-----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, T2mae/wgSMrv5lI90WYwhnY2copM9DXzkBqW/wj561ir4jD8UZPvSdyLb9fDr5A7 SGhv3UForIHmnQxpOfb+cw== 0000917677-00-000046.txt : 20000428 0000917677-00-000046.hdr.sgml : 20000428 ACCESSION NUMBER: 0000917677-00-000046 CONFORMED SUBMISSION TYPE: S-6/A PUBLIC DOCUMENT COUNT: 7 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: 333-34404 FILM NUMBER: 610900 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 ED PROSPECTUS + As filed with the Securities and Exchange Commission on April 27, 2000 Registration No. 333-34404 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: Estate Designer 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. 333-34404) 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, Deductions and Refunds; 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, Deductions and Refunds; and Group or Sponsored Arrangements, or Corporate Purchasers ii Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 14, 15 Policy Summary; Free Look Period; 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; Persistency Refund 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 ESTATE DESIGNER A FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY issued by SECURITY LIFE OF DENVER INSURANCE COMPANY AND SECURITY LIFE SEPARATE ACCOUNT L1 Consider carefully the policy charges, deductions, and refunds beginning on page 42 in this prospectus. You should read this prospectus and keep it for future reference. A prospectus for each underlying investment portfolio must accompany and should be read together with this prospectus. This policy is not available in all jurisdictions. This policy is not offered in any jurisdiction where this type of offering is not legal. Depending on the state where it is issued, policy features may vary. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. We offer other products to insure the lives of two people which may or may not better match your needs and interests. Replacing your existing life insurance policy(ies) with this policy may not be beneficial to you. YOUR POLICY o is a flexible premium variable joint and survivor universal life insurance policy; o is issued on two lives on whom insurance coverage may continue, in whole or in part, until both have died; o is issued by Security Life of Denver Insurance Company; o is guaranteed not to lapse during the first five policy years if you meet certain requirements; and o is returnable by you during the free look period if you are not satisfied. YOUR PREMIUM PAYMENTS o are flexible, so the premium amount and frequency may vary; o are allocated to variable investment options and the guaranteed interest division, based on your instructions; o are invested in shares of the underlying investment portfolios under each variable investment option; and o can be invested in as many as eighteen investment options over the policy's lifetime. YOUR ACCOUNT VALUE o is the sum of your holdings in the variable division, the guaranteed interest division and the loan division; o has no guaranteed minimum value under the variable division. The value varies with the value of the underlying investment portfolio; o has a minimum guaranteed rate of return for amounts in the guaranteed interest division; and o is subject to specified expenses and charges. DEATH PROCEEDS o are paid if the policy is in force at the death of the second of the two insured people; o are equal to the death benefit minus an outstanding policy loan, accrued loan interest and unpaid charges incurred before the second insured person dies; o are calculated under your choice of options; * Option 1- a fixed minimum death benefit; * Option 2- a stated death benefit plus your account value; * Option 3- a stated death benefit plus the sum of the premiums we receive minus partial withdrawals; and o are generally not federally income taxed if your policy continues to meet the federal income tax definition of life insurance. NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS LIFE INSURANCE POLICY IS NOT A BANK DEPOSIT OR OBLIGATION, FEDERALLY INSURED OR BACKED BY ANY BANK OR GOVERNMENT AGENCY. DATE OF PROSPECTUS MAY 1, 2000 ISSUED BY: Security Life of Denver UNDERWRITTEN BY: ING America Equities, Inc. Insurance Company 1290 Broadway ING Security Life Center Denver, CO 80203-5699 1290 Broadway (303) 860-2000 Denver, CO 80203-5699 (800) 525-9852 THROUGH ITS: Security Life Separate Account L1 ADMINISTERED BY: Customer Service Center P.O. Box 173888 Denver, CO 80217-3888 (800) 848-6362 - -------------------------------------------------------------------------------- Estate Designer 2 TABLE OF CONTENTS POLICY SUMMARY.................................................................4 Your Policy..............................................................4 Free Look Period.........................................................4 Premium Payments.........................................................4 Charges and Deductions...................................................4 Variable Division........................................................5 Fees and Expenses of the Investment Portfolios...........................5 Guaranteed Interest Division.............................................7 Policy Values............................................................7 Transfers of Account Value...............................................7 Special Policy Features..................................................7 Policy Modification, Termination and Continuation Features............................................................8 Death Benefits...........................................................9 Tax Considerations.......................................................9 SECURITY LIFE, THE SEPARATE ACCOUNT AND THE INVESTMENT OPTIONS..............................................11 Security Life of Denver Insurance Company...............................11 Security Life Separate Account L1.......................................11 Investment Portfolio Objectives.........................................12 Guaranteed Interest Division............................................17 Maximum Number of Investment Options....................................17 DETAILED INFORMATION ABOUT THE POLICY..................................................................17 Applying for a Policy...................................................17 Temporary Insurance.....................................................18 Policy Issuance.........................................................18 Premiums................................................................19 Premium Payments Affect Your Coverage...................................20 Death Benefits..........................................................21 Riders..................................................................25 Special Features........................................................27 Policy Values...........................................................29 Transfers of Account Value..............................................30 Dollar Cost Averaging...................................................31 Automatic Rebalancing...................................................32 Policy Loans............................................................33 Partial Withdrawals.....................................................34 Lapse...................................................................35 Reinstatement...........................................................36 Surrender...............................................................36 General Policy Provisions...............................................36 Free Look Period...................................................36 Your Policy........................................................37 Age ..............................................................37 Ownership..........................................................37 Beneficiary(ies)...................................................37 Collateral Assignment..............................................38 Incontestability...................................................38 Misstatements of Age or Gender.....................................38 Suicide............................................................38 Transaction Processing.............................................38 Telephone Privileges...............................................39 Non-participation..................................................39 Distribution of the Policies.......................................39 Advertising Practices and Sales Literature .............................................................40 Settlement Provisions..............................................40 Administrative Information About the Policy.............................40 CHARGES, DEDUCTIONS AND REFUNDS...............................................42 Deductions from Premiums................................................42 Daily Deductions from the Separate Account..............................43 Monthly Deductions from Account Value...................................43 Policy Transaction Fees.................................................45 Persistency Refund......................................................45 Refund of Sales Charge..................................................46 Group or Sponsored Arrangements, or Corporate Purchasers.........................................................46 TAX CONSIDERATIONS............................................................47 Tax Status of the Policy................................................47 Diversification Requirements............................................47 Tax Treatment of Policy Death Benefits..................................48 Modified Endowment Contracts............................................48 Multiple Policies.......................................................48 Distributions Other than Death Benefits from Modified Endowment Contracts.......................................48 Distributions Other than Death Benefits from Policies That Are Not Modified Endowment Contracts..........................................................49 Investment in the Policy................................................49 Policy Loans............................................................49 Section 1035 Exchanges..................................................49 Tax-exempt Policy Owners................................................49 Possible Tax Law Changes................................................49 Changes to Comply with the Law..........................................50 Other...................................................................50 ILLUSTRATIONS.................................................................52 ADDITIONAL INFORMATION........................................................56 Directors and Officers..................................................56 Regulation..............................................................57 Legal Matters...........................................................57 Legal Proceedings.......................................................57 Experts.................................................................57 Registration Statement..................................................57 INDEX OF SPECIAL TERMS........................................................58 FINANCIAL STATEMENTS..........................................................59 APPENDIX A...................................................................160 APPENDIX B...................................................................161 - -------------------------------------------------------------------------------- Estate Designer 3 POLICY SUMMARY YOUR POLICY Your policy provides life insurance protection on the lives of two insured people and insurance coverage may continue until both have died. The policy includes the basic policy, applications and riders or endorsements. As long as the policy remains in force, we pay a death benefit after the death of the second of the insured people. While your policy is in force, you may access a portion of your policy value by taking loans or partial withdrawals. You may surrender your policy for its net cash surrender value. At the policy anniversary nearest the younger insured person's 100th birthday you may surrender the policy or continue it under the continuation of coverage option. SEE CONTINUATION OF COVERAGE, PAGE 28. Life insurance is not a short-term investment. You should evaluate your need for life insurance coverage and this policy's long-term investment potential and risks before purchasing a policy. FREE LOOK PERIOD Within limits as specified by law, you have the right to examine your policy and return it for a refund of all premium payments we have received or the account value, if you are not satisfied for any reason. The policy is then void. SEE FREE LOOK PERIOD, PAGE 36. PREMIUM PAYMENTS The policy is a flexible premium policy because the amount and frequency of the premium payments you make may vary within limits. You must make premium payments: o for us to issue your policy; o sufficient to keep your policy in force; and o as necessary to continue certain benefits. Depending on the amount of premium you choose to pay, it may not be enough to keep your policy or certain riders in force. SEE PREMIUMS, PAGE 19. ALLOCATION OF NET PREMIUMS This policy has premium-based charges which are subtracted from your payments. We add the balance, or net premium, to your policy based on your investment instructions. You may allocate the net premium among one or more variable investment options and the guaranteed interest division. SEE ALLOCATION OF NET PREMIUMS, PAGE 20. CHARGES AND DEDUCTIONS All charges presented here are current unless stated otherwise. - -------- This summary highlights some important points about your policy. The policy is more fully described in the attached, complete prospectus. Please read it carefully. "We," "us," "our" and the "company" refer to Security Life of Denver Insurance Company. "You" and "your" refer to the policy owner. The owner is the individual, entity, partnership, representative or party who may exercise all rights over the policy and receive the policy benefits during the insured 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. - -------------------------------------------------------------------------------- Estate Designer 4 CHARGES Other Than Investment Portfolio Annual Expenses (SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 42)
- -------------------------------------- ------------------------------------ ---------------------------------------- CHARGE WHEN CHARGE IS DEDUCTED AMOUNT DEDUCTED - -------------------------------------- ------------------------------------ ---------------------------------------- Tax Charges Each premium payment received 2.5% for state and local taxes; 1.5% for estimated federal income tax treatment of deferred acquisition costs. - -------------------------------------- ------------------------------------ ---------------------------------------- Sales Charge Each premium payment received Percentage of policy or segment premium up to target premium and above target premium: year 1 up to target 8%, above target 4%; year 2-7 up to target 8%, above target 1.5%; year 8+, 1.5% of all premium received. - -------------------------------------- ------------------------------------ ---------------------------------------- Mortality & Expense Risk Charge Daily, included in unit value 0.002055% daily (0.75% annually) - -------------------------------------- ------------------------------------ ---------------------------------------- Policy Charge Monthly from account value $15 per month for first ten policy years and $9 per month thereafter. - -------------------------------------- ------------------------------------ ---------------------------------------- Monthly Administrative Charge Monthly from account value $0.06 per $1,000 death benefit for the first ten policy years, $0.01 per $1,000 death benefit for each policy year. Applies to first $2,500,000 of death benefit thereafter. These maximum rates are guaranteed. - -------------------------------------- ------------------------------------ ---------------------------------------- Cost of Insurance Charge Monthly from account value Varies based on current cost of insurance rates and net amount at risk. - -------------------------------------- ------------------------------------ ---------------------------------------- Rider Charges Monthly from account value Varies depending on the rider benefits you choose. - -------------------------------------- ------------------------------------ ---------------------------------------- Partial Withdrawal Fee Transaction date from account value Up to $25. - -------------------------------------- ------------------------------------ ---------------------------------------- Transfer Fee Transaction date from account value Twelve free transfers per policy year, then $25 per transfer. - -------------------------------------- ------------------------------------ ---------------------------------------- Illustration Fee Transaction date from account value One free illustration per policy year, then a $25 fee may apply. - -------------------------------------- ------------------------------------ ---------------------------------------- Premium Allocation Change Charge Transaction date from account value Twelve free premium allocation changes per policy year, then $25 per change. - -------------------------------------- ------------------------------------ ---------------------------------------- Continuation of Coverage Policy anniversary nearest younger One-time $400 administrative fee. Administrative Fee insured person's 100th birthday from account value - -------------------------------------- ------------------------------------ ----------------------------------------
VARIABLE DIVISION If you invest in the variable investment options, you may make or lose money depending on market conditions. The variable investment options are described in the prospectuses for the underlying investment portfolios. Each investment portfolio has its own investment objective. SEE INVESTMENT PORTFOLIO OBJECTIVES, PAGE 12. FEES AND EXPENSES OF THE INVESTMENT - -------------------------------------------------------------------------------- Estate Designer 5 PORTFOLIOS The separate account purchases shares of the underlying investment portfolios at net asset value. This price reflects investment management fees and other direct expenses deducted from the portfolio assets. This table describes these fees and expenses in gross amounts and net amounts after waiver or reimbursement of fees or expenses by the investment portfolio advisers. Waivers or reimbursements are voluntary and subject to change. The portfolio expense information was provided to us by the portfolios and we have not independently verified this information. These expenses are not direct charges against variable division assets or reductions from contract values; rather these expenses are included in computing each underlying portfolio's net asset value, which is the share price used to calculate the unit values of the variable investment options. For a more complete description of the portfolios' costs and expenses, see the prospectuses for the portfolios. INVESTMENT PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)
Fees and Investment Total Expenses Total Net Management Other Portfolio Waived or Portfolio Portfolio Fees Expenses Expenses Reimbursed Expenses --------- ---- -------- -------- ---------- -------- AIM VARIABLE INSURANCE FUNDS, INC. AIM V.I. Capital Appreciation Fund 0.62% 0.11% 0.73% NA 0.73% AIM V.I. Government Securities Fund 0.50% 0.40%/1/ 0.90% NA 0.90% THE ALGER AMERICAN FUND Alger American Growth Portfolio 0.75% 0.04% 0.79% NA 0.79% Alger American Leveraged AllCap Portfolio 0.85% 0.08%/2/ 0.93% NA 0.93% Alger American MidCap Growth Portfolio 0.80% 0.05% 0.85% NA 0.85% Alger American Small Capitalization Portfolio 0.85% 0.05% 0.90% NA 0.90% FIDELITY VARIABLE INSURANCE PRODUCTS FUND VIP Growth Portfolio 0.58% 0.08% 0.66% NA 0.66%/3/ VIP Money Market Portfolio 0.18% 0.09% 0.27% NA 0.27% VIP Overseas Portfolio 0.73% 0.18% 0.91% NA 0.91%/3/ FIDELITY VARIABLE INSURANCE PRODUCTS FUND II VIP II Asset Manager Portfolio 0.53% 0.10% 0.63% NA 0.63%/3/ VIP II Index 500 Portfolio 0.24% 0.10% 0.34% 0.06% 0.28% INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund /4/ 0.75% 0.44% 1.19% 0.02% 1.17% INVESCO VIF-High Yield Fund /5/ 0.60% 0.48% 1.08% 0.01% 1.07% INVESCO VIF-Small Company Growth Fund /6/ 0.75% 3.35% 4.10% 2.39% 1.71% INVESCO VIF-Total Return Fund/7/ 0.75% 0.55% 1.30% 0.13% 1.17% INVESCO VIF-Utilities Fund /8/ 0.60% 1.08% 1.68% 0.47% 1.21% NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Growth Portfolio 0.84% 0.08% 0.92% NA 0.92% Limited Maturity Bond Portfolio 0.65% 0.11% 0.76% NA 0.76% Partners Portfolio 0.80% 0.07% 0.87% NA 0.87% VAN ECK WORLDWIDE INSURANCE TRUST Worldwide Bond Fund 1.00% 0.22% 1.22% NA 1.22% Worldwide Emerging Markets Fund 1.00% 0.54% 1.54% 0.20%/9/ 1.34% Worldwide Hard Assets Fund 1.00% 0.26% 1.26% NA 1.26% Worldwide Real Estate Fund 1.00% 2.23% 3.23% 1.79%/10/ 1.44%
- --------------------------- - -------------------------------------------------------------------------------- Estate Designer 6 /1/ Included in AIM V.I. Government Securities Fund's "Other Expenses" is 0.10% of interest expense. /2/ Included in Alger American Leveraged AllCap portfolio's "Other Expenses" is 0.01% of interest expense. /3/ Fidelity absorbed a portion of the portfolio and custodian expenses for some portfolios with part of the brokerage commissions and un-invested cash balances. After this absorption, "Total Portfolio Expenses" are 0.65% for Growth portfolio, 0.87% for Overseas portfolio and 0.62% for Asset Manager portfolio. /4/ INVESCO absorbed a portion of VIF-Equity Income Fund's "Other Expenses" and "Total Portfolio Expenses." After this absorption, these expenses are 0.42% and 1.17% respectively. /5/ INVESCO absorbed a portion of VIF-High Yield Fund's "Other Expenses" and "Total Portfolio Expenses." After this absorption, these expenses are 0.47% and 1.07% respectively. /6/ INVESCO absorbed a portion of VIF-Small Company Growth Fund's "Other Expenses" and "Total Portfolio Expenses." After this absorption, these expenses are 0.96% and 1.71%, respectively. /7/ INVESCO absorbed a portion of VIF-Total Return Fund's "Other Expenses" and "Total Portfolio Expenses." After this absorption, these expenses are 0.42% and 1.17%, respectively. /8/ INVESCO absorbed a portion of VIF-Utilities Fund's "Other Expenses" and "Total Portfolio Expenses." After this absorption, these expenses are 0.61% and 1.21%, respectively. /9/ Van Eck Associates Corporation absorbed expenses exceeding 1.30% of the Fund's average daily assets, effective May 13, 1999. /10/ Van Eck Associates Corporation absorbed certain expenses exceeding 1.50%. The fund's expenses were also reduced by a fee arrangement based on cash balances left on deposit with the custodian and a directed brokerage arrangement where the fund directs certain portfolio trades to a broker that, in turn, pays a potion of the fund's expenses. GUARANTEED INTEREST DIVISION The guaranteed interest division guarantees principal and is part of our general account. Any amount you direct into the guaranteed interest division is credited with interest at a fixed rate. SEE GUARANTEED INTEREST DIVISION, PAGE 17. POLICY VALUES Your policy account value is the amount you have in the guaranteed interest division, plus the amount you have in each variable investment option. If you have an outstanding policy loan, your account value includes the amount in the loan division. SEE POLICY VALUES, PAGE 29 AND PARTIAL WITHDRAWALS, PAGE 34. YOUR ACCOUNT VALUE IN THE VARIABLE DIVISION Accumulation units are the way we measure value in the variable division. Accumulation unit value is the value of one unit of a variable investment option on a valuation date. Each variable investment option has a different accumulation unit value. SEE DETERMINING VALUES IN THE VARIABLE DIVISION, PAGE 29. The accumulation unit value for each variable investment option reflects the investment performance of the underlying investment portfolio during the valuation period. Each accumulation unit value reflects asset-based charges under the policy and the expenses of the investment portfolios. SEE DETERMINING VALUES IN THE VARIABLE DIVISION, PAGE 29 AND HOW WE CALCULATE ACCUMULATION UNIT VALUES, PAGE 30. TRANSFERS OF ACCOUNT VALUE With some limitations, you may make twelve free transfers among the variable investment options or to the guaranteed interest division each policy year. We charge $25 for each transfer over twelve in a policy year. There are restrictions on transfers from the guaranteed interest division. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 30 AND POLICY TRANSACTION FEES, PAGE 45. - -------------------------------------------------------------------------------- Estate Designer 7 SPECIAL POLICY FEATURES DESIGNATED DEDUCTION INVESTMENT OPTION You may designate one investment option from which we will deduct all of your monthly deductions. SEE DESIGNATED DEDUCTION INVESTMENT OPTION, PAGE 27. RIDERS You may attach additional benefits to your policy by rider. In most cases, we deduct a monthly charge from your account value for these benefits. SEE RIDERS, PAGE 25. 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 31. 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 32. LOANS You may take loans against your policy's net account value. We charge an annual loan interest rate of 3.75%. We credit an annual interest rate of 3% on amounts held in the loan division as collateral for your loan. Beginning in your eleventh policy year, where permitted by law, we may include amounts in the loan division for calculation of your policy's persistency refund. SEE POLICY LOANS, PAGE 33. Loans may have tax consequences. SEE TAX CONSIDERATIONS, PAGE 47. PARTIAL WITHDRAWALS You may withdraw part of your net account value any time after your first policy anniversary. You may make only one partial withdrawal per policy year. Partial withdrawals may reduce your policy's death benefit and will reduce your account value. SEE PARTIAL WITHDRAWALS, PAGE 34. Partial withdrawals may have tax consequences. SEE TAX CONSIDERATIONS, PAGE 47. PERSISTENCY REFUND Beginning in your eleventh policy year, where permitted by law, we add a persistency refund to your account value. SEE PERSISTENCY REFUND, PAGE 45. REFUND OF SALES CHARGE We guarantee that if you surrender your policy within the first two policy years and it has not lapsed, we will refund some of the sales charge we previously deducted from the premiums we received in your first policy year. SEE REFUND OF SALES CHARGE, PAGE 46. POLICY MODIFICATION, TERMINATION AND CONTINUATION FEATURES RIGHT TO EXCHANGE POLICY For 24 months after the policy date you may exchange your policy for a guaranteed policy, unless law requires differently. There is no charge for this exchange. SEE RIGHT TO EXCHANGE POLICY, PAGE 28. POLICY SPLIT OPTION Under certain circumstances, you may split your policy into two separate life insurance policies each insuring the life of one insured person. This split may occur upon divorce between the two insured people, business dissolution, or a possible adverse future change in the tax law, unless law requires otherwise. The policy split option is free. SEE POLICY SPLIT OPTION, PAGE 27. SURRENDER You may surrender your policy for its net cash surrender value at any time before the death of both of the insured people. All insurance coverage ends on the date we receive your request. SEE SURRENDER, PAGE 36. LAPSE In general, insurance coverage continues as long as your net account value is enough to pay the monthly deductions. However, your policy and its riders are - -------------------------------------------------------------------------------- Estate Designer 8 guaranteed not to lapse during the first five years of your policy if the conditions of the special continuation period have been met. SEE LAPSE, PAGE 35 AND SPECIAL CONTINUATION PERIOD, PAGE 20. REINSTATEMENT You may reinstate your policy and its riders within five years of its lapse if you still own the policy and the insured people are still living and meet our underwriting requirements. You will need to give proof of insurability. You will also need to pay required reinstatement premiums. If you had a policy loan existing when coverage ended, we will reinstate it with accrued loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 36. POLICY MATURITY If at least one of the insured people is still living on the maturity date or the policy anniversary nearest the younger insured person's 100th birthday and you do not choose to let the continuation of coverage feature become effective, you must surrender your policy. We will pay the net account value. Your policy then ends. SEE POLICY MATURITY, PAGE 28. CONTINUATION OF COVERAGE At the policy anniversary nearest the younger insured person's 100th birthday, you may choose to let the continuation of coverage feature become effective. If you do so, we will deduct a one-time administrative fee of $400 and keep your policy in force. SEE CONTINUATION OF COVERAGE, PAGE 28. DEATH BENEFITS After the death of both of the insured people, we pay death proceeds to the beneficiary(ies) if your policy is still in force. Based on the death benefit option you have chosen, the base death benefit varies. We generally require a minimum target death benefit of $500,000 to issue your policy. If you have an adjustable term insurance rider, the minimum stated death benefit required is $1,000 so long as the target death benefit is $500,000. SEE APPLYING FOR A POLICY, PAGE 17 AND DEATH BENEFITS, PAGE 21. You may change your death benefit amount while your policy is in force, subject to certain restrictions. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 24. 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 47. Assuming the policy qualifies as a life insurance contract under current federal income tax law, your account value earnings are generally not subject to income tax as long as they remain within your policy. However depending on circumstances, the following events may cause taxable consequences for you: o partial withdrawals; o surrender; or o lapse. In addition, if your policy is a modified endowment contract, a loan against or secured by the policy may cause income taxation. A penalty tax may be imposed on a distribution from a modified endowment contract as well. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 48. 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. - -------------------------------------------------------------------------------- Estate Designer 9 HOW THE POLICY WORKS YOUR PREMIUM Premium Deductions You make a premium ----------------------------> payment o sales charge o tax charges <---------------------------- NET PREMIUM We allocate the net premium to the investment options you choose | | ----------------------------------------- | | \/ \/ GUARANTEED VARIABLE INVESTMENT INVESTMENT PORTFOLIOS The investment INTEREST DIVISION OPTIONS The variable investment manager deducts Amounts you allocate Amounts you allocate are <-- options invest in investment are held in our general account held in our separate account --> investment portfolios ------> management fees | | and other ----------------------------------------- portfolio expenses | | o persistency refund Refunds | o refund of sales ------------>| Monthly Deductions o policy charge charge (if surrendered | ---------------------> o cost of insurance in years 1 - 3) | | charge | | o monthly administrative \/ | charge ACCUMULATED VALUE | o rider charges The total value of your --| policy | | | Separate Account | | Deductions | |---------------------> o mortality and expense \/ | risk charge LOAN DIVISION | Amount set aside to | secure a policy loan | | | Transaction Fees o partial withdrawal fee ---------------------> o transfer fee o illustration fee o premium allocation change charge o continuation of coverage administrative fee
- -------------------------------------------------------------------------------- Estate Designer 10 SECURITY LIFE, THE SEPARATE ACCOUNT AND THE INVESTMENT OPTIONS SECURITY LIFE OF DENVER INSURANCE COMPANY Security Life of Denver Insurance Company (Security Life) is a stock life insurance company organized under the laws of the State of Colorado in 1929. Our headquarters are located at 1290 Broadway, Denver, Colorado 80203-5699. We are admitted to do business in the District of Columbia and all states except New York. At the close of 1999, the company and its consolidated subsidiaries had over $184.2 billion of life insurance in force. As of December 31, 1999 our total assets were over $11.3 billion and our shareholder's equity was over $899 million. We have a complete line of life insurance products, including: o annuities; o individual life; o group life; o pension products; and o market life reinsurance. Security Life is a wholly owned indirect subsidiary of ING Groep, N.V. ("ING"). ING is one of the world's three largest diversified financial services organizations. ING is headquartered in Amsterdam, The Netherlands. It has consolidated assets over $495.0 billion on a Dutch (modified U.S.) generally accepted accounting principles basis, as of December 31, 1999. The principal underwriter and distributor for our policies is ING America Equities, Inc. ING America Equities is a stock corporation organized under the laws of the State of Colorado in 1993. It is a wholly owned subsidiary of Security Life and is registered as a broker-dealer with the SEC and the NASD. ING America Equities, Inc. is located at 1290 Broadway, Denver, Colorado 80203-5699. SECURITY LIFE SEPARATE ACCOUNT L1 SEPARATE ACCOUNT STRUCTURE We established Security Life Separate Account L1 (the separate account) on November 3, 1993, under Colorado's insurance law. It is a unit investment trust, registered with the SEC under the Investment Company Act of 1940. The SEC does not supervise our management of the separate account or Security Life. The separate account is used to support our variable life insurance policies and for other purposes allowed by law and regulation. We keep the separate account assets separate from our general account and other separate accounts. We may offer other variable life insurance contracts with different benefits and charges that invest in the separate account. We do not discuss these contracts in this prospectus. The separate account may invest in other securities not available for the policy described in this prospectus. The company owns all the assets in the separate account. We credit gains to or charge losses against the separate account without regard to performance of other investment accounts. ORDER OF SEPARATE ACCOUNT LIABILITIES Law provides that we may not charge general account liabilities against separate account assets equal to its reserves and other liabilities. This means that if we ever become insolvent, the separate account assets will be used first to pay separate account policy claims. Only if separate account assets remain after these claims have been satisfied can these assets be used to pay other policy owners and creditors. The separate account may have liabilities from assets credited to other variable life policies offered by the separate account. If the assets of the separate account are greater than required reserves and policy liabilities, we may transfer the excess to our general account. INVESTMENT OPTIONS Investment options include the variable and the guaranteed interest divisions, but not the loan division. The separate account has several variable investment options which invest in shares of underlying investment portfolios. This means that the investment performance of a policy depends on the performance of the investment portfolios you choose. Each investment portfolio has its own investment objective. These investment portfolios are not available directly to individual investors. - -------------------------------------------------------------------------------- Estate Designer 11 They are available only as underlying investments for variable annuity and variable life insurance contracts and certain pension accounts. INVESTMENT PORTFOLIOS Each of the investment portfolios is a separate series of an open-end management investment company. The investment company receives investment advice from a registered investment adviser who is not associated with us. The investment portfolios sell shares to separate accounts of insurance companies. These insurance companies may or may not be affiliated with us. This is known as "shared funding." Investment portfolios may sell shares as the underlying investment for both variable annuity and variable life insurance contracts. This process is known as "mixed funding." The investment portfolios may sell shares to certain qualified pension and retirement plans that qualify under Section 401 of the Internal Revenue Code ("IRC"). As a result, a material conflict of interest may arise between insurance companies, owners of different types of contracts and retirement plans or their participants. If there is a material conflict, we will consider what should be done, including removing the investment portfolio from the separate account. There are certain risks with mixed and shared funding, and with selling shares to qualified pension and retirement plans. See the investment portfolios' prospectuses. INVESTMENT PORTFOLIO OBJECTIVES Each investment portfolio has a different investment objective that it tries to achieve by following its own investment strategy. The objectives and policies of each investment portfolio affect its return and its risks. With this prospectus, you must receive the current prospectus for each investment portfolio. We summarize the investment objectives for each investment portfolio here. You should read each investment portfolio prospectus. Certain investment portfolios offered under this policy have investment objectives and policies similar to other funds managed by the portfolio's investment adviser. The investment results of a portfolio may be higher or lower than those of other funds managed by the same adviser. There is no assurance and no representation is made that the investment results of any investment portfolio will be comparable to those of another fund managed by the same investment adviser. Some investment portfolio advisers (or their affiliates) may pay us compensation for servicing, administration or other expenses. The amount of compensation is usually based on the aggregate assets of the investment portfolio from contracts that we issue or administer. Some advisers may pay us more or less than others and our affiliates may pay us significantly more. - -------------------------------------------------------------------------------- Estate Designer 12
