains (losses) on investments (628,607) (18,721) (557,808) 4,083 (54,296) (1,865) ----------------- -------------- --------------- -------------- -------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(450,380) $25,903 $(422,032) $3,871 $(56,032) $(2,090) ================= ============== =============== ============== ============== =============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 118 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998 AIM ----------------------------------------- Total Capital Government AIM Appreciation Securities ------------ ------------- ------------ INVESTMENT INCOME Dividends from mutual funds $ 97,737 $ 27,109 $ 70,628 Less valuation period deductions (Note B) 13,888 3,056 10,832 --------- -------------- -------------- Net investment income (loss) 83,849 24,053 59,796 --------- -------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 --------- -------------- -------------- Net realized and unrealized gains (losses) on investments 158,686 115,910 42,776 --------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $242,535 $139,963 $102,572 ========= ============== ============== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 119 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck -------------- ------------- -------------- --------------- --------------- -------------- INVESTMENT INCOME Dividends from mutual funds $ 4,158,702 $ 678,740 $ 323,895 $2,094,346 $1,039,818 $21,903 Less valuation period deductions (Note B) 813,630 135,310 141,930 461,022 67,625 7,743 -------------- ------------- -------------- --------------- --------------- -------------- Net investment income (loss) 3,345,072 543,430 181,965 1,633,324 972,193 14,160 -------------- ------------- -------------- --------------- --------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889 Net unrealized gains (losses) on investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508) -------------- ------------- -------------- --------------- --------------- -------------- Net realized and unrealized gains (losses) on investments 13,842,525 2,679,881 2,542,807 7,796,838 822,618 381 -------------- ------------- -------------- --------------- --------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $17,187,597 $3,223,311 $2,724,772 $9,430,162 $1,794,811 $14,541 ============== ============= ============== =============== =============== ==============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 120 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
NB ------------------------------------------------------------------------------------ Total Limited Government NB Maturity Bond Growth Income Partners --------------- ------------------- -------------- ---------------- --------------- INVESTMENT INCOME Dividends from mutual funds $ 678,740 $156,667 $183,497 $ 72,086 $ 266,490 Less valuation period deductions (Note B) 135,310 33,725 24,959 10,366 66,260 --------------- ------------------- -------------- ---------------- --------------- Net investment income (loss) 543,430 122,942 158,538 61,720 200,230 --------------- ------------------- -------------- ---------------- --------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 406,286 (20,056) 14,997 25,762 385,583 Net unrealized gains (losses) on investments 2,273,595 159,151 533,906 26,882 1,553,656 --------------- ------------------- -------------- ---------------- --------------- Net realized and unrealized gains (losses) on investments 2,679,881 139,095 548,903 52,644 1,939,239 --------------- ------------------- -------------- ---------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $3,223,311 $262,037 $707,441 $114,364 $2,139,469 =============== =================== ============== ================ ===============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 121 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
ALGER ----------------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap -------------- ------------------ -------------- ---------------- ----------------- INVESTMENT INCOME Dividends from mutual funds $ 323,895 $218,789 $ 55,945 $ 49,161 $ - Less valuation period deductions (Note B) 141,930 51,004 28,138 48,785 14,003 -------------- ------------------ -------------- ---------------- ----------------- Net investment income (loss) 181,965 167,785 27,807 376 (14,003) -------------- ------------------ -------------- ---------------- ----------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 894,818 114,651 228,363 237,727 314,077 Net unrealized gains (losses) on investments 1,647,989 483,518 246,489 970,056 (52,074) -------------- ------------------ -------------- ---------------- ----------------- Net realized and unrealized gains (losses) on investments 2,542,807 598,169 474,852 1,207,783 262,003 -------------- ------------------ -------------- ---------------- ----------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $2,724,772 $765,954 $502,659 $1,208,159 $248,000 ============== ================== ============== ================ =================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 122 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
FIDELITY ------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ------------- ------------- ------------- ------------- ------------- ------------- INVESTMENT INCOME Dividends from mutual funds $2,094,346 $204,696 $ 274,868 $451,874 $764,538 $ 398,370 Less valuation period deductions (Note B) 461,022 27,097 91,298 60,714 107,253 174,660 ------------- ------------- ------------- ------------- ------------- ------------- Net investment income (loss) 1,633,324 177,599 183,570 391,160 657,285 223,710 ------------- ------------- ------------- ------------- ------------- ------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 1,320,426 33,000 662,436 332,544 - 292,446 Net unrealized gains (losses) on investments 6,476,412 350,408 1,347,793 (305,456) - 5,083,667 ------------- ------------- ------------- ------------- ------------- ------------- Net realized and unrealized gains (losses) on investments 7,796,838 383,408 2,010,229 27,088 - 5,376,113 ------------- ------------- ------------- ------------- ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $9,430,162 $561,007 $2,193,799 $418,248 $657,285 $5,599,823 ============= ============= ============= ============= ============= =============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 123 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
INVESCO ------------------------------------------------------------------------------- Total Total Equity INVESCO Return Income High Yield Utilities --------------- --------------- --------------- --------------- -------------- INVESTMENT INCOME Dividends from mutual funds $1,039,818 $ 76,461 $417,376 $519,369 $ 26,612 Less valuation period deductions (Note B) 67,625 12,921 27,525 23,478 3,701 --------------- --------------- --------------- --------------- -------------- Net investment income (loss) 972,193 63,540 389,851 495,891 22,911 --------------- --------------- --------------- --------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 523,956 46,241 116,951 269,799 90,965 Net unrealized gains (losses) on investments 298,662 203,429 324,767 (253,231) 23,697 --------------- --------------- --------------- --------------- -------------- Net realized and unrealized gains (losses) on investments 822,618 249,670 441,718 16,568 114,662 --------------- --------------- --------------- --------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,794,811 $313,210 $831,569 $512,459 $137,573 =============== =============== =============== =============== ==============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 124 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997 VAN ECK --------------------------------------- Total Worldwide Worldwide Van Eck Balanced Hard Assets --------- ------------ -------------- INVESTMENT INCOME Dividends from mutual funds $21,903 $ 9,006 $ 12,897 Less valuation period deductions (Note B) 7,743 3,329 4,414 --------- ------------ -------------- Net investment income (loss) 14,160 5,677 8,483 --------- ------------ -------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) --------- ------------ -------------- Net realized and unrealized gains (losses) on investments 381 41,907 (41,526) --------- ------------ -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $14,541 $47,584 $(33,043) ========= ============ ============== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 125 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 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) $15,975,284 $ 1,752,701 $ 6,768,070 $ 6,279,181 $ 911,565 $ 3,012 $ 260,755 Net realized gains (losses) on investments 18,191,446 557,950 5,023,269 11,358,812 1,094,239 73,144 84,032 Net unrealized gains (losses) on investments 55,998,041 3,797,732 17,500,945 30,152,442 2,135,798 1,374,192 1,036,932 ------------- -------------- -------------- ------------- ------------- ----------- -------------- Increase in net assets from operations 90,164,771 6,108,383 29,292,284 47,790,435 4,141,602 1,450,348 1,381,719 ------------- -------------- -------------- ------------- ------------- ----------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 162,042,407 9,691,552 19,246,531 115,810,413 12,770,723 1,311,620 3,211,568 Cost of insurance and administrative charges (20,649,015) (2,172,531) (3,837,369) (11,622,709) (2,460,819) (173,456) (382,131) Benefit payments (542,037) - - (542,037) - - - Surrenders (15,066,657) (1,529,928) (3,447,763) (7,887,081) (1,567,128) (33,331) (601,426) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 91,435 (5,513,893) 13,797,533 (17,535,989) 2,140,348 1,919,235 5,284,201 Other 231,958 45,648 34,663 146,782 (17,068) 12,762 9,171 ------------- -------------- -------------- ------------- ------------- ----------- -------------- Increase from principal transactions 126,108,091 520,848 25,793,595 78,369,379 10,866,056 3,036,830 7,521,383 ------------- -------------- -------------- ------------- ------------- ----------- -------------- Total increase in net assets 216,272,862 6,629,231 55,085,879 126,159,814 15,007,658 4,487,178 8,903,102 Net assets at beginning of year 305,030,106 47,067,751 54,428,521 168,285,929 29,630,753 1,816,999 3,800,153 ------------- -------------- -------------- ------------- ------------- ----------- -------------- Net assets at end of year $521,302,968 $53,696,982 $109,514,400 $294,445,743 $44,638,411 $6,304,177 $12,703,255 ============= ============== ============== ============= ============= =========== ==============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 126 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1999
NB -------------------------------------------------------------------------- Total Limited NB Maturity Bond Growth Partners ------------------ --------------- ------------------ ------------------ INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 1,752,701 $ 802,897 $ 382,777 $ 567,027 Net realized gains (losses) on investments 557,950 (293,615) 318,964 532,601 Net unrealized gains (losses) on investments 3,797,732 (423,477) 3,714,218 506,991 ------------------ --------------- ------------------ ------------------ Increase in net assets from operations 6,108,383 85,805 4,415,959 1,606,619 ------------------ --------------- ------------------ ------------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 9,691,552 2,691,658 1,968,259 5,031,635 Cost of insurance and administrative charges (2,172,531) (532,487) (382,030) (1,258,014) Benefit payments Surrenders (1,529,928) (1,033,731) (175,255) (320,942) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (5,513,893) (5,610,959) (1,798,195) 1,895,261 Other 45,648 22,193 21,256 2,199 ------------------ --------------- ------------------ ------------------ Increase from principal transactions 520,848 (4,463,326) (365,965) 5,350,139 ------------------ --------------- ------------------ ------------------ Total increase in net assets 6,629,231 (4,377,521) 4,049,994 6,956,758 Net assets at beginning of year 47,067,751 15,578,349 9,026,160 22,463,242 ------------------ --------------- ------------------ ------------------ Net assets at end of year $53,696,982 $11,200,828 $13,076,154 $29,420,000 ================== =============== ================== ==================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 127 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 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) $ 6,768,070 $ 2,058,314 $ 1,547,583 $ 2,530,830 $ 631,343 Net realized gains (losses) on investments 5,023,269 94,825 322,974 2,007,625 2,597,845 Net unrealized gains (losses) on investments 17,500,945 5,993,398 2,015,333 4,584,649 4,907,565 ------------------ ----------------- ---------------- ---------------- ----------------- Increase in net assets from operations 29,292,284 8,146,537 3,885,890 9,123,104 8,136,753 ------------------ ----------------- ---------------- ---------------- ----------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 19,246,531 4,618,903 3,508,936 7,654,291 3,464,401 Cost of insurance and administrative charges (3,837,369) (957,053) (661,896) (1,597,077) (621,343) Benefit payments Surrenders (3,447,763) (986,740) (286,174) (1,594,894) (579,955) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 13,797,533 1,461,610 1,637,697 4,904,801 5,793,425 Other 34,663 (6,873) (17,173) (10,341) 69,050 ------------------ ----------------- ---------------- ---------------- ----------------- Increase from principal transactions 25,793,595 4,129,847 4,181,390 9,356,780 8,125,578 ------------------ ----------------- ---------------- ---------------- ----------------- Total increase in net assets 55,085,879 12,276,384 8,067,280 18,479,884 16,262,331 Net assets at beginning of year 54,428,521 15,503,371 9,220,207 22,903,614 6,801,329 ------------------ ----------------- ---------------- ---------------- ----------------- Net assets at end of year $109,514,400 $27,779,755 $17,287,487 $41,383,498 $23,063,660 ================== ================= ================ ================ =================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 128 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1999
FIDELITY ----------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 --------------- --------------- -------------- --------------- -------------- ---------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 6,279,181 $ 714,882 $ 3,199,633 $ 631,807 $ 1,089,493 $ 643,366 Net realized gains (losses) on investments 11,358,812 122,474 7,459,882 553,230 - 3,223,226 Net unrealized gains (losses) on investments 30,152,442 316,538 3,509,953 8,740,414 - 17,585,537 --------------- --------------- -------------- --------------- -------------- ---------------- Increase in net assets from operations 47,790,435 1,153,894 14,169,468 9,925,451 1,089,493 21,452,129 --------------- --------------- -------------- --------------- -------------- ---------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 115,810,413 3,791,052 9,969,268 5,963,624 62,143,060 33,943,409 Cost of insurance and administrative charges (11,622,709) (604,489) (1,912,531) (1,071,163) (2,273,369) (5,761,157) Benefit payments (542,037) - - - (542,037) - Surrenders (7,887,081) (641,428) (1,308,922) (1,227,419) (1,281,819) (3,427,493) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (17,535,989) (349,280) 4,285,808 788,107 (42,741,942) 20,481,318 Other 146,782 3,430 54,597 23,794 (8,230) 73,191 --------------- --------------- -------------- --------------- -------------- ---------------- Increase from principal transactions 78,369,379 2,199,285 11,088,220 4,476,943 15,295,663 45,309,268 --------------- --------------- -------------- --------------- -------------- ---------------- Total increase in net assets 126,159,814 3,353,179 25,257,688 14,402,394 16,385,156 66,761,397 Net assets at beginning of year 168,285,929 10,237,279 32,900,142 20,581,887 18,412,252 86,154,369 --------------- --------------- -------------- --------------- -------------- ---------------- Net assets at end of year $294,445,743 $13,590,458 $58,157,830 $34,984,281 $34,797,408 $152,915,766 =============== =============== ============== =============== ============== ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 129 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1999
INVESCO ------------------------------------------------------------------------------------------ Total Total Equity Small Company INVESCO Return Income High Yield Utilities Growth ----------- --------------- --------------- --------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 911,565 $ 204,816 $ 154,625 $ 553,193 $ 13,269 $ (14,338) Net realized gains (losses) on investments 1,094,239 286,623 506,767 (241,611) 304,911 237,549 Net unrealized gains (losses) on investments 2,135,798 (923,083) 965,264 379,005 179,598 1,535,014 ----------- --------------- --------------- --------------- -------------- -------------- Increase (decrease) in net assets from operations 4,141,602 (431,644) 1,626,656 690,587 497,778 1,758,225 ----------- --------------- --------------- --------------- -------------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 12,770,723 4,580,034 4,374,844 1,987,501 1,127,118 701,226 Cost of insurance and administrative charges (2,460,819) (764,047) (922,117) (471,532) (198,877) (104,246) Benefit payments Surrenders (1,567,128) (239,246) (333,959) (155,182) (820,016) (18,725) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 2,140,348 (854,496) 643,961 (518,177) 1,491,088 1,377,972 Other (17,068) (9,279) (21,837) 4,698 3,264 6,086 ----------- --------------- --------------- --------------- -------------- -------------- Increase from principal transactions 10,866,056 2,712,966 3,740,892 847,308 1,602,577 1,962,313 ----------- --------------- --------------- --------------- -------------- -------------- Total increase in net assets 15,007,658 2,281,322 5,367,548 1,537,895 2,100,355 3,720,538 Net assets at beginning of year 29,630,753 8,105,328 10,853,005 7,882,782 2,040,960 748,678 ----------- --------------- --------------- --------------- -------------- -------------- Net assets at end of year $44,638,411 $10,386,650 $16,220,553 $9,420,677 $4,141,315 $4,469,216 =========== =============== =============== =============== ============== ==============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 130 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 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) $ 3,012 $ 3,939 $ 9,896 $ (10,886) $ 63 Net realized gains (losses) on investments 73,144 (313,009) (25,853) 410,384 1,622 Net unrealized gains (losses) on investments 1,374,192 592,123 (9,920) 809,962 (17,973) --------------- --------------- --------------- ---------------- --------------- Increase (decrease) in net assets from operations 1,450,348 283,053 (25,877) 1,209,460 (16,288) --------------- --------------- --------------- ---------------- --------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 1,311,620 441,045 253,322 416,537 200,716 Cost of insurance and administrative charges (173,456) (86,064) (17,509) (56,532) (13,351) Benefit payments Surrenders (33,331) (23,325) - (5,545) (4,461) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 1,919,235 602,367 (80,721) 1,091,100 306,489 Other 12,762 15,247 (819) (2,117) 451 --------------- --------------- --------------- ---------------- --------------- Increase from principal transactions 3,036,830 949,270 154,273 1,443,443 489,844 --------------- --------------- --------------- ---------------- --------------- Total increase in net assets 4,487,178 1,232,323 128,396 2,652,903 473,556 Net assets at beginning of year 1,816,999 1,073,755 205,807 461,156 76,281 --------------- --------------- --------------- ---------------- --------------- Net assets at end of year $6,304,177 $2,306,078 $334,203 $3,114,059 $549,837 =============== =============== =============== ================ ===============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 131 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1999 AIM -------------------------------------- Total Capital Government AIM Appreciation Securities ------------ ------------- ----------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 260,755 $ 94,178 $ 166,577 Net realized gains (losses) on investments 84,032 92,256 (8,224) Net unrealized gains (losses) on investments 1,036,932 1,257,369 (220,437) ------------ ------------- ----------- Increase (decrease) in net assets from operations 1,381,719 1,443,803 (62,084) ------------ ------------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 3,211,568 1,497,094 1,714,474 Cost of insurance and administrative charges (382,131) (216,619) (165,512) Benefit payments Surrenders (601,426) (18,584) (582,842) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 5,284,201 1,391,719 3,892,482 Other 9,171 7,073 2,098 ------------ ------------- ----------- Increase from principal transactions 7,521,383 2,660,683 4,860,700 ------------ ------------- ----------- Total increase in net assets 8,903,102 4,104,486 4,798,616 Net assets at beginning of year 3,800,153 1,204,436 2,595,717 ------------ ------------- ----------- Net assets at end of year $12,703,255 $5,308,922 $7,394,333 ============ ============= =========== See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 132 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ------------ ----------------------------------------- ------------- ------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 16,007,172 $ 3,982,203 $ 4,326,660 $ 5,972,694 $ 1,463,539 $ 178,227 $ 83,849 Net realized gains (losses) on investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599 Net unrealized gains (losses) on investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087 ------------ ----------------------------------------- ------------- ------------------------ Increase (decrease) in net assets from operations 43,310,423 2,006,390 11,837,754 27,606,124 2,068,000 (450,380) 242,535 ------------ ----------------------------------------- ------------- ------------------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 128,820,440 12,563,792 13,089,164 92,335,231 8,092,294 875,501 1,864,458 Cost of insurance and administrative charges (14,458,798) (2,063,802) (2,525,683) (8,200,381) (1,481,570) (108,634) (78,728) Benefit payments (306,862) (11,220) (26,492) (259,989) (9,161) - - Surrenders (10,842,736) (725,767) (859,454) (8,654,377) (586,533) (15,198) (1,407) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (3,936,799) 8,461,193 4,831,250 (25,231,056) 6,011,967 216,552 1,773,295 Other (41,582) (87,331) (18,626) 54,208 9,107 1,060 - ------------ ----------------------------------------- ------------- ------------------------ Increase (decrease) from principal transactions 99,233,663 18,136,865 14,490,159 50,043,636 12,036,104 969,281 3,557,618 ------------ ----------------------------------------- ------------- ------------------------ Total increase (decrease) in net assets 142,544,086 20,143,255 26,327,913 77,649,760 14,104,104 518,901 3,800,153 Net assets at beginning of year 162,486,020 26,924,496 28,100,608 90,636,169 15,526,649 1,298,098 - ------------ ----------------------------------------- ------------- ------------------------ Net assets at end of year $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ ========================================= ============= ========================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 133 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
NB ----------------------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners ----------------- ------------------- ---------------- ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 3,982,203 $ 322,085 $1,526,449 $133,352 $ 2,000,317 Net realized gains (losses) on investments 347,823 10,003 (264,148) (53,894) 655,862 Net unrealized gains (losses) on investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475) ----------------- ------------------- ---------------- ---------------- ---------------- Increase (decrease) in net assets from operations 2,006,390 391,457 1,180,725 18,504 415,704 ----------------- ------------------- ---------------- ---------------- ---------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 12,563,792 3,839,599 2,578,265 31,593 6,114,335 Cost of insurance and administrative charges (2,063,802) (492,782) (393,894) (14,839) (1,162,287) Benefit payments (11,220) - - - (11,220) Surrenders (725,767) (15,922) (419,497) (3,243) (287,105) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,461,193 5,212,588 513,663 (894,126) 3,629,068 Other (87,331) (31,757) 3,226 (31,566) (27,234) ----------------- ------------------- ---------------- ---------------- ---------------- Increase (decrease) from principal transactions 18,136,865 8,511,726 2,281,763 (912,181) 8,255,557 ----------------- ------------------- ---------------- ---------------- ---------------- Total increase (decrease) in net assets 20,143,255 8,903,183 3,462,488 (893,677) 8,671,261 Net assets at beginning of year 26,924,496 6,675,166 5,563,672 893,677 13,791,981 ----------------- ------------------- ---------------- ---------------- ---------------- Net assets at end of year $47,067,751 $15,578,349 $9,026,160 $ - $22,463,242 ================= =================== ================ ================ ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 134 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
ALGER ---------------------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ----------------- ------------------ --------------- ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 4,326,660 $ 1,585,785 $ 539,729 $ 2,083,336 $ 117,810 Net realized gains (losses) on investments 1,685,294 186,963 316,932 915,872 265,527 Net unrealized gains (losses) on investments 5,825,800 166,990 1,022,340 3,099,428 1,537,042 ----------------- ------------------ --------------- ---------------- ---------------- Increase (decrease) in net assets from operations 11,837,754 1,939,738 1,879,001 6,098,636 1,920,379 ----------------- ------------------ --------------- ---------------- ---------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 13,089,164 4,154,774 2,573,424 5,298,963 1,062,003 Cost of insurance and administrative charges (2,525,683) (803,988) (473,224) (989,260) (259,211) Benefit payments (26,492) (14,248) (12,244) - - Surrenders (859,454) (196,345) (376,263) (216,867) (69,979) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 4,831,250 (35,168) 528,261 3,094,366 1,243,791 Other (18,626) (504) (14,286) 1,597 (5,433) ----------------- ------------------ --------------- ---------------- ---------------- Increase (decrease) from principal transactions 14,490,159 3,104,521 2,225,668 7,188,799 1,971,171 ----------------- ------------------ --------------- ---------------- ---------------- Total increase (decrease) in net assets 26,327,913 5,044,259 4,104,669 13,287,435 3,891,550 Net assets at beginning of year 28,100,608 10,459,112 5,115,538 9,616,179 2,909,779 ----------------- ------------------ --------------- ---------------- ---------------- Net assets at end of year $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 ================= ================== =============== ================ ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 135 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. - -------------------------------------------------------------------------------- Strategic Benefit 136 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
INVESCO -------------------------------------------------------------------------------------------- Small Total Total Equity Company INVESCO Return Income High Yield Utilities Growth -------------- -------------- --------------- -------------- --------------- ------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 1,463,539 $ 271,636 $ 453,496 $ 720,665 $ 18,328 $ (586) Net realized gains (losses) on investments 355,780 136,473 342,342 (151,382) 35,245 (6,898) Net unrealized gains (losses) on investments 248,681 73,689 359,519 (541,125) 282,500 74,098 -------------- -------------- --------------- -------------- --------------- ------------- Increase (decrease) in net assets from operations 2,068,000 481,798 1,155,357 28,158 336,073 66,614 -------------- -------------- --------------- -------------- --------------- ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 8,092,294 2,104,849 3,170,236 2,297,048 435,105 85,056 Cost of insurance and administrative charges (1,481,570) (425,176) (567,563) (389,895) (87,692) (11,244) Benefit payments (9,161) - (9,161) - - - Surrenders (586,533) (56,509) (192,220) (329,292) (8,210) (302) Net transfers among divisions (including the loan division and Guaranteed interest division in the general account) 6,011,967 2,955,200 1,315,595 931,519 201,017 608,636 Other 9,107 556 22,617 (18,840) 4,856 (82) -------------- -------------- --------------- -------------- --------------- ------------- Increase (decrease) from principal transactions 12,036,104 4,578,920 3,739,504 2,490,540 545,076 682,064 -------------- -------------- --------------- -------------- --------------- ------------- Total increase (decrease) in net assets 14,104,104 5,060,718 4,894,861 2,518,698 881,149 748,678 Net assets at beginning of year 15,526,649 3,044,610 5,958,144 5,364,084 1,159,811 - -------------- -------------- --------------- -------------- --------------- ------------- Net assets at end of year $29,630,753 $8,105,328 $10,853,005 $7,882,782 $2,040,960 $748,678 ============== ============== =============== ============== =============== =============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 137 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 - - - 0 0 0 Surrenders (15,198) (3,105) (11,871) 0 0 (222) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 216,552 (399,466) 111,286 74,151 387,960 42,621 Other 1,060 90 1,059 (7) (97) 15 --------------- -------------- ---------------- -------------- -------------- ------------- Increase (decrease) from principal transactions 969,281 (413,251) 585,037 201,936 517,188 78,371 --------------- -------------- ---------------- -------------- -------------- ------------- Total increase (decrease) in net assets 518,901 (387,348) 163,005 205,807 461,156 76,281 Net assets at beginning of year 1,298,098 387,348 910,750 - - - --------------- -------------- ---------------- -------------- -------------- ------------- Net assets at end of year $1,816,999 $ - $1,073,755 $205,807 $ 461,156 $76,281 =============== ============== ================ ============== ============== =============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 138 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998 AIM -------------------------------------- Total Capital Government AIM Appreciation Securities ------------ ------------ ------------ INCREASE (DECREASE) IN NET ASSETS Operations Net investment income (loss) $ 83,849 $ 24,053 $ 59,796 Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 ------------ ------------ ------------ Increase (decrease) in net assets from operations 242,535 139,963 102,572 ------------ ------------ ------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 1,864,458 329,635 1,534,823 Cost of insurance and administrative charges (78,728) (28,940) (49,788) Benefit payments - - - Surrenders (1,407) (1,407) - Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 1,773,295 765,185 1,008,110 Other - - - ------------ ------------ ------------ Increase (decrease) from principal transactions 3,557,618 1,064,473 2,493,145 ------------ ------------ ------------ Total increase (decrease) in net assets 3,800,153 1,204,436 2,595,717 Net assets at beginning of year - - - ------------ ------------ ------------ Net assets at end of year $3,800,153 $1,204,436 $2,595,717 ============ ============ ============ See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 139 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck ------------ -------------- -------------- -------------- --------------- ------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 3,345,072 $ 543,430 $ 181,965 $ 1,633,324 $ 972,193 $ 14,160 Net realized gains (losses) on investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889 Net unrealized gains (losses) on investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508) ------------ -------------- -------------- -------------- --------------- ------------- Increase (decrease) in net assets from operations 17,187,597 3,223,311 2,724,772 9,430,162 1,794,811 14,541 ------------ -------------- -------------- -------------- --------------- ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 104,747,260 5,555,766 6,944,048 89,309,110 2,683,620 254,716 Cost of insurance and administrative charges (8,284,944) (957,887) (1,466,664) (5,155,026) (614,145) (91,222) Benefit payments (406,386) (20,591) (63,369) (322,263) (163) - Surrenders (1,977,696) (146,698) (412,252) (1,294,484) (112,699) (11,563) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (6,642,529) 8,721,432 9,006,938 (32,708,946) 7,796,299 541,748 Other 5,891 9,817 11,046 (21,999) 11,180 (4,153) ------------ -------------- -------------- -------------- --------------- ------------- Increase (decrease) from principal transactions 87,441,596 13,161,839 14,019,747 49,806,392 9,764,092 689,526 ------------ -------------- -------------- -------------- --------------- ------------- Total increase (decrease) in net assets 104,629,193 16,385,150 16,744,519 59,236,554 11,558,903 704,067 Net assets at beginning of year 57,856,827 10,539,346 11,356,089 31,399,615 3,967,746 594,031 ------------ -------------- -------------- -------------- --------------- ------------- Net assets at end of year $162,486,020 $26,924,496 $28,100,608 $90,636,169 $15,526,649 $1,298,098 ============ ============== ============== ============== =============== =============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 140 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