- ---------------------------------------------------------------------------------------------------------------------------- INVESTMENT PORTFOLIO OBJECTIVES - ------------------------------------ ------------------------------ -------------------------------------------------------- Variable Investment Option Investment Company/ Adviser/ Investment Objective Manager/ Sub-Adviser - ------------------------------------ ------------------------------ -------------------------------------------------------- AIM V.I. Capital Appreciation Fund Investment Company: Seeks growth of capital through investment in common AIM Variable Insurance Funds stocks. Investment Adviser: A I M Advisors, Inc. - ------------------------------------ ------------------------------ -------------------------------------------------------- AIM V.I. Government Securities Fund Investment Company: Seeks to achieve high current income consistent with AIM Variable Insurance Funds reasonable concern for safety of principal. Investment Adviser: A I M Advisors, Inc. - ------------------------------------ ------------------------------ -------------------------------------------------------- Alger American Growth Portfolio Investment Company: Seeks long-term capital appreciation by focusing on The Alger American Fund growing companies that generally have broad product Investment Adviser: lines, markets, financial resources and depth of Fred Alger Management, Inc. management. Under normal circumstances, the portfolio invests primarily in the equity securities of large companies. The portfolio considers a large company to have a market capitalization of $1 billion or greater. - ------------------------------------ ------------------------------ -------------------------------------------------------- Alger American Leveraged AllCap Investment Company: Seeks long term-term capital appreciation by Portfolio The Alger American Fund investing, under normal circumstances, in the equity Investment Adviser: securities of companies of any size which demonstrate Fred Alger Management, Inc. promising growth potential. The portfolio can leverage, that is, borrow money, up to one-third of its total assets to buy additional securities. By borrowing money, the portfolio has the potential to increase its returns if the increase in the value of the securities purchased exceeds the cost of borrowing, including interest paid on the money borrowed. - ------------------------------------ ------------------------------ -------------------------------------------------------- Alger American MidCap Growth Investment Company: Seeks long-term capital appreciation by focusing on Portfolio The Alger American Fund midsize companies with promising growth potential. Investment Adviser: Under normal circumstances, the portfolio invests Fred Alger Management, Inc. primarily in the equity securities of companies having a market capitalization within the range of companies in the S&P MidCap 400 Index. - ------------------------------------ ------------------------------ -------------------------------------------------------- Alger American Small Seeks long-term capital appreciation by focusing on Capitalization Portfolio Investment Company: small, fast-growing companies that offer innovative The Alger American Fund products, services or technologies to a rapidly Investment Adviser: expanding marketplace. Under normal circumstances, Fred Alger Management, Inc. the portfolio invests primarily in the equity securities of small capitalization companies. A small capitalization company is one that has a market capitalization within the range of the Russell 2000 Growth Index or the S&P SmallCap 600 Index. - ------------------------------------ ------------------------------ -------------------------------------------------------- - -------------------------------------------------------------------------------- Estate Designer 13 - ---------------------------------------------------------------------------------------------------------------------------- INVESTMENT PORTFOLIO OBJECTIVES - ------------------------------------ ------------------------------ -------------------------------------------------------- Variable Investment Option Investment Company/ Adviser/ Investment Objective Manager/ Sub-Adviser - ------------------------------------ ------------------------------ -------------------------------------------------------- VIP Growth Portfolio Investment Company: Fidelity Seeks capital appreciation by investing in common Variable Insurance Products stocks of companies that it believes have Fund above-average growth potential, either domestic or Investment Manager: foreign issuers. Fidelity Management & Research Company - ------------------------------------ ------------------------------ -------------------------------------------------------- VIP Money Market Portfolio Investment Company: Fidelity Seeks as high a level of current income as is Variable Insurance Products consistent with the preservation of capital and Fund liquidity by investing in U.S. dollar-denominated Investment Manager: money market securities, including U.S. Government Fidelity Management & securities and repurchase agreements, and entering Research Company into reverse repurchase agreements. - ------------------------------------ ------------------------------ -------------------------------------------------------- VIP Overseas Portfolio Investment Company: Fidelity Seeks long-term growth of capital by investing at Variable Insurance Products least 65% of total assets in foreign securities. Fund Investment Manager: Fidelity Management & Research Company - ------------------------------------ ------------------------------ -------------------------------------------------------- VIP II Asset Manager Portfolio Investment Company: Fidelity Seeks high total return with reduced risk over the Variable Insurance Products long term by allocating its assets among stocks, Fund II bonds, and short-term instruments. Investment Manager: Fidelity Management & Research Company - ------------------------------------ ------------------------------ -------------------------------------------------------- VIP II Index 500 Portfolio Investment Company: Fidelity Seeks investment results that correspond to the total Variable Insurance Products return of common stocks publicly traded in the United Fund II States as represented by the S&P(R) 500. Investment Manager: Fidelity Management & Research Company Sub-Adviser: Bankers Trust Company - ------------------------------------ ------------------------------ -------------------------------------------------------- VIF-Equity Income Fund Investment Company: INVESCO Seeks high current income, with growth of capital as a Variable Investment Funds, secondary objective by investing at least 65% of its Inc. assets in dividend-paying common and preferred Investment Adviser: stocks. The rest of the fund's assets are invested in INVESCO Funds Group, Inc. debt securities, and lower-grade debt securities. Sub-Adviser: INVESCO Capital Management, Inc. - ------------------------------------ ------------------------------ -------------------------------------------------------- - -------------------------------------------------------------------------------- Estate Designer 14 - ---------------------------------------------------------------------------------------------------------------------------- INVESTMENT PORTFOLIO OBJECTIVES - ------------------------------------ ------------------------------ -------------------------------------------------------- Variable Investment Option Investment Company/ Adviser/ Investment Objective Manager/ Sub-Adviser - ------------------------------------ ------------------------------ -------------------------------------------------------- VIF-High Yield Fund Investment Company: INVESCO Seeks to provide a high level of current income by Variable Investment Funds, investing substantially all of its assets in Inc. lower-rated debt securities and preferred stock, Investment Adviser: including securities issued by foreign companies. INVESCO Funds Group, Inc. Sub-Adviser: INVESCO Capital Management, Inc. - ------------------------------------ ------------------------------ -------------------------------------------------------- VIF-Small Company Growth Fund Investment Company: INVESCO Seeks long-term capital growth by investing at least Variable Investment Funds, 65% of its assets in equity securities of companies Inc. with market capitalizations of $2 billion or less. Investment Adviser: The remainder of the fund's assets can be invested in INVESCO Funds Group, Inc. a wide range of securities that may or may not be Sub-Adviser: issued by small companies. INVESCO Capital Management, Inc. - ------------------------------------ ------------------------------ -------------------------------------------------------- VIF-Total Return Fund Investment Company: INVESCO Seeks to provide high total return through both growth Variable Investment Funds, and current income by investing at least 30% of its Inc. assets in common stocks of companies with a strong Investment Adviser: history of paying regular dividends and 30% of its INVESCO Funds Group, Inc. assets in debt securities. The remaining 40% of the Sub-Adviser: fund is allocated among these and other investments at INVESCO Capital Management, INVESCO's discretion, based upon current business, Inc. economic and market conditions. - ------------------------------------ ------------------------------ -------------------------------------------------------- VIF-Utilities Fund Investment Company: INVESCO Seeks capital appreciation and income by investing at Variable Investment Funds, least 80% of its assets in companies doing business in Inc. the utilities economic sector. The remainder of the Investment Adviser: fund's assets are not required to be invested in the INVESCO Funds Group, Inc. utilities economic sector. Sub-Adviser: INVESCO Capital Management, Inc.. - ------------------------------------ ------------------------------ -------------------------------------------------------- Growth Portfolio Investment Company: Seeks growth of capital by investing mainly in common Neuberger Berman Advisers stock mid-capitalization companies. Management Trust Investment Adviser: Neuberger Berman Management Inc. Sub-Adviser: Neuberger Berman, LLC - ------------------------------------ ------------------------------ -------------------------------------------------------- - -------------------------------------------------------------------------------- Estate Designer 15 - ---------------------------------------------------------------------------------------------------------------------------- INVESTMENT PORTFOLIO OBJECTIVES - ------------------------------------ ------------------------------ -------------------------------------------------------- Variable Investment Option Investment Company/ Adviser/ Investment Objective Manager/ Sub-Adviser - ------------------------------------ ------------------------------ -------------------------------------------------------- Limited Maturity Bond Portfolio Investment Company: Seeks the highest available current income consistent Neuberger Berman Advisers with liquidity and low risk to principal by investing Management Trust mainly in investment-grade bonds and other debt Investment Adviser: securities from U.S. Government and corporate issuers. Neuberger Berman Management Inc. Sub-Adviser: Neuberger Berman, LLC - ------------------------------------ ------------------------------ -------------------------------------------------------- Partners Portfolio Investment Company: Seeks growth of capital by investing mainly in common Neuberger Berman Advisers stock of mid- to large-capitalization companies. Management Trust Investment Adviser: Neuberger Berman Management Inc. Sub-Adviser: Neuberger Berman, LLC - ------------------------------------ ------------------------------ -------------------------------------------------------- Worldwide Bond Fund Investment Company: Seeks high total return--income plus capital Van Eck Worldwide Insurance appreciation--by investing globally, primarily in a Trust variety of debt securities. Investment Adviser and Manager: Van Eck Associates Corporation - ------------------------------------ ------------------------------ -------------------------------------------------------- Worldwide Emerging Markets Fund Investment Company: Seeks long-term capital appreciation by investing in Van Eck Worldwide Insurance equity securities in emerging markets around the world. Trust Investment Adviser and Manager: Van Eck Associates Corporation - ------------------------------------ ------------------------------ -------------------------------------------------------- Worldwide Hard Assets Fund Investment Company: Seeks long-term capital appreciation by investing Van Eck Worldwide Insurance primarily in "hard asset securities." Hard assets Trust include precious metals, natural resources, real Investment Adviser and estate and commodities. Income is a secondary Manager: consideration. Van Eck Associates Corporation - ------------------------------------ ------------------------------ -------------------------------------------------------- Worldwide Real Estate Fund Investment Company: Seeks high total return by investing in equity Van Eck Worldwide Insurance securities of companies that own significant real Trust estate or that principally do business in real estate. Investment Adviser and Manager: Van Eck Associates Corporation - ------------------------------------ ------------------------------ --------------------------------------------------------
- -------------------------------------------------------------------------------- Estate Designer 16 GUARANTEED INTEREST DIVISION You may allocate all or a part of your net premium and transfer your net account value into the guaranteed interest division. The guaranteed interest division guarantees principal and is part of our general account. It pays interest at a fixed rate that we declare. The general account contains all of our assets other than those held in the separate account (variable investment options) or other separate accounts. The general account supports our non-variable insurance and annuity obligations. We have not registered interests in the guaranteed interest division under the Securities Act of 1933. Also, we have not registered the guaranteed interest division or the general account as an investment company under the Investment Company Act of 1940 (because of exemptive and exclusionary provisions). This means that the general account, the guaranteed interest division and its interests are generally not subject to regulation under these Acts. The SEC staff has not reviewed the disclosures in this prospectus relating to the general account and the guaranteed interest division. These disclosures, however, may be subject to certain requirements of the federal securities law regarding accuracy and completeness of statements made. The amount you have in the guaranteed interest division is all of the net premium you allocate to that division, plus transfers you make to the guaranteed interest division plus interest earned. Amounts you transfer out of or withdraw from the guaranteed interest division reduce this amount. It is also reduced by deductions for charges from your account value allocated to the guaranteed interest division. We declare the interest rate that applies to all amounts in the guaranteed interest division. This interest rate is never less than the minimum guaranteed interest rate of 3% and will be in effect for at least twelve months. Interest compounds daily at an effective annual rate that equals the declared rate. We credit interest to the guaranteed interest division on a daily basis. We pay interest regardless of the actual investment performance of our account. We bear all of the investment risk for the guaranteed interest division. MAXIMUM NUMBER OF INVESTMENT OPTIONS There are three divisions: the variable division, the guaranteed interest division and the loan division. Under the variable division, there are numerous variable investment options. SEE SECURITY LIFE SEPARATE ACCOUNT L1, PAGE 11 AND INVESTMENT PORTFOLIO OBJECTIVES, PAGE 12. You may invest in a total of eighteen investment options over the life of your policy. Investment options include the variable and the guaranteed interest divisions, but not the loan division. As an example, if you have had funds in seventeen variable investment options and the guaranteed interest division, these are the only investment options to which you may later add or transfer funds. However, you could still take a policy loan and access the loan division. You may want to use fewer investment options in the early years of your policy, so that you can invest in others in the future. If you invest in eighteen variable investment options, you will not be able to invest in the guaranteed interest division. DETAILED INFORMATION ABOUT THE POLICY This prospectus describes our standard Estate Designer 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 51 show how the policies work. We offer other products to insure the lives of two people which may or may not better match your needs and interests. APPLYING FOR A POLICY You purchase this variable universal life policy by submitting an application to us. On the policy date, the joint equivalent age of the two insured people must be no less than 15 and no more than age 85. The individual age of each insured person must be no - -------------------------------------------------------------------------------- Estate Designer 17 more than 90 years of age on the policy date. There is no maximum age difference between the two insured people. The insured people are the two people on whose lives we issue the policy. The insured people share some relationship and commonly include, among others: husband and wife; business partners; parent and child; grandparent and grandchild; and siblings. Upon the death of the second of the two insured people we pay the death proceeds. SEE AGE, PAGE 37. You may request that we back-date the policy up to six months to allow either or both of the insured people to give proof of a younger age for the purposes of your policy. We may reduce the minimum death benefit for group or sponsored arrangements, or corporate purchasers. Our underwriting and reinsurance procedures in effect at the time you apply limit the maximum death benefit. TEMPORARY INSURANCE If you apply and qualify, we may issue temporary insurance in an amount equal to the face amount of the permanent insurance for which you applied. The maximum amount of temporary insurance for binding limited life insurance coverage is $3 million, which includes any other in-force coverage you have with us. Temporary coverage begins when: 1. you have completed and signed our binding limited life insurance coverage form; 2. we receive and accept a premium payment of at least your scheduled premium (selected on your application); and 3. part I of the application is complete. Temporary life insurance coverage ends on the earliest of: o the date we return your premium payments; o five days after we mail notice of termination to the address on your application; o the date your policy coverage starts; o the date we refuse to issue a policy based on your application; or o 90 days after you sign our binding limited life insurance coverage form. There is no death benefit under the temporary insurance agreement if: o there is a material misrepresentation in your answers on the binding limited life insurance coverage form; o there is a material misrepresentation in statements on your application; o the person 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 both insured people and payment of your initial premium. This evidence may include a medical examination and completion of all underwriting and issue requirements. The policy date shown on your policy schedule determines: o monthly processing dates; o policy months; o policy years; and o policy anniversaries. The policy date is not affected by when you receive the policy. We charge monthly deductions from the policy date unless your policy specifies otherwise. The policy date is determined one of three ways: 1. the date you designate on your application, subject to our approval; 2. the back-date of the policy to save age, subject to our approval and law; or 3. if there is no designated date or back-date, the policy date is: o the date all underwriting and administrative requirements have been met if we receive your initial premium before we issue your policy; or o the date we receive your initial premium if it is after we approve your policy for issue. DEFINITION OF LIFE INSURANCE We apply a test to make sure that your policy meets the federal income tax definition of life insurance. - -------------------------------------------------------------------------------- Estate Designer 18 The guideline premium/cash value corridor test applies to your policy. We may limit premium payments relative to your policy death benefit under this test. SEE TAX STATUS OF THE POLICY, PAGE 47. PREMIUMS You may choose the amount and frequency of premium payments, within limits. You cannot make premium payments after the death of the second of the insured people or after the continuation of coverage period begins. SEE CONTINUATION OF COVERAGE, PAGE 28. We consider any payment we receive to be a premium if you do not have an outstanding loan and your policy is not in the continuation of coverage period. After we deduct certain charges from your premium payment, we add the remaining net premium to your policy. SCHEDULED PREMIUMS Your premiums are flexible. You may select your scheduled premium (within our limits) when you apply for your policy. The scheduled premium, shown in your policy and schedule, is the amount you choose to pay over a stated time period. THIS AMOUNT MAY OR MAY NOT BE ENOUGH TO KEEP YOUR POLICY IN FORCE. You may receive premium reminder notices for the scheduled premium on a quarterly, semi-annual or annual basis. You are not required to pay the scheduled premium. You may choose to pay your premium by electronic funds transfer each month. This option is not available for your initial premium. The financial institution that makes your electronic funds transfer may charge for this service. You can change the amount of your scheduled premium within our minimum and maximum limits at any time. If you fail to pay your scheduled premium or if you change the amount of your scheduled premium, your policy performance will be affected. During the special continuation period, your scheduled premium should not be less than the minimum annual premium shown in your policy. UNSCHEDULED PREMIUM PAYMENTS Generally speaking, you may make unscheduled premium payments at any time, however: 1. We may limit the amount of your unscheduled premium payments that would result in an increase in the base death benefit amount required by the federal income tax law definition of life insurance. We may require satisfactory evidence that the insured people are insurable at the time that you make the unscheduled premium payment if the death benefit is increased due to your unscheduled premium payments; 2. We may require proof that at least one insured person is insurable if your unscheduled premium payment will cause the net amount at risk to increase; and 3. We will return premium payments which are greater than the "seven-pay" limit for your policy if your payment would cause your policy to become a modified endowment contract, unless you have acknowledged in writing the new modified endowment contract status for your policy. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 48 AND CHANGES TO COMPLY WITH THE LAW, PAGE 50. If you have an outstanding policy loan and you make an unscheduled payment, we will consider it a loan repayment, unless you tell us otherwise. If your payment is a loan repayment, we do not take tax or sales charges which apply to premium payments. TARGET PREMIUM Target premium is not based on your scheduled premium. Target premium is actuarially determined based on the age, gender and premium class of the insured person. The target premium is used in determining your initial sales charge, 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 19. MINIMUM ANNUAL PREMIUM To qualify for the special continuation period, you must pay a minimum annual premium during each of your first five policy years. Your minimum annual premium is based on: - -------------------------------------------------------------------------------- Estate Designer 19 o each insured person's age, gender and premium class; o the stated death benefit of your policy; and o riders on your policy. Your minimum annual premium is shown in the schedule pages of your policy. We may reduce the minimum annual premium for group or sponsored arrangements, or for corporate purchasers. SPECIAL CONTINUATION PERIOD The special continuation period is the first five policy years. Under the special continuation period, we guarantee that your policy will not lapse, regardless of its net account value, if on a monthly processing date: o the sum of all premiums you have paid, minus partial withdrawals that you have taken, minus policy loans that you have taken, including accrued loan interest is greater than or equal to; o the minimum monthly premiums for each policy month from the first month of your policy through the current policy monthly processing date. The minimum monthly premium is one-twelfth of the minimum annual premium. During the first five years of your policy if there is not enough net account value to pay the monthly deductions and you have satisfied our requirements, we do not allow your policy to lapse. We do not permanently waive policy charges. Instead, we continue to deduct these charges which may result in a negative net account value, unless you pay enough premium to prevent this. The negative balance is your unpaid monthly deductions owing. At the end of the special continuation period to avoid lapse of your policy you must pay enough premium to bring the net account value to zero plus the amount that covers your estimated monthly deductions for the following two months. SEE LAPSE, PAGE 35. INVESTMENT DATE AND ALLOCATION OF NET PREMIUMS The net premium is the balance remaining after we deduct tax and sales charges from your premium payment. Insurance coverage does not begin until we receive your initial premium. It must be at least equal to the sum of the scheduled premiums which are due from your policy date through your investment date. The investment date is the first date we apply the net premium we have received to your policy. If we receive your initial premium after we approve your policy for issue, the investment date is the date we receive your initial premium. We apply the net premium to your policy after: a) we receive the required amount of premium; b) all issue requirements have been received by our customer service center; and c) we 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 the return of your premium during the free look period, we initially invest amounts you have designated for the variable division in the Fidelity VIP Money Market Portfolio. We later transfer these amounts from the Money Market Portfolio to your selected variable investment options, based on your most recent premium allocation instructions, at the earlier of the following dates: o five days after we mailed your policy plus your state free look period has ended; or o we have received your delivery receipt plus your state free look period has ended. If your state provides for return of account value during the free look period or no free look period, we invest amounts you designated for the variable division directly into your selected variable investment options. We allocate all later premium payments to your policy on the valuation date of receipt. We use your most recent premium allocation instructions specified in whole numbers totaling 100% and using up to eighteen investment options over the life of your policy. SEE MAXIMUM NUMBER OF INVESTMENT OPTIONS, PAGE 17. You may make twelve free premium allocation changes per year, after which a $25 transaction fee applies. If you change your designated deduction investment option from which monthly deductions are taken, we consider this a premium allocation change for which there may be a charge. SEE DESIGNATED DEDUCTION INVESTMENT OPTION, PAGE 27 AND POLICY TRANSACTION FEES, PAGE 45. - -------------------------------------------------------------------------------- Estate Designer 20 PREMIUM PAYMENTS AFFECT YOUR COVERAGE Unless your policy is in the special continuation period, your coverage lasts only as long as your net account value is enough to pay the monthly charges and your account value is more than your outstanding policy loan plus accrued loan interest. If you do not meet these conditions, your policy will enter the 61-day grace period and you must make a premium payment to avoid lapse. SEE LAPSE, PAGE 35 AND GRACE PERIOD, PAGE 35. If you pay your minimum premium each year during the first five policy years and take no policy loan or withdrawals, we guarantee your policy and riders will not lapse during the special continuation period, regardless of your net account value. SEE SPECIAL CONTINUATION PERIOD, PAGE 20. MODIFIED ENDOWMENT CONTRACTS There are special federal income tax rules for distributions from life insurance policies which are modified endowment contracts. These rules apply to policy loans, surrenders and partial withdrawals. Whether or not these rules apply depends upon whether or not the premiums we receive are greater than the "seven-pay" limit. If we find that your scheduled premium causes your policy to be a modified endowment contract on your policy date, we will require you to acknowledge that you know the policy is a modified endowment contract. We will issue your policy based on the scheduled premium you selected. If you do not want your policy to be issued as a modified endowment contract, you may reduce your scheduled premium to a level which does not cause your policy to be a modified endowment contract. We will then issue your policy based on the revised scheduled premium. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 48. DEATH BENEFITS As a joint and survivor universal life insurance policy, your policy has a joint nature to the death benefit. We do not pay death proceeds until the death of both of the insured people. Your death benefit is calculated as of the date of death of the second of the insured people. You can decide the amount of insurance you need, now and in the future. You can combine the long-term advantages of permanent life insurance (base coverage) with the flexibility and short-term advantages of term life insurance. Both permanent and term life insurance are available with your one policy. Generally, we require a minimum target death benefit of $500,000. If you have an adjustable term insurance rider, the minimum stated death benefit to issue a policy is $1,000 as long as your target death benefit is at least $500,000. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 24. 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 people. Use of the adjustable term insurance rider may reduce the distribution allowance, but may increase the monthly cost of insurance. SEE ADJUSTABLE TERM INSURANCE RIDER, PAGE 25. DEATH BENEFIT SUMMARY THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES AND NO REQUESTED OR SCHEDULED INCREASES OR DECREASES IN STATED OR TARGET DEATH BENEFIT AND THAT PARTIAL WITHDRAWALS ARE LESS THAN THE PREMIUM WE RECEIVE.
OPTION 1 OPTION 2 OPTION 3 ===================== ===================================== ==================================== =============================== STATED DEATH The amount of policy death The amount of policy death The amount of policy death BENEFIT benefit at issue, not including benefit at issue, not including benefit at issue, not including rider coverage. This amount rider coverage. This amount rider coverage. This amount stays level throughout the stays level throughout the stays level throughout the life life of the policy. life of the policy. of the policy. - -------------------------------------------------------------------------------- Estate Designer 21 OPTION 1 OPTION 2 OPTION 3 ===================== ===================================== ==================================== =============================== BASE DEATH The greater of the stated The greater of the stated The greater of the stated death BENEFIT death benefit or the account death benefit plus the benefit plus the sum of all value multiplied by the account value or the account premiums we receive minus appropriate factor from the value multiplied by the partial withdrawals you have definition of life insurance appropriate factor from the taken, or the account value factors. definition of life insurance multiplied by the appropriate factors. factor from the definition of life insurance factors. TARGET DEATH Stated death benefit plus Stated death benefit plus Stated death benefit plus BENEFIT adjustable term insurance adjustable term insurance adjustable term insurance rider benefit. This amount rider benefit. This amount rider benefit. This amount remains level throughout the remains level throughout the remains level throughout the life of the policy. life of the policy. life of the policy. TOTAL DEATH It is the greater of the target It is the greater of the target It is the greater of the target BENEFIT death benefit or the base death benefit plus the death benefit plus the sum of death benefit. account value or the base all premiums we receive death benefit. minus partial withdrawals you have taken or the base death benefit. ADJUSTABLE The adjustable term The adjustable term The adjustable term insurance TERM insurance rider benefit is the insurance rider benefit is the rider benefit is the total death INSURANCE total death benefit minus total death benefit minus the benefit minus the base death RIDER BENEFIT base death benefit, but it will base death benefit, but it will benefit, but it will not be less not be less than zero. If the not be less than zero. If the than zero. If the account account value multiplied by account value multiplied by value multiplied by the death the death benefit corridor the death benefit corridor benefit corridor factor is factor is greater than the factor is greater than the greater than the stated death stated death benefit, the stated death benefit plus the benefit plus the sum of all adjustable term insurance account value, the adjustable premiums we receive minus benefit will be decreased. It term insurance rider benefit partial withdrawals you have will be decreased so that the will be decreased. It will be taken, the adjustable term sum of the base death benefit decreased so that the sum of insurance rider benefit will be and the adjustable term the base death benefit and decreased. It will be insurance rider benefit is not the adjustable term insurance decreased so that the sum of greater than the target death rider benefit is not greater the base death benefit and the benefit. If the base death than the target death benefit adjustable term insurance benefit becomes greater than plus the account value. If the rider benefit is not greater the target death benefit, then base death benefit becomes than the target death benefit the adjustable term insurance greater than the target death plus the sum of all premiums rider benefit is zero. benefit plus the account we receive minus partial value, then the adjustable withdrawals you have taken. term insurance rider benefit If the base death benefit is zero. becomes greater than the target death benefit plus the sum of all premiums we receive minus partial withdrawals you have taken, then the adjustable term insurance rider benefit is zero.