NB ----------------------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners ----------------- ------------------- ---------------- ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 543,430 $ 122,942 $ 158,538 $ 61,720 $ 200,230 Net realized gains (losses) on investments 406,286 (20,056) 14,997 25,762 385,583 Net unrealized gains (losses) on investments 2,273,595 159,151 533,906 26,882 1,553,656 ----------------- ------------------- ---------------- ---------------- ---------------- Increase (decrease) in net assets from operations 3,223,311 262,037 707,441 114,364 2,139,469 ----------------- ------------------- ---------------- ---------------- ---------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 5,555,766 1,332,125 1,158,704 324,257 2,740,680 Cost of insurance and administrative charges (957,887) (163,472) (219,117) (62,075) (513,223) Benefit payments (20,591) - - - (20,591) Surrenders (146,698) (3,761) (71,838) (792) (70,307) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,721,432 2,758,363 2,141,068 (1,023,987) 4,845,988 Other 9,817 (2,202) 11,700 (6,404) 6,723 ----------------- ------------------- ---------------- ---------------- ---------------- Increase (decrease) from principal transactions 13,161,839 3,921,053 3,020,517 (769,001) 6,989,270 ----------------- ------------------- ---------------- ---------------- ---------------- Total increase (decrease) in net assets 16,385,150 4,183,090 3,727,958 (654,637) 9,128,739 Net assets at beginning of year 10,539,346 2,492,076 1,835,714 1,548,314 4,663,242 ----------------- ------------------- ---------------- ---------------- ---------------- Net assets at end of year $26,924,496 $6,675,166 $5,563,672 $ 893,677 $13,791,981 ================= =================== ================ ================ ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 141 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
ALGER -------------------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ----------------- ------------------ --------------- --------------- ---------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 181,965 $ 167,785 $ 27,807 $ 376 $ (14,003) Net realized gains (losses) on investments 894,818 114,651 228,363 237,727 314,077 Net unrealized gains (losses) on investments 1,647,989 483,518 246,489 970,056 (52,074) ----------------- ------------------ --------------- --------------- ---------------- Increase (decrease) in net assets from operations 2,724,772 765,954 502,659 1,208,159 248,000 ----------------- ------------------ --------------- --------------- ---------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 6,944,048 2,630,863 1,276,492 2,334,377 702,316 Cost of insurance and administrative charges (1,466,664) (526,742) (299,891) (479,902) (160,129) Benefit payments (63,369) - (62,593) (776) - Surrenders (412,252) (255,386) (74,317) (58,850) (23,699) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 9,006,938 3,518,384 1,419,061 2,796,911 1,272,582 Other 11,046 (6,069) 19,072 2,082 (4,039) ----------------- ------------------ --------------- --------------- ---------------- Increase (decrease) from principal transactions 14,019,747 5,361,050 2,277,824 4,593,842 1,787,031 ----------------- ------------------ --------------- --------------- ---------------- Total increase (decrease) in net assets 16,744,519 6,127,004 2,780,483 5,802,001 2,035,031 Net assets at beginning of year 11,356,089 4,332,108 2,335,055 3,814,178 874,748 ----------------- ------------------ --------------- --------------- ---------------- Net assets at end of year $28,100,608 $10,459,112 $5,115,538 $9,616,179 $2,909,779 ================= ================== =============== =============== ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 142 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
FIDELITY ------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 -------------- ------------- -------------- -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 1,633,324 $ 177,599 $ 183,570 $ 391,160 $ 657,285 $ 223,710 Net realized gains (losses) on investments 1,320,426 33,000 662,436 332,544 - 292,446 Net unrealized gains (losses) on investments 6,476,412 350,408 1,347,793 (305,456) - 5,083,667 ----------- ------------- -------------- -------------- -------------- -------------- Increase (decrease) in net assets from operations 9,430,162 561,007 2,193,799 418,248 657,285 5,599,823 ----------- ------------- -------------- -------------- -------------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 89,309,110 2,162,759 4,558,270 2,410,373 73,366,740 6,810,968 Cost of insurance and administrative charges (5,155,026) (242,289) (813,161) (525,615) (2,213,630) (1,360,331) Benefit payments (322,263) (20,969) (548) (1,233) (257,371) (42,142) Surrenders (1,294,484) (92,218) (135,829) (91,869) (870,621) (103,947) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (32,708,946) 2,215,879 5,219,755 5,730,183 (63,929,591) 18,054,828 Other (21,999) 7,567 3,217 10,563 (35,219) (8,127) ----------- ------------- -------------- -------------- -------------- -------------- Increase (decrease) from principal transactions 49,806,392 4,030,729 8,831,704 7,532,402 6,060,308 23,351,249 ----------- ------------- -------------- -------------- -------------- -------------- Total increase (decrease) in net assets 59,236,554 4,591,736 11,025,503 7,950,650 6,717,593 28,951,072 Net assets at beginning of year 31,399,615 1,545,337 7,049,419 4,275,129 8,295,666 10,234,064 ----------- ------------- -------------- -------------- -------------- -------------- Net assets at end of year $90,636,169 $6,137,073 $18,074,922 $12,225,779 $15,013,259 $39,185,136 =========== ============= ============== ============== ============== ==============
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 143 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
INVESCO ----------------------------------------------------------------------------------- Total Total Equity INVESCO Return Income High Yield Utilities ----------------- ---------------- --------------- -------------- ---------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 972,193 $ 63,540 $ 389,851 $ 495,891 $ 22,911 Net realized gains (losses) on investments 523,956 46,241 116,951 269,799 90,965 Net unrealized gains (losses) on investments 298,662 203,429 324,767 (253,231) 23,697 ----------------- ---------------- --------------- -------------- ---------------- Increase (decrease) in net assets from operations 1,794,811 313,210 831,569 512,459 137,573 ----------------- ---------------- --------------- -------------- ---------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,683,620 517,831 1,250,551 835,890 79,348 Cost of insurance and administrative charges (614,145) (133,107) (266,208) (177,612) (37,218) Benefit payments (163) - - (163) - Surrenders (112,699) (28,672) (37,810) (9,783) (36,434) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 7,796,299 1,498,300 2,804,344 2,695,587 798,068 Other 11,180 2,581 6,081 2,305 213 ----------------- ---------------- --------------- -------------- ---------------- Increase (decrease) from principal transactions 9,764,092 1,856,933 3,756,958 3,346,224 803,977 ----------------- ---------------- --------------- -------------- ---------------- Total increase (decrease) in net assets 11,558,903 2,170,143 4,588,527 3,858,683 941,550 Net assets at beginning of year 3,967,746 874,467 1,369,617 1,505,401 218,261 ----------------- ---------------- --------------- -------------- ---------------- Net assets at end of year $15,526,649 $3,044,610 $5,958,144 $5,364,084 $1,159,811 ================= ================ =============== ============== ================
See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 144 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997 VAN ECK -------------------------------------- Worldwide Total Worldwide Hard Van Eck Balanced Assets ----------- ----------- ------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 14,160 $ 5,677 $ 8,483 Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ----------- ----------- ------------- Increase (decrease) in net assets from operations 14,541 47,584 (33,043) ----------- ----------- ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 254,716 65,167 189,549 Cost of insurance and administrative charges (91,222) (44,774) (46,448) Benefit payments - - - Surrenders (11,563) (7,995) (3,568) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 541,748 (120) 541,868 Other (4,153) (319) (3,834) ----------- ----------- ------------- Increase (decrease) from principal transactions 689,526 11,959 677,567 ----------- ----------- ------------- Total increase (decrease) in net assets 704,067 59,543 644,524 Net assets at beginning of year 594,031 327,805 266,226 ----------- ----------- ------------- Net assets at end of year $1,298,098 $387,348 $910,750 =========== =========== ============= See accompanying notes. - -------------------------------------------------------------------------------- Strategic Benefit 145 Security Life Separate Account L1 Notes to Financial Statements December 31, 1999 NOTE A. ORGANIZATION Security Life Separate Account L1 (the "Separate Account") was established by resolution of the Board of Directors of Security Life of Denver Insurance Company (the "Company") on November 3, 1993. The Separate Account is organized as a unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940. The Separate Account supports the operations of the FirstLine Variable Universal Life, FirstLine II Variable Universal Life, Strategic Advantage Variable Universal Life, Strategic Advantage II Variable Universal Life, and Variable Survivorship Universal Life policies ("Variable Universal Life Policies") offered by the Company. The Separate Account may be used to support other variable life policies as they are offered by the Company. The assets of the Separate Account are the property of the Company. However, the portion of the Separate Account's assets attributable to the policies will not be used to satisfy liabilities arising out of any other operations of the Company. As of December 31, 1999, the Separate Account offered twenty-three investment divisions available to the policyholders, each of which invests in an independently managed mutual fund portfolio ("Fund"). The Funds are as follows: PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS) Neuberger Berman Management Incorporated (NB) Neuberger Berman Limited Maturity Bond Portfolio Neuberger Berman Growth Portfolio Neuberger Berman Partners Portfolio Fred Alger Management, Inc. (Alger) Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Fidelity Management & Research Company (Fidelity) Fidelity Investments VIP II Asset Manager Portfolio Fidelity Investments VIP Growth Portfolio Fidelity Investments VIP Overseas Portfolio Fidelity Investments VIP Money Market Portfolio Fidelity Investments VIP II Index 500 Portfolio - -------------------------------------------------------------------------------- Strategic Benefit 146 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE A. ORGANIZATION (CONTINUED) INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Total Return Portfolio INVESCO VIF Equity Income Portfolio (formerly known as "INVESCO VIF Industrial Income Portfolio") INVESCO VIF High Yield Portfolio INVESCO VIF Utilities Portfolio INVESCO VIF Small Company Growth Portfolio Van Eck Associates Corporation (Van Eck) Van Eck Worldwide Hard Assets Portfolio (formerly known as "Van Eck Gold and Natural Resources Portfolio") Van Eck Worldwide Bond Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Real Estate Portfolio AIM Advisors, Inc. (AIM) AIM VI--Capital Appreciation Portfolio AIM VI--Government Securities Portfolio Effective May 1, 1997, the Divisions of the Separate Account investing in the Neuberger Berman Government Income Portfolio and the Van Eck Worldwide Balanced Portfolio stopped accepting new investments. These divisions were discontinued during 1998. Effective February 19, 1998, six new divisions became available to the policyholders for investment in the following funds: Van Eck Associates Corporation (Van Eck) Van Eck Worldwide Bond Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Real Estate Portfolio AIM Advisors, Inc. (AIM) AIM VI--Capital Appreciation Portfolio AIM VI--Government Securities Portfolio INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Small Company Growth Portfolio - -------------------------------------------------------------------------------- Strategic Benefit 147 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE A. ORGANIZATION (CONTINUED) The Variable Universal Life Policies allow the policyholders to specify the allocation of their net premium to the various Funds. They can also transfer their account values among the Funds. The Variable Universal Life Policies also provide the policyholders the option to allocate their net premiums, or to transfer their account values, to a Guaranteed Interest Division ("GID") in the Company's general account. The GID guarantees a rate of interest to the policyholder, and it is not variable in nature. Therefore, it is not included in these Separate Account statements. NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements of the Separate Account have been prepared on the basis of accounting principles generally accepted in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting principles followed by the Separate Account and the methods of applying those principles are presented below or in the footnotes which follow: INVESTMENT VALUATION--The investments in shares of the Funds are valued at the closing net asset value (market value) per share as determined by the Funds on the day of measurement. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--The investments in shares of the Funds are accounted for on the date the order to buy or sell is confirmed. Dividend income and distributions of capital gains are recorded on the ex-dividend date. Realized gains and losses from sales transactions are reported using the first-in, first-out ("FIFO") method of accounting for cost. The difference between cost and current market value of investments owned on the day of measurement is recorded as unrealized gain or loss on investment. VALUATION PERIOD DEDUCTIONS--Charges are made directly against the assets of the Separate Account divisions and are reflected daily in the computation of the unit values of the divisions. - -------------------------------------------------------------------------------- Strategic Benefit 148 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A daily deduction, at an annual rate of .75% of the daily asset value of the Separate Account divisions, is charged to the Separate Account for mortality and expense risks assumed by the Company. Total mortality and expense charges for the years ended December 31, 1999, 1998 and 1997 were $2,908,885, $1,740,661, and $813,630, respectively. POLICYHOLDER RESERVES--Policyholder reserves are recorded in the Separate Account at the aggregate account values of the policyholders invested in the Separate Account divisions. To the extent that benefits to be paid to the policyholders exceed their account values, the Company will contribute additional funds to the benefit proceeds. - -------------------------------------------------------------------------------- Strategic Benefit 149 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE C. INVESTMENTS Fund shares are purchased at net asset value with net premiums (premium payments, less sales and tax loads charged by the Company) and divisional transfers from other divisions. Fund shares are redeemed for the payment of benefits, for surrenders, for transfers to other divisions, and for charges by the Company for certain cost of insurance and administrative charges. The cost of insurance and administrative charges for the years ended December 31, 1999, 1998 and 1997 were $20,649,015, $14,458,798, and $8,284,944, respectively. Dividends made by the Funds are reinvested in the Funds. The following is a summary of Fund shares owned as of December 31, 1999:
NUMBER NET VALUE OF ASSET OF SHARES COST OF FUND SHARES VALUE AT MARKET SHARES - ------------------------------------------- ----------------- ------------------ ------------------ ------------------ Neuberger Berman Management Inc.: Limited Maturity Bond 845,960.694 $13.24 $ 11,200,520 $ 11,380,242 Growth 350,585.486 $37.27 13,066,321 8,836,640 Partners 1,493,418.911 $19.64 29,330,747 28,931,311 Fred Alger Management, Inc.: American Small Capitalization 503,139.614 $55.15 27,748,150 21,103,331 American MidCap Growth 536,166.146 $32.23 17,280,636 13,903,676 American Growth 642,460.430 $64.38 41,361,603 32,482,027 American Leveraged AllCap 397,806.619 $57.97 23,060,850 16,645,127 Fidelity Management & Research Co.: Asset Manager 727,657.184 $18.67 13,585,360 12,533,037 Growth 1,058,669.574 $54.93 58,152,709 48,588,495 Overseas 1,271,285.820 $27.44 34,884,083 25,474,948 Money Market 34,799,038.450 $1.00 34,799,038 34,799,038 Index 500 913,352.492 $167.41 152,904,343 119,231,939 INVESCO Funds Group, Inc.: Total Return 666,657.538 $15.58 10,386,525 11,019,270 Equity Income 770,554.123 $21.01 16,189,342 14,534,380 High Yield 818,379.460 $11.51 9,419,547 9,910,525 Utilities 197,458.930 $20.97 4,140,713 3,647,584 Small Company Growth 200,033.388 $22.01 4,402,735 2,793,624 Van Eck Associates Corporation: Worldwide Hard Assets 210,388.243 $10.96 2,305,855 2,157,787 Worldwide Bond 31,407.502 $10.69 335,746 341,712 Worldwide Emerging Markets 215,083.218 $14.26 3,067,087 2,209,985 Worldwide Real Estate 60,091.435 $9.15 549,837 567,839 AIM Advisors, Inc.: Capital Appreciation 149,210.483 $35.58 5,308,909 3,932,316 Government Securities 695,609.783 $10.63 7,394,332 7,579,908 ------------------ ------------------ Total $520,874,988 $432,604,741 ================== ==================
- -------------------------------------------------------------------------------- Strategic Benefit 150 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE C. INVESTMENTS (CONTINUED) For the year ended December 31, 1999, the cost of purchases (plus reinvested dividends) and sales of investments are as follows:
BEGINNING END FUND OF YEAR PURCHASES SALES OF YEAR - ------------------------------------------- ----------------- ------------------- ------------------ ------------------ Neuberger Berman Management Inc.: Limited Maturity Bond $ 15,334,595 $ 6,135,221 $ (10,089,574) $ 11,380,242 Growth 8,510,696 5,560,097 (5,234,153) 8,836,640 Partners 22,570,797 9,683,589 (3,323,075) 28,931,311 Fred Alger Management, Inc.: American Small Capitalization 14,851,950 14,105,718 (7,854,337) 21,103,331 American MidCap Growth 7,858,579 7,048,332 (1,003,235) 13,903,676 American Growth 18,608,688 18,809,746 (4,936,407) 32,482,027 American Leveraged AllCap 5,293,171 16,455,429 (5,103,473) 16,645,127 Fidelity Management & Research Co.: Asset Manager 9,501,494 7,672,857 (4,641,314) 12,533,037 Growth 26,845,882 67,064,022 (45,321,409) 48,588,495 Overseas 19,913,166 15,724,213 (10,162,431) 25,474,948 Money Market 18,412,252 113,113,411 (96,726,625) 34,799,038 Index 500 70,067,500 54,287,747 (5,123,308) 119,231,939 INVESCO Funds Group, Inc.: Total Return 7,814,990 5,666,870 (2,462,590) 11,019,270 Equity Income 10,163,306 6,427,991 (2,056,917) 14,534,380 High Yield 8,752,765 4,424,859 (3,267,099) 9,910,525 Utilities 1,727,429 2,817,915 (897,760) 3,647,584 Small Company Growth 674,581 2,769,372 (650,329) 2,793,624 Van Eck Associates Corporation: Worldwide Hard Assets 1,517,809 2,248,842 (1,608,864) 2,157,787 Worldwide Bond 201,853 461,651 (321,792) 341,712 Worldwide Emerging Markets 414,017 5,282,900 (3,486,932) 2,209,985 Worldwide Real Estate 76,310 592,249 (100,720) 567,839 AIM Advisors, Inc. Capital Appreciation 1,085,211 3,341,733 (494,628) 3,932,316 Government Securities 2,560,855 7,659,984 (2,640,931) 7,579,908 ----------------- ------------------- ------------------ ------------------ Total $272,757,896 $377,354,748 $(217,507,903) $432,604,741 ================= =================== ================== ==================
Aggregate proceeds from sales of investments for the year ended December 31, 1999 were $235,699,349. - -------------------------------------------------------------------------------- Strategic Benefit 151 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE D. OTHER POLICY DEDUCTIONS The Variable Universal Life policies provide for certain deductions for sales and tax loads from premium payments received from the policyholders and for surrender charges and taxes from amounts paid to policyholders. Such deductions are taken before the purchase of divisional units or after the redemption of divisional units of the Separate Account. Such deductions are not included in the Separate Account financial statements. NOTE E. POLICY LOANS The Variable Universal Life policies allow the policyholders to borrow against their policies by using them as collateral for a loan. At the time of borrowing against the policies, an amount equal to the loan amount is transferred from the Separate Account divisions to a Loan Division in the Company's General Account to secure the loan. As payments are made on the policy loan, amounts are transferred back from the Loan Division to the Separate Account divisions. Interest is credited to the balance in the Loan Division at a fixed rate. The Loan Division is not variable in nature and is not included in these Separate Account statements. NOTE F. FEDERAL INCOME TAXES The Separate Account is not taxed separately because the operations of the Separate Account are part of the total operations of the Company. The Company is taxed as a life insurance company under the Internal Revenue Code. The Separate Account is not taxed as a "Regulated Investment Company" under subchapter "M" of the Internal Revenue Code. - -------------------------------------------------------------------------------- Strategic Benefit 152 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS The following schedule summarizes the changes in divisional units for the year ended December 31, 1999:
(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 1,245,559.121 421,349.898 (777,749.415) 889,159.604 Growth 447,486.376 233,319.969 (246,467.977) 434,338.368 Partners 986,298.018 385,667.451 (159,832.021) 1,212,133.448 Fred Alger Management, Inc.: American Small Capitalization 838,692.418 603,898.891 (386,833.825) 1,055,757.484 American MidCap Growth 402,532.472 225,361.191 (51,155.349) 576,738.314 American Growth 923,696.066 585,374.403 (251,698.832) 1,257,371.637 American Leveraged AllCap 221,642.446 410,084.371 (206,445.718) 425,281.099 Fidelity Management & Research Co.: Asset Manager 600,255.213 393,745.577 (271,282.884) 722,717.906 Growth 1,293,480.338 2,233,512.279 (1,850,755.971) 1,676,236.646 Overseas 1,429,659.907 963,512.218 (676,554.498) 1,716,617.627 Money Market 1,526,404.399 9,068,762.545 (7,831,518.647) 2,763,648.297 Index 500 3,215,990.519 1,840,375.191 (283,881.113) 4,772,484.597 INVESCO Funds Group, Inc.: Total Return 450,557.216 300,554.107 (148,923.709) 602,187.614 Equity Income 473,616.752 252,971.948 (105,540.763) 621,047.937 High Yield 486,858.648 226,071.484 (176,066.186) 536,863.946 Utilities 110,379.616 140,069.045 (61,038.677) 189,409.984 Small Company Growth 67,506.441 210,114.805 (65,118.036) 212,503.210 Van Eck Associates Corporation: Worldwide Hard Assets 132,513.824 246,466.322 (142,007.717) 236,972.429 Worldwide Bond 18,656.317 43,237.412 (28,779.651) 33,114.078 Worldwide Emerging Markets 67,354.295 582,654.548 (421,189.648) 228,819.195 Worldwide Real Estate 8,765.232 67,514.147 (11,312.206) 64,967.173 AIM Advisors, Inc.: Capital Appreciation 105,457.867 263,795.629 (45,407.464) 323,846.032 Government Securities 246,150.062 723,064.769 (253,309.682) 715,905.149
- -------------------------------------------------------------------------------- Strategic Benefit 153 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED) The following schedule summarizes the changes in divisional units for the year ended December 31, 1998:
(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 Equity Income 297,553.033 216,644.366 (40,580.647) 473,616.752 High Yield 333,501.857 283,205.205 (129,848.414) 486,858.648 Utilities 78,118.685 41,701.114 (9,440.183) 110,379.616 Small Company Growth - 71,535.065 (4,028.624) 67,506.441 Van Eck Associates Corporation: Worldwide Balanced 32,139.282 190.627 (32,329.909) - Worldwide Hard Assets 77,046.773 68,491.375 (13,024.324) 132,513.824 Worldwide Bond - 18,882.425 (226.108) 18,656.317 Worldwide Emerging Markets - 105,064.405 (37,710.110) 67,354.295 Worldwide Real Estate - 9,848.072 (1,082.840) 8,765.232 AIM Advisors, Inc.: Capital Appreciation - 108,895.839 (3,437.972) 105,457.867 Government Securities - 261,432.015 (15,281.953) 246,150.062
- -------------------------------------------------------------------------------- Strategic Benefit 154 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 Equity Income 87,035.356 212,619.908 (2,102.231) 297,553.033 High Yield 108,999.107 225,144.290 (641.540) 333,501.857 Utilities 18,008.490 63,007.328 (2,897.133) 78,118.685 Van Eck Associates Corporation: Worldwide Balanced 29,808.787 5,838.562 (3,508.067) 32,139.282 Worldwide Hard Assets 21,966.093 55,323.208 (242.528) 77,046.773
- -------------------------------------------------------------------------------- Strategic Benefit 155 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE H. NET ASSETS Net assets at December 31, 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 $ 10,334,928 $ 1,357,452 $ (311,830) $ (179,722) $ 11,200,828 Growth 6,662,216 2,132,968 51,289 4,229,681 13,076,154 Partners 24,515,009 2,799,524 1,706,031 399,436 29,420,000 Fred Alger Management, Inc.: American Small Capitalization 16,912,254 3,798,599 424,083 6,644,819 27,779,755 American MidCap Growth 10,911,311 2,117,608 881,608 3,376,960 17,287,487 American Growth 24,684,957 4,633,321 3,185,644 8,879,576 41,383,498 American Leveraged AllCap 12,723,008 733,681 3,191,248 6,415,723 23,063,660 Fidelity Management & Research Co.: Asset Manager 10,710,354 1,643,524 184,257 1,052,323 13,590,458 Growth 32,968,928 5,944,777 9,679,911 9,564,214 58,157,830 Overseas 22,436,070 1,918,003 1,221,073 9,409,135 34,984,281 Money Market 32,057,869 2,739,539 - - 34,797,408 Index 500 108,954,555 2,164,790 8,124,017 33,672,404 152,915,766 INVESCO Funds Group, Inc.: Total Return 9,954,690 564,724 499,981 (632,745) 10,386,650 Equity Income 12,471,276 1,096,169 998,146 1,654,962 16,220,553 High Yield 8,030,598 1,920,186 (39,129) (490,978) 9,420,677 Utilities 3,156,961 58,753 432,472 493,129 4,141,315 Small Company Growth 2,644,377 (14,924) 230,652 1,609,111 4,469,216 Van Eck Associates Corporation: Worldwide Hard Assets 2,458,760 148,762 (449,512) 148,068 2,306,078 Worldwide Bond 356,209 9,684 (25,724) (5,966) 334,203 Worldwide Emerging Markets 1,960,631 (12,622) 308,948 857,102 3,114,059 Worldwide Real Estate 568,214 (162) (213) (18,002) 549,837 AIM Advisors, Inc.: Capital Appreciation 3,725,157 118,230 88,942 1,376,593 5,308,922 Government Securities 7,353,846 226,373 (310) (185,576) 7,394,333 ----------------- --------------- ----------------- --------------- --------------- Total $366,552,178 $36,098,959 $30,381,584 $88,270,247 $521,302,968 ================= =============== ================= =============== ===============
- -------------------------------------------------------------------------------- Strategic Benefit 156 APPENDIX A FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY
Attained Male | Attained Male | Attained Male Age or Unisex Female Unisex | Age or Unisex Female Unisex | Age or Unisex Female Unisex 100/0 80/20 | 100/0 80/20 | 100/0 80/20 --- ----- ------ ----- | --- ----- ------ ----- | --- ----- ------ ----- 0 11.727 14.234 12.149 | | 1 11.785 14.209 12.194 | 34 4.188 4.902 4.314 | 67 1.617 1.815 1.657 2 11.458 13.815 11.857 | 35 4.052 4.742 4.173 | 68 1.583 1.769 1.620 3 11.128 13.417 11.515 | 36 3.920 4.586 4.037 | 69 1.550 1.724 1.585 4 10.803 13.023 11.178 | 37 3.793 4.437 3.906 | 70 1.518 1.681 1.552 5 10.481 12.635 10.845 | 38 3.670 4.293 3.780 | 71 1.488 1.639 1.520 6 10.161 12.253 10.514 | 39 3.553 4.154 3.658 | 72 1.459 1.599 1.489 7 9.844 11.875 10.187 | 40 3.439 4.021 3.541 | 73 1.432 1.560 1.460 8 9.530 11.505 9.863 | 41 3.330 3.894 3.429 | 74 1.406 1.524 1.433 9 9.221 11.141 9.545 | 42 3.226 3.771 3.322 | 75 1.382 1.490 1.407 10 8.918 10.784 9.233 | 43 3.125 3.654 3.218 | 76 1.359 1.457 1.383 11 8.623 10.436 8.928 | 44 3.028 3.541 3.119 | 77 1.338 1.427 1.360 12 8.338 10.098 8.634 | 45 2.936 3.432 3.023 | 78 1.318 1.398 1.338 13 8.066 9.771 8.353 | 46 2.846 3.328 2.931 | 79 1.299 1.371 1.318 14 7.808 9.455 8.085 | 47 2.761 3.227 2.843 | 80 1.281 1.345 1.298 15 7.564 9.150 7.831 | 48 2.678 3.129 2.758 | 81 1.264 1.321 1.280 16 7.335 8.857 7.592 | 49 2.599 3.035 2.676 | 82 1.248 1.298 1.262 17 7.118 8.575 7.364 | 50 2.522 2.945 2.597 | 83 1.233 1.277 1.245 18 6.911 8.302 7.148 | 51 2.449 2.858 2.522 | 84 1.218 1.257 1.230 19 6.713 8.038 6.939 | 52 2.378 2.774 2.449 | 85 1.205 1.238 1.215 20 6.521 7.782 6.737 | 53 2.311 2.693 2.379 | 86 1.193 1.221 1.202 21 6.334 7.534 6.540 | 54 2.246 2.615 2.312 | 87 1.181 1.205 1.189 22 6.150 7.293 6.347 | 55 2.184 2.540 2.248 | 88 1.171 1.190 1.177 23 5.969 7.059 6.158 | 56 2.125 2.468 2.187 | 89 1.160 1.176 1.166 24 5.791 6.831 5.971 | 57 2.068 2.398 2.128 | 90 1.151 1.163 1.155 25 5.615 6.611 5.788 | 58 2.014 2.330 2.071 | 91 1.141 1.150 1.144 26 5.441 6.396 5.608 | 59 1.962 2.265 2.017 | 92 1.131 1.137 1.133 27 5.271 6.188 5.431 | 60 1.912 2.201 1.965 | 93 1.120 1.125 1.122 28 5.104 5.986 5.258 | 61 1.864 2.139 1.915 | 94 1.109 1.112 1.110 29 4.940 5.791 5.089 | 62 1.818 2.079 1.867 | 95 1.097 1.098 1.097 30 4.781 5.601 4.925 | 63 1.774 2.022 1.821 | 96 1.083 1.084 1.084 31 4.626 5.418 4.765 | 64 1.732 1.967 1.777 | 97 1.069 1.069 1.069 32 4.476 5.241 4.610 | 65 1.692 1.914 1.735 | 98 1.054 1.054 1.054 33 4.330 5.069 4.459 | 66 1.654 1.863 1.695 | 99 1.040 1.040 1.040 | | 100 1.000 1.000 1.000
- -------------------------------------------------------------------------------- Strategic Benefit 157 APPENDIX B PERFORMANCE INFORMATION POLICY PERFORMANCE The following hypothetical illustrations demonstrate how the actual investment experience of each variable investment option of the separate account affects the cash surrender value, account value and death benefit of a policy. These hypothetical illustrations are based on the actual historical return of each portfolio as if a policy had been issued on the date indicated. Each portfolio's annual total return is based on the total return calculated for each fiscal year. These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions, which if reflected, would result in lower total return figures than those shown. The illustrations are based on the payment of a $5,750 annual premium, received at the beginning of each year, for a hypothetical policy with a $300,000 face amount death benefit Option 1, issued on a preferred nonsmoker male, age 45. It is assumed that all premiums are allocated to the variable investment option illustrated for the period shown. The benefits are calculated for a specific date. The amount and timing of premium payments and the use of other policy features, such as policy loans, would affect individual policy benefits. The amounts shown for the cash surrender values, account values and death benefits take into account the charges against premiums, current cost of insurance and monthly deductions, the daily charge against the separate account for mortality and expense risks, and each portfolio's charges and expenses. SEE CHARGES, PAGE 40. This prospectus also contains illustrations based on assumed rates of return. SEE ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE 48. Past performance is not an indication of future results. Actual investment results may be more or less than those shown in the hypothetical illustrations. - -------------------------------------------------------------------------------- Strategic Benefit 158 HYPOTHETICAL ILLUSTRATIONS Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- AIM V.I. CAPITAL APPRECIATION FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 2.50% 5,233 5,233 300,000 12/31/95 35.69% 13,899 13,899 300,000 12/31/96 17.58% 22,093 22,093 300,000 12/31/97 13.51% 30,513 30,513 300,000 12/31/98 19.30% 42,009 42,009 300,000 12/31/99 44.61% 67,434 67,434 300,000 AIM V.I. GOVERNMENT SECURITIES FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 -3.73% 4,904 4,904 300,000 12/31/95 15.56% 11,435 11,435 300,000 12/31/96 2.29% 16,694 16,694 300,000 12/31/97 8.16% 23,269 23,269 300,000 12/31/98 7.66% 30,145 30,145 300,000 12/31/99 -1.32% 34,310 34,310 300,000 ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 8.71% 5,561 5,561 300,000 12/31/91 57.54% 16,679 16,679 300,000 12/31/92 3.55% 22,292 22,292 300,000 12/31/93 13.28% 30,675 30,675 300,000 12/31/94 -4.38% 33,781 33,781 300,000 12/31/95 44.31% 55,501 55,501 300,000 12/31/96 4.18% 62,423 62,423 300,000 12/31/97 11.39% 74,372 74,372 300,000 12/31/98 15.53% 90,931 90,931 300,000 12/31/99 43.42% 136,511 136,511 306,603 The assumptions underlying these values are described in Performance Information, page 158. * These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Benefit 159 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- FIDELITY VIP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 39.38% 7,182 7,182 300,000 12/31/99 37.29% 16,721 16,721 300,000 FIDELITY VIP OVERSEAS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 12.69% 5,771 5,771 300,000 12/31/99 42.44% 15,360 15,360 300,000 GCG EQUITY/INCOME PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 4.74% 5,351 5,351 300,000 12/31/91 20.02% 12,415 12,415 300,000 12/31/92 1.88% 17,618 17,618 300,000 12/31/93 11.13% 24,932 24,932 300,000 12/31/94 -1.18% 29,284 29,284 300,000 12/31/95 18.93% 40,384 40,384 300,000 12/31/96 8.77% 48,854 48,854 300,000 12/31/97 17.44% 62,598 62,598 300,000 12/31/98 8.26% 72,523 72,523 300,000 12/31/99 -0.72% 76,222 76,222 300,000 GCG GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/99 78.13% 9,235 9,235 300,000 The assumptions underlying these values are described in Performance Information, page 158. * These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Benefit 160 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- GCG HARD ASSETS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 -13.84% 4,372 4,372 300,000 12/31/91 4.70% 9,792 9,792 300,000 12/31/92 -9.81% 13,228 13,228 300,000 12/31/93 49.93% 27,178 27,178 300,000 12/31/94 2.53% 32,678 32,678 300,000 12/31/95 10.69% 41,299 41,299 300,000 12/31/96 33.17% 61,086 61,086 300,000 12/31/97 6.22% 69,496 69,496 300,000 12/31/98 -29.58% 51,896 51,896 300,000 12/31/99 23.36% 69,508 69,508 300,000 GCG LIMITED MATURITY BOND PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 7.87% 5,516 5,516 300,000 12/31/91 11.27% 11,680 11,680 300,000 12/31/92 4.84% 17,370 17,370 300,000 12/31/93 6.20% 23,556 23,556 300,000 12/31/94 -1.19% 27,931 27,931 300,000 12/31/95 11.72% 36,419 36,419 300,000 12/31/96 4.32% 42,737 42,737 300,000 12/31/97 6.67% 50,348 50,348 300,000 12/31/98 6.86% 58,575 58,575 300,000 12/31/99 1.13% 63,630 63,630 300,000 The assumptions underlying these values are described in Performance Information, page 158. * These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Benefit 161 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- GCG LIQUID ASSETS MONEY MARKET PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 7.75% 5,510 5,510 300,000 12/31/91 5.66% 11,076 11,076 300,000 12/31/92 3.13% 16,466 16,466 300,000 12/31/93 2.64% 21,838 21,838 300,000 12/31/94 3.89% 27,606 27,606 300,000 12/31/95 5.51% 34,041 34,041 300,000 12/31/96 5.01% 40,541 40,541 300,000 12/31/97 5.07% 47,297 47,297 300,000 12/31/98 5.13% 54,434 54,434 300,000 12/31/99 4.74% 61,604 61,604 300,000 GCG MID-CAP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/99 79.05% 9,284 9,284 300,000 GCG RESEARCH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/99 24.23% 6,380 6,380 300,000 GCG TOTAL RETURN PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/99 3.38% 5,279 5,279 300,000 The assumptions underlying these values are described in Performance Information, page 158. * These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Benefit 162 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- INVESCO VIF-EQUITY INCOME FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 29.25% 6,646 6,646 300,000 12/31/96 22.28% 14,223 14,223 300,000 12/31/97 28.17% 24,512 24,512 300,000 12/31/98 15.30% 33,766 33,766 300,000 12/31/99 14.84% 44,140 44,140 300,000 INVESCO VIF-HIGH YIELD FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 19.76% 6,144 6,144 300,000 12/31/96 16.59% 12,973 12,973 300,000 12/31/97 17.33% 20,967 20,967 300,000 12/31/98 1.42% 26,108 26,108 300,000 12/31/99 9.20% 33,658 33,658 300,000 INVESCO VIF-SMALL COMPANY GROWTH FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 16.38% 5,966 5,966 300,000 12/31/99 91.06% 21,037 21,037 300,000 MERRILL LYNCH BALANCED CAPITAL FOCUS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/99 7.85% 5,515 5,515 300,000 MERRILL LYNCH BASIC VALUE FOCUS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 9.28% 5,591 5,591 300,000 12/31/99 20.97% 12,802 12,802 300,000 The assumptions underlying these values are described in Performance Information, page 158. * These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Benefit 163 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- MERRILL LYNCH GLOBAL GROWTH FOCUS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/99 38.69% 7,145 7,145 300,000 MERRILL LYNCH INDEX 500 FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/97 32.81% 6,834 6,834 300,000 12/31/98 28.28% 15,169 15,169 300,000 12/31/99 20.50% 24,165 24,165 300,000 MERRILL LYNCH SMALL CAP VALUE FOCUS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 -6.52% 4,757 4,757 300,000 12/31/99 33.99% 13,090 13,090 300,000 VAN ECK WORLDWIDE BOND FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 11.25% 5,695 5,695 300,000 12/31/91 18.39% 12,648 12,648 300,000 12/31/92 -5.25% 16,592 16,592 300,000 12/31/93 7.79% 23,078 23,078 300,000 12/31/94 -1.32% 27,426 27,426 300,000 12/31/95 17.30% 37,663 37,663 300,000 12/31/96 2.53% 43,265 43,265 300,000 12/31/97 2.38% 48,849 48,849 300,000 12/31/98 12.75% 60,142 60,142 300,000 12/31/99 -7.82% 59,404 59,404 300,000 The assumptions underlying these values are described in Performance Information, page 158. * These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Benefit 164 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- VAN ECK WORLDWIDE EMERGING MARKETS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 26.82% 6,517 6,517 300,000 12/31/97 -11.61% 10,124 10,124 300,000 12/31/98 -34.15% 9,832 9,832 300,000 12/31/99 100.28% 29,634 29,634 300,000 VAN ECK WORLDWIDE REAL ESTATE FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 -11.35% 4,503 4,503 300,000 12/31/99 -2.01% 9,282 9,282 300,000 The assumptions underlying these values are described in Performance Information, page 158. * These annual total return figures reflect the portfolio's management fees and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Strategic Benefit 165 PART II UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. UNDERTAKING REGARDING INDEMNIFICATION Please refer to the Articles of Incorporation listed as Exhibits 1.A(6)(a) and 1.A(6)(b-g) and the By-Laws listed as Exhibits 1.A(6)(h) and 1.A(6)(h)(i). Security Life of Denver's (the "corporation") Certificate of Incorporation and bylaws provide that the corporation shall have every power and duty of indemnification of directors, officers, employees and agents, without limitation, provided by the laws of the state of Colorado. Under Colorado law, the corporation has the power to indemnify such persons against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed action, suit or proceeding, if such person acted in good faith and in a manner which that person reasonably believed to be in or not opposed to the best interest of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. In the case of actions by or in the right of the corporation, such indemnification cannot be made where such person is adjudged liable to the corporation, except pursuant to a court order. The corporation is required to indemnify directors, officers, employees and agents against expense actually and reasonably incurred in connection with actions where such persons have been successful on the merits or otherwise in defense of such actions. Insofar as indemnification for liability arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the securities and Exchange commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling preceding, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. UNDERTAKING REQUIRED BY SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED Security Life of Denver Insurance Company represents that the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by the Company. Contents of Registration Statement This Registration Statement comprises the following papers and documents: The facing sheet. Cross-Reference table. - -------------------------------------------------------------------------------- Strategic Benefit II - 1 The prospectus. The undertaking to file reports. The undertaking regarding indemnification. The undertaking required by Section 26(e)2(A) of the Investment Company Act of 1940, as amended. The signatures. Written consents of the following persons: James L. Livingston, Jr. (See Exhibit 6B). Ernst & Young, L.L.P. (See Exhibit 7A). Sutherland Asbill & Brennan LLP (See Exhibit 7B). The following exhibits: 1.A (1) Resolution of the Executive Committee of the Board of Directors of Security Life of Denver Insurance Company ("Security Life of Denver") authorizing the establishment of the Registrant./1/ (2) Not Applicable. (3) (a) Security Life of Denver Distribution Agreement./1/ (i) Amendment to Security Life of Denver Insurance Company Distribution Agreement./6/ (ii) Amendment to Security Life of Denver Insurance Company Distribution Agreement./9/ (b) Compensation Schedule to Selling Agreement with Merrill Lynch./10/ (c) Commission Schedule for Policies./10/ (d) Commission Schedule for Policies. (4) Not Applicable. (5) (a) Strategic Benefit Variable Universal Life Insurance Policy (Form No. 2507(VUL)-5/00)./10/ (b) Adjustable Term Insurance Rider (Form No. R2006-3/00)./5/ (c) Certificate of Insurance./5/ (6) (a) Security Life of Denver's Restated Articles of Incorporation./1/ (b-g) Amendments to Articles of Incorporation through June 12, 1987./1/ (h) Security Life of Denver's By-Laws./1/ (i) Bylaws of Security Life of Denver Insurance Company (Restated with Amendments through September 30, 1997)./2/ (7) Not Applicable. (8) (a) Participation Agreements (i) Participation Agreement by and among AIM Variable Insurance Funds, Inc., Life Insurance Company, on Behalf of Itself and its Separate Accounts and Name of Underwriter of Variable Contracts and Policies./3/ - -------------------------------------------------------------------------------- Strategic Benefit II - 2 (ii) Sales Agreement by and among The Alger American Fund, Fred Alger Management, Inc., and Security Life of Denver Insurance Company./1/ (iii) Sales Agreement by and among Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, and Security Life of Denver Insurance Company./1/ (iv) Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./1/ (v) Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./1/ (vi) Participation Agreement among INVESCO Variable Investment Funds, Inc., INVESCO Funds Group, Inc., and Security Life of Denver Insurance Company./1/ (vii) Participation Agreement between Van Eck Investment Trust and the Trust's investment adviser, Van Eck Associates Corporation, and Security Life of Denver Insurance Company./1/ (viii) Participation Agreement among Security Life of Denver Insurance Company, The GCG Trust and Directed Services, Inc. (ix) Fund Participation Agreement between Merrill Lynch Variable Series Funds, Inc. and Security Life of Denver Insurance Company. (b) (i) First Amendment to Fund Participation Agreement between Security Life of Denver, Van Eck Investment Trust and Van Eck Associates Corporation. /3/ (ii) Second Amendment to Fund Participation Agreement between Security Life of Denver, Van Eck Worldwide Insurance Trust and Van Eck Associates Corporation. /3/ (iii) Assignment and Modification Agreement between Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, Neuberger & Berman Advisers Management Trust, Advisers Managers Trust and Security Life of Denver Insurance Company. /3/ (iv) First Amendment to Participation Agreement by and among The Alger American Fund, Fred Alger Management, Inc., Security Life of Denver Insurance Company./1/ (v) First Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./1/ (vi) Second Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./1/ (vii) First Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./1/ (viii) Second Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./1/ (ix) First Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc./1/ (x) Third Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./8/ (xi) Third Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc./4/ (xii) Fourth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./4/ (xiii) Fourth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./4/ (xiv) Amendment No. 2 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc./4/ - -------------------------------------------------------------------------------- Strategic Benefit II - 3 (xv) Fourth Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc./6/ (xvi) Amendment No. 3 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc./6/ (xvii) Fifth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./6/ (xviii)Fifth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./6/ (xix) Amendment No. 4 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc. (xx) Sixth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. (xxi) Sixth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. (xxii) Fifth Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc. (c) (i) Service Agreement between Fred Alger Management, Inc. and Security Life of Denver Insurance Company./1/ (ii) Expense Allocation Agreement between A I M Advisors, Inc., AIM Distributors, Inc. and Security Life of Denver./9/ (iii) Service Agreement between INVESCO Funds Group, Inc. and Security Life of Denver Insurance Company./9/ (iv) Service Agreement between Neuberger & Berman Management Incorporated and Security Life of Denver Insurance Company./9/ (v) Service Agreement between Fidelity Investments Institutional Operations Company, Inc. and Security Life of Denver Insurance Company./9/ (vi) Side Letter between Van Eck Worldwide Insurance Trust and Security Life of Denver./9/ (vii) Specimen Administrative Services Agreement among Security Life of Denver Insurance Company and Merrill Lynch Asset Management, L.P./10/ (9) Not Applicable. (10) Specimen Guaranteed Issue Variable Life Insurance Application with Guaranteed Issue Binding Limited Life Insurance Coverage Form (Form Nos. Q2009-11/97 and Q-1112 B-6/98)./10/ 2. Included as Exhibit 1.A(5) above. 3.A Opinion and consent of Gary W. Waggoner as to securities being registered. 4. Not Applicable. 5. Not Applicable. 6.A Opinion and consent of James L. Livingston, Jr. [To be Filed by Amendment.] 7.A Consent of Ernst & Young L.L.P. [To be Filed by Amendment.] B Consent of Sutherland Asbill & Brennan LLP. [To be Filed by Amendment.] 8. Not Applicable. 11. Issuance, Transfer and Redemption Procedures Memorandum. - -------------------------------------------------------------------------------- Strategic Benefit II - 4 _______________ /1/ Incorporated herein by reference to Post-Effective Amendment No. 7 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on April 27, 1998 (File No. 33-74190). /2/ Incorporated herein by reference to Post-Effective Amendment No. 5 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on October 29, 1998 (File No. 33-74190). /3/ Incorporated herein by reference to Post-Effective Amendment No. 6 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on March 2, 1998 (File No. 33-74190). /4/ Incorporated herein by reference to the Pre-Effective Amendment No. 2 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on May 10, 1999 (File No. 333-72753). /5/ Incorporated herein by reference to the Initial Registration to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on November 8, 1999 (File No. 333-90577). /6/ Incorporated herein by reference to the Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on December 3, 1999 (File No. 333-90577). /7/ Incorporated herein by reference to the Pre-Effective Amendment No. 2 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on February 2, 2000 (File No. 333-90577). /8/ Incorporated herein by reference to the Post-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on February 29, 2000 (File No. 333-72753). /9/ Incorporated herein by reference to the Post-Effective Amendment No. 10 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on April 23, 1999 (File No. 33-74190). /10/ Incorporated herein by reference to the Post-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on March 2, 2000 (File No. 333-90577). - -------------------------------------------------------------------------------- Strategic Benefit II - 5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Security Life of Denver Insurance Company and the Registrant, Security Life Separate Account L1, have duly caused this Registration Statement to be signed on their behalf by the undersigned, hereunto duly authorized, and their seal to be hereunto fixed and attested, all in the City and County of Denver and the State of Colorado on the 19th day of April, 2000. SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/ Stephen M. Christopher ---------------------------------- Stephen M. Christopher President (Seal) ATTEST: /s/ Gary W. Waggoner - -------------------------- Gary W. Waggoner SECURITY LIFE SEPARATE ACCOUNT L1 (Registrant) BY: SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/ Stephen M. Christopher ---------------------------------- Stephen M. Christopher President (Seal) ATTEST: /s/ Gary W. Waggoner - ------------------------- Gary W. Waggoner - -------------------------------------------------------------------------------- Strategic Benefit II - 6 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities with Security Life of Denver Insurance Company and on the date indicated. PRINCIPAL EXECUTIVE OFFICERS: /s/ Stephen M. Christopher - ----------------------------------------------- Stephen M. Christopher President, Chief Executive Officer and Director /s/ James L. Livingston, Jr. - ----------------------------------------------- James L. Livingston, Jr. Executive Vice President and Chief Financial Officer PRINCIPAL ACCOUNTING OFFICER: /s/ Shari A. Enger - ----------------------------------------------- Shari A. Enger Vice President and Controller DIRECTORS: /s/ P. Randall. Lowery - ----------------------------------------------- P. Randall Lowery /s/ Michael W. Cunningham - ----------------------------------------------- Michael W. Cunningham - -------------------------------------------------------------------------------- Strategic Benefit II - 7 EXHIBIT INDEX Exhibit No. Description of Exhibit 1.A(3)(b)(i) Compensation Schedule 1.A(3)(c)(i) Commission Schedule 1.A(8)(a)(viii) GCG Trust Participation Agreement 1.A(8)(a)(ix) Merrill Lynch Participation Agreement 1.A(8)(b)(xxiii) Fidelity 7th Amendment 1.A(8)(c)(vii) Merrill Lynch Administrative Services Agreement 1.A(8)(c)(viii) Fidelity Service Contract 6.A Livingston Opinion Letter 7.A Ernst & Young Consent Letter 7.B Sutherland Asbill & Brennan LLP Consent Letter 11. Issuance, Transfer and Redemption Procedures Memorandum. - -------------------------------------------------------------------------------- Strategic Benefit II - 8 EX-1 2 1A3BI Exhibit 1.A(3)(b)(i) SCHEDULE SB-1 COMPENSATION SCHEDULE TO SELLING AGREEMENT FOR MERRILL LYNCH STRATEGIC BENEFIT VARIABLE UNIVERSAL LIFE This Schedule is an attachment effective as of May 1, 2000 to the ING America Equities, Inc. ("ING America Equities") Selling Agreement by and among the parties pursuant to paragraph 17 of that Selling Agreement. The provisions of this Schedule shall apply only to ING Security Life's Strategic Benefit Variable Universal Life policies solicited and issued while this Schedule is in effect. All compensation payable under this Schedule shall be subject to the terms and conditions contained herein at the time of issue of the policy by ING Security Life of Denver Insurance Company ("ING Security Life"). 1. Commission Structure: Commissions are payable on premiums paid in the first year up to the target premium only. No commissions are paid on premium in excess of the target premium. Any time a new coverage segment is created, premiums allocated to that segment in its first year will be commissionable up to that segment's target premium. The commission rates as a percent of target premium are: ------------------------------- --------------------------- POLICY YEAR OF COVERAGE SEGMENT COMMISSION RATE ------------------------------- --------------------------- 1 5% ------------------------------- --------------------------- 2+ 0% ------------------------------- --------------------------- Premiums received within 15 days prior to policy anniversary will result in the agent receiving commissions at the same rate as if the premium was paid on the anniversary date. If this product is sold with a maximum ATR coverage, the target premium could be zero which would result in no commissions payable other than the annual trail commission described in section 2 below. 2. Trail Commissions: are paid as a percent of the net account value. The trail commission is calculated monthly based on the net account value at the end of the prior month. It is paid at the end of the policy year, provided the policy remains in force at that time and is not subject to the grace period provisions. The trail commissions will continue when the insured lives past age 100 and the continuation of coverage feature is in force. The annual trail commission rates are given below. Schedule SB-1 (ver 2-25-00) Page 1 of 3 Annual trail commission rates as a percent of the net account value: ----------------------------- ----------------------------- POLICY YEAR TRAIL COMMISSION RATE ----------------------------- ----------------------------- 1 - 10 1.00% ----------------------------- ----------------------------- 11 - 20 0.75% ----------------------------- ----------------------------- 21+ 0.20% ----------------------------- ----------------------------- 3. Riders: The Adjustable Term Insurance Rider coverage is not commissionable. 4. Commission Calculation: Commissions shall be calculated only on premium actually received and accepted by ING Security Life. Commissions shall be paid only on an earned basis. Outstanding loan amounts carried over are not considered commissionable premium. 5. Premium Allocation: If the Stated Death Benefit has been increased since the policy date, premiums received are allocated to the coverage segments in the same proportion that the commission target premium for each segment bears to the total commission target premium of the policy. 6. Death Benefit Increases: If a premium payment accompanies a request for a Stated Death Benefit increase or is received while a request is pending, the payment will be applied to the policy but commissions shall not be payable until the increase is effective. The commission shall then be payable based on the premium being allocated among all segments as it would normally and the new target premium after the increase. 7. Compensation Payments: Compensation on initial premium shall be due to the Selling Broker-Dealer at the time of the issuance of the policy and for all other premium payments at the time of the receipt and acceptance of premium by ING Security Life, except that the amount, if any, and the time of payment of compensation on stated death benefit increases, replacements, reissues, changes, conversions, exchanges, term renewals, term conversions, premiums paid in advance, policies issued on a "guaranteed issue" basis, policies requiring facultative reinsurance arrangements, and other special cases and programs shall be governed by ING Security Life's underwriting and administrative rules then in effect. The Compensation shall be payable to the Selling Broker-Dealer in accordance with the Schedule I in effect at the time of issue of the policy. 8. Commission Chargeback: In the event that a policy for which a commission has been paid is lapsed or surrendered by the Policy Owner or has a reduction in the Stated Death Benefit during the first three years or is returned to ING Security Life for refund of premium during the Free Look Period as described in the policy, ING Security Life and ING America Equities shall require reimbursement of from Selling Broker-Dealer as Schedule SB-1 (ver 2-25-00) Page 2 of 3 shown below. ---------------------- ----------------------------------------- POLICY OR SEGMENT YEAR COMMISSION CHARGEBACK ---------------------- ----------------------------------------- ---------------------- ----------------------------------------- 1 5% of first year premiums up to target ---------------------- ----------------------------------------- ---------------------- ----------------------------------------- 2 2.5% of first year premiums up to target ---------------------- ----------------------------------------- ---------------------- ----------------------------------------- 3 1.25% of first year premiums up to target ---------------------- ----------------------------------------- ---------------------- ----------------------------------------- 4+ 0% ---------------------- ----------------------------------------- If a premium payment for which a commission has been paid is refunded by ING Security Life, a reimbursement of the commission paid on the amount refunded will be due from the Selling Broker-Dealer. The reimbursement may be deducted by ING America Equities from the next, or any subsequent, commission payment to Selling Broker-Dealer. If the amount to be reimbursed exceeds compensation otherwise due, Selling Broker-Dealer shall promptly reimburse ING America Equities before the next commission cycle. 9. Internal Exchanges: No Commissions shall be payable on the exchange of any policy issued by Security Life or any other ING affiliate for a Merrill Lynch Corporate Benefits Variable Universal Life policy. Schedule SB-1 (ver 2-25-00) Page 3 of 3 EX-2 3 COMMISSION SCHEDULE Exhibit 1.A(3)(c)(i) Commission Structure: Commissions are payable on premiums paid up to the target premium only. No commissions are paid on premium in excess of the target premium. Any time a new coverage segment is created, premiums allocated to that segment will be commissionable up to that segment's target premium. The commission rates as a percent of target premium are given below. POLICY YEAR OF COVERAGE SEGMENT COMMISSION RATE 1 5% 2+ 0% Annual trail commission rates as a percent of the net account value: POLICY YEAR TRAIL COMMISSION RATE 1 - 10 1.00% 11 - 20 0.75% 21+ 0.20% Commission Chargeback: In the event that a policy for which a commission has been paid is lapsed or surrendered by the Policy Owner or has a reduction in the Stated Death Benefit during the first three policy years or is returned for refund of premium during the Free Look Period as described in the policy, reimbursement is required from Selling Broker-Dealer as shown below. POLICY OR SEGMENT YEAR COMMISSION CHARGEBACK 1 5% of first year premiums up to target 2 2.5% of first year premiums up to target 3 1.25% of first year premiums up to target 4+ 0% Page 1 of 1 EX-3 4 GCG TRUST PARTICIPATION FORM OF PARTICIPATION AGREEMENT ---- AMONG SECURITY LIFE OF DENVER INSURANCE COMPANY, THE GCG TRUST, AND DIRECTED SERVICES, INC. THIS AGREEMENT, dated as of the 11th day of February, 2000, by and among Security Life of Denver Insurance Company (the "Company"), a life insurance company organized under the laws of the State of Colorado, on its own behalf and on behalf of each separate account of the Company set forth on Schedule A hereto as may be amended from time to time (each such account hereinafter referred to as the "Account"), The GCG Trust (the "Fund"), a management investment company and business trust organized under the laws of the Commonwealth of Massachusetts, Directed Services, Inc.