- -------------------------------------------------------------------------------- Estate Designer 22 BASE DEATH BENEFIT Your base death benefit can be different from your stated death benefit as a result of: o your choice of death benefit option; o increases or decreases in the stated death benefit; or o a change in your death benefit option. Federal income tax law requires that your death benefit be at least as much as your account value multiplied by a factor defined by law. This factor is based on: o the insured person's age; o the insured person's gender. o the cash value accumulation test for the federal income tax law definition of life insurance. SEE APPENDIX A, PAGE 160. As long as your policy is in force, we will pay the death proceeds to your beneficiary(ies) calculated at the date of the death of the second of the insured people. The beneficiary(ies) is(are) the person (people) you name to receive the death proceeds from your policy. The death proceeds are: o your base death benefit; plus o rider benefits; minus o your outstanding policy loan with accrued loan interest; minus o outstanding policy charges incurred before the death of the second of the two insured people. There could be outstanding policy charges if the date of death of the second of the insured people happens while your policy is in the grace period or in the five-year special continuation 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. Under death benefit option 1, your base death benefit is the greater of: 1. your stated death benefit on the date of the death of the second of the insured people; or 2. your account value on the date of death of the second of the insured people multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A. Under option 1, positive investment performance generally reduces your net amount at risk, which lowers your policy's cost of insurance charge. Option 1 offers insurance coverage that is a set amount with potentially lower cost of insurance charges over time. Under death benefit option 2, your base death benefit is the greater of: 1. your stated death benefit plus your account value on the date of death of the second of the insured people; or 2. your account value on the date of death of the second of the insured people 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. If you choose death benefit option 3, the base death benefit is the greater of: 1. your stated death benefit plus the sum of all premiums we have received minus partial withdrawals you have taken under your policy; or 2. your account value on the date of death of the second of the insured people 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 we receive premiums and decrease if you take partial withdrawals. In no event will your base death benefit be less than your stated death benefit. Death benefit options 2 and 3 are not available during the continuation of coverage period. If you select option 2 or 3 on your policy, it automatically converts to death benefit option 1 when the continuation of coverage period begins. SEE CONTINUATION OF COVERAGE, PAGE 28. CHANGES IN DEATH BENEFIT OPTIONS You may request a change in your death benefit option at any time on or after your first monthly - -------------------------------------------------------------------------------- Estate Designer 23 processing date and before the continuation of coverage period begins. A death benefit option change applies to your entire stated or base death benefit. Changing your death benefit option may reduce or increase your target death benefit, as well as your stated death benefit. Your death benefit option change is effective on your next monthly processing date after we approve it, so long as at least one day remains before your monthly processing date. If less than one day remains before your monthly processing date, your death benefit option change will be effective on your second following monthly processing date. After we approve your request, we send a new policy schedule page to you. You should attach it to your policy. We may ask you to return your policy to our customer service center so that we can make this change for you. We may not approve a death benefit option change if it reduces the target or stated death benefit below the minimum we require to issue your policy. You may change from death benefit option 1 to option 2, 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 option 3 to option 2. For you to change from death benefit option 1 to option 2, we may require proof that the insured people are insurable under our normal rule of underwriting. On the effective date of your option change, your stated death benefit changes as follows: Change Change Stated Death Benefit From To Following Change: ---- -- ---------------- Option 1 Option 2 your stated death benefit before the change minus your account value as of the effective date of the change. Option 2 Option 1 your stated death benefit before the change plus your account value as of the effective date of the change. Option 3 Option 1 your stated death benefit before the change plus the sum of the premiums we have received, minus partial withdrawals you have taken as of the effective date of the change. 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 44. If you change your death benefit option, we adjust the stated death benefit for each of your segments by allocating your account value to each benefit segment. For example, if you change from death benefit option 1 to option 2, your stated death benefit is decreased by the amount of your account value allocation to that segment. If you change from death benefit option 2 to option 1, your stated death benefit is increased by the amount allocated to that segment. Changing your death benefit option may have tax consequences. You should consult a tax adviser before making changes. CHANGES IN DEATH BENEFIT AMOUNTS Contact your agent/registered representative or our customer service center to request a change in your policy's death benefit. The request is effective on the next monthly processing date after we receive and approve your request. There may be underwriting or other requirements which must be met before your request can be approved. Your requested change must be for at least $1,000. After we make your requested change, we will send you a new schedule page. 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 47. 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 - -------------------------------------------------------------------------------- Estate Designer 24 decrease your target death benefit below the minimum we require to issue your policy. You cannot decrease the stated death benefit below $1,000. There may be tax consequences as a result of a change in your death benefit amount. You should consult a tax adviser before changing your death benefit amount. SEE TAX STATUS OF THE POLICY, PAGE 47 AND MODIFIED ENDOWMENT CONTRACTS, PAGE 48. Requested reductions in the death benefit will be applied first to decrease the target death benefit. We decrease your stated death benefit only after your adjustable term insurance rider coverage is reduced to zero. If you have more than one segment, we divide decreases in stated death benefit among your benefit segments pro rata unless law requires differently. You may increase your target or stated death benefit after your first monthly processing date and before the policy anniversary when the joint equivalent age of the insured people is 85. You must provide satisfactory evidence that the insured people are still insurable to increase your death benefit. Unless you tell us differently, we assume your request for an increase in your target death benefit is also a request for an increase to your stated death benefit. Thus, the amount of your adjustable term insurance rider will not change. You may change your target death benefit once in a policy year. Keep it with your policy. We may ask you to send your policy to us so that we can make the change for you. The initial death benefit segment, or first segment, is the stated death benefit on your policy's effective date. A requested increase in stated death benefit will cause a new segment to be created. Once we create a new segment, it is permanent unless law requires differently. The segment year runs from the segment effective date to its anniversary. Each new segment may have: o a new minimum annual premium during the special continuation period; o a new sales charge; o new cost of insurance charges, guaranteed and current; o a new incontestability period; o a new suicide exclusion period; and o a new target premium. We allocate the net amount at risk among segments in the same proportion that each segment bears to the total stated death benefit. Premiums we receive after an increase are applied to your policy segments in the same proportion as the target premium for each segment bears to the total target premium for all segments. For each coverage segment, your schedule page shows your target premium which is used to determined your sales charge. RIDERS Your policy may include benefits, attached by a rider. A rider may have an additional cost. You may cancel riders at any time. Periodically we may offer other riders not listed here. Contact your agent/registered representative for a complete list of riders available. Adding or canceling riders may have tax consequences. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 48. ADJUSTABLE TERM INSURANCE RIDER You may increase your death proceeds by adding an adjustable term insurance rider. This rider allows you to schedule the pattern of death benefits appropriate for anticipated needs. As the name suggests, the adjustable term insurance rider adjusts over time to maintain your desired level of coverage. You specify a target death benefit when you apply for this rider. The target death benefit can be level for the life of your policy or can be scheduled to change at the beginning of a selected policy year(s). SEE DEATH BENEFITS, PAGE 21. We generally require a minimum target death benefit of $500,000 to issue a policy. If you have an adjustable term insurance rider, the minimum stated death benefit to issue a policy is $1,000 as long as your target death benefit is at least $500,000. The adjustable term insurance rider death benefit is the difference between your target death benefit and your base death benefit, but not less than zero. The rider's death benefit automatically adjusts daily as your base death benefit changes. Your death benefit depends on which death benefit option is in effect: - -------------------------------------------------------------------------------- Estate Designer 25 OPTION 1: If option 1 is in effect, the total death benefit is the greater of: a. the target death benefit; or b. the account value multiplied by the appropriate factor from the death benefit corridor factors in the policy. OPTION 2: If option 2 is in effect, the total death benefit is the greater of: a. the target death benefit plus the account value; or b. the account value multiplied by the appropriate factor from the death benefit corridor factors in the policy. OPTION 3: If option 3 is in effect, the total death benefit is the greater of: a. the target death benefit plus the sum of the premiums we have received minus partial withdrawals you have taken; or b. the account value multiplied by the appropriate factor from the death benefit corridor factors in the policy. For example, under option 1, assume your base death benefit changes as a result of a change in your account value. The adjustable term insurance rider adjusts to provide death benefits equal to your target death benefit in each year: Base Death Target Death Adjustable Term Benefit Benefit Insurance Rider Amount ------- ------- ---------------------- $501,500 $550,000 $48,500 502,500 550,000 47,500 502,250 550,000 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 $550,000 or more, the adjustable term insurance would be zero. Even when the adjustable term insurance is reduced to zero, your rider remains in effect until you remove it from your policy. Therefore, if later the base death benefit drops below your target death benefit, the adjustable term insurance rider coverage reappears to maintain your target death benefit. You may change the target death benefit schedule after it is issued, based on our rules. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 24. We may deny future, scheduled increases to your target death benefit if you cancel a scheduled change or if you ask for an unscheduled decrease in your target death benefit. Partial withdrawals, changes from death benefit option 1 to option 2 and base decreases may reduce your target death benefit. SEE PARTIAL WITHDRAWALS, PAGE 34 AND CHANGES IN DEATH BENEFIT OPTIONS, PAGE 23. There is no defined premium for a given amount of adjustable term insurance coverage. Instead, we deduct a separate monthly cost of insurance charge from your account value. The cost of insurance for this rider is calculated as the monthly cost of insurance rate for the rider coverage multiplied by the adjustable term death benefit in effect at the monthly processing date. The cost of insurance rates are determined by us from time to time. They are based on the issue ages, genders and premium classes of the insured people, as well as the length of time since your policy date. The only charge for this coverage is the cost of insurance charge. The total charges you pay may be less if you have greater coverage under an adjustable term insurance rider rather than as base death benefit. The monthly guaranteed maximum cost of insurance rates for this rider are in your policy. SEE COST OF INSURANCE CHARGE, PAGE 44. If the target death benefit is increased by you after the adjustable term insurance rider is issued, we use the same cost of insurance rate schedule for the entire coverage for this rider. These rates are based on the original premium classes even though satisfactory new evidence of insurability is required for the increased schedule. The monthly guaranteed maximum cost of insurance rates for this rider will be stated in the policy. SEE COST OF INSURANCE CHARGE, PAGE 44. Not all policy features apply to the adjustable term insurance rider. The rider does not contribute to the policy account value nor to surrender value. It does not affect investment performance and cannot be used for a policy loan. The adjustable term insurance - -------------------------------------------------------------------------------- Estate Designer 26 rider provides benefits only at the death of the second of the insured people. SINGLE LIFE TERM INSURANCE RIDER This rider provides a benefit upon the death of one of the primary insured people under your policy. You may choose to add a single life term insurance rider for just one insured person. Alternatively, you may add two single life term insurance riders: one for each insured person. You may add this rider to your policy at any time if both insured people are alive and insurable according to our rules. We will issue the single life term insurance rider on an insured person who is between the ages of 15 and 85. Coverage may continue until the earlier of when: o the insured person covered by this rider reaches age 100; o the continuation of coverage provision becomes effective; o the insured person covered by this rider dies; o the grace period expires; or o the policy is surrendered. SEE CONTINUATION OF COVERAGE, PAGE 28. The minimum amount of coverage for a single life term insurance rider is $1,000. The maximum coverage under this rider is subject to our underwriting determinations. At issue, you may schedule the rider's death benefit to increase or decrease. Your request for an increase or decrease in rider coverage is effective on the next monthly processing date after we approve your request. There may be underwriting or other requirements which must be met before we approve your request. A requested change in your coverage must be for at least $1,000. If you schedule or request an increase after issue, the person insured under this rider will be subject again to our underwriting requirements. The charge for this rider is based on the age, gender, premium class and underwriting characteristics of the insured person. The charge for this rider is deducted on each monthly processing date as a cost per each $1,000 of the net amount at risk under the rider. See the policy schedule pages for information on your actual cost. SPECIAL FEATURES DESIGNATED DEDUCTION INVESTMENT OPTION You may designate an investment option from which we will deduct your monthly charges. You may make this designation at any time. You may not use the loan division as your designated deduction option. You may elect not to choose a designated deduction investment option or the amount in your designated deduction investment option may not be enough to cover the monthly deductions. If so, these charges are taken from the variable and guaranteed interest divisions in the same proportion that your account value in each has to your total net account value on the monthly processing date. If you change your designated deduction investment option, we consider this a premium allocation change for which there may be a charge. SEE POLICY TRANSACTION FEES, PAGE 45. POLICY SPLIT OPTION Under certain circumstances, you may exchange your policy for two single life insurance policies: one on each of the two insured people. The policy split option has its own insurability requirements which may be met at or before the time your policy is split. Evidence of insurability is required for a new single life policy where coverage is greater than 50% of your original policy death benefit or for an insured person who is subject to certain underwriting ratings. On the effective date of the policy split, the available death benefit under your policy will be divided between the two new single life insurance policies. You may take less than the maximum death benefit amount available. Unless law requires otherwise, you may use the policy split option if: a) three months following the effective date of a final divorce decree regarding the marriage of the two insured people; b) there is a change to the federal estate tax law which results in either: i) removal of the unlimited marital deduction provision; or ii) a reduction in the current maximum federal estate tax of at least 50% after your policy date; or c) there is a dissolution of business conducted or owned by the two insured people. - -------------------------------------------------------------------------------- Estate Designer 27 You must send us written notice of your election to use the policy split option within 180 days of the occurrence of an eligible event. You must provide satisfactory evidence that the event has occurred. The effective date of the policy split is the first monthly processing date after we approve it. The insurance coverage under the two individual life insurance policies will start on the effective date of the policy split only if both insured people are alive on that date. If either insured person is not alive on that date, your exchange is void. All terms and conditions of the new policies apply once your policy is split and they may differ from those of this policy. Consult your new single life insurance policies. The premiums for each new policy will be based on each insured person's age, gender and premium class at the time of the split of your policy. Premiums will be due for each new policy under the terms of the new policy. The account value of the old policy will be allocated to the new policies on the effective date in the same proportion that the face amount was divided between the two single life insurance policies, unless we agree to a different allocation. If this allocation causes an increase in the face amount of either of the new single life policies, we may limit the account value you may apply to each new policy. Any remaining account value will be paid to you in cash and may be taxable. The refund of sales charge does not apply on a policy split. If you have an outstanding policy loan it will be divided and transferred to each new single life insurance policy in the same proportion as your account value is allocated. Any remaining loan balance must be paid before the effective date of the policy split. Any person or entity to which you have assigned your policy must agree to the policy split. An assignment of your policy generally will apply to each new single life insurance policy. If you have a single life term insurance rider on your policy at the date of the policy split, you may have a term insurance rider insuring the same insured person if that rider is available on the new policy. Other riders may or may not be available on the new policies and may be subject to new proof of insurability. Exercising the policy split option may be treated as a taxable transaction. Moreover, the two single life insurance policies could be treated as modified endowment contracts. SEE TAX CONSIDERATIONS, PAGE 47. You may not split your policy into two single life insurance policies if any of the following has happened: a) the continuation of coverage period has begun; b) one of the insured people has died; c) your policy grace period has ended; or d) your policy has been terminated or surrendered. You should consult a tax adviser before exercising the policy split option. RIGHT TO EXCHANGE POLICY During the first 24 months after your policy date, you have the right to exchange your policy for a guaranteed policy, unless law requires differently. We transfer the amount you have in the variable division to the guaranteed interest division. We allocate all of your future net premiums only to the guaranteed interest division. We do not allow future payments or transfers to the variable investment options after you exercise this right. We will not charge you for this exchange. SEE GUARANTEED INTEREST DIVISION, PAGE 17. POLICY MATURITY You may surrender your policy at any time. At the policy anniversary nearest the younger insured person's 100th birthday if you do not choose to let the continuation of coverage feature become effective, the policy matures. You may then surrender the policy for the net account value and end coverage. Part of this payment may be taxable. You should consult your tax adviser. CONTINUATION OF COVERAGE The continuation of coverage feature allows your insurance coverage to continue in force beyond policy maturity. If on the policy anniversary nearest the younger insured person's 100th birthday you choose to allow the continuation of coverage feature to become effective, we: o convert target death benefit to stated death benefit; o convert death benefit option 2 or 3 to death benefit option 1, if applicable; - -------------------------------------------------------------------------------- Estate Designer 28 o terminate all riders; o deduct a one-time $400 administrative fee to cover future expenses; o transfer your net account value (excluding the amount in the loan division) into the guaranteed interest division; and o terminate dollar cost averaging and automatic rebalancing. Your insurance coverage continues in force until the death of the second of the insured people, unless the policy lapses or is surrendered. However: o we accept no more premium payments; o we deduct no further charges; o your monthly deductions cease; and o you may not make transfers into the variable division. During the continuation of coverage period, you may take policy loans or partial withdrawals from your policy. If we pay a persistency refund on the guaranteed interest division, it will be credited to your policy. SEE PERSISTENCY REFUND, PAGE 45. If you have an outstanding policy loan, interest continues to accrue. If you fail to make sufficient loan or loan interest payments, it is possible that the loan balance plus accrued interest may become greater than your account value and cause your policy to lapse. To avoid this lapse, you may make loan and loan interest payments during the continuation of coverage period. If you wish to stop coverage during the continuation of coverage period, you may surrender your policy and receive the net account value. All normal consequences of surrender apply. SEE SURRENDER, PAGE 36. The continuation of coverage feature may not be available in all states. If a state has approved this feature, it is an automatic feature and you do not need to take any action to activate it. The tax consequences of coverage continuing beyond the younger insured's person's 100th birthday are uncertain. You should consult a tax adviser as to those consequences. POLICY VALUES ACCOUNT VALUE Your account value is the total amount you have in the guaranteed interest division, the variable division and the loan division. Your account value reflects: o net premiums applied; o charges deducted; o partial withdrawals taken; o investment performance of the variable investment options; o interest earned on the guaranteed interest division; and o interest earned on the loan division. NET ACCOUNT VALUE Your policy's net account value is your account value minus the amount of your outstanding policy loan and accrued loan interest, if any. CASH SURRENDER VALUE Your cash surrender value is your account value plus any refund of sales charge due. NET CASH SURRENDER VALUE Your net cash surrender value is your cash surrender value minus the amount of your outstanding policy loan and accrued loan interest, if any. DETERMINING VALUES IN THE VARIABLE DIVISION The amounts in the variable division are measured by accumulation units and accumulation unit values. The value of each variable investment option is the accumulation unit value for that option multiplied by the number of accumulation units you own in that option. Each variable investment option has a different accumulation unit value. The accumulation unit value is the value of one accumulation unit determined on each valuation date. The accumulation unit value of each variable investment option varies with the investment performance of the underlying portfolio. It reflects: o investment income; o realized and unrealized gains and losses; o investment portfolio expenses; and o daily mortality and expense risk charges we take from the separate account. SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES, PAGE 30. You purchase accumulation units when you allocate premium or make transfers to a variable investment - -------------------------------------------------------------------------------- Estate Designer 29 option, including transfers from the loan division. We redeem accumulation units: o when amounts are transferred from a variable investment option (including transfers to the loan division); o for your policy's monthly deductions from your account value; o for policy transaction charges; o when you take a partial withdrawal; o when you surrender your policy; and o to pay the death proceeds. We calculate the number of accumulation units purchased or sold by: 1. dividing the dollar amount of your transaction by: 2. the accumulation unit value for that variable investment option calculated at the close of business on the valuation date of the transaction. A valuation date is one on which the net asset value of the investment portfolio shares and unit values of the variable investment options are determined. A valuation date is each day the New York Stock Exchange and the company's customer service center are open for business, except for days on which an investment portfolio does not value its shares or any other day as required by law. Each valuation date ends at 4:00 p.m. Eastern time. The date of a transaction is the date we receive your premium or transaction request at our customer service center, so long as the date of receipt is a valuation date. We use the accumulation unit value which is next calculated after we receive your premium or transaction request and we use the number of accumulation units attributable to your policy on the date of receipt. We take monthly deductions from your account value on the monthly processing date. If your monthly processing date is not a valuation date, the monthly deduction is processed on the next valuation date. The value of amounts allocated to the variable investment options goes up or down depending on investment performance of the underlying investment portfolio. FOR AMOUNTS IN THE VARIABLE INVESTMENT OPTIONS, THERE IS NO GUARANTEED MINIMUM VALUE. HOW WE CALCULATE ACCUMULATION UNIT VALUES We determine accumulation unit values on each valuation date. We generally set the accumulation unit value for a variable investment option at $10 when the investment option is first opened. After that first date, the accumulation unit value on any valuation date is: 1. the accumulation unit value for the preceding valuation date multiplied by 2. the variable investment option's accumulation experience factor for the valuation period. Every valuation period begins at 4:00 p.m. Eastern time on a valuation date and ends at 4:00 p.m. Eastern time on the next valuation date. We calculate an accumulation experience factor for each variable investment option every valuation date as follows: 1. We take the share value of the underlying portfolio shares as reported to us by the investment portfolio managers as of the close of business on that valuation date. 2. We add dividends or capital gain distributions declared per share and reinvested by the investment portfolio on the date that the share value is affected. If applicable, we subtract a charge for taxes. 3. We divide the resulting amount by the value of the shares in the underlying investment portfolio at the close of business on the previous valuation date. 4. We then subtract the mortality and expense risk charge under your policy. The daily charge is .002055% (.75% annually) of the accumulation unit value. If the previous day was not a valuation date, the charge is multiplied by the number of days since the last valuation date. TRANSFERS OF ACCOUNT VALUE You may make twelve free transfers among the variable investment options or the guaranteed interest - -------------------------------------------------------------------------------- Estate Designer 30 division in each policy year, with a $25 fee per transaction after that. If your state requires a refund of premium during the free look period, you may not make transfers until after your free look period ends. We do not limit the number of transfers you may make. Transfers for automatic rebalancing or dollar cost averaging do not count toward your twelve free transfers. You may not make transfers during the continuation of coverage period. SEE POLICY TRANSACTION FEES, PAGE 45 AND CONTINUATION OF COVERAGE, PAGE 28. You may make transfer requests in writing, or by telephone if you have telephone privileges, to our customer service center. Your transfer takes effect on the valuation date we receive your request. The minimum amount you may transfer is $100. This minimum does not need to come from one investment option or be transferred to one investment option as long as the total amount you transfer is at least $100. However, if the amount remaining in an investment option is less than $100 and you make a transfer request from that investment option, we transfer the entire amount. EXCESSIVE TRADING Excessive trading activity can disrupt investment portfolio management strategies and increase portfolio expenses through: o increased trading and transaction costs; o forced and unplanned portfolio turnover; o lost opportunity costs; and o large asset swings that decrease the investment portfolio's ability to provide maximum investment return to all policyowners. In response to excessive trading, we may place restrictions or refuse transfers made by third-party agents acting on behalf of owners such as market timing services. We will refuse or place restrictions on transfers when we determine, in our sole discretion, that transfers are harmful to the investment portfolios or to policyowners as a whole. GUARANTEED INTEREST DIVISION TRANSFERS Transfers into the guaranteed interest division in each policy year are not restricted. You may transfer amounts from the guaranteed interest division only in the first 30 days of each policy year. Transfer requests received within 30 days before your policy anniversary will be processed on your policy anniversary. A request received by us within 30 days after your policy anniversary is effective on the valuation date we receive it. Transfer requests made at any other time will not be processed. Transfers from the guaranteed interest division in each policy year are limited to the largest of: o 25% of your guaranteed interest division balance at the time of your first transfer or withdrawal out of it in that policy year; o the sum of the amounts you have transferred and withdrawn from the guaranteed interest division in the prior policy year; or o $100. DOLLAR COST AVERAGING If your policy has at least $10,000 invested in either qualifying source investment portfolio, you may elect dollar cost averaging. The qualifying source investment portfolios are the Fidelity VIP Money Market Portfolio or the Neuberger Berman AMT Limited Maturity Bond Portfolio. The main goal of dollar cost averaging is to protect your policy values from short-term price changes. DOLLAR COST AVERAGING DOES NOT ASSURE A PROFIT NOR DOES IT PROTECT YOU AGAINST A LOSS IN A DECLINING MARKET. This systematic plan of transferring account values is intended to reduce the risk of investing too much when the price of an investment portfolio's shares is high. It is intended to reduce the risk of investing too little when the price of an investment portfolio's shares is low. Since you transfer the same dollar amount to other investment options each period, you purchase more units in an investment option when the unit value is low and you purchase fewer units if the unit value is high. We do not count dollar cost averaging transfers toward your twelve free transfers per policy year. There is no charge for this feature. You may add dollar cost averaging to your policy at any time. The first dollar cost averaging date must be at least one day after we receive your dollar cost averaging request. If your state requires refund of all premiums we receive during the free look period, dollar cost averaging cannot begin until your free look period has ended. - -------------------------------------------------------------------------------- Estate Designer 31 With dollar cost averaging, you designate either a dollar amount or a percentage of your account value for automatic transfer from a qualifying source investment portfolio. Each period we automatically transfer the amount you select from your chosen source investment portfolio to one or more other variable investment options. You may not use the guaranteed interest division or the loan division in dollar cost averaging. The minimum percentage you may transfer to any one investment option is 1% of the total amount you transfer. You must transfer at least $100 on each dollar cost averaging transfer date. Dollar cost averaging may occur on the same day of the month on a monthly, quarterly, semi-annual or annual basis. Unless you tell us otherwise, dollar cost averaging automatically takes place monthly on the monthly processing date. You may have both dollar cost averaging and automatic rebalancing at the same time. However, the dollar cost averaging source investment portfolio cannot be included in your automatic rebalancing program. CHANGING DOLLAR COST AVERAGING You may change your dollar cost averaging program one time per policy year. If you have telephone privileges, you may change the program by telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 39. TERMINATING DOLLAR COST AVERAGING You may cancel dollar cost averaging by sending satisfactory notice to our customer service center. We must receive it at least one day before the next dollar cost averaging date. Dollar cost averaging will terminate on the date: 1. you specify; or 2. your balance in the source investment portfolio reaches a dollar amount you set; or 3. the amount in the source investment portfolio is equal to or less than the amount to be transferred on a dollar cost averaging date. We will transfer the remaining amount and dollar cost averaging ends. AUTOMATIC REBALANCING Automatic rebalancing is a method of maintaining a consistent approach to investing account values over time and simplifying the process of asset allocation among your chosen investment options. Transfers made for automatic rebalancing do not count toward your twelve free transfers per policy year. There is no charge for this feature. If you choose this feature, on each rebalancing date we transfer amounts among the investment options to match your pre-set automatic rebalancing allocation. After the transfer, the ratio of your account value in each investment option to your total account value for all investment options included in automatic rebalancing matches the automatic rebalancing allocation percentage you set for that investment option. This action rebalances the amounts in the investment options that do not match your set allocation. This mismatch can happen if an investment option outperforms the other investment options for that time period. You may choose the automatic rebalancing feature on your application or later by completing our customer service form. Automatic rebalancing may occur on the same day of the month on a monthly, quarterly, semi-annual or annual basis. If you do not specify a frequency, automatic rebalancing will occur quarterly. The first transfer occurs on the date you select (after your free look period ends if your state requires return of premium 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. When you choose automatic rebalancing allocations, you may choose up to eighteen total investment options. SEE MAXIMUM NUMBER OF INVESTMENT OPTIONS, PAGE 17. You may have both automatic rebalancing and dollar cost averaging at the same time. However, the source investment portfolio for your dollar cost averaging cannot be included in your automatic rebalancing program. You may not include the loan division in your automatic rebalancing program. CHANGING AUTOMATIC REBALANCING You may change your allocation percentages for - -------------------------------------------------------------------------------- Estate Designer 32 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 30. 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 The loan division is part of our general account specifically designed to hold money used as collateral for loans and loan interest. You may borrow from your policy at any time after the first monthly processing date, by using your policy as security for a loan, or as otherwise required by law. The amount you borrow is called a policy loan. Your policy loan is: 1. the total amount you borrow from your policy; plus 2. policy loan interest that is capitalized when due; minus 3. policy loan or interest repayments you make. Unless law requires differently, a new policy loan must be at least $100. The maximum amount you may borrow on any valuation date, unless required differently by law, is your net account value minus the monthly deductions to your next policy anniversary or 13 monthly deductions if you take a loan within thirty days before your next policy anniversary. Your request for a policy loan must be directed to our customer service center. If you have telephone privileges, you may request a policy loan of less than $25,000 by telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 39. When you request a loan you may specify one investment option from which the loan will be taken. If you do not specify one, the loan will be taken proportionately from each active investment option you have, including the guaranteed interest division. Loan interest charges on your policy loan accrue daily at an annual interest rate of 3.75%. Interest is due in arrears on each policy anniversary. If you do not pay your interest when it is due, we add it to your policy loan balance. When you take a policy loan, we transfer an amount equal to your policy loan to the loan division. We follow this same process for loan interest due at your policy anniversary. We credit the loan division with interest at an annual rate of 3%. If you request an additional loan, we add the new loan amount to your existing policy loan. This way, there is only one loan outstanding on your policy at any time. LOAN REPAYMENT You may repay your policy loan at any time while your policy is in force. We assume that payments you make, other than scheduled premiums, are policy loan repayments. You must tell us if you want payments to be premium payments. When you make a loan repayment, we transfer an amount equal to your payment from the loan division to the variable investment options and the guaranteed interest division in the same proportion as your current premium allocation, unless you tell us otherwise. EFFECTS OF A POLICY LOAN ON YOUR POLICY Taking a loan decreases the amount you have in the investment options. Accruing loan interest will change your net account value as compared to what it would have been if you did not take a loan. Even if you repay your loan, it has a permanent effect on your account value. The benefits under your policy may be affected. The loan is a first lien on your policy. If you do not repay your policy loan, we deduct your outstanding policy loan and accrued loan interest from the death proceeds payable or the cash surrender value payable on surrender. Failure to repay your loan may affect the length of - -------------------------------------------------------------------------------- Estate Designer 33 time your policy remains in force. If you do not make loan payments your policy could lapse. POLICY LOANS MAY CAUSE YOUR POLICY TO LAPSE IF YOUR NET ACCOUNT VALUE IS NOT ENOUGH TO PAY YOUR DEDUCTIONS EACH MONTH. SEE LAPSE, PAGE 35. 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 48, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 49. If you use the continuation of coverage feature and you have a policy loan, loan interest continues to accrue. PARTIAL WITHDRAWALS You may request a partial withdrawal to be processed on any valuation date after your first policy anniversary by contacting our customer service center. You make a partial withdrawal when you withdraw part of your net account value. If your request is by telephone, it must be for less than $25,000 and may not cause a decrease in your death benefit. Otherwise, your request must be in writing. SEE TELEPHONE PRIVILEGES, PAGE 39. You may take only one partial withdrawal per policy year. The minimum partial withdrawal you may take is $100. The maximum partial withdrawal you may take is the amount which leaves $500 as your net account value. If you request a withdrawal of more than this maximum, we require you to surrender your policy or reduce the withdrawal. When you take a partial withdrawal, we deduct your withdrawal amount plus a service fee from your account value. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 42. Unless you tell us otherwise, we will make a partial withdrawal from the guaranteed interest division and the variable investment options in the same proportion that each has to your net account value immediately before your withdrawal. You may select one investment option from which your partial withdrawal will be taken. If you select the guaranteed interest division, however, the amount withdrawn from it may not be for more than your total withdrawal multiplied by the ratio of your account value in the guaranteed interest division to your total net account value immediately before the partial withdrawal transaction. Partial withdrawals may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 48, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 49. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1 If you selected death benefit option 1, it is your first partial withdrawal of the policy year, no more than fifteen years have passed since your policy date and the joint equivalent age of the insured people is not yet age 81, you may make a partial withdrawal of up to the greater of 10% of your account value, or 5% of your stated death benefit without decreasing your stated death benefit. Otherwise, amounts you withdraw will reduce your stated death benefit by the amount of the withdrawal unless your policy death benefit has been increased due to the federal income tax definition of life insurance. If your policy death benefit has been increased due to the federal income tax definition of life insurance at the time of the partial withdrawal, then at least part of your partial withdrawal may be made without reducing your stated death benefit. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 2 If you have selected death benefit option 2, a partial withdrawal does not reduce your stated or target death benefit. However because your account value is reduced, we reduce the total death benefit by at least the partial withdrawal amount. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 3 If you have selected death benefit option 3 and your partial withdrawal is less than the total of premiums we have received minus the total of your partial withdrawals, then your stated death benefit will not be reduced. However because your account value is reduced, your total death benefit will be reduced. If your partial withdrawal is more than the amount of premiums we have received minus the total of your prior partial withdrawals, a two step process is used: 1. Your withdrawal of the amount that makes premiums received minus all partial withdrawals equal to zero is taken; then - -------------------------------------------------------------------------------- Estate Designer 34 2. The excess withdrawal amount you requested will reduce your stated death benefit if: o the excess amount is greater than 10% of your account value after step "1" above; or o the excess amount is greater than 5% of your stated death benefit. STATED DEATH BENEFIT AND TARGET DEATH BENEFIT REDUCTIONS Regardless of your chosen death benefit option, partial withdrawals do not reduce your stated death benefit if: o your base death benefit has been increased to qualify your policy as life insurance under the federal income tax laws; and o you withdraw an amount that is no greater than the amount that reduces your account value to a level which no longer requires your base death benefit to be increased to qualify as life insurance for federal income tax law purposes. SEE TAX STATUS OF THE POLICY, PAGE 47. We require a minimum stated death benefit and a minimum target death benefit to issue your policy. You may not take a partial withdrawal if it reduces your stated death benefit or target death benefit below this minimum. SEE POLICY ISSUANCE, PAGE 46. We will send a new policy schedule page for your policy showing the effect of your withdrawal if there is any change to your stated death benefit or your target death benefit. In order to make this change, we may ask that you return the policy to our customer service center. Your withdrawal and any reductions in the death benefits are effective as of the valuation date on which we receive your request. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 48, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 49. LAPSE Your insurance coverage continues as long as your net account value is enough to pay your deductions each month. Lapse does not apply if the special continuation period is in effect and you have met all requirements. SEE SPECIAL CONTINUATION PERIOD, PAGE 20. If the continuation of coverage feature is active, your policy could still lapse if there is an outstanding policy loan even though there are no further monthly deductions. GRACE PERIOD Your policy enters a 61-day lapse grace period if, on a monthly processing date: 1. your net account value is zero (or less); and 2. the five-year special continuation period has expired, or you have not paid the required special continuation period premium. We notify you that your policy is in a grace period at least 30 days before it ends. We send this notice to you (or a person to whom you have assigned your policy) at your last known address in our records. We notify you of the premium payment necessary to prevent your policy from lapsing. This amount is generally the past due charges, plus your estimated monthly policy and rider deductions for the next two months. If the death of the second of the insured people occurs during the grace period we do pay death proceeds to your beneficiary(ies), but with reductions for your policy loan balance, accrued loan interest and monthly deductions owed. If we receive payment of the required amount before the end of the grace period, we apply it to your account value in the same manner as your other premium payments, then we deduct the overdue amounts from your account balance. If you do not pay the full amount within the 61-day grace period, your policy and its riders lapse without value. We withdraw your remaining account balance from the variable and guaranteed interest divisions. We deduct amounts you owe us and inform you that your policy coverage has ended. - -------------------------------------------------------------------------------- Estate Designer 35 LAPSE SUMMARY SPECIAL CONTINUATION PERIOD ================================================================ IF YOU MEET THE IF YOU DO NOT MEET THE REQUIREMENTS REQUIREMENTS OR IT IS NO LONGER IN EFFECT Your policy does not Your policy enters the lapse if you do not grace period if your net have enough net account value is not account value to pay enough to pay the the monthly charges. monthly charges, or if The charges are your loan plus accrued deducted and may loan interest is more cause a negative than your account account value until the value. If you do not earlier of: 1) the date pay enough premium to you have enough net cover the past due account value, or 2) monthly charges and until the end of the interest due, plus the special continuation monthly charges and period. interest due through the end of the grace period, your policy lapses. REINSTATEMENT If you do not pay enough premium before the end of the grace period, your policy lapses. You may still reinstate your policy and its riders within five years of the end of the grace period if you still own the policy and both of the insured people are still living and meet our underwriting requirements. Unless law requires differently, we will reinstate your policy and riders if: 1. you have not surrendered your policy; 2. you provide satisfactory evidence to us that both insured people are alive and that each is still insurable according to our normal rules of underwriting; and 3. we receive enough premium from you to keep your policy and its riders in force from the beginning to the end of the grace period and for two months after the reinstatement date. When your policy lapses, we will not reinstate your policy if one insured person has died or become uninsurable since your policy date. If one insured person was uninsurable at the issue of your policy and remains uninsurable, we will review the underwriting requirements applicable to each insured person at the time you request reinstatement to determine whether or not your policy may be reinstated. Reinstatement is effective on the monthly processing date following our approval of your reinstatement application. If you had a policy loan when coverage ended, we reinstate it with accrued loan interest to the date of lapse. The cost of insurance charges at the time of reinstatement are adjusted to reflect the time since the lapse. We apply net premiums received after reinstatement according to your most recent instructions which may be the premium allocation instructions in effect at the start of the grace period. SURRENDER You may surrender your policy for its net cash surrender value any time before the death of the second of the insured people. You may take your net cash surrender value in other than one payment. We compute your net cash surrender value as of the valuation date we receive your written surrender request and policy at our customer service center. All insurance coverage ends on the date we receive your surrender request and policy. SEE POLICY VALUES, PAGE 29 AND SETTLEMENT PROVISIONS, PAGE 40. We do not pro-rate or add back charges or expenses which we deducted before your surrender; but to your account value a refund of sales charge may apply. SEE REFUND OF SALES CHARGE, PAGE 46. A surrender of your policy may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 48, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 49. GENERAL POLICY PROVISIONS FREE LOOK PERIOD You have the right to examine your policy. The right to examine your policy, often called the free look period, starts on the date you receive your policy and is a length of time specified by law. If for any reason you do not want it, you may return your policy to us or your agent/registered representative within the period shown on the policy's face page. If you return your policy to us within that time period, we will consider it canceled as of your policy date. If you cancel your policy during this free look period, - -------------------------------------------------------------------------------- Estate Designer 36 you will receive a refund as determined under law. Generally, there are two types of free look refunds: o some states require a return of all premiums we receive; o other states require payment of account value plus a refund of all charges deducted. Your policy will specify what type of free look refund applies in your state. The type of free look refund in your state will affect when the net premium we receive before the end of the free look period is invested into the variable investment options. SEE ALLOCATION OF NET PREMIUMS, PAGE 20. YOUR POLICY The entire contract between you and us is the combination of: o your policy; o a copy of your original application and any applications for benefit increases or decreases; o all of your riders; o endorsements; o policy schedule pages; and o reinstatement applications. If you make a change to your coverage, we give you a copy of your changed application and new policy schedules. If you send your policy to us, we attach these items to your policy and return it to you. Otherwise, you need to attach them to your policy. Unless there is fraud, we consider all statements made in an application to be representations and not guarantees. We use no statement to deny a claim, unless it is in an application. A president or an officer of our company and our secretary or assistant secretary must sign all changes or amendments we make to your policy. No other person may change the terms or conditions of your policy. AGE The age stated in your policy schedule is the joint equivalent age of the insured people we use to issue your policy. The joint equivalent age is the sum of both insured people's ages adjusted for the difference in ages and gender, divided by two and rounded down. The insured people must each be no more than 90 years of age at policy issue. The minimum joint equivalent age must be no less than 15. The maximum joint equivalent age must be no more than 85. There is no limit on the difference in the insured people's ages. Age is measured as the age of the insured person on the birthday nearest the policy anniversary. Generally, we use the joint equivalent age to calculate rates, charges and values. We determine the joint equivalent age at any given time by adding the number of completed policy years to the age calculated at issue and shown in the schedule. The younger insured person's 100th birthday is the 100th anniversary of the younger insured person's birth regardless if he/she has survived. The policy anniversary nearest to this date is the date used for policy maturity and continuation of coverage. OWNERSHIP The original owner is the person named as the owner in the policy application. The owner can exercise all rights and receive benefits until the death of the second of the insured people while the policy is still in force. This includes the right to change the owner, beneficiary(ies) or the method designated to pay death proceeds. As a matter of law, all rights of ownership are limited by the rights of any person who has been assigned rights under the policy and any irrevocable beneficiary(ies). You may name a new owner by giving us written notice. The effective date of the change to the new owner is the date the prior owner signs the notice. However, we will not be liable for any action we take before a change is recorded at our customer service center. A change in ownership may cause the prior owner to recognize taxable income on gain under the policy. BENEFICIARY(IES) You, as owner, name the beneficiary(ies) when you apply for your policy. The primary beneficiary(ies) who survives both of the insured people receives the death proceeds. The other surviving beneficiary(ies) receives death proceeds only if there is no surviving primary beneficiary(ies). If more than one beneficiary(ies) survives both insured people, they share the death proceeds equally, unless you have told us otherwise. If none of your policy beneficiaries has survived both insured people, we - -------------------------------------------------------------------------------- Estate Designer 37 pay the death proceeds to you or to your estate, as owner. Once you tell us who the beneficiary(ies) is/are, we keep this information on file. You may name a new beneficiary(ies) any time before the death of the second of the insured people. We pay the death proceeds to the beneficiary(ies) whom you have most recently named according to our records. We do not make payments to multiple sets of beneficiaries. COLLATERAL ASSIGNMENT You may assign your policy by sending written notice to us. After we record the assignment, your rights as owner and the beneficiary's(ies') rights (unless the beneficiary(ies) was made an irrevocable beneficiary(ies) under an earlier assignment) are subject to the assignment. It is your responsibility to make sure the assignment is valid. INCONTESTABILITY If your policy has been in force and both insured people are alive for two years from your policy date, we will not question the validity of the statements in your application. If your policy has been in force and both insured people are alive for two years from the effective date of a new segment or from the effective date of an increase in any other benefit, with respect to the insured people (such as an increase in stated death benefit) we will not contest the statements in your application for the new segment or other increase. If this policy has been in force and both insured people are alive for two years from the effective date of reinstatement, we will not contest the statements in your application for reinstatement. MISSTATEMENTS OF AGE OR GENDER If an insured person's age or gender has been misstated, we adjust the death benefit to the amount which would have been purchased for each insured person's correct age and gender. We base the adjusted death benefit on the cost of insurance charges deducted from your account value on the last monthly processing date before the death of the second of the insured people, or as otherwise required by law. If unisex cost of insurance rates apply, we do not make any adjustments for a misstatement of gender. SUICIDE If either insured person commits suicide (while that insured person is sane or insane) within two years of your policy date, unless otherwise required by law, we limit death proceeds payable in one sum to: 1. the total of all premiums we receive to the time of death; minus 2. outstanding policy loan amounts and accrued loan interest; minus 3. partial withdrawals you have taken. We make a limited payment to the beneficiary(ies) for a new segment or other increase if the death of the second of the insured people is due to suicide (while that insured person is sane or insane), within two years of the effective date of a new segment or within two years of an increase in any other benefit, unless otherwise required by law. The limited payment we make is equal to the cost of insurance and monthly expense charges which were deducted for such increase. TRANSACTION PROCESSING Generally, within seven days of when we receive all information required to process a payment, we pay: o death proceeds; o net cash surrender value upon surrender o partial withdrawals; and o loan proceeds. We may delay processing these transactions if: o the NYSE is closed for trading; or o trading on the NYSE is restricted by the SEC; o there is an emergency so that it is not reasonably possible to sell securities in the variable investment options or to determine the value of a variable investment option's assets; or o a governmental body with jurisdiction over the separate account allows suspension by its order. SEC rules and regulations determine whether or not these conditions exist. We execute transfers among the variable investment options as of the valuation date of our receipt of your request at our customer service center. We determine the death benefit as of the date of death of the second of the - -------------------------------------------------------------------------------- Estate Designer 38 insured people. The death proceeds are not affected by changes in the value of the variable investment options after that date. We may delay payment from our guaranteed interest division for up to six months, unless state law requires otherwise, of surrender proceeds, withdrawal amounts or loan amounts. If we delay payment more than 30 days, we pay interest at our declared rate (or at a higher rate if required by law) from the date we receive your complete request. NOTIFICATION AND CLAIMS PROCEDURES Except for certain authorized telephone requests, we must receive in writing any election, designation, change, assignment or request made by the owner. Your must use a form acceptable to us. We are not liable for actions taken before we receive and record the written notice. We may require you to return your policy for policy changes and at the time of surrender. If an insured person dies while your policy is in force, please let us or your agent/registered representative know as soon as possible. We will immediately send you instructions on how to make a claim at the death of the second of the insured people or at either insured person's death if you have a single life term insurance rider. As proof of the insured person's death, we may require you to provide proof of the deceased insured person's age and a certified copy of the death certificate. The beneficiary(ies) and the deceased insured person's next of kin may need to sign authorization forms. These forms allow us to get information about the deceased insured person. This information may include medical records of doctors and hospitals used by the deceased insured person. TELEPHONE PRIVILEGES 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, if applicable, to call our customer service center to: o make transfers; o change premium allocations; o change features in your dollar cost averaging and automatic rebalancing programs; o request partial withdrawals; or o request a policy loan. Our customer service center uses reasonable procedures to make sure that instructions received by telephone are genuine. These procedures may include: 1. requiring some form of personal identification; 2. providing written confirmation of any transactions; and 3. tape recording telephone calls. By accepting automatic telephone privileges, you authorize us to record your telephone calls with us. If we use reasonable procedures to confirm instructions, we are not liable for losses due to unauthorized or fraudulent instructions. We may discontinue this privilege at any time. NON-PARTICIPATION Your policy does not participate in the surplus earnings of Security Life. DISTRIBUTION OF THE POLICIES The principal underwriter (distributor) for our policies is ING America Equities, Inc., a wholly owned subsidiary of Security Life. It is registered as a broker-dealer with the SEC and the NASD. We pay ING America Equities, Inc. for acting as the principal underwriter under a distribution agreement. We sell our policies through licensed insurance agents who are registered representatives of other broker-dealers including, but not limited to: 1. VESTAX Securities Corporation, an indirect affiliate of Security Life of Denver Insurance Company; 2. Locust Street Securities, Inc., an indirect affiliate of Security Life of Denver Insurance Company; 3. Multi-Financial Securities, Corp., an indirect affiliate of Security Life of Denver Insurance Company; and 4. IFG Network Securities, Inc., an indirect affiliate of Security Life of Denver - -------------------------------------------------------------------------------- Estate Designer 39 Insurance Company. All broker-dealers who sell this policy have entered into selling agreements with us. Under these selling agreements, we pay a distribution allowance to broker-dealers, who then pay their agents/registered representatives who sell this policy. This policy offers a choice of two structures for the distribution allowances, but the structure choice does not affect fees or charges on your policy. Under the levelized structure, the distribution allowance in policy years one through seven is 12% of the premium we receive up to target premium and 4% of premium we receive in excess of target premium. In policy year eight and thereafter, the distribution allowance is 2% of all premium we receive. Under the modified structure, the distribution allowance in policy year one is 30% of premium we receive up to target premium and 2% of premium in excess of target premium. In policy years two through seven it is 7.5% of premium up to target premium and 4% of premium we receive in excess of target premium. In policy year eight and thereafter, it is 2% of all premium we receive. Broker-dealers receive annual renewal payments (trails) of 0.20% of the average net account value for the first ten policy years; 0.15% of average net account value for policy years eleven through twenty and 0.10% of average net account value each policy year thereafter. If both insured people die before the seventh policy anniversary and your policy is in force, we make a one-time additional compensation payment for the initial sale of your policy. In addition to the distribution allowances, we may pay wholesaler fees or marketing and training allowances. We pay all allowances from our resources which include sales charges deducted from premium payments. ADVERTISING PRACTICES AND SALES LITERATURE We may use advertisements and sales literature to promote this product, including: o articles on variable life insurance and other information published in business or financial publications; o indices or rankings of investment securities; and o comparisons with other investment vehicles, including tax considerations. We may use information regarding the past performance of the variable investment options. However, past performance is not indicative of future performance of the investment options or the policies and is not reflective of the actual investment experience of policyowners. We may feature certain investment options and their managers, as well as describe asset levels and sales volumes. We may refer to past, current, or prospective economic trends, and investment performance or other information we believe may be of interest to our customers. SETTLEMENT PROVISIONS You may elect to have the beneficiary(ies) receive the death proceeds other than in one payment. If you make this election, you must do so before the death of the second of the insured people. If you have not made this election, the beneficiary(ies) may do so within 60 days after we receive proof of death of the second of the insured people. You may take your surrender proceeds in other than one payment. The investment performance of the variable investment options does not affect payments under these settlement options. Instead, interest accrues at a fixed rate based on the option you choose. Payment options are subject to our rules at the time you make your selection. Currently, a periodic payment must be at least $20 and the total proceeds 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 - -------------------------------------------------------------------------------- Estate Designer 40 ADMINISTRATIVE INFORMATION ABOUT THE POLICY VOTING PRIVILEGES We invest the variable investment options' assets in shares of investment portfolios. We are the legal owner of the shares held in the separate account and we have the right to vote on certain issues. Among other things, we may vote on issues described in the fund's current prospectus or issues requiring a vote by shareholders under the Investment Company Act of 1940. Even though we own the shares, we give you the opportunity to tell us how to vote the number of shares attributable to your policy. We count fractional shares. If you have a voting interest, we send you proxy material and a form on which to give us your voting instructions. Each investment portfolio share has the right to one vote. The votes of all investment portfolio shares are cast together on a collective basis, except on issues for which the interests of the portfolios differ. In these cases, voting is done on a portfolio-by-portfolio basis. Examples of issues that require a portfolio-by-portfolio vote are: 1. changes in the fundamental investment policy of a particular investment portfolio; or 2. approval of an investment advisory agreement. We vote the shares in accordance with your instructions at meetings of investment portfolio shareholders. We vote any investment portfolio shares that are not attributable to policies and any investment portfolio shares for which the owner does not give us instructions, the same way we vote as if we did receive owner instructions. We reserve the right to vote investment portfolio shares without getting instructions from policy owners if the federal securities laws, regulations or their interpretations change to allow this. You may instruct us only on matters relating to the investment portfolios corresponding to variable investment options in which you have invested assets as of the record date set by the investment portfolio's board for the portfolio's shareholders meeting. We determine the number of investment portfolio shares in each variable investment option that we attribute to your policy by dividing your account value allocated to that variable investment option by the net asset value of one share of the matching investment portfolio. MATERIAL CONFLICTS We are required to track events to identify any material conflicts arising from using investment portfolios for both variable life and variable annuity separate accounts. The boards of the investment portfolios, Security Life and other insurance companies participating in the investment portfolios, have this same duty. There may be a material conflict if: o state insurance law or federal income tax law changes; o investment management of an investment portfolio changes; or o voting instructions given by owners of variable life insurance policies and variable annuity contracts differ. The investment portfolios may sell shares to certain qualified pension and retirement plans qualifying under Code Section 401. These include cash or deferred arrangements under Code Section 401(k). Therefore, there is a possibility that a material conflict may arise between the interests of owners in general or between certain classes of owners; and these retirement plans or participants in these retirement plans. If there is a material conflict, we have the duty to determine appropriate action including removing the portfolios involved from our variable investment options. We may take other action to protect policy owners. This could mean delays or interruptions of the variable operations. When state insurance regulatory authorities require it, we may ignore voting instructions relating to changes in an investment portfolio's adviser or its investment policies. If we do ignore voting instructions, we give you a summary of our actions in our next semi-annual report to owners. Under the Investment Company Act of 1940, we must get your approval for certain actions involving our separate account. In this case, you have one vote for every $100 of value you have in the variable investment options. We cast votes credited to amounts in the variable investment options, but not credited to policies in the same proportion as votes cast by owners. - -------------------------------------------------------------------------------- Estate Designer 41 RIGHT TO CHANGE OPERATIONS Subject to state limitations, we may from time to time make any of the following changes to our separate account: 1. Change the investment objective. 2. Offer additional variable investment options which will invest in portfolios we find appropriate for policies we issue. 3. Eliminate variable investment options. 4. Combine two or more variable investment options. 5. Substitute a new investment portfolio for a portfolio in which the division currently invests. A substitution may become necessary if, in our judgment: o a portfolio no longer suits the purposes of your policy; o there is a change in laws or regulations; o there is a change in a portfolio's investment objectives or restrictions; o the portfolio is no longer available for investment; or o another reason we deem a substitution is appropriate. 6. Transfer assets related to your policy class to another separate account. 7. Withdraw the separate account from registration under the 1940 Act. 8. Operate the separate account as a management investment company under the 1940 Act. 9. Cause one or more variable investment options to invest in a mutual fund other than, or in addition to, the investment portfolios. 10. Stop selling these policies. 11. End any employer or plan trustee agreement with us under the agreement's terms. 12. Limit or eliminate any voting rights for the separate account. 13. Make any changes required by the 1940 Act or its rules or regulations. We will not make a change until it is effective with the SEC and approved by the appropriate state insurance departments, if necessary. We will notify you of changes. If you wish to transfer the amount you have in the affected investment option to another variable investment option or to the guaranteed interest division, you may do so free of charge. Just notify us at our customer service center. REPORTS TO OWNERS At the end of each policy year we send a report to you that shows: o your total net policy death benefit (your stated death benefit plus adjustable term insurance rider death benefit, if any); o your account value; o your policy loan, if any, plus accrued interest; o your net cash surrender value; o information about the variable investment options; and o your account transactions during the year showing net premiums, transfers, deductions, loan amounts and withdrawals. We also send semi-annual reports with financial information on the investment portfolios, including a list of the investment holdings of each portfolio to you. We send confirmation notices to you throughout the year for certain policy transactions. CHARGES, DEDUCTIONS AND REFUNDS The amount of a charge may not correspond to the cost incurred by us to provide the service or benefit. For example, the sales charge may not cover all of our sales and distribution expenses. Some proceeds from other charges, including the mortality and expense risk charge or cost of insurance charges, may be used to cover such expenses. DEDUCTIONS FROM PREMIUMS We treat payments we receive as premium payments if you do not have an outstanding loan and your policy is not in the continuation of coverage period. - -------------------------------------------------------------------------------- Estate Designer 42 After we deduct certain expenses from your payment, we add the remaining net premium to your policy. SALES CHARGE We deduct a percentage from each premium payment to compensate us for the costs we incur in selling the policies. The sales charge helps cover the costs of distribution, preparing our sales literature, promotional expenses and other direct and indirect expenses. We base the percentage on the time expired since your policy date, or addition of a segment and on your premium payments up to and above a target premium. The sales charge deducted from your premium payments after an increase in stated death benefit is based on each segment's target premium and the length of time that the segment has been in effect. Your policy schedule page shows the target premium for your policy. Sales Charge Percentage Policy or Up to Policy or Above Policy or Segment Segment Segment Year Target Premium Target Premium ---- -------------- -------------- 1 8% 4% 2 - 7 8% 1.5% 8 + 1.5% 1.5% For example, if this policy is issued to insure a male, age 85 who is uninsurable, and a female, age 85 who is insurable but in a substandard underwriting rating class, the target premium for sales charge purposes is $590 for each $1,000 of stated death benefit. We believe this amount represents the maximum target premium and that most policies will have a much lower target premium. SEE TARGET PREMIUM, PAGE 19 AND ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE 51. We may reduce or waive the sales charge for certain group or sponsored arrangements, or for corporate purchasers. SEE GROUP OR SPONSORED ARRANGEMENTS, OR CORPORATE PURCHASERS, PAGE 46. SEE REFUND OF SALES CHARGE, PAGE 46. TAX CHARGES We pay state and local taxes in almost all states. These taxes vary in amount from state to state and may vary from jurisdiction to jurisdiction within a state. Currently, state and local taxes range from 0.5% to 5% with some states not imposing these types of taxes. We deduct 2.5% of each premium payment to cover these taxes. This rate approximates the average tax rate we expect to pay in all states. We also deduct 1.5% of each premium payment to cover our estimated costs for the federal income tax treatment of deferred acquisition costs. This cost is determined solely by the amount of life insurance premiums we receive. We reserve the right to increase or decrease your premium expense charge for taxes as a result of changes in the tax law, within limits set by law. We also reserve the right to increase or decrease your premium expense charge for the federal income tax treatment of deferred acquisition costs based on any change in that cost to us. DAILY DEDUCTIONS FROM THE SEPARATE ACCOUNT MORTALITY AND EXPENSE RISK CHARGE We deduct 0.002055% per day (0.75% annually) of the amount you have in the variable investment options for the mortality and expense risks we assume. This charge is deducted as part of the calculation of the daily unit values for the variable investment options and does not appear as a separate charge on your statement or confirmation. The mortality risk is that insured people, as a group, may live less time than we estimated. The expense risk is that the costs of issuing and administering the policies and in operating the variable division are greater than the amount we estimated. The mortality and expense risk charge does not apply to your account value in the guaranteed interest division or the loan division. MONTHLY DEDUCTIONS FROM ACCOUNT VALUE We deduct charges from your account value on each monthly processing date until the maturity date or when the continuation of coverage period begins. - -------------------------------------------------------------------------------- Estate Designer 43 POLICY CHARGE The initial policy charge is $15 per month for the first ten years of your policy. After the first ten years of your policy, the policy charge is $9 per month. This charge compensates us for such costs as: o application processing; o medical examinations; o establishment of policy records; and o insurance underwriting costs. MONTHLY ADMINISTRATIVE CHARGE We charge a per month administrative charge of $0.06 per $1,000 for the first ten policy years for the greater of target or stated death benefit. We charge $0.01 per $1,000 for each policy year after the tenth for the greater of target or stated death benefit. We limit the per $1,000 charge to $150 per month for the first ten policy years and $25 per month for each policy year thereafter. This charge applies to the first $2,500,000 of death benefit. This charge is designed to compensate us for ongoing costs such as: o premium billing and collections; o claim processing; o policy transactions; o record keeping; o reporting and communications with policy owners; and o other expenses and overhead. COST OF INSURANCE CHARGE The cost of insurance charge compensates us for the ongoing costs of providing insurance coverage under the policy, including the expected cost of paying death proceeds that may be more than your account value at the death of the second of the insured people. The cost of insurance charge is equal to our current monthly cost of insurance rate multiplied by the net amount at risk for each portion of your death benefit. We calculate the net amount at risk monthly, at the beginning of each policy month. For the base death benefit, the net amount at risk is calculated using the difference between the current base death benefit and your account value. We determine your account value after we deduct your policy and rider charges due on that date other than cost of insurance charges for the base death benefit and adjustable term insurance rider. If your base death benefit at the beginning of a month increases (due to requirements of the federal income tax law definition of life insurance), the net amount at risk for your base death benefit for that month also increases. Similarly, the net amount at risk for your adjustable term insurance rider decreases. This means that your cost of insurance charge varies from month to month with changes in your net amount at risk, changes in the death benefit and with the increasing age of the insured people. We allocate the net amount at risk to segments in the same proportion that each segment has to the total stated death benefit for all coverage segments as of the monthly processing date. We base your current cost of insurance rates on the insured people's ages, genders and premium classes on the policy and each segment date. We apply unisex rates where appropriate under the law. This currently includes the state of Montana and policies purchased by employers and employee organizations in connection with employment-related insurance or benefit programs. Separate cost of insurance rates apply to: o each segment of the base death benefit; o your adjustable term insurance rider; and o single life term insurance riders. We may make changes in the cost of insurance or rider charges for a class of insured persons. We base the new charge on changes in expectations about: o investment earnings; o mortality; o the time policies remain in effect; o expenses; and o taxes. These rates are never more than the guaranteed maximum rates shown in your policy. The guaranteed maximum rates are based on the 1980 Commissioner's Standard Ordinary Sex Distinct Mortality Table. The maximum rates for the initial and each new segment will be printed in your schedule pages. There are no cost of insurance charges during the continuation of coverage period. RIDER CHARGES On each monthly processing date, we deduct the cost of benefits under your riders including the single life - -------------------------------------------------------------------------------- Estate Designer 44 term insurance rider. Rider charges do not include the adjustable term insurance rider. SEE RIDERS, PAGE 25. POLICY TRANSACTION FEES We also charge fees for certain transactions under your policy. We take these fees from the variable and guaranteed interest divisions pro rata to the account value in each investment option. PARTIAL WITHDRAWALS We deduct the lesser of a $25 service fee or 2% of the requested partial withdrawal from your account value for each partial withdrawal you take to cover our costs. SEE PARTIAL WITHDRAWALS, PAGE 34. TRANSFERS There is a $25 fee to cover our costs for each transfer over twelve free transfers per policy year. If you include multiple transfers in one transfer request, it counts as one transfer. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 30. 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 twelve free premium allocation changes per policy year. After the twelve free changes, we charge $25 for each additional premium allocation change in that policy year. If you change your designated deduction investment option, we consider it a premium allocation change. SEE MONTHLY DEDUCTIONS FROM ACCOUNT VALUE, PAGE 43. CONTINUATION OF COVERAGE ADMINISTRATIVE FEE At the policy anniversary nearest the younger insured person's 100th birthday, if your policy has not been surrendered, the continuation of coverage period begins. We will charge a one-time administrative fee of $400. This charge compensates us for maintaining and servicing your policy until the death of the second of the insured people. We then no longer charge monthly charges. DIVISIONS FROM WHICH WE DEDUCT CHARGES, LOANS AND PARTIAL WITHDRAWALS
MONTHLY CHARGES: COST OF LOANS AND INSURANCE CHARGES, RIDER TRANSACTION FEES PARTIAL WITHDRAWALS CHARGES, ADMINISTRATIVE FEES - ------------- --------------------------------------------- -------------------------------- ------------------------------------ Choice May choose a designated deduction Proportionally among May choose any investment investment option, including variable and guaranteed option or combination of guaranteed interest division interest divisions investment options Default Proportionally among variable and Proportionally among Proportionally among variable guaranteed interest divisions variable and guaranteed and guaranteed interest divisions interest divisions - ------------- --------------------------------------------- -------------------------------- ------------------------------------
PERSISTENCY REFUND Where law allows us, we pay long-term policy owners a persistency refund. Each month your policy remains in force after your tenth policy anniversary, we credit your account value with a refund of 0.05% of account value. This refund is 0.6% of your account value on an annual basis. We do not guarantee that we will pay a persistency refund on the guaranteed interest division. If we pay a persistency refund on the guaranteed interest division, we will pay it even if your policy is in the continuation of coverage period. If applicable, we add the persistency refund to the variable and guaranteed interest divisions, but not the loan division, in the same proportion that your - -------------------------------------------------------------------------------- Estate Designer 45 account value in each investment option has to your net account value as of the monthly processing date. Here are two examples of how the persistency refund may affect your account value: EXAMPLE 1: YOUR POLICY HAS NO LOAN: o account value = $10,000 (all in the variable division) o monthly persistency refund rate = .0005 o persistency refund = 10,000 x .0005 = $5.00 Value Before Value After Persistency Persistency Refund Refund ------ ------ Variable Division $10,000.00 $10,005.00 EXAMPLE 2: YOUR POLICY DOES HAVE A LOAN: o account value = $10,000 o account value in the variable division = $6,000 o account value in the loan division = $4,000 o monthly persistency refund rate = .0005 o persistency refund = 10,000 x .0005 = $5.00 Value Before Value After Persistency Persistency Refund Refund ------ ------ Variable Division $6,000.00 $6,005.00 Loan $4,000.00 $4,000.00 REFUND OF SALES CHARGE If you surrender your policy within the first two policy years (guaranteed) and it has not lapsed, we will refund a portion of the sales charge previously deducted from your premium payments. We base the refund on premium payments we receive in your first policy year. The refund of sales charge is not available if your policy was purchased with the proceeds of a policy issued by us or one of our affiliates.
==================================================================================================== Refund of Sales Charge as a Percentage of First Policy Year Premium ====================================================================================== We Currently Pay We Guarantee Policy Year a Minimum of ------------------------------------------------------ Up to Target Premium Above Target Premium - ---------------------------------------------------------------------------------------------------- 1 5% 10% 8% - ---------------------------------------------------------------------------------------------------- 2 2.5% 10% 4% - ---------------------------------------------------------------------------------------------------- 3 N/A 10% N/A - ---------------------------------------------------------------------------------------------------- 4+ N/A N/A N/A ====================================================================================================
OTHER CHARGES Under current law, we pay no tax on investment income and capital gains included in variable life insurance policy reserves. This means that no charge is currently made to any variable investment option for our federal income taxes. If the tax law changes and we have federal income tax chargeable to the variable investment options, we may make such a charge in the future. GROUP OR SPONSORED ARRANGEMENTS, OR CORPORATE PURCHASERS Individuals, corporations or other institutions may purchase this policy. For group or sponsored arrangements (including employees and certain family members of employees of Security Life, its affiliates and appointed sales agents), corporate purchasers or special exchange programs which we may offer from time to time, we may reduce or waive the: o administrative charge; o minimum stated death benefit; o minimum target death benefit; o minimum annual premium; o target premium; - -------------------------------------------------------------------------------- Estate Designer 46 o sales charges; o cost of insurance charges; or o other charges normally assessed. We can reduce or waive these items based on expected economies. Group arrangements include those in which there is a trustee, an employer or an association. The group may purchase multiple policies covering a group of individuals. Sponsored arrangements include those in which an employer or association allows us to offer policies to its employees or members on an individual basis. Our sales, administration and mortality costs generally vary with the size and stability of the group, among other factors. We take all these factors into account when we reduce charges. A group or sponsored arrangement must meet certain requirements to qualify for reduced charges. We make reductions to charges based on our rules in effect when we approve a policy application. We may change these rules from time to time. Each sponsored arrangement or corporation may have different group premium payments and premium requirements. We will not be unfairly discriminatory in any variation in the administrative charge, or other charges, fees and privileges. These variations are based on differences in costs or services. TAX CONSIDERATIONS The following summary provides a general description of the federal income tax considerations associated with the policy and does not purport to be complete or to cover all tax situations. This discussion is not intended as tax advice. Counsel or other competent tax advisers should be consulted for more complete information. This discussion is based upon our understanding of the present federal income tax laws. No representation is made as to the likelihood of continuation of the present federal income tax laws or as to how they may be interpreted by the Internal Revenue Service. TAX STATUS OF THE POLICY This policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the policy shall be construed in a manner which is consistent with that design. In order to qualify as a life insurance contract for federal income tax purposes and to receive the tax treatment normally accorded life insurance contracts under federal tax law, a policy must satisfy certain requirements which are set forth in the Internal Revenue Code. Specifically, the policy must meet the requirements of the "guideline premium/cash value corridor test," as specified in Code section 7702. The guideline premium/cash value corridor test provides for a maximum premium in relation to the death benefit, and a minimum "corridor" of death benefit in relation to account value. SEE APPENDIX A, PAGE 161 FOR A TABLE OF THE GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST FACTORS. There is very little guidance with respect to policies issued on a last survivor basis as to how these requirements are applied. Nevertheless, we believe it is reasonable to conclude that our policies satisfy the applicable requirements. If it is subsequently determined that a policy does not satisfy the applicable requirements, we will take appropriate and reasonable steps to bring the policy into compliance with such requirements and we reserve the right to restrict policy transactions or modify your policy in order to do so. DIVERSIFICATION REQUIREMENTS In addition to meeting the Code Section 7702 guideline premium/cash corridor test, 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 - -------------------------------------------------------------------------------- Estate Designer 47 are includable in the gross income from your policy under these circumstances. The IRS has stated in published rulings that a variable contract owner is considered the owner of separate account assets if the contract owner has "indicia of ownership" in those assets. "Indicia of ownership" includes the ability to exercise investment control over the assets. Your ownership rights under your policy are similar to, but different in some ways from those described by the IRS in rulings in which it determined that policy owners are not owners of separate account assets. For example, you have flexibility in allocating your premium payments and in your policy values. These differences could result in the IRS treating you as the owner of a pro rata share of the separate account assets. We do not know what standards will be set forth in the future, if any, in Treasury regulations or rulings. We reserve the right to modify your policy, as necessary, to try to prevent you from being considered the owner of a pro rata share of the separate account assets, or to otherwise qualify your policy for favorable tax treatment. We will at all times assure that the policy meets the statutory definition which qualifies the policy as life insurance for federal income tax purposes. In addition, as long as the policy remains in force, increases in account value as a result of interest or investment experience will not be subject to federal income tax unless and until there is a distribution from the policy, such as a partial withdrawal or loan. SEE TAX TREATMENT OF POLICY DEATH BENEFITS, PAGE ?. The following discussion assumes that the policy will qualify as a life insurance contract for federal income tax purposes. TAX TREATMENT OF POLICY DEATH BENEFITS We believe that the death benefit under a policy is generally excludable from the gross income of the beneficiary(ies) under section 101(a)(1) of the Code. However, there are exceptions to this general rule. Additionally, federal and local transfer, estate inheritance and other tax consequences of ownership or receipt of policy proceeds depend on the circumstances of each policy owner or beneficiary(ies). A tax adviser should be consulted about these consequences. Generally, the policy owner will not be taxed on any of the policy account value until there is a distribution. When distributions from a policy occur, or when loan amounts are taken from or secured by a policy, the tax consequences depend on whether or not the policy is a "modified endowment contract." Special rules also apply if you are subject to the alternative minimum tax. You should consult a tax adviser if you are subject to the alternative minimum tax. MODIFIED ENDOWMENT CONTRACTS Under the Internal Revenue Code, certain life insurance contracts are classified as "modified endowment contracts" and are given less favorable tax treatment than other life insurance contracts. Due to the flexibility of the policies as to premiums and benefits, the individual circumstances of each policy will determine whether or not it is classified as a modified endowment contract. The rules are too complex to be summarized here, but generally depend on the amount of premiums we receive during the first seven policy years. Certain changes in a policy after it is issued could also cause it to be classified as a modified endowment contract. A current or prospective policy owner should consult with a competent adviser to determine whether or not a policy transaction will cause the policy to be classified as a modified endowment contract. If a policy becomes a modified endowment contract, distributions that occur during the policy year will be taxed as distributions from a modified endowment contract. In addition, distributions for a policy within two years before it becomes a modified endowment contract will be taxed in this manner. This means that a distribution made from a policy that is not a modified endowment contract could later become taxable as a distribution from a modified endowment contract. MULTIPLE POLICIES All modified endowment contracts that are issued by us (or our affiliates) to the same policy owner during any calendar year are treated as one modified endowment contract for purposes of determining the amount includable in the policy owner's income when a taxable distribution occurs. - -------------------------------------------------------------------------------- Estate Designer 48 DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS Once a policy is classified as a modified endowment contract, the following tax rules apply both prospectively and to any distributions made in the prior two years: 1. All distributions other than death benefits, including distributions upon surrender and withdrawals, from a modified endowment contact will be treated first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. 2. Loan amounts taken from or secured by a policy classified as a modified endowment contract are treated as distributions and taxed first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. 3. A 10% additional income tax penalty may be imposed on the distribution amount subject to income tax. Consult a tax adviser to determine whether or not you may be subject to this penalty tax. DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS Distributions other than death benefits from a policy that is not classified as a modified endowment contract are generally treated first as a recovery of the policy owner's investment in the policy. Only after the recovery of all investment in the policy, is there taxable income. However, certain distributions which must be made in order to enable the policy to continue to qualify as a life insurance contract for federal income tax purposes, if policy benefits are reduced during the first fifteen policy years, may be treated in whole or in part as ordinary income subject to tax. Loan amounts from or secured by a policy that is not a modified endowment contract are generally not treated as distributions. Finally, neither distributions from, nor loan amounts from or secured by, a policy that is not a modified endowment contract are subject to the 10% additional income tax. INVESTMENT IN THE POLICY Your investment in the policy is generally the total of your aggregate premiums. When a distribution is taken from the policy, your investment in the policy is reduced by the amount of the distribution that is tax free. POLICY LOANS In general, interest on a policy loan will not be deductible. 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 - -------------------------------------------------------------------------------- Estate Designer 49 uncertain, there is always the possibility that the tax treatment of the policy could be changed by legislation or otherwise. You should consult a tax adviser with respect to legislative developments and their effect on the policy. CHANGES TO COMPLY WITH THE LAW So that your policy continues to qualify as life insurance under the Code, we reserve the right to refuse to accept all or part of your premium payments or to change your death benefit. We may refuse to allow you to make partial withdrawals that would cause your policy to fail to qualify as life insurance. We also may: o make changes to your policy or its riders; or o take distributions from your policy to the degree that we deem necessary to qualify your policy as life insurance for tax purposes. If we make any change of this type, it applies the same way to all affected policies. The tax law limits the amount we can charge for mortality costs and other expenses used to calculate whether your policy qualifies as life insurance for federal income tax purposes. We must base these calculations on reasonable mortality charges and as permitted, other charges reasonably expected to be paid. The Treasury issued proposed regulations on what it considers reasonable mortality charges. We believe that the charges used for your policy should meet the Treasury's current requirement for "reasonableness." We reserve the right to make changes to the mortality charges if future regulations have standards which make changes necessary in order to continue to qualify your policy as life insurance for federal income tax purposes. Additionally, assuming that you do not want your policy to be or to become a modified endowment contract, we include a policy endorsement under which we have the right to amend your policy, including riders. We do this to attempt to enable your policy to continue to meet the seven-pay test for federal income tax purposes. If the policy premium you pay is more than the seven-pay limit, we have the right to remove any excess premium or to make any appropriate adjustments to your policy's account value and death benefit. It is not clear, however, whether we can take effective action pursuant to this endorsement under all possible circumstances to prevent a policy that has exceeded the premium limitation from being classified as a modified endowment contract. Any increase in your death benefit will cause an increase in your cost of insurance charges. OTHER Policy owners may use our policies in various arrangements, including: o qualified plans; o non-qualified deferred compensation or salary continuance plans; o split dollar insurance plans; o executive bonus plans; o retiree medical benefit plans; and o other plans. The tax consequences of these plans may vary depending on the particular facts and circumstances of each arrangement. If you want to use any of your 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 - -------------------------------------------------------------------------------- Estate Designer 50 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. - -------------------------------------------------------------------------------- Estate Designer 51 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, CASH SURRENDER VALUES AND ACCUMULATED PREMIUMS The following tables are intended to show how the policy works, including how benefits and values can vary over time. Each table compares these values with total premiums we receive with interest. The policy illustrated uses the following assumptions:
Definition Death of Life Stated Target Smoker Benefit Insurance Death Death Gender Age Status* Option Test Benefit Premium Benefit ------ --- ------ ------ ---- ------- ------- ------- Male 50 Nonsmoker 1 GP 1,000,000 $13,000 1,000,000 Preferred Female 50 Nonsmoker Preferred
- ------------------- * "Smoker" includes the use of cigarettes, cigars, pipes, chewing tobacco, nicotine chewing gum or patch, snuff or any other tobacco or nicotine-based product. The target premium for the illustrated policy is $15,906.14 (approximately $16 per $1,000 of stated death benefit). The tables show how death benefits, account values and net cash surrender values of a hypothetical policy could vary over an extended period of time, assuming the variable division had constant hypothetical gross annual investment returns of 0%, 12%, or 6% over the periods indicated in each table. Values would differ from those shown in the tables if the annual investment returns were not constant. The amounts shown would differ if we had used two females, two males or smoker rates. These illustrations assume there is no policy loan. We illustrate premium payments as if they were made at the beginning of the year. The third column of each table shows what would happen if an amount equal to the assumed premiums earned interest, after taxes, of 5% compounded annually. The net investment return on your policy is lower than the gross investment return on the variable investment options as a result of the mortality and expense risk charge, the portfolio management fees and portfolio expenses. We show the effect of the net investment return in the amounts for death benefits, account values and cash surrender values. The tables reflect annual investment management fees of 0.66% of the portfolios' aggregate average daily net assets. This hypothetical rate is a simple average of the investment advisory fees applying to the investment portfolios for the year ending December 31, 1999. We assume other portfolio expenses at the rate of 0.31% of the portfolios' average daily net assets. This is an average of all the portfolios' other expenses for the year ending December 31, 1999 after any expense reimbursements or waivers by investment portfolio managers has been made. The average of all portfolios' total expenses is 0.97%. Actual fees vary by portfolio. The portfolio fees and expenses used in the illustrations are the net amounts shown after absorption of fees and expenses by the portfolio's investment manager. Absent such expense reimbursements or waivers, the total average investment management fees, average other portfolio expenses and the average of all - -------------------------------------------------------------------------------- Estate Designer 52 portfolios' total expenses used in the illustrations would have been higher (0.71%, 0.47% and 1.18%, respectively). The tables assume that the current expense reimbursement arrangements will continue. However, they may not continue through 2000. The effect of these portfolio charges and expenses, and mortality and expense risk charges result in a net rate of return of: o (1.71 )% on a 0% gross rate of return; o 10.20% on a 12% gross rate of return; and o 4.25% on a 6% gross rate of return. The tables assume that charges have been deducted including deductions for premiums, cost of insurance rider charges, monthly deductions, mortality and expense risk charge, administrative and sales charges. The tables show charges at our current rates which includes a persistency refund. The tables also show charges at the maximum rates we guarantee in our policies. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 43. The tables reflect that we do not currently charge against the separate account for state or federal taxes. If we charge for the taxes in the future, it will take a higher gross rate of return than the rates shown to produce the same death benefits, account values and cash surrender values. If we are asked to do so, we will give you a comparable personal illustration based on: o the insured people's ages and genders; 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 your policy. At issue, we deliver an individualized illustration showing the scheduled premium you chose and the insured people's actual risk classes. After we issue the policy, if you ask us to, we will give you an illustration of future policy benefits. We base these hypothetical future benefits on both guaranteed and current cost factor assumptions and actual account value. - -------------------------------------------------------------------------------- Estate Designer 53 PROSPECT: INSURED PERSON NO. 1'S NAME MALE 50 NONSMOKER PREFERRED PRESENTED BY: INSURED PERSON NO. 2'S NAME FEMALE 50 NONSMOKER PREFERRED SECURITY LIFE ESTATE DESIGNER VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $1,000,000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $13,000.00 GUIDELINE PREMIUM/CASH VALUE CORRIDOR 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 13000 13650 10320 10970 1000000 11623 12273 1000000 10972 11622 1000000 2 13000 27983 20390 20715 1000000 24354 24679 1000000 22333 22658 1000000 3 13000 43032 30200 30200 1000000 38290 38290 1000000 34086 34086 1000000 4 13000 58833 39733 39733 1000000 53536 53536 1000000 46227 46227 1000000 5 13000 75425 48975 48975 1000000 70204 70204 1000000 58753 58753 1000000 6 13000 92846 57906 57906 1000000 88418 88418 1000000 71657 71657 1000000 7 13000 111138 66506 66506 1000000 108315 108315 1000000 84930 84930 1000000 8 13000 130345 75588 75588 1000000 130979 130979 1000000 99448 99448 1000000 9 13000 150513 84285 84285 1000000 155746 155746 1000000 114360 114360 1000000 10 13000 171688 92574 92574 1000000 182813 182813 1000000 129656 129656 1000000 15 13000 294547 132885 132885 1000000 375594 375594 1000000 220538 220538 1000000 20 13000 451350 152978 152978 1000000 689873 689873 1000000 319494 319494 1000000 25 13000 651475 133249 133249 1000000 1223815 1223815 1309483 416815 416815 1000000 30 13000 906890 16188 16188 1000000 2113789 2113789 2219478 485907 485907 1000000 AGE 65 13000 322925 138918 138918 1000000 426528 426528 1000000 239886 239886 1000000
The expense charges and cost of insurance rates will never be greater than those which were used to calculate the above values. The hypothetical gross rates of return shown are illustrative only and are not a representation of past or future investment results. Actual investment results may be different from those shown and will depend on a number of factors, including selected investment allocations and investment experience. No representation is made that these hypothetical gross investment returns can be achieved or sustained over any period of time. The death benefit, account value and cash surrender value for a policy would be different from those shown if the actual gross annual rates of return averaged 0.00%, 12.00% and 6.00% over a period of years but varied above or below that average during the period. They would also be different if premiums were paid in a different frequency than shown. - -------------------------------------------------------------------------------- Estate Designer 54 PROSPECT: INSURED PERSON NO. 1'S NAME MALE 50 NONSMOKER PREFERRED PRESENTED BY: INSURED PERSON NO. 2'S NAME FEMALE 50 NONSMOKER PREFERRED SECURITY LIFE ESTATE DESIGNER VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $1,000,000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $13,000.00 GUIDELINE PREMIUM/CASH VALUE CORRIDOR 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 13000 13650 10320 11620 1000000 11623 12923 1000000 10972 12272 1000000 2 13000 27983 20390 21690 1000000 24354 25654 1000000 22333 23633 1000000 3 13000 43032 30200 31500 1000000 38290 39590 1000000 34086 35386 1000000 4 13000 58833 39733 39733 1000000 53536 53536 1000000 46227 46227 1000000 5 13000 75425 49080 49080 1000000 70314 70314 1000000 58861 58861 1000000 6 13000 92846 58263 58263 1000000 88801 88801 1000000 72027 72027 1000000 7 13000 111138 67279 67279 1000000 109170 109170 1000000 85745 85745 1000000 8 13000 130345 76960 76960 1000000 132540 132540 1000000 100916 100916 1000000 9 13000 150513 86456 86456 1000000 158281 158281 1000000 116714 116714 1000000 10 13000 171688 95765 95765 1000000 186632 186632 1000000 133162 133162 1000000 15 13000 294547 146381 146381 1000000 392994 392994 1000000 236032 236032 1000000 20 13000 451350 191700 191700 1000000 737872 737872 1000000 364403 364403 1000000 25 13000 651475 226808 226808 1000000 1316264 1316264 1408402 521899 521899 1000000 30 13000 906890 241640 241640 1000000 2282915 2282915 2397061 714510 714510 1000000 AGE 65 13000 322925 155992 155992 1000000 448575 448575 1000000 259565 259565 1000000
The current cost of insurance rates are subject to change. Account values will vary from those illustrated if actual rates differ from those assumed. Current mortality charge rates are based on current mortality experience and are not dependent upon future improvements in underlying mortality. The hypothetical gross rates of return shown are illustrative only and are not a representation of past or future investment results. Actual investment results and policy charges may be different from those shown and will depend on a number of factors, including the investment allocations and investment experience. No representation is made that these hypothetical gross investment returns can be achieved or sustained over any period of time. The death benefit, account value and cash surrender value for a policy would be different from those shown if the actual gross annual rates of return averaged 0.00%, 12.00% and 6.00% over a period of years but varied above or below that average during the period. They would also be different if premiums were paid in a different frequency than shown. - -------------------------------------------------------------------------------- Estate Designer 55 ADDITIONAL INFORMATION DIRECTORS AND OFFICERS Set forth below is information regarding the directors and principal officers of Security Life of Denver Insurance Company. Security Life's address, and the business address of each person named, except as noted with one or two asterisks (*/**), is Security Life Center, 1290 Broadway, Denver, Colorado 80203-5699. The business address of each person denoted with one asterisk (*) is ING North America Insurance Corporation, 5780 Powers Ferry Road, Atlanta, Georgia 30327-4390. The business address of each person denoted with two asterisks (**) is Security Life of Denver Insurance Company, 9140 Arrowpoint Blvd., Suite 400, Charlotte, North Carolina 28273. Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Stephen M. Christopher Chairman, President and Chief Executive Officer Jess A. Skriletz Director, Chief Executive Officer and General Manager, ING Reinsurance and ING Institutional Markets Michael W. Cunningham* Director, Executive Vice President Mark A. Tullis* Director P. Randall Lowery* Director Thomas F. Conroy President, ING Reinsurance International Gregory G. McGreevey President, ING Institutional Markets Jerome J. Cwiok* Executive Vice President and Chief Operating Officer James L. Livingston, Jr. Executive Vice President, CFO and Chief Actuary Jeffrey R. Messner Executive Vice President and Chief Marketing Officer John R. Barmeyer* Senior Vice President, ING US Legal Services Peter Bell Senior Vice President, Risk Selection and Medical Director, ING Reinsurance Wayne D. Bidelman Senior Vice President, CCRC, ING Reinsurance R. Thomas Daniel* Senior Vice President, Marketing Arnold A. Dicke Senior Vice President and Chief Actuary, ING Reinsurance Charles E. LeDoyen** Senior Vice President, Structured Settlements Terry L. Morrison Senior Vice President, New Business Operations Derek J. Reynolds* Senior Vice President and Chief Information Officer Jeffrey W. Seel* Senior Vice President, Chief Investment Officer Mark A. Smith Senior Vice President, Insurance Services Lawrence D. Taylor Senior Vice President, Product Management Gretta Ytterbo Senior Vice President, ING US Legal Services Gary W. Waggoner Vice President, General Counsel and Corporate Secretary - -------------------------------------------------------------------------------- Estate Designer 56 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. - -------------------------------------------------------------------------------- Estate Designer 57 INDEX OF SPECIAL TERMS The following special terms are used in this prospectus. We explain each term on the page(s) listed in the body of this prospectus and in the summary, if applicable: Account value..............................................7 Accumulation unit.........................................29 Accumulation unit value....................................7 Adjustable term insurance rider...........................25 Base death benefit........................................23 Beneficiary(ies)..........................................23 Cash surrender value......................................29 Continuation of coverage..................................28 Death proceeds............................................23 Divisions.................................................17 Free look period..........................................36 General account...........................................17 Guaranteed interest division..............................17 Initial premium...........................................20 Investment date...........................................20 Investment options........................................11 Joint equivalent age......................................37 Loan division.............................................33 Minimum annual premium....................................19 Net account value.........................................29 Net amount at risk........................................44 Net cash surrender value..................................29 Net premium................................................4 Partial withdrawal........................................20 Policy.....................................................4 Policy date...............................................18 Policy loan...............................................33 Portfolios................................................11 Scheduled premium.........................................19 Segment...................................................25 Separate account L1.......................................11 Special continuation period...............................20 Stated death benefit......................................18 Target death benefit......................................25 Target premium............................................43 Total death benefit.......................................25 Transaction date..........................................30 Valuation date............................................29 Valuation period..........................................30 Variable division.........................................17 Variable investment option................................11 Younger insured person's 100th birthday...................37 - -------------------------------------------------------------------------------- Estate Designer 58 FINANCIAL STATEMENTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, are prepared in accordance with accounting principles generally accepted in the United States and start on page 60. The financial statements included for the Security Life Separate Account L1 at December 31, 1999 and for each of the three years in the period ended December 31, 1999, are prepared in accordance with accounting principles generally accepted in the United States and represent those divisions that had commenced operations by that date. The consolidated financial statements of Security Life and Subsidiaries, as well as the financial statements included for the Security Life Separate Account L1 referred to above have been audited by Ernst & Young LLP. The consolidated financial statements of Security Life and Subsidiaries should be distinguished from the financial statements of the Security Life Separate Account L1 and should be considered only as bearing upon the ability of Security Life and Subsidiaries to meet its obligations under the policies. They should not be considered as bearing upon the investment experience of the divisions of Security Life Separate Account L1. - -------------------------------------------------------------------------------- Estate Designer 59 Consolidated Financial Statements Security Life of Denver Insurance Company and Subsidiaries Years ended December 31, 1999, 1998 and 1997 with Report of Independent Auditors - -------------------------------------------------------------------------------- Estate Designer 60 Security Life of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1999, 1998 and 1997 CONTENTS Report of Independent Auditors ...............................................62 Audited Consolidated Financial Statements Consolidated Balance Sheets ..................................................63 Consolidated Statements of Income ............................................65 Consolidated Statements of Comprehensive Income...............................66 Consolidated Statements of Stockholder's Equity ..............................67 Consolidated Statements of Cash Flows ........................................68 Notes to Consolidated Financial Statements ...................................70 - -------------------------------------------------------------------------------- Estate Designer 61 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 - -------------------------------------------------------------------------------- Estate Designer 62 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 ============ ===============
- -------------------------------------------------------------------------------- Estate Designer 63
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. - -------------------------------------------------------------------------------- Estate Designer 64 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. - -------------------------------------------------------------------------------- Estate Designer 65 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. - -------------------------------------------------------------------------------- Estate Designer 66 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. - -------------------------------------------------------------------------------- Estate Designer 67 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
- -------------------------------------------------------------------------------- Estate Designer 68 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. - -------------------------------------------------------------------------------- Estate Designer 69 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. - -------------------------------------------------------------------------------- Estate Designer 70 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. - -------------------------------------------------------------------------------- Estate Designer 71 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. - -------------------------------------------------------------------------------- Estate Designer 72 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. - -------------------------------------------------------------------------------- Estate Designer 73 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. - -------------------------------------------------------------------------------- Estate Designer 74 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. - -------------------------------------------------------------------------------- Estate Designer 75 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. - -------------------------------------------------------------------------------- Estate Designer 76 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 ================= ================== ================= =================
- -------------------------------------------------------------------------------- Estate Designer 77 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 ================= ================== ================= =================
- -------------------------------------------------------------------------------- Estate Designer 78 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) ==================== ==================== ====================
- -------------------------------------------------------------------------------- Estate Designer 79 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. - -------------------------------------------------------------------------------- Estate Designer 80 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. - -------------------------------------------------------------------------------- Estate Designer 81 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. - -------------------------------------------------------------------------------- Estate Designer 82 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 ========== ========== =========== =========== - -------------------------------------------------------------------------------- Estate Designer 83 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. - -------------------------------------------------------------------------------- Estate Designer 84 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. - -------------------------------------------------------------------------------- Estate Designer 85 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) - -------------------------------------------------------------------------------- Estate Designer 86 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. - -------------------------------------------------------------------------------- Estate Designer 87 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. - -------------------------------------------------------------------------------- Estate Designer 88 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. - -------------------------------------------------------------------------------- Estate Designer 89 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. - -------------------------------------------------------------------------------- Estate Designer 90 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. - -------------------------------------------------------------------------------- Estate Designer 91 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. - -------------------------------------------------------------------------------- Estate Designer 92 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. - -------------------------------------------------------------------------------- Estate Designer 93 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. - -------------------------------------------------------------------------------- Estate Designer 94 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