(the "Adviser" and the "Distributor), a corporation organized under the laws of the State of New York. WHEREAS, the Fund engages in business as an open-end management investment company and is available to act as the investment vehicle for separate accounts established for variable life insurance and variable annuity contracts (the "Variable Insurance Products") to be offered by insurance companies which have entered into participation agreements with the Fund, Adviser and Distributor ("Participating Insurance Companies"); WHEREAS, the shares of beneficial interest of the Fund are divided into several series of shares, each designated a "Portfolio" and representing the interest in a particular managed portfolio of securities and other assets; WHEREAS, the Fund has obtained an order from the Securities and Exchange Commission (the "SEC") granting Participating Insurance Companies and variable annuity and variable life insurance separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended, (the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, if and to the extent necessary to permit shares of the Fund to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies (the "Mixed and Shared Funding Exemptive Order"), and the parties to this Agreement agree to comply with the conditions or undertakings specified in the Mixed and Shared Funding Exemptive Order to the extent applicable to each such party; WHEREAS, the Fund is registered as an open-end management investment company under the 1940 Act and shares of the Portfolios are registered under the Securities Act of 1933, as amended (the "1933 Act"); WHEREAS, the Adviser, which serves as investment adviser to the Fund, is duly registered as an investment adviser under the federal Investment Advisers Act of 1940, as amended; WHEREAS, the Company has registered or will register certain variable life insurance contracts (the "Contracts") under the 1933 Act; WHEREAS, the Account is a duly organized, validly existing segregated asset account, established by the Company under the insurance laws of the State of Colorado, to set aside and invest assets attributable to the Contracts; WHEREAS, the Company has registered the Account as a unit investment trust under the 1940 Act; -A1- WHEREAS, the Company has issued or will issue certain variable life insurance contracts supported wholly or partially by the Account (the "Contracts"), and said Contracts are listed in Schedule A hereto, as it may be amended from time to time by mutual written agreement; WHEREAS, the Distributor, which serves as distributor to the Fund, is registered as a broker dealer with the SEC under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares in the Portfolios listed in Schedule B hereto, as it may be amended from time to time by mutual written agreement (the "Designated Portfolios") on behalf of the Account to fund the aforesaid Contracts, and the Distributor is authorized to sell such shares to the Account at net asset value; NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund, the Adviser, and the Distributor agree as follows: ARTICLE I. Sale of Fund Shares ------------------- 1.1. The Fund agrees to sell to the Company those shares of the Designated Portfolios that each Account or the appropriate subaccount of each Account orders, executing such orders on a daily basis at the net asset value next computed after receipt and acceptance by the Fund or its designee of the order for the shares of the Fund. For purposes of this Section 1.1, the Company will be the designee of the Fund for receipt of such orders from each Account or the appropriate subaccount of each Account and receipt by such designee will constitute receipt by the Fund; provided that the Fund receives notice of such order by 10:00 a.m. Eastern Time on the next following business day ("T+1"). "Business Day" will mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the SEC. 1.2. The Company will pay for Fund shares on T+1 that an order to purchase Fund shares is made in accordance with Section 1.1 above. Payment will be in federal funds transmitted by wire. This wire transfer will be initiated by 12:00 p.m. Eastern Time. 1.3. The Fund agrees to make shares of the Designated Portfolios available indefinitely for purchase at the applicable net asset value per share by Participating Insurance Companies and their separate accounts on those days on which the Fund calculates its Designated Portfolio net asset value pursuant to rules of the SEC and the Fund shall use reasonable efforts to calculate such net asset value on each day the New York Stock Exchange is open for trading; provided, however, that the Board of Trustees of the Fund (the "Fund Board") may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Fund Board, acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.4. On each Business Day on which the Fund calculates its net asset value, the Company will aggregate and calculate the net purchase or redemption orders for each Account or the appropriate subaccount of each Account maintained by the Fund in which contract owner assets are invested. Net orders will only reflect orders that the Company has received prior to the close of regular trading on the New York Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m., Eastern Time) on that Business Day. Orders that the Company has received after the close of regular trading on the NYSE will be treated as though received on the next Business Day. Each communication of orders by the Company will constitute a representation that such orders were received by it prior to the close of regular trading on the NYSE on the Business Day on which the purchase or redemption order is priced in accordance with Rule 22c-1 under the 1940 Act. Other procedures relating to the handling of orders will be in accordance with the prospectus and statement of information of the relevant Designated Portfolio or with oral or written instructions that the Distributor or the Fund will forward to the Company from time to time. 1.5. The Fund agrees that shares of the Fund will be sold only to Participating Insurance Companies and their separate accounts, qualified pension and retirement plans or such other persons as are permitted under -2- applicable provisions of the Internal Revenue Code of 1986, as amended, (the "Internal Revenue Code"), and regulations promulgated thereunder, the sale to which will not impair the tax treatment currently afforded the Contracts. No shares of any Portfolio will be sold to the general public except as set forth in this Section 1.5. 1.6. The Fund agrees to redeem for cash, upon the Company's request, any full or fractional shares of the Fund held by the Company, executing such requests on a daily basis at the net asset value next computed after receipt and acceptance by the Fund or its agent of the request for redemption. For purposes of this Section 1.6, the Company will be the designee of the Fund for receipt of requests for redemption from each Account or the appropriate subaccount of each Account and receipt by such designee will constitute receipt by the Fund, provided the Fund receives notice of request for redemption by 10:00 a.m. Eastern Time on the next following Business Day. Payment will be in federal funds transmitted by wire to the Company's account as designated by the Company in writing from time to time, on the same Business Day the Fund receives notice of the redemption order from the Company. The Fund reserves the right to delay payment of redemption proceeds, but in no event may such payment be delayed longer than the period permitted by the 1940 Act. The Fund will not bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds; the Company alone will be responsible for such action. If notification of redemption is received after 10:00 a.m. Eastern Time, payment for redeemed shares will be made on the next following Business Day. 1.7. The Company agrees to purchase and redeem the shares of the Designated Portfolios offered by the then current prospectus of the Fund in accordance with the provisions of such prospectus. 1.8. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Purchase and redemption orders for Fund shares will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.9. The Fund will furnish same day notice (by telecopier, followed by written confirmation) to the Company of the declaration of any income, dividends or capital gain distributions payable on each Designated Portfolio's shares. The Company hereby elects to receive all such dividends and distributions as are payable on the Designated Portfolio shares in the form of additional shares of that Designated Portfolio. The Fund will notify the Company of the number of shares so issued as payment of such dividends and distributions. The Company reserves the right to revoke this election upon reasonable prior notice to the Fund and to receive all such dividends and distributions in cash. 1.10. The Fund will make the net asset value per share for each Designated Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated and will use its best efforts to make such net asset value per share available by 6:00 p.m., Eastern Time, but in no event later than 7:00 p.m., Eastern Time, each business day. 1.11. Any error in the calculation of the net asset value, dividend and capital gain information greater than or equal to $0.01 per share of the Fund's shares, shall be reported immediately upon discovery to the Company. Any error of a lesser amount shall be corrected in the next Business Day's net asset value per share for the Fund. Any such notice will state for each day for which an error occurred the incorrect price, the correct price and, to the extent communicated to the Fund's shareholders, the reason for the price change. The Company may send this notice or a derivation thereof (so long as such derivation is approved in advance by the Distributor or the Adviser) to contractowners whose accounts are affected by the price change. The parties will negotiate in good faith to develop a reasonable method for effecting such adjustments. The Fund shall provide the Company, on behalf of the Account or the appropriate subaccount of each Account, with a prompt adjustment to the number of shares purchased or redeemed to reflect the correct share net asset value. 1.12. (a) The parties hereto acknowledge that the arrangement contemplated by this Agreement is not exclusive; the Fund's shares may be sold to other insurance companies (subject to Section 1.8 hereof) and the cash value of the Contracts may be invested in other investment companies, provided, however, that until this Agreement is terminated pursuant to Article X, the Company shall promote the Designated Portfolios on the same basis as other funding vehicles available under the Contracts and funding vehicles -3- other than those listed on Schedule B to this Agreement may be available for the investment of the cash value of the Contracts. (b) The Company shall not, without prior notice to the Advisor and the Distributor (unless otherwise required by applicable law), take any action to operate the Account as a management investment company under the 1940 Act. (c) The Company shall not, without prior notice to the Advisor and the Distributor (unless otherwise required by applicable law), induce Contract owners to change or modify the Fund or change the Fund's distributor or investment adviser. (d) The Company shall not, without prior notice to the Fund, induce Contract owners to vote on any matter submitted for consideration by the shareholders of the Fund in a manner other than as recommended by the Board of Trustees of the Fund. ARTICLE II. Representations and Warranties ------------------------------ 2.1. The Company represents and warrants that the Contracts are or will be registered under the 1933 Act and that the Contracts will be issued and sold in compliance with all applicable federal and state laws, including state insurance suitability requirements. The Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established each Account as a separate account under applicable state law and has registered the Account as a unit investment trust in accordance with the provisions of thin 1940 Act to serve as a segregated investment account for the Contracts, and that it will maintain such registration for so long as any Contracts are outstanding. The Company will amend the registration statement under the 1933 Act for the Contracts and the registration statement under the 1940 Act for the Account from time to time as required in order to effect the continuous offering of the Contracts or as may otherwise be required by applicable law. The Company will register and qualify the Contracts for sale in accordance with the securities laws of the various states only if and to the extent deemed necessary by the Company. 2.2. The Company represents that the Contracts are currently and at the time of issuance will be treated as endowment or life insurance contracts under applicable provisions of the Internal Revenue Code, and that it will make every effort to maintain such treatment and that it will notify the Fund and the Adviser immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.3. The Company represents and warrants that it will not purchase shares of the Designated Portfolios with assets derived from tax-qualified retirement plans except, indirectly, through Contracts purchased in connection with such plans. 2.4. The Fund represents and warrants that Fund shares of the Designated Portfolios sold pursuant to this Agreement will be registered under the 1933 Act and duly authorized for issuance in accordance with applicable law and that the Fund is and will remain registered under the 1940 Act for as long as such shares of the Designated Portfolios are outstanding. The Fund will amend the registration statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Fund will register and qualify the shares of the Designated Portfolios for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Fund. 2.5. The Fund represents that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.6. The Fund represents and warrants that in performing the services described in this Agreement, the Fund will comply with all applicable laws, rules and regulations. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies, objectives and restrictions) complies with the insurance laws and regulations of any state. The Fund and the Distributor agree that -4- upon request they will use their best efforts to furnish the information required by state insurance laws so that the Company can obtain the authority needed to issue the Contracts in the various states. 2.7. The Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it reserves the right to make such payments in the future. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1 the Fund undertakes to have its Fund Board formulate and approve any plan under Rule 12b-1 to finance distribution expenses in accordance with the 1940 Act. 2.8. The Distributor represents and warrants that it will distribute the Fund shares of the Designated Portfolios in accordance with all applicable federal and state securities laws including, without limitation, the 1933 Act, the 1934 Act and the 1940 Act. 2.9. The Fund represents that it is lawfully organized and validly existing under the laws of the Commonwealth of Massachusetts and that it does and will comply in all material respects with applicable provisions of the 1940 Act. 2.10. The Distributor represents and warrants that it is and will remain duly registered under all applicable federal and state securities laws and that it will perform its obligations for the Fund in accordance in all material respects with any applicable state and federal securities laws. 2.11. The Fund and the Distributor represent and warrant that all of their trustees, officers, employees, investment advisers, and other individuals/entities having access to the funds and/or securities of the Fund are and continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid bond includes coverage for larceny and embezzlement and is issued by a reputable bonding company. ARTICLE III. Prospectuses and Proxy Statements; Voting ----------------------------------------- 3.1. The Fund or the Distributor will provide the Company, at the Fund's or its affiliate's expense, with as many copies of the current Fund prospectus for the Designated Portfolios as the Company may reasonably request for distribution, at the Company's expense, to prospective contractowners and applicants. The Fund or the Distributor will provide, at the Fund's or its affiliate's expense, as many copies of said prospectus as necessary for distribution, at the Company's expense, to existing contractowners. The Fund or the Distributor will provide the copies of said prospectus to the Company or to its mailing agent. If requested by the Company in lieu thereof, the Fund or the Distributor will provide such documentation, including a computer diskette or a final copy of a current prospectus set in type at the Fund's or its affiliate's expense, and such other assistance as is reasonably necessary in order for the Company at least annually (or more frequently if the Fund prospectus is amended more frequently) to have the Fund's prospectus and the prospectuses of other mutual funds in which assets attributable to the Contracts may be invested printed together in one document, in which case the Fund or its affiliate will bear its reasonable share of expenses as described above, allocated based on the proportionate number of pages of the Fund's and other fund's respective portions of the document. 3.2. The Fund or the Distributor will provide the Company, at the Fund's or its affiliate's expense, with as many copies of the statement of additional information as the Company may reasonably request for distribution, at the Company's expense, to prospective contractowners and applicants. The Fund or the Distributor will provide, at the Fund's or its affiliate's expense, as many copies of said statement of additional information as necessary for distribution, at the Company's expense, to any existing contractowner who requests such statement or whenever state or federal law otherwise requires that such statement be provided. The Fund or the Distributor will provide the copies of said statement of additional information to the Company or to its mailing agent. 3.3. The Fund or the Distributor, at the Fund's or its affiliate's expense, will provide the Company or its mailing agent with copies of its proxy material, if any, reports to shareholders and other communications to shareholders in such quantity as the Company will reasonably require. The Company will distribute this proxy material, reports and other communications to existing contract owners and tabulate the votes. 3.4. If and to the extent required by law the Company will: -5- (a) solicit voting instructions from contractowners; (b) vote the shares of the Designated Portfolios held in the Account in accordance with instructions received from contractowners; and (c) vote shares of the Designated Portfolios held in the Account for which no timely instructions have been received, as well as shares it owns, in the same proportion as shares of such Designated Portfolio for which instructions have been received from the Company's contractowners; so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for variable contractowners. Except as set forth above, the Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. The Company will be responsible for assuring that each of its separate accounts participating in the Fund calculates voting privileges in a manner consistent with all legal requirements, including the Mixed and Shared Funding Exemptive Order. 3.5. The Fund will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular, the Fund either will provide for annual meetings (except insofar as the SEC may interpret Section 16 of the 1940 Act not to require such meetings) or, as the Fund currently intends to comply with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts described in Section 16(c) of that Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in accordance with the SEC's interpretation of the requirements of Section 16(a) with respect to periodic elections of trustees and with whatever rules the SEC may promulgate with respect thereto. ARTICLE IV. Sales Material and Information ------------------------------ 4.1. the Distributor will provide the Company on a timely basis with investment performance information for each Designated Portfolio in which the Company maintains a subaccount of the Account, including total return for the preceding calendar month and calendar quarter, the calendar year to date, and the prior one-year, five-year, and ten year (or life of the Fund) periods. The Company may, based on the SEC mandated information supplied by the Distributor, prepare communications for contractowners ("Contractowner Materials"). The Company will provide copies of all Contractowner Materials concurrently with their first use for the Distributor's internal recordkeeping purposes. It is understood that neither the Distributor nor any Designated Portfolio will be responsible for errors or omissions in, or the content of, Contractowner Materials except to the extent that the error or omission resulted from information provided by or on behalf of the Distributor or the Designated Portfolio. Any printed information that is furnished to the Company pursuant to this Agreement other than each Designated Portfolio's prospectus or statement of additional information (or information supplemental thereto), periodic reports and proxy solicitation materials is the Distributor's sole responsibility and not the responsibility of any Designated Portfolio or the Fund. The Company agrees that the Portfolios, the shareholders of the Portfolios and the officers and governing Board of the Fund will have no liability or responsibility to the Company in these respects. 4.2. The Company will not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement, prospectus or statement of additional information for Fund shares, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in published reports for the Fund which are in the public domain or approved by the Fund or the Distributor for distribution, or in sales literature or other material provided by the Fund, Adviser or by the Distributor, except with permission of the Distributor. Any piece of sales literature or other promotional material intended to be used by the Company which requires the permission of the Distributor prior to use will be furnished by Company to the Distributor, or its designee, at least ten (10) business days prior to its use. No such material will be used if the Distributor reasonably objects to such use within five (5) business days after receipt. Nothing in this Section 4.2 will be construed as preventing the Company or its employees or agents from giving advice on investment in the Fund. -6- 4.3. The Fund, the Adviser or the Distributor will furnish, or will cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company or its Account is named, at least ten (10) business days prior to its use. No such material will be used if the Company reasonably objects to such use within five (5) business days after receipt of such material. 4.4. The Fund, the Adviser and the Distributor will not give any information or make any representations or statements on behalf of the Company or concerning the Company, each Account, or the Contracts other than the information or representations contained in a registration statement, prospectus or statement of additional information for the Contracts, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in published reports for each Account or the Contracts which are in the public domain or approved by the Company for distribution to contractowners, or in sales literature or other material provided by the Company, except with permission of the Company. The Company agrees to respond to any request for approval on a prompt and timely basis. 4.5. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, statements of additions information, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, contemporaneously with the filing of such document with the SEC, the NASD or other regulatory authority. 4.6. The Company will provide to the Fund at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no action letters, and all amendments to any of the above, that relate to the Contracts or each Account, contemporaneously with the filing of such document with the SEC, the NASD or other regulatory authority. 4.7. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media, (e.g., on-line networks such as the Internet or other electronic messages), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisements sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports, and proxy materials and any other material constituting sales literature or advertising under the NASD rules, the 1933 Act or the 1940 Act. 4.8. The Fund and the Distributor hereby consent to the Company's use of the names The GCG Trust, Directed Services, Inc., the portfolio names designated on Schedule B or other designated names as may be used from time to time in connection with the marketing of the Contracts, subject to the terms of Sections 4.1 and 4.2 of this Agreement. Such consent will terminate with the termination of this Agreement. ARTICLE V. Fees and Expenses ----------------- 5.1. The Fund, the Adviser and the Distributor will pay no fee or other compensation to the Company under this Agreement except if the Fund or any Designated Portfolio adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution expenses, then, subject to obtaining any required exemptive orders or other regulatory approvals, the Fund may make payments to the Company or to the underwriter for the Contracts if and in such amounts agreed to by the Fund in writing. 5.2. All expenses incident to performance by the Fund of this Agreement will be paid by the Fund to the extent permitted by law. The Fund will bear the expenses for the cost of registration and qualification of the Fund's shares; preparation and filing of the Fund's prospectus, statement of additional information and registration statement, proxy materials and reports; setting in type and printing the Fund's prospectus; setting in type and printing proxy materials and reports by it to contractowners (including the costs of printing a Fund prospectus that constitutes an annual report); the preparation of all statements and notices required by any federal or state law; all taxes on the -7- issuance or transfer of the Fund's shares; any expenses permitted to be paid or assumed by the Fund pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act; and all other expenses set forth in Article III of this Agreement. All expenses incident to the distribution and tabulation of the Fund's proxy materials will be paid by the Fund, except postage which will be paid by the Company. ARTICLE VI. Diversification and Qualification --------------------------------- 6.1. The Adviser will ensure that the Fund will at all times invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable insurance contracts under the Internal Revenue Code and the regulations issued thereunder. Without limiting the scope of the foregoing, the Fund will comply with Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time, relating to the diversification requirements for variable insurance, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulation. In the event of a breach of this Article VI by the Fund, it will take all reasonable steps: (a) to notify the Company of such breach; and (b) to adequately diversify the Fund so as to achieve compliance within the grace period afforded by Treasury Regulation 1.817-5. 6.2. The Fund represents that it is or will be qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provisions) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 6.3. The Company represents that the Contracts are currently, and at the time of issuance shall be, treated as life insurance contracts, under applicable provisions of the Internal Revenue Code, and that it will make every effort to maintain such treatment, and that it will notify the Fund and the Distributor immediately upon having a reasonable basis for believing the Contracts have ceased to be so treated or that they might not be so treated in the future. The Company agrees that any prospectus offering a contract that is a "modified endowment contract" as that term is defined in Section 7702A of the Internal Revenue Code (or any successor or similar provision), shall identify such contract as a modified endowment contract. ARTICLE VII. Potential Conflicts ------------------- 7.1. The Fund Board will monitor the Fund for the existence of any material irreconcilable conflict between the interests of the Contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable life insurance contract owners; or (f) a decision by an insurer to disregard the voting instructions of contract owners. The Fund Board shall promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. 7.2. The Company will report any potential or existing conflicts of which it is aware to the Fund Board. The Company will assist the Fund Board in carrying out its responsibilities under the Mixed and Shared Funding Exemptive Order, by providing the Fund Board with all information reasonably necessary for the Fund Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Fund Board whenever Contract owner voting instructions are disregarded. 7.3. If it is determined by a majority of the Fund Board, or a majority of its disinterested members, that a material irreconcilable conflict exists, the Company and other Participating Insurance Companies shall, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested Fund Board members), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (1) withdrawing the assets allocable to some or all of the separate accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life -8- insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; and (2) establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the Account's investment in the Fund and terminate this Agreement with respect to each Account; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Fund Board. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice that this provision is being implemented, and until the end of that six month period the Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account within six months after the Fund Board informs the Company in writing that it has determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Fund Board. Until the end of the foregoing six month period, the Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.6. For purposes of Section 7.3 through 7.6 of this Agreement, a majority of the disinterested members of the Fund Board shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contract if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. In the event that the Fund Board determines that any proposed action does not adequately remedy any irreconcilable material conflict, then the Company will withdraw the Account's investment in the Fund and terminate this Agreement within six (6) months after the Fund Board informs the Company in writing of the foregoing determination; provided, however, that such withdrawal and termination shall be limited to the extent required by any such material irreconcilable conflict as determined by a majority of the disinterested members of the Fund Board. 7.7. If and to the extent the Mixed and Shared Funding Exemption Order or any amendment thereto contains terms and conditions different from Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement, then the Fund and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with the Mixed and Shared Funding Exemptive Order, and Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in the Mixed and Shared Funding Exemptive Order or any amendment thereto. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Mixed and Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Mixed and Shared Funding Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.5, 3.6, 7.1., 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. ARTICLE VIII. Indemnification --------------- 8.1. Indemnification By The Company ------------------------------ (a) The Company agrees to indemnify and hold harmless the Fund, the Adviser, the Distributor, and each person, if any, who controls or is associated with the Fund, the Adviser or the Distributor within -9- the meaning of such terms under the federal securities laws and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 8.1) against any and all losses, claims, expenses, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or litigation (including reasonable legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement, prospectus or statement of additional information for the Contracts or contained in the Contracts or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the Fund, the Adviser or the Distributor for use in the registration statement, prospectus or statement of additional information for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or as a result of statements or representations by or on behalf of the Company or wrongful conduct of the Company or persons under its control, with respect to the sale or distribution of the Contracts or Fund shares; or (3) arise out of any untrue statement or alleged untrue statement of a material fact contained in the Fund registration statement, prospectus, statement of additional information or sales literature or other promotional material of the Fund (or amendment or supplement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make such statements not misleading in light of the circumstances in which they were made, if such a statement or omission was made in reliance upon and in conformity with information furnished to the Fund by or on behalf of the Company or persons under its control; or (4) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; or (5) arise out of any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach by the Company of this Agreement; except to the extent provided in Sections 8.1(b) and 8.3 hereof. This indemnification will be in addition to any liability that the Company otherwise may have. (b) No party will be entitled to indemnification under Section 8.1(a) to the extent such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties promptly will notify the Company of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Fund shares or the Contracts or the operation of the Fund. 8.2. Indemnification By The Adviser, the Fund and the Distributor ------------------------------------------------------------ (a) The Adviser, the Fund and the Distributor, in each case solely to the extent relating to such party's responsibilities hereunder, agree to indemnify and hold harmless the Company and each person, if -10- any, who controls or is associated with the Company within the meaning of such terms under the federal securities laws and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 8.2) against any and all losses, claims, expenses, damages, liabilities (including amounts paid in settlement with the written consent of the Adviser) or litigation (including reasonable legal and other expenses) to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Fund or sales literature or other promotional material of the Fund (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Adviser, the Distributor or the Fund by or on behalf of the Company for use in the registration statement, prospectus or statement of additional information for the Fund or in sales literature of the Fund (or any amendment or supplement thereto) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or as a result of statements or representations or wrongful conduct of the Adviser, the Fund or the Distributor or persons under the control of the Adviser, the Fund or the Distributor respectively, with respect to the sale of the Fund shares; or (3) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, statement of additional information or sales literature or other promotional material covering the Contracts (or any amendment or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated or necessary to make such statement or statements not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the Adviser, the Fund or the Distributor or persons under the control of the Adviser, the Fund or the Distributor; or (4) arise as a result of any failure by the Fund, the Adviser or the Distributor to provide the services and furnish the materials under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the diversification requirements and procedures related thereto specified in Article VI of this Agreement); or (5) arise out of or result from any material breach of any representation and/or warranty made by the Adviser, the Fund or the Distributor in this Agreement, or arise out of or result from any other material breach of this Agreement by the Adviser the Fund or the Distributor; except to the extent provided in Sections 8.2(b) and 8.3 hereof. This indemnification will be in addition to any liability that the Fund, Adviser or the Distributor otherwise may have. (b) No party will be entitled to indemnification under Section 8.2(a) to the extent such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties will promptly notify the Adviser, the Fund and the Distributor of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Contracts or the operation of the account. 8.3. Indemnification Procedure ------------------------- -11- Any person obligated to provide indemnification under this Article VIII ("Indemnifying Party" for the purpose of this Section 8.3) will not be liable under the indemnification provisions of this Article VIII with respect to any claim made against a party entitled to indemnification under this Article VIII ("Indemnified Party" for the purpose of this Section 8.3) unless such Indemnified Party will have notified the Indemnifying Party in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim will have been served upon such Indemnified Party (or after such party will have received notice of such service on any designated agent), but failure to notify the Indemnifying Party of any such claim will not relieve the Indemnifying Party from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of the indemnification provision of this Article VIII, except to the extent that the failure to notify results in the failure of actual notice to the Indemnifying Party and such Indemnifying Party is damaged solely as a result of failure to give such notice. In case any such action is brought against the Indemnified Party, the Indemnifying Party will be entitled to participate, at its own expense, in the defense thereof. The Indemnifying Party also will be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Indemnifying Party to the Indemnified Party of the Indemnifying Party's election to assume the defense thereof, the Indemnified Party will bear the fees and expenses of any additional counsel retained by it, and the Indemnifying Party will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation, unless: (a) the Indemnifying Party and the Indemnified Party will have mutually agreed to the retention of such counsel; or (b) the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The Indemnifying Party will not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there is a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement will be entitled to the benefits of the indemnification contained in this Article VIII. The indemnification provisions contained in this Article VIII will survive any termination of this Agreement. ARTICLE IX. Applicable Law -------------- 9.1 This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of Delaware. 9.2 This Agreement shall be subject to the provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant (including, but not limited to, any Mixed and Shared Funding Exemptive Order) and the terms hereof shall be interpreted and construed in accordance therewith. If, in the future, the Mixed and Shared Funding Exemptive Order should no longer be necessary under applicable law, then Article VII shall no longer apply. ARTICLE X. Termination ----------- 10.1. This Agreement will terminate: (a) at the option of any party, with or without cause, with respect to some or all of the Designated Portfolios, upon sixty (60) days' advance written notice to the other parties or, if later, upon receipt of any required exemptive relief or orders from the SEC, unless otherwise agreed in a separate written agreement among the parties; or (b) at the option of the Company, upon receipt of the Company's written notice by the other parties, with respect to any Designated Portfolio if shares of the Designated Portfolio are not reasonably available to meet the requirements of the Contracts as determined in good faith by the Company; or (c) at the option of the Company, upon receipt of the Company's written notice by the other parties, with respect to any Designated Portfolio in the event any of the Designated Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or Federal law or such law precludes -12- the use of such shares as the underlying investment media of the Contracts issued or to be issued by Company; or (d) at the option of the Fund, upon receipt of the Fund's written notice by the other parties, upon institution of formal proceedings against the Company by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Contracts, the administration of the Contracts, the operation of the Account, or the purchase of the Fund shares, provided that the Fund determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Company's ability to perform its obligations under this Agreement; or (e) at the option of the Company, upon receipt of the Company's written notice by the other parties, upon institution of formal proceedings against the Fund, Adviser or the Distributor by the NASD, the SEC, or any state securities or insurance department or any other regulatory body, provided that the Company determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Fund's or the Distributor's ability to perform its obligations under this Agreement; or (f) at the option of the Company, upon receipt of the Company's written notice by the other parties, if the Fund ceases to qualify as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, or under any successor or similar provision, or if the Company reasonably and in good faith believes that the Fund may fail to so qualify; or (g) at the option of the Company, upon receipt of the Company's written notice by the other parties, with respect to any Designated Portfolio if the Fund fails to meet the diversification requirements specified in Article VI hereof or if the Company reasonably and in good faith believes the Fund may fail to meet such requirements; or (h) at the option of any party to this Agreement, upon written notice to the other parties, upon another party's material breach of any provision of this Agreement which material breach is not cured within thirty (30) days of said notice; or (i) at the option of the Company, if the Company determines in its sole judgment exercised in good faith, that either the Fund, the Adviser or the Distributor has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Company, such termination to be effective sixty (60) days' after receipt by the other parties of written notice of the election to terminate; or (j) at the option of the Fund or the Distributor, if the Fund or the Distributor respectively, determines in its sole judgment exercised in good faith, that the Company has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Fund or the Adviser, such termination to be effective sixty (60) days' after receipt by the other parties of written notice of the election to terminate; or (k) at the option of the Company or the Fund upon receipt of any necessary regulatory approvals and/or the vote of the contractowners having an interest in the Account (or any subaccount) to substitute the shares of another investment company for the corresponding Designated Portfolio shares of the Fund in accordance with the terms of the Contracts for which those Designated Portfolio shares had been selected to serve as the underlying investment media. The Company will give sixty (60) days' prior written notice to the Fund of the date of any proposed vote or other action taken to replace the Fund's shares; or (l) at the option of the Company or the Fund upon a determination by a majority of the Fund Board, or a majority of the disinterested Fund Board members, that an irreconcilable material conflict exists -13- among the interests of: (1) all contractowners of variable insurance products of all separate accounts; or (2) the interests of the Participating Insurance Companies investing in the Fund as set forth in Article VII of this Agreement; or (m) at the option of the Fund in the event any of the Contracts are not issued or sold in accordance with applicable federal and/or state law. Termination will be effective immediately upon such occurrence without notice. 10.2. Notice Requirement. No termination of this Agreement ------------------- will be effective unless and until the party terminating this Agreement gives prior written notice to all other parties of its intent to terminate, which notice will set forth the basis for the termination. 10.3. Effect of Termination. Notwithstanding any termination ---------------------- of this Agreement, the Fund and the Distributor will, at the option of the Company, continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement ( hereinafter referred to as "Existing Contracts.") . Specifically, without limitation, the owners of the Existing Contracts will be permitted to reallocate investments in the Portfolios (as in effect on such date), redeem investments in the Portfolios and/or invest in the Portfolios upon the making of additional purchase payments under the Existing Contracts. 10.4. Surviving Provisions. Notwithstanding any termination --------------------- this Agreement, each party's obligations under Article VIII to indemnify other parties will survive and not be affected by any termination of this Agreement. In addition, each party's obligations under Section 12.7 will survive and not be affected by any termination of this Agreement. Finally, with respect to Existing Contracts, all provisions of this Agreement also will survive and not be affected by any termination of this Agreement. ARTICLE XI. Notices ------- 11.1. Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Fund: The GCG Trust c/o Myles Tashman Secretary 1475 Dunwoody Drive West Chester, PA 19380-1479 If to the Company: Security Life of Denver Insurance Company c/o Office of General Counsel ATTN: Variable Attorney 1290 Broadway Denver, CO 80203-5699 If to Adviser: Directed Services, Inc. c/o Myles Tashman Executive Vice President and General Counsel 1475 Dunwoody Drive West Chester, PA 19380-1479 If to Distributor: ING America Equities, Inc. c/o Chief Legal Officer 1290 Broadway Denver, CO 80203-5699 -14- ARTICLE XII. Miscellaneous ------------- 12.1. All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the directors, trustees, officers, partners, employees, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. No Portfolio or series of the Fund will be liable for the obligations or liabilities of any other Portfolio or series. 12.2. The Fund, the Adviser and the Distributor acknowledge that the identities of the customers of the Company or any of its affiliates (collectively the "Company Protected Parties" for purposes of this Section 12.2), information maintained regarding those customers, and all computer programs and procedures or other information developed or used by the Company Protected Parties or any of their employees or agents in connection with the Company's performance of its duties under this Agreement are the valuable property of the Company Protected Parties. The Fund, the Adviser and the Distributor agree that if they come into possession of any list or compilation of the identities of or other information about the Company Protected Parties' customers, or any other information or property of the Company Protected Parties, other than such information as is publicly available or as may be independently developed or compiled by the Fund, the Adviser or the Distributor from information supplied to them by the Company Protected Parties' customers who also maintain accounts directly with the Fund, the Adviser or the Distributor, the Fund, the Adviser and the Distributor will hold such information or property in confidence and refrain from using, disclosing or distributing any of such information or other property except: (a) with the Company's prior written consent; or (b) as required by law or judicial process. The Company acknowledges that the identities of the customers of the Fund, the Adviser, the Distributor or any of their affiliates (collectively the "Adviser Protected Parties" for purposes of this Section 12.2), information maintained regarding those customers, and all computer programs and procedures or other information developed or used by the Adviser Protected Parties or any of their employees or agents in connection with the Fund's, the Adviser's or the Distributor's performance of their respective duties under this Agreement are the valuable property of the Adviser Protected Parties. The Company agrees that if it comes into possession of any list or compilation of the identities of or other information about the Adviser Protected Parties' customers, or any other information or property of the Adviser Protected Parties, other than such information as is publicly available or as may be independently developed or compiled by the Company from information supplied to them by the Adviser Protected Parties' customers who also maintain accounts directly with the Company, the Company will hold such information or property in confidence and refrain from using, disclosing or distributing any of such information or other property except: (a) with the Fund's, the Adviser's or the Distributor's prior written consent; or (b) as required by law or judicial process. Each party acknowledges that any breach of the agreements in this Section 12.2 would result in immediate and irreparable harm to the other parties for which there would be no adequate remedy at law and agree that in the event of such a breach, the other parties will be entitled to equitable relief by way of temporary and permanent injunctions, as well as such other relief as any court of competent jurisdiction deems appropriate. 12.3. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 12.4. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together will constitute one and the same instrument. 12.5. If any provision of this Agreement will be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement will not be affected thereby. 12.6. This Agreement will not be assigned by any party hereto without the prior written consent of all the parties. 12.7. Each party to this Agreement will maintain all records required by law, including records detailing the services it provides. Such records will be preserved, maintained and made available to the extent required by law and in accordance with the 1940 Act and the rules thereunder. Each party to this Agreement will cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and will permit each other and such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. -15- Upon request by the Fund or the Distributor, the Company agrees to promptly make copies or, if required, originals of all records pertaining to the performance of services under this Agreement available to the Fund or the Distributor, as the case may be. The Fund agrees that the Company will have the right to inspect, audit and copy all records pertaining to the performance of services under this Agreement pursuant to the requirements of any state insurance department. Each party also agrees to promptly notify the other parties if it experiences any difficulty in maintaining the records in an accurate and complete manner. This provision will survive termination of this Agreement. 12.8. Each party represents that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate or board action, as applicable, by such party and when so executed and delivered this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. 12.9. The parties to this Agreement may amend the schedules to this Agreement from time to time to reflect changes in or relating to the Contracts, the Accounts or the Designated Portfolios of the Fund or other applicable terms of this Agreement. 12.10. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights. 12.11. If Fund is a Mass business trust - The parties to this Agreement acknowledge and agree that all liabilities of the Fund arising, directly or indirectly, under this agreement, will be satisfied solely out of the assets of the Fund and that no trustee, officer, agent or holder of shares of beneficial interest of the Fund will be personally liable for any such liabilities. -16- IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be hereunder affixed hereto as of the date specified below: SECURITY LIFE OF DENVER INSURANCE COMPANY: By: /s/ Stephen M. Christopher ------------------------------- Title: President ---------------------------- Date: 2/29/00 ---------------------------- THE GCG TRUST: By: /s/ Marilyn Talman ------------------------------ Title: Assistant Secretary --------------------------- Date: 3/1/00 ---------------------------- DIRECTED SERVICES, INC : By: /s/ David L. Jacobson ------------------------------ Title: Senior Vice President --------------------------- Date: 3/1/00 ---------------------------- ING AMERICA EQUITIES, INC. By: /s/ James L. Livingston, Jr. ------------------------------ Title: President --------------------------- Date: 2/29/00 ---------------------------- -17- SCHEDULE A SECURITY LIFE OF DENVER INSURANCE COMPANY CONTRACTS AND SEPARATE ACCOUNT(S) SEPARATE ACCOUNT(S): Security Life of Denver Insurance Company Separate Account L1 CONTRACT(S): Corporate Benefits Variable Universal Life Strategic Benefit Variable Universal Life -A1- SCHEDULE B THE GCG TRUST DESIGNATED PORTFOLIOS PORTFOLIOS: Equity Income Series Fully Managed Series Limited Maturity Bond Series Hard Assets Series Real Estate Series Liquid Asset Series Capital Appreciation Series Rising Dividends Series Emerging Markets Series Value Equity Series Strategic Equity Series Small Cap Series Mid-Cap Growth Series Total Return Series Research Series Capital Growth Series Growth Series Global Fixed Income Series Developing World Series All Cap Series Investors Series Managed Global Series Large Cap Value Series Schedule Date: February 2, 2000 -B1- EX-4 5 MERRILL LYNCH PARTICIPATION Exhibit 1.A(8)(a)(ix) FUND PARTICIPATION AGREEMENT BETWEEN MERRILL LYNCH VARIABLE SERIES FUNDS, INC. AND SECURITY LIFE OF DENVER INSURANCE COMPANY THIS Fund Participation Agreement, by and between MERRILL LYNCH VARIABLE SERIES FUNDS, INC., an open-end management investment company organized as a Maryland corporation (the "Fund") and SECURITY LIFE OF DENVER INSURANCE COMPANY (the "Company"), a life insurance company organized under the laws of the state of Colorado on the Company's own behalf and on behalf of each segregated asset account of the Company set forth on Schedule A as attached hereto, as such schedule may be amended from time to time (the "Accounts"), is made as of the 1st day of May, 2000. W I T N E S S E T H WHEREAS, the Fund has filed a registration statement with the Securities and Exchange Commission to register itself as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and to register the offer and sale of its shares under the Securities Act of 1933, as amended (the "1933 Act"); and WHEREAS, the Fund desires to act as an investment vehicle for separate accounts established for variable life insurance policies and variable annuity contracts to be offered by insurance companies that have entered into participation agreements with the Fund (the "Participating Insurance Companies"); and WHEREAS, the capital stock of the Fund is divided into several series of shares, each series representing an interest in a particular managed portfolio of securities and other assets; and WHEREAS, the several series of shares of the Fund offered by the Fund to the Company and the Accounts are set forth on Schedule B attached hereto (each, a "Portfolio," and, collectively, the "Portfolios"); and WHEREAS, the Fund has received an order from the SEC granting Participating Insurance Companies and their separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and rules 6e-2(b) (15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies and certain qualified pension and retirement plans (the "Shared Fund Exemptive Order"); WHEREAS, Merrill Lynch Asset Management, L.P. ("MLAM") is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and any applicable state securities law, and acts as the Fund's investment adviser; and WHEREAS, Princeton Funds Distributor, Inc. (the "Underwriter") is registered as a broker-dealer with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934, as amended (the "1934 Act"), is a member in good standing of The National Association of Securities Dealers, Inc. (the "NASD") and acts as principal underwriter of the shares of the Fund; and WHEREAS, the Company has registered or will register under the 1933 Act certain variable life insurance policies funded or to be funded through one or more of the Accounts (the "Contracts"); and WHEREAS, the Company has registered or will register each Account as a unit investment trust under the 1940 Act; and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares in one or more of the Portfolios (the "Shares") on behalf of the Accounts to fund the Contracts, and the Fund intends to sell such Shares to the relevant Accounts at such Shares' net asset value. NOW, THEREFORE, in consideration of their mutual promises, the parties agree as follows: ARTICLE 1 SALE OF THE FUND SHARES 1.1 Subject to Section 1.3 of this Agreement, the Fund shall cause the Underwriter to make Shares of the Portfolios available to the Accounts at such Shares' most recent net asset value provided to the Company prior to receipt of such purchase order by the Fund (or the Underwriter or its agent), in accordance with the operational procedures mutually agreed to by the Underwriter and the Company from time to time and the provisions of the then-current prospectus of the Fund. Shares of a particular Portfolio of the Fund shall be ordered in such quantities and at such times as determined by the Company to be necessary to meet the requirements of the Contracts. The Directors of the Fund (the "Directors") may refuse to sell Shares of any Portfolio to any person (including the Company and the Accounts), or suspend or terminate the offering of Shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Directors acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.2 Subject to Section 1.3 of this Agreement, the Fund will redeem any full or fractional Shares of any Portfolio when requested by the Company on behalf of an Account at such Shares' most recent net asset value provided to the Company prior to receipt by the Fund (or the Underwriter or its agent) of the request for redemption, as established in accordance with the operational procedures mutually agreed to by the Underwriter and the Company from time to time and the provisions of the then current-prospectus of the Fund. The Fund shall make payment for such Shares on the next business day, or within seven days, with notice to the Company by 3:00 p.m. Eastern Time, but in no event shall payment be delayed for a greater period than is permitted by the 1940 Act (including any Rule or order of the SEC thereunder). 1.3 The Fund shall accept purchase and redemption orders resulting from investment in and payments under the Contracts on each Business Day, provided that such orders are received prior to 9:00 a.m. Eastern Time on such Business Day and reflect instructions received by the Company from Contract holders in good order prior to the time the net asset value of each Portfolio is priced in accordance with its prospectus (such Portfolio's "valuation time") on the prior Business Day. Any purchase or redemption order for Shares of any Portfolio received, on any Business Day, after such Portfolio's valuation time on such Business Day shall be deemed received prior to 9:00 a.m. Eastern Time on the next succeeding Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the SEC. Purchase and redemption orders shall be provided by the Company to the Underwriter as agent for the Fund in such written or electronic form (including facsimile) as may be mutually acceptable to the Company and the Underwriter. The Underwriter may reject purchase and redemption orders that are not in proper form. In the event that the Company and the Underwriter agree to use a form of written or electronic communication which is not capable of recording the time, date and recipient of any communication and confirming good transmission, the Company agrees that it shall be responsible (i) for confirming with the Underwriter that any communication sent by the Company was in fact received by the Underwriter in proper form, and (ii) for the effect of any delay in the Underwriter's receipt of such communication in proper form. The Fund and its agents shall be entitled to rely, and shall be fully protected from all liability in acting, upon the instructions of the persons named in the list of authorized individuals attached hereto as Schedule C, or any subsequent list of authorized individuals provided to the Fund or its agents by the Company in such form, without being required to determine the authenticity of the authorization or the authority of the persons named therein. 1.4 Purchase orders that are transmitted to the Fund in accordance with Section 1.3 of this Agreement shall be paid for no later than 12:00 noon on the same Business Day that the Fund receives notice of the order. Payment for purchase orders may be made on the net of redemption order basis. Payments shall be made in federal funds transmitted by wire. In the event that the Company shall fail to pay in a timely manner for any purchase order validly received by the Underwriter on behalf of the Fund pursuant to Section 1.3 of this Agreement (whether or not such failure is the fault of the Company), the Company shall hold the Fund harmless from any losses reasonably sustained by the Fund as the result of acting in reliance on such purchase order. 1.5 Issuance and transfer of the Fund's Shares will be by book entry only. Stock certificates will not be issued to the Company or to any Account. Shares ordered from the Fund will be recorded in the appropriate title for each Account. 1.6 The Fund shall furnish prompt notice to the Company of any income, dividends or capital gain distribution payable on Shares of any Portfolio. The Company hereby elects to receive all such income dividends and capital gain distributions as are payable on a Portfolio's Shares in additional Shares of that Portfolio. The Fund shall notify the Company of the number of Shares so issued as payments of such dividends and distributions. 1.7 The Fund shall make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after such net asset value per share is calculated and shall use its best efforts to make such net asset value per share available by 6:30 p.m., New York time. 1.8 The Company agrees that it will not take any action to operate any Account as a management investment company under the 1940 Act without the Fund's and the Underwriter's prior written consent. 1.9 The Fund agrees that its Shares will be sold only to Participating Insurance Companies and their separate accounts. No Shares of any Portfolio will be sold directly to the general public. The Company agrees that the Fund Shares will be used only for the purposes of funding the Contracts and Accounts listed in Schedule A, as such schedule may be amended from time to time. 1.10 The Fund agrees that all Participating Insurance Companies shall have the obligations and responsibilities regarding pass-through voting and conflicts of interest corresponding to those contained in Section 2.11 and Article 4 of this Agreement. 