- -------------------------------------------------------------------------------- Estate Designer 95 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. - -------------------------------------------------------------------------------- Estate Designer 96 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. - -------------------------------------------------------------------------------- Estate Designer 97 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. - -------------------------------------------------------------------------------- Estate Designer 98 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 - -------------------------------------------------------------------------------- Estate Designer 99 Security Life Separate Account L1 Financial Statements Years ended December 31, 1999, 1998 and 1997 CONTENTS Report of Independent Auditors ..............................................101 Audited Financial Statements Statement of Net Assets .....................................................102 Statement of Operations .....................................................109 Statement of Changes in Net Assets ..........................................129 Notes to Financial Statements ...............................................149 - -------------------------------------------------------------------------------- Estate Designer 100 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 - -------------------------------------------------------------------------------- Estate Designer 101 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 Denver (427,980) (99,394) (63,161) (120,210) (99,549) (45,652) (14) ------------- ------------ ------------- --------------- ------------- ------------ ------------- 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. - -------------------------------------------------------------------------------- Estate Designer 102 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. - -------------------------------------------------------------------------------- Estate Designer 103 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. - -------------------------------------------------------------------------------- Estate Designer 104 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. - -------------------------------------------------------------------------------- Estate Designer 105 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. - -------------------------------------------------------------------------------- Estate Designer 106 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. - -------------------------------------------------------------------------------- Estate Designer 107 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. - -------------------------------------------------------------------------------- Estate Designer 108 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. - -------------------------------------------------------------------------------- Estate Designer 109 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. - -------------------------------------------------------------------------------- Estate Designer 110 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. - -------------------------------------------------------------------------------- Estate Designer 111 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. - -------------------------------------------------------------------------------- Estate Designer 112 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. - -------------------------------------------------------------------------------- Estate Designer 113 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. - -------------------------------------------------------------------------------- Estate Designer 114 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. - -------------------------------------------------------------------------------- Estate Designer 115 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. - -------------------------------------------------------------------------------- Estate Designer 116 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. - -------------------------------------------------------------------------------- Estate Designer 117 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. - -------------------------------------------------------------------------------- Estate Designer 118 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. - -------------------------------------------------------------------------------- Estate Designer 119 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. - -------------------------------------------------------------------------------- Estate Designer 120 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. - -------------------------------------------------------------------------------- Estate Designer 121 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. - -------------------------------------------------------------------------------- Estate Designer 122 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. - -------------------------------------------------------------------------------- Estate Designer 123 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. - -------------------------------------------------------------------------------- Estate Designer 124 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. - -------------------------------------------------------------------------------- Estate Designer 125 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. - -------------------------------------------------------------------------------- Estate Designer 126 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. - -------------------------------------------------------------------------------- Estate Designer 127 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. - -------------------------------------------------------------------------------- Estate Designer 128 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. - -------------------------------------------------------------------------------- Estate Designer 129 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. - -------------------------------------------------------------------------------- Estate Designer 130 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. - -------------------------------------------------------------------------------- Estate Designer 131 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. - -------------------------------------------------------------------------------- Estate Designer 132 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. - -------------------------------------------------------------------------------- Estate Designer 133 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. - -------------------------------------------------------------------------------- Estate Designer 134 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. - -------------------------------------------------------------------------------- Estate Designer 135 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ------------ ----------------------------------------- ------------- ------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 16,007,172 $ 3,982,203 $ 4,326,660 $ 5,972,694 $ 1,463,539 $ 178,227 $ 83,849 Net realized gains (losses) on investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599 Net unrealized gains (losses) on investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087 ------------ ----------------------------------------- ------------- ------------------------ Increase (decrease) in net assets from operations 43,310,423 2,006,390 11,837,754 27,606,124 2,068,000 (450,380) 242,535 ------------ ----------------------------------------- ------------- ------------------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 128,820,440 12,563,792 13,089,164 92,335,231 8,092,294 875,501 1,864,458 Cost of insurance and administrative charges (14,458,798) (2,063,802) (2,525,683) (8,200,381) (1,481,570) (108,634) (78,728) Benefit payments (306,862) (11,220) (26,492) (259,989) (9,161) - - Surrenders (10,842,736) (725,767) (859,454) (8,654,377) (586,533) (15,198) (1,407) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (3,936,799) 8,461,193 4,831,250 (25,231,056) 6,011,967 216,552 1,773,295 Other (41,582) (87,331) (18,626) 54,208 9,107 1,060 - ------------ ----------------------------------------- ------------- ------------------------ Increase (decrease) from principal transactions 99,233,663 18,136,865 14,490,159 50,043,636 12,036,104 969,281 3,557,618 ------------ ----------------------------------------- ------------- ------------------------ Total increase (decrease) in net assets 142,544,086 20,143,255 26,327,913 77,649,760 14,104,104 518,901 3,800,153 Net assets at beginning of year 162,486,020 26,924,496 28,100,608 90,636,169 15,526,649 1,298,098 - ------------ ----------------------------------------- ------------- ------------------------ Net assets at end of year $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ ========================================= ============= ========================
See accompanying notes. - -------------------------------------------------------------------------------- Estate Designer 136 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
NB ----------------------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners ----------------- ------------------- ---------------- ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 3,982,203 $ 322,085 $1,526,449 $133,352 $ 2,000,317 Net realized gains (losses) on investments 347,823 10,003 (264,148) (53,894) 655,862 Net unrealized gains (losses) on investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475) ----------------- ------------------- ---------------- ---------------- ---------------- Increase (decrease) in net assets from operations 2,006,390 391,457 1,180,725 18,504 415,704 ----------------- ------------------- ---------------- ---------------- ---------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 12,563,792 3,839,599 2,578,265 31,593 6,114,335 Cost of insurance and administrative charges (2,063,802) (492,782) (393,894) (14,839) (1,162,287) Benefit payments (11,220) - - - (11,220) Surrenders (725,767) (15,922) (419,497) (3,243) (287,105) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,461,193 5,212,588 513,663 (894,126) 3,629,068 Other (87,331) (31,757) 3,226 (31,566) (27,234) ----------------- ------------------- ---------------- ---------------- ---------------- Increase (decrease) from principal transactions 18,136,865 8,511,726 2,281,763 (912,181) 8,255,557 ----------------- ------------------- ---------------- ---------------- ---------------- Total increase (decrease) in net assets 20,143,255 8,903,183 3,462,488 (893,677) 8,671,261 Net assets at beginning of year 26,924,496 6,675,166 5,563,672 893,677 13,791,981 ----------------- ------------------- ---------------- ---------------- ---------------- Net assets at end of year $47,067,751 $15,578,349 $9,026,160 $ - $22,463,242 ================= =================== ================ ================ ================
See accompanying notes. - -------------------------------------------------------------------------------- Estate Designer 137 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
ALGER ---------------------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ----------------- ------------------ --------------- ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 4,326,660 $ 1,585,785 $ 539,729 $ 2,083,336 $ 117,810 Net realized gains (losses) on investments 1,685,294 186,963 316,932 915,872 265,527 Net unrealized gains (losses) on investments 5,825,800 166,990 1,022,340 3,099,428 1,537,042 ----------------- ------------------ --------------- ---------------- ---------------- Increase (decrease) in net assets from operations 11,837,754 1,939,738 1,879,001 6,098,636 1,920,379 ----------------- ------------------ --------------- ---------------- ---------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 13,089,164 4,154,774 2,573,424 5,298,963 1,062,003 Cost of insurance and administrative charges (2,525,683) (803,988) (473,224) (989,260) (259,211) Benefit payments (26,492) (14,248) (12,244) - - Surrenders (859,454) (196,345) (376,263) (216,867) (69,979) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 4,831,250 (35,168) 528,261 3,094,366 1,243,791 Other (18,626) (504) (14,286) 1,597 (5,433) ----------------- ------------------ --------------- ---------------- ---------------- Increase (decrease) from principal transactions 14,490,159 3,104,521 2,225,668 7,188,799 1,971,171 ----------------- ------------------ --------------- ---------------- ---------------- Total increase (decrease) in net assets 26,327,913 5,044,259 4,104,669 13,287,435 3,891,550 Net assets at beginning of year 28,100,608 10,459,112 5,115,538 9,616,179 2,909,779 ----------------- ------------------ --------------- ---------------- ---------------- Net assets at end of year $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 ================= ================== =============== ================ ================
See accompanying notes. - -------------------------------------------------------------------------------- Estate Designer 138 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
FIDELITY --------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 --------------- -------------- --------------- -------------- --------------- -------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 5,972,694 $ 745,317 $ 2,480,616 $ 886,122 $ 713,205 $ 1,147,434 Net realized gains (losses) on investments 6,403,348 20,247 1,534,000 298,379 - 4,550,722 Net unrealized gains (losses) on investments 15,230,082 315,702 4,444,805 707,398 - 9,762,177 --------------- -------------- --------------- -------------- --------------- -------------- Increase (decrease) in net assets from operations 27,606,124 1,081,266 8,459,421 1,891,899 713,205 15,460,333 --------------- -------------- --------------- -------------- --------------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 92,335,231 2,713,832 8,443,426 5,709,711 55,421,815 20,046,447 Cost of insurance and administrative charges (8,200,381) (490,838) (1,358,671) (939,010) (1,769,895) (3,641,967) Benefit payments (259,989) - (8,890) (8,379) (240,733) (1,987) Surrenders (8,654,377) (652,157) (2,494,098) (438,536) (2,335,262) (2,734,324) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (25,231,056) 1,440,884 1,798,160 2,169,798 (48,429,964) 17,790,066 Other 54,208 7,219 (14,128) (29,375) 39,827 50,665 --------------- -------------- --------------- -------------- --------------- -------------- Increase (decrease) from principal transactions 50,043,636 3,018,940 6,365,799 6,464,209 2,685,788 31,508,900 --------------- -------------- --------------- -------------- --------------- -------------- Total increase (decrease) in net assets 77,649,760 4,100,206 14,825,220 8,356,108 3,398,993 46,969,233 Net assets at beginning of year 90,636,169 6,137,073 18,074,922 12,225,779 15,013,259 39,185,136 --------------- -------------- --------------- -------------- --------------- -------------- Net assets at end of year $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 =============== ============== =============== ============== =============== ==============
See accompanying notes. - -------------------------------------------------------------------------------- Estate Designer 139 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. - -------------------------------------------------------------------------------- Estate Designer 140 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
VAN ECK -------------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bonds Markets Estate --------------- -------------- ---------------- -------------- -------------- ------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 178,227 $ 44,624 $ 135,776 $ (212) $ (1,736) $ (225) Net realized gains (losses) on investments (260,570) 4,682 (162,110) 130 (101,436) (1,836) Net unrealized gains (losses) on investments (368,037) (23,403) (395,698) 3,953 47,140 (29) --------------- -------------- ---------------- -------------- -------------- ------------- Increase (decrease) in net assets from operations (450,380) 25,903 (422,032) 3,871 (56,032) (2,090) --------------- -------------- ---------------- -------------- -------------- ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 875,501 (1,347) 571,430 129,336 137,102 38,980 Cost of insurance and administrative charges (108,634) (9,423) (86,867) (1,544) (7,777) (3,023) Benefit payments - - - 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. - -------------------------------------------------------------------------------- Estate Designer 141 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998 AIM -------------------------------------- Total Capital Government AIM Appreciation Securities ------------ ------------ ------------ INCREASE (DECREASE) IN NET ASSETS Operations Net investment income (loss) $ 83,849 $ 24,053 $ 59,796 Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 ------------ ------------ ------------ Increase (decrease) in net assets from operations 242,535 139,963 102,572 ------------ ------------ ------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 1,864,458 329,635 1,534,823 Cost of insurance and administrative charges (78,728) (28,940) (49,788) Benefit payments - - - Surrenders (1,407) (1,407) - Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 1,773,295 765,185 1,008,110 Other - - - ------------ ------------ ------------ Increase (decrease) from principal transactions 3,557,618 1,064,473 2,493,145 ------------ ------------ ------------ Total increase (decrease) in net assets 3,800,153 1,204,436 2,595,717 Net assets at beginning of year - - - ------------ ------------ ------------ Net assets at end of year $3,800,153 $1,204,436 $2,595,717 ============ ============ ============ See accompanying notes. - -------------------------------------------------------------------------------- Estate Designer 142 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck ------------ -------------- -------------- -------------- --------------- ------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 3,345,072 $ 543,430 $ 181,965 $ 1,633,324 $ 972,193 $ 14,160 Net realized gains (losses) on investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889 Net unrealized gains (losses) on investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508) ------------ -------------- -------------- -------------- --------------- ------------- Increase (decrease) in net assets from operations 17,187,597 3,223,311 2,724,772 9,430,162 1,794,811 14,541 ------------ -------------- -------------- -------------- --------------- ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 104,747,260 5,555,766 6,944,048 89,309,110 2,683,620 254,716 Cost of insurance and administrative charges (8,284,944) (957,887) (1,466,664) (5,155,026) (614,145) (91,222) Benefit payments (406,386) (20,591) (63,369) (322,263) (163) - Surrenders (1,977,696) (146,698) (412,252) (1,294,484) (112,699) (11,563) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (6,642,529) 8,721,432 9,006,938 (32,708,946) 7,796,299 541,748 Other 5,891 9,817 11,046 (21,999) 11,180 (4,153) ------------ -------------- -------------- -------------- --------------- ------------- Increase (decrease) from principal transactions 87,441,596 13,161,839 14,019,747 49,806,392 9,764,092 689,526 ------------ -------------- -------------- -------------- --------------- ------------- Total increase (decrease) in net assets 104,629,193 16,385,150 16,744,519 59,236,554 11,558,903 704,067 Net assets at beginning of year 57,856,827 10,539,346 11,356,089 31,399,615 3,967,746 594,031 ------------ -------------- -------------- -------------- --------------- ------------- Net assets at end of year $162,486,020 $26,924,496 $28,100,608 $90,636,169 $15,526,649 $1,298,098 ============ ============== ============== ============== =============== =============
See accompanying notes. - -------------------------------------------------------------------------------- Estate Designer 143 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
NB ----------------------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners ----------------- ------------------- ---------------- ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 543,430 $ 122,942 $ 158,538 $ 61,720 $ 200,230 Net realized gains (losses) on investments 406,286 (20,056) 14,997 25,762 385,583 Net unrealized gains (losses) on investments 2,273,595 159,151 533,906 26,882 1,553,656 ----------------- ------------------- ---------------- ---------------- ---------------- Increase (decrease) in net assets from operations 3,223,311 262,037 707,441 114,364 2,139,469 ----------------- ------------------- ---------------- ---------------- ---------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 5,555,766 1,332,125 1,158,704 324,257 2,740,680 Cost of insurance and administrative charges (957,887) (163,472) (219,117) (62,075) (513,223) Benefit payments (20,591) - - - (20,591) Surrenders (146,698) (3,761) (71,838) (792) (70,307) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,721,432 2,758,363 2,141,068 (1,023,987) 4,845,988 Other 9,817 (2,202) 11,700 (6,404) 6,723 ----------------- ------------------- ---------------- ---------------- ---------------- Increase (decrease) from principal transactions 13,161,839 3,921,053 3,020,517 (769,001) 6,989,270 ----------------- ------------------- ---------------- ---------------- ---------------- Total increase (decrease) in net assets 16,385,150 4,183,090 3,727,958 (654,637) 9,128,739 Net assets at beginning of year 10,539,346 2,492,076 1,835,714 1,548,314 4,663,242 ----------------- ------------------- ---------------- ---------------- ---------------- Net assets at end of year $26,924,496 $6,675,166 $5,563,672 $ 893,677 $13,791,981 ================= =================== ================ ================ ================
See accompanying notes. - -------------------------------------------------------------------------------- Estate Designer 144 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
ALGER -------------------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ----------------- ------------------ --------------- --------------- ---------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 181,965 $ 167,785 $ 27,807 $ 376 $ (14,003) Net realized gains (losses) on investments 894,818 114,651 228,363 237,727 314,077 Net unrealized gains (losses) on investments 1,647,989 483,518 246,489 970,056 (52,074) ----------------- ------------------ --------------- --------------- ---------------- Increase (decrease) in net assets from operations 2,724,772 765,954 502,659 1,208,159 248,000 ----------------- ------------------ --------------- --------------- ---------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 6,944,048 2,630,863 1,276,492 2,334,377 702,316 Cost of insurance and administrative charges (1,466,664) (526,742) (299,891) (479,902) (160,129) Benefit payments (63,369) - (62,593) (776) - Surrenders (412,252) (255,386) (74,317) (58,850) (23,699) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 9,006,938 3,518,384 1,419,061 2,796,911 1,272,582 Other 11,046 (6,069) 19,072 2,082 (4,039) ----------------- ------------------ --------------- --------------- ---------------- Increase (decrease) from principal transactions 14,019,747 5,361,050 2,277,824 4,593,842 1,787,031 ----------------- ------------------ --------------- --------------- ---------------- Total increase (decrease) in net assets 16,744,519 6,127,004 2,780,483 5,802,001 2,035,031 Net assets at beginning of year 11,356,089 4,332,108 2,335,055 3,814,178 874,748 ----------------- ------------------ --------------- --------------- ---------------- Net assets at end of year $28,100,608 $10,459,112 $5,115,538 $9,616,179 $2,909,779 ================= ================== =============== =============== ================
See accompanying notes. - -------------------------------------------------------------------------------- Estate Designer 145 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
FIDELITY ------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 -------------- ------------- -------------- -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 1,633,324 $ 177,599 $ 183,570 $ 391,160 $ 657,285 $ 223,710 Net realized gains (losses) on investments 1,320,426 33,000 662,436 332,544 - 292,446 Net unrealized gains (losses) on investments 6,476,412 350,408 1,347,793 (305,456) - 5,083,667 ----------- ------------- -------------- -------------- -------------- -------------- Increase (decrease) in net assets from operations 9,430,162 561,007 2,193,799 418,248 657,285 5,599,823 ----------- ------------- -------------- -------------- -------------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 89,309,110 2,162,759 4,558,270 2,410,373 73,366,740 6,810,968 Cost of insurance and administrative charges (5,155,026) (242,289) (813,161) (525,615) (2,213,630) (1,360,331) Benefit payments (322,263) (20,969) (548) (1,233) (257,371) (42,142) Surrenders (1,294,484) (92,218) (135,829) (91,869) (870,621) (103,947) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (32,708,946) 2,215,879 5,219,755 5,730,183 (63,929,591) 18,054,828 Other (21,999) 7,567 3,217 10,563 (35,219) (8,127) ----------- ------------- -------------- -------------- -------------- -------------- Increase (decrease) from principal transactions 49,806,392 4,030,729 8,831,704 7,532,402 6,060,308 23,351,249 ----------- ------------- -------------- -------------- -------------- -------------- Total increase (decrease) in net assets 59,236,554 4,591,736 11,025,503 7,950,650 6,717,593 28,951,072 Net assets at beginning of year 31,399,615 1,545,337 7,049,419 4,275,129 8,295,666 10,234,064 ----------- ------------- -------------- -------------- -------------- -------------- Net assets at end of year $90,636,169 $6,137,073 $18,074,922 $12,225,779 $15,013,259 $39,185,136 =========== ============= ============== ============== ============== ==============
See accompanying notes. - -------------------------------------------------------------------------------- Estate Designer 146 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. - -------------------------------------------------------------------------------- Estate Designer 147 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997 VAN ECK -------------------------------------- Worldwide Total Worldwide Hard Van Eck Balanced Assets ----------- ----------- ------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 14,160 $ 5,677 $ 8,483 Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ----------- ----------- ------------- Increase (decrease) in net assets from operations 14,541 47,584 (33,043) ----------- ----------- ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 254,716 65,167 189,549 Cost of insurance and administrative charges (91,222) (44,774) (46,448) Benefit payments - - - Surrenders (11,563) (7,995) (3,568) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 541,748 (120) 541,868 Other (4,153) (319) (3,834) ----------- ----------- ------------- Increase (decrease) from principal transactions 689,526 11,959 677,567 ----------- ----------- ------------- Total increase (decrease) in net assets 704,067 59,543 644,524 Net assets at beginning of year 594,031 327,805 266,226 ----------- ----------- ------------- Net assets at end of year $1,298,098 $387,348 $910,750 =========== =========== ============= See accompanying notes. - -------------------------------------------------------------------------------- Estate Designer 148 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 - -------------------------------------------------------------------------------- Estate Designer 149 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 - -------------------------------------------------------------------------------- Estate Designer 150 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. - -------------------------------------------------------------------------------- Estate Designer 151 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. - -------------------------------------------------------------------------------- Estate Designer 152 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 ================== ==================
- -------------------------------------------------------------------------------- Estate Designer 153 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. - -------------------------------------------------------------------------------- Estate Designer 154 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. - -------------------------------------------------------------------------------- Estate Designer 155 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
- -------------------------------------------------------------------------------- Estate Designer 156 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
- -------------------------------------------------------------------------------- Estate Designer 157 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
- -------------------------------------------------------------------------------- Estate Designer 158 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 ================= =============== ================= =============== ===============
- -------------------------------------------------------------------------------- Estate Designer 159 APPENDIX A FACTORS FOR THE GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST FOR A LIFE INSURANCE POLICY
Attained Attained Attained Attained Age of Younger Age of Younger Age of Younger Age of Younger Insured Factor Insured Factor Insured Factor Insured Factor 0 2.50 25 2.50 50 1.85 75 1.05 1 2.50 26 2.50 51 1.78 76 1.05 2 2.50 27 2.50 52 1.71 77 1.05 3 2.50 28 2.50 53 1.64 78 1.05 4 2.50 29 2.50 54 1.57 79 1.05 5 2.50 30 2.50 55 1.50 80 1.05 6 2.50 31 2.50 56 1.46 81 1.05 7 2.50 32 2.50 57 1.42 82 1.05 8 2.50 33 2.50 58 1.38 83 1.05 9 2.50 34 2.50 59 1.34 84 1.05 10 2.50 35 2.50 60 1.30 85 1.05 11 2.50 36 2.50 61 1.28 86 1.05 12 2.50 37 2.50 62 1.26 87 1.05 13 2.50 38 2.50 63 1.24 88 1.05 14 2.50 39 2.50 64 1.22 89 1.05 15 2.50 40 2.50 65 1.20 90 1.05 16 2.50 41 2.43 66 1.19 91 1.04 17 2.50 42 2.36 67 1.18 92 1.03 18 2.50 43 2.29 68 1.17 93 1.02 19 2.50 44 2.22 69 1.16 94 1.01 20 2.50 45 2.15 70 1.15 95 1.00 21 2.50 46 2.09 71 1.13 96 1.00 22 2.50 47 2.03 72 1.11 97 1.00 23 2.50 48 1.97 73 1.09 98 1.00 24 2.50 49 1.91 74 1.07 99 1.00 100 1.00
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Estate Designer 160 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 net portfolio's management fees after any voluntary waiver and other operating expenses but do not reflect the policy level or separate account asset-based charges and deductions, which if reflected, would result in lower total return figures than those shown. The illustrations are based on the payment of a $13,000 annual premium, received at the beginning of each year, for a hypothetical policy with a $1,000,000 stated death benefit, the guideline premium test, death benefit option 1, issued to a preferred, nonsmoker male, age 50 and a preferred, nonsmoker female, age 50. It is assumed that all premiums are allocated to the variable investment option illustrated for the period shown. The benefits are calculated for a specific date. The amount and timing of premium payments and the use of other policy features, such as policy loans, would affect individual policy benefits. The amounts shown for the cash surrender values, account values and death benefits take into account the charges against premiums, current cost of insurance and monthly deductions, the daily charge against the separate account for mortality and expense risks, and each portfolio's charges and expenses. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 42. This prospectus also contains illustrations based on assumed rates of return. SEE ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, CASH SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE 51. Past performance is not an indication of future results. Actual investment results may be ore or less than those shown in the hypothetical illustrations. - -------------------------------------------------------------------------------- Estate Designer 161 HYPOTHETICAL ILLUSTRATIONS Nonsmoker Male Age 50 Preferred Risk Class Nonsmoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- AIM V.I. CAPITAL APPRECIATION FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 2.50% 11,997 10,697 1,000,000 12/31/95 35.69% 29,926 28,626 1,000,000 12/31/96 17.58% 46,867 45,567 1,000,000 12/31/97 13.51% 62,945 62,945 1,000,000 12/31/98 19.30% 86,741 86,741 1,000,000 12/31/99 44.61% 139,434 139,434 1,000,000 AIM V.I. GOVERNMENT SECURITIES FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 -3.73% 11,321 10,021 1,000,000 12/31/95 15.56% 24,829 23,529 1,000,000 12/31/96 2.29% 35,698 34,398 1,000,000 12/31/97 8.16% 47,957 47,957 1,000,000 12/31/98 7.66% 62,199 62,199 1,000,000 12/31/99 -1.32% 70,907 70,907 1,000,000 ALGER AMERICAN GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 4.14% 12,175 10,875 1,000,000 12/31/91 40.39% 31,184 29,884 1,000,000 12/31/92 12.38% 46,231 44,931 1,000,000 12/31/93 22.47% 67,188 67,188 1,000,000 12/31/94 1.45% 77,947 77,947 1,000,000 12/31/95 36.37% 119,546 119,546 1,000,000 12/31/96 13.35% 146,065 146,065 1,000,000 12/31/97 25.75% 196,261 196,261 1,000,000 12/31/98 48.07% 304,991 304,991 1,000,000 12/31/99 33.74% 419,773 419,773 1,000,000 The assumptions underlying these values are described in Performance Information, page 161. * 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. - -------------------------------------------------------------------------------- Estate Designer 162 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 50 Preferred Risk Class Nonsmoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 12.04% 13,033 11,733 1,000,000 12/31/97 19.68% 27,720 26,420 1,000,000 12/31/98 57.83% 59,202 57,902 1,000,000 12/31/99 78.06% 120,907 120,907 1,000,000 ALGER AMERICAN MIDCAP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 -1.54% 11,558 10,258 1,000,000 12/31/95 44.45% 31,179 29,879 1,000,000 12/31/96 11.90% 46,032 44,732 1,000,000 12/31/97 15.01% 62,831 62,831 1,000,000 12/31/98 30.30% 94,649 94,649 1,000,000 12/31/99 31.85% 137,426 137,426 1,000,000 ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 8.71% 12,671 11,371 1,000,000 12/31/91 57.54% 35,676 34,376 1,000,000 12/31/92 3.55% 47,278 45,978 1,000,000 12/31/93 13.28% 63,279 63,279 1,000,000 12/31/94 -4.38% 69,724 69,724 1,000,000 12/31/95 44.31% 114,762 114,762 1,000,000 12/31/96 4.18% 129,251 129,251 1,000,000 12/31/97 11.39% 155,181 155,181 1,000,000 12/31/98 15.53% 190,695 190,695 1,000,000 12/31/99 43.42% 287,435 287,435 1,000,000 The assumptions underlying these values are described in Performance Information, page 161. * 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. - -------------------------------------------------------------------------------- Estate Designer 163 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 50 Preferred Risk Class Nonsmoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- FIDELITY VIP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 -11.73% 10,454 9,154 1,000,000 12/31/91 45.51% 29,807 28,507 1,000,000 12/31/92 9.32% 43,499 42,199 1,000,000 12/31/93 19.37% 62,234 62,234 1,000,000 12/31/94 -0.02% 71,892 71,892 1,000,000 12/31/95 35.36% 110,517 110,517 1,000,000 12/31/96 14.71% 137,542 137,542 1,000,000 12/31/97 23.48% 182,257 182,257 1,000,000 12/31/98 39.49% 267,882 267,882 1,000,000 12/31/99 37.44% 380,760 380,760 1,000,000 FIDELITY VIP MONEY MARKET PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 8.04% 12,599 11,299 1,000,000 12/31/91 6.09% 24,207 22,907 1,000,000 12/31/92 3.90% 35,606 34,306 1,000,000 12/31/93 3.23% 45,651 45,651 1,000,000 12/31/94 4.25% 57,823 57,823 1,000,000 12/31/95 5.87% 71,517 71,517 1,000,000 12/31/96 5.41% 85,523 85,523 1,000,000 12/31/97 5.51% 101,147 101,147 1,000,000 12/31/98 5.46% 117,437 117,437 1,000,000 12/31/99 5.17% 134,095 134,095 1,000,000 The assumptions underlying these values are described in Performance Information, page 161. * 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. - -------------------------------------------------------------------------------- Estate Designer 164 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 50 Preferred Risk Class Nonsmoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- FIDELITY VIP OVERSEAS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 -1.67% 11,544 10,244 1,000,000 12/31/91 8.00% 23,498 22,198 1,000,000 12/31/92 -10.72% 30,080 28,780 1,000,000 12/31/93 37.35% 53,400 53,400 1,000,000 12/31/94 1.72% 64,232 64,232 1,000,000 12/31/95 9.74% 81,136 81,136 1,000,000 12/31/96 13.15% 102,654 102,654 1,000,000 12/31/97 11.56% 125,958 125,958 1,000,000 12/31/98 12.81% 153,456 153,456 1,000,000 12/31/99 42.55% 232,976 232,976 1,000,000 FIDELITY VIP II ASSET MANAGER PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 6.72% 12,455 11,155 1,000,000 12/31/91 22.56% 27,664 26,364 1,000,000 12/31/92 11.71% 42,057 40,757 1,000,000 12/31/93 21.23% 61,477 61,477 1,000,000 12/31/94 -6.09% 66,788 66,788 1,000,000 12/31/95 16.96% 89,482 89,482 1,000,000 12/31/96 14.60% 113,474 113,474 1,000,000 12/31/97 20.65% 149,233 149,233 1,000,000 12/31/98 15.05% 183,105 183,105 1,000,000 12/31/99 11.09% 214,117 214,117 1,000,000 The assumptions underlying these values are described in Performance Information, page 161. * 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. - -------------------------------------------------------------------------------- Estate Designer 165 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 50 Preferred Risk Class Nonsmoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- FIDELITY VIP II INDEX 500 PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/93 9.74% 12,783 11,483 1,000,000 12/31/94 1.04% 23,280 21,980 1,000,000 12/31/95 37.19% 45,507 44,207 1,000,000 12/31/96 22.82% 66,498 66,498 1,000,000 12/31/97 32.82% 101,327 101,327 1,000,000 12/31/98 28.31% 142,227 142,227 1,000,000 12/31/99 20.51% 182,470 182,470 1,000,000 INVESCO VIF-EQUITY INCOME FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 29.25% 14,906 13,606 1,000,000 12/31/96 22.28% 30,577 29,277 1,000,000 12/31/97 28.17% 51,849 50,549 1,000,000 12/31/98 15.30% 69,650 69,650 1,000,000 12/31/99 14.84% 91,121 91,121 1,000,000 INVESCO VIF-HIGH YIELD FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 19.76% 13,873 12,573 1,000,000 12/31/96 16.59% 27,997 26,697 1,000,000 12/31/97 17.33% 44,522 43,222 1,000,000 12/31/98 1.42% 53,818 53,818 1,000,000 12/31/99 9.20% 69,451 69,451 1,000,000 INVESCO VIF-SMALL COMPANY GROWTH FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 16.38% 13,505 12,205 1,000,000 12/31/99 91.06% 44,692 43,392 1,000,000 The assumptions underlying these values are described in Performance Information, page 161. * 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. - -------------------------------------------------------------------------------- Estate Designer 166 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 50 Preferred Risk Class Nonsmoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- INVESCO VIF-TOTAL RETURN FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 22.79% 14,202 12,902 1,000,000 12/31/96 12.18% 27,336 26,036 1,000,000 12/31/97 22.91% 45,796 44,496 1,000,000 12/31/98 9.56% 59,570 59,570 1,000,000 12/31/99 -3.40% 66,888 66,888 1,000,000 INVESCO VIF-UTILITIES FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 9.08% 12,711 11,411 1,000,000 12/31/96 12.76% 25,804 24,504 1,000,000 12/31/97 23.41% 44,103 42,803 1,000,000 12/31/98 25.48% 66,202 66,202 1,000,000 12/31/99 19.13% 90,469 90,469 1,000,000 NEUBERGER BERMAN GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 -8.19% 10,837 9,537 1,000,000 12/31/91 29.73% 27,153 25,853 1,000,000 12/31/92 9.54% 40,699 39,399 1,000,000 12/31/93 6.79% 52,645 52,645 1,000,000 12/31/94 -4.99% 59,245 59,245 1,000,000 12/31/95 31.73% 90,995 90,995 1,000,000 12/31/96 9.14% 109,678 109,678 1,000,000 12/31/97 29.01% 154,756 154,756 1,000,000 12/31/98 15.53% 190,207 190,207 1,000,000 12/31/99 50.40% 300,730 300,730 1,000,000 The assumptions underlying these values are described in Performance Information, page 161. * 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. - -------------------------------------------------------------------------------- Estate Designer 167 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 50 Preferred Risk Class Nonsmoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- NEUBERGER BERMAN LIMITED MATURITY BOND PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 8.32% 12,629 11,329 1,000,000 12/31/91 11.34% 25,398 24,098 1,000,000 12/31/92 5.18% 37,278 35,978 1,000,000 12/31/93 6.63% 48,944 48,944 1,000,000 12/31/94 -0.15% 58,622 58,622 1,000,000 12/31/95 10.94% 75,851 75,851 1,000,000 12/31/96 4.31% 89,113 89,113 1,000,000 12/31/97 6.74% 106,138 106,138 1,000,000 12/31/98 4.39% 121,413 121,413 1,000,000 12/31/99 1.48% 133,374 133,374 1,000,000 NEUBERGER BERMAN PARTNERS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 36.47% 15,692 14,392 1,000,000 12/31/96 29.57% 33,364 32,064 1,000,000 12/31/97 31.25% 56,708 55,408 1,000,000 12/31/98 4.21% 67,923 67,923 1,000,000 12/31/99 7.37% 83,314 83,314 1,000,000 The assumptions underlying these values are described in Performance Information, page 161. * 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. - -------------------------------------------------------------------------------- Estate Designer 168 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 50 Preferred Risk Class Nonsmoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- VAN ECK WORLDWIDE BOND FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 11.25% 12,947 11,647 1,000,000 12/31/91 18.39% 27,329 26,029 1,000,000 12/31/92 -5.25% 35,477 34,177 1,000,000 12/31/93 7.79% 47,554 47,554 1,000,000 12/31/94 -1.32% 56,568 56,568 1,000,000 12/31/95 17.30% 77,840 77,840 1,000,000 12/31/96 2.53% 89,608 89,608 1,000,000 12/31/97 2.38% 102,282 102,282 1,000,000 12/31/98 12.75% 126,868 126,868 1,000,000 12/31/99 -7.82% 126,089 126,089 1,000,000 VAN ECK WORLDWIDE EMERGING MARKETS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 26.82% 14,641 13,341 1,000,000 12/31/97 -11.61% 22,102 20,802 1,000,000 12/31/98 -34.15% 21,494 20,194 1,000,000 12/31/99 100.28% 61,101 61,101 1,000,000 VAN ECK WORLDWIDE HARD ASSETS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/91 -2.93% 11,408 10,108 1,000,000 12/31/92 -4.09% 20,831 19,531 1,000,000 12/31/93 64.83% 50,524 49,224 1,000,000 12/31/94 -4.78% 56,169 56,169 1,000,000 12/31/95 10.99% 73,190 73,190 1,000,000 12/31/96 18.04% 97,817 97,817 1,000,000 12/31/97 -1.67% 105,417 105,417 1,000,000 12/31/98 -30.93% 79,666 79,666 1,000,000 12/31/99 21.00% 109,026 109,026 1,000,000 The assumptions underlying these values are described in Performance Information, page 161. * 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. - -------------------------------------------------------------------------------- Estate Designer 169 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 50 Preferred Risk Class Nonsmoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- VAN ECK WORLDWIDE REAL ESTATE FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 -11.35% 10,495 9,195 1,000,000 12/31/99 -2.01% 20,377 19,077 1,000,000 The assumptions underlying these values are described in Performance Information, page 161. * 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. - -------------------------------------------------------------------------------- Estate Designer 170 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 I.A(6)(b-g) and the By-Laws listed as Exhibits I.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. - -------------------------------------------------------------------------------- Estate Designer II - 1 Cross-Reference table. 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). [TO BE FILED BY AMENDMENT) Ernst & Young, L.L.P. (See Exhibit 7A). [TO BE FILED BY AMENDMENT) Sutherland Asbill & Brennan LLP (See Exhibit 7B). [TO BE FILED BY AMENDMENT] 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./8/ (ii) Amendment to Security Life of Denver Insurance Company Distribution Agreement./11/ (b) Specimen Amendment to Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Compensation Schedule./11/ (c) Commission Schedule for Policies./11/ (4) Not Applicable. (5) (a) Specimen Estate Designer Universal Life Insurance Policy (Form No.2506(JTVUL)- 5/00)./11/ (b) Adjustable Term Insurance Rider (Form No. R2007-5/00)./4/ (c) Single Life Term Insurance Rider (Form No.R2004-8/99)./4/ (6) (a) Security Life of Denver's Restated Articles of Incorporation./1/ (b-g) Amendments to Articles of Incorporation through June 12, 1987./1/ - -------------------------------------------------------------------------------- Estate Designer II - 2 (h) Security Life of Denver's By-Laws./1/ (i) Bylaws of Security Life of Denver Insurance Company (Restated with Amendments through September 30, 1997)./2/ (7) Not Applicable. (8) (a) Participation Agreements (i) Participation Agreement by and among AIM Variable Insurance Funds, Inc., Life Insurance Company, on Behalf of Itself and its Separate Accounts and Name of Underwriter of Variable Contracts and Policies./3/ (ii) Sales Agreement by and among The Alger American Fund, Fred Alger Management, Inc., and Security Life of Denver Insurance Company./1/ (iii) Sales Agreement by and among Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, and Security Life of Denver Insurance Company./1/ (iv) Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./1/ (v) Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./1/ (vi) Participation Agreement among INVESCO Variable Investment Funds, Inc., INVESCO Funds Group, Inc., and Security Life of Denver Insurance Company./1/ (vii) Participation Agreement between Van Eck Investment Trust and the Trust's investment adviser, Van Eck Associates Corporation, and Security Life of Denver Insurance Company./1/ (viii) Specimen Participation Agreement among Security Life of Denver Insurance Company, The GCG Trust and Directed Services, Inc./10/ (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/ - -------------------------------------------------------------------------------- Estate Designer II - 3 (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./8/ (xii) Fourth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Company./8/ (xiii) Fourth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./8/ (xiv) Amendment No. 2 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc./8/ (xv) Fourth Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc./9/ (xvi) Amendment No. 3 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc./9/ (xvii) Fifth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./9/ (xviii) Fifth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./9/ (xix) Amendment No. 4 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc./11/ (xx) Sixth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./11/ (xxi) Sixth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company./11/ (xxii) Fifth Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc./11/ (c) (i) Service Agreement between Fred Alger Management, Inc. and Security Life of Denver Insurance Company./6/ (ii) Expense Allocation Agreement Between A I M Advisors, Inc., AIM Distributors, Inc. and Security Life of Denver./7/ (iii) Service Agreement between INVESCO Funds Group, Inc. and Security Life of Denver Insurance Company./7/ (iv) Service Agreement between Neuberger & Berman Management Incorporated and Security Life of Denver Insurance Company./7/ (v) Service Agreement between Fidelity Investments Institutional Operations Company, Inc. and Security Life of Denver Insurance Company./7/ (vi) Side Letter between Van Eck Worldwide Insurance Trust and Security Life of Denver./7/ (9) Not Applicable. - -------------------------------------------------------------------------------- Estate Designer II - 4 (10) Specimen Estate Designer Life Insurance Application with Binding Limited Life Insurance Coverage Form (Form No. Q2006-9/97)./11/ 2. Included as Exhibit l.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. B. Consent of Ernst & Young L.L.P. (TO BE FILED BY AMENDMENT] C. Consent of Sutherland Asbill & Brennan LLP. [TO BE FILED BY AMENDMENT] 8. Not Applicable. 11. Issuance, Transfer and Redemption Procedures Memorandum. - ------------- /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 Ll, 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 Ll, 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 Ll, filed with the Securities and Exchange Commission on March 2, 1998 (File No. 33-74190). /4/ 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 Ll, filed with the Securities and Exchange Commission on February 22, 1999 (File No. 333-72753). /5/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form. S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account Ll, filed with the Securities and Exchange Commission on March 30, 1999 (File Nc. 333-72753). /6/ Incorporated herein by reference to Post-Effective Amendment 140. 7 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account Ll, filed with the Securities and Exchange Commission on April 27, 1998 (File No. 33-74190). /7/ Incorporated herein by reference to Post-Effective Amendment No. 10 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account Ll, filed with the Securities and Exchange Commission on April 23, 1999 (File No. 33-74190). /8/ Incorporated herein by reference to 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 Ll, filed with the Securities and Exchange Commission on May 10, 1999 (File No. 333-72753). /9/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account Ll, filed with the Securities and Exchange Commission on December 3, 1999 (File No. 333-90577). /10/ 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). /11/ 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). - -------------------------------------------------------------------------------- Estate Designer 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 Ll, 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 7th 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 Ll (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 - -------------------------------------------------------------------------------- Estate Designer 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 - Controller DIRECTORS: /s/ P. Randall Lowery - --------------------------- P. Randall Lowery /s/ Michael W. Cunningham - --------------------------- Michael W. Cunningham - -------------------------------------------------------------------------------- Estate Designer II - 7 EXHIBIT INDEX Exhibit No. Description of Exhibit - ----------- ---------------------- 3. A. Opinion and consent of Gary W. Waggoner as to securities being registered. 11. Issuance, Transfer and Redemption Procedures Memorandum. - -------------------------------------------------------------------------------- Estate Designer II - 8 EX-1 2 COMPENSATION SCHEDULE Exhibit 1.A(3)(b)(i) SCHEDULE J COMPENSATION SCHEDULE TO SELLING AGREEMENT FOR SECURITY LIFE ESTATE DESIGNER JOINT SURVIVOR VARIABLE UNIVERSAL LIFE This Schedule is an attachment to the ING America Equities, Inc. ("ING AMERICA EQUITIES") Selling Agreement by and among the parties pursuant to paragraph 17 of that Selling Agreement, effective as of May 1, 2000, or the date that Selling Broker-Dealer submits an application for this product, whichever is later. The provisions of this Schedule shall apply only to Security Life ESTATE DESIGNER 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 Security Life of Denver Insurance Company ("SECURITY Life"). 1. Commission Structure - Option L (Levelized):
----------- ------------- ---------- ------------------------------------------------ PCA SCA RCA Trail ----------- ------------- ---------- ------------------------------------------------ Years 1 - 7 Years 1 - 7 Years 8+ Years Years Years 21+ 1 - 10 11 - 20 ----------- ------------- ---------- --------------- --------------- ---------------- 12% 4% 2% 0.20% net 0.15% net 0.10% net account value account value account value ----------- ------------- ---------- --------------- --------------- ----------------
PCA (PRIMARY COMMISSIONABLE AMOUNT) is equal to the first year's target premium (shown on policy schedule pages and illustrations). Gross premiums paid up to the PCA in any year are commissioned at the full PCA rate. If the gross premium paid in one year is less than the PCA, that difference is carried over to the next year. A new PCA is generated any time a new base coverage segment is created. Note that a death benefit option change does not create a new PCA. Premium dollars are allocated first to PCA, then to SCA, and then to RCA. SCA (SECONDARY COMMISSIONABLE AMOUNT) is equal to the difference between the gross premium received in each segment year in years one through seven and the corresponding PCA for that year. RCA (RENEWABLE COMMISSIONABLE AMOUNT) equals the gross premium received per segment year in years 8 and thereafter. Schedule J Page 1 of 4 2. Commission Structure - Option M (Modified):
---------------------------- ------------------------- ------------ --------------------------------------- PCA SCA RCA Trail ---------------------------- ------------------------- ------------ --------------------------------------- Year 1 Years Year 1 Years Years 8+ Years Years Years 2 - 7 2 - 7 1 - 10 11 - 20 21+ --------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------- 30% 7.5% 2% 4% 2% 0.20% net 0.15% net 0.10% net account account account value value value --------------- ------------ ------------ ------------ ------------ ------------ ------------ -------------
PCA (PRIMARY COMMISSIONABLE AMOUNT) is equal to the first year's target premium (shown on policy schedule pages and illustrations). A new PCA is generated any time a new base coverage segment is created. Note that a death benefit option change does not create a new PCA. Premium dollars are allocated first to PCA, then to SCA, and then to RCA. SCA (SECONDARY COMMISSIONABLE AMOUNT) is equal to the difference between the gross premium received in each segment year in years one through seven and the corresponding PCA for that year. RCA (RENEWABLE COMMISSIONABLE AMOUNT) equals the gross premium received per segment year in years 8 and thereafter. 3. Premium Receipt: Premium received within 15 days prior to a policy anniversary will result in the agent receiving commissions at the same rate as if the premium was paid on the anniversary date. 4. Selection of Commission Structure: is made at the time of policy application and cannot be changed once the application is received by Security Life. If no commission structure is requested on the application, Option L will apply. 5. Trail Commissions: are payable at each policy (not segment) anniversary based on the policy's average net account value at the end of each of the prior twelve months. The trail commission is payable annually at the end of a policy year provided the policy is in force, and not subject to grace period provisions, on that date. 6. Riders: Commissionable riders will have a separate target premium which is set at issue and is level thereafter. The Adjustable Term Insurance Rider has no target premium associated with it. 7. Commission Calculation: Commissions shall be calculated only on premium actually received an accepted by SECURITY LIFE. Commissions shall be paid only on an earned basis. Outstanding loan amounts carried over as part of a 1035 exchange are not considered commissionable premium. Schedule J Page 2 of 4 8. 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. 9. 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. 10. Compensation Payments: Compensation on initial premiums shall be due to the SELLING BROKER-DEALER at the time of the issuance of the policy. Thereafter, it shall be payable at the time of the receipt and acceptance of premium by SECURITY LIFE, except that the amount, 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 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 J in effect at the time of issue of the policy. 11. Commission Chargeback: In the event that a policy (for which a commission has been paid) is lapsed or surrendered by the Policy Owner during the first six months, or is returned to SECURITY LIFE for refund of premium during the Free Look Period as described in the policy, SECURITY LIFE and ING AMERICA Equities shall require reimbursement from SELLING BROKER-DEALER equal to 100% of the commissions paid. If a premium payment for which a commission has been paid is refunded by SECURITY LIFE, a reimbursement of the commission paid on the amount refunded will be due from the SELLING BROKER-DEALER. Further, if a policy is surrendered or has a death benefit reduction during the first three policy years, a commission chargeback applies.
------------------------------------------- ------------------------------------------- OPTION L OPTION M ------------------------------------------- ------------------------------------------- Premiums Received in PCA RCA & SCA PCA RCA & SCA ---------------------- --------------------- ------------------- ---------------------- -------------------- Months 12% 4% 30% 2% 1 - 6 ---------------------- --------------------- ------------------- ---------------------- -------------------- Months N/A N/A 30% 2% 7 - 12 ---------------------- --------------------- ------------------- ---------------------- -------------------- Months N/A N/A 14% 0.94% 13-24 ---------------------- --------------------- ------------------- ---------------------- -------------------- Months N/A N/A 4% 0.27% 25-36 ---------------------- --------------------- ------------------- ---------------------- --------------------
Schedule J Page 3 of 4 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. 12. Internal Exchanges: Commissions on the exchange of any policy issued by SECURITY LIFE or any other ING affiliate for an ESTATE DESIGNER policy, if any, will be paid in accordance with the internal exchange procedures in effect at SECURITY LIFE on the date the exchange is completed. The commission rates and/or target premiums may be adjusted in accordance with the rules in effect at the time of the exchange. If the Representative responsible for the exchange is not the producer of the original policy, and the original producer is still active with SECURITY LIFE, no commission will be payable to the Representative or the SELLING BROKER-DEALER. 13. Commission Payment for Early Second Death: In the event that the death of both insured persons under a policy occurs in the first seven policy years, SELLING BROKER/DEALER shall be entitled to compensation on the policy subject to the following rules: o The policy when sold was a commissionable policy (i.e., not an internal exchange as defined in section 12 above) o The policy must be in active status with SECURITY LIFE and some premium must have been paid into the policy during the 12 months prior to the death of the second insured person o The payment due if these conditions are met is the present value of the remaining premium-based commissions from the policy month in which the second death occurred through the end of policy year seven, as calculated by SECURITY LIFE at 10.5%. o The calculation shall use the premium stream, payment mode and commission structure as reflected on the "as sold" illustration on file at SECURITY LIFE o This payment is due to SELLING BROKER/DEALER only after payment of the death benefit under the policy has been determined and made by SECURITY LIFE to policy beneficiaries o Trail commissions are excluded from the calculation for this payment and are not payable after termination of the policy whether terminated by death or otherwise. Schedule J Page 4 of 4 EX-2 3 IIG MASTER SALES... Exhibit 1.A(3)(d) MASTER SALES AND SUPERVISORY AGREEMENT LIFE INSURANCE THIS MASTER SALES AND SUPERVISORY AGREEMENT (the "Agreement") is made this ___ day of _____________, 20__, by and among Security Life of Denver Insurance Company, Southland Life Insurance Company, Equitable Life Insurance Company of Iowa and USG Annuity & Life Company (collectively, the "ING Insurers"), ING America Equities, Inc. (the "ING Broker-Dealer"), ______________________(the "Distributor") and the Distributor Agency or Distributor Agencies identified on the signature page (the "Distributor Agency(ies)"). WITNESSETH WHEREAS, the ING Insurers issue various life insurance contracts, both registered under the federal securities laws and non-registered, (the "Contracts"), and offer for sale such Contracts in accordance with federal securities laws and/or the applicable laws of those states in which the Contracts have been qualified for sale; and WHEREAS, the ING Insurers have authorized the ING Broker-Dealer (which is registered with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1934 (the "1934 Act") and is a member of the National Association of Securities Dealers (the "NASD") as principal underwriter and distributor of the variable Contracts to enter into, subject to the consent of the ING Insurers, with distributors for the distribution of the Contracts; and WHEREAS, the Distributor distributes registered and non-registered life insurance contracts through its registered representatives (the "Representatives") affiliated with the Distributor Agency(ies) in accordance with applicable federal securities laws and applicable laws of those states in which the Distributor does business; and WHEREAS, the Distributor proposes to undertake certain supervisory and administrative obligations discussed below in connection with the distribution of the Contracts and is authorized to enter into dealer agreements for distribution of Contracts; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and promises herein contained, the parties agree as follows: 1. Relationship of Parties. As set forth on Schedule 1, the ING Insurers are the issuers of the Contracts covered by this Agreement. Each Insurer shall have control over the offering of its Contracts and shall control the availability and rules regarding the offering of the Contracts. The ING Broker-Dealer is the principal underwriter and distributor of the respective Contracts (also as set forth on Schedule 1). The Distributor represents it is a registered broker-dealer under the 1934 Act and a member of the NASD. The ING Insurers hereby authorize the Distributor Agency under the insurance laws and each ING Insurer and ING Broker-Dealer authorizes the Distributor under the securities laws to distribute the Contracts. The Distributor agrees to supervise its Representatives in connection with the distribution, solicitation and sale of the Contracts and to perform other services as described below. 2. Responsibilities of the ING Insurers. The ING Insurers agree to: (a) After receipt of the required license appointment application forms, request all state life insurance appointments needed in order for the Distributor Agency(ies) and its Representatives to act as representatives of the ING Insurers. 1 (b) Review, accept, modify or reject applications for policies received from the Distributor Agency(ies) and its Representatives. (c) Pay compensation to the Distributor and or Distributor Agencies as outlined in Section 6 and on the Compensation Schedule. (d) Provide service to policyowners and relevant information to the Distributor, Distributor Agency(ies) and its Representatives regarding the policies written under this agreement, on a reasonable basis, as done in the normal course of business. (e) Accept sole responsibility for reviewing and paying, or declining to pay, all claims, according to the ING Insurers' normal business practices and administrative policies and procedures. 3. Authority and Duties of the Distributor. The Distributor agrees that it shall, at all times when performing functions under this Agreement, be registered as a securities broker-dealer with the SEC and will maintain its membership with the NASD. Additionally, the Distributor shall be licensed or registered as a securities broker-dealer in the states requiring such a license or registration in connection with supervision and other services pertaining to its Contract sales activities. The Distributor shall distribute the Contracts and shall have all attendant duties, responsibilities and liabilities associated with that function for compliance, supervision and servicing purposes. The Distributor agrees to use its best efforts to find suitable purchasers for the Contracts. (a) Selection and Supervision of Representatives. The Distributor shall select and employ Representatives and shall have full responsibility for the training, supervision and control of such Representatives as contemplated by Section 15(b)(4)(E) of the 1934 Act and applicable NASD Rules. Such Representatives shall be subject to the control of the Distributor with respect to such persons' securities-regulated activities in connection with the Contracts (where such Contracts require such regulation). In the case of registered Contracts, the Distributor shall cause its Representatives to be NASD registered representatives, appropriately licensed with the applicable state and appointed by the relevant ING Insurers before such Representatives engage in the solicitation of applications for such registered Contracts and in the case of all registered and non-registered Contracts, shall cause such Representatives to limit solicitation of applications to jurisdictions where such Representatives are licensed and appointed and where the Contracts being solicited have been approved for sale. The ING Insurers and Broker-Dealer shall not have any responsibility for the supervision of any Representative or any other associated person or affiliate of the Distributor. If the act or omission of a Representative or any other associated person or affiliate of the Distributor is the proximate cause of any claim, damage or liability (including reasonable attorneys' fees) to an ING Insurer or ING Broker-Dealer, the Distributor shall be entirely responsible and liable therefor. (b) Notice of Representative's Noncompliance. In the event a Representative fails or refuses to submit to the supervision of the Distributor, ceases to be a Representative of the Distributor, or fails to meet the rules and standards imposed by the Distributor on its Representatives, the Distributor shall communicate such fact to the ING Insurers and ING Broker-Dealer in writing immediately, and shall immediately notify such Representative that he or she is no longer authorized to sell the Contracts. (c) Compliance with NASD Registration and Conduct Rules and Federal and State Securities Laws. In the case of registered Contracts, the Distributor shall fully comply with the 2 requirements of the 1934 Act and all other applicable federal or state laws and with the rules of the NASD and shall establish such rules and procedures as may be necessary to cause diligent supervision of the securities activities of its Representatives. The Distributor agrees to maintain appropriate books, records and supervisory procedures as are required by the SEC, NASD and other regulatory agencies having jurisdiction. (d) Purchaser Suitability. In the case of all Contracts, the Distributor shall be responsible for suitability and shall take reasonable steps to ensure that its Representatives make recommendations to applicants to purchase Contracts only if there are reasonable grounds to believe the purchase of each Contract is suitable for the applicant. The procedure shall include review of all proposals and applications for Contracts for suitability and completeness and correctness as to form as well as review and endorsement on an internal record of the Distributor of the transactions. Neither the Distributor nor its Representatives shall engage, directly or indirectly, in the twisting or other solicitation of the policyowners of the ING Insurers for the purpose of inducing the termination or replacement of policies or contracts issued by the ING Insurers unless such termination is in the best interests of the policyowner. (e) Prospectus and Statement of Additional Information. In the case of registered Contracts, the ING Broker-Dealer shall provide the Distributor with prospectuses and any supplements or amendments thereto, and the Statement of Additional Information ("SAI") describing the Contracts subject to this Agreement. Each ING Insurer, with regard to Contracts it issues, is responsible for maintaining in effect, in accordance with the requirements of the SEC, each Registration Statement of which the prospectus is a part. Each ING Insurer shall immediately notify the Distributor of the issuance of any stop order or any federal or state regulatory proceeding which would prevent the sale of their respective Contracts in any state or jurisdiction. The Distributor shall ensure compliance with the prospectus delivery requirements of the 1933 Act. The Distributor agrees to deliver a copy of the SAI concurrently with a copy of the prospectus to Contract applicants in jurisdictions where such delivery may be required. (f) Advertising and Sales Promotion Materials. In the case of registered Contracts, the Distributor and the Distributor Agency(ies) shall perform the selling functions authorized by this Agreement only in accordance with the terms and conditions of the then current prospectus applicable to the Contracts and shall make no representations not included in the prospectus or in any authorized supplemental material, including illustrations. In the case of all Contracts, the Distributor shall use, and shall cause the Distributor Agency(ies) and its Representatives to use, in the solicitation and sale of the Contracts, only those advertising and sales materials, including illustrations, that are or have been approved by the appropriate ING Insurer and ING Broker-Dealer. In the event that the Distributor, Distributor Agency(ies) or any of its Representatives create advertising and sales promotion materials with respect to the Contracts, the materials may only be used with the prior written approval of the appropriate ING Insurer and ING Broker-Dealer. (g) Securing Applications. Each application for a Contract shall be made only on an application form provided by the appropriate ING Insurer. The Distributor shall review all such applications for completeness and for compliance with the conditions herein including, in the case of registered Contracts, the suitability and prospectus delivery requirements set forth above under Sections 2(d) and (e). All payments collected by the Distributor, or any of its Representatives, shall be remitted promptly, in full, without deduction or reduction, together with such application form and any other required documentation directly to the appropriate ING Insurer at the address indicated on such application or to such other address as may be designated by such ING Insurer. All such payments and documents shall be the property of the ING Insurers. Checks or 3 money orders in payment of such Contracts should be made payable to the order of the ING Insurer issuing the Contracts. The ING Insurers reserve the right to reject, in their sole discretion, any Contract application and return any payment made in connection with an application which is rejected. Unless otherwise agreed, Contracts issued on applications accepted by an ING Insurer shall be forwarded to the Representative of the Distributor for prompt delivery to the policyowner. 4. Authority and Duties of the Distributor Agency(ies) (a) Responsibilities of the Distributor Agency(ies) i. The Distributor agrees to procure applications for the ING Insurer's Contracts. Production must be through the Distributor Agency(ies) and Representatives of the Distributor Agency(ies), which are duly licensed and appointed by the ING Insurers in the applicable states. ii. The Distributor Agency(ies) shall recommend Representatives for appointment by the ING Insurers by causing such Representatives to complete any and all application forms required by the ING Insurers and to submit any other requirements that may be required under applicable law or by the ING Insurers. The Distributor Agency(ies) covenants and agrees that it and all of its Representatives appointed pursuant to this Agreement shall not solicit nor aid, directly or indirectly, in the solicitation of any application for any Contract until they are fully licensed by the proper authorities and appointed by the relevant ING Insurers under the applicable insurance laws within the applicable jurisdictions where the Distributor Agency(ies) and its Representatives propose to offer Contracts. The Distributor Agency(ies) further covenants and agrees that solicitations will only take place where the applicable ING Insurer is authorized to conduct business and where the Contracts may be lawfully sold. iii. The Distributor Agency(ies) shall periodically provide the ING Insurers with a list of all Representatives appointed by the Distributor Agency(ies) and the jurisdictions where such Representatives are licensed to solicit sales of the Contracts. The Distributor Agency(ies) shall provide immediate notice to the ING Insurers of any Representatives terminating their relationship with the Distributor Agency(ies). Upon such notice, the Representative's appointment with the ING Insurers shall be terminated and the Representative will no longer be authorized to represent the ING Insurers as contemplated by this Agreement. Notwithstanding such termination, the ING Insurers or any of them may, in their sole discretion reappoint and/or re-contract such Representatives. iv. The Distributor Agency(ies) shall prepare and transmit the appropriate appointment forms to the applicable ING Insurer at the address provided on the license appointment form. The ING Insurers may refuse, by written notice to the Distributor Agency(ies), for any reason, to apply for the appointment of a Representative and may cancel any existing appointment at any time. Upon receipt of such notice, the Distributor Agency(ies) agrees to immediately cause such Representative to cease solicitation of sales for the Contracts. v. The Distributor Agency(ies) shall supervise all Representatives appointed pursuant to this Agreement to solicit sales of the Contracts and shall bear responsibility for all acts and omissions of each Representative. The Distributor Agency(ies) shall comply with and exercise all responsibilities required by applicable federal and state law and regulations. The Distributor Agency(ies) 4 shall train and supervise its Representatives to ensure that purchase of a Contract is only recommended to an applicant if there are reasonable grounds to believe the purchase of the Contract is suitable for that applicant. While not limited to the following, a determination of suitability shall be based on information furnished to a Representative after reasonable inquiry of such applicant concerning the applicant's insurance and investment objectives, financial situation and needs, and the likelihood that the applicant will continue to make any premium payments contemplated by the Contract and will keep the Contract in force. vi. The Distributor Agency(ies) agrees to treat money received or collected for the ING Insurer who issued the Contract as property held in trust, and to remit such money promptly in full, together with the application form and any other required documentation, to such ING Insurer's Customer Service Center at the address shown on the application form for the Contract. All such payment and documents shall be the property of the applicable ING Insurer. vii. The Distributor Agency(ies) agrees to adhere to the "cash with application" requirements as set forth in each ING Insurer's rules and regulations, copies of which the Distributor Agency(ies) acknowledges it has received. The Distributor Agency(ies) further agrees, when applicable, to provide the proper form of interim coverage and inform the applicant of the specific conditions of the coverage. viii. The Distributor Agency(ies) agrees to comply with the underwriting and issue requirements of the ING Insurers, as published by the ING Insurers, and the applicable insurance laws and regulations of the state or states in which the Distributor Agency(ies) operates. Such laws and regulations include, but are not limited to, those pertaining to client funds, privacy and confidentiality, licensing, rebating, replacements, exchanges, solicitation and advertising. ix. The Distributor Agency(ies) agrees to inform the ING Insurers of all material facts of which it is aware relating to insurance of insureds or proposed insureds. (b) Limitation of Authority. i. The Distributor Agency(ies) shall have no authority and agrees not to bind any ING Insurer by any promise or agreement; incur any debt, expense, or liability whatever in its name or account; or receive any money due or to become due to ING Insurer except first premiums on applications or Contracts and except where an ING Insurer otherwise agrees in writing. ii. The Distributor Agency(ies) shall have no authority and agrees not to deliver any policy or allow any policy to be delivered until the first premium has been paid in full. No delivery shall take place if, after an inquiry, the Distributor Agency(ies) or Representative is aware that any person proposed for insurance is not in the same condition of health, habits, occupation and other facts as are represented in the application. iii. The Distributor Agency(ies) shall have no authority and agrees not to make, modify or discharge any Contract, or bind an Insurer by making any promises respecting any Contract, except when authorized in writing to do so by an authorized officer of an ING Insurer. 