1.11 So long as it shall be the intention of the Fund to maintain the net asset value per share of any Portfolio at $1.00, on any day on which (a) the net asset value per share of the Shares is determined, (b) MLAM determines, in the manner described in the then-current prospectus of the Fund, that the net income of such Portfolio on such day is negative, and (c) MLAM delivers a certificate to the Companies setting forth the reduction in the number of outstanding Shares to be effected as described in the then-current prospectus of the Fund in connection with such determination, the Company, on behalf of itself and the Accounts, agrees to return to the Fund its pro rata share of the number of Shares to be reduced and agrees that, upon delivery by MLAM to the Company of such certificate, (a) the Company's ownership interest in the Shares so to be returned shall immediately cease, (b) such Shares shall be deemed to have been canceled and to be no longer outstanding, and (c) all rights in respect of such Shares shall cease. ARTICLE 2 OBLIGATION OF THE PARTIES 2.1 The Fund shall prepare and be responsible for filing with the SEC and any state securities regulators requiring such filing, all shareholder reports, notices, proxy materials (or similar materials such as voting instruction solicitation materials), prospectuses and statements of additional information of the Fund. The Fund shall bear the costs or registration and qualification of its Shares, preparation and filing of the documents listed in this Section 2.1 and all taxes to which an issuer is subject on the issuance and transfer of its shares. 2.2 At least annually, the Fund or its designee shall provide the Company, free of charge, with as many copies of the current prospectus (describing only the Portfolios) for the Shares as the Company may reasonably request for distribution to existing Contract owners whose Contracts are funded by such Shares. The Fund or its designee shall provide the Company, at the Companies' expense, with as many copies of the current prospectus for the Shares as the Company may reasonably request for distribution to prospective purchasers of Contracts. If requested by the Company in lieu thereof, the Fund or its designee shall provide such documentation (including a "camera ready" copy of the new prospectus as set in type) and other assistance as is reasonably necessary in order for the parties hereto once each year (or more frequently if the prospectus for the Shares is supplemented or amended) to have the prospectus for the Contracts and the prospectus for the Shares printed together in one document; the expenses of such printing to be borne by the Company. In the event that the Company requests that the Fund or its designee provide the Fund's prospectus in a "camera ready" format, the Fund shall be responsible solely for providing the prospectus in the format in which it is accustomed to formatting prospectuses and shall bear the expense of providing the prospectus in such format (e.g., typesetting expenses), and the Company shall bear the expense of adjusting or changing the format to conform with any of its prospectuses. 2.3 The prospectus for the Shares shall state that the statement of additional information for the Shares is available from the Fund or its designee. The Fund or its designee, at its expense, shall print and provide such statement of additional information to the Company (or a master of such statement suitable for duplication by the Company) for distribution to any owner of a Contract funded by the Shares. The Fund or its designee, at the Company's expense, shall print and provide such statement to the Company (or a master of such statement suitable for duplication by the Company) for distribution to a prospective purchaser who requests such statement. 2.4 The Fund or its designee shall provide the Company free of charge copies, if and to the extent applicable to the Shares, of the Fund's proxy materials, reports to Shareholders and other communications to Shareholders in such quantity as the Company shall reasonably require for distribution to Contract owners. 2.5 With respect to any prospectus, shareholder report or proxy solicitation materials that concern solely the Fund and no other investment vehicle funding the Accounts, the Fund shall pay for the expenses of solicitation and tabulation, and the Company's postage costs in connection with mailing such materials to existing Contract owners. With respect to any prospectus, shareholder report or proxy solicitation materials that concern the Fund together with other investment vehicles funding the Accounts, the Fund shall pay a proportionate amount of the Company's postage costs, based on the percentage of such Account's overall assets that are invested in the Fund, in connection with mailing such materials to existing Contract owners. 2.6 The Company shall furnish, or cause to be furnished, to the Fund or its designee, a copy of each prospectus for the Contracts or statement of additional information for the Contracts in which the Fund or its investment adviser is named prior to the filing of such document with the SEC. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee, each piece of sales literature or other promotional material in which the Fund or its investment adviser is named, at least five Business Days prior to is use. No such prospectus, statement of additional information or material shall be used if the Fund or its designee reasonably objects to such use within five Business Days after receipt of such material. 2.7 The Fund shall furnish, or cause to be furnished, to the Company a copy of each piece of sales literature or other material in which the Company is named, at least five business days prior to its use. No such material shall be used if the Company reasonably objects to such use with five business days after receipt of such material. 2.8 The Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund or its investment adviser in connection with the sale of the Contracts other than information or representations contained in and accurately derived from the registration statement or prospectus for the Fund Shares (as such registration statement and prospectus may be amended or supplemented from time to time), reports of the Fund, Fund-sponsored proxy statement, or in sales literature or other promotional material approved by the Fund or its designee, except with the written permission of the Fund or its designee. 2.9 The Fund shall not give any information or make any representations or statements on behalf of the Company or concerning the Company, the Accounts or the Contracts other than information or representations contained in and accurately derived from the registration statement or prospectus for the Contracts (as such registration statement and prospectus may be amended or supplemented from time to time), or in materials approved by the Company for distribution including sales literature or other promotional materials, except with the written permission of the Company. 2.10 The Company shall amend the registration statement of the Contracts under the 1933 Act and registration statement for each Account under the 1940 Act from time to time as required in order to effect the continuous offering of the Contracts or as may otherwise be required by applicable law. The Company shall register and qualify the Contracts for sale to the extent required by applicable securities laws and insurance laws of the various states. 2.11 The Company shall be responsible for assuring that any prospectus offering a Contract that is a life insurance contract where it is reasonably probable that such Contract would be a "modified endowment contract," as that term is defined in Section 7702A of the Internal Revenue Code of 1986, as amended (the "Code"), will identify such Contract as a modified endowment contract (or policy). 2.12 Solely with respect to Contracts and Accounts that are subject to the 1940 Act, so long as, and the extent that, the SEC interprets the 1940 Act to require pass-through voting privileges for variable policyowners: (a) the Company will provide pass-through voting privileges to owners of Contracts whose cash values are invested, through the Accounts, in Shares of the Fund; (b) the Fund shall require all Participating Insurance Companies to calculate voting privileges in the same manner and the Company shall be responsible for assuring that the Accounts calculate voting privileges in the manner established by the Fund; (c) with respect to each Account, the Company will vote Shares of the Fund held by the Account and for which no timely voting instructions from Contract or policyowners are received, as well as Shares held by the Account that are owned by the Company for their general accounts, in the same proportion as the Company votes Shares held by the Account for which timely voting instructions are received from Contract owners; and (d) the Company and its agents will in no way recommend or oppose or interfere with the solicitation of proxies for Fund Shares held by Contract owners without the prior written consent of the Fund, which consent may be withheld in the Fund's sole discretion. ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.1 The Company represents and warrants that it is an insurance company duly organized and in good standing under the laws of the State of Colorado and has established each Account as a segregated asset account under such law on the date set forth in Schedule A. 3.2 The Company represents and warrants that it has registered or, prior to any issuance or sale of the Contracts, will register each Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts. 3.3 The Company represents and warrants that the Contracts will be registered under the 1933 Act prior to any issuance or sale of the Contracts; the Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws; and the sale of the Contracts shall comply in all material respects with state insurance requirements. 3.4 The Company represents and warrants that the Contracts are currently and at the time of issuance will be treated as life insurance policies, whichever is appropriate, under applicable provisions of the Code. The Company shall make every effort to maintain such treatment and shall notify the Fund and the Underwriter immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 3.5 The Fund represents and warrants that it is duly organized and validly existing under the laws of the State of Maryland. 3.6 The Fund represents and warrants that the sale of the Fund Shares offered and sold pursuant to this Agreement will be registered under the 1933 Act and that the Fund is registered under the 1940 Act. The Fund shall use its best efforts to amend its registration statement under the 1933 Act and the 1940 Act from time to time as required in order to affect the continuous offering of its shares. If the Fund determines registration is appropriate, the Fund shall use its best efforts to register and qualify its Shares for sale in accordance with the laws of all fifty states, the District of Columbia, Virgin Islands and Puerto Rico and such other jurisdictions reasonably requested by the Company. 3.7 The Fund represents and warrants that the investments of each Portfolio will comply with the diversification requirements set forth in section 817(h) of the Code and the rules and regulations thereunder. ARTICLE 4 POTENTIAL CONFLICTS 4.1 The parties acknowledge that the Fund's Shares may be made available for investment to other Participating Insurance Companies. In such event, the Directors will monitor the Fund for the existence of any material irreconcilable conflict between the interests of the contract owners of all Participating Insurance Companies. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities decision in any relevant proceeding; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (f) a decision by an insurer to disregard the voting instructions of contract owners. The Directors shall promptly inform the Company if they determine that an irreconcilable material conflict exists and the implications thereof. 4.2 The Company agrees to promptly report any potential or existing conflicts of which they are aware to the Directors. The Company will assist the Directors in carrying out their responsibilities under the Shared Fund Exemptive Order by providing the Directors with all information reasonably necessary for the Directors to consider any issues raised including, but not limited to, information as to a decision by the Company to disregard Contract owner voting instructions. 4.3 If it is determined by a majority of the Directors, or a majority of the Fund's Directors who are not affiliated with the Adviser or the Underwriter (the "Disinterested Directors"), that a material irreconcilable conflict exists that affects the interests of Contract owners, the Company shall, in cooperation with other Participating Insurance Companies whose contract owners are also affected, at their expense and to the extent reasonably practicable (as determined by the Directors) take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, which steps could include: (a) withdrawing the assets allocable to some or all of the Accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question of whether or not such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 4.4 If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the affected Account's or Accounts' investment in the Fund and terminate this Agreement with respect to such Account(s); provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the Disinterested Directors. Any such withdrawal and termination must take place within 30 days after the Fund gives written notice that this provision is being implemented. Until the end of such 30-day period, the Fund shall continue to accept and implement orders by the Company for the purchase and redemption of Shares of the Fund. 4.5 If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the affected Account's (or Accounts') investment in the Fund and terminate this Agreement with respect to such Account(s) within 30 days after the Fund informs the Company in writing that it has determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the Disinterested Directors. Until the end of such 30-day period, the Fund shall continue to accept and implement orders by the Company for the purchase and redemption of Shares of the Fund. 4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority of the Disinterested Directors shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Company be required to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. In the event that the Directors determine that any proposed action does not adequately remedy any irreconcilable material conflict, then the Company will withdraw the affected Account's (or Accounts') investment in the Fund and terminate this Agreement with respect to such Account(s) within 30 days after the Directors inform the Company in writing of the foregoing determination; provided, however, that such withdrawal and termination shall be limited to the extent required by any such material irreconcilable conflict as determined by a majority of the Disinterested Directors. 4.7 The Company shall at least annually submit to the Directors such reports, materials or data as the Directors may reasonably request so that the Directors may fully carry out the duties imposed upon them by the Shared Fund Exemptive Order, and said reports, materials and data shall be submitted more frequently if deemed appropriate by the Directors. 4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the application for the Shared Fund Exemptive Order) on terms and conditions materially different from those contained in the application for the Shared Fund Exemptive Order, then the Fund and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary (a) to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable. ARTICLE 5 INDEMNIFICATION 5.1 Indemnification by the Company. The Company agrees to indemnify and hold harmless the Fund and each of its Directors, officers, employees and agents and each person, if any, who controls the Fund within the meaning of Section 15 of the 1933 Act (collectively the "Indemnified Parties" for purposes of this Article 5) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or expenses (including the reasonable costs of investigating or defending any alleged loss, claim, damage, liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses"), to which such Indemnified Parties may become subject under any statute or regulation, or common law or otherwise, insofar as such Losses: (a) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in a registration statement or prospectus for the Contracts or in the Contracts themselves or in sales literature generated or approved by the Company on behalf of the Contracts or Accounts (or any amendment or supplement to any of the foregoing) (collectively, "Company Documents" for the purposes of this Article 5), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, provided that this indemnity shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and was accurately derived from written information furnished to the Company by or on behalf of the Fund for use in Company Documents or otherwise for use in connection with the sale of the Contracts or Shares; or (b) arise out of or result from statements or representations (other than statements or representations contained in and accurately derived from Fund Documents (as defined in Section 5.2(a) below) or wrongful conduct of the Company or persons under its control, with respect to the sale or acquisition of the Contracts or Shares; or (c) arise out of or result from any untrue statement or alleged untrue statement of a material fact contained in Fund Documents (defined below) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon and accurately derived from written information furnished to the Fund by or on behalf of the Company; or (d) arise out of or result from any failure by the Company to provide the services or furnish the materials required under the terms of this Agreement; or (e) arise out of or result from any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company. 5.2 Indemnification by the Fund. The Fund agrees to indemnify and hold harmless the Company and each of its directors, officers, employees and agents and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Article 5) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Fund) or expenses (including the reasonable costs of investigating or defending any alleged loss, claim, damage liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses"), to which such Indemnified Parties may become subject under any statute or regulation, or at common law or otherwise, insofar as such Losses: (a) arise out of or are based upon any untrue statements or alleged untrue statement of any material fact contained in the registration statement or prospectus for the Fund (or any amendment or supplement thereto) or in sales literature approved by the Fund (but solely with respect to statements regarding the Fund), (collectively, "Fund Documents" for the purposes of this Article 5), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this indemnity shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and was accurately derived from written information furnished to the Fund by or on behalf of the Company for use in Fund Documents or otherwise for use in connection with the sale of the Contracts or Shares; or (b) arise out of or result from statements or representations (other than statements or representations contained in and accurately derived from Company Documents) or wrongful conduct of the Fund or persons under its control, with respect to the sale or acquisition of the Contracts or Shares; or (c) arise out of or result from any untrue statement or alleged untrue statement of a material fact contained in Company Documents or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon and accurately derived from written information furnished to the Company by or on behalf of the Fund; or (d) arise out of or result from any failure by the Fund to provide the services or furnish the materials required under the terms of this Agreement; or (e) arise out of or result from any material breach of any representation and/or warranty made by the Fund in this Agreement or arise out of or result from any other material breach of this Agreement by the Fund. 5.3 Neither the Company nor the Fund shall be liable under the indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to any Losses incurred or assessed against any Indemnified Party to the extent such Losses arise out of or result from such Indemnified Party's willful misfeasance, bad faith or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement. 5.4 Neither the Company nor the Fund shall be liable under the indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the party against whom indemnification is sought in writing within a reasonable time after the summons, or other first written notification, giving information of the nature of the claim shall have been served upon or otherwise received by such Indemnified Party (or after such Indemnified Party shall have received notice of service upon or other notification to any designated agent), but failure to notify the party against whom indemnification is sought of any such claim shall not relieve that party from any liability that it may have to the Indemnified Party in the absence of Sections 5.1 and 5.2. 5.5 In case any such action is brought against the Indemnified Parties, the indemnifying party shall be entitled to participate, at its own expense, in the defense of such action. The indemnifying party also shall be entitled to assume the defense thereof, with counsel reasonably satisfactory to the party named in the action. After notice from the indemnifying party to the Indemnified Party of an election to assume such defense, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the indemnifying party will not be liable to the Indemnified Party under this Agreement for any legal or other expenses subsequently incurred by such Indemnified Party independently in connection with the defense thereof other than reasonable costs of investigation. ARTICLE 6 TERMINATION 6.1 This Agreement may be terminated by either party for any reason by six (6) months' advance written notice to the other party, and may be terminated by the Fund pursuant to Sections 6.2 through 6.4 below upon sixty (60) days' advance written notice to the Company or by the Company pursuant to Section 6.5 below upon sixty (60) days' advance written notice to the Fund. 6.2 This Agreement may be terminated at the option of the Fund upon institution of formal proceedings against the Company by the NASD, the SEC, the insurance department of any state, or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Contracts, the operation of the Account, the administration of the Contracts or the purchase of the Shares, or an expected or anticipated ruling, judgment or outcome that would, in the Fund's reasonable judgment, materially impair the Company's ability to meet and perform the Company's obligations and duties hereunder. 6.3 This Agreement may be terminated at the option of the Fund if the Internal Revenue Service determines that the Contracts cease to qualify as annuity contracts or life insurance policies, as applicable, under the Code. 6.4 This Agreement may be terminated by the Fund, at its option, if the Fund shall determine, in its sole judgment exercised in good faith, that either (1) the Company shall have suffered a material adverse change in its business or financial condition, (2) the Company shall have been the subject of material adverse publicity that is likely to have a material adverse impact upon the business and operations of either the Fund, the Adviser or the Underwriter, or (3) the Company breaches any obligation under this Agreement in a material respect and such breach shall continue unremedied for thirty (30) days after receipt of notice from the Fund of such breach. Notwithstanding any other provision of this Agreement, in the event that the Fund exercises its right to terminate this Agreement pursuant to this Section 6.4, such termination shall not become effective until the earlier of (i) the time which the Company notifies the Fund it has made arrangements (including obtaining any necessary regulatory approvals) to substitute other funding vehicles for shares of the Portfolios under the Contracts, and (ii) one year following the date the Fund exercises its right to terminate. 6.5 This Agreement may be terminated at the option of the Company if (A) the Internal Revenue Serve determines that any Portfolio fails to qualify as a `Regulated Investment Company' under the Code or fails to comply with the diversification requirements of Section 817(h) of the Code, or (B) upon or after institution of formal proceedings against the Fund, its adviser or distributor by the NASD, the SEC, or any other regulatory body regarding the Fund's duties under this Agreement, or the operation or administration of the Fund, the Company shall determine, in its sole judgment exercised in good faith, that either (1) the Fund or the Underwriter shall have been the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Company, or (2) the Fund breaches any obligation under this Agreement in a material respect and such breach shall continue unremedied for thirty (30) days after receipt of notice from the Company of such breach. 6.6 The provisions of Article 5 shall survive the termination of this Agreement, and the provisions of Article 4 and Sections 2.4 and 2.11 shall survive the termination of this Agreement as long as shares of the Fund are held on behalf of Contract owners in accordance with Section 6.5. ARTICLE 7 NOTICES Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Fund: Merrill Lynch Variable Series Fund, Inc. c/o Merrill Lynch Asset Management, L.P. 800 Scudders Mill Road Plainsboro, New Jersey 08536 Attention: General Counsel If to the Company: Security Life Insurance Company of Denver Office of the General Counsel 1290 Broadway Denver, Colorado 80203 Attention: Variable Counsel ARTICLE 8 MISCELLANEOUS 8.1 The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 8.2 This Agreement may be executed simultaneously in two or more counterparts, each of which taken together constitute one and the same instrument. 8.3 If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 8.4 This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of New York, shall be subject to the provisions of the 1933, 1934, and 1940 Acts, and the rules, regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant and the terms hereof shall be interpreted and construed in accordance therewith. 8.5 The parties to this Agreement acknowledge and agree that all liabilities of the Fund arising, directly or indirectly, under this Agreement, of any and every nature whatsoever, shall be satisfied solely out of the assets of the Fund and that no Director, officer, agent, or holder of shares of beneficial interest of the Fund shall be personally liable for any such liabilities. 8.6 Each party shall cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD, and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 8.7 The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 8.8 The parties to this Agreement acknowledge and agree that this Agreement shall not be exclusive in any respect. 8.9 Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the prior written approval of the other party. 8.10 No provisions of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by both parties. IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute this Fund Participation Agreement as of the date and year first above written. SECURITY LIFE INSURANCE COMPANY OF DENVER By: /s/ Jim Livingston ------------------------------- Name: Jim Livingston Title: Executive Vice President MERRILL LYNCH VARIABLE SERIES FUNDS, INC. By: /s/ Terry K. Glenn ------------------------------- Name: Terry K. Glenn Title: President SCHEDULE A Segregated Accounts of Security Life Insurance Company of Denver Name of Separate Account Date Established Security Life of Denver November 3, 1993 Separate Account L1 SCHEDULE B Portfolios of Merrill Lynch Variable Series Funds, Inc. Offered to Segregated Accounts Class A Shares Merrill Lynch Global Growth Focus Fund Merrill Lynch Index 500 Fund Merrill Lynch Balanced Capital Focus Fund Class B Shares Merrill Lynch Basic Value Focus Fund Merrill Lynch Small Cap Value Focus Fund SCHEDULE C Persons Authorized to Act on Behalf of Security Life Insurance Company of Denver - -------------------------------------------------------------------------------- The Fund, the Underwriter and their respective agents are authorized to rely on instructions from the following individuals on behalf of each Account: Name Signature Jerry Cwiok /s/ Jerry Cwiok Mark Smith /s/ Mark Smith Terry Morrison /s/ Terry Morrison Pamela Anson /s/ Pamela Anson Linda Turley /s/ Linda Turley Marty Evans /s/ Marty Evans Debra Bell /s/ Debra Bell Jim Livingston /s/ Jim Livingston Deborah Hancock /s/ Deborah Hancock EX-5 6 FIDELITY 7TH AMENDMENT Exhibit 1.A(8)(b)(xxiii) SEVENTH AMENDMENT TO PARTICIPATION AGREEMENT THIS AGREEMENT is made by and among Security Life of Denver Insurance Company, a life insurance company organized under the laws of the State of Colorado (the "Company"), Variable Insurance Products Fund, an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts (the "Fund"), and Fidelity Distributors Corporation, a Massachusetts corporation (the "Underwriter") (collectively, the "Parties"). WHEREAS, the Parties executed a participation agreement dated August 10, 1994 (the "Participation Agreement"), governing how shares of the Fund's portfolios are to be made available to certain variable life insurance and/or variable annuity contracts (the "Contracts") offered by the Company through certain separate accounts (the "Separate Accounts"); WHEREAS, the various contracts for which shares are purchased are listed in Schedule A of the Participation Agreement; WHEREAS, the Parties have agreed that it is in their interests to add an additional Contract and class of Fund to be purchased by the Separate Accounts; NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund and the Underwriter agree as follows: 1. The Participation Agreement is hereby amended by substituting for the current Schedule A an amended Schedule A in the form attached hereto which adds the Strategic Benefit and Estate Designer Variable Universal Life policies to the list of Contracts funded by the Separate Accounts. 2. Section 2.5 of Article II. Representations and Warranties is hereby deleted and replaced in its entirety with the following: 2.5. (a) With respect to Initial Class shares, the Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may make such payments in the future. The Fund has adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no payments for distribution expenses. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of trustees, a majority of whom are not interested persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. (b) With respect to Service Class shares and Service Class 2 shares, the Fund has adopted Rule 12b-1 Plans under which it makes payments to finance distribution expenses. The Fund represents and warrants that it has a board of trustees, a majority of whom are not interested persons of the Fund, which has formulated and approved each of its Rule 12b-1 Plans to finance distribution expenses of the Fund and that any changes to the Fund's Rule 12b-1 Plans will be approved by a similarly constituted board of trustees. 3. Paragraph 5.1 of Article V. Fees and Expenses is hereby amended to delete the following sentence as of the date of this Amendment, "Currently, no such payments are contemplated." 4. The Participation Agreement is hereby amended by substituting for the current Schedule C an amended Schedule C in the form attached hereto which adds certain other investment options to the Contracts funded by the Separate Accounts. 5. The Participation Agreement is hereby amended by substituting for the current Schedule D an amended Schedule D in the form attached hereto which adds certain classes of certain Fidelity Funds to some Contracts funded by the Separate Accounts. Executed this 26th day of April, 2000. Security Life of Denver Variable Insurance Products Fund Insurance Company BY: /s/ Jim Livingston BY: /s/ Robert C. Pozen ------------------------------ ---------------------------- Jim Livingston Robert C. Pozen Executive Vice President Senior Vice President Fidelity Distributors Corporation BY: /s/ Kevin J. Kelly ----------------------------- Kevin J. Kelly Vice President Schedule A ---------- Separate Accounts and Associated Contracts ------------------------------------------ Name of Separate Account and Contracts Funded Date of Established by Board of Directors By Separate Account - ----------------------------------------- ------------------- Security Life Separate Account A1 o The Exchequer Variable Annuity (November 3, 1993) (Flexible Premium Deferred Combination Fixed and Variable Annuity Contract) Security Life Separate Account L1 o First Line (Flexible Premium (November 3, 1993) Variable Life Insurance Policy) o Strategic Advantage Variable Universal Life (Flexible Premium Variable Universal Life Insurance Policy) o FirstLine II Variable Universal Life (Flexible Premium Variable Universal Life Insurance Policy) o Strategic Advantage II Variable Universal Life (Flexible Premium Variable Life Insurance) o Variable Survivorship Universal Life (Flexible Premium Variable Life Insurance) o Corporate Benefits Variable Universal Life (Flexible Premium Variable Life Insurance) o Strategic Benefit Variable Universal Life (Flexible Premium Variable Life Insurance) o Estate Designer Variable Universal Life (Joint and Survivor Flexible Premium Variable Life Insurance) Schedule C ---------- Other investment companies currently available under variable annuities or variable life insurance issued by the Company (not al funds/portfolios are available in all products): AIM VI Capital Appreciation Portfolio AIM VI Government Securities Portfolio Alger American MidCap Growth Portfolio Alger American Small Capitalization Portfolio Alger American Growth Portfolio Alger American Leveraged Allcap Portfolio GCG Trust Equity Income Portfolio Growth Portfolio Hard Assets Portfolio Limited Maturity Bond Portfolio Liquid Asset Portfolio Mid-Cap Growth Portfolio Research Portfolio Total Return Portfolio INVESCO VIF High Yield Fund INVESCO VIF Equity Income Fund INVESCO VIF Total Return Fund INVESCO VIF Utilities Fund INVESCO VIF Small Company Growth Fund Neuberger Berman Growth Portfolio Neuberger Berman Limited Maturity Bond Portfolio Neuberger Berman Partners Portfolio Van Eck Worldwide Insurance Trust Worldwide Bond Fund Worldwide Emerging Markets Fund Worldwide Hard Assets Fund Worldwide Real Estate Fund Fidelity Investments Variable Insurance Products Fund II Asset Manager Portfolio Index 500 Schedule D ---------- Portfolios of the Fund available as funding vehicles under the Contracts: Initial Class Shares Growth Portfolio Money Market Portfolio Overseas Portfolio Service Class Shares (Strategic Benefit Contracts only) Growth Portfolio Overseas Portfolio EX-6 7 MERRILL LYNCH ADMINISTRATIVE SERVICE AGMT Exhibit 1.A(8)(c)(vii) ADMINISTRATIVE SERVICES AGREEMENT SECURITY LIFE OF DENVER INSURANCE COMPANY (the "Insurer") and MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM") mutually agree to the arrangements set forth in this Agreement (the "Agreement") dated as of May 1, 2000. WHEREAS, MLAM is the investment adviser to the Merrill Lynch Variable Series Funds, Inc. (the "Fund"); and WHEREAS, the Insurer issues variable life insurance policies (the "Policies"); and WHEREAS, the Insurer and the Fund have entered into a Fund Participation Agreement ("Participation Agreement") dated May 1, 2000, providing for the sale of shares of the Fund to certain segregated separate accounts of the Insurer; and WHEREAS, amounts invested in the Policies by policy holders are deposited in one or more separate accounts of the Insurer which will in turn purchase shares of certain portfolios of the Fund, each of which is an investment option offered by the Policies (the "Portfolios"); and WHEREAS, the Fund expects to derive substantial savings in administrative expenses by virtue of having separate accounts of the Insurer as shareholders of record of Fund shares and having the Insurer perform certain administrative services for the Fund (which are identified on Schedule A hereto); and WHEREAS, neither MLAM nor the Insurer has any contractual or other legal obligation to perform such administrative services for the Fund; and WHEREAS, the Insurer desires to be compensated for providing such administrative services to the Fund; and WHEREAS, MLAM desires that the Fund benefit from the lower administrative expenses expected to result from the administrative services performed by the Insurer; and WHEREAS, MLAM accordingly would prefer to compensate the Insurer for providing administrative services to the Fund from its own funds, derived from its own resources, including its bona fide profits, rather than request that the Fund bear the costs of such compensation: NOW, THEREFORE, the parties agree as follows: 1. ADMINISTRATION EXPENSE PAYMENTS. (a) MLAM agrees to pay the Insurer an amount as identified and described on Schedule B hereto of that portion of the gross annual investment advisory fees paid by the Fund to MLAM attributable to certain investments in portfolios of the Fund by separate accounts of the Insurer. (b) the Insurer shall calculate the payment contemplated by this Section 1 at the end of each fiscal quarter and will invoice such payment to MLAM, which shall remit payment reasonably promptly thereafter. 2. NATURE OF PAYMENTS. The parties to this Agreement recognize and agree that MLAM's payments to the Insurer are for administrative services only and do not constitute payment in any manner for investment advisory services or for costs of distribution of Policies or of Fund shares and are not otherwise related to investment advisory or distribution services or expenses. The amount of administration expense payments made by MLAM to the Insurer pursuant to Section 1(a) of this Agreement are not intended to be, and shall not be deemed to be, indicative of MLAM's bona fide profits from serving as investment adviser to any Fund. 3. TERM AND TERMINATION. (a) Any Party may terminate this Agreement, without penalty, on ninety day's advance written notice to the other Party. Unless so terminated, this Agreement shall continue in effect for so long as MLAM or its successor(s) in interest, or any affiliate thereof, continues to perform in a similar capacity for the Fund, and for so long as Insurer or its successors(s) in interest, or any affiliate thereof, provides the services contemplated hereunder with respect to Contracts under which values or monies are allocated to a Portfolio. (b) This Agreement shall automatically terminate upon (i) the termination of the Participation Agreement between the Insurer and the Fund, or (ii) the dissolution or bankruptcy of any party hereto, or in the event that any party hereto is placed in receivership or rehabilitation, or in the event that the management of its affairs is assumed by any governmental, regulatory or judicial authority. 4. AMENDMENT. This Agreement may be amended only upon mutual agreement of the parties hereto in writing. 5. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered (a) to MLAM, at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, attention: Michael Hennewinkel, General Counsel; and (b) to the Insurer, at Office of the General Counsel, 1290 Broadway, Denver, Colorado 80203, Attention: Variable Counsel. 6. MISCELLANEOUS. (a) Successors and Assigns. This Agreement shall be binding upon the parties hereto and their transferees, successors and assigns. The benefits of and the right to enforce this Agreement shall accrue to the parties and their transferees, successors and assigns. (b) Assignment. Neither this Agreement nor any of the rights, obligations or liabilities of either party hereto shall be assigned without the written consent of the other party. (c) Intended Beneficiaries. Nothing in this Agreement shall be construed to give any person or entity other than the parties hereto any legal or equitable claim, right or remedy. Rather, this Agreement is intended to be for the sole and exclusive benefit of the parties hereto. (d) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same instrument. (e) Applicable Law. This Agreement shall be interpreted, construed, and enforced in accordance with the laws of the State of New York, without reference to the conflict of law thereof. (f) Severability. If any portion of this Agreement shall be found to be invalid or unenforceable by a court or tribunal or regulatory agency of competent jurisdiction, the remainder shall not be affected thereby, but shall have the same force and effect as of the invalid or unenforceable portion had not been inserted. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SECURITY LIFE INSURANCE COMPANY OF DENVER By: /s/ Jim Livingston Name: Jim Livingston Title: Executive Vice President MERRILL LYNCH ASSET MANAGEMENT, L.P. By: Princeton Services, Inc. its General Partner /s/ Terry K. Glenn Terry K. Glenn Executive Vice President SCHEDULE A ADMINISTRATIVE SERVICES FOR THE FUND MAINTENANCE OF BOOKS AND RECORDS o Maintaining an inventory of share purchases to assist transfer agent in recording issuance of shares. o Performing miscellaneous accounting services to assist transfer agent in recording transfers of shares (via net purchase orders). o Reconciliation and balancing of the separate account at the Fund level in the general ledger and reconciliation of cash accounts at general account. PURCHASE ORDERS o Determination of net amount of cash flow into Fund. o Reconciliation and deposit of receipts at Fund and confirmation thereof. REDEMPTION ORDERS o Determination of net amount required for redemptions by Fund. o Notification to Fund of cash required to meet payments. o Cost of share redemptions. REPORTS o Periodic information reporting to the Fund. FUND-RELATED CONTRACT OWNER SERVICES o Telephonic support for contract owners with respect to inquiries about the Fund (not including information about performance or related to sales.) OTHER ADMINISTRATIVE SUPPORT o Sub-Accounting services. o Providing other administrative support to the Fund as mutually agreed between the Insurer and the Fund. o Relieving the Fund of other usual or incidental administrative services provided to individual policyholders. o Preparation of reports to certain third-party reporting services. SCHEDULE B PORTFOLIOS OF MERRILL APPLICABLE FEE RATE LYNCH VARIABLE SERIES FUNDS, INC. (CLASS A SHARES) Merrill Lynch Global Growth Focus Fund 0.15% Merrill Lynch Balanced Capital Focus Fund 0.15% Merrill Lynch Index 500 Portfolio 0.05% EX-7 8 FIDELITY SERVICE CONTRACT Exhibit 1.A(8)(c)(viii) FORM OF SERVICE CONTRACT With Respect to Service Class Shares of: ( ) Variable Insurance Products Fund - High Income Portfolio ( ) Variable Insurance Products Fund - Equity-Income Portfolio (x) Variable Insurance Products Fund - Growth Portfolio (x) Variable Insurance Products Fund - Overseas Portfolio ( ) Variable Insurance Products Fund II - Asset Manager Portfolio ( ) Variable Insurance Products Fund II - Contrafund Portfolio ( ) Variable Insurance Products Fund II - Asset Manager: Growth Portfolio ( ) Variable Insurance Products Fund III - Growth Opportunities Portfolio ( ) Variable Insurance Products Fund III - Balanced Portfolio ( ) Variable Insurance Products Fund III - Growth & Income Portfolio ( ) Variable Insurance Products Fund III - Mid Cap Portfolio To Fidelity Distributors Corporation: We desire to enter into a Contract with you to be effective May 1, 2000, for activities in connection with (i) the distribution of shares of the funds noted above (the "Funds") of which you are the principal underwriter as defined in the Investment Company Act of 1940 (the "Act") and for which you are the agent for the continuous distribution of shares, and (ii) the servicing of holders of shares of the Funds and existing and prospective holders of Variable Products (as defined below). THE TERMS AND CONDITIONS OF THIS CONTRACT ARE AS FOLLOWS: 1. We shall provide distribution and certain shareholder services for our clients who own or are considering the purchase of variable annuity contracts or variable life insurance policies as specified on the attached schedule, for which shares of the Funds are available as underlying investment options ("Variable Products"), which services may include, without limitation, answering questions about the Funds from owners of Variable Products; receiving and answering correspondence (including requests for prospectuses and statements of additional information for the Funds); performing subaccounting with respect to Variable Products' values allocated to the Funds; preparing, printing and distributing reports of values to owners of Variable Products who have contract values allocated to the Funds; printing and distributing prospectuses, statements of additional information, any supplements to prospectuses and statements of additional information, and shareholder reports; preparing, printing and distributing marketing materials for Variable Products; assisting customers in completing applications for Variable Products and selecting underlying mutual fund investment options; preparing, printing and distributing subaccount performance figures for subaccounts investing in Fund shares; and providing other reasonable assistance in connection with the distribution of Fund shares to insurers. 2. We shall provide such office space and equipment, telephone facilities and personnel (which may be all or any part of the space, equipment and facilities currently used in our business, or all or any personnel employed by us) as is necessary or beneficial for us to provide information and services to existing and prospective owners of Variable Products, and to assist you in providing services with respect to Variable Products. 3. We agree to indemnify and hold you, the Funds, and the Funds' advisers and transfer agent harmless from any and all direct or indirect liabilities or losses resulting from requests, directions, actions or inactions, of or by us or our officers, employees or agents regarding the purchase, redemption, transfer or registration of Fund shares that underlie Variable Products of our clients. Such indemnification shall survive the termination of this Contract. Neither we nor any of our officers, employees or agents are authorized to make any representation concerning Fund shares except those contained in the registration statement or prospectus for the Fund shares, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in sales literature or other promotional material approved by the Fund or its designee or by you, except with the permission of the Fund or you or the designee of either. 4. In consideration of the services and facilities described herein, we shall be entitled to receive, and you shall pay or cause to be paid to us, fees at an annual rate as set forth on the accompanying fee schedule. We understand that the payment of such fees has been authorized pursuant to, and shall be paid in accordance with, a Distribution and Service Plan approved by the Board of Trustees of the applicable Fund, by those Trustees who are not "interested persons" of the Fund (as defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of the Distribution and Service Plan or in any agreements related to the Distribution and Service Plan ("Qualified Trustees"), and by shareholders of such class; and that such fees are subject to change during the term of this Contract and shall be paid only so long as this Contract is in effect. We also understand and agree that, notwithstanding anything to the contrary, if at any time payment of all such fees would, in your reasonable determination, conflict with the limitations on sales or service charges set forth in Section 2830(d) of the NASD Conduct Rules, then such fees shall not be paid; provided that in such event each Fund's Board of Trustees may, but is not required to, establish procedures to pay such fees, or a portion thereof, in such manner and amount as they shall deem appropriate. 5. We agree to conduct our activities in accordance with any applicable federal or state laws and regulations, including securities laws and any obligation thereunder to disclose to our clients the receipt of fees in connection with their investment in Variable Products. 6. This Contract shall continue in force for one year from the effective date (see below), and thereafter shall continue automatically for successive annual periods, provided such continuance is specifically subject to termination without penalty at any time if a majority of each Fund's Qualified Trustees or a majority of the outstanding voting securities (as defined in the 1940 Act) of the applicable class vote to terminate or not to continue the Distribution and Service Plan. Either of us also may cancel this Contract without penalty upon telephonic or written notice to the other; and upon telephonic or written notice to us, you may also amend or change any provision of this Contract. This Contract will also terminate automatically in the event of its assignment (as defined in the 1940 Act). 7. All communications to you shall be sent to you at your offices, 82 Devonshire Street, Boston, MA 02109. Any notice to us shall be duly given if mailed or telegraphed to us at the address shown in this Contract. 8. This Contract shall be construed in accordance with the laws of the Commonwealth of Massachusetts. Very truly yours, ING America Equities, Inc. BY:/s/ James L. Livingston - ---------------------------------------------- ------------------------- Name of Qualified Recipient (Please Print or Type) James L. Livingston, Jr. President 1290 Broadway - ------------------------------ Street Denver Colorado 80203 - ---------------------------------------------- City State Zip Code Date: ---------------------------- FIDELITY DISTRIBUTORS CORPORATION By: /s/ Eric D. Roiter -------------------------------- Eric D. Roiter Vice President NOTE: Please return TWO signed copies of this Service Contract to Fidelity Distributors Corporation. Upon acceptance, one countersigned copy will be returned to you. FOR INTERNAL USE ONLY: EFFECTIVE DATE: ------------------ FEE SCHEDULE FOR QUALIFIED RECIPIENTS OF Variable Insurance Products Fund - High Income Portfolio Variable Insurance Products Fund - Equity-Income Portfolio Variable Insurance Products Fund - Growth Portfolio Variable Insurance Products Fund - Overseas Portfolio Variable Insurance Products Fund II - Asset Manager Portfolio Variable Insurance Products Fund II - Contrafund Portfolio Variable Insurance Products Fund II - Asset Manager: Growth Portfolio Variable Insurance Products Fund III - Growth Opportunities Portfolio Variable Insurance Products Fund III - Balanced Portfolio Variable Insurance Products Fund III - Growth & Income Portfolio Variable Insurance Products Fund III - Mid Cap Portfolio (1) Those who have signed the Service Contract and who render distribution, administrative support and recordkeeping services as described in paragraph 1 of the Service Contract will hereafter be referred to as "Qualified Recipients." (2) A Qualified Recipient providing services pursuant to the Service Contract will be paid a monthly fee at an annualized rate of 10 basis points of the average aggregate net assets of its clients invested in Service Class shares of the Funds listed above. (3) In addition, a Qualified Recipient providing services pursuant to the Service Contract will be paid a quarterly fee at an annualized rate of 5 basis points of the average aggregate net assets of its clients invested in service class Shares of the Funds listed above. In order to be assured of receiving full payment under this paragraph (3) for a given calendar quarter, a Qualified Recipient must have insurance company clients with a minimum of $100 million of average net assets in the aggregate in the Funds listed below. For any calendar quarter during which assets in these Funds are in the aggregate less than $100 million, the amount of qualifying assets may be considered to be zero for the purpose of computing the payments due under this paragraph (3), and the payments under this paragraph (3) may be reduced or eliminated. Variable Insurance Products Fund - Equity-Income Portfolio Variable Insurance Products Fund - Growth Portfolio Variable Insurance Products Fund - Overseas Portfolio Variable Insurance Products Fund II - Asset Manager Portfolio Variable Insurance Products Fund II - Contrafund Portfolio Variable Insurance Products Fund II - Asset Manager: Growth Portfolio Variable Insurance Products Fund III - Growth Opportunities Portfolio Variable Insurance Products Fund III - Balanced Portfolio Variable Insurance Products Fund III - Growth & Income Portfolio Variable insurance Products Fund III - Mid Cap Portfolio (4) The fees paid to each Qualified Recipient will be calculated and paid quarterly. Checks will be mailed to each Qualified Recipient by the 30th of the following month. SCHEDULE OF VARIABLE PRODUCTS ISSUED BY SECURITY LIFE OF DENVER INSURANCE COMPANY WITH "SERVICE CLASS" SHARES Strategic Benefit VUL EX-8 9 LIVINGSTON OPINION LETTER EXHIBIT 6.A [letterhead of Security Life here] April 27, 2000 Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203-5699 Re: Security Life Separate Account L1 Pre-Effective Amendment No. 1; SEC File No. 333-34402 Gentlemen: In my capacity as Executive Vice President, CFO and Chief Actuary of Security Life of Denver Insurance Company ("Security Life"), I have provided actuarial advice concerning: The preparation of Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 (File No. 333-34402) to be filed by Security Life and its Security Life Separate Account L1 (the "Separate Account") with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 with respect to the Strategic Benefit variable universal life insurance policies; and The preparation of the policy forms for the Strategic Benefit variable universal life insurance policies described in Pre-Effective Amendment No. 1 (the "Policies"). It is my professional opinion that 1. The aggregate fees and charges under the Policies are reasonable in relation to the services rendered the expenses expected to be incurred and the risks assumed by Security Life. 2. The illustrations of death benefits, account value, cash surrender value, and total premiums paid plus interest at 5 percent shown in the Prospectus, based on the assumptions stated in the illustration are consistent with the provisions of the Policies. The rate structures of the Policies have not been designed so as to make the relationship between premiums and benefits, as shown in the illustrations included, appear to be correspondingly more favorable to prospective buyers than other illustrations which could have been provided at other combinations of ages, sex of the insured, death benefit option and amount, definition of life insurance test, premium class, and premium amounts. Insureds of other premium classes may have higher costs of insurance charges. 3. All other numerical examples shown in the Prospectus are consistent with the Policies and our other practices, and have not been designed to appear more favorable to prospective buyers than other examples which could have been provided. I hereby consent to the filing of this opinion as an Exhibit to Pre-Effective Amendment No. 1 to the Registration Statement and the use of my name under the heading "Experts" in the Prospectus. Sincerely, /s/ James L. Livingston, Jr. James L. Livingston, Jr., F.S.A., M.A.A.A. JLL:tls EX-9 10 ERNST & YOUNG CONSENT LTR Exhibit 7.A Consent of Independent Auditors We consent to the reference to our firm under the captions "Experts" and "Financial Statements" and to the use of our reports dated April 7, 2000 and April 14, 2000 (with respect to the financial statements of Security Life Separate Account L1 and the consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries, respectively), in Pre-Effective Amendment No. 1 to the Registration Statement (Form S-6 No. 333-34402) and related Prospectus of Security Life of Denver Insurance Company and Security Life Separate Account L1 dated May 1, 2000. /s/ ERNST & YOUNG LLP Denver, Colorado April 27, 2000 EX-10 11 SAB CONSENT LTR [SUTHERLAND ASBILL & BRENNAN LLP] CONSENT OF SUTHERLAND ASBILL & BRENNAN LLP We consent to the reference to our firm in the prospectus included in Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 for Security Life of Denver Separate Account L1 (File No. 333-34402). In giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933. SUTHERLAND ASBILL & BRENNAN LLP By: /s/ Kimberly J. Smith -------------------------- Kimberly J. Smith Washington, D.C. April 27, 2000 EX-11 12 ITR MEMO EXHIBIT 11 STRATEGIC BENEFIT VUL DESCRIPTION OF ISSUANCE, TRANSFER, AND REDEMPTION PROCEDURES FOR POLICIES PURSUANT TO RULE 6E-3(T)(B)(12)(III) This document sets forth the administrative procedures that will be followed by Security Life of Denver ("Security Life") in connection with the issuance of its Strategic Benefit flexible premium variable universal life insurance policies (the "policies") issued through Security Life Separate Account L1 (the "Separate Account"), the transfer of assets held under the policies, and the redemption of interests in policies for use on multi-life basis when the insured people share a common employment or business relationship. I. PROCEDURES RELATING TO ISSUANCE AND PURCHASE OF THE POLICIES A. Offering of the Policy The policy is offered only to corporate entities or qualifying groups of ten or more insured people who may be individual owners ("owners") who satisfy certain suitability standards. The policy may be purchased to insure the life of a person (an "insured") in whom the owner has an insurable interest. Security Life requires satisfactory evidence of insurability, which may include a medical examination of the insured. The issue ages are 15 through 85. Age is determined by the insured's age as of the birthday nearest the policy date. Generally, a minimum total group first year premium of at least $250,000 is required. However, depending on underwriting circumstances, the minimum total group first year premium may be reduced. There is no minimum required base death benefit, although a minimum target death benefit of $50,000 per policy is required. The minimum target death benefit on some policies may be less as long as the average target death benefit for the group at policy issuance is at least $50,000. Acceptance of an application depends on Security Life's underwriting rules. Security Life reserves the right to reject an application for any reason. If a policy has more than one owner (joint owners), then transactions under the policy except for telephone transfers of account value require the authorization of all owners. B. Cost of Insurance Charges Structure, Payments and Underwriting Standards Security Life places the insured in a premium class when the policy is issued, based on underwriting. This original premium class applies to the initial stated death benefit. 1 The cost of insurance charge for a policy is based on the age at issue, sex, premium class of the insured, and on the policy year. Therefore the charge varies from time to time. Security Life places insureds in the following premium classes, based on underwriting: Standard smoker (ages 0-85); and Standard Non-smoker (ages 20-85). Security Life's definition of "Smoker" includes the use of cigarettes, cigars, pipes, chewing tobacco, nicotine chewing gun or patch, snuff or any other tobacco or nicotine-based product or, insureds may be placed in a substandard rate class, with a higher mortality risk than the standard smoker or standard non- smoker classes. Security Life guarantees that the cost of insurance rates used to calculate the monthly cost of insurance charge will not exceed the maximum cost of insurance set forth in the policies. The guaranteed cost of insurance rate for standard classes are based on the 1980 Commissioners' Standard ordinary mortality Tables, Male or Female, Smoker or Nonsmoker Mortality Premiums (1980 CSO Tables). The guaranteed cost of insurance rates for substandard classes are based on multiples of or additives to the 1980 CSO Tables. At any time, Security Life's current cost of insurance may be less than the guaranteed cost of insurance that is set forth in the policy. Current cost of insurance rates are determined based on expectations as to future mortality, investment earnings, expenses, taxes, and persistency experience. These rates may change from time to time. Cost of insurance rates (whether guaranteed or current) for an insured in a standard non-smoker class are equal to or lower than guaranteed cost of insurance for an insured of the same age and sex in a standard smoker class. Cost of insurance rates (whether guaranteed or current) for an insured in a standard non-smoker or smoker class are generally lower than guaranteed cost of insurance for an insured of the same age and sex and smoker status in a substandard class. The cost of insurance will not be the same for all policies. Insurance is based on the principle of pooling and distribution of mortality risks which assumes that each owner is charged a cost of insurance commensurate with the insured's mortality risk as actuarially determined, reflecting factors such as age, sex, health, and underwriting method. A uniform cost of insurance charge for all insureds would discriminate unfairly in favor of those insureds representing higher risks. However, there will be a uniform cost of insurance charge for all insureds of the same issue age, sex, policy duration and underwriting classification. If the insured's age or sex has been misstated in the application for the policy or in any application for supplemental or rider benefits, and if the misstatement becomes known during the lifetime of the insured, then policy values will be adjusted to reflect the correct monthly deductions (based on the correct age or sex) since the policy date. If the policy's values are insufficient to cover the monthly deduction on the prior monthly date, the grace period will be deemed to have begun, and notification will be sent to the owner at least 61 days prior to the end of the grace period. See "Policy Termination and Grace Period," below. 