5 iv. The Distributor Agency(ies) shall have no authority and agrees not to authorize or allow a Representative to do any act prohibited under this Agreement. c) General Provisions. i. The Distributor Agency(ies) may not assign the rights to procure applications or be relieved of the obligations of the Distributor Agency(ies) under this Agreement without an ING Insurer's prior written consent. ii. There is no intention by either party under this Agreement, to create any third party beneficiary of this Agreement. iii. The Distributor Agency(ies) shall be solely responsible for hiring any staff it may desire and for maintaining office space and meeting necessary expenses without reimbursement from any ING Insurer. iv. The Distributor Agency(ies) and its Representatives shall be free to exercise independent judgment as to the time, place and means of performing all acts under this Agreement, and the relationship of the Distributor Agency(ies) and its Representatives to the ING Insurers shall be that of an independent contractor. Nothing in this Agreement shall be construed to create the relationship of employer and employee between the Distributor Agency(ies) (or any of its Representatives) and an ING Insurer. v. Each ING Insurer and the Distributor Agency(ies) recognize and respect each other's respective interest in providing continuing service to those who purchase Contracts. Each party agrees to provide the others relevant information regarding the Contracts on a reasonable basis, as done in the normal course of business. vi. Failure of the Distributor Agency(ies) or any ING Insurer to insist upon strict compliance with any of the conditions of this Agreement shall not be construed as a waiver of any such conditions. vii. No oral promises or representations shall be binding nor shall this Agreement be modified except by agreement in writing, executed on behalf of the ING Insurers and the ING Broker-Dealer by duly authorized officers of each of them. viii. This Agreement supersedes all previous contracts and agreements between or among the Distributor Agency(ies) and the ING Insurers made for the procurement of Contracts, but it shall not affect the economic obligations of either party under such previous contracts and agreements. ix. The provisions under this Section shall survive any termination of this Agreement. x. The Distributor Agency(ies) hereby grants a limited Power of Attorney to the Distributor, to execute any amendments, modifications or waivers with respect to this Agreement. 5. Property of ING Insurers. All money payable in connection with any of the Contracts whether as premium, purchase payment or otherwise and whether paid by or on behalf of any policyowner or anyone else having an interest in the Contracts is the property of the ING Insurer which issued the Contract and shall be transmitted immediately in accordance with the administrative 6 procedures of such ING Insurer without any deduction or offset for any reason including, but not limited to, any deduction or offset for compensation claimed by the Distributor or the Distributor Agency(ies). 6. Compensation. (a) While this Agreement is in force, the ING Broker-Dealer shall arrange for payment to the Distributor of compensation payable on sales of the registered Contracts solicited in accordance with the Compensation Schedule attached hereto, as in effect at the time the Contract premiums or purchase payments (both referred to as "Premiums") are received by an ING Insurer. Payment of compensation for sales of non-registered Contracts is payable to the Distributor Agency(ies) in accordance with the Compensation Schedule attached hereto. No compensation of any kind may be earned, paid, credited or accrued in any way with respect to sales in the State of New York. (b) After termination of this Agreement, payment of compensation shall be made in the same manner as if the Agreement had remained in force. However, the Distributor shall continue to be liable for any charge-backs pursuant to the provisions of the Compensation Schedules and for any other amount advanced by or otherwise due an ING Insurer or ING Broker-Dealer. (c) The ING Insurers shall not have responsibility for payment of any compensation whatsoever to any Representative of the Distributor. Compensation from the Distributor Agency(ies) to the Representative for Contracts solicited and sold by the Representative shall be governed by a separate agreement between the Distributor and its Representative, and to the extent deemed necessary by the Distributor, by an agreement between the Distributor and the Distributor Agency(ies). (d) The Distributor represents that no commissions or other compensation based upon a percentage of premiums or based upon a percentage of assets or other valuable consideration will be paid for services rendered in soliciting the purchase of the Contracts to any person or entity which is not duly licensed and registered by the required authority and appointed by the ING Insurers to sell the Contracts in the state of such solicitation or sale; provided, however, that this representation shall not prohibit the payment of compensation to the surviving spouse or other beneficiary of a person entitled to receive such compensation pursuant to a bona fide written contract that calls for such payment. The Distributor agrees that no compensation of any kind other than described in this Section 6 of this Agreement is payable by an ING Insurer or ING Broker-Dealer to the Distributor. (e) The amount of compensation, if any, and its time of payment for replacements, changes, conversions, exchanges, term renewals, term conversions, premiums paid in advance, policies issued on a "guaranteed issue" basis, or other special cases and programs, shall be governed by the ING Insurer's underwriting and administrative rules then in effect. 7. Refund of Compensation. No compensation shall be payable, and the Distributor and the Distributor Agency(ies) jointly and severally agree to reimburse the ING Broker-Dealer promptly, and in any event within 30 days, for any compensation paid to the Distributor or its Representatives under each of the following conditions: a) if an ING Insurer, in its sole discretion, determines not to issue the Contract applied for; b) if an ING Insurer refunds the premiums or purchase payments upon the applicant's surrender or withdrawal pursuant to any "free-look" privilege; c) if an ING Insurer refunds the premiums or purchase payments paid by applicant as a result of a complaint by applicant, recognizing that the ING Insurer has sole 7 discretion to refund premiums or purchase payments; d) if an ING Insurer determines that any person signing an application who is required to be licensed and appointed or any other person or entity receiving compensation for soliciting purchase of the Contracts is not duly licensed and appointed to sell the Contracts in the jurisdiction of such sale or attempted sale; and e) as may be otherwise provided in the Compensation Schedule. 8. Indebtedness and Right of Setoff. Nothing contained herein shall be construed as giving the Distributor or its Representatives the right to incur any indebtedness on behalf of the ING Insurers or the ING Broker-Dealer. The Distributor hereby authorizes any ING Insurer and ING Broker-Dealer to set off liabilities, however created, of the Distributor and its Representatives to any ING Insurer and/or ING Broker-Dealer against any and all amounts otherwise payable to the Distributor. 9. Termination. (a) This Agreement may not be assigned except by written mutual consent and shall continue for an indefinite term, subject to the termination by any party upon ten-days' advance written notice to the other parties (subject to any longer time period if prescribed by state law), except that in the event that an ING Broker-Dealer or the Distributor ceases to be a registered broker-dealer or a member of the NASD, this Agreement shall immediately terminate. (b) This Agreement shall be immediately terminated upon: i. A breach of this Agreement by the Distributor. ii. The sale, dissolution, termination or other discontinuation of the Distributor, unless the ING Insurers and the ING Broker-Dealer have given written permission to the continuation of this Agreement, which consent will not be unreasonably withheld. iii. Bankruptcy of the Distributor. (c) Upon termination of this Agreement, all authorizations, rights and obligations shall cease, except the agreements in Sections 3, 4, 5, 6, 7, 8,12, 13, and 14 and the payment of any accrued but unpaid compensation to the Distributor or refund of compensation due to the ING Broker-Dealer and the ING Insurers. (d) Also, upon termination of this Agreement, Distributor agrees to return to the ING Insurers all marketing materials, including illustration software, as well as all applicable confidential items listed in Section 13 of this Agreement that may be in the possession of the Distributor or its Representatives. 10. Non-Employee Relationship. For the purpose of compliance with any applicable federal or state securities laws or regulations, the Distributor acknowledges and agrees that in performing the services covered by this Agreement, it is acting in the capacity of an independent "broker" or "dealer" as defined in the By-Laws of the NASD and not as an agent or employee of the ING Insurers or the ING Broker-Dealer or any registered investment company. In furtherance of its responsibilities as a broker or dealer, The Distributor acknowledges that it is responsible for statutory and regulatory compliance in securities transactions involving any business produced by its Representatives concerning the Contracts. 8 11. Non-Exclusivity. The Distributor agrees that no territory or Contract is assigned exclusively hereunder and that the ING Insurers and ING Broker-Dealer reserve the right in their discretion to enter into selling agreements with other broker-dealers and distributors, and to contract with or establish one or more insurance agencies in any jurisdiction in which the Distributor transacts business hereunder. 12. Cooperation in Investigation. The Distributor, the Distributor Agency(ies), the ING Broker-Dealer and the ING Insurers jointly agree to cooperate fully in any insurance, securities or other regulatory investigation or proceeding or judicial proceeding arising in connection with any Contract without limiting the foregoing: (a) The Distributor shall promptly notify the ING Insurers and the ING Broker-Dealer of any customer complaint or notice of any regulatory authority investigation or proceeding or judicial proceeding which it might receive with respect to any Contract. (b) In the case of a substantive customer complaint, the parties shall cooperate in investigating and responding to such complaint. Any response shall be sent to the other parties to this Agreement for approval not less than five business days prior to its being sent to the customer or regulatory authority, except that if a more prompt response is required, the proposed response shall be communicated by telephone, email or facsimile transmission. 13. Confidentiality of Information. Distributor and the Distributor Agency(ies) acknowledge that each may acquire information relating to the products, strategies, systems, marketing plans, customers and personnel of ING Insurers and the ING Broker-Dealer and that such information is considered by the ING Insurers and the ING Broker-Dealer to be confidential and proprietary. The Distributor and the Distributor Agency(ies) shall hold all such information in strictest confidence and shall not (and shall cause its Representatives to not) (a) disclose such information to any third party; or (b) utilize such information for their commercial benefit or to the detriment of the ING Insurers or the ING Broker-Dealer. The Distributor and the Distributor Agency(ies) acknowledge that a breach of this provision would result in significant and irreparable harm to the ING Insurers and the ING Broker-Dealer and hereby agree and consent to an injunction in addition to any other remedies that the ING Insurers and the ING Broker-Dealer may have at law or in equity. 14. Indemnification. (a) The ING Insurers and ING Broker-Dealer (referred to jointly in this Section 13 as "ING") agree to indemnify and hold harmless the Distributor and the Distributor Agencies (referred to jointly in this Section 13 as the "Selling Group") and such associated persons as its officers, directors, agents and employees, against any losses, claims, damages or liabilities, joint or several, to which Selling Group or such associated persons may become subject under the 1933 Act, the 1934 Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact required to be stated therein or necessary to make the statements therein not misleading contained (i) in any Registration Statement, any prospectus or any document executed by ING specifically for the purpose of qualifying a Contract for sale under the laws of any jurisdiction or (ii) in any written information or sales material authorized for and supplied or furnished to Selling Group and its Representatives by ING, their employees or agents, in connection with the sale of the Contracts. ING shall reimburse Selling Group and each such associated person for legal or other expenses reasonably incurred by Selling Group or 9 such associated person in connection with investigating or defending any such loss, claim, damage, liability or action. (b) The Selling Group jointly and severally agree to indemnify and hold harmless ING and their affiliates and such associated persons as their officers, directors, agents and employees, against any losses, claims, damages or liabilities to which ING and any such associated person may become subject under the 1933 Act, the 1934 Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon: i. any unauthorized use of sales materials or any oral or written misrepresentations or any unlawful sales practices concerning a Contract by the Selling Group, its officers, directors, employees, agents, Representatives or associated persons; and ii. claims by agents or Representatives or employees of the Selling Group for commissions or other compensation or remuneration of any type; and iii. failure by agents, Representatives or employees of the Selling Group to comply with all applicable state insurance laws and regulations including but not limited to state licensing requirements, rebate statutes and replacement regulations, and the provisions of this Agreement; and iv. telephone instructions by a Representative to ING in connection with any Contract. The Selling Group shall reimburse ING and any director, officer, employee or agent for any legal or other expenses reasonably incurred by ING or such associated person in connection with investigating or defending any such loss, claim, damage, liability or action. This indemnity provision shall be in addition to any liability which the Selling Group may otherwise have. (c) After a party entitled to indemnification receives notice of the commencement of any action, if a claim in respect thereof is to be made against any person obligated to provide indemnification, such indemnified party shall notify the indemnifying party in writing of the commencement thereof as soon as practicable thereafter. However, the omission to so notify the indemnifying party shall not relieve it from any liability except to the extent that the omission results in a failure of actual notice to the indemnifying party, and such indemnifying party is damaged solely as a result of the failure to give such notice. 15. Fidelity Bond and Errors and Omissions Insurance. The Distributor shall secure and maintain a fidelity bond (including coverage for larceny and embezzlement), issued by a reputable bonding company, covering all of its directors, officers, agents, Representatives, associated persons and employees who have access to funds of an ING Insurer or ING Broker-Dealer. This bond shall be maintained at the Distributor's expense in at least the amount prescribed under Article III, Section 32 of the NASD Rules of Fair Practice or future amendments thereto. The Distributor shall provide the ING Broker-Dealer with a copy of said bond or verification of an applicable exception upon request. The Distributor shall also secure and maintain errors and omissions insurance acceptable to the Insurer and covering the Distributor and its Representatives. The Distributor hereby assigns any proceeds received from a fidelity bonding company, errors and omissions or other liability coverage, to an ING Insurer or ING Broker-Dealer as their interest may appear, to the extent of their loss due to activities covered by the bond, policy or other liability coverage. If there is any deficiency amount, whether due to a deductible or otherwise, 10 the Distributor hereby indemnifies and holds harmless an ING Insurer and ING Broker-Dealer from any such deficiency and from the costs of collection thereof, including reasonable attorneys' fees. Alternatively, in the event that the Distributor self-insures this liability, it shall submit such proof to the ING Insurers and the ING Broker-Dealer as such parties deem satisfactory to demonstrate the adequacy of such financial resources. 16. Notices. All notices required hereunder shall be duly given if mailed to: Office of General Counsel ATTN: Variable Attorney c/o Security Life of Denver ING Insured Investor Group 1290 Broadway Denver, CO 80203 All notices to the Distributor shall be duly given if mailed to: [Distributor name and address] 17. Disputes; Arbitration. (a) If a dispute arises between the parties, the parties agree that their respective representatives shall meet and consult in good faith and attempt to settle the dispute, within thirty (30) days of written notice thereof, as a condition precedent to the initiation of arbitration proceedings as set forth herein. Notwithstanding any other provision of this Agreement to the contrary, the parties hereto agree that any and all disputes with respect to any claim pursuant to the provisions of this Agreement, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association by a panel of three (3) arbitrators appointed pursuant to such Rules, and judgment upon the award rendered by such arbitrators may be entered in any court having jurisdiction. Such arbitrators shall not have the authority or power to reform, alter, amend or modify any of the terms or conditions of this Agreement or to enter an award which reforms, alters, amends or modifies such terms or conditions. Notwithstanding the forgoing, the arbitrators shall have no authority to award any punitive damages except upon proof of fraud with intent to deceive. The decision of such arbitrators shall be in writing, setting forth both findings of fact and conclusions of law, and shall be final and conclusive upon the parties; and no suit at law or in equity based on such dispute, controversy or claim shall be instituted by any party hereto, other than to enforce the award of such arbitrators. Such arbitration shall be conducted in Denver, Colorado or in such other location as the parties thereto may agree. (b) In the event of a dispute, the prevailing party shall be entitled to be reimbursed by the non-prevailing party or parties for such prevailing party's reasonable attorney's fees and other expenses. (c) The parties agree that as precondition to the commencement of arbitration by any party, the dispute must be submitted to non-binding mediation with a mediator agreed to by both parties. If the parties cannot agree on a mediator within fourteen (14) days from the date of a request for mediation, the dispute will be mediated by a person selected in accordance with the rules of the American Arbitration Association. 18. Governing Law and Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 11 19. Entire Agreement; Amendment of Agreement. This Agreement including any Exhibits and Schedules attached hereto contains the entire agreement among the parties concerning the subject matter hereof and supercedes any and all prior agreements, understandings, negotiations, correspondence or other written or oral communications among the parties respecting the subject matter. The ING Insurers or the ING Broker-Dealer may amend this Agreement, including any Exhibits and Schedules hereto, upon at least ten (10) days' prior written notice to the Distributor, unless otherwise stated in such Schedule. The submission of an application for the Contracts by the Distributor after the effective date of any such amendment shall constitute agreement to such amendment. Additional Distributor Agencies may be added as parties to this Agreement at any time by a written amendment signed by the ING Insurers, the ING Broker-Dealer, the Distributor and such additional Distributor Agencies. All Distributor Agencies, which are parties to this Agreement at the time of such amendment, hereby consent and agree in advance to the addition of such additional Distributor Agencies. 20. Binding Effect. This Agreement shall be binding on and shall inure to the benefit of the parties to it and their respective successors in interest. If any provision of the Agreement conflicts with any other provision, or if any provision shall be held of made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. 21. Effective Date. This Agreement shall be effective as of the date it is fully executed by all parties. 22. Execution in Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together will constitute one and the same instrument. In reliance on the representations set forth and in consideration of the undertakings described, the parties represented below do hereby contract and agree. [ING Insurers] [ING Broker-Dealer] By: _________________________ By: _________________________ Title: ________________________ Title: ________________________ [Distributor] By: __________________________ Name: ________________________ Title: _________________________ Date: _________________________ [Distributor Agency] [Distributor Agency] By: __________________________ By: __________________________ Name: ________________________ Name: ________________________ Title: _________________________ Title: _________________________ Date: _________________________ Date: _________________________ 12 [Distributor Agency] [Distributor Agency] By: __________________________ By: __________________________ Name: ________________________ Name: ________________________ Title: _________________________ Title: _________________________ Date: _________________________ Date: _________________________ [Distributor Agency] [Distributor Agency] By: __________________________ By: __________________________ Name: ________________________ Name: ________________________ Title: _________________________ Title: _________________________ Date: _________________________ Date: _________________________ [Distributor Agency] [Distributor Agency] By: __________________________ By: __________________________ Name: ________________________ Name: ________________________ Title: _________________________ Title: _________________________ Date: _________________________ Date: _________________________ [Distributor Agency] [Distributor Agency] By: __________________________ By: __________________________ Name: ________________________ Name: ________________________ Title: _________________________ Title: _________________________ Date: _________________________ Date: _________________________ [Distributor Agency] [Distributor Agency] By: __________________________ By: __________________________ Name: ________________________ Name: ________________________ Title: _________________________ Title: _________________________ Date: _________________________ Date: _________________________ 13 EX-3 4 LIVINGSTON OPINTION LTR 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. 333-34404 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. 333-34404) 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 Estate Designer variable universal life insurance policies; and The preparation of the policy forms for the Estate Designer 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-4 5 ETNST & YOUNG CONSENT 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. 333-34404) 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-5 6 SAB CONSENT LETTER [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. 333-34404). 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-6 7 ITR MEMO Exhibit 11 DESCRIPTION OF ISSUANCE, TRANSFER, AND REDEMPTION PROCEDURES FOR POLICIES PURSUANT TO RULE 6E-3(T)(B)(12)(III) This document sets forth the administrative procedures that will be followed by Security Life of Denver ("Security Life") in connection with the issuance of its joint and survivor flexible premium variable universal life insurance policies (the "policies") issued through Security Life Separate Account L1 (the "Separate Account"), the transfer of assets held under the policies, and the redemption of interests in policies. I. PROCEDURES RELATING TO ISSUANCE AND PURCHASE OF THE POLICIES A. Offering of the Policy The policy is offered on two lives to persons or entities who satisfy certain suitability standards ("owners"). The policy may be purchased to insure the lives of two individuals ("insureds") in whom the owner has an insurable interest. Security Life requires satisfactory evidence of each of the insured's insurability, which may include a medical examination. The issue ages are 0 through 90. Age is determined by the insured's age as of the birthday nearest the policy date. The joint equivalent age is based on the sum of the insureds' ages divided by two. It must be at least 15 and cannot exceed age 85 at the time of policy issue. For Estate Designer ("ED"), the minimum stated death benefit is $1,000; however, the required minimum total death benefit is $500,000. The total death benefit includes stated death benefit plus coverage provided under a term rider. 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 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 insureds in a premium class when the policy is issued, based on underwriting. This original premium class applies to the initial stated death benefit. The current cost of insurance charge for a policy is based on the age at issue, sex, premium class of the insureds, 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 15-90); Standard Nonsmoker (ages 15-90), or Preferred (ages 15-90). Security Life's definition of "smoker" includes the use of cigarettes, cigars, pipes, chewing tobacco, nicotine gum or patch, snuff, or any other tobacco or nicotine-based product. Or, Estate Designer May 1, 2000 1 insureds may be placed in a substandard rate class, with a higher mortality risk than the standard smoker or standard nonsmoker classes. Additionally, an uninsurable rating may be assessed to an individual that is rated higher than table P. The uninsurable rating will be handled in the unideath calculation the same way a table rating is except the percentage will be higher. The uninsurable rating is capped at the later of age 65 or 15 years from issue. 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 nonsmoker class are equal to or lower than guaranteed cost of insurance for an insured of the same age and sex in a standard tobacco class. Cost of insurance rates (whether guaranteed or current) for an insured in a standard nonsmoker 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. The policy provides coverage on two insureds and a Death Benefit payable upon the death of the second insured. The policy will remain in force as long as the policy's cash surrender value is sufficient to cover the charges due. Security Life guarantees a policy will remain in force Estate Designer May 1, 2000 2 during the special continuation period, regardless of the cash surrender value, if the total premium paid to date, minus partial withdrawals and policy debt equals or exceeds the minimum monthly premium (shown in the policy) multiplied by the number of complete policy months, including the current policy month. The special continuation period is five years from the policy date. The minimum monthly premium is based on the joint equivalent age, sex and premium class of each insured, the stated death benefit and supplemental or rider benefits. The minimum monthly premium may change as a result of changes to the stated death benefit, the death benefit option, ratings, and supplemental or rider benefits. Security Life will notify the owner of change in the minimum monthly premium. On or after one year from the policy date, the owner may request a reduction in the stated death benefit, by 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 stated death benefit decrease is $1,000. The decrease will become effective on the monthly processing date next following the date that the decrease is 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. An 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 requires 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 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 joint equivalent age of the insureds 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 Estate Designer May 1, 2000 3 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. To determine the risk amount associated with a stated death benefit, Security Life generally will attribute the account value solely to the initial stated death benefit. However, if the account value exceeds the initial stated death benefit, the excess will be attributed to the increases in stated death benefit in the order of the increases. If there is a stated death benefit decrease after an increase, the decrease is applied first to prior stated death benefit increases, 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. C. 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 Policy Date is used to determine the monthly processing date, coverage effective date and policy anniversaries. The insurance coverage becomes effective on the policy date, which may be specified on the application. The policy date is: 1) the date specified on the application, and 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 AND 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. Monthly deductions for the backdated period are deducted on the policy date. The initial premium payment must be at least equal to 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 Estate Designer May 1, 2000 4 Security Life. If premium payment is rejected, Security Life will return it promptly, without adjustment. 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 - 9/15). 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. D. Allocation of Net Premiums On the investment date, the account value equals the initial premium payment minus the 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 account value minus outstanding policy debt. Cash surrender value is account value plus the applicable refund of sales charge. Net cash surrender value is the cash surrender 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, semiannually 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 periodic 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 most recent allocations instructions. Estate Designer May 1, 2000 5 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 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 telephone. The change applies to all premium payments received with or after receipt of the owner's notice. E. 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 you designate 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 Fidelity VIP Money Market Portfolio. Later, these amounts are transferred from the Money Market Portfolio to the selected variable investment options, at the earlier of: 1) five days after we mailed your policy and your state free look period has ended; or 2) you have actually received your policy, we have received your delivery receipt and your 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. F. Additional Payment Additional unscheduled premium payments can be made at any time while the policy is in force. Premium payments after the initial premium payment must be made to Security Life. 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. Estate Designer May 1, 2000 6 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 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 specific unscheduled payment is to be a repayment of policy debt. G. 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 and the special continuation period is not in effect, the policy will be in default. In addition, if on a monthly processing date the cash value less policy debt exceeds the amount of the monthly deduction due for the following policy month, the policy will be in default whether or not the special continuation period is in effect. An owner, and 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 to be paid ("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 second insured person 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 the insured's 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. H. Reinstatement of a Policy Terminated for Insufficient Values The policy may be reinstated within five years after lapse and before the maturity date, subject to compliance with certain conditions, including a necessary premium payment and submission of satisfactory evidence of insurability. I. Repayment of a Loan Estate Designer May 1, 2000 7 An owner may repay all or part of his/her policy debt at any time while at least one 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. J. Policy Riders Rider benefits may be available to be added to the policy. Monthly charges for riders, if any, will be deducted from the account value as part of the monthly deductions. The following rider benefits may be available: Adjustable Term Insurance Rider and Single Life Term Rider. Additional rules and limits apply to these benefits and are set forth in the applicable endorsement or rider. II TRANSFERS AMONG INVESTMENT OPTIONS Several investment options of the Separate Account are available for allocation of net premiums, 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, The Alger American Fund, Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II, INVESCO Variable Investment Funds, Inc., Neuberger Berman Advisors Management Trust and Van Eck Worldwide Insurance Trust. 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. 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 Estate Designer May 1, 2000 8 be made between investment options in a policy year. Currently, Security Life assesses an excess transfer charge of $25 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 at any time, for any reason, if Security Life deems such suspension to be in the best interests of owners. During the first twenty-four policy months following the 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. Transfers may also be effected pursuant to the dollar cost averaging or auto rebalancing feature if elected by the owner as described in the current prospectus. 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 second insured's death, plus supplemental or rider benefits, minus outstanding policy debt minus unpaid monthly deductions incurred prior to the date of death. If an 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 second 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 second insured would have purchased for the correct sex and age. Estate Designer May 1, 2000 9 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 second insured and all other requirements necessary to make payment. If the payment of the death benefit of a policy is contested, payment of proceeds may be delayed. The death benefit payable depends on the death benefit option in effect on the date of death. Subject to certain conditions, owners may change the death benefit option. Under option 1, the base death benefit is the greater of the specified amount or the applicable percentage of account value on the date of the second 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 second insured's death. Under option 3, the base death benefit is the greater of the specified amount plus the sum of all premiums received, minus partial withdrawals or the applicable percentage of the account value on the date of the second insured's death. The "applicable percentage" is the appropriate factor from the Definition of Life Insurance factors shown in the policy's appendix A or B. A table showing the applicable percentages for attained ages 0 to 100 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 next 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 death benefit will be the specified death benefit before the change plus the sum of premiums received minus partial withdrawals taken as of the effective date of the change. Estate Designer May 1, 2000 10 C. Policy Loan After the first monthly processing date and while at least one 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 net 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. 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 3.75%. 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 policy debt. D. Partial Withdrawals An owner may make partial cash surrenders (known as partial withdrawals) from 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. Estate Designer May 1, 2000 11 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. 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, and (3) charges for supplemental or 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, 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 $400 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 second insured person, so long as it does not lapse. G. Settlement Options 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 second 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 Estate Designer May 1, 2000 12 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 only available if the proceeds applied are $2000 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 involve 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 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. Estate Designer May 1, 2000 13 -----END PRIVACY-ENHANCED MESSAGE-----