2 C. Death Benefit The policy provides coverage on a named insured and a Death Benefit payable upon the death of the insured. The policy will remain in force as long as the policy's cash surrender value is sufficient to cover the charges due. On or after the first monthly processing date, the owner may request a reduction in the stated death benefit, by written notice to Security Life, subject to the following rules. If a change in the stated death benefit would result in total premiums paid exceeding the premium limitations prescribed under current tax law to qualify the policy as a life insurance contract, Security Life will refund promptly to the owner the excess above the premium limitations. The minimum amount of a decrease in stated death benefit is $1,000, and a decrease will become effective on the monthly processing date next following the date that notice requesting the decrease is received and approved by Security Life. Security Life reserves the right to decline a requested decrease in the stated death benefit if compliance with the guideline premium limitations under current tax law resulting from this decrease would result in immediate termination of the policy, or if to effect the requested decrease, payments to the owner would have to be made from the accumulated value for compliance with the guideline premium limitations, and the amount of such payments would exceed the cash surrender value under the policy. At any time the owner may request an increase in the stated death benefit; any increase in the stated death benefit must be at least $1,000 (unless the increase is effected pursuant to a rider providing for automatic increases in stated death benefit), and an application must be submitted. An increase that is not guaranteed by rider will require satisfactory evidence of insurability and must meet Security Life's underwriting rules. The increase in stated death benefit will become effective on the next monthly processing date after the request is approved. The account value will be adjusted to reflect a monthly deduction (as of the effective date) based on the increased stated death benefit. Security Life will determine a cost of insurance rate for each increase in coverage based on the age of the insured at the time of the increase. The following rules apply to determine the risk amount for each rate. When an increase in stated death benefit is requested, Security Life conducts underwriting before approving the increase to determine whether a different premium class will apply to the increase. If the premium class for the increase has lower cost of insurance rates than the original premium class, then the premium class for the increase will also be applied to the initial stated death benefit. If the premium class for the increase has higher cost of insurance rates than the original premium class, the premium class for the increase will apply only to the increase in stated death benefit, and the original premium class will continue to apply to the initial stated death benefit. 3 To determine the risk amount associated with a stated death benefit, Security Life will attribute the total net amount at risk for the total stated death benefit. If there is a decrease in stated death benefit after an increase, the decrease is applied first to decrease prior increases in stated death benefit starting with the most recent increase. The policy will be offered and sold pursuant to an established mortality structure and underwriting standards in accordance with state insurance laws. Where state insurance laws prohibit the use of actuarial tables that distinguish between men and women in determining premiums and policy benefits for their insured resident, Security Life will comply. D. Application and Payment Processing To purchase a policy, an application must be completed and submitted through an authorized Security Life agent. Temporary life insurance coverage may be provided prior to the policy date under the terms of a temporary insurance agreement. In accordance with Security Life's underwriting rules, temporary life insurance coverage may not exceed $3,000,000 and will not remain in effect for more than ninety (90) days. The insurance coverage becomes effective on the policy date, which may be specified on the application. The policy date is used to determine the monthly processing date, coverage effective date and policy anniversaries. The policy date is: 1) the date specified on the application, 2) the back-date of the policy to save age; or if neither 1) or 2) apply, it is the date all underwriting and administrative requirements are met if the initial premium has been received. Otherwise, it is the date the initial premium is received by Security Life. The investment date is the date that Security Life first applies premium to the policy. It is the first valuation date following Security Life's: 1) receipt of the initial premium, 2) approval of the policy for issue, and 3) receipt of all issue requirements. As provided under state insurance law, the owner may be permitted to backdate the policy to preserve insurance age. In no case may the policy date be more than six months prior to the application date. The monthly deductions for the backdated period are deducted on the policy date. The initial premium payment must be at least equal to the sum of the scheduled premiums from the policy date through the investment date. Planned periodic premiums and unscheduled premiums that are not underwritten will be credited to the policy and the net premium invested on the valuation date they are received by Security Life. If a premium payment is rejected, Security Life will return it promptly, without adjustment. 4 The policy date is the date from which policy months, years, and anniversaries are measured. A policy month is a one-month period beginning with a monthly processing date and ending with the day immediately preceding the next following monthly processing date (i.e. 8/15 - 9/14). The monthly processing date is the same as the policy date for each succeeding month. The monthly deductions are made each monthly processing date. A policy year is twelve months commencing with the policy date and ending with the day immediately preceding the next annual date (i.e. 8/15/1999 - 8/14/2000). The issue date, if the same as the policy date, is the date from which the suicide and contestable periods start. It is shown in the policy. E. Allocation of Net Premiums On the investment date, the account value equals the initial premium payment minus premium expense charges, minus monthly deductions made as the policy date (up to six months for backdated policies). On each investment date thereafter, the account value is the sum of the amounts in the variable investment options, the guaranteed interest division, and the loan division. The account value will vary with the performance of the selected investment options, interest credited on amounts in the guaranteed interest division, interest credited on amounts in the loan division, charges, transfers, partial withdrawals, loans and loan repayments. The net account value is cash value minus outstanding policy debt. When applying for a policy, the owner selects a plan for paying premium payments at specified intervals, e.g., quarterly, semi-annually or annually, until the maturity date. If the owner elects, Security Life will arrange for payment of planned period premiums on a monthly basis under a pre-authorized, electronic funds transfer (bank draft) arrangement. The owner is not required to pay premium in accordance with the plan; but can pay more or less than planned or skip a planned premium entirely. Currently, there is no minimum amount for each premium payment. Security Life may establish a minimum amount effective 90 days after sending a written notice to the owner. Subject to certain limits (described below), the owner can change the amount and frequency of planned periodic premiums at any time by sending a notice to Security Life. However, Security Life reserves the right to limit the amount of a premium payment or the total premium paid. In the application, the owner specifies the percentage of net premium to be allocated to each investment option including the guaranteed interest division (G.I.D.). Net premiums generally will be invested on the valuation date that Security Life receives them and in accordance with the owner's most recent allocation instructions. The net premium allocation percentages specified in the application will apply to subsequent premium payments until the owner instructs otherwise. The minimum percentage that may be specified for an investment option is 1%, and all percentages must be whole numbers. The sum of allocations must equal 100%. Security Life limits the number of investment options (18) to which account value may be allocated over the life of the policy. An owner can change the 5 allocation percentages at any time by sending a notice to Security Life or, if telephone privileges are in effect, the request can be received by phone. The change applies to all premium payments received with or after receipt of the owner's notice. F. Free Look Some states mandate that if an owner exercises his/her free look right he/she is entitled to a full premium refund. Other states mandate that if the owner exercises his/her free look option he/she is entitled to receive the value of the fund allocations plus a refund of the policy charges previously deducted. Amounts designated for the guaranteed interest division will be invested into that division on the investment date. If the owner's state requires return of premium during the free look period, amounts designated for the variable division are initially invested into the Liquid Asset Portfolio. Later, these amounts are transferred from the Liquid Asset Portfolio to the selected variable investment options, at the earlier of: 1) five days after we mailed the policy and the state free look period has ended; or 2) we have received the policy delivery receipt an the state free look period has ended. If the owner's state provides for return of account value during the free look period or no free look period, amounts designated for the variable division are invested directly into the selected variable investment options. G. Additional Payment Additional unscheduled premium payments can be made at any time while the policy is in force. Premium payments after the initial premium payment must be made to the home office. Security Life has the right to limit the number and amount of such premium payments. Total premium payments paid in a policy year may not exceed guideline premium payment limitations for life insurance set forth in the Internal Revenue Code. Security Life will promptly refund the portion of any premium payment that is determined to be in excess of the premium payment limit established by law to qualify a policy as a contract for life insurance. Security Life reserves the right to reject a requested increase in planned periodic premiums, or unscheduled premium. Security Life also reserves the right to require satisfactory evidence of insurability prior to accepting a premium which increases the risk amount of the policy. No premium payment will be accepted after the maturity date. The payment of premiums may cause a policy to be a Modified Endowment Contract (M.E.C.) under the Internal Revenue Code. If acceptance of a premium paid would, in Security Life's view, cause the policy to become a M.E.C., then to the extent feasible Security Life will not accept that portion of the premium that would cause the policy to become a M.E.C. unless the owner confirms in writing that it is his/her intent to convert the policy to a 6 M.E.C. Security Life may return the excess portion of the payment pending receipt of instructions from the owner. The owner may specify that a particular unscheduled payment is to be a repayment of policy debt. H. Policy Termination and Grace Period The policy terminates at the earliest of: 1) the end of the grace period, 2) the surrender of the policy or, 3) the fulfillment of Security Life's obligations under the policy (i.e., payment of the death benefit proceeds). If the cash surrender value on a monthly processing date is less than the amount of the monthly deduction to be deducted, the policy will be in default. In addition, if on a monthly processing date the outstanding policy debt exceeds the account value, the policy will be in default. The owner, and any assignee of record, will be sent notice of the default. If a policy goes into default, the owner will be allowed a 61-day grace period to pay a premium payment sufficient to cover the monthly deductions due during the grace period and for two additional months, or a sufficient amount to avoid termination caused by a high outstanding loan balance. Security Life will send notice of the amount required ("grace period premium payment") to the owner's last known address and the address of the assignee of record. The grace period will begin when the notice is sent. The policy will remain in effect during the grace period. If the insured should die during the grace period, the death benefit proceeds will be payable to the beneficiary, but the amount paid will be reduced for the monthly deductions which were due as of the date of death and for outstanding policy debt. If the grace period premium payment is not paid by the end of the grace period, the policy will lapse. It will have no value and no benefits will be payable. I. Reinstatement of a Policy Terminated for Insufficient Values The policy may be reinstated within five years after lapse and before the maturity date, subject to compliance with certain conditions, including a necessary premium payment and submission of satisfactory evidence of insurability. J. Repayment of a Loan An owner may repay all or part of his/her policy debt at any time while the insured person is living and the policy is in force. Loan repayments must be sent to the home office and will be credited as of the date received. The owner may instruct Security Life that a specific unscheduled payment is to be applied as a loan repayment. When a loan repayment is made, account value in the loan division in an amount equal to the repayment, is transferred from the loan division to the investment options according to the owner's current net premium allocation instructions. 7 K. Policy Riders Rider benefits may be available to be added to the policy. Monthly charges for the rider will be deducted from the account value as part of the monthly deductions. The only rider available is the Adjustable Term Insurance Rider. Additional rules and limits apply to the rider benefits and are set forth in the rider. II. TRANSFERS AMONG INVESTMENT OPTIONS Several investment options of the Separate Account are available for allocation of net premiums paid, subject to certain limitations set forth in the policy. Each invests in shares or units of an underlying portfolio. Currently available investment options invest in portfolios of AIM Variable Insurance Funds, Inc., The Alger American Fund, Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II, the GCG Trust, INVESCO Variable Investment Funds, Inc., Neuberger Berman Advisors Management Trust, Van Eck Worldwide Insurance Trust and to portfolios of Merrill Lynch Asset Management, L.P. All Funds are registered under the Investment Company Act of 1940 as open-end management investment companies. Additional funds may be made available in the future. After the free-look period and prior to the maturity date, the owner may transfer all or part of the account value from the investment options to other investment options or to the guaranteed interest division. An amount may be transferred from the guaranteed interest division to the variable investment options, subject to some restrictions. The minimum transfer amount is the lesser of $100 or the entire amount in that investment option. A transfer request that would reduce the amount in an investment option below $100 will be treated as a transfer request for the entire amount. Transfers from the guaranteed interest division are permitted only within the first 30 days of a policy year. Transfer requests received within 30 days prior to a policy anniversary will be processed on the policy anniversary. Such transfers are limited in amount to the greatest of: 25% of the balance in the guaranteed interest division on the policy anniversary; the total withdrawn in the prior policy year; or $100.00. With the exception of the Right to Exchange (described below), Security Life reserves the right to limit the number or frequency of transfers permitted in the future. Security Life will make the transfer as of the end of the valuation period during which such transfer is received by Security Life. Currently, there is a limit on the number (12) of free transfers that can be made between investment options in a policy year. Currently, Security Life assesses an excess transfer charge of $10 for each transfer in excess of the first twelve transfers during a policy year. The excess transfer charge will be deducted from the investment option from which the requested transfer is being made. Transfer requests will be accepted by telephone, provided the appropriate authorization has been provided to Security Life. Security Life reserves the right to suspend telephone transfer privileges 8 at any time, for any reason, if Security Life deems such suspension to be in the best interests of owners. Transfers may be effected pursuant to the dollar cost averaging or automatic rebalancing feature if elected by the owner as described in the current prospectus (without charge). During the first twenty-four policy months following the policy date, and within sixty days of the later of notification of a change in the investment policy of the separate account or the effective date of such change, the owner may exercise a one-time Right to Exchange the policy by requesting that all of the variable account value be transferred to the guaranteed interest division. Exercise of the Right to Exchange is not subject to the excess transfer charge. Following the exercise of the Right to Exchange, premium may not be allocated to the variable account, and transfers of account value to the variable account will not be permitted. The other terms and conditions of the policy will continue to apply. III. REDEMPTION PROCEDURES, SURRENDER AND RELATED TRANSACTIONS A. Surrender for Cash Surrender Value An owner may surrender the policy at any time for its cash surrender value by submitting notice to the home office. Security Life may require return of the policy. A surrender request will be processed as of the valuation date the surrender notice and all required documents are received. Payment generally will be made within seven calendar days. An owner's policy will terminate and cease to be in force if it is surrendered. It cannot be reinstated later. B. Death Claims The death benefit proceeds are equal to the sum of the base death benefit for each coverage segment under the death benefit option selected, calculated on the date of the insured's death, plus rider benefits, minus outstanding policy debt, minus unpaid monthly deductions incurred prior to the date of death. If the insured's age or sex has been misstated in the application for the policy or in an application for supplemental or rider benefits, and if the misstatement becomes known after the death of the insured person, then the death benefit under the policy or such supplemental or rider benefits will be that which the cost of insurance charge which was deducted from the account value on the last monthly processing date prior to the death of the insured would have purchased for the correct sex and age. Security Life will pay interest at the rate declared by us or at a higher rate required by law. Security Life will usually pay the death benefit proceeds to the beneficiary within seven days after receipt at its home office of due proof of death of the insured and all other requirements necessary to make payment. If the payment of the death benefit of a policy is contested, payment of proceeds may be delayed. 9 The death benefit payable depends on the death benefit option in effect on the date of death. Subject to certain conditions, owners may change the death benefit option. Under Option 1, the base death benefit is the greater of the specified amount, which includes the account value or the applicable percentage of account value on the date of the insured's death. Under Option 2, the base death benefit is the greater of the specified amount plus the account value on the date of death, or the applicable percentage of the account value on the date of the insured's death. Under Option 3, the base death benefit is the greater of the stated death benefit plus the sum of all premiums received minus partial withdrawals, or the account value multiplied by the applicable percentage of the account value on the date of the insured's death. The "applicable percentage" is the appropriate factor from the Definition of Life Insurance factors shown in the policy's appendix A. A table showing the applicable percentages for attained ages 0 to 95 is set forth in the policy. On or after one year from the policy date, the owner may change the death benefit option on the policy, by notice to Security Life, subject to the following rules. A change in the Death Benefit Option may be requested at least one day prior to a policy anniversary. After the change, the specified death benefit amount must still comply with the minimum to issue a policy. The effective date of the change will be the next monthly processing date following the day that Security life approves the request. Security Life may require satisfactory evidence of insurability for some changes. An owner may change from death benefit option 1 to option 2, from option 2 to option 1 or from option 3 to option 1. NO CHANGE FROM DEATH BENEFIT OPTION 1 OR 2 TO OPTION 3, OR OPTION 3 TO OPTION 2 IS PERMITTED. When a change from Option 1 to Option 2 is made, the specified death benefit amount after the change is effected will be the specified death benefit amount before the change minus the account value on the effective date of the change. When a change from Option 2 to Option 1 is made, the specified death benefit amount after the change will be the specified death benefit amount before the change plus the account value on the effective date of the change. When a change from Option 3 to Option 1 is made, the specified amount will be the stated death benefit before the change plus the sum of premiums received minus partial withdrawals taken as of the effective date of the change. C. Policy Loan After the first monthly processing date and while the insured is living, provided the policy is not in the grace period, the owner may borrow against the policy by submitting a request to the home office. The minimum amount of a loan is $100. The maximum loan amount is the cash surrender value less monthly deductions to the next policy anniversary or 13 monthly deductions if the loan request is received within 30 days prior to a policy anniversary. Maximum loan amounts may be different if required by state law. 10 An outstanding loan reduces the amount available for a new loan. A loan is processed as of the date the loan request is approved. Loan proceeds generally will be sent to the owner within seven calendar days. When a policy loan is made, an amount sufficient to secure the loan is transferred out of the investment options and into the policy's loan division. Thus, a loan will have no immediate effect on the account value, but other policy values, such as the cash surrender value and the death benefit proceeds, will be reduced immediately by the amount borrowed. This transfer is made from the account value in each investment option in proportion to the account value in each on the date of the loan, unless the owner specifies that transfers be made from a specific investment option. An amount equal to due and unpaid loan interest which exceeds interest credited to the loan division will be transferred to the loan division on each policy anniversary. Such interest will be transferred from each investment option in the same proportion that account value in each bears to the total unloaned account value. The loan account will be credited with interest at an effective annual rate of not less than the annual loan interest rate of 3%. Loan interest accrues daily at a compound annual interest rate of 3.25%. Interest is due in arrears on each policy anniversary. Outstanding loan amounts (including unpaid interest added to the loan) plus accrued interest not yet due equals the total policy debt. D. Partial Withdrawals An owner may make partial cash surrenders (known as partial withdrawals) under the policy at any time after the first policy anniversary. An owner must submit a request to the home office. Each partial withdrawal must be at least $100. The maximum partial withdrawal is the amount which will leave $500 as the net cash surrender value. When a partial withdrawal is taken, the amount of the withdrawal plus a service fee is deducted from the account value. This service fee is 2% of the amount of the withdrawal, up to a maximum fee of $25. As of the date Security Life processes the partial withdrawal, the cash value will be reduced by the partial withdrawal amount. Unless the owner requests that a partial cash surrender be deducted from specified investment options, it will be deducted from the investment options on a pro-rata basis in proportion to the account value in each. If death benefit Option 1 is in effect, Security life may reduce the specified death benefit amount. Security Life may reject a partial withdrawal request if it would reduce the specified death benefit amount below the minimum amount required to issue the policy, or if the partial withdrawal would cause the policy to fail to qualify as a life insurance contract under applicable tax laws, as interpreted by Security Life. Partial withdrawals will be processed as of the valuation date the request is received by Security Life, and generally will be paid within seven calendar days. 11 E. Monthly Charges On each monthly processing date, Security Life will deduct from the account value the monthly deductions due, commencing as of the policy date. An owner's policy date is the date used to determine the applicable monthly processing date. The monthly deduction consists of (1) cost of insurance charges, (2) the monthly administrative charge, (3) mortality and expense charge, and (4) charges for rider benefits. The monthly deduction is deducted from the investment options, including the guaranteed interest division pro rata based on the account value in each investment option, unless the owner has selected a designated deduction investment option for the policy. F. Continuation of Coverage The maturity date is generally the insured's 100th birthday, and is shown in the policy. At the policy's maturity date, the owner may surrender the policy for its net cash surrender value. Or, he/she may allow insurance coverage to continue under the continuation of coverage feature. If the policy is in effect and not surrendered, the target death benefit, which includes term rider coverage, becomes the specified death benefit amount. All riders are terminated. Policies with death benefit options 2 or 3 become policies with death benefit option 1. A one-time fee of $200 is deducted to cover all future costs of the policy and the account value is transferred into the Guaranteed Interest Division. No further premium payments can be made, however, loan and interest payments are accepted. All variable investment features terminate. Loans and partial withdrawals may be taken. The policy will continue until the death of the insured person, so long as it does not lapse. G. Change of Insured The owner of the policy may choose, at any time after issue, to change the insured person under the policy. There is no fee for this change. However, the new insured must be insurable under Security Life's normal rules of underwriting. The account value will be moved to a new policy number and the new insured. Charges and fees under the new policy may change based on the new insured. At the time of the change, target premium and surrender charges are calculated under both policies. If the surrender charge on the new policy is higher, no surrender charge is deducted at the time of the change. If the surrender charge on the new policy is lower, a surrender charge in the amount of the difference (between old and new policy) is deducted. The resulting account value, less tax charges as described in the prospectus, is transferred into the new policy. No initial sales charge is deducted on the change; but the new policy is subject to all applicable charges running from its policy date and for all new premium payments received. If there is a policy loan outstanding, it is transferred to the new policy. H. Settlement Options 12 During the insured's lifetime, the owner may elect that the beneficiary receive the death proceeds other than in one sum. If this election has not been made, the beneficiary may do so within 60 days after the insured person's death. The owner may also elect to take the net cash surrender value under one of these options. Option I: Payouts for a Designated Period: Payouts will be made in 1, 2, 4 or 12 installments per year as elected for a designated period, which may be 5 to 30 years. The installment dollar amounts will be equal except for any excess interest. The amount of the first monthly payout for each $1,000 of account value applied is shown in Settlement Option Table I in the policy. Option II: Life Income with Payouts Guaranteed for a Designated Period: payouts will be made in 1, 2, 4 or 12 installments per year throughout the payee's lifetime, or if longer, for a period of 5, 10, 15, or 20 years as elected. The installment dollar amounts will be equal except for any excess interest. The amount of the first monthly payout for each $1,000 of account value applied is shown in Settlement Option Table II in the policy. This option is not available for ages not shown in this Table. Option III: Hold at Interest: Amounts may be left on deposit with us to be paid upon the death of the payee or at any earlier date elected. Interest on any unpaid balance will be at the rate declared by us or at any higher rate required by law. Interest may be accumulated or paid in 1, 2, 4 or 12 installments per year, as elected. Money may not be left on deposit for more than 30 years. Option IV: Payouts of a Designated Amount: Payouts will be made until proceeds, together with interest, which will be at the rate declared by us or at any higher rate required by law, are exhausted. Payouts will be made in 1, 2, 4 or 12 equal installments per year, as elected. Option V: Other: The owner may ask us to apply the money under any other option that we make available at the time the benefit is paid. Payments under these options are not affected by the investment experience of any division of our variable account. Instead, interest accrues pursuant to the options chosen. Payment options will also be subject to our rules at the time of selection. These alternate payment options are available only if the proceeds applied are $2,000 or more and a periodic payment will be at least $20. The beneficiary or any other person who is entitled to receive payment may name a successor to receive any amount that we would otherwise pay to that person's estate if that person died. The person who is entitled to receive payment may change the successor at any time. We must approve an arrangement that involves a payee who is not a natural person (for example, a corporation), or a payee who is a fiduciary. Also, the details of all arrangements 13 will be subject to our rules at the time the arrangements take effect. This includes rules on the minimum amount we will pay under an option, minimum amounts for installment payments, withdrawal or commutation rights (i.e., the rights to receive payments over time, for which we may offer a lump sum payment), the naming of people who are entitled to receive payment and their successors, and the ways of proving age and survival. 14 -----END PRIVACY-ENHANCED MESSAGE-----